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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 28, 1996
 
                                      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     (I.R.S. 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. [_]
 
  Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 3, 1997: $12,381,998
 
  Number of shares of the Registrant's Stock outstanding as of March 3, 1997:
4,701,666
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 13, 1997 are incorporated by reference into Part
III of this Form 10-K. Portions of the Registrant's Registration Statement on
Form S-1 (registration No. 333-10793) are incorporated by reference into Part
IV of this Form 10-K.
 
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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. (the "Company") may contain "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including but not
limited to, the Company's expected future revenues, operations and
expenditures, estimates of the potential markets for the Company's products,
assessments of competitors and potential competitors, projected timetables for
the market introduction of the Company's products and estimates of the
capacity of facilities to support such 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)
increasing postal rates, paper prices and media costs, (ii) limited sources of
fiber used to make the wigs, (iii) the limited number of wig manufactures,
(iv) the Company's dependence upon foreign suppliers, (v) the potential
development of a cure for hair loss and cancer treatment improvements, (vi)
the effectiveness of catalogs and advertising, and (vii) the Company's
competition. See also "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 judgement 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.
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  The Company is a direct marketer targeting niche consumer product
categories. SC Direct, its principal operating subsidiary, is the leading U.S.
retailer of women's wigs and hairpieces. SC Publishing, a subsidiary of SC
Direct, sells continuing education courses to nurses, real estate
professionals and CPAs.
 
  SC Direct sells wigs and hairpieces primarily to women over the age of 50,
using three distinct catalogs: Paula Young, Christine Jordan and Especially
Yours. In 1996, SC Direct mailed 19.0 million catalogs, generating net sales
of $32.3 million. SC Direct has developed a proprietary data base consisting
of approximately 5.1 million persons, including more than one million active
customers and more than 1.1 million persons who have requested catalogs in the
past year but who have not made a purchase. Due to the fact that wig wearers
are difficult to find, the Company believes that its wig database is unique
and would be very expensive to replicate. The Company believes that this poses
a substantial barrier to entry for any potential competitor.
 
  SC Direct's target market is women over the age of 50. The Company believes
that only approximately five million, or 25%, of the 20 million American women
with thinning hair currently wear wigs, and that, accordingly, there is
substantial opportunity for future growth of SC Direct's business.
 
  SC Direct's strategy for its core business is to exploit new distribution
opportunities for wigs and hairpieces and to sell additional products to its
customers. For example, in the last three years, SC Direct has introduced its
upscale Christine Jordan catalog and its Especially Yours catalog for African-
American customers, expanded into international markets and begun a test
program selling to hair salons.
 
  In 1995, SC Direct launched its Paula's Hatbox catalog, through which it
sells a variety of fashion hats to women. The Company believes that the market
for fashion hats has niche characteristics similar to those of the wig market.
In addition, SC Direct began test marketing men's wigs in the Paula Young
catalog in March 1997.
 
  SC Publishing offers nurses, real estate agents and CPAs home study
continuing education through the Western Schools catalogs. SC Publishing's
strategy is to build its business by offering additional products and
 
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programs to its core customers and by expanding into new and related
professional fields. In 1996, SC Publishing mailed 6.0 million catalogs,
generating net sales of $4.0 million.
 
  The Company intends to build its business in existing niche markets and
enter new niche markets both by internal expansion and through acquisitions.
Niche markets are characterized by smaller market size, unique or hard to find
products, or hard to locate customers. In executing its plans, the Company
will seek to do the following:
 
  . Refine Marketing Programs. The Company continually seeks to refine its
    marketing programs, including the two-step marketing program which it
    utilizes to identify hard to locate customers in niche markets. The
    Company constantly seeks to develop new and improved marketing
    techniques to increase catalog requests, convert catalog requests into
    orders and increase sales to existing customers.
 
  . Offer Broad Product Selection at Attractive Pricing. The Company
    believes that it differentiates itself from both traditional store-front
    retailers and other direct marketers by offering a broad and deep
    selection of the products it offers. By virtue of its large order volume
    and direct purchasing from wig manufacturers, the Company is able to
    offer wigs at prices lower than most hair salons and wig shops.
 
  . Maintain Close Supplier Relationships. The Company maintains close
    relationships with many of the leading wig manufacturers. Through these
    relationships, the Company is able to obtain better control over
    purchasing, styles, quality and cost.
 
  . Continue to Provide Superior Customer Service. By emphasizing the
    training of marketing representatives, the Company seeks to maintain
    high levels of customer satisfaction. The Company seeks to provide
    prompt, courteous and knowledgeable service to its customers in order to
    build customer loyalty and demonstrate to the customer the convenience
    of catalog shopping.
 
  . Achieve Economies of Scale and Efficiencies. The Company believes that,
    if it is able to achieve its growth objectives, it will be able to
    reduce its fixed and other costs as a percentage of sales.
 
  . Develop New Products and Enter New Markets. The Company intends to add
    new product lines through new or expanded catalogs. To that end, the
    Company carefully monitors the wig, hat and continuing education markets
    to identify unfulfilled consumer demand. By developing and offering new
    products to meet that demand, the Company creates additional sales
    opportunities and reinforces customer loyalty to the Company's catalogs.
    The Company is seeking to add complementary products to its existing
    product lines that would appeal to its current customer base. The
    Company is also looking for new markets to enter, either through
    internal development or acquisitions.
 
WIGS
 
 Industry and Market
 
  Based on U.S. Census Bureau import data, approximately five million wigs are
sold annually in the United States. The wig market is comprised of fashion wig
wearers and need-based wig wearers. Need-based wig wearers purchase wigs as an
everyday necessity due to a physical problem such as naturally thinning hair
or total hair loss, as well as temporary hair loss due to medical procedures
and conditions (i.e., cancer treatments). Many everyday wig wearers prefer to
replace their wigs every three to four months, and have a wig "wardrobe,"
consisting of several wigs of different styles and colors.
 
  In the 1960s, wigs and related products were broadly viewed as a fashion
accessory, but as styles 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 and
inventories of wigs. The Company recognized that a base of dedicated, need-
based wig customers existed which was no longer being adequately serviced by
the remaining retail alternatives. Therefore, the Company launched its catalog
business to service this market.
 
  The retail wig market is serviced by direct mail catalogers and retail
markets, including beauty salons, department stores and wig shops. The Company
estimates that catalog retailers represent 40% of the current
 
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market and offer the benefits of privacy, convenience, lower prices and broad
product selection. Retail stores provide customers with more personalized
service and allow customers to try on the product, however, they charge higher
prices and offer less convenience, privacy and selection than catalog
retailers.
 
  The Company believes it has advantages over its two principal mail order
competitors, General Wig Company (a subsidiary of Revlon, Inc.), which markets
wigs through the Beauty Trends catalog, and Vincent James Company, which
markets wigs through the TWC Catalog. The Company believes that these
advantages include economies of scale, the size of its customer list, and the
extent of its advertising program. The Company estimates that no other
individual wig catalog retailer represents more than 5% of the market.
 
  The African-American wig market, unlike the Caucasian market, has yet to
undergo the transition to direct marketing from retail outlets. Currently,
only about 5% of African-American wigs are sold through catalogs, with the
balance sold in beauty salons, department stores and wig shops. As a result,
there are no significant catalog competitors. The Company is aware of only
three other mail order catalogs targeting the African-American market--Black
is Beautiful, Naomi Simms and Gold Medal.
 
 Products
 
  The Company sells a full range of wigs and hairpieces in five separate
product lines. Hairpieces include wiglets, add-ons or extensions, and the
Company's newest product, Style Enhancers. 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 or extensions are usually added for style reasons,
generally to the back of the head. Style Enhancers offer full coverage, like a
wig, but allow the woman to integrate her own hair with the hairpiece, thus
creating a blend of her own natural hair with the hairpiece. The Company
offers about 45 different wig styles per catalog in more than 25 colors,
including browns, blondes, grays and reds. Most wigs are available in one or
two sizes, except for wigs in the Christine Jordan line which offers all
styles in five sizes.
 
  Wigs are manufactured using a special modacrylic fiber, the market for which
is dominated by two Japanese firms, Kaneka Corporation and Toyo Chemical
Corporation. Modacrylic fiber is not a proprietary material, and other
manufacturers in the past have produced this material. Although the Company
believes that in the event of a disruption in the supply of fiber, alternative
sources could be found, such a transition to new fiber suppliers could
interrupt or delay wig production schedules, potentially causing a material
adverse effect on the Company's business.
 
  The manufacture of a wig begins with the blending of the fibers for color
and the cutting of the fiber to proper length. The fibers are then sewn to a
cotton or lace wefting, after which the predetermined curl pattern is baked
in. The wefting is then sewn together into the final pattern and styled.
 
  During 1996, the Company purchased approximately 55% of its wigs and
hairpieces directly from foreign manufacturers and the balance from four U.S.
importers. Each of the Company's five largest manufacturers represented
between 4% and 24% of its overall wig purchases in 1996. The Company is
increasing the percentage of wigs purchased directly from manufacturers
because direct purchasing permits better control over price, quality and
style. By 1998, the Company plans to purchase 80% to 90% of its wigs directly
from the manufacturers.
 
  The Company also sells wig accessories, including brushes and stylers,
styrofoam head forms and stands, rainhoods, wig liners, shampoos and styling
products, generally at prices below $10.
 
 Marketing
 
  The Company markets its products through catalogs, generally by way of a
two-step marketing program. Step one involves obtaining prospective customers
by soliciting customer interest through targeted advertising. The Company uses
a variety of advertising media, including magazines, newspaper tabloids, co-op
mailers, package insert programs and television. The Company places
advertising based on demographics, cost and historical experience. Historical
experience is measured by cost per inquiry, cost per customer and lifetime
value of a customer and, based on this information, the Company determines
which media are effective and where future marketing dollars should be spent.
 
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  Step two, which commences when a prospective customer responds favorably to
an advertisement placed by the Company, involves sending the prospective
customer a series of catalogs designed to elicit an initial sale. By pre-
qualifying prospects in this manner, SC Direct has been able to convert 15% to
20% of inquirers into customers within one year of catalog request. If a sale
is made, the customer is put on an active list and additional catalogs
designed to create a repeat buyer are mailed. Inactive inquiries and customers
are periodically sent a program of targeted mailings designed to reactivate
customer interest.
 
  The Company believes that in niche markets its two-step marketing program
has several advantages over the more traditional one-step marketing approach
which entails mailing unsolicited catalogs to rented names. Since catalogs are
sent only to persons who have shown an interest in the Company's products, the
Company experiences higher conversion rates and fewer catalogs need to be
printed and mailed, which leads to savings in paper, postage and other catalog
production costs.
 
