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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               ----------------

                                   FORM 10-K

           FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
                OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934 For the fiscal year ended December 30, 2000

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

For the transition period from            to

                        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       (IRS Employer Identification No.)
    incorporation or organization)


                                                        02375
           21 BRISTOL DRIVE                          (Zip Code)
      SOUTH EASTON, MASSACHUSETTS
    (Address of principal executive
               offices)

                                (508) 238-0199
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                     None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.01 par value
                               (title of class)

   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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, if definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 23, 2001 (based on the closing sale price of the Common
Stock on the NASDAQ National Market on such date) was $3,898,477.

   Number of shares of the Registrant's Common Stock outstanding as of March
23, 2001: 4,337,886

                      Documents Incorporated by Reference

   Proxy statement to be distributed by management in connection with the
Registrant's Year 2001 Annual Meeting of Shareholders, to be filed not later
than April 29, 2001, incorporated by reference into Part III of this Report.

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                   NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Except for the historical information contained herein, this Annual Report
on Form 10-K for Specialty Catalog Corp. 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, Korea and Indonesia, (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 under the caption "Risk Factors" under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The forward-looking statements contained herein represent the
Company's judgment as of the date of this Annual Report on Form 10-K, and the
Company cautions readers not to place undue reliance on such statements.

   Unless otherwise indicated,"2000" means the 52 weeks ended December 30,
2000, "1999" means the 52 weeks ended January 1, 2000 and "1998" means the 52
weeks ended January 2, 1999.

                                    PART I

Item 1. Business

General

   Specialty Catalog Corp. (the "Company") is the leading direct marketer of
women's wigs and hairpieces in the US. The Company offers its products through
multiple distribution channels consisting of regular mailings of catalogs to
its proprietary customer list, Internet marketing and selling, and catalogs
circulated as part of advertising and mailing-list rental programs. The
Company has operations in the United States and the United Kingdom, and
certain other operations. The Company provides its customers with a broad
selection of stylish and comfortable products at affordable prices.

   The growth strategy of the Company's wig and hairpiece business has these
key elements:

    .  Increasing the profitability of its core business by improving
       operating processes and customer satisfaction,

    .  Increasing sales from its core catalog circulation by expanding its
       proprietary customer list through advertising and list rental
       programs,

    .  Increasing sales to its existing customers through refinements in
       database management, merchandise offerings, customer service, and
       creative presentations,

    .  Increasing sales through Internet retailing and advertising,

    .  Increasing sales through expanded business to business
       opportunities, and

    .  Pursuing international expansion opportunities.

Women's Wigs and Hairpieces

   The Paula Young(R) catalog, with a 2001 planned circulation of over 9-
million catalogs to its customer file, has the largest circulation and sales
of any wig and hairpiece catalog in the US and Canada. As the Company's
flagship catalog, the Paula Young catalog features a broad assortment of
ladies wigs and hairpieces under the

                                       2
<PAGE>

Company's proprietary brand names--the Paula Young and Christine Jordan(R)
lines of fashion wigs and hairpieces--and other popular wig brands, including
Eva Gabor(R). In addition, the Paula Young catalog offers a selection of wig
and hairpiece accessories including turbans, shampoos, combs and styling
heads.

   The Especially Yours(R) catalog features the Especially Yours brand of
women's wigs and hairpieces specifically designed for African-American women.
The Especially Yours line features women's wigs and hairpieces including
natural hairline crimping and fiber texture that reflects the natural hair of
its customers. Especially Yours catalogs also offer a selection of women's
apparel, hats and accessories to the African-American women's market. The
catalog also carries the Diahann Carroll(TM) line of wigs and hairpieces under
an exclusive license with the Tony-award winning actress and singer.

   The Company views each catalog as an opportunity to communicate with
current and potential customers. In this regard, the Paula Young and the
Especially Yours catalogs present the Company's products in a manner that
focuses on the natural look, beauty, versatility and comfort of the products.
Furthermore, the catalogs often feature customer testimonials, wearing
instructions and other presentations designed to make the catalog the
authoritative source on women's wigs and hairpieces.

International Activities

   Through its wholly-owned subsidiary, Daxbourne International Limited
("Daxbourne"), the Company is a leading retailer and wholesaler of women's
wigs, hairpieces and related products in the United Kingdom. Daxbourne has
established a significant franchise in the UK through wholesale, retail and
catalog distribution channels. Daxbourne's retail operations consist of 11
retail concessions within department stores and one stand-alone retail outlet.

   On January 26, 2001, Daxbourne acquired the women's wig and hairpiece
business of the Company's British licensee. The licensee had been the
exclusive British licensee of the Company's Paula Young brand of women's wigs
and hairpieces since 1994. During the term of the license agreement the
licensee developed and circulated the Paula Young Fashion Wigs catalog using
the merchandising and creative resources of the Company, thereby establishing
Paula Young as a preeminent brand in Britain with a loyal customer following.
The acquisition agreement provides for the termination of the 1994 license
agreement and transfer of the assets of the Paula Young Fashion Wigs catalog
business to Daxbourne. Daxbourne's catalog division will now circulate both
catalogs--continuing to circulate its Jacqueline Collection catalog and the
Paula Young Fashion Wigs catalog.

Western Schools(R)

   Under the Company's Western Schools brand, continuing education ("CE")
courses are offered to nurses (approximately 92 percent of its total revenues
in 2000) and CPAs (approximately 8 percent of its total revenues in 2000).
Western Schools has developed its franchise by offering high-quality, value-
priced CE courses.

American Healthcare Institute(R)

   Under the Company's American Healthcare Institute ("AHI") brand, the
Company sponsors approximately 1,000 CE seminars and conferences each year to
nurses and other mental health professionals.

   On February 3, 2001, AHI moved from Wheaton, Maryland to the Company's
headquarters in South Easton, Massachusetts.

Internet Marketing (wig.com, paulayoung.com, especiallyyours.com, Western-
online.com and Ahi-online.com)

   During 2000, the Company continued its Internet business by introducing
Especiallyyours.com and Ahi-online.com. The Company also began to e-advertise
on other Internet web sites and search engines through key word and banner
advertising. The Company also introduced special offers and promotions to its
customers via e-mail to promote sales at its web sites. In 2001, Western
Schools business launched Western Schools Online, where students can down load
courses, take tests, have the tests graded and receive continuing education
credits all on line--a totally virtual experience. All of the Company's web
sites have electronic order taking and e-mail customer service.

                                       3
<PAGE>

Industry and Markets

 Wigs

   Annual retail sales of women's wig and hairpieces in the US are estimated
to be between $300-million and $400-million. The consumer wig market is
generally comprised of fashion wig wearers and need-based wig wearers.
Fashion-based consumers purchase wigs and hairpieces as a beauty accessory.
Need-based wig wearers purchase wigs as a necessity, due to a physical
condition such as thinning hair or hair loss, or due to medical procedures and
conditions (e.g., alopecia and cancer treatments). Many everyday wig wearers
replace their wigs every three to four months, and would perhaps have a wig
"wardrobe," consisting of several wigs, either of the same style and color or
of different styles and colors.

   In the 1960s wigs and hairpieces were considered a fashion accessory.
However, as styles and tastes changed, the fashion-driven demand for wigs
decreased. Due to this trend, during the 1970s and 1980s, the number of
specialty wig boutiques declined and department stores reduced their selling
space allocated to inventories of wigs. The Company's catalog business was
started to serve the need-based wig customers who were not being adequately
serviced by other retail alternatives. Because only approximately 5-million
women, or 25 percent of the estimated 20-million American women with thinning
hair, currently wear wigs, there appears to be substantial opportunities for
growth of the Company's business.

   The Caucasian retail wig market--estimated to be approximately $200-million
of annual retail sales comprising approximately 2.7-million units--is serviced
by direct mail catalogers, beauty salons, wig shops, boutiques and department
stores. It is estimated that catalog sales represent approximately forty
percent of the wig and hairpiece units sold and approximately twenty percent
of the sales dollars annually in the Caucasian market, demonstrating that
price points at retail stores are generally higher than mail order price
points. Catalogs offer the benefits of privacy, convenience, lower prices and
broader product selection. Retail stores generally provide customers with more
personalized service.

   Unlike the Caucasian market, the African-American wig market--estimated to
be approximately $140-million of annual retail sales comprising approximately
3.1-million units--has yet to undergo any significant transition to direct
marketing from retail outlets. Although African-American women comprise
approximately thirteen percent of the US female population, it is estimated
that they purchase more than fifty percent of the wig and hairpiece units sold
each year in the US. Only about five percent of African-American wigs and
hairpieces are sold through catalogs, with the balance sold primarily in
beauty salons and wig shops. The Company believes that its Especially Yours(R)
catalog, which targets African-American women, already has the highest sales
volume of any catalog offering wigs designed for African-American women.

   The Company estimates that the international wig and hairpiece market is at
least as large as the US market. By identifying opportunities through
acquisitions and licensing programs, the Company has the ability to facilitate
international expansion. The Company currently has a license agreement to sell
its products in Germany.

 Continuing Education

   Nursing, accounting and other industries require their professionals to
meet CE requirements on a periodic basis. Required CE frequency and the number
of required hours vary from profession to profession and from state to state
depending on state laws and association regulations. Approximately forty
percent of the states in the US currently require nurses to have some form of
CE. The CE industry has many small providers, including local universities,
but few large providers. In addition, some hospitals and accounting firms
educate their own employees through in-house programs and by subsidizing
outside programs. Because CE is a required product, people may not be
enthusiastic buyers. Accordingly, Western Schools and AHI compete aggressively
in their markets on price, course content, course selection, and customer
service.

Products

 Wigs and Hairpieces

   The Company sells a broad assortment of women's wigs and hairpieces in the
United States, Canada, the UK, and Germany. The collections include 150
different wig styles and 36 different hairpieces in more than 80 colors. The
current Paula Young and Especially Yours wig collections provide full head
coverage. Hairpieces

                                       4
<PAGE>

include wiglets and add-ons. Wiglets are small wigs generally worn on the top
of the head to add style or cover thinning hair on the top or crown area. Add-
ons are generally used to add styling to the back of the head.

 Sourcing

   The Company purchases approximately ninety-one percent of its wigs and
hairpieces directly from ten foreign manufacturers and the balance from three
domestic importers. The five largest foreign manufacturers each represent
between nine percent and twenty-three percent of wig and hairpiece purchases.
As an industry leader, the Company stays in close contact with these
manufacturers, as well as other prominent wig manufacturers. Through these
relationships, the Company is able to obtain better control over purchasing,
styles, quality and cost.

   Most of the synthetic wigs and hairpieces sold by the Company are made from
a special synthetic fiber. Two Japanese firms, Kaneka Corporation and Toyo
Chemical Corporation dominate the production of this fiber. A disruption in
the current supply of this fiber may have a material adverse effect on the
Company. The synthetic fiber is not a proprietary material and other
manufacturers have previously produced it. Nonetheless, the time required to
obtain an alternative source of supply and the attendant delay in new
production, as well as possible increases in the price of the fiber, would
have a significant impact on wig and hairpiece sales and profit margins.

   The Company anticipates that most of its wigs and hairpieces will continue
to be manufactured in the Far East. Accordingly, the Company's operations are
subject to the risks of doing business abroad, including fluctuations in the
value of currencies, export duties, work stoppages, political instability and
governmental intervention. Therefore, the availability of and the cost of wigs
and hairpieces may be affected. Although to date such risks have not had a
significant effect on the Company's business operations, no assurance can be
given that such risks will not have a material adverse effect on the Company's
business operations in the future.

 Apparel and Hats

   Especially Yours catalogs offer a selection of apparel and hats targeted to
African-American women. Hats are generally purchased from domestic vendors,
and apparel is purchased from vendors, who generally contract to produce the
merchandise overseas or domestically.

Marketing

   The Company markets its wigs and hairpieces and CE courses through catalogs
and over the Internet.

   Paula Young and Especially Yours are differentiated from traditional
storefront retailers and other direct marketers due to the broad and deep
selection of the core wig products each offers. These brands also enjoy a
significant price advantage against competing brands due to large order volume
and direct purchasing from manufacturers.

   The Company's two-step marketing program is the major method of new
customer generation for Paula Young and Especially Yours. The Company's two-
step marketing program entails first obtaining prospective customers by
soliciting customer interest through targeted advertising, and following
receipt of such interest with a series of catalogs designed to elicit an
initial sale.

   For the first step, the Company uses a variety of targeted advertising
media, namely, magazines, newspapers, tabloids, co-op mailers, the Internet
and package insert programs. Advertising placements are selected based on
demographics, cost and historical experience. Historical experience is
measured by cost per inquiry and cost per customer compared against the
lifetime value of a customer. Based on this information, the Company evaluates
the effectiveness of media placements, and adjusts plans and programs
accordingly.

   The second step, which commences when a prospective customer responds
favorably to an advertisement, involves sending prospective customers a series
of catalogs. Since the first step pre-qualifies prospective customers, Paula
Young is able to convert approximately seventeen percent of advertising
respondents into customers. Especially Yours is able to convert approximately
nine percent of its Especially Yours inquirers into customers. When a sale is
made, the customer is put on an active customer list and additional catalogs
designed to create a repeat buyer are mailed.

                                       5
<PAGE>

   Another method of customer generation involves the one-step process of
periodically circulating to inactive inquirers and former customers targeted
mailings designed to convert or reactivate this group into customers.

   The Company also advertises through its Internet web sites www.wig.com,
www.paulayoung.com and www.especiallyyours.com. These web sites provide
information on the latest selection of wigs and hairpieces, products and
styling, and answers to frequently asked questions. The web sites also have
secure, online ordering capabilities and they also provide links to additional
sites of interest to wig customers. Analysis shows that more than fifty
percent of the customers buying through the Internet had no previous
relationship with the Company. The Company has reserved other generic domain
Internet sites in order to increase the amount of online traffic to its web
sites. During 2000, the Company used key word and impression-based banner
advertising, the expense of which was significantly offset by reductions in
print advertising placements. This advertising has resulted in a substantial
increase in visits to and purchases from the Company's web sites.

