<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the period ended April 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
incorporation or organization) Identification No.)
21 BRISTOL DRIVE
SOUTH EASTON, MASSACHUSETTS 02375
(Address of principal executive offices) (Zip Code
(508) 238-0199
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Number of shares of the Registrant's Common Stock outstanding as of May 1,
2000: 4,337,886.
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SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Condensed Consolidated Financial Statements as of April 1, 2000 and January 1,
2000, and for the Three Months Ended April 1, 2000 and April 3, 1999
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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<PAGE>
PART I. FINANCIAL STATEMENTS
Item 1. Condensed Consolidated Financial Statements
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Net sales............................................... $ 13,963,300 $ 13,266,668
Cost of sales (including buying, occupancy and order
fulfillment costs).................................. 4,867,849 4,560,428
------------- -------------
Gross profit............................................ 9,095,451 8,706,240
Operating expenses...................................... 8,548,359 7,468,154
Depreciation and amortization........................... 399,701 197,936
------------- -------------
Income from operations.................................. 147,391 1,040,150
Interest expense, net................................... 214,580 195,813
------------- -------------
Income (loss) before income taxes....................... (67,189) 844,337
Income tax provision (benefit).......................... (27,560) 347,169
------------- -------------
Net income (loss)....................................... (39,629) 497,168
------------- -------------
Other comprehensive income (loss)....................... 4,667 (36,286)
------------- -------------
Comprehensive income (loss)............................. $ (34,962) $ 460,882
============= =============
Earnings per share - Basic EPS:
Net income (loss) per share....................... $ (0.01) $ 0.11
============= =============
Weighted average shares outstanding............... 4,351,386 4,440,264
============= =============
Earnings per share - Diluted EPS:
Net income (loss) per share....................... $ (0.01) $ 0.11
============= =============
Weighted average shares outstanding............... 4,351,386 4,723,636
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, January 1, April 3,
2000 2000 1999
---- ---- ----
(unaudited) (audited) (unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 202,181 $ 1,136,847 $ 911,969
Accounts receivable, net....................................... 1,545,581 1,206,490 1,204,924
Inventories.................................................... 5,178,285 5,626,304 5,156,821
Prepaid expenses............................................... 4,815,705 4,012,538 3,620,620
------------ ------------ ------------
Total current assets.................................. 11,741,752 11,982,179 10,894,334
------------ ------------ ------------
Property, plant and equipment, net................................... 4,458,544 4,326,710 3,249,525
Intangible assets, net............................................... 4,413,270 4,563,627 3,469,341
Deferred income taxes................................................ 4,463,318 4,338,843 4,378,682
Other assets......................................................... 188,190 211,918 211,856
------------ ------------ ------------
Total assets......................................... $ 25,265,074 $ 25,423,277 $ 22,203,738
============ ============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses.......................... $ 5,790,498 $ 4,261,400 $ 3,486,672
Liabilities to customers....................................... 1,667,366 1,169,256 965,498
Short-term borrowings.......................................... 4,744,824 6,401,238 4,039,272
Income taxes payable........................................... 500,944 449,577 325,562
Current portion of long-term debt.............................. 2,369,706 2,125,000 1,958,863
------------ ------------ ------------
Total current liabilities............................ 15,073,338 14,406,471 10,775,867
------------ ------------ ------------
Long-term debt....................................................... 2,140,824 2,900,000 3,516,940
Other long-term liabilities.......................................... 346,943 377,875 234,667
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.......................................... - - (43,988)
Accumulated other comprehensive loss........................... (46,583) (51,250) (20,360)
Accumulated deficit............................................ (5,629,683) (5,590,054) (5,892,372)
------------ ------------ ------------
10,535,701 10,570,663 10,255,247
Less treasury stock, at cost, 888,388 shares at April 1, 2000
and January 1, 2000, and 822,188 shares at April 3, 1999..... (2,831,732) (2,831,732) (2,578,983)
------------ ------------ ------------
Total shareholders' equity ............................ 7,703,969 7,738,931 7,676,264
------------ ------------ ------------
Total liabilities and shareholders' equity ...... $ 25,265,074 $ 25,423,277 $ 22,203,738
============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ (39,629) $ 497,168
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization.................................... 399,701 197,936
Deferred income taxes............................................ (121,358) 348,659
Amortization of deferred compensation............................ -- 4,375
Changes in operating assets and liabilities:
Accounts receivable, net....................................... (343,966) 3,032
Inventories.................................................... 435,630 214,318
Prepaid expenses............................................... (804,610) 184,486
Other assets................................................... 22,701 (34,861)
Accounts payable and accrued expenses.......................... 1,540,923 (273,359)
Liabilities to customers....................................... 498,110 289,051
Income taxes payable........................................... 55,213 58,509
Other long-term liabilities.................................... (4,167) --
------------- -------------
Net cash provided by operating activities............................ 1,638,548 1,489,314
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (432,684) (339,465)
------------- -------------
Net cash used in investing activities................................ (432,684) (339,465)
------------- -------------
Cash flows from financing activities:
Repayments on short-term borrowings, net........................ (1,632,871) (990,285)
Purchases of treasury stock..................................... -- (225,342)
Repayments of long-term debt.................................... (500,000) (102,154)
Repayments of capital lease obligations......................... (26,765) (17,209)
------------- -------------
Net cash used in financing activities................................ (2,159,636) (1,334,990)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents......... 19,106 (761)
------------- -------------
Decrease in cash and cash equivalents................................ (934,666) (185,902)
Cash and cash equivalents, beginning of year......................... 1,136,847 1,097,871
------------- -------------
Cash and cash equivalents, end of year............................... $ 202,181 $ 911,969
============= =============
</TABLE>
Supplemental disclosures of cash flow information:
During the three months ended April 1, 2000 and April 3, 1999, the Company
received federal income tax refunds of $320,000 and $375,000, respectively.
Summary of non-cash transactions:
During the three months ended April 3, 1999, the Company recorded capital
lease obligations of $100,257 related to the purchase of data processing
equipment.
See notes to condensed consolidated financial statements.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
These unaudited condensed consolidated financial statements should be read
in conjunction with the 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 three months ended April 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 three months ended
April 1, 2000 and April 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 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 has not
yet determined the effect, if any, of adopting SFAS No. 133 on the condensed
consolidated financial statements.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
3. Reconciliation of Basic and Diluted Earnings per Share
The following table (in thousands) shows the amounts used in computing
basic and diluted earnings per share for net income (loss) and the effects of
potentially dilutive options on the weighted average number of shares
outstanding.
<TABLE>
<CAPTION>
For the three months ended
April 1, 2000 April 3, 1999
------------- -------------
Net Loss Shares Net Income Shares
-------- ------ ---------- ------
<S> <C> <C> <C> <C>
Basic earnings per share $ (40) 4,351 $ 497 4,440
Effect of dilutive options -- -- -- 284
------ ----- ----- -----
Diluted earnings per share $ (40) 4,351 $ 497 4,724
====== ===== ===== =====
</TABLE>
Options to purchase 953,477 shares of common stock ranging from $0.31 to
$7.15 per share were not included in computing diluted EPS for the three months
ended April 1, 2000 because their effects were antidilutive. Options to purchase
585,435 shares of common stock ranging from $5.33 to $7.15 per share were not
included in computing diluted EPS for the three months ended April 3, 1999
because their effects were antidilutive.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
4. Operating Expenses
Charges Related to Golub Transaction
On December 3, 1999, the Company and Golub Associates, Inc. ("GAI") jointly
announced the execution of a non-binding letter of intent pursuant to which GAI
would lead a transaction to acquire all of the outstanding common stock of
Specialty Catalog Corp. for a cash purchase price of $5.00 per share. This
transaction was subject to various contingencies. On January 19, 2000, a merger
agreement was entered into which provided for a cash merger in which the holders
of common stock of the Company immediately prior to the effective date of the
merger would have received $5.00 per share of the Company's common stock. The
merger agreement was subject to the satisfaction of a number of closing
conditions. On March 9, 2000, the Company announced that the Company and GAI and
its affiliates had mutually terminated the merger agreement because, even though
financing had been arranged, certain other closing conditions could not be
satisfied in a timely manner. The Company recorded charges of approximately
$352,000 to operating expenses during the three months ended April 1, 2000.