  The Company continually refines its marketing programs and processes for the
purpose of increasing its conversion rate and satisfying its existing
customers. The Company employs a variety of research methods, including
demographic analysis, customer surveys, test mailings and advertising, focus
groups and outside research sources. The Company's research efforts have
assisted the Company in pursuing its strategic goals by identifying new niche
markets, such as hats and wigs and hairpieces for African-American women.
 
 Brands
 
  The Company markets through three distinct wig catalogs: Paula Young,
Christine Jordan and Especially Yours. Each catalog includes detailed product
descriptions and specifications, full color photographs and pricing
information. Each of these catalogs is published several times a year, and
often, different variations of each catalog are distributed. Each catalog
focuses on its namesake brand, as well as other selections of the Company's
brands. The Company markets the following brands through its catalogs:
 
  Paula Young, the Company's flagship line, is designed to have the broadest
appeal and is available in all three catalogs. Paula Young wigs are value
priced from $29 to $89 and have a "shake and wear" styling with quality
construction.
 
  Celebrity Secrets(R) originally was launched as a wig line geared toward a
more sophisticated customer, with more contemporary styling and unique
features. However, in January 1997 this line was refocused on the new Style
Enhancer hairpiece products. Style Enhancers provide full coverage but allows
the woman to blend her own hair into the hairpiece. Style Enhancer prices
range from $59 to $69 and are available in the Paula Young catalog.
 
  Christine Jordan is the Company's premium brand and consists of the
Company's highest quality wigs ranging in price from $69 to $99. Christine
Jordan wigs have a unique fiber blend and come in their own distinctive
colors. In addition, the wigs have comfort construction with a natural
hairline and it is the only brand in the industry to carry five sizes in all
styles. This wig line is featured in its own separate catalog as well as the
Paula Young catalog.
 
  Especially Yours offers styles specially designed for African-American women
and offers a variety of features, including natural hairline crimping and
fiber texture, to reflect the natural hair of African-Americans. Especially
Yours is featured in its own separate catalog with prices ranging from $29 to
$69 and is also available in selected Paula Young catalogs.
 
  Touch of Class features only hairpieces, including wiglets, add-ons and
extensions. Touch of Class products are sold primarily in the Paula Young
catalog.
 
  In addition to its own five proprietary brands, the Company also markets Eva
Gabor(R) wigs, a brand comparable in quality to Paula Young, but which is
owned by Eva Gabor International. There is no licensing or marketing agreement
between the Company and Eva Gabor International.
 
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 New Opportunities
 
  African-American Market. Although African-American women comprise
approximately 13% of the U.S. female population, they purchase approximately
50% of the wigs sold. The Company estimates that sales to the African-American
wig market approximate $125 million annually. African-American women wear
hairpieces for fashion reasons and are more likely to begin wearing wigs and
hairpieces at a younger age than Caucasian women. The Company's newest wig
catalog, Especially Yours, targets this market and is already the largest
African-American wig catalog. The Company plans to market actively to African-
American women.
 
  International Expansion. The Company seeks to leverage its marketing and
product knowledge, infrastructure and procurement ability to expand
internationally. The Company estimates that the international market is at
least as large as the U.S. market. In the United Kingdom, New Zealand, and
most recently in Germany and Austria, the Company has entered into license
agreements which grant each licensee exclusive rights to use the Company's
trademarks to sell wigs in the licensee's territory. The licensee uses the
Company's inventory and fulfillment services, for which the Company is
reimbursed, and also receives marketing advice and catalog development
assistance. Pursuant to the license agreements, the licensees are required to
pay royalties on their net sales, including a minimum guaranteed annual
royalty, and expend a specified minimum amount of advertising expenditures
each year.
 
  The Company has targeted Europe, Japan, Scandinavia, Australia, Israel and
South Africa as potential expansion areas. In 1995, the Company purchased its
Canadian licensee's customer list and began to market directly to Canadian
consumers. The Company's Canadian gross sales were approximately $1 million in
1996.
 
  Business to Business. The Company launched a pilot program in 1995 to sell
wigs to beauty salons. The program permits participating salons to offer their
customers a broad selection of styles while keeping a limited inventory of
wigs in the store.
 
  Men's Wigs. The Company began test marketing men's wigs in the Paula Young
catalog in March 1997.
 
HATS
 
  In 1995, as part of its overall expansion strategy, the Company launched the
Paula's Hatbox catalog. The Company believed that the fashion hat market, like
the wig market, was not well served by existing retail chains of distribution,
with no major competitor offering a broad selection of quality hats. The
Company's research suggested that the marketing skills needed to capture this
niche market were similar to those the Company used in the wig market.
 
  The women's fashion hat market is fragmented among department stores, small
boutiques, resort stores and other general merchants and catalog retailers who
offer a limited number of styles as a complement to their principal product
lines. Although the women's fashion hat market is estimated to be a $700
million market, no dominant hat retailer has emerged.
 
  The Company sells a variety of hats in more than 125 styles and colors,
ranging in style and price from simple baseball caps or sun visors for under
$20 to designer hats for more than $200. Paula's Hatbox also includes hat pins
and accessories, including costume jewelry, sunglasses, scarves, belts, shoes
and handbags.
 
  The majority of the Company's hats are manufactured domestically and
purchased from domestic vendors often from top designers. Currently, with the
exception of hat boxes, the Company does not purchase hats and related
products directly from manufacturers. As sales of hats expand, the Company
expects to improve profit margins through improved sourcing.
 
  The Company is using the two step marketing approach developed in its wig
business to sell hats. In addition, the Company is testing new one step
marketing techniques and selling hats through its Especially Yours catalog. In
1996, Paula's Hatbox represented 2% of the Company's sales. Although the
Company believes that the hat market presents a significant opportunity for
growth, there can be no assurance that the Company's efforts to expand its hat
business will be successful or profitable.
 
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CONTINUING EDUCATION
 
  SC Publishing distributes catalogs under the name of Western Schools and
specializes in providing continuing education ("CE") to nurses, real estate
brokers and salespersons, and CPAs. SC Publishing represents a relatively
small proportion of the Company's overall revenue, with net sales in 1996 of
$4.0 million, or approximately 11% of the Company's overall net sales.
 
  Required CE frequency and the number of required hours varies from
profession to profession and from state to state depending on state laws and
association regulations. The CE industry has many small providers, including
local universities, but few large providers. In addition, some hospitals and
CPA 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, SC Publishing competes aggressively on
price, course content and selection, and customer service.
 
  Nursing represented more than half of SC Publishing's continuing education
sales in 1996. Twenty-one states currently require nurses to have some form of
CE. Two additional states will begin to require CE in 1997. SC Publishing is
exploring the expansion of this segment through the addition of non-CE
products and business-to-business opportunities in joint ventures, with
hospitals, nursing homes and seminar providers.
 
  SC Publishing sells continuing education to real estate agents only in
California, which is the largest U.S. market for real estate agents and
brokers. SC Publishing sells continuing education to CPAs, who generally are
required to obtain CE every year. SC Publishing seeks to compete in this
market by offering current CE topics in a convenient manner at competitive
prices.
 
  SC Publishing develops its products by first identifying topics pertinent to
its target audiences of nurses, real estate agents and CPAs and then
contracting with qualified authors to develop a course text book and exam
materials. In some cases where products may change rapidly because of changing
regulations or knowledge, SC Publishing buys existing textbooks and contracts
with authors and/or industry experts to convert these into courses. All
courses are reviewed by other industry experts before publishing. SC
Publishing generally prints its own materials and hence controls its own
inventory investment based on projected demand.
 
OPERATIONS
 
 Order Entry and Customer Service
 
  The Company has structured its telemarketing operation and training for its
telemarketing representatives to simplify catalog shopping by emphasizing
prompt, courteous and knowledgeable service. Customers may call toll free
telephone numbers 24 hours a day, seven days a week, to place orders or to
request a catalog. Approximately 58% of the Company's orders are placed by
telephone, with calls lasting three to four minutes. The balance of orders are
received by mail. The Company has contracted with an outside telemarketing
provider to handle calls in the event call volume exceeds the Company's
capacity during peak business hours, as well as to answer the Company's phones
during off-peak hours. Overflow situations also occur due to holidays and
operational disruptions such as poor weather.
 
  Telemarketing representatives process orders directly into the Company's
computer system which provides customer history, product availability, product
specifications, expected ship date and order number. The telemarketing
representatives use a scripted catalog sales system, are knowledgeable in key
product specifications and features, and are trained to cross-sell accessories
and related products. In keeping with the Company's efforts to maximize
operating efficiency, representatives are trained to handle a range of
products and customer service calls, allowing the Company to shift
representatives among products as call volume requires.
 
  The Company is in the second of a three year contract with AT&T. The Company
uses AT&T equipment with a 500 line capacity and presently uses about 320
lines in 86 stations. The Company's telephone system permits flexibility in
routing calls to maximize teleservice representative efficiency.
 
 
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 Credit
 
  Virtually all of the Company's sales are transacted by check or through
credit card, and, as a result, accounts receivable consist primarily of
amounts due from the Company's credit card processor. Credit card payments are
deposited electronically into the Company's bank account one to two days after
submission of credit card transactions. Personal checks over $200 and all
credit card charges are pre-authorized. During fiscal 1996, losses due to bad
checks amounted to less than 1% of net product sales.
 
  In addition, purchases from SC Direct may be made by certain customers with
the Paula Young credit card, which SC Direct began testing in 1990 and in 1995
offered to all wig customers who had previously paid by check. Based on the
initial results obtained from the expansion, the Company has put further
expansion of the program on hold.
 
 Fulfillment
 
  The Company's fulfillment goal is the prompt delivery of ordered
merchandise. Orders of in-stock merchandise received before 11:00 a.m. are
usually shipped on the same day, primarily via bulk or priority mail. For an
additional charge, the Company will ship by overnight or second day courier.
Merchandise not in stock on the date of order is shipped for delivery on the
same day it is received by the Company, or the next business day.
 
  The Company uses an integrated computer picking, packing and shipping
system. The system 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 1996, the Company shipped an average of approximately 3,107
orders per day, with a peak of 3,585 orders shipped in one day. The Company
estimates it currently has the physical capacity to ship approximately 7,800
orders per day in two shifts with additional employees.
 
 Returns
 
  The Company's return policy allows customers to return products for prompt
refund or exchange. Returns for refund and exchange over the past three years
averaged 17% and 14%, respectively, at SC Direct and 2% and 1%, respectively,
at SC Publishing. The Company believes that these return levels are normal for
mail order products of this nature. Return experience is closely monitored at
the SKU 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. Returned wigs are inspected and
returned to inventory if not worn, and if worn are donated to various
hospitals' chemotherapy departments and local chapters of the American Cancer
Society. Undamaged and unmarked SC Publishing books are also returned to
inventory.
 