   Western Schools markets its CE courses using a one-step marketing program
targeted at nurses and certified public accountants whose licenses need to be
renewed. Western Schools also provides its latest selection of CE courses and
exam materials online through its web site www.westernschools.com. During
2001, the Company introduced www.Western-online.com. This web site will offer
all Western Schools CE courses and exam taking online to the nursing
profession.

   AHI markets its CE courses using a one-step marketing program targeted at
nurses and other mental health professionals whose licenses need to be
renewed. AHI also provides its latest selection of CE courses online through
its web site www.ahi-online.com.

New Opportunities

 New Products

   The Company seeks to leverage its customer relationships by adding new
product lines to its catalogs. During 2000, the Company introduced
Hotlocks(R), fashion accessories, such as hair extensions, scrunchies,
headbands and clip-ons that come in many colors and are worn for fashion and
fun. In early 2001, the WhisperLite(TM) collection was introduced. These wigs
weigh as little as 1-and 1/2- ounces and have open wefting and lightweight cap
construction for a very comfortable fit.

 Business-to-Business

   Through its Salon Silhouettes catalog the Company has been testing
business-to-business opportunities in the US. The Salon Silhouettes catalog is
distributed to wig shops and beauty salons in order to provide the opportunity
for the Company to market to women who prefer shopping in retail outlets.

 Licensing Agreements

   Because of the leadership position of Paula Young, and building off the
leverage of its unique position in the marketplace, including its unique
products and its sourcing capabilities, Paula Young has been able to expand
into other countries through licensing agreements. Generally the Company's
standard license agreement grants each licensee an exclusive right to use the
Company's trademarks to sell wigs and hairpieces within the licensee's
territory. The Company supplies the licensee the inventory for which the
Company is paid its cost for the inventory plus an administrative fee for
shipping and handling costs. The Company also provides marketing advice and
catalog development assistance. In general, the licensees are required to pay
royalties on their net sales and expend a specified minimum amount of
advertising each year. The Company currently has an active license agreement
in Germany and will continue to search for additional international licensing
opportunities.

 Acquisitions

   Through acquisitions, the Company may attempt to build market share through
further consolidation of the wig and hairpiece market and the CE market. The
Company may consider acquisition candidates, such as those offering products
targeted to senior women or those offering complementary products.

                                       6
<PAGE>

Databases

   The Company has developed proprietary databases of its wig and hairpiece
customers, African-American women, nurses, other mental health professionals
and certified public accountants. After confirming that security measures are
in place to protect proprietary data, these lists are rented to non-competing
businesses. Limited exchanges of lists of inactive customers with wig
competitors are also done from time to time. Due to the uniqueness and niche
nature of its products, the Company's customers are generally from very
specific demographic categories. These databases are very specific and would
be very difficult to replicate and, as such, protect the business's
competitive advantages.

Operations

 Order Entry and Customer Service

   The Company's telemarketing operation strives to simplify and encourage
catalog and Internet shopping by providing prompt, courteous and knowledgeable
customer service. Customers can call toll-free telephone numbers from 7 AM to
12 AM, seven days a week to place orders or to request a catalog.
Approximately sixty-eight percent of orders are placed by telephone or over
the Internet. A third-party provider handles over-flow call volume during peak
periods and coverage in the event of operational disruptions.

   At the time of order entry complete information about the customer and the
order are entered into an integrated information system. This system provides
customer history, product availability and specifications, expected ship date
and other order specifics. The Company attempts to train telemarketing
representatives to use a scripted catalog sales system, in order to be
knowledgeable in key product specifications and features, and to be trained to
cross-sell accessories and related products. The Company also attempts to
train telemarketing representatives to handle a range of products and customer
service calls, allowing the Company to shift representatives among catalog
lines as call volume requires.

 Fulfillment

   The Company's Massachusetts' distribution center fulfills all US and
Canadian orders. Orders received for available product are usually shipped by
the next business day, primarily via third class or priority mail. Merchandise
not in stock on the date of order is generally shipped within two days of
receipt. The Company's Daxbourne facility in London fulfills all UK and German
orders.

   The Company uses an integrated computer picking, packing and shipping
system, which monitors the in-stock status of each item ordered, processes the
order and generates all related packing and shipping materials, taking into
account the location of items within the distribution center. During fiscal
2000, on average, the Company shipped approximately 4,400 packages per
business day.

 Returns

   The Company's return policy allows customers to return products for
exchange or refund. The Company believes that its return levels are normal for
mail order products. Return experience is closely monitored at the individual
product level to identify trends in product offerings, product defects and
quality issues in an attempt to assess future purchases, enhance customer
satisfaction and reduce overall returns. During 2000, the introduction of new
colors and styles, particularly human hair wigs at higher price points than
synthetic wigs, caused an increase in the rate of returns experienced by the
Company. As a result, the Company decided to eliminate the majority of its
human hair styles and other styles with high customer return rates.

 Catalog Production

   The Company's graphic arts staff designs all of the catalogs circulated by
the Company's businesses. In-house design of catalogs results in greater
control, continuity, flexibility and creativity, as well as significant cost
savings.

                                       7
<PAGE>

Competition

   The mail order catalog business is highly competitive. The Company's
businesses compete on the basis of uniqueness of product offering, breadth of
product offering, quality of product offering, relative value of product
offering, customer service, advertising effectiveness, and catalog design. The
Paula Young(R) and Especially Yours(R) catalogs and web sites compete with
other mail order catalogs, retail stores, including hair salons and wig shops,
department, specialty and discount stores and Internet web sites. The Company
enjoys advantages of economies of scale, the size of its customer list, and
its extensive advertising programs.

   The Company's CE businesses compete with other mail order catalogs, in-
house CE programs, professional associations, and other seminar providers. The
CE industry has many small providers, including local universities, but few
large providers. Potential competition may emerge from new distribution
channels such as the Internet. Accordingly, the businesses compete
aggressively on price, course content and selection, and customer service.

Employees

   As of December 30, 2000, the Company's United States operations employed a
total of 298 employees, consisting of 81 salaried full-time employees, 129
full-time hourly employees, and 88 part-time employees. Daxbourne
International Limited employed 63 employees, consisting of 26 salaried full-
time employees and 37 part-time hourly employees in the United Kingdom. The
Company's employees are not covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.

Trademarks, Trade Names and Patents

   The Company has 16 registered trademarks in the United States, two
registered trademarks in the United Kingdom, two trademark applications and
one patent with the US Patent and Trademark Office. The Company has four
registered trademarks under California law. The Company also has five
registered URLs. In the ordinary course of business, the Company often
utilizes new trade names. When appropriate, the Company seeks to register
these names.

Government Regulations

   In 1994, the United States Supreme Court reaffirmed an earlier decision
that allowed direct marketers to make sales into states where they do not have
a physical presence without collecting sales taxes, but noted that Congress
has the power to change this law. The imposition of an obligation to collect
sales taxes may have a negative effect on the Company's response rates and
would require the Company to incur administrative costs in collecting and
remitting sales taxes. Massachusetts and Maryland are the only two
jurisdictions where the Company is currently required to collect sales taxes.

Item 2. Properties

   The Company occupies, under lease contracts, approximately 43,000 square
foot office building in South Easton, Massachusetts, approximately 50,000
square foot warehouse facility in Brockton, Massachusetts and approximately
5,000 square feet of office space in Wheaton, Maryland.

   The Company owns a building of approximately 6,000 square feet in London,
England, which is used by Daxbourne for office and warehouse operations.

Item 3. Legal Proceedings

   None.

Item 4. Submission of Matters to a Vote of Security Holders

   No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.

                                       8
<PAGE>

                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters

   The common stock of the Company trades on the Nasdaq National Market
("NASDAQ") under the symbol "CTLG". The following table sets forth the high
and low quotations from Nasdaq.

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
<S>                                                                <C>    <C>
2000
  First Quarter................................................... $5.250 $2.625
  Second Quarter.................................................. $3.125 $2.000
  Third Quarter................................................... $3.000 $2.313
  Fourth Quarter.................................................. $2.969 $1.563
1999
  First Quarter................................................... $4.375 $3.000
  Second Quarter.................................................. $4.000 $3.188
  Third Quarter................................................... $4.500 $3.125
  Fourth Quarter.................................................. $6.000 $3.375
</TABLE>

   The closing price of the Company's common stock at March 23, 2001 was $2.50
per share.

   The number of holders of record of the Company's common stock as of March
23, 2001 was approximately 50.

   The Company has been notified by NASDAQ that the Company's common stock bid
price is below its continued listing standards and that the Company's current
listing is subject to review by NASDAQ in accordance with its continued
listing procedures. Accordingly, while an established public trading market
exists, with respect to the Common Stock, there can be no assurance that the
Common Stock will remain listed on the NASDAQ National Market or otherwise be
subject of an established trading market. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors".

   The Company has not paid a dividend with respect to its common stock and
does not anticipate paying dividends in the foreseeable future. Under the
terms of the Company's existing debt agreement, the Company is not permitted
to pay dividends.

                                       9
<PAGE>

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
                                            Fiscal Year Ended
                          --------------------------------------------------------
                           Dec. 30,   Jan. 1,     Jan. 2,     Jan. 3,    Dec. 28,
                             2000     2000(1)       1999      1998(2)      1996
                          ---------- ----------  ----------  ---------- ----------
                               (In thousands, except per-share amounts and
                                         weighted average shares)
<S>                       <C>        <C>         <C>         <C>        <C>
Statement of Operations
 Data:
Net sales(3)............  $   60,892 $   54,475  $   55,591  $   49,310 $   41,037
Cost of sales(3)........      22,002     20,338      20,893      18,173     15,432
                          ---------- ----------  ----------  ---------- ----------
Gross profit............      38,890     34,137      34,698      31,137     25,605
Operating expenses (3)..      36,031     31,891      31,159      26,044     22,330
                          ---------- ----------  ----------  ---------- ----------
Income from operations..       2,859      2,246       3,539       5,093      3,275
Interest expense, net...         974        794         872         821      1,658
                          ---------- ----------  ----------  ---------- ----------
Income before income
 taxes and extraordinary
 items..................       1,885      1,452       2,667       4,272      1,617
Income taxes............         773        653       1,096       1,793        644
                          ---------- ----------  ----------  ---------- ----------
Income before
 extraordinary items....       1,112        799       1,571       2,479        973
                          ---------- ----------  ----------  ---------- ----------
Net income(4)...........  $    1,112 $      799  $    1,571  $    2,260 $      973
                          ========== ==========  ==========  ========== ==========
Earnings per Share--
 Basic EPS:
  Income before
   extraordinary items..  $     0.26 $     0.18  $     0.31  $     0.51 $     0.31
  Net income............  $     0.26 $     0.18  $     0.31  $     0.46 $     0.31
  Weighted average
   shares outstanding...   4,341,915  4,400,944   5,033,800   4,905,667  3,180,091
Earnings per Share--
 Diluted EPS:
  Income before
   extraordinary items..  $     0.25 $     0.17  $     0.29  $     0.45 $     0.25
  Net income............  $     0.25 $     0.17  $     0.29  $     0.41 $     0.25
  Weighted average
   shares outstanding...   4,530,756  4,684,874   5,495,014   5,527,701  3,946,211
<CAPTION>
                                                  As Of
                          --------------------------------------------------------
                           Dec. 30,   Jan. 1,     Jan. 2,     Jan. 3,    Dec. 28,
                             2000    2000(1,5)    1999(5)     1998(5)      1996
                          ---------- ----------  ----------  ---------- ----------
                                              (In thousands)
<S>                       <C>        <C>         <C>         <C>        <C>
Balance Sheet Data:
Working capital.........  $    3,295 $   (2,424) $    ( 268) $    1,308 $    5,619
Total assets............      23,704     25,423      23,044      23,478     18,405
Long-term debt..........       7,200      2,900       3,671       5,012      8,147
Shareholders' equity....       8,728      7,739       7,436       7,866      4,801
</TABLE>
--------
(1)  The fiscal year ended January 1, 2000 includes four months of activity of
     AHI, which was acquired by the Company on September 10, 1999. For the
     four months ended January 1, 2000, AHI had net sales of $886,690, gross
     profit of $256,905 and a net loss of $14,870.
(2)  The fiscal year ended January 3, 1998 includes three months of activity
     of the Company's subsidiary, Daxbourne International Limited, which was
     acquired by the Company on October 3, 1997. For the three months ended
     January 3, 1998, Daxbourne had net sales of $1,172,376, gross profit of
     $844,171 and net income of $80,375.
(3)  Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping
     and Handling Fees and Costs," requires that shipping and handling fees,
     billed to a customer in a sale transaction, should be classified as part
     of revenues. This consensus had to be adopted no later than the fourth
     quarter of 2000. The Company has restated its consolidated statements of
     operations for the fiscal years presented by reclassifying all shipping
     and handling income from cost of sales and operating expenses to
     revenues.
(4)  In 1997, net income reflects a $218,699 extraordinary loss on the early
     retirement of debt (net of an income tax benefit of $149,083).
(5)  Certain amounts in the 1997, 1998 and 1999 financial statements have been
     reclassified to conform to the 2000 presentation.

                                      10
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

   The discussion and analysis below should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto. In
addition to historical information, the following Management's Discussion and
Analysis of Financial Condition and Results of Operations contains forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ significantly from those anticipated in these forward-
looking statements. See "Note Regarding Forward-Looking Statements".