Resignation of Chief Executive Officer
In August 1999, the Company announced the resignation of its chief
executive officer. In connection with the resignation and its search for a new
chief executive officer, in the third quarter of 1999, the Company recorded a
pretax charge of $500,000, consisting of severance and other severance related
benefits and recruiting fees incurred. Coincident with the execution of the GAI
merger agreement (see footnote 5), the Company and Mr. Bock entered into an
amendment to his employment agreement wherein Mr. Bock agreed to remain with the
Company until the earlier of June 30, 2000, or the closing of the GAI merger
agreement. Under the terms of the employment agreement, as amended, Mr. Bock was
paid a severance payment of $325,000 on January 3, 2000. There was no accrued
compensation expense at April 1, 2000 in connection with these charges.
Also, under the terms of the agreement and the amendment to the employment
agreement, Mr. Bock is entitled to receive his normal compensation until June
30, 2000, and a bonus of $175,000, $75,000 of which was paid on January 3, 2000,
$50,000 of which was paid on or about March 14, 2000, and $50,000 of which was
paid on or about April 5, 2000. One-half of these bonus payments, or $87,500,
was charged to operating expenses during the three months ended April 1, 2000,
and the remaining $87,500 will be charged to operating expenses during the
second quarter of 2000.
Closure of Paula's Hatbox Catalog
During the fourth quarter of 1999, in a move motivated by the desire to
exit the competitive ladies ready-to-wear market segment, and to dedicate its
focus and resources on the growth and development of the Company's core wig
businesses, the Company decided to stop circulating the Paula's Hatbox(R)
catalog. The Company recorded a pretax charge of $730,000 in October 1999
related to severance and severance related benefits, the write-off of remaining
unamortized deferred catalog costs and inventory write-offs. There was no
accrued restructuring charge remaining at April 1, 2000 in connection with this
closure.
Special Charges in 1998
In August 1998, the Company announced a reorganization of certain
management positions. In connection with this reorganization, the Company
recorded in the third quarter of 1998 a pretax charge of $469,558, consisting of
severance pay and other severance related benefits for five former employees of
the Company. The Company
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
paid out the severance and severance related benefits through July 1999.
Included in accrued expenses at April 3, 1999 were accrued restructuring charges
of $53,917.
5. Long-Term Debt
On May 12, 2000, the Company and Fleet National Bank (the "Bank") amended
the Credit and Guaranty Agreement (the "Amended BKB Agreement"). The amended
agreement modifies the definition of Consolidated EBITDA to exclude the special
charges associated with the terminated transaction with Golub Associates Inc. In
addition, certain debt covenants were amended. The Amended BKB Agreement matures
in October 2001 and has repayments of $1,750,000 in 2000 and $2,250,000 in 2001.
6. Subsequent Events
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, 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 will 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 included in a current report on Form 8-K was
filed with the Securities and Exchange Commission on April 11, 2000.
Executive Officer Appointment
On May 9, 2000, the Company announced the appointment of Joseph J.
Grabowski (age 53) as president of the Company effective immediately. On July 1,
2000, Mr. Grabowski will assume the title of CEO, replacing Steven L. Bock whose
resignation, effective June 30, 2000, was previously announced.
The term of the executive employment agreement between the Company and Mr.
Grabowski commenced on May 8, 2000 and terminates on May 7, 2002 (the "Initial
Term"). Under this employment agreement, Mr. Grabowski will receive an annual
salary of $300,000. Mr. Grabowski will be eligible for a performance bonus
ranging between 0% to 100% of his annual salary, based upon the Company's
performance as compared against the annual plan approved by the Board. Upon the
termination of the Initial Term, this agreement shall automatically renew for
successive one year periods unless either party gives the other written notice
of its election not to renew at least 90 days before the expiration of the
Initial Term or any renewal period. Upon executing this agreement, Mr. Grabowski
was granted options under the 2000 Stock Incentive Plan, subject to shareholder
approval, to purchase 250,000 shares of common stock of the Company, at the fair
market value price on the commencement date of his employment agreement. The
Company shall obtain and maintain at all times during the Initial Term a term
life insurance policy on Mr. Grabowski of $500,000, of which a designee of Mr.
Grabowski is the beneficiary.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The Company may terminate Mr. Grabowski's employment: (i) upon his death or
permanent disability and (ii) if he engages in conduct that constitutes "cause".
Mr. Grabowski may terminate his agreement for "Good Reason" as defined in the
employment agreement. In the event Mr. Grabowski's employment is terminated for
any reason other than "cause", Mr. Grabowski will receive a "Termination
Payment" as defined in the employment agreement. Mr. Grabowski's employment
agreement contains non-competition and other restrictions effective during the
term of employment and for a one-year period thereafter.
7. Business Segments and Financial Information by Geographic Location
Specialty Catalog Corp. has four reportable segments: SC Direct, Daxbourne
International Limited, SC Publishing and American Healthcare Institute. The SC
Direct segment 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. Daxbourne International Limited is a retailer and wholesaler
of women's wigs, hairpieces and related products in the United Kingdom. SC
Publishing distributes catalogs under its Western Schools(R) brand and
specializes in providing continuing education courses to nurses and accounting
professionals. 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.
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 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. SC Direct,
SC Publishing and American Healthcare Institute 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.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
A summary of information about the Company's operations by segment for the
three months ended April 1, 2000 and April 3, 1999 follows (intersegment
eliminations are intercompany receivables and investments in subsidiaries):
<TABLE>
<CAPTION>
American
SC SC Healthcare Intersegment
Direct Daxbourne Publishing Institute Eliminations Total
------ --------- ---------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
April 1, 2000
Net sales.................. $10,004,688 $1,444,037 $1,701,282 $ 813,293 $ -- $ 13,963,300
Gross profit............... 6,286,607 1,002,369 1,356,342 450,133 -- 9,095,451
Operating expenses......... 6,686,156 649,160 722,910 490,133 -- 8,548,359
Depreciation and
amortization............. 261,750 93,434 10,672 33,845 -- 399,701
Income (loss) from
operations............... (661,299) 259,775 622,760 (73,845) -- 147,391
Interest expense, net...... 155,204 59,376 -- -- -- 214,580
Income tax provision
(benefit)................ (329,460) 76,696 255,332 (30,128) -- (27,560)
Segment assets............. 20,116,284 4,998,529 4,745,380 2,413,791 $(7,008,910) 25,265,074
Capital expenditures....... 380,050 15,359 -- 37,275 -- 432,684
American
SC SC Healthcare Intersegment
Direct Daxbourne Publishing Institute Eliminations Total
------ --------- ---------- --------- ------------ -----
For the three months ended
April 3, 1999
Net sales.................. $10,300,330 $1,389,169 $1,577,169 $ -- $ -- $ 13,266,668
Gross profit............... 6,518,594 985,225 1,202,421 -- -- 8,706,240
Operating expenses......... 6,186,097 661,793 620,264 -- -- 7,468,154
Depreciation and
amortization............. 91,525 95,484 10,927 -- -- 197,936
Income from operations..... 240,972 227,948 571,230 -- -- 1,040,150
Interest expense, net...... 129,852 65,961 -- -- -- 195,813
Income tax provision....... 45,560 67,392 234,217 -- -- 347,169
Segment assets............. 17,353,209 5,094,904 4,005,714 -- $ (4,250,089) 22,203,738
Capital expenditures....... 334,012 -- 5,453 -- -- 339,465
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to the historical information contained herein, this Quarterly
Report on Form 10-Q for 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 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.
Three Months Ended April 1, 2000 Compared to the Three Months Ended April 3,
1999
Net sales increased to $14.0 million for the three months ended April 1,
2000 from $13.3 million for the three months ended April 3, 1999, an increase of
approximately $697,000, or 5.2 per cent. This increase was due to: (i) the
addition of approximately $813,000 in net sales from American Healthcare
Institute ("AHI"), which was acquired by the Company in September 1999 and (ii)
increases in SC Publishing's and Daxbourne's net sales of approximately $124,000
and $55,000, respectively, primarily due to improved customer response rates as
a result of changes in circulation strategies. These net sales increases for the
three months ended April 1, 2000 were offset by lower SC Direct net sales of
approximately $295,000. The decrease in SC Direct's net sales was primarily due
to a decrease of approximately $914,000 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, offset by increases in SC Direct's Paula
Young(R) and Especially Yours(R) catalogs of approximately $572,000 and $46,000,
respectively, due primarily to increased 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 sizes, attributable to changes
in the product mix in both catalogs.
Gross margin as a percentage of net sales decreased to 65.1 per cent for
the three months ended April 1, 2000 from 65.6 per cent for the three months
ended April 3, 1999. Gross margin increased to $9.1 million for the three months
ended April 1, 2000 from $8.7 million for the three months ended April 3, 1999,
an increase of approximately $389,000, or 4.5 per cent, as a result of the
increase in net sales discussed above, offset by the reduction in the gross
margin rate mentioned above.