 Inventory Management
 
  The Company's inventory management goal is a high initial fulfillment rate
with reasonable levels of inventory investment and low overstocks. To achieve
this goal, the Company seeks to schedule merchandise deliveries and inventory
amounts to conform closely to sales levels. The Company typically orders
merchandise in several lots, with the sizes of reorders dependent on customer
demand.
 
  Initial orders for wigs and hats are placed two to four months before a
catalog mailing. Initial deliveries are scheduled to occur one or two weeks
before the first mailing. Initial purchase quantities are based on a variety
of factors, including past experience with the same or similar products,
future availability, shipping time, and, with respect to hat vendors, the
Company's ability to negotiate a reorder commitment from the vendor. The
Company analyzes the initial sales and returns for each item in a catalog.
Using this information, the Company projects gross demand and returns for such
items and, based on these projections and inventory on hand and on order,
makes decisions regarding additional purchases. The Company sells overstocks
and discontinued items through targeted mailings and sale pages bound into its
full-price catalogs.
 
 
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 Catalog Production
 
  The Company's catalogs are created in-house by the Company's graphic arts
staff of designers and production artists using a computer desktop publishing
system. The Company's in-house preparation of catalogs provides the Company
with greater control, flexibility and creativity in catalog production and
product selection, and results in significant cost savings. The Company mailed
25.0 million catalogs in fiscal 1996, compared to 29.2 million catalogs in
fiscal 1995. The Company's most active customers receive a Company catalog as
often as every two weeks.
 
DATABASES
 
  The Company has developed databases consisting in aggregate of approximately
5.9 million persons, including more than one million active customers and more
than 3.8 million active inquirers. The Company markets mailing lists derived
from its databases to non-competing businesses to provide additional sources
of income after confirming that security measures are in place to protect this
proprietary data. List rental income was $241,000 in 1996. The Company has
undertaken limited exchanges of lists of inactive customers with wig
competitors.
 
COMPETITION
 
  The mail order catalog business is highly competitive. The Company believes
that it competes on the basis of quality, value, service, product offerings,
advertising effectiveness, catalog design, convenience and efficiency. The
Company's wig and hat catalogs compete with other mail order catalogs, both
specialty and general, and retail stores, including department stores,
specialty stores, discount stores and hair salons and wig shops. The Company's
Continuing Education ("CE") catalogs compete with other mail order catalogs,
in-house CE, professional associations, and seminar providers. The Company
believes that the Company's catalogs have a competitive advantage in providing
greater selection, convenience and privacy than traditional retail outlets.
Some of the Company's competitors have greater financial and marketing
resources than the Company. Potential competition may emerge from new
distribution channels such as the Internet and interactive television.
 
EMPLOYEES
 
  As of December 31, 1996, the Company employed a total of 265 employees,
comprising 60 salaried full-time employees, 133 full-time hourly employees,
and 72 part-time hourly employees. None of the Company's employees are covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
 
TRADEMARKS, PATENTS AND TRADE NAMES
 
  The Company has registered 9 trademarks, 4 trademark applications, 1 patent
application pending with the U.S. Patent and Trademark Office and has 4
trademarks registered under California state law. In the course of normal
business, the Company often utilizes new tradenames. 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 may
require the Company to incur administrative costs in collecting and remitting
the sales taxes. The Company believes that Massachusetts is the only
jurisdiction where it is currently required to collect sales taxes.
 
 
                                       9
<PAGE>
 
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
      NAME                         AGE                  POSITION
      ----                         ---                  --------
   <S>                             <C> <C>
   Steven L. Bock.................  43 Chairman of the Board and Chief Executive
                                       Officer
   Stephen M. O'Hara..............  41 President and Secretary
   J. William Heise...............  48 Senior Vice President and Chief Financial
                                       Officer
   Jerral R. Pulley...............  62 Senior Vice President
</TABLE>
 
  Steven L. Bock has been Chairman of the Board and Chief Executive Officer of
the Company (or its predecessor company) since December 1990. He has been a
director of SC Direct and SC Publishing (including the years when these
companies were under bankruptcy protection of the courts) since March 1989. SC
Direct was formed by RSG Partners, a private investment and management firm
founded by Mr. Bock and two partners in 1988. Mr. Bock was a partner in RSG
Partners from 1988 to 1990. From October 1986 to October 1988, Mr. Bock was a
vice president of TSG Holdings, Inc., the investment advisor to
Transcontinental Services Group, a U.K. listed investment holding company,
where he was responsible for initiating, financing and managing business
investments. Mr. Bock is a director of Xetex Corporation, a technology
development company. Part of Xetex's business is conducted through
SOLI.FLO SM, a 50/50 joint venture with Fluor Daniel Inc., a publicly held
engineering and construction company. Mr. Bock is a Member of SOLI.FLO's
Members Committee. Mr. Bock is a member of the Young Presidents Organization.
He graduated (summa cum laude) with a B.A. degree from SUNY at Albany and
received his J.D. degree (cum laude) from Harvard Law School.
 
  Stephen M. O'Hara has been President of the Company since 1994 and was
President of Wigs by Paula, Inc., a predecessor company, from November 1991 to
November 1994 (including the years Wigs By Paula, Inc. was under the
protection of the bankruptcy courts). From May 1990 to November 1991, Mr.
O'Hara was Vice President, Marketing and Vice President, Strategy of the All
American Gourmet division of Kraft General Foods. From May 1988 to May 1990,
Mr. O'Hara was President of Quantum Investments, a venture capital firm
targeting small consumer businesses, as well as a principal in Quantum
Associates, a management consulting firm. From November 1984 to May 1988 he
served in a variety of positions with CML Group ("CML"), most recently as
President of CML's subsidiary Carroll Reed, Inc., a women's apparel retailer
and direct marketer. Prior to CML, Mr. O'Hara served in Procter and Gamble's
marketing department from 1979 to 1984. Mr. O'Hara holds A.B. and M.B.A.
degrees from Harvard University.
 
  J. William Heise has been Senior Vice President and Chief Financial Officer
of the Company since August 1996 and was Acting Chief Financial Officer from
March 1996 to August 1996. From November 1994 to November 1995, Mr. Heise was
Vice President/Chief Financial Officer at Sun Television and Appliances, Inc.,
a retailer of consumer electronics and appliances. From October 1983 to March
1994, Mr. Heise served in a variety of positions with Victoria's Secret
Catalogue, Inc., including Executive Vice President/Chief Financial Officer
from 1989 to 1992 and Executive Vice President/Operations from 1992 to 1994.
Mr. Heise holds a B.A. degree from Ohio University.
 
  Jerral R. Pulley has been Senior Vice President of SC Publishing since
October 1995. From November 1994 to October 1995, Mr. Pulley worked as an
independent consultant. From 1990 to November 1994, Mr. Pulley served as CEO
of Polymerics, Inc. a leading manufacturer of arts and crafts supplies. From
1970 through 1990, Mr. Pulley held a variety of senior positions at Binney &
Smith, Ryder System, Perfect Building Group, Borden Inc., Lifesavers, Inc. and
Pepsi-Cola of North America. From 1958 to 1970 Mr. Pulley worked in marketing
at Procter & Gamble. Mr. Pulley holds a B.S. degree from the University of
Utah and a M.B.A. degree from U.C.L.A.
 
                                      10
<PAGE>
 
ITEM 2. PROPERTIES
 
  At December 28, 1996 the Company occupied a 43,000 square foot building in
South Easton, Massachusetts, which is utilized as one-third warehouse and two-
thirds office space. In addition, the Company also leased another 22,000
square foot facility one block away, primarily utilized as additional
warehouse space. In March 1997, the Company signed a five year and five month
lease beginning April 1, 1997 for a 50,000 square foot facility in an adjacent
town to replace the 22,000 square foot facility which will enable the Company
to consolidate all fulfillment operations into the new facility, and free up
expansion space in its main South Easton Facility.
 
  Under the terms of the current lease for the 43,000 square foot facility,
both the landlord and the Company have the right to terminate the lease upon
four month's notice. In the event the landlord gives the Company notice, the
Company believes that it could move to new appropriate space within four
months. Nonetheless, there can be no assurance that the Company will find
appropriate space within four months. The Company is currently assessing
various options regarding this facility.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is, from time to time, a party to routine litigation arising in
the normal course of its business. The Company believes that none of these
actions will have a material adverse effect on the financial condition or
results of operations of the Company.
 
  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.
 
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.
 
 
                                      11
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS
 
  The common stock of the Company began trading in October 1996 (subsequent to
the public offering) on the National Association of Securities Dealers
Automated Quotation System "NASDAQ" National Market under the symbol "CTLG".
The following table sets forth the high and low quotations from NASDAQ. Prior
to the offering in October 1996, no established public trading market existed.
 
<TABLE>
<CAPTION>
                                                                  COMMON STOCK
                                                                      PRICE
                                                                  -------------
                                                                   HIGH   LOW
                                                                  ------ ------
       <S>                                                        <C>    <C>
       Fourth Quarter (commencing October 17, 1996).............. $7 3/8 $6 1/2
</TABLE>
 
  The number of record holders of the Company's common stock as of March 6,
1997 was approximately 13.
 
  The Company has not paid a dividend with respect to its common stock nor
does the Company anticipate paying dividends in the foreseeable future. Under
the terms of the Company's existing debt agreement at December 28, 1996 and
the Company's new debt agreement entered into in March 1997, the Company is
not permitted to pay dividends.
 