Introduction

   The Company targets niche consumer product categories primarily via direct
marketing. SC Direct, its principal operating subsidiary in the United States
("SC Direct"), is the US leading retailer of women's wigs and hairpieces.
Daxbourne International Limited ("Daxbourne"), a subsidiary of SC Direct, is a
leading United Kingdom retailer and wholesaler of women's wigs and hairpieces.
SC Publishing, another subsidiary of SC Direct ("SC Publishing"), sells
continuing education courses to nurses and certified public accountants.
American Healthcare Institute ("AHI"), an operating division of SC Publishing,
which was acquired by the Company on September 10, 1999, and accounted for
under the purchase method of accounting, provides continuing-education
seminars and conferences for the healthcare industry.

Results of Operations

 2000 Compared to 1999

   Revenues increased to $60.9 million in 2000 from $54.5 million in 1999, an
increase of $6.4 million or 11.7 percent. This increase was due to the
addition of $4.4 million in net sales from AHI, which was acquired by the
Company in September 1999, and increases in SC Direct's, Daxbourne's and
Western Schools net sales of approximately $1.1 million, $157,000, and $51,000
respectively. The remainder of the revenue increase resulted from the
approximately proportionate increase in shipping & handling income of
approximately $795,000 due to the increase in Company net sales mentioned
above. The increase in SC Direct's net sales was primarily due to net sales
increases in the Paula Young and Especially Yours catalogs in the amount of
$2.2 million and $1.7 million, respectively. These increases were due
primarily to increased number of orders from increased circulation of its
catalogs to existing customers and to new customers generated by the Company's
advertising programs and sales over the Internet as well as changes in the
product mix in both catalogs. The increase in SC Direct's net sales was offset
by a decrease of $2.8 million in net sales from its Paula Hatbox(R) catalog,
as a result of the Company's decision in the fourth quarter of 1999 to no
longer circulate this catalog.

   Gross margin as a percentage of revenues increased to 63.9 percent in 2000
from 62.7 percent in 1999 as a result of minor merchandise mix changes. Gross
margin increased to $38.9 million in 2000 from $34.1 million in 1999, an
increase of $4.8 million or 14.1 percent. This increase was due to the
increase in revenues discussed above as well as an increase in the gross
margin rate discussed above.

   Operating expenses increased to $36.0 million in 2000 from $31.9 million in
1999, an increase of $4.1 million or 12.9 percent. This increase was due
primarily to: (a) additional catalog production and advertising expenses of
approximately $2.5 million and $395,000, respectively, mainly related to the
acquisition of AHI as well as increased circulation of catalogs mailed to the
Paula Young and Especially Yours customers and to inactive Paula Young
customers in an effort to reactivate these names, (b) approximately $632,000
related to costs incurred in connection with the bonus paid to the former
chief executive officer and the terminated sale of the Company's common stock
to Golub Associates, Inc., (c) increased depreciation and amortization of
approximately $621,000 related to the implementation of the Company's catalog
information system in August 1999, and (d) $1.7 million in additional payroll
and benefit costs, mainly related to the AHI acquisition, additional
information technology personnel and an increase in in-house telemarketing and
customer service personnel. The increase in operating expenses was offset by:
(i) a reduction in outside telemarketing and customer service costs of
approximately $575,000, and (ii) a prior year's restructuring charge described
below.

                                      11
<PAGE>

   In August 1999, the Company announced the resignation of its chief
executive officer. In connection with the resignation and search for a new
chief executive officer, the Company recorded a pre-tax charge of $500,000,
consisting of severance and other severance related benefits and recruiting
fees. During the fourth quarter of 1999, the Company eliminated the
circulation of the Paula's Hatbox catalog that featured ladies hats and
selected women's apparel and accessories. The Company recorded a pre-tax
charge of $730,000 in October 1999, of which $480,000 related to severance and
severance related benefits for four employees and the write-off of remaining
unamortized deferred catalog costs. The remaining $250,000 related to
inventory write-offs.

   Interest expense, net of interest income, increased to approximately
$974,000 in 2000 from approximately $794,000 in 1999, an increase of
approximately $180,000 or 22.7 percent. The increase was attributable to
higher interest rates during 2000 compared to 1999, offset by lower average
principal amounts outstanding on the Company's bank facility.

   Income tax expense, as a percentage of pre-tax income, was 41.0 percent in
2000 versus 45.0 percent in 1999, due to an additional provision for state
taxes as a result of the completion of a state tax audit during 1999.

 1999 Compared to 1998

   Net sales decreased to $54.5 million in 1999 from $55.6 million in 1998, a
decrease of $1.1 million, or 1.9 percent. This decrease was due a decrease in
SC Direct's net sales of $3.0 million, offset by increases in Daxbourne's and
Western Schools net sales of approximately $261,000 and $616,000 respectively,
primarily due to improved customer response rates as a result of changes in
circulation strategies. On September 10, 1999, the Company acquired AHI. AHI
had net sales of approximately $887,000 for the period September 10, 1999
through January 1, 2000. The decrease in SC Direct's net sales was primarily
due to (i) a decrease of $3.2 million in net sales from its Paula Young
catalog, resulting from lower sales to potential new customers due to a
planned reduction in advertising expenditures in the first half of 1999, (ii)
a decrease of $1.1 million in net sales from the Christine Jordan catalog as a
result of the Company's decision to no longer circulate the Christine Jordan
catalog, but continue to sell Christine Jordan branded products through its
Paula Young catalog, and (iii) a decrease of approximately $604,000 in net
sales from its Paula's Hatbox catalog. These net sales decreases in SC Direct
were offset by an increase of $1.9 million in net sales from SC Direct's
Especially Yours catalog, primarily due to increased orders attributable to an
increase in the customer base as a result of customer generation efforts in
previous years, and an increase in average order size, attributable to changes
in the product mix in the Especially Yours catalog.

   Gross margin as a percentage of net sales increased to 62.7 percent for
1999 from 62.4 percent for 1998. Gross margin decreased to $34.1 million in
1999 from $34.7 million in 1998, a decrease of approximately $561,000, or 1.6
percent, as a result of the reduction in net sales discussed above, offset by
the increase in the gross margin rate mentioned above.

   Operating expenses increased to $31.9 million in 1999 from $31.2 million in
1998, an increase of approximately $731,000, or 2.3 percent. This increase was
attributable primarily to severance and severance related benefits, and the
write-off of remaining non-amortized deferred catalog costs from the
discontinuance of the Paula's Hatbox catalog. Included in operating expenses
for 1999 are charges of: (i) $500,000 consisting of severance, severance
related benefits and recruiting fees, recorded as a result of costs incurred
in connection with the resignation of the Company's chief executive officer
and for fees already incurred in connection with the Company's search for a
replacement, (ii) approximately $277,000 related to costs incurred in
connection with certain acquisitions that the Company decided not to pursue,
(iii) increased depreciation and amortization of approximately $327,000
related to the implementation of the Company's catalog information system in
August 1999, and (iv) the write-off of $480,000 for the remaining unamortized
deferred catalog costs and severance and severance related benefits for four
employees relating to the elimination of the Paula's Hatbox catalog. These
increases to operating expenses are offset by lower advertising expenses of
$1.1 million due to the Company's strategic decision to eliminate certain
marginal advertising programs.

                                      12
<PAGE>

   Interest expense, net of interest income, decreased to approximately
$794,000 in 1999 from approximately $872,000 in 1998, a decrease of
approximately $78,000, or 8.9 percent. The decrease was attributable to lower
average principal amounts outstanding on the Company's bank facility due to
debt repayments.

   Income tax expense, as a percentage of pre-tax income, was 45.0 percent in
1999 versus 41.1 percent in 1998, due to an additional provision for state
taxes as a result of the completion of a state tax audit during 1999.

Liquidity and Capital Resources

   Net cash flows used by the Company for 2000 were approximately $702,000.
Cash flows provided by operating activities for 2000 were $2.3 million, offset
by uses of $1.4 million in investing activities and $1.5 million in financing
activities. The major factors that caused the difference between net income
and net cash flows provided by operations for 2000 were increases in: (i)
depreciation and amortization expense of $1.7 million, and (ii) deferred
income tax expense of approximately $83,000, offset by a decrease in cash
working capital items of approximately $608,000. The Company used $1.4 million
in investing activities for computer and equipment purchases. The $1.5 million
in net cash used in financing activities was primarily due to: (i) the
repayment of $1.9 million of long-term debt, (ii) the repayment of short-term
borrowings of $5.4 million, (iii) the repayment of approximately $119,000 of
capital leases, and (iv) the purchase of approximately $35,000 of treasury
stock, offset by the issuance of $6.0 million of long-term debt related to the
closing of the Company's new $12.25 million senior credit facility with Fleet
National Bank.

   On December 27, 2000, the Company entered into an $12.25 million credit
agreement (the "Agreement") with Fleet National Bank (the "Bank") for the
purpose of refinancing its existing senior debt and to provide for the working
capital needs of the Company. The new credit facility, which may be increased
to $13.0 million in 2002, replaces the Company's former credit facilities with
the Bank. The Agreement includes a $9.0 million five-year term note (the "Term
Loan") and a $3.25 million two-year revolving credit agreement (the "Line of
Credit"). The amount available on the Line of Credit increases as principal
amortization payments on the Term Loan are paid, such that the total Agreement
remains at $12.25 million over the two years of the Line of Credit agreement.
The Line of Credit provides for revolving credit loans and letters of credit
with floating rates based on margins over LIBOR or prime at the Company's
option. The Term Loan is for five years and is amortized at the rate of
$450,000 a quarter beginning January 1, 2001.

   As of December 30, 2000, $6.4 million of the Term Loan was under LIBOR
contract rates ranging from 8.6625 percent to 9.02813 percent and the
remainder of the Term Loan was at the base rate of 9.75 percent. As of
December 30, 2000, approximately $788,000 of the Line of Credit was at the
base rate of 9.75 percent. The Company is required to pay a commitment fee of
0.375 percent per annum on the unused portion of the commitment. At December
30, 2000, $2.5 million was available under this Line of Credit.

   The Agreement is collateralized by a first perfected security interest in
all tangible and intangible assets of the Company, subject to certain
permitted liens. The Agreement is subject to certain consolidated covenants,
including but not limited to leverage and debt service coverage ratios,
minimum earnings requirements, and a restriction on the payment of cash
dividends on the Company's common stock.

   The Company's cash flow from operations and available credit facilities are
considered adequate to fund planned business operations and both the short-
term and long-term capital needs of the Company. However, certain events, such
as an additional significant acquisition, could require new external
financing.

Recently Issued Accounting Pronouncements

   Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping
and Handling Fees and Costs," requires that shipping and handling fees, billed
to a customer in a sale transaction, should be classified as part of revenues.
This consensus had to be adopted no later than the fourth quarter of 2000. The
Company has restated its consolidated statements of operations for the fiscal
years ended December 30, 2000, January 1, 2000 and January 2, 1999 by
reclassifying all shipping and handling income from cost of sales and
operating expenses to revenues.

                                      13
<PAGE>

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The adoption of SAB No. 101 did not materially affect the Company's
consolidated financial statements in the current year.

   Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS No. 133, certain contracts that were not
formerly considered derivatives may now meet the definition of a derivative.
The Company will adopt SFAS No. 133 effective January 1, 2001. Management does
not expect the adoption of SFAS No. 133 to have a significant impact on the
financial position, results of operations, or cash flows of the Company.

Risk Factors

   Postal Rates, Paper Prices and Media Costs. Postage, shipping and paper
costs are significant expenses in the operation of the Company's business. The
Company mails its catalogs and generally ships its products to customers
through the US Postal Service and, at the customer's request and expense,
ships its products by overnight and second day delivery services. The Company
passes on the costs of mailing its products directly to customers as separate
shipping and handling charges, but does not directly pass on paper costs and
the costs of mailing its catalogs. Any future increases in postal or shipping
rates or paper costs could have a material adverse effect on the Company's
operating results if the Company is unable to pass on these increases to its
customers. In addition, a rise in media costs could have a material adverse
effect on the Company's ability to generate new customers.

   Limited Sources of Fiber. The majority of the Company's revenue is derived
from the sale of wigs. The Company's synthetic wigs are made from special
synthetic fiber manufactured by two Japanese companies, Kaneka Corporation and
Toyo Chemical Corporation. The wig manufacturers from whom the Company
purchases its inventory purchase the fiber from these two fiber manufacturers.
Should there be a permanent or long-term disruption in the supply of fiber,
the time required to obtain an alternate source and the attendant delay in new
production, as well as a possible significant increase in the price of fiber,
may have a material adverse effect on the Company's wig and hairpiece sales
and profit margins.

   Limited Number of Wig Manufacturers. The wigs sold by the Company are
produced by a limited number of manufacturers. Each of the Company's five
largest manufacturers supplied between nine percent and twenty-three percent
of the Company's overall wig purchases in 2000. The loss of one or more of
these manufacturers could materially disrupt the Company's wig operations.
Although the Company believes that in such an event it could purchase its wig
requirements from the remaining manufacturers and from additional
manufacturers, there can be no assurance that such sources of supply could
meet the Company's wig requirements without considerable disruption to the
Company's purchasing cycles, inventory levels and profit margins. The Company
does not currently have, and does not anticipate entering into in the
foreseeable future, long-term supply contracts with manufacturers.

   Dependence Upon Foreign Suppliers; Exchange Rates; and Currency
Fluctuations. The Company expects that most of its wigs and hairpieces will
continue to be manufactured in the Far East in the future. Accordingly, the
Company's operations are subject to the customary risks of doing business
abroad, including fluctuations in the value of currencies, export duties, work
stoppages and, in certain parts of the world, political instability and
possible governmental intervention. As such, the availability and cost of wigs
may be favorably or adversely affected by any of these items. Although to date
such risks have not had a significant effect on the Company's business
operations, no assurance can be given that such risks will not have a material
adverse effect on the Company's business operations in the future.