Operating expenses increased to $8.9 million for the three months ended
April 1, 2000 from $7.7 million for the three months ended April 3, 1999, an
increase of $1.2 million, or 15.6 per cent. This increase was primarily due to
(i) the addition of approximately $524,000 of operating expenses from AHI, (ii)
approximately $439,000 related to costs incurred in connection with the bonus
paid to the chief executive officer and the terminated sale of the Company's
common stock to Golub Associates, Inc., (iii) additional catalog production
expenses of approximately $301,000, as a result of an increase in the number of
catalogs mailed due to renewed circulation to inactive customer files in an
effort to reactivate these names and (iv) increased depreciation and
amortization of
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<PAGE>
approximately $202,000 related to the implementation of the Company's catalog
information system in August 1999.
Excluding the pretax special charges associated with the terminated
transaction with Golub Associates Inc. mentioned above, net income for the three
months ended April 1, 2000 would have been approximately $220,000, or $0.05 per
diluted share. On this basis, EBITDA (net income before interest, income taxes,
depreciation and amortization) for the three months ended April 1, 2000 was
approximately $987,000. On an actual basis, EBITDA was approximately $547,000
for the three months ended April 1, 2000.
Interest expense, net of interest income, increased to approximately
$215,000 for the three months ended April 1, 2000 from approximately $196,000
for the three months ended April 3, 1999, an increase of approximately $18,000,
or 9.2 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 first quarter of 2000 compared to the first quarter of 1999.
Liquidity and Capital Resources
Net cash flow used by the Company for the three months ended April 1, 2000
was approximately $935,000, of which $2.2 million and approximately $433,000
was used in financing activities and investing activities, respectively, offset
by $1.6 million provided by operating activities. The major factors that caused
the difference between net loss and net cash flows provided by operations for
the three months ended April 1, 2000 were: increases in: (i) cash working
capital items of $1.4 million, and (ii) depreciation and amortization expense of
approximately $400,000, offset by a decrease in deferred income taxes of
approximately $121,000. The $2.2 million in net cash used in financing
activities was primarily due to: (i) the repayment of $1.6 million in short-term
borrowings, (ii) the repayment of $500,000 of long-term debt, and (iii) the
repayment of approximately $27,000 related to capital leases. The Company used
approximately $433,000 in investing activities for computer and equipment
purchases.
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, 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 will 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 included in a current report on Form 8-K was
filed with the Securities and Exchange Commission on April 11, 2000.
On May 12, 2000, the Company and Fleet National Bank (the "Bank") amended
the Amended BKB Agreement. The amended agreement modifies the definition of
Consolidated EBITDA to exclude the special charges associated with the
terminated transaction with Golub Associates Inc. In addition, certain debt
covenants were amended. The Amended BKB Agreement matures in October 2001 and
has repayments of $1,750,000 in 2000 and $2,250,000 in 2001.
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.
-12-
<PAGE>
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company has not yet determined the effect, if any, of adopting
SFAS No. 133 on the consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposures to market risks include fluctuations in
interest rates on its short-term and long-term borrowings of $9.3 million as of
April 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 April 1, 2000, the outstanding balance on all of the Company's credit
facilities was $9,255,354. Based on this balance, an immediate change of one per
cent in the interest rate would cause a change in interest expense of
approximately $93,000 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.
-13-
<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 herewith.
10.2 Eighth Amendment to Credit and Guaranty Agreement and Seventh
Amendment to Credit Agreement dated as of May 12, 2000 between
the Fleet National Bank and the Registrant, filed herewith.
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, File No. 0-21499.
27.1 Financial Data Schedule (for EDGAR filing purposes only), filed
herewith.
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the three months ended April 1,
2000:
. January 18, 2000 - Agreement and Plan of Recapitalization
and Merger by and among Golub Associates Incorporated,
Catalog Acquisition Corp. and Specialty Catalog Corp.; and
Company Option Agreement by and among Golub Associates
Incorporated and Specialty Catalog Corp.
. February 11, 2000 - Agreement extending the time available
to Golub Associates Incorporated to secure its financing
commitments until March 1, 2000.
. March 14, 2000 - Termination of Agreement and Plan of
Recapitalization and Merger by and among Golub Associates
Incorporated, Catalog Acquisition Corp. and Specialty
Catalog Corp
Reports on Form 8-K filed subsequent to the three months ended April 1,
2000:
. April 11, 2000 - Rights Agreement between Specialty Catalog
Corp. and Continental Stock Transfer and Trust Company, as
Rights Agent.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SPECIALTY CATALOG CORP.
Dated: May 15, 2000 By: /s/ Joseph Grabowski
--------------------------------
President
Dated: May 15, 2000 By: /s/ Thomas McCain
--------------------------------
Thomas McCain
Senior Vice President and
Chief Financial Officer
-15-
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of May 8, 2000
is entered into between Specialty Catalog Corp., a Delaware corporation (the
"Employer" or the "Company") and Joseph Grabowski (the "Executive").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company desires to employ the Executive and to be assured
of his services on the terms and conditions hereinafter set forth; and
WHEREAS, the Executive is willing to accept such employment on such
terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, the Company and the Executive hereby
agree as follows:
1. Employment, Duties and Acceptance.
a. Employment, Duties. The Company hereby employs the Executive for the
Term (as defined in Section 2 below) as follows: (i) effective on the date
hereof, as President and Chief Operating Officer of the Company until Executive
becomes Chief Executive Officer in accordance with the following clause (ii);
and (ii) effective on the earlier of (x) June 30, 2000 or (y) the resignation or
termination of employment of the current Chief Executive Officer of the Company,
without further actions or deeds, as the Chief Executive Officer of the Company,
in each case subject to the supervision and direction of the Board of Directors
of the Company. The Executive shall have such duties, responsibilities and
authority as are customarily required of and given to a Chief Executive Officer
and such other duties and responsibilities commensurate with such position as
the Board of Directors of the Company ("Board") shall determine from time to
time. Such duties, responsibilities and authority shall include, without
limitation, responsibility for the management, operation, strategic direction,
financial structure and overall conduct of the business of the Company. The
Executive shall have the right to veto the hiring by the Company of any
employees at the level of vice-president or higher. The Executive shall report
directly to the Board.
b. Acceptance. The Executive hereby accepts such employment and agrees to
render the services described above. During the Term, the Executive agrees to
serve the Employer faithfully and to the best of the Executive's ability, to
devote all of the Executive's business time, energy and skill to such
employment, and to use the Executive's best efforts, skill and ability to
promote the Employer's interests. The Executive further agrees to accept
election, and to serve during all or any part of the Term, as an officer of the
Employer and of any subsidiary or affiliate of the Employer, without any
compensation therefor other than that specified in this Agreement, if elected or
appointed to any such position by the Board of Directors of the Employer, or of
any subsidiary or affiliate, as the case may be. The Company agrees to maintain
a Directors and Officer's Liability ("D&O") Policy in the face amount of
$5,000,000, covering the Executive for the Term of this Agreement.
c. Location. Executive shall be perform his duties primarily at the
offices of the Employer in the South Easton/Boston, Massachusetts area, as the
Board of Directors may determine, subject to reasonable travel requirements
outside of this area on behalf of the Employer.
<PAGE>
2. Term of Employment.
The term of this Agreement shall commence effective as of May 8, 2000 (the
"Commencement Date") and terminate on May 7, 2002 (the "Initial Term"), subject
to earlier termination pursuant to the provisions of Section 4 hereof.
Notwithstanding the foregoing, upon the termination of the Initial Term, this
Agreement shall automatically renew for successive one year periods unless
either party gives the other written notice of its election not to renew at
least 90 days before the expiration of the Initial Term or any renewal period.
The Initial Term and any renewal period is collectively referred to as the
"Term."
3. Compensation; Benefits.
a. Base Salary. The Company shall pay to the Executive for all services to
be performed hereunder and performance of all of his obligations hereunder,
including the Executive's compliance with the covenants contained herein, an
annual salary of $300,000 ("Base Salary"), payable in accordance with the
Company's normal salary payment schedule, as the same may be amended from time
to time. Except as specifically provided herein, such salary shall be the
Executive's total compensation and is inclusive of compensation received or
receivable by the Executive in respect of any other office or employment in, or
service to, the Company. The Base Salary may be increased but not decreased at
any time by the Board of Directors in their sole discretion. The Board shall
review the salary of the Executive and consider an appropriate increase in
January 2001, and in each subsequent year during the Term.
b. Incentive Compensation. In addition to the Base Salary described in
Paragraph 3(a) above, if the Company meets certain targets described below, the
Executive shall be entitled to receive, in cash, incentive compensation as
described below.