 
                                      12
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                   HISTORICAL
                                  ------------------------------------------------
                                               FISCAL YEAR ENDED
                                  ------------------------------------------------
                                  JAN. 2,   JAN. 1,   DEC. 31,  DEC. 30,  DEC. 28,
                                    1993      1994      1994      1995      1996
                                  --------  --------  --------  --------  --------
                                           (IN THOUSANDS, EXCEPT PER-
                                     SHARE AMOUNTS AND AVERAGE ORDER SIZE)
<S>                               <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1)....................  $ 47,120  $ 33,801  $38,179   $42,568   $36,272
Cost of sales(1)................    21,544    13,868   15,648    16,423    12,811
                                  --------  --------  -------   -------   -------
Gross profit(1).................    25,576    19,933   22,531    26,145    23,461
Selling, general and
 administrative(1)..............    24,452    16,768   17,772    22,835    20,186
Restructuring charges...........       --        --       --        513       --
                                  --------  --------  -------   -------   -------
Income from operations..........     1,124     3,165    4,759     2,797     3,275
Interest expense, net...........     3,080       431      661     1,918     1,658
Reorganization items............       --      1,038    2,890       --        --
                                  --------  --------  -------   -------   -------
Income (loss) before income
 taxes, cumulative effect of
 change in accounting principle
 and extraordinary item.........    (1,956)    1,696    1,208       879     1,617
Income taxes....................       180       704      498       357       644
                                  --------  --------  -------   -------   -------
Income (loss) before cumulative
 effect of change in accounting
 principle and extraordinary
 item...........................  $ (2,136) $    992  $   710   $   522   $   973
                                  ========  ========  =======   =======   =======
Net income (loss)(2)............  $ (2,136) $  9,977  $12,789   $   522   $   973
                                  --------  --------  -------   -------   -------
Preferred stock dividends.......       --        --        31       292       --
                                  --------  --------  -------   -------   -------
Net income available to common
 stockholders...................  $ (2,136) $  9,977  $12,758   $   230   $   973
                                  ========  ========  =======   =======   =======
EARNINGS (LOSS) PER COMMON
 SHARE:(3)
Income (loss) before cumulative
 effect of change in accounting
 principle and extraordinary
 item...........................  $  (0.71) $   0.33  $  0.23   $  0.08   $  0.25
Net Income (loss)...............  $  (0.71) $   3.31  $  4.23   $  0.08   $  0.25
OTHER FINANCIAL AND OPERATING
 DATA:
Total catalog circulation.......    17,562    18,807   22,623    29,245    25,049
Active customer file(4).........       890       941    1,094     1,096     1,044
Average order size..............  $  57.98  $  60.82  $ 60.27   $ 61.05   $ 62.35
<CAPTION>
                                                   HISTORICAL
                                  ------------------------------------------------
                                                     AS OF
                                  ------------------------------------------------
                                  JAN. 2,   JAN. 1,   DEC. 31,  DEC. 30,  DEC. 28,
                                    1993      1994      1994      1995      1996
                                  --------  --------  --------  --------  --------
                                                 (IN THOUSANDS)
<S>                               <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital.................  $    (30) $    124  $ 2,114   $   649   $ 5,619
Total assets....................     6,150    19,142   17,364    18,170    18,405
Long-term debt(5)...............    31,621    30,125   15,180    12,876     8,147
Preferred stock.................       --        --     2,249     2,249       --
Stockholders' equity (deficit)..  $(30,358) $(20,381) $(4,654)  $(4,416)  $ 4,801
</TABLE>
 
                                       13
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
 
--------
(1) Net sales, cost of sales, gross profit and selling, general and
    administrative expenses include for fiscal 1992 the results of certain
    subsidiaries that were sold as of the end of 1992. For comparative
    purposes, excluding the sold subsidiaries the Company's net sales, cost of
    sales, gross profit and selling, general and administrative expenses would
    be $32,430,000, $14,367,000 $18,063,000 and $15,885,000, respectively, in
    fiscal 1992.
(2) Net income reflects, for the fiscal year ended January 1, 1994, a gain of
    $8,985,122 from the cumulative effect of change in accounting for income
    taxes, and for the fiscal year ended December 31, 1994, a gain from
    extraordinary item of $12,078,489, net of income taxes resulting from the
    forgiveness of debt upon the Company's emergence from the Bankruptcy. See
    the financial statements and the notes thereto.
(3) Earnings per share for each fiscal year of the Company is computed by
    dividing net income after preferred dividends for such fiscal year by the
    weighted average number of shares of common stock and common stock
    equivalents outstanding during such fiscal year. See the consolidated
    financial statements and the notes thereto.
(4) Reflects the number of customers who are being mailed catalogs at the end
    of each period.
(5) Long-term debt reflects, for fiscal years ended January 2, 1993 and
    January 1, 1994, amounts subject to settlement under reorganization
    proceeding. See the consolidated financial statements and the notes
    thereto.
 
                                      14
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  Unless otherwise indicated, "1996" means the Company's fiscal year ended
December 28, 1996, "1995" means the Company's fiscal year ended December 30,
1995, and "1994" means the Company's fiscal year ended December 31, 1994. The
discussion and analysis below should be read in conjunction with the Financial
Statements of the Company and the notes to the financial statements. 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.
 
OVERVIEW
 
  The Company is a direct marketer targeting niche consumer product
categories. SC Direct, its principal operating subsidiary, is the leading U.S.
retailer of women's wigs and hairpieces. SC Publishing, a subsidiary of SC
Direct, sells continuing education courses to nurses, real estate
professionals and CPAs.
 
  In 1996, SC Direct's sales of women's wigs, hairpieces, accessories and hats
represented 88.5% of the Company's net sales. Since 1992, the mix of SC
Direct's sales has expanded through: (i) the expansion of its core Paula Young
wig business; (ii) the introduction in 1993 of the upscale Christine Jordan
wig catalog; (iii) the introduction in 1994 of the Especially Yours catalog,
serving African-American women; and (iv) the introduction in 1995 of the
Paula's Hatbox catalog. In addition, in 1995 the Company began selling
directly to consumers in Canada.
 
  The remainder of the Company's sales come from SC Publishing's catalogs,
which sell continuing education courses to nurses, real estate agents and
CPAs. In July 1995, the Company moved SC Publishing from San Diego, California
to the Company's South Easton, Massachusetts facilities. The Company
encountered difficulties in integrating SC Publishing into its operations in
South Easton, resulting in disruptions to SC Publishing's operations and a
reduction in its 1995 operating profitability.
 
RESULTS OF OPERATIONS
 
 1996 Compared to 1995
 
  Net sales decreased $6.3 million, or 14.8%, from $42.6 million in 1995 to
$36.3 million in 1996. This decrease was primarily caused by a 14.4% reduction
in the number of catalogs mailed during 1996 compared to 1995. Fewer catalogs
were mailed because (i) a reduction in advertising during the second half of
1995 and all of 1996 resulted in fewer prospective customers requesting
catalogs; and (ii) historical mailing results did not project that sufficient
revenues would be generated to cover the costs of printing and mailing
catalogs to certain segments of the customer mailing list in view of the
increases in the cost of paper and postage which have occurred since the
beginning of 1995. While these actions resulted in lower sales, the Company
believes they were important in generating operating income in 1996.
 
  Gross margin increased from 61.4% in 1995 to 64.7% in 1996. This increase
resulted from (i) the continued expansion of the Company's direct import
program which resulted in a larger percentage of product being purchased at
lower prices directly from overseas factories; and (ii) a reduction in the
cost of shipping to customers packages weighing less than one pound, which
reduced total shipping costs.
 
  SG&A expenses decreased $2.6 million, or 11.4%, from $22.8 million in 1995
to $20.2 million in 1996. This decrease resulted from mailing fewer catalogs
to customers and reducing page counts in certain catalogs in order to reduce
paper and postage costs. The decrease also reflects fewer mailings to
prospective customers as a result of the Company's decision to reduce
advertising expenditures during the second half of 1995 and all of 1996. Total
catalogs mailed decreased by 4.2 million, or 14.4%, from 29.2 million in 1995
to 25.0 million in 1996. Total catalog production costs decreased by $1.5
million, or 23.4%, from $6.4 million in 1995 to
 
                                      15
<PAGE>
 
$4.9 million in 1996. Catalog production costs were adversely affected by the
cost of paper during the first six months of 1996. During the last six months
of 1996 the Company was able to take advantage of some reductions in the cost
of paper. Advertising and catalog expense for 1996 decreased $2.9 million or
17.8% from $16.3 million in 1995 to $13.4 million in 1996.
 
  Net interest expense decreased $0.2 million,or 10.5%, from $1.9 million in
1995 to $1.7 million in 1996, reflecting lower principal amounts outstanding
on the Company's bank loan and lower interest rates. The Company's bank debt
was reduced in October 1996 by $5.9 million dollars through the use of
proceeds from the Company's initial public offering, of which $4.45 million
was applied to the company's term loan and $1.45 million was applied to the
company's line of credit.
 
  Cash increased by $1,278,980, from $113,364 in 1995 to $1,392,344 in 1996.
This increase reflects the net proceeds from the initial public offering of
$7.8 million less the payment of bank debt as discussed above and the use of
the remaining net proceeds as working capital.
 
  Net trade receivables decreased $547,853, or 40.0%, from $1,367,929 in 1995,
to $820,076 in 1996. This decrease is primarily due to a reduction in the
Company's private label credit card program. In 1995 the Company attempted to
expand the program with unsatisfactory results. As a result, the Company wrote
off poorly performing accounts during 1996 and is currently maintaining the
program at historical levels.
 
  Accounts payable and accrued expenses decreased $2.0 million, or 42.6%, from
$4.7 million in 1995, to $2.7 million in 1996. This decrease reflects the
Company's ability to pay invoices more quickly as a result of its improved
cash position.
 
 1995 Compared to 1994
 
  Net sales increase $4.4 million, or 11.5%, from $38.2 million in 1994 to
$42.6 million in 1995. This increase was primarily caused by (i) an increase
in the number of catalogs mailed; (ii) $1.1 million of gross sales of wigs and
hairpieces marking the commencement of direct sales by the Company into
Canada; (iii) an increase of $1.3 million in Continuing Education sales; and
(iv) a reduction of $0.8 million in returned merchandise.
 
  Gross margin increased from 59.0% in 1994 to 61.4% in 1995. This increase
resulted from continued expansion of the Company's direct import program which
resulted in a larger percentage of product being purchased at lower prices
directly from overseas factories.
 
  SG&A expenses increased $5.0 million, or 28.1%, from $17.8 million in 1994
to $22.8 million in 1995. This increase resulted from (i) sharp increases in
paper, postage and media costs and, (ii) an increase in total catalogs mailed
of 6.6 million, or 29.2% from 22.6 million in 1994 to 29.2 million in 1995.
The catalog production costs increased by $2.3 million, or 56.1% from $4.1
million in 1994 to $6.4 million in 1995. Catalog production costs were
adversely affected by continuous increases in the cost of paper during 1995
that ranged from 19% to 45% depending on paper grade. In December 1995 paper
prices were 45% to 55% higher than in September 1994. Due to a 14.3% postal
rate increase at the beginning of 1995 along with mailing more catalogs, total
postage costs increased $1.7 million, or 39.5% from $4.3 million in 1994 to
$6.0 million in 1995.
 
  Net interest expense increased $1.2 million, or 171.4%, from $0.7 million in
1994 to $1.9 million in 1995, reflecting a full year of debt servicing costs
on the Senior and Subordinated Indebtedness incurred as part of the Company's
reorganization in November 1994.
 
  Inventories increased by $900,000, or 21.4%, from $4.2 million at the end of
1994 to $5.1 million at the end of 1995. While this rate of increase was
higher than the rate at which sales increased in 1995, it was caused by a
$968,000 shortfall from budgeted sales in the fourth quarter of 1995.
 
  Net trade receivables increased $788,781, or 136.2%, from $579,148 in 1994,
to $1,367,929 in 1995. This increase is primarily due to an expansion of the
Company's private label credit card program in 1995.
 