   Risk of a Cure for Hair Loss; Cancer Treatment Improvement. Millions of
American women suffer varying degrees of hair loss, including those suffering
hair loss as a side effect of cancer treatments. Women suffering

                                      14
<PAGE>

from hair loss comprise a substantial percentage of the Company's customer
base for its wigs and hairpieces. Ongoing research is conducted by numerous
groups, both public and private, seeking remedies for hair loss. One drug,
Minoxidil (marketed under the name Rogaine(R) as well as other names), is
available over-the-counter and is sold to men and women as a measure against
hair loss. There can be no assurance that another new drug will not be
developed that could prevent hair loss among women. Such an event may have a
material adverse effect on the Company's core wig business. In addition, the
development of any therapies, such as new cancer treatments, that would
eliminate hair loss as a side effect, may have a material adverse effect on
the Company's business.

   Registered Trademarks and Trade Names. The Company currently has several
registered trademarks and may seek additional legal protection for its
products and trade names. The Company has invested substantial resources in
developing several distinctive catalog trademarks as well as branded products
and product lines. There can be no assurance that the steps taken by the
Company to protect its rights will be sufficient to deter misappropriation.
Failure to protect these intellectual property assets could have a material
adverse effect on the Company's business operations. Moreover, although the
Company does not currently know of any lawsuit alleging the Company's
infringement of intellectual property rights that could have a material
adverse effect on the Company's business, there can be no assurance that any
such lawsuit will not be filed against the Company in the future or, if such a
lawsuit is filed, that the Company would ultimately prevail.

   Risk of Delisting From NASDAQ--The Company's common stock is listed on the
NASDAQ National Market System. The Company cannot guarantee that it will
always be listed. NASDAQ's rules for continual listing include stockholders'
equity requirements, and market value requirements. The Company has been
notified by NASDAQ that the Company's common stock bid price is below its
continued listing standards and that the Company's current listing is subject
to review by NASDAQ.

   If the Company's common stock is delisted from NASDAQ, and if the Company's
common stock cannot be listed on the NASDAQ Small Cap Market, trading in the
Company's common stock would likely be conducted, if at all, in the over-the-
counter market. This would make it more difficult for stockholders to dispose
of their common stock and more difficult to obtain accurate quotations on the
Company's common stock. This could have an adverse effect on the price of the
common stock. There are separate rules regulating broker-dealers who trade on
behalf of customers in unlisted stocks. These rules require broker-dealers to
sell common stock only to established customers and accredited investors
(generally defined as investors with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with a spouse), to make
special suitability determinations about the purchasers, and to receive the
purchaser's written consent to the transaction prior to sale. The effect of
these requirements, among others, may be to limit the ability or incentive of
broker-dealers to sell the Company's common stock.

Item 7A. 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 approximately
$9.8 million as of December 30, 2000 under its credit facility. On January 19,
2001, the Company and the Bank entered into an Interest Rate Swap Agreement
based on a notional principal balance of $4.5 million. Under the interest rate
swap agreement, the Company receives quarterly LIBOR-based interest rate
payments from the Bank, and pays interest quarterly at a fixed rate of 5.57%
to the Bank. These interest rate payments are settled net with the Bank. The
agreement is effective for a period of two years and terminates on January 19,
2003.

   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 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".

                                      15
<PAGE>

   As of December 30, 2000, the outstanding balance on all of the Company's
credit facilities was $9,788,099. Based on this balance, an immediate change
of one percent in the interest rate would cause a change in interest expense
of approximately $98,000 on an annual basis. The Company's objective in
maintaining these variable rate borrowings is the flexibility obtained
regarding early repayment without penalties and lower overall cost as compared
with fixed-rate borrowings.

   The foreign currencies to which the Company has the most significant
exchange rate exposure are the British Pound, Chinese Yuan, Indonesian Rupiah
and Korean Won. The Company expects that most of its wigs and hairpieces will
continue to be manufactured in China, Indonesia and Korea in the future.
Although a substantial portion of the Company's transactions with these
countries occurs in US dollars, the Company's operations 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.

                                      16
<PAGE>

Item 8. Financial Statements

<TABLE>
<CAPTION>
                                                                          Page
                                                                          -----
<S>                                                                       <C>
Independent Auditors' Report............................................     18
Financial Statements as of December 30, 2000 and January 1, 2000 and for
 the Three Fiscal Years Ended December 30, 2000, January 1, 2000 and
 January 2, 1999
Consolidated Balance Sheets.............................................     19
Consolidated Statements of Operations...................................     20
Consolidated Statements of Shareholders' Equity and Comprehensive Income
 (Loss).................................................................     21
Consolidated Statements of Cash Flows...................................  22-23
Notes to Consolidated Financial Statements..............................  24-38
</TABLE>

                                       17
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Specialty Catalog Corp.:

   We have audited the accompanying consolidated balance sheets of Specialty
Catalog Corp. and subsidiaries (the "Company") as of December 30, 2000 and
January 1, 2000 and the related consolidated statements of operations,
shareholders' equity and comprehensive income (loss) and cash flows for the
years then ended and the year ended January 2, 1999. Our audits also included
the consolidated financial statement schedule listed in the Index at Item
14(a)(2). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
30, 2000 and January 1, 2000 and the results of its operations and its cash
flows for the years then ended and the year ended January 2, 1999, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such consolidated financial statement
schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 15, 2001

                                      18
<PAGE>

                            SPECIALTY CATALOG CORP.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            December
                                                               30,      January 1,
                          ASSETS                              2000         2000
                          ------                           -----------  -----------
<S>                                                        <C>          <C>
Current assets:
  Cash and cash equivalents............................... $   435,276  $ 1,136,847
  Accounts receivable, less allowance for doubtful
   accounts of $39,791 and $116,198 at December 30, 2000
   and January 1, 2000, respectively                         1,521,469    1,206,490
  Inventories.............................................   5,324,460    5,626,304
  Prepaid expenses........................................   3,561,311    4,012,538
                                                           -----------  -----------
    Total current assets..................................  10,842,516   11,982,179
                                                           -----------  -----------
Property, plant and equipment:
  Property, plant and equipment...........................   9,623,867    8,286,156
  Less accumulated depreciation and amortization..........  (5,232,422)  (3,967,224)
                                                           -----------  -----------
    Total property, plant and equipment, net..............   4,391,445    4,318,932
                                                           -----------  -----------
Intangible assets, net....................................   3,942,508    4,571,405
Deferred income taxes.....................................   4,273,287    4,338,843
Other assets..............................................     253,748      211,918
                                                           -----------  -----------
    Total assets.......................................... $23,703,504  $25,423,277
                                                           ===========  ===========
<CAPTION>
           LIABILITIES AND SHAREHOLDERS' EQUITY
           ------------------------------------
<S>                                                        <C>          <C>
Current liabilities:
  Accounts payable and accrued expenses................... $ 3,656,757  $ 4,261,400
  Liabilities to customers................................     925,888    1,169,256
  Short-term borrowings...................................     788,100    6,401,238
  Income taxes............................................     376,914      449,577
  Current portion of long-term debt.......................   1,800,000    2,125,000
                                                           -----------  -----------
    Total current liabilities.............................   7,547,659   14,406,471
                                                           -----------  -----------
Long-term debt............................................   7,200,000    2,900,000
Other long-term liabilities...............................     227,929      377,875
Commitments and contingencies
Shareholders' equity:
  Preferred stock, $1.00 par value: 1,000,000 shares
   authorized;
   no shares issued and outstanding.......................          --           --
  Common stock, $.01 par value: 10,000,000 shares
   authorized; 5,239,774 shares issued at December 30,
   2000 and January 1, 2000; 4,337,886 and 4,351,386
   shares outstanding at December 30, 2000 and January 1,
   2000, respectively.....................................      52,397       52,397
  Additional paid-in capital..............................  16,159,570   16,159,570
  Accumulated other comprehensive loss....................    (138,950)     (51,250)
  Accumulated deficit.....................................  (4,477,923)  (5,590,054)
                                                           -----------  -----------
                                                            11,595,094   10,570,663
  Less treasury stock, at cost, 901,888 and 888,388 shares
   at December 30, 2000 and January 1, 2000,
   respectively...........................................  (2,867,178)  (2,831,732)
                                                           -----------  -----------
    Total shareholders' equity............................   8,727,916    7,738,931
                                                           -----------  -----------
      Total liabilities and shareholders' equity.......... $23,703,504  $25,423,277
                                                           ===========  ===========
</TABLE>

                See notes to consolidated financial statements.

                                       19
<PAGE>

                            SPECIALTY CATALOG CORP.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                            -----------------------------------
                                             December
                                                30,     January 1,  January 2,
                                               2000        2000        1999
                                            ----------- ----------- -----------
<S>                                         <C>         <C>         <C>
Net Sales:
  Revenues................................. $52,973,996 $47,312,945 $48,397,806
  Shipping and handling income.............   7,660,299   6,865,334   6,707,605
  Royalties................................     257,817     296,303     485,746
                                            ----------- ----------- -----------
Total net sales............................  60,892,112  54,474,582  55,591,157
Cost of sales (including buying, occupancy
 and order
 fulfillment costs)........................  22,002,323  20,337,583  20,892,943
                                            ----------- ----------- -----------
Gross profit...............................  38,889,789  34,136,999  34,698,214
Operating Expenses:
  Operating expenses.......................  34,340,466  30,819,662  30,413,015
  Depreciation and amortization............   1,690,232   1,070,719     745,931
                                            ----------- ----------- -----------
Total operating expenses...................  36,030,698  31,890,381  31,158,946
                                            ----------- ----------- -----------
Income from operations.....................   2,859,091   2,246,618   3,539,268
Interest expense, net......................     973,575     794,165     871,893
                                            ----------- ----------- -----------
Income before income taxes.................   1,885,516   1,452,453   2,667,375
Income taxes...............................     773,385     652,967   1,095,994
                                            ----------- ----------- -----------
Net income................................. $ 1,112,131 $   799,486 $ 1,571,381
                                            =========== =========== ===========
Earnings per share--Basic EPS:
  Net income per share..................... $      0.26 $      0.18 $      0.31
                                            =========== =========== ===========
  Weighted average shares outstanding......   4,341,915   4,400,944   5,033,800
                                            =========== =========== ===========
Earnings per share--Diluted EPS:
  Net income per share..................... $      0.25 $      0.17 $      0.29
                                            =========== =========== ===========
  Weighted average shares outstanding......   4,530,756   4,684,874   5,495,014
                                            =========== =========== ===========
</TABLE>


                See notes to consolidated financial statements.

                                       20
<PAGE>

                            SPECIALTY CATALOG CORP.

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                           Common Stock
                         -----------------
                                                                      Accumulated
                                                                         Other     Additional                   Total
                                            Treasury      Deferred   Comprehensive   Paid-in   Accumulated  Shareholders'
                          Shares   Amount     Stock     Compensation Income (Loss)   Capital     Deficit       Equity
                         --------- ------- -----------  ------------ ------------- ----------- -----------  -------------
<S>                      <C>       <C>     <C>          <C>          <C>           <C>         <C>          <C>
Balance, January 3,
 1998................... 5,022,001 $50,220          --    $(65,862)    $   3,495   $15,838,826 $(7,960,921)  $ 7,865,758
Other comprehensive
 income (loss):
 Net income.............        --      --          --          --            --            --   1,571,381     1,571,381
 Foreign currency
  translation
  adjustment............        --      --          --          --        12,431            --          --        12,431
Total comprehensive
 income.................                                                                                       1,583,812
 Exercise of stock
  options (including the
  tax benefit of
  $256,021).............   217,773   2,177          --          --            --       320,744          --       322,921
 Treasury stock
  repurchase............        --      -- $(2,353,641)         --            --            --          --    (2,353,641)
 Amortization of
  deferred
  compensation..........        --      --          --      17,499            --            --          --        17,499
                         --------- ------- -----------    --------     ---------   ----------- -----------   -----------
Balance, January 2,
 1999................... 5,239,774  52,397  (2,353,641)    (48,363)       15,926    16,159,570  (6,389,540)    7,436,349
                         --------- ------- -----------    --------     ---------   ----------- -----------   -----------
Other comprehensive
 income (loss):
 Net income.............        --      --          --          --            --            --     799,486       799,486
 Foreign currency
  translation
  adjustment............        --      --          --          --       (67,176)           --          --       (67,176)
Total comprehensive
 income.................                                                                                         732,310
 Treasury stock
  repurchase............        --      --    (478,091)         --            --            --          --      (478,091)
 Amortization and write-
  off of deferred
  compensation..........        --      --          --      48,363            --            --          --        48,363
                         --------- ------- -----------    --------     ---------   ----------- -----------   -----------
Balance, January 1,
 2000................... 5,239,774  52,397  (2,831,732)         --       (51,250)   16,159,570  (5,590,054)    7,738,931
                         --------- ------- -----------    --------     ---------   ----------- -----------   -----------
Other comprehensive
 income (loss):
 Net income.............        --      --          --          --            --            --   1,112,131     1,112,131
 Foreign currency
  translation
  adjustment............        --      --          --          --       (87,700)           --          --       (87,700)
Total comprehensive
 income.................                                                                                       1,024,431
 Treasury stock
  repurchase............        --      --     (35,446)         --            --            --          --       (35,446)
                         --------- ------- -----------    --------     ---------   ----------- -----------   -----------
Balance, December 30,
 2000................... 5,239,774 $52,397 $(2,867,178)   $     --     $(138,950)  $16,159,570 $(4,477,923)  $ 8,727,916
                         ========= ======= ===========    ========     =========   =========== ===========   ===========
</TABLE>


                See notes to consolidated financial statements.

