-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2IYtwadroR3njXmtbziGDdeiZ2f7h8iGcqsqYXQbBiPemCXGTBq4wFrqcCQUXPm t7FCSAbaT9nhkXWeebkm6Q== 0000927016-99-002830.txt : 19990809 0000927016-99-002830.hdr.sgml : 19990809 ACCESSION NUMBER: 0000927016-99-002830 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECIALTY CATALOG CORP CENTRAL INDEX KEY: 0001020897 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 043253301 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21499 FILM NUMBER: 99679922 BUSINESS ADDRESS: STREET 1: 21 BRISTOL DRIVE CITY: SOUTH EASTON STATE: MA ZIP: 02375 BUSINESS PHONE: 5082380199 MAIL ADDRESS: STREET 1: 21 BRISTOL DRIVE CITY: SOUTH EASTON STATE: MA ZIP: 02375 10-Q 1 FORM 10-Q ================================================================================ 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 July 3, 1999 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-21499 ____________ SPECIALTY CATALOG CORP. (Exact Name of Registrant as Specified in Its Charter) 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 August 1, 1999: 4,401,886 ================================================================================ SPECIALTY CATALOG CORP. INDEX PART I. FINANCIAL STATEMENTS
Page No. -------- Item 1. Condensed Consolidated Financial Statements as of July 3, 1999, January 2, 1999 and July 4, 1998, for the Three Months Ended July 3, 1999 and July 4, 1998 and for the Six Months Ended July 3, 1999 and July 4, 1998 Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
-2- PART I. FINANCIAL STATEMENTS Item 1. Condensed Consolidated Financial Statements SPECIALTY CATALOG CORP. Condensed Consolidated Statements of Operations (unaudited)
Three months ended Six months ended July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998 ------------ ------------ ------------ ------------ Net sales.......................................... $12,264,398 $13,263,194 $25,531,066 $26,571,758 Cost of sales (including buying, occupancy and order fulfillment costs)...................... 4,160,051 4,745,763 8,720,478 9,579,016 ----------- ----------- ----------- ----------- Gross margin....................................... 8,104,347 8,517,431 16,810,588 16,992,742 Selling, general and administrative expenses....... 6,451,643 6,371,392 14,117,732 15,284,684 ----------- ----------- ----------- ----------- Income from operations............................. 1,652,704 2,146,039 2,692,856 1,708,058 Interest expense, net.............................. 169,297 214,882 365,110 425,235 ----------- ----------- ----------- ----------- Income before income taxes......................... 1,483,407 1,931,157 2,327,746 1,282,823 Income tax provision............................... 619,009 796,246 966,179 522,965 ----------- ----------- ----------- ----------- Net income......................................... 864,398 1,134,911 1,361,567 759,858 Other comprehensive loss........................... (14,418) (10,692) (50,704) (3,642) ----------- ----------- ----------- ----------- Comprehensive income............................... $ 849,980 $ 1,124,219 $ 1,310,863 $ 756,216 =========== =========== =========== =========== Basic earnings per share: Net income per share......................... $ 0.20 $ 0.22 $ 0.31 $ 0.15 =========== =========== =========== =========== Weighted average shares outstanding.......... 4,417,718 5,057,001 4,426,344 5,049,693 =========== =========== =========== =========== Diluted earnings per share: Net income per share......................... $ 0.18 $ 0.21 $ 0.29 $ 0.14 =========== =========== =========== =========== Weighted average shares outstanding.......... 4,698,616 5,529,354 4,708,514 5,524,650 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. -3- SPECIALTY CATALOG CORP. Condensed Consolidated Balance Sheets (unaudited)
July 3, January 2, July 4, 1999 1999 1998 ----------------- ----------------- ---------------- Assets Current assets: Cash and cash equivalents......................................... $ 1,066,831 $ 721,949 $ 67,042 Accounts receivable, net.......................................... 1,326,640 1,220,741 1,585,677 Merchandise inventories........................................... 4,574,730 5,388,395 5,770,502 Prepaid expenses.................................................. 3,165,881 3,738,846 3,805,301 ----------- ----------- ----------- Total current assets.................................... 10,134,082 11,069,931 11,228,522 Property, plant and equipment, net...................................... 3,607,732 2,946,112 2,799,773 Intangible assets, net.................................................. 3,344,187 3,678,158 3,800,637 Deferred income taxes................................................... 3,831,705 4,521,988 5,060,374 Other assets............................................................ 182,362 183,193 239,726 ----------- ----------- ----------- Total assets............................................ $21,100,068 $22,399,382 $23,129,032 =========== =========== =========== Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings............................................. $ 4,276,098 $ 5,097,067 $ 4,010,915 Accounts payable and accrued expenses............................. 2,279,068 3,403,414 2,575,572 Liabilities to customers.......................................... 975,783 676,447 947,750 Deferred purchase price obligation................................ -- -- 494,130 Current portion of long-term debt................................. 1,964,471 1,963,319 1,581,459 ----------- ----------- ----------- Total current liabilities............................... 9,495,420 11,140,247 9,609,826 Long-term debt.......................................................... 2,880,049 3,671,167 4,652,331 Other long-term liabilities............................................. 213,869 151,619 158,376 Commitments and contingencies Shareholders' equity: Common stock, $.01 par value: 10,000,000 shares authorized; 4,411,586, 4,481,986 and 5,057,001 shares issued and outstanding at July 3, 1999, January 2, 1999 and July 4, 1998, respectively........................................... 52,397 52,397 50,570 Additional paid-in capital...................................... 16,159,570 16,159,570 15,916,252 Deferred compensation........................................... (39,613) (48,363) (57,113) Accumulated other comprehensive income (loss)................... (34,778) 15,926 (147) Accumulated deficit............................................. (5,027,973) (6,389,540) (7,201,063) ----------- ----------- ----------- 11,109,603 9,789,990 8,708,499 Less treasury stock, at cost, 828,188 shares at July 3, 1999, 757,788 shares at January 2, 1999 and 0 shares at July 4, 1998......................................................... (2,598,873) (2,353,641) -- ----------- ----------- ----------- Total shareholders' equity 8,510,730 7,436,349 8,708,499 ----------- ----------- ----------- Total liabilities and shareholders' equity..... $21,100,068 $22,399,382 $23,129,032 =========== =========== ===========
See notes to condensed consolidated financial statements. -4- SPECIALTY CATALOG CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended July 3, 1999 July 4, 1998 ------------ ------------ Cash flows from operating activities: Net income...................................................... $ 1,361,567 $ 759,858 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 404,688 356,563 Amortization of deferred compensation....................... 8,750 8,749 Deferred income taxes....................................... 700,427 499,676 Changes in operating assets and liabilities: Accounts receivable........................................ (124,055) (462,088) Merchandise inventories.................................... 789,544 492,589 Prepaid expenses........................................... 569,347 (460,626) Other assets............................................... (9,874) 50,788 Accounts payable and accrued expenses...................... (1,091,280) (550,675) Liabilities to customers................................... 299,336 (49,193) Income taxes............................................... -- (215,305) Other long-term liabilities................................ -- 25,002 ------------ ------------ Net cash provided by operating activities....................... 2,908,450 455,338 ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment................ (830,697) (829,910) ------------ ------------ Net cash used in investing activities........................... (830,697) (829,910) ------------ ------------ Cash flows from financing activities: Advances (repayments) on short-term borrowings, net...... (730,389) 211,682 Repayment of long-term debt.............................. (713,164) (351,717) Repurchase of treasury stock............................. (245,232) -- Issuance of common stock................................. -- 10,752 Repayment of capital lease obligations................... (38,007) (34,381) ------------ ------------ Net cash used in financing activities........................... (1,726,792) (163,664) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents.... (6,079) 1,438 ------------ ------------ Increase (decrease) in cash and cash equivalents................ 344,882 (536,798) Cash and cash equivalents, beginning of year.................... 721,949 603,840 ------------ ------------ Cash and cash equivalents, end of year.......................... $ 1,066,831 $ 67,042 ============ ============
Summary of Non-Cash Transactions: During the three months ended April 3, 1999, the Company recorded capital lease obligations of $100,257 related to the purchase of data processing equipment. During the three months ended April 4, 1998, 35,000 stock options were exercised for which the Company recorded a deduction in its income tax payable and an increase in additional paid in capital of $67,024. See notes to condensed consolidated financial statements. -5- SPECIALTY CATALOG CORP. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Basis of Presentation These unaudited condensed consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K of Specialty Catalog Corp. (the "Company") for the fiscal year ended January 2, 1999, and the consolidated financial statements and footnotes included therein. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The results of operations for the three and six months ended July 3, 1999 are not necessarily indicative of the results for the entire fiscal year ending January 1, 2000. The financial statements for the three and six months ended July 3, 1999 and July 4, 1998 are unaudited but include, in the Company's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies The accounting policies underlying the financial statements are those set forth in Note 1 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended January 2, 1999. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98- 1 required that costs incurred in the development of internal use software be capitalized and amortized over a period of time. The Company adopted SOP 98-1 in the first quarter of 1998. During the three months ended July 3, 1999 and July 4, 1998, the Company capitalized approximately $344,000 and $87,000, respectively, of costs associated with a new comprehensive catalog information system, of which approximately $144,000 and $49,000, respectively, were internal payroll and payroll related costs. During the six months ended July 3, 1999 and July 4, 1998, the Company capitalized approximately $604,000 and $217,000, respectively, of costs, of which approximately $251,000 and $116,000, respectively, were internal payroll and payroll related costs. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet determined the effect, if any, of adopting SFAS No. 133 on the consolidated financial statements. 3. Reconciliation of Basic and Diluted Earnings per Share The following table (in thousands) shows the amounts used in computing basic and diluted earnings per share for net income and the effects of potentially dilutive options on the weighted average number of shares outstanding. -6- SPECIALTY CATALOG CORP. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited)
For the three months ended For the six months ended July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998 -------------- -------------- --------------- -------------- Net Net Net Net Income Shares Income Shares Income Shares Income Shares Basic earnings per share $864 4,418 $1,135 5,057 $1,362 4,426 $760 5,050 Effect of dilutive options -- 281 -- 472 -- 282 -- 475 ---- ----- ------ ----- ------ ----- ---- ----- Diluted earnings per share $864 4,699 $1,135 5,529 $1,362 4,708 $760 5,525 ==== ===== ====== ===== ====== ===== ==== =====
Options to purchase 677,601 shares of common stock ranging from $5.33 to $7.15 per share were not included in computing diluted EPS for the three and six months ended July 3, 1999 because their effects were antidilutive. Options to purchase 545,735 shares of common stock ranging from $6.50 to $7.15 per share were not included in computing diluted EPS for the three and six months ended July 4, 1998 because their effects were also antidilutive. 4. Restructuring Charges During the third quarter of 1998, a restructuring charge of $469,558 was recorded to reflect the reorganization of certain management positions. Included in accrued expenses at July 3, 1999 are accrued restructuring charges of $10,721. 5. Business Segments and Financial Information by Geographic Location Specialty Catalog Corp. has three reportable segments: SC Direct, SC Publishing and Daxbourne International Limited. SC Direct primarily sells women's wigs and hairpieces through its Paula Young(R) catalog. SC Direct also offers African-American women a broad selection of quality wigs, hairpieces, apparel and related products through its Especially Yours(R) catalog. In addition, SC Direct sells apparel, hats and other fashion accessories through its Paula's Hatbox(R) catalog. SC Publishing distributes catalogs under its Western Schools(R) brand and specializes in providing continuing education courses to nurses and CPAs. Daxbourne International Limited is a retailer and wholesaler of women's wigs, hairpieces and related products in the United Kingdom. The accounting policies of the reportable segments are the same as those described in Note 1 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended January 2, 1999. The Company's reportable segments are strategic business units that offer either different products or operate in different geographic locations. The Company markets its products in two major geographic areas, the United States and the United Kingdom. SC Direct and SC Publishing market their products and maintain their assets in the United States. Daxbourne International Limited markets its products and maintains its assets in the United Kingdom. -7- 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 and six months ended July 3, 1999 and July 4, 1998 follows (intersegment eliminations are inter-company receivables and investments in subsidiaries):
SC Intersegment -- SC Direct Publishing Daxbourne Eliminations Total --------- ---------- --------- ------------ ----- For the three months ended July 3, 1999 Net sales................................. $ 9,761,402 $1,258,202 $1,244,794 -- $12,264,398 Gross margin.............................. 6,271,952 953,908 878,487 -- 8,104,347 Selling, general and administrative (1)... 5,021,525 693,872 736,246 -- 6,451,643 Depreciation and amortization (1)......... 98,766 11,145 96,843 -- 206,754 Operating profit.......................... 1,250,427 260,036 142,241 -- 1,652,704 Interest expense, net..................... 112,488 -- 56,809 -- 169,297 Income tax provision...................... 466,576 106,618 45,815 -- 619,009 Segment assets............................ 16,819,527 4,107,961 4,709,419 $(4,536,839) 21,100,068 Capital expenditures...................... 806,908 7,067 16,722 -- 830,697 For the three months ended July 4, 1998 Net sales................................. $11,050,821 $ 964,785 $1,247,588 -- $13,263,194 Gross margin.............................. 6,960,795 677,892 878,744 -- 8,517,431 Selling, general and administrative (1)... 5,057,798 617,706 695,888 -- 6,371,392 Depreciation and amortization (1)......... 79,517 5,473 97,622 -- 182,612 Operating profit.......................... 1,902,997 60,186 182,856 -- 2,146,039 Interest expense, net..................... 136,581 -- 78,301 -- 214,882 Income tax provision...................... 724,229 24,677 47,340 -- 796,246 Segment assets............................ 17,758,843 3,655,896 5,229,108 $(3,514,815) 23,129,032 Capital expenditures...................... 804,995 -- 24,915 -- 829,910