                                      16
<PAGE>
 
  Accounts payable and accrued expenses increased $1.8 million, or 62.1%, from
$2.9 million in 1994, to $4.7 million in 1995. This increase reflected the
Company's efforts to manage cash by paying invoices less quickly.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash flow provided by operating activities fluctuated during the past two
fiscal years as business conditions changed. In 1995 the Company generated
$1.0 million from operating activities and in 1996 the Company generated
$322,000 from operating activities. In 1995 accounts payable was higher than
normal due to liquidity issues and in 1996 the Company returned its accounts
payable to normal levels.
 
  In November 1994 the Company entered into an agreement with Banque Nationale
de Paris ("BNP") for a $14 million term loan and a $2 million revolving line
of credit (the "Senior Indebtedness"). The term loan had an aggressive four
and one half year repayment schedule, which effectively utilized all of the
Company's free cash flow and caused the Company to have limited working
capital during 1995 and the first nine months of 1996.
 
  In addition to principal and interest due under the Senior Indebtedness, the
Company was obligated to pay an additional fee to BNP ("Additional Fee") in
the event of any future default, prepayment or change in control, or upon the
final principal payment in May 1999. The Additional Fee due at December 28,
1996 was $625,000 and was scheduled to rise to $1.0 million over the term of
the bank loan. On August 14, 1996, the Company entered into a Second
Amendment, Waiver and Consent ("Second Amendment") with BNP. Pursuant to the
Second Amendment, BNP consented to the Company's initial public offering and
the use of proceeds of the offering, agreed to amend certain financial
covenants and agreed to waive the Additional Fee provided that BNP's Senior
Indebtedness was repaid in full on or prior to March 31, 1997.
 
  Pursuant to the Company's Plan of Reorganization approved by the Bankruptcy
Court in September 1994, certain of the Company's current stockholders
purchased $3.6 million of subordinated indebtedness with a stated interest
rate of 11.5%, payable semi-annually on June 1 and December 1 ("Subordinated
Indebtedness"). The Company may, at its option through November 22, 1999, and,
under certain conditions, through November 22, 2002, pay interest on the
Subordinated Indebtedness with additional notes containing identical terms and
conditions as the Subordinated Indebtedness. The principal of the Subordinated
Indebtedness is due December 1, 2002, subject to a subordination agreement
with BNP. As of December 28, 1996, approximately $4.7 million, including
accrued interest, was outstanding under the Subordinated Indebtedness.
 
  Due to its working capital constraints, on June 1, 1996 the Company entered
into an agreement with a director, Martin E. Franklin, and two associates of
Mr. Franklin, pursuant to which Mr. Franklin and such associates loaned
$495,000 to the Company. This loan was made on August 9, 1996, bears interest
at 11.5%, and is due August 9, 1999, provided that this loan will not be
repaid prior to the repayment of the Subordinated Indebtedness. In addition,
in connection with such loan, Mr. Franklin and his associates purchased for
$5,000 a warrant to acquire an aggregate of 265,335 shares of the Company's
Common Stock at an aggregate exercise price of $500,000.
 
  In October 1996, the Company successfully completed an initial public
offering ("IPO") for 1.5 million shares of its common stock at $6.50 per
share. Net proceeds to the Company were $7.8 million. The proceeds from the
IPO were used to pay down $6.1 million of the Senior Indebtedness, to bring
accounts payable into a current position and to provide additional working
capital. The paydown reduced the future scheduled payments by approximately
one third and gave the Company full availability of its $2 million revolving
credit line. Since the IPO, the Company has maintained a cash balance between
$1.1 million and $2.4 million and has not had to use its revolving line of
credit.
 
  On March 12, 1997 the Company entered into a new $11 million credit facility
("Credit Facility") with the Bank of Boston. The new Credit Facility provides
a $5 million term loan ("Term Loan") and a $6 million revolving line of credit
("Line of Credit"). The Company used the proceeds from the Term Loan and
$500,000
 
                                      17
<PAGE>
 
under the Line of Credit to pay off its remaining indebtedness to BNP, thereby
avoiding any obligation to pay the Additional Fee to BNP. The Company is
currently in the process of repaying all of its Subordinated Indebtedness,
including accrued interest. The total amount repaid as of March 18, 1997 was
approximately $1.9 million. The Company plans on using all of its cash on hand
plus the Line of Credit to repay the Subordinated Indebtedness. After
repayment the availability under the Line of Credit is expected to be
approximately $2.5 million. The Company plans on using all future cash
receipts to pay down the line on a daily basis thereby keeping its outstanding
debt at the lowest possible level. The Line of Credit will be used to fund all
of the Company's disbursements, up to the $6 million limit, subject to certain
covenant restrictions.
 
  The Company also plans on repaying Mr. Franklin and his associates the
$495,000 loaned to the Company in June 1996. It is expected that at the same
time Mr. Franklin and his associates will immediately exercise their warrants
upon receiving repayment.
 
  The Term Loan has a four year repayment schedule with $750,000 due in 1997,
$1.25 million due in each of the next three years and $500,000 due in 2001.
The Company believes this amortization schedule is much more favorable than
under the BNP agreement, with $1.25 million less payments required in 1997 and
$1.1 million less in 1998.
 
  The Company currently has recorded a deferred tax asset reflecting the
benefit of approximately $16.5 million of NOLs available for federal and state
income tax purposes, which expire from 2005 through 2010. The Company's
initial public offering resulted in an "ownership change" under Section 382 of
the Code and, as a result, the Company's ability to use its "pre-change" NOLs
is limited to $1.55 million in each fiscal year following the offering.
Realization of the NOLs is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. The Company believes that it is
more likely than not that the deferred tax asset will be realized, however,
there can be no assurance that the Company will be able to use the NOLs.
 
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 U.S. 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 will have an 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. Virtually all of the wigs sold by the Company are made
from special synthetic fiber manufactured by only 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 Company believes that the time required to obtain an
alternate source and the attendant delay in new production, as well as a
possibly significant increase in the price of fiber, may have a material
adverse effect on the Company's wig and hairpiece sales and profit margin.
 
  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 4% and 24% of the Company's overall wig
purchases in 1996. 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
 
                                      18
<PAGE>
 
currently have, and does not anticipate entering into in the foreseeable
future, long-term supply contracts with its manufacturers.
 
  Dependence Upon Foreign Suppliers; Exchange Rates; Currency
Fluctuations. All of the wigs purchased by the Company, including those
purchased from domestic importers, are manufactured in Asia. The Company
expects that most of its wig merchandise will continue to be manufactured in
Asia 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, quotas, work stoppages and, in certain parts of
the world, political instability and possible governmental intervention. Since
the Company pays for its wigs in U.S. dollars, the cost of wigs may be
adversely affected by an increase in the relative value of the relevant
foreign currencies against the U.S. dollar. 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. These women comprise a
significant 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 (primarily
marketed under the name Rogaine(R)), is now available over-the-counter and is
sold to men and women as a measure against hair loss. There can be no
assurance that a new drug will not be developed that could prevent hair loss
among women. Such an event could have a material adverse effect on the
Company's core wig business. In addition, the development of any new cancer
therapies that would eliminate hair loss as a side effect of treatment could
have a material adverse effect on the Company's business.
 
  Effectiveness of Catalogs and Advertising. The Company targets potential new
customers through its advertising programs and solicits orders from existing
customers through catalog marketing campaigns. Catalog marketing campaigns and
advertising are working capital intensive and the success of such activities
depends, to a large extent, upon the accuracy of assumptions and judgments
made by the Company. The Company must continuously identify new customers with
its advertising programs and stimulate new purchases from existing customers
with its catalog marketing campaigns in order to be successful. There can be
no assurance that such advertising and catalog mailings will result in
attracting new customers at the rate required to maintain profitability or
continue to generate new purchases from the Company's existing customers. The
failure of such activities to identify new customers or to generate new
purchases from existing customers may have a material adverse effect on the
Company's business and its results of operations.
 
  Competition. The Company encounters competition in all areas of its
business. The Company competes directly with other direct mail catalog
retailers and numerous other retail sources of products which are the same as,
or similar to, those products sold by the Company through its catalogs. Some
of the Company's competitors have greater financial and marketing resources
than the Company. Potential competition may emerge via new distributions
channels such as the Internet and interactive television.
 
 
                                      19
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Independent Auditors' Report.............................................  21
Financial Statements and Supplementary Schedules as of December 28, 1996
 and December 30, 1995 and for the Three Years Ended December 28, 1996,
 December 30, 1995 and December 31, 1994
  Consolidated Balance Sheets............................................  22
  Consolidated Statements of Operations..................................  23
  Consolidated Statements of Stockholders' Equity (Deficit)..............  24
  Consolidated Statements of Cash Flows..................................  25
  Notes to Consolidated Financial Statements.............................  27
  Schedule II--Valuation and Qualifying Accounts.........................  38
</TABLE>
 
  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.
 
                                      20
<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. as of December 28, 1996 and December 30, 1995 and the related
consolidated statements of operations and consolidated statements of
stockholders' equity (deficit) and cash flows for the three years ended
December 28, 1996, December 30, 1995 and December 31, 1994. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 8. These financial statements and 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 generally accepted auditing
standards. 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 Specialty Catalog Corp. as of
December 28, 1996 and December 30, 1995 and the results of its operations and
its cash flows for the three years ended December 28, 1996, December 30, 1995
and December 31, 1994, in conformity with generally accepted accounting
principles. 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.
 
                                          Deloitte & Touche LLP
 
Boston, Massachusetts
March 12, 1997
(March 18, 1997 with respect
to Note 7 and Note 12)
 