                                       21
<PAGE>

                            SPECIALTY CATALOG CORP.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                          --------------------------------------
                                          December 30,  January 1,   January 2,
                                              2000         2000         1999
                                          ------------  -----------  -----------
<S>                                       <C>           <C>          <C>
Cash flows from operating activities:
  Net income............................  $ 1,112,131   $   799,486  $ 1,571,381
Adjustments to reconcile net income to
 net cash provided by
 operating activities:
  Depreciation and amortization.........    1,690,232     1,070,719      745,931
  Deferred income taxes.................       82,547       413,292      872,233
  Amortization of deferred
   compensation.........................           --        48,363       17,499
  Changes in operating assets and
   liabilities, net of impact of
   acquisitions:
    Accounts receivable.................     (342,569)        1,194      (96,676)
    Inventories.........................      249,536      (248,884)     878,091
    Prepaid expenses....................      440,541      (207,728)    (465,520)
    Other assets........................      (72,646)      (57,263)      94,473
    Accounts payable and accrued
     expenses...........................     (553,093)      500,008      297,625
    Liabilities to customers............     (243,368)      492,809     (320,496)
    Income taxes payable................      (44,532)      154,836      209,895
    Other long-term liabilities.........      (41,670)           --        4,167
                                          -----------   -----------  -----------
Net cash provided by operating
 activities.............................    2,277,109     2,966,832    3,808,603
                                          -----------   -----------  -----------
Cash flows from investing activities:
  Purchases of property, plant and
   equipment............................   (1,377,009)   (1,844,967)  (1,188,905)
  Acquisitions, net of cash acquired ...           --    (1,323,381)    (505,140)
                                          -----------   -----------  -----------
Net cash used in investing activities...   (1,377,009)   (3,168,348)  (1,694,045)
                                          -----------   -----------  -----------
Cash flows from financing activities:
  Issuance of common stock..............           --            --       10,752
  Advances (repayments) on short-term
   borrowings, net......................   (5,445,457)    1,357,390    1,289,559
  Issuance of long-term debt............    6,000,000     1,000,000           --
  Purchases of treasury stock...........      (35,446)     (478,091)  (2,353,641)
  Repayments of long-term debt..........   (1,924,057)   (1,564,142)    (969,011)
  Repayments of capital lease
   obligations..........................     (118,706)      (64,533)     (20,303)
                                          -----------   -----------  -----------
Net cash provided by (used in) financing
 activities.............................   (1,523,666)      250,624   (2,042,644)
                                          -----------   -----------  -----------
Effect of exchange rate changes on cash
 and cash equivalents...................      (78,005)      (10,132)      13,095
                                          -----------   -----------  -----------
Increase (decrease) in cash and cash
 equivalents............................     (701,571)       38,976       85,009
Cash and cash equivalents, beginning of
 year...................................    1,136,847     1,097,871    1,012,862
                                          -----------   -----------  -----------
Cash and cash equivalents, end of year..  $   435,276   $ 1,136,847  $ 1,097,871
                                          ===========   ===========  ===========
Supplemental disclosures of cash flow
 information:
  Cash paid during the year for:
    Interest............................  $   844,204   $   794,668  $   812,845
                                          ===========   ===========  ===========
    Income taxes........................  $   431,184   $   426,370  $   725,000
                                          ===========   ===========  ===========
</TABLE>

                See notes to consolidated financial statements.

                                       22
<PAGE>

                            SPECIALTY CATALOG CORP.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

Supplemental disclosures of cash flow information:

   During the years ended December 30, 2000 and January 1, 2000, the Company
received federal income tax refunds of $320,000 and $375,000, respectively.

Summary of non-cash transactions:

   During the years ended December 30, 2000 and January 1, 2000, the Company
recorded capital lease obligations of $10,430 and $290,789, respectively
related to the purchase of data processing equipment.

   During 1999, the Company disposed of fully depreciated fixed assets no
longer in use totaling $753,244.

   During 1998, 217,773 stock options were exercised for which the Company
recorded a reduction in its income taxes payable and an increase in additional
paid-in capital of $256,021. Unpaid severance amounting to $56,148 that was
recorded in accrued restructuring charges to a former employee was used as
payment against a portion of these stock options exercised.


                See notes to consolidated financial statements.

                                       23
<PAGE>

                            SPECIALTY CATALOG CORP.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Fiscal Years Ended December 30, 2000, January 1, 2000, and January 2, 1999

1. Summary of Significant Accounting Policies

   Nature of Business--Specialty Catalog Corp. (the "Company") targets niche
consumer product categories, primarily via direct marketing. SC Corporation,
the Company's principal operating subsidiary doing business under the name SC
Direct ("SC Direct"), is the leading US retailer of women's wigs and
hairpieces. Daxbourne International Limited ("Daxbourne"), a subsidiary of SC
Direct, is a leading UK retailer, wholesaler and direct marketer of women's
wigs and hairpieces. SC Publishing ("SC Publishing"), another subsidiary of SC
Direct, sells continuing education courses to nurses and certified public
accountants. American Healthcare Institute ("AHI"), an operating division of
SC Publishing, which was acquired by the Company on September 10, 1999,
provides continuing-education seminars and conferences for the healthcare
industry.

   Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

   Translation of Foreign Currencies--The financial statements of the
Company's foreign subsidiary are translated from local currency into US
dollars using the current exchange rate at the balance sheet date for assets
and liabilities and the average exchange rate prevailing during the period for
revenues and expenses. The local currency of its foreign subsidiary is
considered to be the functional currency. Exchange gains and losses on
intercompany balances of a long-term investment nature are recorded as a
component of other comprehensive income (loss) in shareholders' equity, while
other transaction gains and losses are recorded directly to the consolidated
statements of operations. Comprehensive income (loss) consisted solely of
accumulated foreign currency translation adjustments in connection with the
Company's UK subsidiary in 2000 and 1999.

   Cash and Cash Equivalents--Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.

   Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost method. A reserve for obsolete
inventory is recorded based on the expected realizable value of merchandise.
The cost of inventory includes the cost of merchandise, freight, duty,
brokerage fees and marine insurance.

   Prepaid Expenses--The costs incurred to develop, print and place direct
response advertisements to obtain names of potential customers are recorded as
prepaid expenses until the time the advertisement is published, mailed or
otherwise made available to potential customers. Direct response advertising,
including catalog printing and mailing costs, for selling purposes, is
capitalized and amortized over the expected period of future benefit,
generally two to four months. For the years ended December 30, 2000, January 1
2000, and January 2, 1999, advertising expense was $17.0 million, $14.3
million and $15.4 million, respectively.

   Property, Plant and Equipment--Property, plant and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the
respective assets. Amortization is computed on the straight-line method over
the lesser of the estimated useful lives of the related assets or the lease
terms.

   In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires 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 2000 and 1999, the Company capitalized
$568,706 and $1,185,536, respectively, of costs associated with its new
catalog

                                      24
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1. Summary of Significant Accounting Policies (continued)

information system that was implemented in August 1999, of which $254,651 and
$583,659, respectively, were internal payroll and payroll related costs.

   Intangibles--Intangible assets, consisting of goodwill, covenants not to
compete, customer lists, trademarks, and trade names, are amortized using the
straight-line method over useful lives of three to thirty years. Management's
policy regarding intangible assets is to evaluate the recoverability of its
intangible assets when the facts and circumstances suggest that these assets
may be impaired. This policy is consistent with those policies set forth in
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed".
Evaluations consider factors including operating results, business and
strategic plans, economic projections, and market emphasis. Evaluations
compare expected cumulative, non-discounted operating cash flows with net book
values of related intangible assets. Unrealizable intangible asset values are
charged to operations. There were no impairment charges during the fiscal
years presented.

   Other Assets--Other assets consist primarily of deferred financing costs.
Deferred financing costs which were incurred by the Company in connection with
the credit agreement (the "Agreement") with Fleet National Bank (the "Bank")
(see footnote 7) are amortized over the life of the underlying indebtedness
using the straight-line method. At December 30, 2000 and January 1, 2000,
deferred financing costs were $71,448 and $81,987, respectively.

   Income Taxes--The Company uses the asset and liability method of accounting
for deferred income taxes. The provision for income taxes includes income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax basis of assets and liabilities.

   Revenue--The Company recognizes sales and the related costs of sales at the
time merchandise is shipped to customers. The Company allows for merchandise
returns at the customer's discretion within the period stated in the Company's
sales policy. An allowance is provided for returns based on historical return
rates applied to recent shipments.

   Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of
financial instruments, relating to both those assets and liabilities
recognized and those not recognized in the consolidated balance sheets of the
Company, for which it is practicable to estimate fair value. The estimated
fair value of financial instruments which are presented herein have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of amounts the
Company could realize in a current market exchange.

   The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and short-term borrowings approximate their
carrying values at December 30, 2000 and January 1, 2000, due to the short-
term maturities of these investments. The carrying values and fair values of
the Company's long-term debt at December 30, 2000 and January 1, 2000 were
$9,000,000 and $5,025,000.

   Stock-Based Compensation--Compensation cost of stock-based compensation
arrangements with employees is measured based on Accounting Principles Board
("APB") Opinion No. 25. The Company applies APB Opinion No. 25 to its stock-
based compensation awards to employees and the disclosure provisions of SFAS
No. 123, "Accounting for Stock-based Compensation", are addressed in footnote
10.

                                      25
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1. Summary of Significant Accounting Policies (continued)

   Newly Issued Accounting Pronouncements--Emerging Issues Task Force ("EITF")
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs", requires
that shipping and handling fees, billed to a customer in a sale transaction,
should be classified as part of revenues. This consensus had to be adopted no
later than the fourth quarter of 2000. The Company has restated its
consolidated statements of operations for the fiscal years ended December 30,
2000, January 1, 2000 and January 2, 1999 by reclassifying all shipping and
handling income from cost of sales and operating expenses to revenues.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The adoption of SAB No. 101 did not materially affect the Company's
consolidated financial statements in the current year.

   Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS No. 133, certain contracts that were not
formerly considered derivatives may now meet the definition of a derivative.
The Company will adopt SFAS No. 133 effective January 1, 2001. Management does
not expect the adoption of SFAS No. 133 to have a significant impact on the
financial position, results of operations, or cash flows of the Company.

   Fiscal Year--The Company is on a 52/53-week fiscal year, ending on the
Saturday closest to December 31. Unless otherwise indicated, "2000" means the
52 weeks ended December 30, 2000, "1999" means the 52 weeks ended January 1,
2000 and "1998" means the 52 weeks ended January 2, 1999.

   Accounting Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Management bases its estimates on historical
experiences and on various assumptions that are believed to be reasonable
under the circumstances. The primary estimates underlying the Company's
financial statements include allowances for doubtful accounts, allowances for
returns, and inventory valuation.

   Reclassifications--Certain amounts in the 1998 and 1999 financial
statements have been reclassified to conform to the 2000 presentation.

2. Prepaid Expenses

   Prepaid expenses at December 30, 2000 and January 1, 2000 consist of the
following:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                          ---------- ----------
<S>                                                       <C>        <C>
Deferred catalog costs................................... $2,915,706 $2,704,258
Prepaid advertising......................................    176,173    181,113
Prepaid income taxes.....................................         --    720,000
Other....................................................    469,432    407,167
                                                          ---------- ----------
                                                          $3,561,311 $4,012,538
                                                          ========== ==========
</TABLE>

                                      26
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Property, Plant and Equipment

   Property, plant and equipment at December 30, 2000 and January 1, 2000
consist of the following:

<TABLE>
<CAPTION>
                                            Useful
                                             Life       2000         1999
                                           --------- -----------  -----------
<S>                                        <C>       <C>          <C>
Furniture and equipment................... 5-7 years $ 1,934,588  $ 1,764,086
Building..................................  40 years     298,140      323,000
Data processing equipment................. 3-5 years   6,731,971    5,652,965
Automobiles...............................   3 years     122,798      112,025
Leasehold improvements....................       (i)     536,370      434,080
                                                     -----------  -----------
                                                       9,623,867    8,286,156
Less accumulated depreciation and
 amortization amortization................            (5,232,422)  (3,967,224)
                                                     -----------  -----------
                                                     $ 4,391,445  $ 4,318,932
                                                     ===========  ===========
</TABLE>
--------
(i)  Lesser of the estimated useful lives of the related assets or the lease
     term.

   Depreciation and amortization expense related to property, plant and
equipment was $1,274,150, $734,776 and $429,311 for 2000, 1999 and 1998,
respectively. In 1999, the Company disposed of fully depreciated fixed assets
no longer in use totaling $753,244. There were no gains or losses recognized
on the consolidated statement of operations from these disposals.

4. Intangible Assets

   Intangible assets at December 30, 2000 and January 1, 2000 consist of the
following:

<TABLE>
<CAPTION>
                                              Useful
                                               Life        2000         1999
                                            ----------- -----------  ----------
<S>                                         <C>         <C>          <C>
Goodwill................................... 20-30 years $ 2,801,432  $2,937,185
Trade names................................    30 years   1,096,464   1,157,307
Covenant-not-to-compete....................     5 years     745,350     807,500
Customer lists.............................   3-5 years     381,045     400,310
                                                        -----------  ----------
                                                          5,024,291   5,302,302
Less accumulated amortization..............              (1,081,783)   (730,897)
                                                        -----------  ----------
                                                        $ 3,942,508  $4,571,405
                                                        ===========  ==========
</TABLE>

   Amortization expense related to intangible assets was $416,082, $335,943
and $316,620 for 2000, 1999 and 1998, respectively.

5. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses at December 30, 2000 and January 1,
2000 consist of the following:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                          ---------- ----------
<S>                                                       <C>        <C>
Accounts payable......................................... $2,500,268 $3,076,493
Accrued compensation.....................................    158,178    579,721
Other accrued expenses...................................    998,311    605,186
                                                          ---------- ----------
                                                          $3,656,757 $4,261,400
                                                          ========== ==========
</TABLE>

                                      27
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Liabilities to Customers

   Liabilities to customers at December 30, 2000 and January 1, 2000 consist
of the following:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                             -------- ----------
<S>                                                          <C>      <C>
Deferred revenue............................................ $365,167 $  450,279
Refunds due customers.......................................  201,867     17,592
Reserve for returns.........................................  358,854    701,385
                                                             -------- ----------
                                                             $925,888 $1,169,256
                                                             ======== ==========
</TABLE>

   Deferred revenue reflects cash received from customers for ordered items
that have not yet been shipped. Refunds due customers represents merchandise
returned by customers for a cash or credit refund. The reserve for returns
represents estimated merchandise to be returned for refunds in the future
based on historical return rates applied to recent shipments.

7. Long-Term Debt

   Long-term debt at December 30, 2000 and January 1, 2000 consists of the
following:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                          ---------- ----------
<S>                                                       <C>        <C>
Fleet National Bank (Term Loan), due October 2001........ $       -- $4,000,000
Fleet National Bank (UK Term Loan), due October 2001.....         --  1,025,000
Fleet National Bank (Term Loan), due January 2006........  9,000,000         --
                                                          ---------- ----------
                                                           9,000,000  5,025,000
Less current portion.....................................  1,800,000  2,125,000
                                                          ---------- ----------
                                                          $7,200,000 $2,900,000
                                                          ========== ==========
</TABLE>

   On December 27, 2000, the Company entered into an $12.25 million credit
agreement (the "Agreement") with Fleet National Bank (the "Bank") for the
purpose of refinancing its existing senior debt and to provide for the working
capital needs of the Company. The new credit facility, which may be increased
to $13.0 million in 2002, replaces the Company's former credit facilities with
the Bank. The Agreement includes a $9.0 million five-year term note (the "Term
Loan") and a $3.25 million two-year revolving credit agreement (the "Line of
Credit"). The amount available on the Line of Credit increases as principal
amortization payments on the Term Loan are paid, such that the total Agreement
remains at $12.25 million over the two years of the Line of Credit agreement.
The Line of Credit provides for revolving credit loans and letters of credit
with floating rates based on margins over LIBOR or prime at the Company's
option. The Term Loan is for five years and is amortized at the rate of
$450,000 a quarter beginning January 1, 2001.

   As of December 30, 2000, $6.4 million of the Term Loan was under LIBOR
contract rates ranging from 8.6625 percent to 9.02813 percent and the
remainder of the Term Loan was at the base rate of 9.75 percent. As of
December 30, 2000, approximately $788,000 of the Line of Credit was at the
base rate of 9.75 percent. The Company is required to pay a commitment fee of
0.375 percent per annum on the unused portion of the commitment. At December
30, 2000, $2,461,901 was available under the Line of Credit.

                                      28
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Agreement is collateralized by a first perfected security interest in
all tangible and intangible assets of the Company, subject to certain
permitted liens. The Agreement is subject to certain consolidated covenants,
including but not limited to leverage and debt service coverage ratios,
minimum earnings requirements, and a restriction on the payment of cash
dividends on the Company's common stock. The aggregate maturities of long-term
debt after December 30, 2000 are as follows:

<TABLE>
<CAPTION>
      Fiscal Year                                                       Amount
      -----------                                                     ----------
      <S>                                                             <C>
      2001........................................................... $1,800,000
      2002...........................................................  1,800,000
      2003...........................................................  1,800,000
      2004...........................................................  1,800,000
      2005...........................................................  1,800,000
                                                                      ----------
                                                                      $9,000,000
                                                                      ==========
</TABLE>

8. Operating Expenses

   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. In 2000 and 1999, the
Company recorded costs of $632,294 and $65,467, respectively, from this
transaction.

   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
pre-tax charge of $500,000, consisting of severance and other severance
related benefits and recruiting fees. Accrued compensation expenses at January
1, 2000 include expenses accrued in connection with these charges of $397,344.
All amounts relating to the accrued expenses were paid in 2000.

   From 1996 to 1999, the Company circulated the Paula's Hatbox catalog that
featured ladies hats and then expanded to include selected women's apparel and
accessories. 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 this catalog in the fourth quarter of 1999. The
Company recorded a pre-tax charge of $730,000 in October 1999 related to the
write-off of remaining unamortized deferred catalog costs, inventory write-
offs and to severance and severance related benefits for four employees.
Accrued restructuring charges at January 1, 2000 include expenses accrued in
connection with this closure of $27,091. All amounts relating to the accrued
expenses were paid in 2000.

   In August 1998, the Company announced the reorganization of certain
management positions. In connection with this reorganization, the Company
recorded in the third quarter of 1998 a pre-tax charge of $469,558, consisting
of severance and other severance related benefits through July 1999 for five
employees. Accrued expenses at January 2, 1999 include expenses accrued in
connection with these charges of $99,301.

                                      29
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Acquisitions

 American Healthcare Institute

   On September 10, 1999, the Company acquired the assets and assumed certain
liabilities of AHI, a private Maryland-based continuing-education seminar and
conference provider for $1,323,381 in cash. This transaction was accounted for
as a purchase. The results of operations of AHI for the period from September
10, 1999 through January 1, 2000 are included in the accompanying consolidated
financial statements. The $1,150,634 excess of costs over net assets acquired
was allocated to customer lists and goodwill which are being amortized over 3
and 20 years, respectively.

10. Shareholders' Equity

   Treasury Stock--In December 1998, the Company's Board of Directors
authorized the Company to repurchase up to $1.0 million of the Company's
common stock. As of December 30, 2000, the Company had repurchased 144,100
shares at an average price of $3.56 per share.

   Stock Compensation Plan--On June 22, 2000, the Company adopted the 2000
Stock Incentive Plan (the "Plan"). The Plan authorizes the issuance of up to
750,000 shares of the Company's common stock through the grant of stock
options and awards of restricted stock. Each option has a maximum term of ten
years from the date of grant, subject to early termination.

   Options granted under the Company's 1996 Stock Incentive Plan, as amended
(the "1996 Plan"), before their termination will remain outstanding according
to their terms, but no further options will be granted under the 1996 Plan
after June 22, 2000.

   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 is
exercisable (as defined in the Rights Agreement) by the registered holder of a
Right Certificate to purchase 1/1000th of a share of Series A Preferred Stock
of the Company, subject to adjustment, at an exercise price per 1/1000th of a
share of Series A Preferred Stock of $15, subject to adjustment. Each 1/1000th
of a share of Series A Preferred Stock will have economic attributes (i.e.,
participation in dividends and voting rights) substantially equivalent to one
whole share of the common stock of the Company. The Rights expire on the tenth
anniversary of the date of the Rights Agreement unless earlier redeemed or
exchanged by the Company as provided in the Rights Agreement. For further
information, a detailed description of the Rights Agreement and a copy of the
Rights Agreement were included in a current report on Form 8-K, which was
filed with the Securities and Exchange Commission on April 13, 2000.

                                      30
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Stock option activity is summarized below:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                             Exercise   Average
                                                             Price Per  Exercise
                                                  Shares       Share     Price
                                                 ---------  ----------- --------
<S>                                              <C>        <C>         <C>
Outstanding January 3, 1998..................... 1,156,734  $0.31-$7.15  $3.69
Granted.........................................    25,000  $      6.50  $6.50
Exercised.......................................  (217,773) $      0.31  $0.31
Forfeited or expired............................   (59,050) $      6.50  $6.50
                                                 ---------  -----------  -----
Outstanding January 2, 1999.....................   904,911  $0.31-$7.15  $4.40
Granted.........................................   181,500  $      6.50  $6.50
Forfeited or expired............................  (112,284) $6.50-$6.88  $6.51
                                                 ---------  -----------  -----
Outstanding January 1, 2000.....................   974,127  $0.31-$7.15  $4.54
                                                 ---------  -----------  -----
Granted.........................................   422,500  $2.25-$2.50  $2.50
Forfeited or expired............................  (134,950) $6.50-$6.63  $6.51
                                                 ---------  -----------  -----
Outstanding December 30, 2000................... 1,261,677  $0.31-$7.15  $3.65
                                                 =========  ===========  =====
</TABLE>

   The 1,261,677 stock options outstanding as of December 30, 2000 consisted
of 310,226 of $0.31 options issued in November 1994 to an employee of the
Company, 75,000 of $5.33 options issued in October 1996 to an employee of the
Company, 150,000 of $7.15 options issued in October 1996 to the Company's
underwriters in connection with the Company's initial public offering, 303,951
of options ranging in exercise prices from $6.50 to $6.625 issued under the
1996 Plan to employees and directors of the Company and 422,500 of options
ranging in exercise prices from $2.25 to $2.50 issued under the Plan to
employees and directors of the Company.

   Options exercisable at December 30, 2000, January 1, 2000 and January 2,
1999 were 639,177, 650,326 and 524,583, respectively. The options outstanding
as of December 30, 2000 have weighted average remaining contractual lives of
3.9 years for the $0.31 options issued in 1994, 5.8 years for the $5.33-$7.15
options granted in 1996, 6.8 years for the $6.50-$6.625 options granted in
1997, 7.4 years for $6.50 options granted in 1998, 8.5 years for the $6.50
options granted in 1999 and 9.5 years for the $2.25-$2.50 options granted in
2000. The weighted average fair value of stock options granted in 2000, 1999
and 1998 were $1.09, $0.54 and $1.75, respectively.

                                      31
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The Company applies the intrinsic value provisions of APB Opinion No. 25
and related interpretations in accounting for awards granted to employees. Had
compensation cost been determined based on the fair value at the grant dates
for options granted with the method prescribed by SFAS No. 123 "Accounting for
Stock-based Compensation", the Company's net income and basic and diluted
earnings per share would have been changed to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                    2000      1999      1998
                                                 ---------- -------- ----------
<S>                                              <C>        <C>      <C>
Net income:
  As reported................................... $1,112,131 $799,486 $1,571,381
                                                 ========== ======== ==========
  Pro forma..................................... $1,033,147 $633,002 $1,385,609
                                                 ========== ======== ==========
Basic earnings per share:
  As reported................................... $     0.26 $   0.18 $     0.31
                                                 ========== ======== ==========
  Pro forma..................................... $     0.24 $   0.14 $     0.28
                                                 ========== ======== ==========
Diluted earnings per share:
  As reported................................... $     0.25 $   0.17 $     0.29
                                                 ========== ======== ==========
  Pro forma..................................... $     0.23 $   0.14 $     0.25
                                                 ========== ======== ==========
</TABLE>

   The fair value of each option grant used to compute pro forma net income
and basic and diluted earnings per share disclosures is the estimated present
value on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 2000, 1999 and 1998
respectively: expected volatility of 33.32 percent, 29.00 percent and 27.59
percent, a risk free interest rate of 6.00 percent, 5.30 percent and 5.63
percent and an expected holding period of 6 years.

11. Reconciliation of Basic and Diluted Earnings per Share

   The following table shows the amounts used in computing basic and diluted
earnings per share for net income and the effects of potentially dilutive
options on the weighted average number of shares outstanding.

<TABLE>
<CAPTION>
                                           For the fiscal year ended
                         --------------------------------------------------------------
                          December 30, 2000     January 1, 2000      January 2, 1999
                         -------------------- -------------------- --------------------
                         Net Income  Shares   Net Income  Shares   Net Income  Shares
                         ---------- --------- ---------- --------- ---------- ---------
<S>                      <C>        <C>       <C>        <C>       <C>        <C>
Basic earnings per
 share.................. $1,112,131 4,341,915  $799,486  4,400,944 $1,571,381 5,033,800
Effect of dilutive
 options................         --   188,841        --    283,930         --   461,214
                         ---------- ---------  --------  --------- ---------- ---------
Diluted earnings per
 share.................. $1,112,131 4,530,756  $799,486  4,684,874 $1,571,381 5,495,014
                         ========== =========  ========  ========= ========== =========
</TABLE>

   Options to purchase 923,951 shares of common stock ranging from $5.33 to
$7.15 per share were not included in computing diluted EPS for the year ended
December 30, 2000 because their effects were antidilutive. Options to purchase
670,351 shares of common stock ranging from $5.33 to $7.15 per share were not
included in computing diluted EPS for the year ended January 1, 2000 because
their effects were antidilutive. Options to purchase 599,935 shares of common
stock ranging from $6.88 to $7.15 per share were not included in computing
diluted EPS for the year ended January 2, 1999 because their effects were
antidilutive.