(1) Depreciation and amortization is included in selling, general and administrative expense in the condensed consolidated statements of operations under "selling, general and administrative expenses" for the three months ended July 3, 1999 and July 4, 1998. -8- SPECIALTY CATALOG CORP. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited)
SC -- Intersegment SC Direct Publishing Daxbourne Eliminations Total ----------- ----------- --------- ------------ ----- For the six months ended July 3, 1999 Net sales................................. $20,061,732 $2,835,371 $2,633,963 -- $25,531,066 Gross margin.............................. 12,790,547 2,156,329 1,863,712 -- 16,810,588 Selling, general and administrative (1)... 11,299,146 1,325,063 1,493,523 -- 14,117,732 Depreciation and amortization (1)......... 190,291 22,072 192,327 -- 404,690 Operating profit.......................... 1,491,401 831,266 370,189 -- 2,692,856 Interest expense, net..................... 242,340 -- 122,770 -- 365,110 Income tax provision...................... 512,136 340,835 113,208 -- 966,179 Segment assets............................ 16,819,527 4,107,961 4,709,419 $(4,536,839) 21,100,068 Capital expenditures...................... 806,908 7,067 16,722 -- 830,697 For the six months ended July 4, 1998 Net sales................................. $21,701,349 $2,280,996 $2,589,413 -- $26,571,758 Gross margin.............................. 13,549,861 1,602,157 1,840,724 -- 16,992,742 Selling, general and administrative (1)... 12,717,959 1,203,046 1,363,679 -- 15,284,684 Depreciation and amortization (1)......... 151,903 13,774 195,297 -- 360,974 Operating profit.......................... 831,902 399,111 477,045 -- 1,708,058 Interest expense, net..................... 260,456 -- 164,779 -- 425,235 Income tax provision...................... 234,290 163,635 125,040 -- 522,965 Segment assets............................ 17,758,843 3,655,896 5,229,108 $(3,514,815) 23,129,032 Capital expenditures...................... 804,995 -- 24,915 -- 829,910
(1) Depreciation and amortization is included in selling, general and administrative expense in the condensed consolidated statements of operations under "selling, general and administrative expenses" for the six months ended July 3, 1999 and July 4, 1998. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In addition to the historical information contained herein, this Quarterly Report on Form 10-Q for Specialty Catalog Corp. (the "Company") may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the Company's expected future revenues, operations and expenditures, estimates of the potential markets for the Company's products, assessments of competitors and potential competitors and projected timetables for the market introduction of the Company's products. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, but not limited to, the following risks and uncertainties: (i) the Company's indebtedness and future capital requirements, (ii) increasing postal rates, paper prices and media costs, (iii) limited sources of fiber used to make the Company's products, (iv) the limited number of suppliers of the Company's products, (v) the Company's dependence upon foreign suppliers, especially in China, Indonesia and Korea, (vi) the customary risks of doing business abroad, including fluctuations in the value of currencies, (vii) the potential development of a cure for hair loss and cancer treatment improvements, (viii) the effectiveness of the Company's catalogs and advertising programs, (ix) the Company's competition, (x) the impact of acquisitions on the Company's prospects and (xi) contingencies and risks associated with the year 2000 problem. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from those projected or suggested in the forward-looking statements is contained in the Company's filings with the Securities and Exchange Commission, including those risks and uncertainties discussed under the caption "Risk Factors" in the Company's Form 10-K for the year ended January 2, 1999. The forward-looking statements contained herein represent the Company's judgment as of the date of this Quarterly Report on Form 10-Q, and the Company cautions readers not to place undue reliance on such statements. Three Months Ended July 3, 1999 Compared to the Three Months Ended July 4, 1998 The Company's net sales decreased to $12.3 million for the three months ended July 3, 1999 from $13.3 million for the three months ended July 4, 1998, a decrease of $1.0 million, or 7.5%. SC Direct's net sales were $1.3 million lower than the prior year's second quarter net sales, primarily due to (i) a decrease of $1.5 million in net sales from its Paula Young(R) catalog, primarily as