(i) Year 2000 Bonus. During the Company's fiscal year ending December
30, 2000 ("Year 2000"), the Executive shall be entitled to
incentive compensation payment predicated upon the Company
achieving both (i) EBITDA of $6.3 million and (ii) EPS of 53
cents, each in respect of Year 2000. The Executive shall earn
incentive compensation payable hereunder in respect of Year 2000
equal to the percentage of his annual Base Salary (which shall
not be prorated for purposes of determining incentive
compensation) set forth in Exhibit 1, but only so long as the
Company achieves EPS of 53 cents or more in respect of Year 2000.
(ii) Year 2001 Bonus. During the Company's fiscal year ending December
29, 2001 (the "Year 2001"), Executive's entitlement to incentive
compensation for any fiscal year of the Company shall be
predicated upon the successful accomplishment of annual,
business-related performance goals for the Company established by
the Board of Directors of the Company in the Company's annual
budget or plan, as approved by the Board of Directors of the
Company (each such annual budget or plan being referred to, for
the relevant year, as the "Plan"). For such year, the Executive
shall earn incentive compensation equal to the percentage of
Executive's annual Base Salary set forth in Exhibit 2. The
incentive compensation payable hereunder in respect of any period
constituting less than an entire fiscal year (a "Partial Year")
shall be prorated for the Partial Year and determined in the
manner set forth in Section 4(e)(v)(C) hereof.
(iii) Certain Adjustments. In the event that the Company shall acquire
one or more additional businesses during any year, the parties
acknowledge that the Plan must be adjusted, either upward or
downward, to set the formula so that the Executive may be
compensated for improvements in performance after giving effect
to the pertinent transaction. Similar adjustments shall be
necessitated by one or more dispositions of businesses by the
<PAGE>
Company or other corporate events such as stock splits and stock
dividends. Therefore, the Plan shall be appropriately adjusted,
in light of the facts and circumstances of the particular
situation, for acquisitions and dispositions by the Company of
businesses or other corporate events that will have an effect on
the calculation of EBITDA or EPS of the Company. In the event
that the Executive and the Company shall dispute the computation
of the calculation of the incentive compensation or appropriate
adjustments to the Plan for acquisitions, dispositions or other
corporate events, such dispute shall be resolved in the manner
described in (iv) below.
(iv) The determination of incentive compensation for any year during
the Term shall be made by the accountants then auditing the books
and records of the Company as soon as may be practicable after
the end of such year but no later than ninety (90) days after
such year end. Upon the determination of such incentive
compensation, the accountants shall deliver a copy of such
determination to the Company's Chief Financial Officer and the
Executive and, unless either the Company or the Executive
notifies the other party that it in good faith objects to such
computation within ten (10) business days thereafter, such
computation shall be binding and conclusive upon the Company and
the Executive. In the event that a party objects to such
computation, the Executive and the Company shall endeavor to
resolve such dispute, but failing same, and on the request of
either the Company or the Executive the dispute shall be
submitted for resolution to a national accounting firm as the
Company and the Executive may agree upon. The decision of such
accounting firm shall be rendered within thirty (30) days and
shall be final and binding on the parties. The fees and expenses
of such accounting firm shall be borne one-half by the Executive
and one-half by the Company. The incentive compensation shall be
payable by the Company within thirty days after the determination
of the amount thereof has become final and binding on the
parties.
(v) For purposes of this Agreement:
(A) "EBITDA" for any period shall mean the aggregate earnings of
the Company, on a consolidated basis, for the relevant
period, before interest, taxes, depreciation and
amortization, all as determined in accordance with generally
accepted accounting principles applied on a basis consistent
with the manner in which such principles have heretofore
been applied by the independent public accountants of the
Corporation, except that: (i) gains and losses on
------
acquisitions and dispositions of capital assets outside the
ordinary course of business shall not be taken into account;
---
(ii) extraordinary items of income, gain, loss or expense
(as so characterized by generally accepted accounting
principles applied on a consistent basis) shall not be taken
into account; except as may be described below; (iii) any
expenses relating to the terminated transaction with Golub
Associates, Inc., shall be taken into account; (iv) any
expenses relating to salary, incentive compensation,
relocation and other transaction expenses payable to the
Executive shall be taken into account; and (v) any expenses
(severance or otherwise) payable to the Company's current
Chief Executive Officer in connection with his departure
from the Company, to the extent accrued on the Company's
financial statements as of March 31, 2000, shall be taken
into account.
(B) EPS for any period shall mean the Company's earnings per
basic common share, on a consolidated fully-diluted basis,
for the relevant period all as determined in accordance with
generally accepted accounting principles applied on a basis
consistent with the manner in which such principles have
heretofore been applied by
<PAGE>
the independent public accountants of the Corporation,
except that: (i) gains and losses on acquisitions and
------
dispositions of capital assets outside the ordinary course
of business shall not be taken into account; (ii)
---
extraordinary items of income, gain, loss or expense (as so
characterized by generally accepted accounting principles
applied on a consistent basis) shall not be taken into
---
account, except as may be described below; (iii) any
expenses relating to the terminated transaction with Golub
Associates, Inc., shall be taken into account; (iv) any
expenses relating to salary, incentive compensation,
relocation and other transaction expenses payable to the
Executive shall be taken into account; and (v) any expenses
(severance or otherwise) payable to the Company's current
Chief Executive Officer in connection with his departure
from the Company, to the extent accrued on the Company's
financial statements as of March 31, 2000, shall be taken
into account.
(C) After Year 2001, the Executive and the Company may mutually
agree in writing to restructure the terms of Executive's
incentive compensation entitlement hereunder.
c. Vacation. The Executive shall be entitled to four (4) weeks paid
vacation to be taken at such time or times as Executive and Employer may
reasonably determine.
d. Fringe Benefits. During the Term, the Executive shall be entitled to
all benefits for which the Executive shall be eligible under any qualified
pension plan, 401(k) plan, sick leave, group medical insurance or other so-
called "fringe" benefit plans which the Employer provides to its employees
generally, together with executive benefits for the Executive, as from time to
time in effect for officers of the Employer generally, subject in all respects
to the terms, conditions and qualifications of such plans. During the Term, a
Company-owned computer will be installed in Executive's home and the Company
shall pay for monthly Internet access with respect to such computer.
e. Options. The Company shall grant to the Executive options to purchase
250,000 shares of common stock of the Company, at a price which shall equal the
Fair Market Value (as defined in the Company's 2000 Stock Incentive Plan) of the
shares on the Commencement Date. Such options shall be subject to the terms of
the Company's 2000 Plan approved on April 11, 2000 by the Board of Directors and
the standard form of stock option agreement to be used for employees under the
2000 Plan. The Executive shall be eligible for additional option grants under
the Company's 2000 Stock Incentive Plan (or any successor plans) commensurate
with his title and position with the Company. In addition, the Company has
recommended to the Company's Option Committee (the "Option Committee") and the
Option Committee has agreed that the Executive shall receive a grant of options
to purchase 250,000 shares of common stock of the Company, at a price which
shall equal the Fair Market Value (as defined in the applicable stock option
plan) of the shares on the date of grant, at the first meeting of the Option
Committee after the end of the first fiscal year of the Company in which the
Company's gross revenues exceed $120,000,000. All options granted to the
Executive shall, to the maximum extent permitted by law, be classified as
incentive stock options. Such options shall vest in three equal installments as
follows: on the first anniversary of the date of grant, on the second
anniversary of the date of grant, and on the third anniversary of the date of
grant. In the event that the Executive's employment is terminated by the Company
without cause or by the Executive for Good Reason, any options that have not
vested as of the date of such termination shall become immediately exercisable
by the Executive on the termination date, and shall be exercisable for a period
of five years after the termination date (or, if earlier, through the expiration
date of such options). In the event of a corporate transaction described in
Section 18.1 of the 2000 Stock Incentive Plan, any options that have not vested
shall become fully vested prior to the consummation of such transaction. In the
event that the Executive's employment is terminated by reason of the Executive's
death or disability (as such term is defined in Section 4(a) hereof), any
options, upon vesting in accordance herewith, shall each be exercisable until
the earlier of (i) 6:00 p.m., Boston time, on
<PAGE>
the fifth anniversary of the date of death or disability, (ii) the expiration
date of such option or (iii) the occurrence of any other event under the terms
of the relevant plan or option agreement that would accelerate the termination
date of such option.
In the event that the Executive's employment is terminated for "cause,"
any options shall be exercisable until the earlier of (i) 6:00 p.m., Boston
time, on the thirtieth (30th ) day following the termination date and (ii) the
expiration date of such option.
f. Relocation Expenses.