                                      21
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                    DECEMBER 28,  DECEMBER 30,
                                                        1996          1995
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      ASSETS
Current assets:
  Cash and cash equivalents........................ $  1,392,344  $    113,364
  Accounts receivable, less allowance for doubtful
   accounts of $72,197 and $160,000 at December 28,
   1996 and December 30, 1995, respectively........      820,076     1,367,929
  Inventories......................................    4,986,293     5,073,743
  Prepaid expenses.................................    3,877,533     3,462,818
                                                    ------------  ------------
    Total current assets...........................   11,076,246    10,017,854
                                                    ------------  ------------
Property and equipment:
  Property and equipment, at cost..................    4,113,834     3,982,348
  Less accumulated depreciation and amortization...   (3,298,109)   (3,040,751)
                                                    ------------  ------------
    Property and equipment--net....................      815,725       941,597
                                                    ------------  ------------
Deferred income taxes..............................    6,170,102     6,779,356
                                                    ------------  ------------
Other assets.......................................      343,123       431,553
                                                    ------------  ------------
      Total assets................................. $ 18,405,196  $ 18,170,360
                                                    ============  ============
  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable and accrued expenses............ $  2,653,534  $  4,730,936
  Liabilities to customers.........................      691,377       755,902
  Line of credit...................................          --      1,050,000
  Income taxes.....................................      107,019        81,945
  Current portion of long-term debt................    2,005,714     2,750,000
                                                    ------------  ------------
    Total current liabilities......................    5,457,644     9,368,783
                                                    ------------  ------------
Long-term debt.....................................    3,394,286     8,750,000
Subordinated debt-related party....................    4,752,325     4,125,519
Other long-term liabilities........................          --        341,939
Commitments and contingencies
Stockholders' equity (deficit):
  Preferred stock, $1.00 par value: 1,000,000
   authorized; no shares issued and outstanding....          --            --
  Common stock, $.01 par value: 10,000,000 shares
   authorized; 4,701,666 shares issued and
   outstanding at December 28, 1996................       47,017           --
  13% preferred stock, $100 par value: 30,000
   shares authorized; 22,491 shares issued and
   outstanding at December 30, 1995................          --      2,249,100
  Class A common stock, $.01 par value; 5,208,160
   shares authorized; 1,958,880 shares issued and
   outstanding at December 30, 1995................          --         19,589
  Class B common stock, $.01 par value; 651,020
   shares authorized; 433,893 shares issued and
   outstanding at December 30, 1995................          --          4,339
  Class C common stock, $.01 par value; 651,020
   shares authorized; 433,893 shares issued and
   outstanding at December 30, 1995................          --          4,339
  Additional paid-in capital.......................   15,199,050     4,641,774
Deferred compensation..............................      (83,363)          --
Note receivable--stockholder.......................     (140,174)     (140,174)
Accumulated deficit................................  (10,221,589)  (11,194,848)
                                                    ------------  ------------
    Total stockholders' equity (deficit)...........    4,800,941    (4,415,881)
                                                    ------------  ------------
      Total liabilities and stockholders' equity
       (deficit)................................... $ 18,405,196  $ 18,170,360
                                                    ============  ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       22
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                       CONSOLIDATED STATEMENTS OPERATIONS
 
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED
                                      ----------------------------------------
                                      DECEMBER 28,  DECEMBER 30,  DECEMBER 31,
                                          1996          1995          1994
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Net sales............................ $36,271,663   $42,568,120   $38,178,792
Cost of sales (including buying,
 occupancy and order fulfillment
 costs)..............................  12,810,921    16,423,590    15,648,066
                                      -----------   -----------   -----------
Gross profit.........................  23,460,742    26,144,530    22,530,726
                                      -----------   -----------   -----------
Operating expenses:
  Selling, general and administrative
   expenses..........................  20,185,965    22,835,086    17,771,721
  Restructuring charges..............         --        512,943           --
                                      -----------   -----------   -----------
Total operating expenses.............  20,185,965    23,348,029    17,771,721
                                      -----------   -----------   -----------
Income from operations...............   3,274,777     2,796,501     4,759,005
                                      -----------   -----------   -----------
Interest expense--net................  (1,657,471)   (1,917,664)     (661,022)
                                      -----------   -----------   -----------
Income before reorganization items,
 income taxes, and extraordinary
 item................................   1,617,306       878,837     4,097,983
Reorganization items.................         --            --      2,889,707
                                      -----------   -----------   -----------
Income before income taxes and
 extraordinary item..................   1,617,306       878,837     1,208,276
Income taxes.........................     644,047       356,575       497,954
                                      -----------   -----------   -----------
Income before extraordinary item.....     973,259       522,262       710,322
Extraordinary item--gain on debt
 discharge--net of income taxes of
 $1,094,649..........................         --            --     12,078,489
                                      -----------   -----------   -----------
Net income........................... $   973,259   $   522,262   $12,788,811
                                      -----------   -----------   -----------
Preferred stock dividends............         --       (292,383)      (31,241)
                                      -----------   -----------   -----------
Net income available to common
 shareholders........................ $   973,259   $   229,879   $12,757,570
                                      ===========   ===========   ===========
Per common share
  Income before extraordinary items.. $      0.25   $      0.08   $      0.23
  Extraordinary items................ $       --    $       --    $      4.00
  Net income per share............... $      0.25   $      0.08   $      4.23
                                      ===========   ===========   ===========
  Weighted average shares
   outstanding.......................   3,946,211     3,015,078     3,015,078
                                      ===========   ===========   ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       23
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                      COMMON STOCK             CLASS A             CLASS B            CLASS C        13% PREFERRED STOCK
                   --------------------  --------------------  -----------------  -----------------  ---------------------
                     SHARES     AMOUNT     SHARES     AMOUNT    SHARES   AMOUNT    SHARES   AMOUNT    SHARES     AMOUNT
                   ----------  --------  ----------  --------  --------  -------  --------  -------  --------  -----------
<S>                <C>         <C>       <C>         <C>       <C>       <C>      <C>       <C>      <C>       <C>
Balance, January
1, 1994..........   1,000,000  $ 10,000         --   $    --        --   $   --        --   $   --        --   $       --
 Cancellation of
 SC Corporation
 common shares in
 connection with
 reorganization
 and settlement
 of bankruptcy
 proceedings.....  (1,000,000)  (10,000)        --        --        --       --        --       --        --           --
 Issuance of SC
 Corporation
 common shares in
 connection with
 reorganization
 and settlement
 of bankruptcy
 proceedings.....     868,365     8,684         --        --        --       --        --       --        --           --
 Issuance of
 preferred
 stock...........         --        --          --        --        --       --        --       --     22,491    2,249,100
 Exchange of SC
 Corporation
 common shares
 for Specialty
 Catalog Corp.
 common shares at
 the rate of
 1/100 share of
 Specialty
 Catalog Corp.
 stock for each
 share of SC
 Corporation
 common stock for
 one.............   1,958,301    19,583         --        --        --       --        --       --        --           --
 Net income......         --        --          --        --        --       --        --       --        --           --
 Redeemable
 preferred stock
 dividends.......         --        --          --        --        --       --        --       --        --           --
                   ----------  --------  ----------  --------  --------  -------  --------  -------  --------  -----------
Balance, December
31, 1994.........   2,826,666    28,267         --        --        --       --        --       --     22,491    2,249,100
 Exchange of
 common shares
 for Class A,
 Class B, and
 Class C shares..  (2,826,666)  (28,267)  1,958,880    19,589   433,893    4,339   433,893    4,339       --           --
 Net income......         --        --          --        --        --       --        --       --        --           --
 Redeemable
 preferred stock
 dividends.......         --        --          --        --        --       --        --       --        --           --
                   ----------  --------  ----------  --------  --------  -------  --------  -------  --------  -----------
Balance, December
30, 1995.........         --        --    1,958,880    19,589   433,893    4,339   433,893    4,339    22,491    2,249,100
 Issuance of
 common stock in
 connection with
 initial public
 offering........   1,500,000    15,000         --        --        --       --        --       --        --           --
 Exchange of
 Class A, Class
 B, and Class C
 shares for
 common stock....   2,826,666    28,267  (1,958,880)  (19,589) (433,893)  (4,339) (433,893)  (4,339)      --           --
 Conversion of
 preferred stock
 into common
 stock...........     375,000     3,750         --        --        --       --        --       --    (22,491)  (2,249,100)
 Net income......         --        --          --        --        --       --        --       --        --           --
 Redeemable
 preferred stock
 dividends.......         --        --          --        --        --       --        --       --        --           --
 Forgiveness of
 preferred stock
 dividends and
 related accrued
 interest........         --        --          --        --        --       --        --       --        --           --
 Deferred
 compensation....         --        --          --        --        --       --        --       --        --           --
 Amortization of
 deferred
 compensation....         --        --          --        --        --       --        --       --        --           --
 Issuance of
 warrants........         --        --          --        --        --       --        --       --        --           --
                   ----------  --------  ----------  --------  --------  -------  --------  -------  --------  -----------
Balance, December
28, 1996.........   4,701,666  $ 47,017         --   $    --        --   $   --        --   $   --        --   $       --
                   ==========  ========  ==========  ========  ========  =======  ========  =======  ========  ===========
<CAPTION>
                                ADDITIONAL
                     DEFERRED     PAID-IN    ACCUMULATED
                   COMPENSATION   CAPITAL      DEFICIT
                   ------------ ------------ -------------
<S>                <C>          <C>          <C>
Balance, January
1, 1994..........    $    --    $ 4,115,300  $(24,505,921)
 Cancellation of
 SC Corporation
 common shares in
 connection with
 reorganization
 and settlement
 of bankruptcy
 proceedings.....         --         10,000           --
 Issuance of SC
 Corporation
 common shares in
 connection with
 reorganization
 and settlement
 of bankruptcy
 proceedings.....         --        859,681           --
 Issuance of
 preferred
 stock...........         --            --            --
 Exchange of SC
 Corporation
 common shares
 for Specialty
 Catalog Corp.
 common shares at
 the rate of
 1/100 share of
 Specialty
 Catalog Corp.
 stock for each
 share of SC
 Corporation
 common stock for
 one.............         --        (19,583)          --
 Net income......         --            --     12,788,811
 Redeemable
 preferred stock
 dividends.......         --        (31,241)          --
                   ------------ ------------ -------------
Balance, December
31, 1994.........         --      4,934,157   (11,717,110)
 Exchange of
 common shares
 for Class A,
 Class B, and
 Class C shares..         --            --
 Net income......         --            --        522,262
 Redeemable
 preferred stock
 dividends.......         --       (292,383)          --
                   ------------ ------------ -------------
Balance, December
30, 1995.........         --      4,641,774   (11,194,848)
 Issuance of
 common stock in
 connection with
 initial public
 offering........         --      7,739,760           --
 Exchange of
 Class A, Class
 B, and Class C
 shares for
 common stock....         --            --            --
 Conversion of
 preferred stock
 into common
 stock...........                 2,245,350           --
 Net income......                       --        973,259
 Redeemable
 preferred stock
 dividends.......         --       (146,188)          --
 Forgiveness of
 preferred stock
 dividends and
 related accrued
 interest........         --        511,542           --
 Deferred
 compensation....     (87,750)       87,750           --
 Amortization of
 deferred
 compensation....       4,387           --            --
 Issuance of
 warrants........         --        119,062           --
                   ------------ ------------ -------------
Balance, December
28, 1996.........    $(83,363)  $15,199,050  $(10,221,589)
                   ============ ============ =============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       24
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                       CONSOLIDATED STATEMENTS CASH FLOWS
 