                                      32
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Income Taxes

   The provision for income taxes at December 30, 2000, January 1, 2000 and
January 2, 1999 consists of the following:

<TABLE>
<CAPTION>
                                                    2000      1999       1998
                                                  --------  --------  ----------
<S>                                               <C>       <C>       <C>
Current:
  Federal........................................ $     --  $     --  $       --
  State..........................................       --   175,591          --
  Foreign........................................  300,658   271,117      57,932
                                                  --------  --------  ----------
                                                   300,658   446,708      57,932
                                                  --------  --------  ----------
Deferred:
  Federal........................................  332,532   262,573     606,533
  State..........................................  199,282    24,466     209,800
  Foreign........................................  (59,087)  (80,780)    221,729
                                                  --------  --------  ----------
                                                   472,727   206,259   1,038,062
                                                  --------  --------  ----------
    Total........................................ $773,385  $652,967  $1,095,994
                                                  ========  ========  ==========
</TABLE>

   Deferred income tax assets and liabilities at December 30, 2000 and January
1, 2000 consist of the following:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                          ---------- ----------
<S>                                                       <C>        <C>
Deferred income tax assets:
  Net operating loss carryforwards and credits........... $4,130,171 $4,021,799
  Operating reserves.....................................    668,708    418,620
  Inventory..............................................    349,307    462,145
  Property, plant and intangibles........................    307,277    528,306
                                                          ---------- ----------
                                                           5,455,463  5,430,870
                                                          ---------- ----------
Deferred income tax liabilities:
  Deferred catalog costs.................................  1,139,993  1,045,754
  Other..................................................     42,183     46,273
                                                          ---------- ----------
                                                           1,182,176  1,092,027
                                                          ---------- ----------
  Net deferred income tax asset.......................... $4,273,287 $4,338,843
                                                          ========== ==========
</TABLE>

   Reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes for the years ended December 30, 2000,
January 1, 2000 and January 2, 1999 is as follows:

<TABLE>
<CAPTION>
                                                               2000  1999  1998
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
Statutory Federal income tax rate............................. 34.0% 34.0% 34.0%
State taxes, net of Federal income tax benefits...............  6.3   6.3   6.1
Other.........................................................  0.7   4.7   1.0
                                                               ----  ----  ----
                                                               41.0% 45.0% 41.1%
                                                               ====  ====  ====
</TABLE>

   The Company has recorded a deferred tax asset of $4,273,287 primarily
reflecting the benefit of $10,379,069 of net operating loss carryforwards
which expire in varying amounts between 2001 and 2010. Realization is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. The use of the

                                      33
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ynet operating losses is subject to an annual limitation of $1,555,125 due to
a change in control of the Company pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended ("IRC"). Over the past three years, the
Company has used substantially all of the net operating loss carryforwards
available to it. Tax benefits of Federal operating loss carryforwards of
approximately $190,000, $632,000 and $703,000 were utilized in 2000, 1999 and
1998, respectively. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset will be
realized.

13. Commitments and Contingencies

   Lease Commitments--Certain non-cancelable leases are classified as capital
leases, and the leased assets are included as part of "Property, Plant and
Equipment". The obligations of the Company under such leases are
collateralized by leased equipment. Other leases are classified as operating
leases and are not capitalized. Future minimum lease payments under capital
leases as of December 30, 2000 are included in "Other Long-term Liabilities"
and are as follows:

<TABLE>
<CAPTION>
      Year                                                              Amount
      ----                                                             --------
      <S>                                                              <C>
      2001............................................................ $ 99,969
      2002............................................................   56,308
      2003............................................................   54,760
      2004............................................................   27,380
                                                                       --------
      Total minimum lease payments....................................  238,417
        Less--amounts representing interest...........................   18,822
                                                                       --------
      Present value of minimum lease payments......................... $219,595
                                                                       ========
</TABLE>

   Operating Leases--The Company leases certain administrative, warehousing
and other facilities and equipment under operating leases. The following is a
schedule of future minimum rental payments under non-cancelable operating
leases as of December 30, 2000:

<TABLE>
<CAPTION>
      Year                                                              Amount
      ----                                                            ----------
      <S>                                                             <C>
      2001........................................................... $  622,704
      2002...........................................................    503,344
      2003...........................................................    109,306
      2004...........................................................     26,806
      2005...........................................................     16,458
                                                                      ----------
                                                                      $1,278,618
                                                                      ==========
</TABLE>

   Management expects that, in the normal course of business, expiring leases
will be renewed or replaced by other leases. Rent expense under operating
leases was $651,563, $580,137 and $594,752 for 2000, 1999 and 1998,
respectively.

   Employment and Bonus Agreements--On May 9, 2000, the Company announced the
appointment of Joseph J. Grabowski as president of the Company effective as of
May 8, 2000. On July 1, 2000, Mr. Grabowski assumed the title of CEO,
replacing Steven L. Bock whose resignation was effective June 30, 2000.

   The term of the executive employment agreement (the "Employment Agreement")
between the Company and Mr. Grabowski commenced on May 8, 2000 and, unless
extended, terminates on May 7, 2002 (the "Initial Term"). Under this
Employment Agreement, Mr. Grabowski will receive an annual salary of $300,000,
along with other benefits. Mr. Grabowski will be eligible for a performance
bonus of up to 100 percent of his annual salary, based upon the Company's
performance as compared against the annual performance plan. Upon

                                      34
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

executing this agreement, Mr. Grabowski was granted options under the 2000
Stock Incentive Plan to purchase 250,000 shares of common stock of the Company
at $2.50 per share, the then fair market value of the stock. Mr. Grabowski is
also eligible to receive an additional grant of 250,000 stock options, at a
price which shall equal the Fair Market Value on the date of the grant, as
defined in the 2000 Stock Incentive Plan, after the end of the first fiscal
year in which the Company's gross revenues exceed $120,000,000.

   The Company may terminate Mr. Grabowski's employment upon his death or
permanent disability, or if he engages in conduct that constitutes "cause"
under the Employment Agreement. Mr. Grabowski may terminate his employment for
"Good Reason" as defined in the Employment Agreement. In the event Mr.
Grabowski's employment is terminated by the Company other than for "cause",
Mr. Grabowski will receive a "Termination Payment" as defined in the
Employment Agreement. The Employment Agreement contains non-competition and
other restrictions effective during the term of employment and for a one-year
period thereafter.

   In addition, Mr. Grabowski, along with all other salaried employees, may
earn certain other bonuses based on the Company's achievement of certain
operating targets.

14. Employee Benefit Plan

   The Company maintains a qualified defined contribution plan, under the
provisions of Section 401(k) of the IRC, covering substantially all United
States employees. Under the terms of the plan, eligible employees may make
contributions of up to 15 percent of pay, subject to statutory limitations.
Contributions not exceeding 5 percent of an employee's pay are matched 40
percent by the Company. The Company may, at its discretion, make an additional
year-end contribution. Employee contributions are always fully vested. Company
contributions vest 20 percent for each completed year of service, becoming
fully vested after five years of service. Matching contributions by the
Company under the plan were $105,578, $87,697 and $86,535 in 2000, 1999 and
1998, respectively. No discretionary contributions have been made to the plan.

15. Business Segments and Financial Information by Geographic Location

   Specialty Catalog Corp. has six reportable segments: Paula Young,
Especially Yours and Paula's Hatbox under the SC Direct division, Western
Schools and AHI under the SC Publishing division and Daxbourne International
Limited. The SC Direct division sells women's wigs and hairpieces using two
distinct catalogs: Paula Young and Especially Yours. In addition, prior to the
end of 1999, SC Direct sold apparel, hats and other fashion accessories
through its Paula's Hatbox catalog. The SC Publishing division distributes
catalogs under its Western Schools brand and specializes in providing
continuing education courses to nurses and accounting professionals. SC
Publishing's other segment, AHI, which was acquired by the Company on
September 10, 1999, distributes catalogs under its own name and specializes in
providing continuing education seminars and conferences to nurses and other
mental health professionals. Daxbourne International Limited is a retailer and
wholesaler of women's wigs, hairpieces and related products in the United
Kingdom.

   Beginning in the second quarter of fiscal year 2000, the Company changed
its reportable segments from SC Direct, SC Publishing, AHI and Daxbourne
International Limited to Paula Young, Especially Yours, Paula's Hatbox,
Western Schools, AHI and Daxbourne International Limited. The change was made
to conform the Company's financial reporting to how it now manages its
business. As a result, the Company has restated the segment reporting results
for the years ended January 1, 2000 and 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. The SC Direct and SC Publishing divisions market their
products and maintain their assets in the United States. Daxbourne
International Limited markets its products and maintains its assets in the
United Kingdom.

                                      35
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   A summary of information about the Company's operations by segment for the
year ended December 30, 2000, January 1, 2000 and January 2, 1999 follows:

<TABLE>
<CAPTION>
                       Paula    Especially    Paula's     Corporate    Total SC    Western                Total SC
                       Young      Yours       Hatbox      Expenses      Direct     Schools      AHI      Publishing  Daxbourne
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 2000
 ----
 <S>                <C>         <C>         <C>          <C>          <C>         <C>        <C>         <C>         <C>
 Net sales
  (including
  royalties).....   $30,851,690 $7,213,115  $        --  $        --  $38,064,805 $4,377,591 $5,251,389  $ 9,628,980 $5,538,028
 Shipping &
  handling
  income.........     5,486,250  1,282,825           --           --    6,769,075    849,717         21      849,738     41,486
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Total revenues..    36,337,940  8,495,940           --           --   44,833,880  5,227,308  5,251,410   10,478,718  5,579,514
 Gross profit....    23,280,988  5,157,179           --     (231,454)  28,206,713  3,811,700  3,081,129    6,892,829  3,790,247
 Operating
  expenses.......    15,080,217  5,078,787           --    5,311,239   25,470,243  3,082,328  3,288,630    6,370,958  2,499,265
 Depreciation and
  Amortization...            --         --           --    1,147,980    1,147,980     42,668    146,401      189,069    353,183
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Income (loss)
  from
  Operations.....     8,200,771     78,392           --   (6,690,673)   1,588,490    686,704   (353,902)     332,802    937,799
 Interest
  expense, net...            --         --           --      740,397      740,397         --      3,517        3,517    229,661
 Income tax
  provision
  (benefit)......            --         --           --      348,046      348,046    281,548   (146,547)     135,001    290,338
 Segment assets..            --         --           --   16,888,254   16,888,254  4,466,359    488,140    4,954,499  1,860,751
 Capital
  expenditures...            --         --           --    1,259,034    1,259,034     16,433     73,097       89,530     28,445
<CAPTION>
 1999
 ----
 <S>                <C>         <C>         <C>          <C>          <C>         <C>        <C>         <C>         <C>
 Net sales
  (including
  royalties).....   $28,623,097 $5,557,564  $ 2,833,709  $        --  $37,014,370 $4,326,888 $  886,690  $ 5,213,578 $5,381,300
 Shipping &
  handling
  Income.........     4,737,847    872,417      431,611           --    6,041,875    785,121         --      785,121     38,338
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Total revenues..    33,360,944  6,429,981    3,265,320           --   43,056,245  5,112,009    886,690    5,998,699  5,419,638
 Gross profit....    21,712,460  3,810,056      909,075     (232,455)  26,199,136  3,639,002    576,593    4,215,595  3,722,268
 Operating
  expenses.......    12,792,835  3,680,678    2,844,866    5,531,387   24,849,766  2,802,061    573,456    3,375,517  2,594,379
 Depreciation and
  amortization...            --         --           --      627,157      627,157     44,461     28,341       72,802    370,760
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Income (loss)
  from
  operations.....     8,919,625    129,378   (1,935,791)  (6,390,999)     722,213    792,480    (25,204)     767,276    757,129
 Interest
  expense, net...            --         --           --      535,375      535,375         --         --           --    258,790
 Income tax
  provision
  (benefit)......            --         --           --      140,605      140,605    324,916    (10,334)     314,582    197,780
 Segment assets..            --         --           --   16,494,808   16,494,808  4,084,173    425,903    4,510,076  4,418,393
 Capital
  expenditures...            --         --           --    1,687,039    1,687,039      8,661     80,107       88,768     69,160
<CAPTION>
 1998
 ----
 <S>                <C>         <C>         <C>          <C>          <C>         <C>        <C>         <C>         <C>
 Net sales
  (including
  royalties).....   $32,979,626 $3,634,695  $ 3,438,200  $        --  $40,052,521 $3,711,181 $       --  $ 3,711,181 $5,119,850
 Shipping &
  handling
  income.........     5,104,102    544,906      467,051           --    6,116,059    567,938         --      567,938     23,608
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Total revenues..    38,083,728  4,179,601    3,905,251           --   46,168,580  4,279,119         --    4,279,119  5,143,458
 Gross profit....    24,722,185  1,998,412    1,765,131     (235,168)  28,250,560  2,892,093         --    2,892,093  3,555,561
 Operating
  expenses.......    13,964,167  2,818,773    3,110,169    5,616,092   25,509,201  2,559,474         --    2,559,474  2,344,340
 Depreciation and
  amortization...            --         --           --      327,870      327,870     27,704         --       27,704    390,357
                    ----------- ----------  -----------  -----------  ----------- ---------- ----------  ----------- ----------
 Income (loss)
  from
  operations.....    10,758,018   (820,361)  (1,345,038)  (6,179,130)   2,413,489    304,915         --      304,915    820,864
 Interest
  expense, net...            --         --           --      530,001      530,001         --         --           --    341,892
 Income tax
  provision
  (benefit)......            --         --           --      772,528      772,528    125,013         --      125,013    198,453
 Segment assets..            --         --           --   14,747,288   14,747,288  3,614,759         --    3,614,759  4,682,424
 Capital
  expenditures...            --         --           --    1,119,713    1,119,713     21,122         --       21,122     48,070
<CAPTION>
                       Total
                    -----------
 2000
 ----
 <S>                <C>
 Net sales
  (including
  royalties).....   $53,231,813
 Shipping &
  handling
  income.........     7,660,299
                    -----------
 Total revenues..    60,892,112
 Gross profit....    38,889,789
 Operating
  expenses.......    34,340,466
 Depreciation and
  Amortization...     1,690,232
                    -----------
 Income (loss)
  from
  Operations.....     2,859,091
 Interest
  expense, net...       973,575
 Income tax
  provision
  (benefit)......       773,385
 Segment assets..    23,703,504
 Capital
  expenditures...     1,377,009
<CAPTION>
 1999
 ----
 <S>                <C>
 Net sales
  (including
  royalties).....   $47,609,248
 Shipping &
  handling
  Income.........     6,865,334
                    -----------
 Total revenues..    54,474,582
 Gross profit....    34,136,999
 Operating
  expenses.......    30,819,662
 Depreciation and
  amortization...     1,070,719
                    -----------
 Income (loss)
  from
  operations.....     2,246,618
 Interest
  expense, net...       794,165
 Income tax
  provision
  (benefit)......       652,967
 Segment assets..    25,423,277
 Capital
  expenditures...     1,844,967
<CAPTION>
 1998
 ----
 <S>                <C>
 Net sales
  (including
  royalties).....   $48,883,552
 Shipping &
  handling
  income.........     6,707,605
                    -----------
 Total revenues..    55,591,157
 Gross profit....    34,698,214
 Operating
  expenses.......    30,413,015
 Depreciation and
  amortization...       745,931
                    -----------
 Income (loss)
  from
  operations.....     3,539,268
 Interest
  expense, net...       871,893
 Income tax
  provision
  (benefit)......     1,095,994
 Segment assets..    23,044,471
 Capital
  expenditures...     1,188,905
</TABLE>