a result of less sales to new customers due to a reduction in advertising expenditures and (ii) a decrease of approximately $215,000 in net sales from the Christine Jordan(R) catalog as a result of the Company's decision to no longer circulate the Christine Jordan(R) catalog, but continue to sell the branded products through its Paula Young(R) catalog. These net sales decreases were offset by an increase of approximately $341,000 in net sales from SC Direct's Especially Yours(R) catalog and an increase of approximately $133,000 in net sales from SC Direct's Paula's Hatbox(R) catalog. SC Publishing's net sales were approximately $293,000 higher than the prior year's second quarter net sales, primarily due to improved customer response rates. Gross margin as a percent of net sales increased to 66.1% for the three months ended July 3, 1999 from 64.2% for the three months ended July 4, 1998. This increase in the gross margin rate reflects the Company's efforts to transition its core Paula Young(R) catalog from an emphasis on reduced prices and discounting to a focus on product line expansion and innovation, including the introduction of human hair and human hair blend wigs. Gross margin decreased to $8.1 million for the three months ended July 3, 1999 from $8.5 million for the three months ended July 4, 1998, a decrease of approximately $414,000, or 4.9%, as a result of the reduction in net sales mentioned above, offset by the increase in gross margin caused by the increase in the gross margin rate mentioned above. Selling, general and administrative expenses ("SG&A") increased slightly to $6.5 million for the three months ended July 3, 1999 from $6.4 million for the three months ended July 4, 1998, an increase of approximately $80,000, or 1.3%. -10- Interest expense, net decreased to approximately $169,000 for the three months ended July 3, 1999 from approximately $215,000 for the three months ended July 4, 1998, a decrease of approximately $46,000, or 21.4%. The decrease in interest expense, net reflects lower average principal amounts outstanding on the Company's bank facility due to the positive free cash flows generated by the Company. Six Months Ended July 3, 1999 Compared to the Six Months Ended July 4, 1998 Net sales decreased to $25.5 million for the six months ended July 3, 1999 from $26.6 million for the six months ended July 4, 1998, a decrease of $1.1 million, or 4.1%. SC Direct's net sales were $1.6 million lower than the prior year's first half net sales, primarily due to (i) a decrease of $2.3 million in net sales from its Paula Young(R) catalog, primarily as a result of less sales to new customers due to a reduction in advertising expenditures, and (ii) a decrease of approximately $472,000 in net sales from the Christine Jordan(R) catalog as a result of the Company's decision to no longer circulate the Christine Jordan(R) catalog, but continue to sell the branded products through its Paula Young(R) catalog. These net sales decreases were offset by an increase of $1.1 million in net sales from SC Direct's Especially Yours(R) catalog and an increase of approximately $52,000 in net sales from SC Direct's Paula's Hatbox(R) catalog. SC Publishing's net sales were approximately $554,000 higher than the prior year's first half net sales, primarily due to improved customer response rates. Gross margin as a percent of net sales increased to 65.8% for the six months ended July 3, 1999 from 64.0% for the six months ended July 4, 1998. This increase in the gross margin rate reflects the Company's efforts to transition its core Paula Young(R) catalog from an emphasis on reduced prices and discounting to a focus on product line expansion and innovation, including the introduction of human hair and human hair blend wigs. The gross margin decreased to $16.8 million for the six months ended July 3, 1999 from $17.0 million for the six months ended July 4, 1998, a decrease of approximately $183,000, or 1.1%, as a result of the reduction in net sales mentioned above, offset by the improvement in the gross margin rate mentioned above. SG&A expenses decreased to $14.1 million for the six months ended July 3, 1999 from $15.3 million for the six months ended July 4, 1998, a decrease of $1.2 million, or 7.8%. The decrease in SG&A related to lower advertising expenses of $1.2 million which is primarily a result of the Company's strategic decision to eliminate certain marginal advertising programs which did not generate new customers and sales at a sufficient level to justify its expenditures. Interest expense, net decreased to approximately $365,000 for the six months ended July 3, 1999 from approximately $425,000 for the six months ended July 4, 1998, a decrease of approximately $60,000, or 14.1%. The decrease in interest expense, net reflects lower average principal amounts outstanding on the Company's bank facility due to the positive free cash flows generated by the Company. Liquidity and Capital Resources Cash flows provided by operating activities were $2.9 million for the six months ended July 3, 1999, offset by approximately $831,000 used in investing activities and $1.7 million used in financing activities. The major factors that caused the difference between net income and cash flows from operations are: depreciation and amortization of approximately $405,000, increases in non- cash working