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED
                                      ----------------------------------------
                                      DECEMBER 28,  DECEMBER 30,  DECEMBER 31,
                                          1996          1995          1994
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
Net income..........................  $   973,259   $   522,262   $ 12,788,811
Adjustments to reconcile net income
 to net cash provided by (used in)
 operating activities:
  Interest paid through issuance of
   debt.............................      237,216       445,333            --
  Provision for bad debts...........       22,000       146,004         34,180
  Depreciation and amortization.....      276,407       249,127        748,628
  Deferred income taxes.............      609,254       350,819      1,439,943
  Amortization of deferred
   compensation.....................        4,387           --             --
  Changes in operating assets and
   liabilities:
    Accounts receivable.............      525,853      (934,785)       120,860
    Inventories.....................       87,450      (852,477)      (817,280)
    Prepaid expenses................     (414,715)     (288,275)      (120,628)
    Other assets....................       87,285       104,935       (383,072)
    Accounts payable and accrued
     expenses.......................   (2,028,204)    1,802,918     (1,944,118)
    Provision for estimated
     returns........................     (125,669)     (356,033)       150,299
    Liabilities to customers........       61,144      (155,817)        (8,654)
    Income taxes....................       25,074       (29,505)       (43,077)
    Other long-term liabilities.....      (18,315)       18,315            --
  Change due to reorganization
   activities:
    Extraordinary gain on debt
     discharge......................          --            --     (13,173,138)
                                      -----------   -----------   ------------
Net cash provided by (used in)
 operating activities...............  $   322,426   $ 1,022,821   $ (1,207,246)
                                      -----------   -----------   ------------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
  Purchases of property and
   equipment........................     (148,206)     (413,146)      (447,919)
  Repayments of note receivable.....          --          7,409            --
                                      -----------   -----------   ------------
Net cash used in investing
 activities.........................  $  (148,206)  $  (405,737)  $   (447,919)
                                      -----------   -----------   ------------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
  Issuance of common stock..........    7,754,760           --         827,042
  Issuance of redeemable preferred
   stock............................          --            --       2,142,840
  Settlement of long-term
   obligations......................          --            --     (20,237,480)
  Issuance of junior subordinated
   debt and warrants................      500,000           --      17,680,186
  Repayments of long-term debt......   (6,100,000)   (2,500,000)           --
  Advances on line of credit........      400,000     1,050,000            --
  Repayments on line of credit......   (1,450,000)          --             --
                                      -----------   -----------   ------------
Net cash provided by (used in)
 financing activities...............  $ 1,104,760   $(1,450,000)  $    412,588
                                      -----------   -----------   ------------
Increase (decrease) in cash and cash
 equivalents........................    1,278,980      (832,916)    (1,242,577)
Cash and cash equivalents, beginning
 of year............................      113,364       946,280      2,188,857
                                      -----------   -----------   ------------
Cash and cash equivalents, end of
 year...............................  $ 1,392,344   $   113,364   $    946,280
                                      ===========   ===========   ============
SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:
  Cash paid during the year for:
    Interest........................  $ 1,102,460   $ 1,533,826   $    493,624
                                      ===========   ===========   ============
    Income taxes....................  $    66,158   $    35,261   $    174,735
                                      ===========   ===========   ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       25
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                CONSOLIDATED STATEMENTS CASH FLOWS--(CONTINUED)
 
SUMMARY OF NONCASH TRANSACTIONS:
 
  During the years ended December 28, 1996 and December 30, 1995, the Company
issued $237,216 and $445,333, respectively, of subordinated debt in lieu of
payment of interest.
 
  During the years ended December 28, 1996, December 30, 1995 and December 31,
1994, the Company declared dividends on preferred stock of $146,188, $292,383
and $31,241, respectively. In conjunction with Company's initial public
offering, all shares of preferred stock were converted into common stock and
all accumulated dividends, and accrued interest on those dividends, through
the date of the offering were irrevocably waived by the holders of the
preferred stock as of August 13, 1996.
 
  In 1994 the Company received a note in the amount of $147,583 in exchange
for common and preferred stock.
 
                See notes to consolidated financial statements.
 
                                      26
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Nature of Business--Specialty Catalog Corp. (the "Company") is a direct
marketer targeting niche consumer product categories. SC Corporation, the
Company's principal operating subsidiary doing business under the name SC
Direct ("SC Direct"), is the leading U.S. retailer of women's wigs and
hairpieces. SC Publishing, Inc. ("SC Publishing"), a wholly-owned subsidiary
of SC Direct, sells continuing education courses to nurses, real estate
professionals and Certified Public Accountants.
 
  Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company, SC Direct, and SC Publishing.
All material intercompany balances and transactions have been eliminated in
consolidation.
 
  Cash and Cash Equivalents--Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.
 
  Accounts Receivable--The Company records an allowance to provide for
uncollectable accounts receivable. This allowance is determined based on the
historical rate of bad debts applied to current balances. In 1996 and 1995,
the Company had write-offs of accounts receivable against this allowance of
$109,803 and $34,221, respectively. Bad debt expense for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 was $189,161,
$146,004, and $34,180, respectively. Amounts collected for previously written
off accounts are credited to miscellaneous income.
 
  Inventories--Inventories are stated at the lower of first-in, first-out cost
or market. 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
is capitalized and amortized over the expected period of future benefit,
generally two to four months. The adoption of Statement of Principles 93-7,
"Reporting on Advertising Costs," did not have a material impact on the
calculation of deferred catalog costs since the Company employed a similar
methodology in the past. For 1996, 1995, and 1994, advertising expense was
$13.4 million, $16.3 million and $12.2 million, respectively.
 
  Property and Equipment--Property 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.
 
  Other Assets--Other assets consist primarily of trademarks and deferred
financing costs. Trademarks are stated at cost less accumulated amortization.
Amortization is computed on a straight-line basis over 37 years. At December
28, 1996 and December 30, 1995, the Company had $35,685 and $33,870,
respectively, of unamortized trademarks included in other assets.
 
  Deferred financing costs which were incurred by the Company in connection
with the Banque Nationale de Paris ("BNP") note (Note 7) are charged to
operations as additional interest expense over the life of the underlying
indebtedness using the straight-line method. At December 28, 1996 and December
30, 1995 deferred financing costs were $287,804 and $397,091, respectively.
 
                                      27
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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 bases of assets and liabilities.
 
  Revenue--The Company recognizes sales and the related costs of sales at the
time the 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, both assets and liabilities recognized and not
recognized in the consolidated balance sheet 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 line of credit approximate their carrying
values at December 28, 1996 and December 30, 1995, due to the short-term
maturities of these investments. The carrying value and fair value of the
Company's long-term debt at December 28, 1996 was $10,152,325. The fair value
of the Company's long-term debt is based on the subsequent repayment of the
Company's long-term debt in March 1997 (See Note 16).
 
  Net Income Per Share--Net income per share is calculated using the weighted
average number of common shares and common equivalent shares outstanding
during each of the periods retroactively restated to give effect to the
325.51-for-one stock split.
 
  Newly Adopted Accounting Statements--In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on fair value of the equity instruments awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and has disclosed the
required pro forma effect on net income and earnings per share.
 
  Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
 ." This statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles which are to be disposed of. The adoption of this statement had no
effect on the financial position, or results of operations or cash flows of
the Company.
 
  In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which is effective for financial statements issued for
periods ending after December 15, 1997. This statement requires the disclosure
of basic and diluted per share computations. The Company has not yet
determined the impact of this statement to its earnings per share.
 
                                      28
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Fiscal Year--The Company is on a 52/53 week fiscal year, ending on the
Saturday closest to December 31. The fiscal years ended December 28, 1996,
December 30, 1995 and December 31, 1994, each consisted of 52 weeks.
 
  Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles 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 which are believed to be reasonable under the circumstances.
 
  Reclassifications--Certain amounts in the 1994 and 1995 financial statements
have been reclassified to conform to the 1996 presentation.
 
2. CORPORATE ORGANIZATION AND BANKRUPTCY PROCEEDINGS
 
  On December 28, 1992, SC Corporation and its subsidiaries Wigs by Paula,
Inc. ("Wigs"), Western Schools, Inc., the predecessor of SC Publishing, After
the Stork, Inc. ("Stork") and Brotman Acquisition Corp. ("Brotman") filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code ("Bankruptcy") in the United States Bankruptcy Court for the
District of Connecticut, ("Bankruptcy Court"). From that date until November
23, 1994, SC Corporation operated its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. During that period, the
Company did not pay $1,030,757 and $1,688,592 of contractual interest for the
years ended December 31, 1994 and January 1, 1994 while under the protection
of Bankruptcy.
 
  In January 1993, the Bankruptcy Court and SC Corporation agreed to lift the
stay and permit Signal Capital Corporation, SC Corporation's senior secured
creditor ("Signal"), to sell Stork and Brotman. Stork was sold for $950,000 to
a group of purchasers which included Viking Holdings Limited ("Viking") and
Steven Bock, the Company's chairman and chief executive officer. Brotman was
sold by Signal to a liquidator.
 
  SC Corporation's Disclosure Statement with respect to the First Amended and
Restated Joint Plan of Reorganization of SC Corporation and its subsidiaries
Wigs and SC Publishing ("Plan of Reorganization") was approved by the
Bankruptcy Court on September 21, 1994. The Plan of Reorganization was
subsequently confirmed by the Bankruptcy Court on October 26, 1994 and the
reorganization of SC Corporation was consummated on November 23, 1994.
 
  The Plan of Reorganization provided for the payment of $15,508,726 in cash,
$1,673,453 in subordinated notes, 10,227 shares of preferred stock valued at
$1,022,700 and 295,121 shares of common stock valued at $295,121 in settlement
of $24,102,851 of secured claims, and $3,345,066 in cash, $354,247 in
subordinated notes, 2,164 shares of preferred stock valued at $216,400 and
179,353 shares of common stock valued at $179,353 in settlement of $11,665,353
of unsecured claims. The gain on such discharge of pre-petition claims has
been recorded as an extraordinary item, net of income taxes of $1,094,649. The
Company funded the Plan of Reorganization by selling additional shares of
common stock and 13% Preferred Stock ("13% Preferred Stock"), entering into a
new senior credit facility, and issuing subordinated notes ("Subordinated
Notes"). Subsequent to the consummation of the reorganization, certain
stockholders of the Company purchased the subordinated notes and 13% Preferred
Stock from the holder of the secured claims at their face values and the
common stock from the holders of the secured and unsecured claims at its fair
market value.
 
                                      29
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Reorganization items consist of the following:
 
<TABLE>
<CAPTION>
                                                                      1994
                                                                   -----------
     <S>                                                           <C>
     Interest income.............................................. $   103,308
     Professional fees............................................  (2,133,117)
     Executive and employee compensation..........................    (533,840)
     Other........................................................    (326,058)
                                                                   -----------
                                                                   $(2,889,707)
                                                                   ===========
</TABLE>
 
  The Company was incorporated on November 30, 1994 for the purpose of
becoming the parent company of SC Corporation. On that date, the Company
issued 2,826,666 shares of its common stock and 22,491 shares of 13% Preferred
Stock to the stockholders of SC Corporation in exchange for their shares of SC
Corporation common stock and preferred stock.
 