(i) The Company shall reimburse the Executive for certain
expenses which he actually and necessarily incurs in
connection with relocating his personal residence from New
York to the Boston area up, to a maximum of $150,000, as
follows:
(A) for all direct moving expenses (as such terms are
defined in Section 217 of the Internal Revenue
Code) and for reasonable brokerage commissions, if
any, incurred in connection with the sale of
Executive's home in New York; and
(B) for any State or Federal Income Tax incurred on
the sale of the Executive's residence in New York
(which taxes shall be equal to the Executive's
taxable gain realized on such sale multiplied by
the highest tax rate in effect under the Internal
Revenue Code or applicable State tax law with
respect to such income); and
(C) for temporary lodging and other miscellaneous
expenses incurred prior to occupancy of his new
residence but only until September 1, 2000.
(ii) Such relocation expenses shall be reimbursed in accordance
with the Company's reimbursement policies and guidelines.
(iii) If the Executive is terminated for cause, or if the
Executive voluntarily terminates the Agreement without Good
Reason prior to expiration of the Initial Term, he shall
repay the amounts paid to him or on his behalf by the
Company under subparagraph (i) above as follows:
(A) if such termination occurs prior to the first
anniversary of the Commencement Date, 50% of reimbursed
relocation expenses;
(B) if such termination occurs on or after the first
anniversary of the Commencement Date and prior to the
eighteenth (18th) month after the Commencement Date,
25% of the reimbursed relocation expenses;
g. Reimbursement of Business Expenses. During the Term of this
Agreement, upon submission of proper invoices, receipts or other supporting
documentation satisfactory to the Company, the Executive shall be reimbursed by
the Company for all reasonable business expenses actually and necessarily
incurred by the Executive on behalf of the Company in connection with the
performance of services under this Agreement.
h. Life Insurance. The Company shall obtain and maintain in full force
and effect at all times during the Term a term life insurance policy on the life
of Executive, which will provide a death benefit
<PAGE>
to Executive's designee (or, if none, Executive's estate) of Five Hundred
Thousand Dollars ($500,000.00).
i. Legal Fees. The Company shall pay all reasonable attorneys' fees
incurred by the Executive in connection with the negotiation, preparation and
execution of this Agreement, not to exceed $5,000.
j. House Loan. The Company shall lend to Executive up to $150,000 for
use by Executive in connection with the purchase of a house in the South
Easton/Boston, Massachusetts area. Such loan, which shall be evidenced by
Executive's promissory note, shall bear interest at the rate paid by the Company
for borrowed money from its commercial lenders from time to time, which interest
shall be payable quarterly. The principal amount, together with accrued and
unpaid interest thereon, shall be payable on the earlier of the third
anniversary date of the loan or the date which is thirty days after the date of
termination of Executive's employment for any reason.
4. Termination. This Agreement shall terminate prior to the termination date
set forth in Section 2 hereof upon the following terms and conditions:
a. Death or Permanent Disability. If the Executive dies or becomes
permanently disabled, this Agreement shall terminate effective at the end of the
calendar month during which his death occurs or when his disability is deemed to
have become permanent. If the Executive is unable to substantially perform all
of his normal duties for the Company in the usual and customary fashion because
of illness or incapacity (whether physical or mental) for 90 or more days
(whether or not consecutive) out of any Three Hundred Sixty Five (365)
consecutive days, his disability shall be deemed to have become permanent.
b. Cause. If the Board of Directors of the Company vote to terminate the
Executive's employment for cause, this Agreement shall terminate and the
Executive shall be removed from office effective on the date specified by such
directors. For purposes of this Agreement, termination of the Executive's
employment shall be deemed for cause if such termination is the result of:
(i) the Executive's misappropriation of the Company's funds or
property, or fraud on the part of the Executive;
(ii) the Executive's conviction of, or plea of guilty or no contest
to, any felony under the laws of the United States or any State
or political subdivision thereof;
(iii) a knowing misrepresentation of a material fact made by the
Executive to the Company's Board of Directors;
(iv) a material breach of this Agreement by the Executive, provided
that the Executive has first been given written notice
describing such breach in reasonable detail, and within fifteen
(15) days he has not remedied the same;
(v) Executive uses illegal drugs or chronically abuses legal drugs
or alcohol during business hours or conducts business under the
undue influence of drugs or alcohol or his abuse of drugs or
alcohol adversely affects his ability to perform his duties,
which Executive shall not have cured after reasonable notice and
a reasonable opportunity to cure;
(vi) engaging in an act of sexual harassment or discrimination
prohibited by the laws of the United States or a state in which
the Company's offices are located or in which
<PAGE>
the Company conducts business which undermines or is detrimental
to the Company, or any other conduct taken or omitted in bad
faith which is significantly detrimental to the Company; or
(vii) any other action or omission constituting gross negligence or
willful misconduct by the Executive, in the performance of his
duties hereunder.
c. Good Reason Termination. The Executive may terminate his employment for
"Good Reason" at any time during the Term by written notice to the Company given
not more than fifteen (15) days after the occurrence of the event constituting
"Good Reason." Such notice shall state an effective date no earlier than fifteen
(15) days after the date it is given. The Company shall have fifteen days (15)
from the receipt of such notice within which to cure or dispute in good faith
the reasons set forth in such notice. If not timely cured or disputed in good
faith, termination by Executive of his employment for "Good Reason" shall be
treated as termination by the Company without cause. For purposes hereof, "Good
Reason" shall mean:
(i) the assignment to Executive of any duties inconsistent with
Executive's position (including status), authority or material
responsibilities, or the removal of Executive's authority or
material responsibilities;
(ii) the failure by the Company to make any payment when due hereunder
or to comply with any of the other material provisions of this
Agreement;
(iii) the sale of substantially all of the Company's assets or a
"change of control" (as defined in the Company's 1996 Stock
Incentive Plan, as amended) of the Company shall have occurred;
and
(iv) failure by the Company to obtain approval of the 2000 Stock
Incentive Plan by its shareholders.
d. Termination Without Cause. The Company may terminate the Executive's
employment under this Agreement without "cause" (as defined above) at any time
during the Term by ten (10) days' advance written notice to the Executive.
e. Termination Payments, Etc. In the event that the Executive's employment
terminates under the circumstances described herein, the Executive shall be
entitled to receive, subject to applicable withholding taxes, the following
amounts:
(i) Upon a termination of employment due to the Executive's death
pursuant to Section 4(a) hereof, the Executive's estate shall be
entitled to such benefits as are provided pursuant to Section
3(d) hereof for a period of one year from the date of death or
the period remaining in the Term, whichever ends sooner.
(ii) Upon a termination of employment due to the Executive's permanent
disability pursuant to Section 4(a) hereof, the Executive shall
(A) receive the Base Salary for a period of one year from the
date such permanent disability is determined pursuant to Section
4(a) hereof or the period remaining in the Term, whichever ends
sooner, payable in accordance with Section 3(a) hereof (less any
amounts of disability income paid to the Executive pursuant to
any disability insurance policy maintained by the Company); and
(B) be entitled to such other benefits as are provided pursuant
<PAGE>
to Sections 3(d) and (h) hereof for a period of one year from the
date such permanent disability is determined pursuant to Section
4(a) hereof or the period remaining in the Term, whichever ends
sooner.
(iii) In addition to the amounts set forth in (i) and (ii) above, if
the Executive's employment is terminated by reason of the
Executive's death or disability during the term, Executive shall
be entitled to payment of the sum of (i) any Base Salary through
the date of termination, as well as any earned bonus for any
calendar year or pro-rated portion of such year through the date
of termination, that theretofore had not been paid and (ii) any
other compensation earned through the date of termination but not
yet paid or delivered to the Executive ("Accrued Obligations"),
which shall be paid or made to the Executive or his estate or
beneficiary, as applicable.
(iv) Upon a termination of employment by the Company for "cause"
pursuant to Section 4(b) hereof, the Executive shall receive only
the Base Salary through the date of such termination, payable in
accordance with Section 3(a) hereof.
(v) Upon a termination of employment during the Term by the Company
without cause or by the Executive for Good Reason, the Term shall
terminate on the date of such termination and the Company's
remaining obligations to the Executive shall be as follows: (A)
Accrued Obligations; (B) payment to the Executive within thirty
(30) days of the date of termination of a lump sum equal to the
Executive's Base Salary for the remainder of the Term; and (C)
any earned bonus for the pro-rated portion of the calendar year
in which Executive's employment is terminated through the date of
termination, to the extent and in the manner accrued on the
Company's financial statements.