capital items of approximately $433,000 and an increase in deferred income taxes of approximately $700,000. The $831,000 in cash used in investing activities was mainly due to the Company's installation of a new catalog information system, which amounted to approximately $604,000. The $1.7 million in cash used in financing activities was due to (i) the repayment of approximately $730,000 on the Company's short-term borrowings, (ii) the repayment of long-term debt of approximately $713,000 and (iii) the Company's repurchase of approximately $245,000 of common stock. -11- The Company is in the process of installing a new catalog information system purchased from an outside vendor. The system is currently undergoing modification by the Company's internal staff. The system is scheduled to be implemented for SC Direct, the main operating subsidiary of the Company, in the third quarter of 1999. Following the implementation by SC Direct, it is anticipated that the system will be modified to deal with the special processing needs of SC Publishing, another subsidiary of the Company. The entire cost of the new system, including new hardware and internal payroll and payroll related costs, is estimated to be $2.0 million. As of July 3, 1999, $1.7 million of these costs have been capitalized, of which approximately $344,000 was added during the three months ended July 3, 1999. The Company's cash flow from operations and available credit facilities are considered adequate to fund planned business operations and both the short-term and long-term capital needs of the Company. However, certain events, such as additional significant acquisitions, could require new external financing. Year 2000 Readiness The Company's current information and computer systems will be affected by the Year 2000 ("Y2K") issue, which refers to the inability of computerized systems to process dates beyond December 31, 1999. The Company has formulated a Y2K Plan to address the Company's Y2K issues. Based on its current assessments from the Y2K Plan, the Company does not expect at present that it will experience a disruption of its operations as a result of the change to the new millennium. The Company is in the process of installing a new comprehensive catalog information system purchased from an outside vendor, who has represented that the software addresses the Y2K issue. If the Company's new computer system fails with respect to the Y2K issue, there could be a material adverse impact on the business operations or financial performance of the Company, including its ability to take customer orders, ship products, invoice customers and collect payments. It is anticipated that the installation will be completed in the third quarter of 1999 for SC Direct. The Company estimates that the entire cost of the new system, including new hardware and internal payroll and payroll related costs, will be $2.0 million. As of July 3, 1999, $1.7 million of these costs have been capitalized, of which approximately $344,000 was added during the three months ended July 3, 1999. If the new catalog information system cannot be effectively installed, then the Company has scheduled its current computer vendor to provide a free upgrade in the third quarter of 1999 that will make the Company's current computer operating system Y2K ready. Also, in January 1998, the Company successfully converted its financial and accounting systems to a new software package that has been represented by the vendor to be Y2K ready. The foregoing timetable and assessment of costs to become Y2K compliant reflect management's current best estimates. These estimates are based on many assumptions, including assumptions about the cost, availability and ability of resources to locate, remediate and modify affected systems, equipment and facilities. Based upon its activities to date, the Company does not currently believe that these factors will cause results to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, financial institutions, non-retail customers and governments do not become Y2K compliant on a timely basis. The Company is assessing the state of readiness of its major suppliers and customers through written inquiry and evaluation of responses. The Company intends to follow up with those suppliers or customers that indicate material problems. Alternate suppliers or service providers will be identified for those whose responses indicate an unusually high risk of a Y2K problem. The Company's evaluation of business processes that are not related to information systems, and the development of contingency plans where such evaluation identifies a high risk of a Y2K problem, should be completed by the third quarter of 1999. The main risks associated with the Y2K problem are the uncertainties as to whether the Company's suppliers and vendors can continue to perform their services for the Company uninterrupted by the Y2K event, and whether the Company's non-retail customers can continue to -12- operate their businesses uninterrupted by the Y2K event. The Company's suppliers, if they are unable to remediate their Y2K problems, may be unable to produce or deliver goods ordered by the Company. The Company depends significantly upon telephone orders; should the Company's telephone service be adversely affected, the Company will be unable to receive a high percentage of its retail orders. The Company also depends in large measure on delivery services such as the United States Post Office, Federal Express and UPS to deliver goods to retail customers; accordingly, should one or more of these delivery services prove unable to make deliveries as a result of Y2K problems, the Company's cash flow and business would be severely and adversely affected. Although the state of readiness of the Company's suppliers, delivery services and non-retail customers will be monitored and evaluated, and contingency plans will be developed, no assurances can be given as to the eventual state of readiness of the Company's suppliers and/or customers. Nor can any assurances be given as to eventual effectiveness of the Company's contingency plans. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. Actual results may differ materially from such projected information due to changes in the underlying assumptions. Recently Issued Accounting Pronouncements In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98- 1"). SOP 98-1 required that costs incurred in the development of internal use software be capitalized and amortized over a period of time. The Company adopted SOP 98-1 in the first quarter of 1998. During the three months ended July 3, 1999 and July 4, 1998, the Company capitalized approximately $344,000 and $87,000, respectively, of costs associated with a new comprehensive catalog information system, of which approximately $144,000 and $49,000, respectively, were internal payroll and payroll related costs. During the six months ended July 3, 1999 and July 4, 1998, the Company capitalized approximately $604,000 and $217,000, respectively, of costs, of which approximately $251,000 and $116,000, respectively, were internal payroll and payroll related costs. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet determined the effect, if any, of adopting SFAS No. 133 on the consolidated financial statements. Quantitative and Qualitative Disclosures About Market Risk The Company's primary exposures to market risks include fluctuations in interest rates on its short-term and long-term debt of $9.1 million as of July 3, 1999 and in foreign currency exchange rates. The Company does not use derivative financial instruments. The Company is subject to interest rate risk on its short-term borrowings under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Management does not believe that the risk inherent in the variable-rate nature of these instruments will have a material effect on the Company's consolidated financial statements. However, no assurance can be given that such a risk will not have a material adverse effect on the Company's financial statements in the future. The Company's US term loan and US revolving line of credit bear interest rates based on either a base rate or a LIBOR contract rate. As of July 3, 1999, the US term loan was under a LIBOR contract rate of 6.81% for $3.5 million. As of July 3, 1999, $2.0 million of the US revolving line of credit was under LIBOR contract rates ranging from 6.70% to 6.86% and the remainder of the US revolving line of credit was at the base rate of 8.00%. The Company's UK term loan and UK revolving line of credit bear interest rates based on either a Sterling base -13- rate or a LIBOR contract rate. As of July 3, 1999, a majority of both the UK term loan and UK revolving line of credit were under a LIBOR contract rate of 9.48%. As of July 3, 1999, the outstanding borrowings on the Company's credit facilities were $9.1 million. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $86,000 on an annual basis. The Company's objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared with fixed-rate borrowings and longer-term variable rate borrowings. The foreign currencies to which the Company has the most significant exchange rate exposure are the British Pound, Chinese Yuan and Indonesian Rupiah. The Company currently expects that most of its wigs and hairpieces will continue to be manufactured in China and Indonesia in the future. Accordingly, the Company's operations are subject to fluctuations in the value of these countries' currencies. Although to date such exchange rate exposures have not had a significant effect on the Company's business operations, no assurance can be given that such exchange rate exposures will not have a material adverse effect on the Company's business operations in the future. Also, the implementation of the Euro currency in 1999 is not expected to materially affect the Company's operations, or its risk profile. Based on a hypothetical ten percent adverse movement in interest rates and foreign currency exchange rates, the potential losses in future earnings, fair value of risk-sensitive financial instruments, and cash flows are not material, although the actual effects may differ materially from the hypothetical analysis. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of shareholders on Tuesday, May 25, 1999. The following represents the results of the voting on proposals submitted to a vote of shareholders at such meeting: a. Proposal to elect directors: Name of Director Number of votes in favor Number of votes withheld ---------------- ------------------------ ------------------------ Steven L. Bock 4,236,492 -- Alan S. Cooper 4,236,492 -- Martin E. Franklin 4,236,492 -- Samuel L. Katz 4,236,492 -- Guy Naggar 4,236,492 -- Andrea Pomerantz Lustig 4,233,992 2,500 All persons name above were re-elected as directors of the Company for a term of office expiring on the date of the next annual meeting of shareholders, or special meeting in lieu thereof, and until their respective successors are duly elected and qualified. -14- b. Proposal to amend the Company's 1996 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder from 750,000 to 1,000,000. Votes for Votes against Votes abstaining Not voted --------- ------------- ---------------- ---------- 3,313,193 270,383 79,026 573,890 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Amendment dated as of June 24, 1999 to Employment Agreement between Registrant and Steven L. Bock, Filed herewith. 27.1 Financial Data Schedule (for EDGAR filing purposes only), Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the three and six months ended July 3, 1999. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECIALTY CATALOG CORP. Dated: August 2, 1999 By: /s/ Steven L. Bock -------------------------------- Steven L. Bock Chairman, President and Chief Executive Officer Dated: August 2, 1999 By: /s/ Thomas K. McCain -------------------------------- Thomas K. McCain Senior Vice President and Chief Financial Officer -16- EX-10.1 2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.1 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT First Amendment dated as of June 24, 1999 (the "First Amendment") to the --------------- Amended and Restated Employment Agreement by and between Specialty Catalog Corp., a Delaware corporation ("Specialty"), SC Corporation, a Delaware --------- corporation ("SC"; together with Specialty, sometimes referred to as the -- "Corporation"), each having its offices at 21 Bristol Drive, South Easton, ----------- Massachusetts, and Steven L. Bock, an individual having an address at 10 Graystone Lane, Weston, Massachusetts (the "Executive"), dated as of October 15, --------- 1996 (as further amended and in effect from time to time, the "Employment ---------- Agreement"). Terms not otherwise defined herein which are defined in the - --------- Employment Agreement shall have the same respective meanings herein as therein. WHEREAS, the Corporation and Executive have agreed to modify certain terms and conditions of the Employment Agreement as specifically set forth in this First Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: (S)1. Amendments to Section 1(c) of the Employment Agreement. Section ------------------------------------------------------ 1(c) of the Employment Agreement is hereby amended and restated in its entirety by inserting the following new Section 1(c): (c) Subject to earlier termination as hereinafter provided, the term of this Agreement shall commence on the Effective Date and shall end (unless notice of expiration shall not have been timely given by the Corporation or Executive, as hereinafter provided in this Section 1(c)) at the close of business on December 31, 1999 (as such term may be extended or earlier terminated, the "Term"). The Corporation may cause the Term to ---- expire at December 31, 1999 by giving notice of expiration in writing to Executive on or before June 30, 1999. Executive may cause the Term to expire at December 31, 1999 by giving notice of expiration in writing to the Corporation on or before July 31, 1999. Either the Corporation or Executive may cause the Term to expire at the end of any calendar year ending on or after December 31, 2000 by giving not less than six months' notice of expiration in writing to the other party. For purposes of this Employment Agreement, a "Term Year" shall be a period during the Employment Term commencing on January 1, 1997 (or any anniversary thereof) and ending on the date immediately preceding the next anniversary of such date, it being understood that, for purposes of this Agreement, the portion of any calendar year following the last full calendar year of the Term shall be deemed a Term Year, except that vacation pursuant to Section 2.(d) for any Term Year of less than a full calendar year in duration shall be prorated. -2- (S)2. Ratification, Etc. Except as expressly amended hereby, the ------------ --- Employment Agreement and all documents, instruments and agreements related thereto, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Employment Agreement and this First Amendment shall be read and construed as a single agreement. All references in the Employment Agreement or any related agreement or instrument to the Employment Agreement shall hereafter refer to the Employment Agreement as amended hereby. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as a document under seal as of the date first above written. SPECIALTY CATALOG CORP. By: /s/ David E. Cicurel -------------------- Name: David E. Cicurel Title: Director SC CORPORATION By: /s/ David E. Cicurel -------------------- Name: David E. Cicurel Title: Director /s/ Steven L. Bock ------------------ STEVEN L. BOCK EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS JAN-01-2000 JAN-03-1999 JUL-03-1999 1,066,831 0 1,388,613 (61,973) 4,574,730 10,134,082 7,834,436 (4,226,704) 21,100,068 9,495,420 0 0 0 52,397 8,458,333 21,100,068 25,531,066 25,531,066 8,720,478 8,720,478 14,117,732 0 365,110 2,327,746 966,179 1,361,567 0 0 0 1,361,567 0.31 0.29
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