                                      36
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Selected Quarterly Financial Data (1) (unaudited):

<TABLE>
<CAPTION>
            2000             1st Quarter  2nd Quarter 3rd Quarter  4th Quarter
            ----             -----------  ----------- -----------  -----------
<S>                          <C>          <C>         <C>          <C>
Net sales................... $16,070,125  $16,661,394 $13,475,795  $14,684,798
Gross profit................  10,245,589   10,822,438   8,406,632    9,415,130
Net income (loss)...........     (39,629)     776,115      67,272      308,373
Earnings (loss) per share--
 Basic EPS
  Net income (loss)......... $     (0.01) $      0.18 $      0.02  $      0.07
  Weighted average shares
   outstanding..............   4,351,386    4,340,353   4,337,886    4,337,886
Earnings (loss) per share--
 Diluted EPS
  Net income (loss)......... $     (0.01) $      0.17 $      0.01  $      0.07
  Weighted average shares
   outstanding..............   4,351,386    4,615,365   4,643,556    4,491,358
<CAPTION>
            1999             1st Quarter  2nd Quarter 3rd Quarter  4th Quarter
            ----             -----------  ----------- -----------  -----------
<S>                          <C>          <C>         <C>          <C>
Net sales (2)............... $15,154,754  $14,059,624 $11,672,611  $13,587,593
Gross profit (2)............   9,724,590    9,107,795   7,410,472    7,894,142
Net income (loss) (2).......     497,168      864,398     (74,525)    (487,555)
Earnings (loss) per share--
 Basic EPS
  Net income (loss)......... $      0.11  $      0.20 $     (0.02) $     (0.11)
  Weighted average shares
   outstanding..............   4,440,264    4,417,718   4,399,955    4,351,386
Earnings (loss) per share--
 Diluted EPS
  Net income (loss)......... $      0.11  $      0.18 $     (0.02) $     (0.11)
  Weighted average shares
   outstanding..............   4,723,636    4,698,616   4,399,955    4,351,386
<CAPTION>
            1998             1st Quarter  2nd Quarter 3rd Quarter  4th Quarter
            ----             -----------  ----------- -----------  -----------
<S>                          <C>          <C>         <C>          <C>
Net sales................... $15,119,625  $15,079,614 $12,544,184  $12,847,734
Gross profit................   9,447,074    9,539,183   7,934,045    7,777,912
Net income (loss)...........    (375,053)   1,134,911     319,544      491,979
Earnings (loss) per share--
 Basic EPS
  Net income (loss)......... $     (0.07) $      0.22 $      0.06  $      0.10
  Weighted average shares
   outstanding..............   5,042,386    5,057,001   5,057,001    4,979,282
Earnings (loss) per share--
 Diluted EPS
  Net income (loss)......... $     (0.07) $      0.21 $      0.06  $      0.09
  Weighted average shares
   outstanding..............   5,042,386    5,529,354   5,517,927    5,409,539
</TABLE>
--------
(1)  Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping
     and Handling Fees and Costs," requires that shipping and handling fees,
     billed to a customer in a sale transaction, should be classified as part
     of revenues. This consensus had to be adopted no later than the fourth
     quarter of 2000. The Company has restated its consolidated statements of
     operations for the fiscal years ended December 30, 2000, January 1, 2000
     and January 2, 1999 by reclassifying all shipping and handling income from
     cost of sales and operating expenses to revenues.
(2)  The fiscal year ended January 1, 2000 includes four months of activity of
     AHI, which was acquired by the Company on September 10, 1999. For the four
     months ended January 1, 2000, AHI had net sales of $886,690, gross profit
     of $256,905 and a net loss of $14,870.

                                       37
<PAGE>

                            SPECIALTY CATALOG CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


17. Subsequent Events

   On January 19, 2001, the Company and the Bank entered into an Interest Rate
Swap Agreement based on a notional principal balance of $4.5 million. Under
the interest rate swap agreement, the Company receives
quarterly LIBOR-based interest rate payments from the Bank, and pays interest
quarterly at a fixed rate of 5.57% to the Bank. These interest rate payments
are settled net with the Bank. The agreement is effective for a period of two
years and terminates on January 19, 2003.

   On January 26, 2001, Daxbourne acquired the women's wig and hairpiece
business of the Company's British licensee. The licensee had been the
exclusive British licensee of the Company's Paula Young brand of women's wigs
and hairpieces since 1994. During the term of the license agreement the
licensee developed and circulated the Paula Young Fashion Wigs catalog using
the merchandising and creative resources of the Company, thereby establishing
Paula Young as a preeminent brand in Britain with a loyal customer following.
The acquisition agreement provides for the termination of the 1994 license
agreement, transfer of the assets of the Paula Young Fashion Wigs catalog
business to Daxbourne. Daxbourne's catalog division will now circulate both
catalogs--continuing to circulate its Jacqueline Collection catalog and the
Paula Young Fashion Wigs catalog.

   On February 3, 2001, AHI moved from Wheaton, Maryland to the Company's
headquarters in South Easton, Massachusetts.

                                      38
<PAGE>

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

   Not applicable.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

   The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Election of Directors" and "Executive
Compensation" in the Company's Proxy Statement relating to the 2001 Annual
Meeting of Shareholders.

Item 11. Executive Compensation

   The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement relating to the 2001 Annual Meeting of Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Principal Shareholders" in the Company's
Proxy Statement relating to the 2001 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

   The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Transactions" in the Company's
Proxy Statement relating to the 2001 Annual Meeting of Shareholders.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

    (a) 1. FINANCIAL STATEMENTS

       The financial statements are listed and included under Part II, Item 8
  of this Report.

      2. FINANCIAL STATEMENT SCHEDULE

                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                             Column A   Column B   Column C   Column D  Column E
                             --------- ---------- ---------- ---------- --------
                                             Additions
                              Balance  ---------------------            Balance
                                at     Charged to Charged to             at end
                             beginning costs and    other                  of
        Description          of period  expenses   accounts  Deductions  period
        -----------          --------- ---------- ---------- ---------- --------
<S>                          <C>       <C>        <C>        <C>        <C>
Year ended December 30,
 2000:
  Allowance for doubtful
   accounts................  $116,198   $ 21,372  $       -- $   97,779 $ 39,791
  Accrued restructuring
   charge..................  $ 27,091   $     --  $       -- $   27,091 $     --
  Reserve for returns......  $701,385   $     --  $7,966,567 $8,309,098 $358,854
Year ended January 1, 2000:
  Allowance for doubtful
   accounts................  $ 65,621   $ 67,005  $       -- $   16,428 $116,198
  Accrued restructuring
   charge..................  $ 99,301   $730,000  $       -- $  802,210 $ 27,091
  Reserve for returns......  $452,635   $     --  $9,782,865 $9,534,115 $701,385
Year ended January 2, 1999:
  Allowance for doubtful
   accounts................  $ 79,500   $ 17,000  $       -- $   30,879 $ 65,621
  Accrued restructuring
   charge..................  $     --   $469,558  $       -- $  370,257 $ 99,301
  Reserve for returns......  $730,958   $     --  $7,625,322 $7,903,645 $452,635
</TABLE>


                                      39
<PAGE>

   All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been omitted
because the information is disclosed in the Consolidated Financial Statements
or because such schedules are not required or are not applicable.

      3. EXHIBITS

     The exhibits are listed under Part IV, Item 14(C) of this Report.

     (b)  REPORTS ON FORM 8-K

     No reports on Form 8-K have been filed during the last quarter of the
  period covered by this report.

     (c)  EXHIBITS

 Exhibit No.Description
 ----------------------
 3.1  Certificate of Incorporation of the Registrant, as amended. Filed as
      Exhibit 3.01 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 3.2  By Laws of the Registrant, as amended. Filed as Exhibit 3.02 to
      Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 4.1  Specimen Certificate representing the Common Stock, par value $0.01 per
      share. Filed as Exhibit 4.01 to Specialty Catalog Corp.'s Form S-1, File
      No. 333-10793.
10.1  Employment Agreement dated as of May 8, 2000 between the Registrant and
      Joseph Grabowski. Filed as Exhibit 10.1 to Specialty Catalog Corp.'s
      Form 10-Q, dated May 15, 2000.
10.2  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.
10.3  Amended and Restated Senior Credit Facilities dated December 27, 2000
      between Fleet National Bank and the Registrant, Filed herewith.
10.4  2000 Stock Incentive Plan. Filed as Appendix A to Specialty Catalog
      Corp.'s Proxy Statement for its 2000 Annual Meeting.
10.5  1996 Stock Option Plan. Filed as Exhibit 10.01 to Specialty Catalog
      Corp.'s Form S-1, File No. 333-10793.
10.6  Employment Agreement dated as of October 4, 1996 between the Registrant
      and Steven L. Bock. Filed as Exhibit 10.02 to Specialty Catalog Corp.'s
      Form S-1, File No. 333-10793.
10.7  First Amendment to Employment Agreement dated as of June 24, 1999
      between the Registrant and Steven L. Bock, Filed as Exhibit 10.17 to
      Specialty Catalog Corp.'s Form 10-K, dated March 28, 2000, File No. 0-
      21499.
10.8  Second Amendment to Employment Agreement dated as of December 2, 1999
      between the Registrant and Steven L. Bock, Filed as Exhibit 10.18 to
      Specialty Catalog Corp.'s Form 10-K, dated March 28, 2000, File No. 0-
      21499.
10.9  Lease dated July 10, 1985 between Simon D. Young, Trustee of the Sandpy
      Realty Trust, ("Trustee"), and SC Corporation (f/k/a Wigs by Paula) for
      premises located at 21 Bristol Drive, South Easton, MA. Filed as Exhibit
      10.18 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
10.10 First Amendment of Lease, dated March 15, 1986, between the Trustee and
      SC Corporation. Filed as Exhibit 10.19 to Specialty Catalog Corp.'s Form
      S-1, File No. 333-10793.
10.11 Second Amendment to Lease, dated March 1, 1989, between the Trustee and
      SC Corporation. Filed as Exhibit 10.20 to Specialty Catalog Corp.'s Form
      S-1, File No. 333-10793.
10.12 Third Amendment to Lease, dated October 22, 1993 between the Trustee and
      SC Corporation. Filed as Exhibit 10.21 to Specialty Catalog Corp.'s Form
      S-1, File No. 333-10793.

                                      40
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No.Description
 ----------------------
<C>   <S>
10.13 Fourth Amendment to Lease, dated November 26, 1997 between the Trustee
      and SC Corporation. Filed as Exhibit 10.41 to Specialty Catalog Corp.'s
      Form 10-K, dated March 26, 1998, File No. 0-21499.
10.14 Supplemental Defined Contribution Plan. Filed as Exhibit 10.31 to
      Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
10.15 Net Building Lease dated March 7, 1997 between Campanelli Investment
      Properties and the Registrant for premises located at 128 Campanelli
      Industrial Drive, Brockton, MA. Filed as Exhibit 10.36 to Specialty
      Catalog Corp.'s Form 10-K, dated March 27, 1997, File No. 0-21499.
21.1  Subsidiaries of the Registrant, Filed herewith.
23.1  Consent of Deloitte & Touche LLP, Filed herewith.
</TABLE>

                                      41
<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.

                                                  /s/ Joseph Grabowski
                                          By: _________________________________
                                                      Joseph Grabowski
                                                       President and
                                                  Chief Executive Officer

                                                   /s/ Thomas McCain
                                          By: _________________________________
                                                       Thomas McCain
                                                 Senior Vice President and
                                                  Chief Financial Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated. By so signing, each of the undersigned, in his or her
capacity as a director or officer, or both, as the case may be, of the
Registrant, does hereby appoint Thomas K. McCain, and his or her true and
lawful attorneys or attorney to execute in his or her name, place and stead,
in his or her capacity as a director or officer or both, as the case may be,
of the Registrant, this report on Form 10-K and any and all amendments to said
report and all instruments necessary or incidental in connection therewith,
and to file the same with Securities and Exchange Commission. Said attorney
shall have full power and authority to do and perform in the name and on
behalf of each of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises as fully and to
all intents and purposes as each of the undersigned might or could do in
person, hereby ratifying and approving the acts of said attorney.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
       /s/ Joseph Grabowski            President and Chief          March 26, 2001
______________________________________  Executive Officer
           Joseph Grabowski             (Principal Executive
                                        Officer)

        /s/ Thomas McCain              Senior Vice President and    March 26, 2001
______________________________________  Chief Financial Officer
            Thomas McCain               (Principal Financial and
                                        Accounting Officer)

      /s/ Martin E. Franklin           Director                     March 26, 2001
______________________________________
          Martin E. Franklin

        /s/ David Cicurel              Director                     March 26, 2001
______________________________________
            David Cicurel

        /s/ Samuel L. Katz             Director                     March 26, 2001
______________________________________
            Samul L. Katz

          /s/ Guy Naggar               Director                     March 26, 2001
______________________________________
              Guy Naggar
</TABLE>

                                      42