(vi) Upon a voluntary termination of employment by the Executive for
any reason other than Good Reason, the Executive shall only
receive the Base Salary through the date of such termination,
payable in accordance with Section 3(a) hereof.
f. No Mitigation; Offset. In the event of any termination of employment
under Sections 4(c) or 4(d) hereof, the Executive shall be under no obligation
to seek other employment.
g. Nature of Payments. Any amounts due under this Section 4 are in the
nature of severance payments considered to be reasonable by the Company and are
not in the nature of a penalty.
5. Protection of Confidential Information; Non-Competition.
a. Confidentiality. In view of the fact that the Executive's work
for the Employer will bring the Executive into close contact with confidential
affairs, information and plans for future developments of the Employer not
readily available to the public, as well as access to certain trade secrets
pertaining to the business of the Employer, all of which Executive acknowledges
are proprietary to and the exclusive property of the Company, the Executive
agrees:
(i) To keep and retain in the strictest confidence all confidential
matters of the Employer, including, without limitation, "know
how", trade secrets, unpatented inventions, technology, software,
clinical trials, test results, policies, operational methods,
technical processes, formulae, inventions, research projects,
evaluations, reports, business plans, financial information,
customer lists, suppliers and other business
<PAGE>
affairs of the Employer, learned by the Executive including,
but not limited to all information relating to functional
imaging as a medical industrial commercial or commercial
diagnostic or investigational tool and any confidential
information concerning any of the financial arrangements,
financial positions, competitive status, customer or
suppliers matters, internal organizational matters,
technical capabilities, or other business affairs of or
relating to the Company (collectively, "Confidential
Information") known to or learned by the Executive hereafter
and, except to the minimum extent required by law or legal
process, and not to disclose or use such Confidential
Information to or for the benefit of anyone other than
Executive's, consultants and representatives of the Company
on a "need to know" basis, either during or after
termination of the Executive's employment with the Company,
for any reason, except in the course of performing the
Executive's duties hereunder or with the Company's express
written consent; and
(ii) To deliver promptly to the Company on termination of the
Executive's employment, or at any time the Company may so
request, all memoranda, notes, records, reports, manuals,
drawings, blueprints and other documents, and all copies
thereof, including computer programs, discs, software,
firmware, etc., relating to the Company's business,
operations and financial condition, and all property
associated therewith, which the Executive may then possess
or have under the Executive's control.
b. Covenants Not to Compete.
(i) Executive covenants to and with Company that during
employment by Company and for one year following the
termination of employment, for any reason, Executive will
not, directly or indirectly, either as a principal, agent,
employee, employer, stockholder, or co-partner, or in any
other individual or representative capacity:
(A) engage in or carry on any business which is in
competition with the business now or hereinafter
conducted by the Company during the Term ("Business")
in the Territory (as hereinafter defined), provided,
however, that such covenant not to compete shall not
apply solely in the event that the Company defaults in
making any payment required to be paid to Executive
hereunder which amount is not paid or disputed in good
faith by the Company within fifteen (15) days after
notice of non-payment is given by the Executive.
Nothing contained in this Section 5, whether express or
implied, shall prevent the Executive from being a
holder of two percent (2%) or less for the purposes of
passive investment only of marketable securities then
being quoted on a recognized national stock exchange or
traded on the National Market System of the NASDAQ.
Notwithstanding anything to the contrary contained in
this Section 5, nothing contained in this Section 5 is
intended, nor shall be deemed, to restrict the
Executive from using his free time to continue or
otherwise engage in charitable and other not for profit
professional activities. "Territory" shall mean the
United States of America, the United Kingdom, or any
place else worldwide in which any aspect of the
Business is then conducted;
<PAGE>
(B) solicit any past, present, or other customers during
the Term, of the Company or its affiliates
("Customers") for business in any way relating to any
aspect of the Business;
(C) request, directly or indirectly, that any Customers or
other persons sharing a business relationship with the
Company or any of its affiliates, curtail or cancel
their business with the Company or any of its
affiliates, or otherwise take action which might be to
the disadvantage of the Company or any of its
affiliates; or
(D) induce or actively attempt to influence any other
employee or consultant of the Company or any of its
affiliates to terminate such other employee's or
consultant's employment or consultancy with the Company
or any of its affiliates.
(ii) If the Executive violates any of the restrictions contained
in Section 5(a) hereof, the restrictive period provided for
in such Section shall be increased by the period of time
from the commencement of any such violation until the time
such violation shall be cured by the Executive to the
satisfaction of the Company.
(iii) The Executive acknowledges that the foregoing restrictions
are reasonable under the circumstances of his employment and
the Business and will not prevent him from earning a living.
c. Remedies. If the Executive commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5(a) or 5(b) hereof, the Employer
shall have the following rights and remedies:
(i) Executive understands and agrees that Company shall suffer
irreparable harm in the event that Executive breaches any of
Executive's obligations under Sections 5(a) and 5(b) of this
Agreement and that monetary damages shall be inadequate to
compensate Company for such breach. Accordingly, Executive
agrees that, in the event of a breach or threatened breach
by Executive of any of the provisions of this Agreement, the
Company shall be entitled to a temporary restraining order,
preliminary injunction and permanent injunction in order to
prevent or restrain any such breach by Executive.
(ii) The Company shall be entitled to seek all other monetary
damages to which it is entitled under the law in connection
with any transactions constituting a breach of any of the
provisions of Sections 5(a) or 5(b). Each of the rights and
remedies enumerated above shall be independent of the other,
and shall be severally enforceable, and all of such rights
and remedies shall be in addition to, and not in lieu of,
any other rights and remedies available to the Employer
under law or in equity.
(iii) If any of the covenants contained in Sections 5(a) or 5(b),
or any part thereof, hereafter are construed to be invalid
or unenforceable, the same shall not affect the remainder of
the covenant or covenants, which shall be given full effect,
without regard to the invalid portions, to the maximum
extent possible to carry out the intent of the parties.
<PAGE>
(iv) If any of the covenants contained in Sections 5(a) or 5(b),
or any part thereof, are held to be unenforceable because of
the duration of such provision or the area covered thereby,
the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of
such provision and, in its reduced form, said provision
shall then be enforceable.
(v) In the event that any action, suit or other proceeding in
law or in equity is brought to enforce the covenants
contained in Sections 5(a) and 5(b) or to obtain money
damages for the breach thereof, and such action results in
the award of a judgment for money damages or in the granting
of any injunction in favor of the Employer, all expenses
(including reasonable attorneys' fees) of the Employer in
such action, suit or other proceeding shall (on demand of
the Employer) be paid by the Executive. In the event the
Employer fails to obtain a judgment for money damages or an
injunction in favor of the Employer, all expenses (including
reasonable attorneys' fees) of the Executive in such action,
suit or other proceeding shall (on demand of the Executive)
be paid by the Employer.
d. Representation of Executive. The Executive represents and warrants
that he is not party to, or bound by, any agreement or commitment, or subject to
any restriction, including, but not limited to agreements related to previous
employment containing confidentiality or non-compete covenants, which in the
future may have a possibility of adversely affecting the business of the Company
or the performance by the Executive of his duties under this Agreement.
6. Inventions and Patents.
a. Covered Inventions. The Executive agrees that all processes,
technologies and inventions, including new contributions, improvements, ideas
and discoveries, of any type nature, description or purpose, the extent that
same relate to the Business, whether patentable or not, conceived, developed,
invented or made or improved by him prior to or during the Term, (collectively,
"Covered Inventions"), whether during or outside normal business hours, whether
or not on the Company's premises, whether or not requested or financed by the
Company, shall immediately be communicated by the Executive to the Company and
shall belong to the Company. The Executive shall further (a) promptly disclose
such Covered Inventions to the Company; (b) assign to the Company, without
additional compensation, all patent and other rights to such Covered Inventions
for the United States and foreign countries; and (c) sign all papers necessary
to carry out the foregoing. If any Covered Invention is described in a patent
application or is disclosed to third parties, directly or indirectly, by the
Executive within one (1) year after the termination of the Executive's
engagement, it is to be presumed that the Invention was conceived or made during
the Term.
b. Execution of Documents. The Executive shall at any time, whether
during or after the term of this Agreement, at the request of the Company,
execute all documents and do all acts and things as the Company may reasonably
request in connection with the obtaining of Patents in the United States of
America or elsewhere for Covered Inventions on behalf of the Company.
<PAGE>
7. Intellectual Property.
The Company shall be the sole owner of all the products and proceeds of the
Executive's services hereunder, including, but not limited to, all inventions
materials, ideas, concepts, formats, suggestions, developments, arrangements,
packages, programs and other intellectual properties that the Executive may
acquire, obtain, develop or create during the Term related to the Business, free
and clear of any claims by the Executive (or anyone claiming under the
Executive) of any kind or character whatsoever. The Executive shall, at the
request of the Company, execute such assignments, certificates or other
instruments as the Company may from time to time deem necessary or desirable to
evidence, establish, maintain, perfect, protect, enforce or defend its right,
title or interest in or to any such properties.
8. Indemnification.
The Company hereby undertakes and agrees to indemnify and hold Executive
harmless, to the fullest extent permitted under applicable law, from, against
and in respect of any and all loss, liability, cost, expense or damage (and any
and all actions, suits, proceedings, claims, demands, assessments, judgments,
costs and expenses, including, without limitation, legal fees and expenses,
incident to any of the foregoing) suffered or incurred by Executive arising out
of in connection with(a) his performance of his duties with or for the Company,
(b) his holding any office, title or capacity with the Company at any time, or
(c) by reason of any act or omission of the Company; provided that Executive did
not act in bad faith or in a manner he reasonably believed to be opposed to the
best interests of the Company.
9. General.
a. Notices. All notices, requests, consents and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, sent by facsimile
transmission with confirmation, overnight courier or mailed first class, postage
prepaid, by registered or certified mail (notices mailed shall be deemed to have
been given on the date mailed), as follows (or to such other address as either
party shall designate by notice in writing to the other in accordance herewith):
If to the Employer, to: If to the Employee, to:
Specialty Catalog Corp. Joseph Grabowski
21 Bristol Drive c/o Specialty Catalog Corp.
South Easton, MA 02375 21 Bristol Drive
Att'n: Thomas McCain, CFO South Easton, MA 02375
Fax: 508-238-5694 Fax: 508-238-5694
With a copy to: With a copy to:
Kane Kessler, P.C.
1350 Avenue of the Americas James J. Coster, Esq.
New York, New York 10019 Satterlee Stephens Burke & Burke LLP
Att'n: Jeffrey S. Tullman, Esq. 230 Park Avenue
Fax: 212-245-3009 New York, New York 10169
Tel: 212 818-9200
Fax: 212 818-9606
b. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely in Delaware.
<PAGE>
c. Headings. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
d. Entire Agreement. This Agreement may be executed by facsimile
signatures in one or more counterparts, each of which shall be deemed an
original. This Agreement sets forth the entire agreement and understanding of
the parties relating to the subject matter hereof and supersedes all prior
agreements, arrangements and understandings, written or oral, relating to the
subject matter hereof. No representation, promise or inducement has been made by
either party that is not embodied in this Agreement, and neither party shall be
bound by or liable for any alleged representation, promise or inducement not so
set forth.
e. Assignment. This Agreement, and the Executive's rights and obligations
hereunder, may not be assigned by the Executive. The Company may assign its
rights, together with its obligations, hereunder (i) to any affiliate or (ii) to
third parties in connection with any sale, transfer or other disposition of its
business or assets, except as would result in a change in control of the
Company; and the obligations of the parties hereunder shall be binding on their
successors, heirs or assigns.
f. Amendment. This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both of the parties hereto, or in the
case of a waiver, by the party waiving compliance. The failure of either party
at any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by either
party of the breach of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver of
the breach of any other term or covenant contained in this Agreement.
g. Survival. The provisions of Paragraphs 5, 6, 7 and 8 shall survive the
expiration or termination of this Agreement for any reason, and shall remain in
full force and effect.
<PAGE>
In Witness Whereof, the parties have executed this Employment Agreement as
of the date first above written.
Specialty Catalog Corp.
By: /s/ Martin E. Franklin
-----------------------
Name: Martin E. Franklin
Title: Director
The Executive:
/s/ Joseph Grabowski
--------------------
Joseph Grabowski
<PAGE>
EXHIBIT 1
---------
Year 2000 Incentive Compensation
For Year 2000 incentive compensation shall be determined as follows:
<TABLE>
<CAPTION>
Percentage Of Annual Base Salary To Be
Year 2000 EBITDA Awarded As Incentive Compensation
- ---------------- ---------------------------------
<S> <C> <C>
$6.3 million to $6.7 million 25.0% (Resulting in a bonus of
$75,000)
$6.8 million 30.0% (Resulting in a bonus of
$90,000)
$6.9 million 35.0% (Resulting in a bonus of
$105,000)
$7.0 million 40.0% (Resulting in a bonus of
$120,000)
$7.1 million 45.0% (Resulting in a bonus of
$135,000)
$7.2 million or greater 50.0% (Resulting in a bonus of
$150,000)
$7.2 million to $8.0 million 75.0% (Resulting in a bonus of
$225,000)
$8.0 million or over 100.0% (Resulting in a bonus of
$300,000)
</TABLE>
In the event that the Company's EBITDA is greater than $6.7 million but
falls between any of the amounts set forth in the left column, then the
percentage of annual Base Salary to be awarded as an incentive compensation
shall be prorated between the immediately lower and immediately higher entries
in the right column. For example, if EBITDA is exactly $6.85 million, or halfway
between $6.8 million and $6.9 million in the left column, then the incentive
compensation would be exactly halfway between the corresponding percentages in
the right column, or 32.5% of annual Base Salary.
<PAGE>
EXHIBIT 2
---------
Year 2001 Incentive Compensation
For periods commencing Year 2001
Corporation's Actual EBITDA Percentage Of Base Salary To Be
As A Percentage of Plan EBITDA Awarded As Incentive Compensation
- ------------------------------ ---------------------------------
90% 10.0%
100% 25.0%
110% 50.0%
120% 75.0%
130% and above 100.0%
In the event that the Company's actual EBITDA as a percentage of Plan
EBITDA is greater than 90% but falls between any of the percentages set forth in
the left column, then the percentage of Base Salary to be awarded as incentive
compensation shall be prorated between the immediately lower and immediately
higher entries in the right column. For example, if actual EBITDA is exactly 95%
of Plan EBITDA, or halfway between 90% and 100% in the left column, then the
incentive compensation would be exactly halfway between the corresponding
percentages in the right column, or 17.5% of Base Salary.
<PAGE>
Exhibit 10.2
================================================================================
EIGHTH AMENDMENT TO
CREDIT AND GUARANTY AGREEMENT
AND
SEVENTH AMENDMENT TO
CREDIT AGREEMENT
Dated as of May 12, 2000
Among
SPECIALTY CATALOG CORP.
SC CORPORATION, d/b/a SC DIRECT
SC PUBLISHING, INC.
DAXBOURNE INTERNATIONAL LIMITED
and
FLEET NATIONAL BANK
================================================================================
<PAGE>
EIGHTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT
AND
SEVENTH AMENDMENT TO CREDIT AGREEMENT
This EIGHTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT and SEVENTH
AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of May 12,
2000 by and among SPECIALTY CATALOG CORP., a Delaware corporation (the "Company"
or the "Parent"), SC CORPORATION, a Delaware corporation d/b/a SC DIRECT ("SC
Direct"), and SC PUBLISHING, INC., a Delaware corporation ("SC Publishing")
(each a "U.S. Borrower," and collectively, the "U.S. Borrowers"), DAXBOURNE
INTERNATIONAL LIMITED, (Registered No. 3369640), a private company limited by
shares formed under the laws of England and Wales (the "U.K. Borrower") (the
U.S. Borrowers and U.K. Borrower, each a "Borrower," and collectively, the
"Borrowers") and FLEET NATIONAL BANK (f/k/a BankBoston, N.A.), a national
banking association (the "Bank").
Recitals
--------
The Borrowers and the Bank are parties to a Credit and Guaranty
Agreement dated as of March 12, 1997 (as amended, the "U.S. Credit Agreement")
and a Credit Agreement dated as of October 3, 1997 (as amended, the "U.K. Credit
Agreement") (each a "Credit Agreement," and collectively, the "Credit
Agreements"). All capitalized terms used herein and not otherwise defined shall
have the meanings set forth in the Credit Agreements. The Borrowers desire to
amend the Credit Agreements in certain respects, and the Bank is willing to
agree to such amendments on the terms and conditions set forth herein.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 5, the Borrowers and the Bank hereby amend
the Credit Agreements as follows:
Section 1. Amendment of Definitions. Section 1.1 of each of the
------------------------
Credit Agreements is hereby amended as follows:
(a) The definition of "Consolidated EBITDA" is hereby
-------------------
deleted in its entirety and a new definition substituted
therefor as follows:
"`Consolidated EBITDA' shall mean for any
-------------------
period the sum of (a) Consolidated Net Income plus
(b) all amounts deducted in computing Consolidated
Net Income in respect of (i) interest expense on
Indebtedness, (ii) taxes based on or measured by
income, and (iii) depreciation and amortization
expense, in each case for the period under review;
provided, however, that in calculating Consolidated
-------- -------
Net Income, (i) the restructuring charge incurred by
the Company and its Subsidiaries relating to
severance packages for certain senior employees
during the quarter ended October 2, 1999, in an
aggregate amount not to exceed $600,000, shall not be
treated as an expense during such quarter but shall
be treated as an expense in future quarters as and
when such severance amounts are paid in cash or
property, (ii) the charge incurred by the Company
associated with the termination of the "Paula's
Hatbox" line of
<PAGE>
business during the quarter ended January 1, 2000
up to $1,800,000, shall not be treated as an
expense, (iii) the non-operating charge incurred
by the Company and its Subsidiaries associated
with a proposed transaction with Golub Associates
during the quarter ended March 31, 2000 up to
$467,000, shall not be treated as an expense and
(iv) the charge incurred by the Company and its
Subsidiaries related to severance payments made to
the chief executive officer of the Company during
the quarter ended March 31, 2000 up to $397,000,
shall not be treated as an expense; and provided,
--------
further, that in calculating Consolidated EBITDA
-------
for any period through the third quarter of 2000
for the purposes of Sections 7.1 and 7.3 hereto,
there shall be included an assumed $125,000 of net
income from operations of American Healthcare
Institute, Inc. ("AHI") for each quarter of
operations of AHI through the third quarter of
1999 of the Borrowers."
(b) A new definition of "Eighth Amendment" shall be added
in alphabetical order, as follows:
"`Eighth Amendment' shall mean the Eighth
Amendment to Credit and Guaranty Agreement and Seventh
Amendment to Credit Agreement dated as of May 12, 2000 by
and among the Borrowers and the Bank."
Section 2. Amendment of Financial Covenants. Article 7 of each of
--------------------------------
the Credit Agreements is hereby amended by deleting Section 7.2 in its entirety
and substituting therefor the following:
"Section 7.2. Ratio of Consolidated Operating Cash
------------------------------------
Flow to Consolidated Total Debt Service. The Company and its
---------------------------------------
Subsidiaries shall not permit for any period of four
consecutive fiscal quarters, commencing with the period
ending March 31, 2000, the ratio of (a) Consolidated
Operating Cash Flow to (b) Consolidated Total Debt Service,
to be less than 1.25-to-1.0; provided, however, that for
-------- -------
purposes of calculating Consolidated Total Debt Service, the
Company shall be presumed to have made the required $500,000
principal payments on the Term Loan on January 4, 1999, July
1, 1999 and October 4, 1999, notwithstanding that such
payments may actually have been made prior to such dates or
deemed to have been made prior to such dates."
Section 3. Amendment of Events of Default. Section 10.1 of each of
------------------------------
the Credit Agreements is hereby amended by deleting paragraph (h) in its
entirety and substituting therefor the following:
"(h) The chief executive officer of the
Company, SC Direct and SC Publishing shall cease to serve
actively as a full-time employee of such entities, whether
by reason of death, disability, resignation, action by the
Board of Directors, or otherwise, and 90 days shall have
passed without express written waiver."
Section 4. Waiver of Default. The Bank hereby waives the Default that
-----------------
has occurred pursuant to Section 10.1(h) of the Credit Agreements (prior to
amendment hereby) as a result of the cessation by Steven L. Bock of active
full-time employment with the U.S. Borrowers. The Bank's waiver
<PAGE>
hereunder of such Default shall not establish a course of dealing or constitute
or otherwise be an implicit waiver of subsequent Defaults.
Section 5. Effectiveness; Conditions to Effectiveness. This Eighth
------------------------------------------
Amendment to Credit and Guaranty Agreement and Seventh Amendment to Credit
Agreement shall become effective as of the date set forth above upon execution
hereof by the Borrowers and the Bank and satisfaction of the following
conditions:
(a) Fee. The Borrowers shall have paid to the Bank a fee of
---
$15,000, which fee shall be earned in full by the Bank upon its execution
hereof.
Section 6. Representations and Warranties; No Default. The U.S.
------------------------------------------
Borrowers hereby confirm to the Bank the representations and warranties of the
U.S. Borrowers set forth in Article 5 of the U.S. Credit Agreement as amended as
of the date hereof, as if set forth herein in full (provided, however, that
-------- -------
references therein to the 1996 Financial Statements shall be deemed to refer to
the audited financial statements of Specialty Catalog Corp. and its Subsidiaries
for fiscal year 1999; and provided, further, that the representation contained
-------- -------
in Section 5.12 of the U.S. Credit Agreement is qualified to the extent of the
resignation of Steven L. Bock as a full-time employee of the Borrowers). The
U.K. Borrower hereby confirms to the Bank the representations and warranties of
the U.K. Borrower set forth in Article 5 of the U.K. Credit Agreement as amended
as of the date hereof, as if set forth herein in full (provided, however, that
references therein to the 1996 Financial Statements shall be deemed to refer to
the audited financial statements of Specialty Catalog Corp. and its Subsidiaries
for fiscal year 1999; and provided, further, that the representation contained
-------- -------
in Section 5.12 of the U.K. Credit Agreement is qualified to the extent of the
resignation of Steven L. Bock as a full-time employee of the Borrowers). The
Borrowers hereby certify that (except as set forth and waived by the Bank
pursuant to Section 4 hereof) no Default exists under the Credit Agreements.
Section 7. Miscellaneous. The Borrowers agree to pay on demand all the
-------------
Bank's reasonable expenses in preparing, executing and delivering this
Amendment, and all related instruments and documents, including, without
limitation, the reasonable fees and out-of-pocket expenses of the Bank's special
counsel, Goodwin, Procter & Hoar LLP. This Amendment shall be a Bank Agreement
under each of the Credit Agreements and shall be governed by and construed and
enforced under the laws of The Commonwealth of Massachusetts (except to the
extent it effects any amendment of the U.K. Credit Agreement, as to which
English law shall apply).
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the U.S. Borrowers, the U.K. Borrower and the Bank
have caused this Eighth Amendment to Credit and Guaranty Agreement and Seventh
Amendment to Credit Agreement to be executed by their duly authorized officers
as of the date first set forth above.
SPECIALTY CATALOG CORP.
By: /s/ Thomas McCain
----------------------------------
Name: Thomas McCain
Title: Senior Vice President
SC CORPORATION d/b/a SC DIRECT
By: /s/ Thomas McCain
----------------------------------
Name: Thomas McCain
Title: Senior Vice President
SC PUBLISHING, INC.
By: /s/ Thomas McCain
----------------------------------
Name: Thomas McCain
Title: Senior Vice President
DAXBOURNE INTERNATIONAL LIMITED
By: /s/ Thomas McCain
----------------------------------
Name: Thomas McCain
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/ John Sharry
----------------------------------
Name: John Sharry
Title: Vice President
<PAGE>
ACKNOWLEDGMENT OF GUARANTOR
The undersigned, Guarantor of all Bank Obligations pursuant to an
Unlimited Guaranty dated as of December 30, 1997, hereby acknowledges and
consents to the foregoing.
SC LICENSING CORP.
By: /s/ Bradford Bishop
----------------------------------
Name: Bradford Bishop
Title: President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-30-2000 JAN-01-2000
<PERIOD-START> JAN-02-2000 JAN-03-1999
<PERIOD-END> APR-01-2000 APR-03-1999
<CASH> 202,181 911,969
<SECURITIES> 0 0
<RECEIVABLES> 1,644,996 1,262,769
<ALLOWANCES> (99,415) (57,845)
<INVENTORY> 5,178,285 5,156,821
<CURRENT-ASSETS> 11,741,752 10,894,334
<PP&E> 8,719,548 7,351,779
<DEPRECIATION> (4,261,004) (4,102,254)
<TOTAL-ASSETS> 25,265,074 22,203,738
<CURRENT-LIABILITIES> 15,073,338 10,775,867
<BONDS> 0 0
0 0
0 0
<COMMON> 52,397 52,397
<OTHER-SE> 7,651,572 7,623,867
<TOTAL-LIABILITY-AND-EQUITY> 25,265,074 22,203,738
<SALES> 13,963,300 13,266,668
<TOTAL-REVENUES> 13,963,300 13,266,668
<CGS> 4,867,849 4,560,428
<TOTAL-COSTS> 4,867,849 4,560,428
<OTHER-EXPENSES> 8,948,060 7,666,090
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 214,580 195,813
<INCOME-PRETAX> (67,189) 844,337
<INCOME-TAX> (27,560) 347,169
<INCOME-CONTINUING> (39,629) 497,168
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