3. PREPAID EXPENSES
 
  Prepaid expenses at December 28, 1996 and December 30, 1995 consists of the
following:
 
<TABLE>
<CAPTION>
                                                            1996       1995
                                                         ---------- ----------
     <S>                                                 <C>        <C>
     Deferred catalog costs............................. $2,206,141 $2,320,261
     Prepaid advertising................................  1,043,005    825,064
     Other..............................................    628,387    317,493
                                                         ---------- ----------
                                                         $3,877,533 $3,462,818
                                                         ========== ==========
</TABLE>
 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment at December 28, 1996 and December 30, 1995 consists
of the following:
 
<TABLE>
<CAPTION>
                                             USEFUL
                                              LIFE      1996         1995
                                             ------- -----------  -----------
     <S>                                     <C>     <C>          <C>
     Furniture and equipment................ 7 years $ 1,141,835  $ 1,139,016
     Data processing equipment.............. 5 years   2,856,930    2,734,186
     Leasehold improvements................. (i)         115,069      109,146
                                                     -----------  -----------
                                                       4,113,834    3,982,348
     Less accumulated depreciation and
      amortization..........................          (3,298,109)  (3,040,751)
                                                     -----------  -----------
                                                     $   815,725  $   941,597
                                                     ===========  ===========
</TABLE>
    (i) Lesser of the estimated useful lives of the related assets or the
       lease term.
 
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
  Accounts payable and accrued expenses at December 28, 1996 and December 30,
1995 consist of the following:
 
<TABLE>
<CAPTION>
                                                             1996       1995
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Accounts payable.................................... $1,312,352 $3,368,865
     Accrued compensation................................    444,706    490,227
     Accrued interest....................................    357,542    148,865
     Other accrued expenses..............................    538,934    722,979
                                                          ---------- ----------
                                                          $2,653,534 $4,730,936
                                                          ========== ==========
</TABLE>
 
                                      30
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. LIABILITIES TO CUSTOMERS
 
  Liabilities to customers at December 28, 1996 and December 30, 1995 consist
of the following:
 
<TABLE>
<CAPTION>
                                                                 1996     1995
                                                               -------- --------
     <S>                                                       <C>      <C>
     Deferred revenue......................................... $175,780 $114,636
     Reserve for returns......................................  515,597  641,266
                                                               -------- --------
                                                               $691,377 $755,902
                                                               ======== ========
</TABLE>
 
  Deferred revenues reflect cash received from customers for back ordered
items which have not yet been shipped. 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 28, 1996 and December 30, 1995 consists of the
following:
 
<TABLE>
<CAPTION>
                                                            1996        1995
                                                         ----------- -----------
<S>                                                      <C>         <C>
BNP term advance, Prime Rate plus 2% or Eurodollar Rate
 plus 3.5%, payable quarterly in amounts between
 $500,000 and $1,500,000 through May 22, 1999..........  $ 5,400,000 $11,500,000
SC Holdings LLC Subordinated Note, 11.5%, payable
 November 22, 2002.....................................    3,680,186   3,680,186
SC Holdings LLC PIK Note, 11.5%, payable November 22,
 2002..................................................      682,549     445,333
Junior Subordinated Note, 11.5%, payable August 12,
 1999..................................................      389,590         --
                                                         ----------- -----------
                                                          10,152,325  15,625,519
Less current portion...................................    2,005,714   2,750,000
                                                         ----------- -----------
                                                         $ 8,146,611 $12,875,519
                                                         =========== ===========
</TABLE>
 
  The Company entered into a new credit agreement with The First National Bank
of Boston on March 12, 1997 (the "BKB Agreement") for the purpose of
refinancing the existing senior and subordinated debt and to provide for the
capital expenditures and working capital needs of the Company. The BKB
Agreement includes a $5,000,000 term loan and a $6,000,000 revolving credit
facility. The interest rate on the borrowings will vary subject to certain
financial ratios and outstanding borrowings. The BKB Agreement has a maturity
of four years from the closing. The term loan is to be repaid in quarterly
installments commencing September 30, 1997 with payments totalling $750,000 in
1997, $1,250,000 per year for 1998, 1999 and 2000, and $500,000 in 2001. The
Term loan is subject to accelerated prepayment clauses equal to 100% of the
net proceeds from sale of certain assets of the Company or debt or equity
offerings.
 
  The BKB Agreement will be cross collateralized by a first perfect security
interest in all tangible and intangible assets of the Company. The BKB
Agreement is subject to certain 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 BKB Agreement has been used to repay all the BNP obligations on March
12, 1997. On March 18, 1997, the Company repaid $1,896,913 of principal and
accrued interest on the SC Holdings LLC Subordinated Note and SC Holdings PIK
Note, with $1,765,767 repaid from proceeds from the BKB Agreement and $131,146
repaid through the forgiveness of the note receivable from a stockholder (see
Note 12).
 
  SC Holdings LLC is a limited liability company whose stockholders owned all
the issued and outstanding shares of 13% Preferred Stock of the Company and
certain of the issued and outstanding shares of Common Stock of the Company
prior to the conversion of the 13% Preferred Stock to Common Stock
coincidental with the initial public offering.
 
                                      31
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company may, at its option through November 22, 1999, and, under certain
conditions, through November 22, 2002, pay interest on the Subordinated Notes
by issuing additional Subordinated Notes with identical terms and conditions
with an aggregate principal amount equal to the amount of interest then
payable. In 1996 and 1995, the Company issued $237,216 and $445,333,
respectively, of additional Subordinated Notes as payment of interest for the
periods January 1996 through June 1996 and November 1994 through December
1995, respectively.
 
  On June 1, 1996, the Company entered into an agreement with a director and
two associates of the director to issue junior subordinated notes for $495,000
payable on August 12, 1999 and bearing interest at 11.5%. In connection with
the issuance of these notes, the Company agreed to issue warrants for $5,000
to purchase 265,335 shares of Class A common stock for an aggregate exercise
price of $500,000 ($1.8844 per share). The warrants expire on September 30,
1999. The note and related warrants were issued on August 12, 1996. The note
has been discounted using an effective interest rate of 21.5%, which
represented the Company's borrowing rate for junior subordinated debt at the
date of the transaction. The remainder of the value representing $114,061 was
assigned to the warrants and recorded as additional paid-in capital.
 
  The aggregate maturities of long-term debt after December 28, 1996 are as
follows:
 
<TABLE>
<CAPTION>
     FISCAL YEAR                                                       AMOUNT
     -----------                                                     -----------
     <S>                                                             <C>
     1997........................................................... $ 2,005,714
     1998...........................................................   2,314,286
     1999...........................................................   1,469,590
     2000...........................................................         --
     2001...........................................................         --
     2002 and thereafter............................................   4,362,735
                                                                     -----------
                                                                     $10,152,325
                                                                     ===========
</TABLE>
 
8. PREFERRED STOCK
 
  On November 30, 1994, the Company issued 22,491 shares of 13% Preferred
Stock. Coincidental with the Company's initial public offering on October 17,
1996, all outstanding shares of preferred stock were converted into 375,000
shares of common stock. All accumulated dividends, and accrued interest on
those dividends through the date of the offering, were irrevocably waived by
the holders of the preferred stock as of August 13, 1996.
 
9. STOCKHOLDERS' EQUITY
 
  Issuance of Common Stock--As part of the Company's reorganization and
settlement of its bankruptcy proceedings, on November 23, 1994 SC Corporation
issued 868,365 shares of common stock and canceled 1,000,000 shares of old
common stock that had been issued prior to the date that SC Corporation filed
for reorganization under Chapter 11. On November 30, 1994, the stockholders
exchanged their shares of SC Corporation common stock for the Company's common
stock at the rate of approximately 100 shares of SC Corporation's common stock
for each share of the Company's common stock.
 
  In 1995, the Company's Board of Directors and holders of common stock
elected to recapitalize the common stock into three classes, Class A, Class B
and Class C. Holders of Class A shares were entitled to one vote per share
while holders of Class B and Class C shares were entitled to one-half vote per
share and one and one-half votes per share, respectively. All dividend and
liquidation rights remained unchanged. Upon sale, disposition or other
transfer of any share(s) of Class B common stock by the original holder
thereof, (i) such
 
                                      32
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
share(s) shall automatically and immediately convert into an equal number of
shares of Class A common stock, and (ii) an equal number of shares of Class C
common stock shall automatically and immediately convert into an equal number
of shares of Class A common stock. All shareholders received one share of
Class A for each share of common with the exceptions of one shareholder who
received one-half share of Class A and one-half share of Class B for each
share of common and another shareholder who received one-half share of Class A
and one-half share of Class C for each share of common.
 
  On October 17, 1996, the Company completed an initial public offering of 1.5
million shares of its common stock at an initial offering price of $6.50 per
share. Net proceeds to the Company after offering expenses was $7,754,760.
Coincidental with the offering, the Company increased the number of authorized
common shares from 6,510,200 to 10 million, converted on a one-for-one basis
the outstanding shares of Class A, Class B and Class C shares into common
stock, and effected a 325.51-for-one split of outstanding common stock. All
numbers of common shares and per share data in the accompanying consolidated
financial statements have been adjusted for the stock split.
 
  Stock Compensation Plan--On October 17, 1996, the Company adopted the 1996
Stock Option Plan (the "Plan") which authorized the purchase of up to 500,000
shares of 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. The per share exercise price for options
granted under the Plan will be not less than the fair market value of a share
of the Company's common stock on the date of the grant.
 
  Stock option activity is summarized below:
 
<TABLE>
<CAPTION>
                                                                        WEIGHTED
                                                             EXERCISE   AVERAGE
                                                             PRICE PER  EXERCISE
                                                   SHARES      SHARE     PRICE
                                                   -------  ----------- --------
     <S>                                           <C>      <C>         <C>
     Outstanding, January, 1994...................     --           --     --
     Granted...................................... 582,999  $      0.31  $0.31
     Exercised....................................     --           --     --
     Forfeited or expired.........................     --           --     --
                                                   -------  -----------  -----
     Outstanding December 31, 1994................ 582,999  $      0.31  $0.31
     Granted......................................     --           --     --
     Exercised....................................     --           --     --
     Forfeited or expired.........................     --           --     --
                                                   -------  -----------  -----
     Outstanding, December 30, 1995............... 582,999  $      0.31  $0.31
     Granted...................................... 327,150  $5.33-$6.50  $6.23
     Exercised....................................     --           --     --
     Forfeited or expired.........................  (7,500) $      6.50  $6.50
                                                   -------  -----------  -----
     Outstanding, December 28, 1996............... 902,649  $0.31-$6.50  $2.40
                                                   =======  ===========  =====
</TABLE>
 
  Options exercisable at December 28, 1996 and December 30, 1995 were 538,444
and 60,618, respectively. The options outstanding as of December 28, 1996 have
weighted average remaining contractual lives of 7.9 years for the $0.31
options issued in 1994 and 9.8 years for the options granted in 1996.
 
                                      33
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company applies APB 25 and related Interpretations in accounting for the
Plan and therefore no compensation cost has been recognized for options
granted under the Plan provisions. Had compensation cost been determined based
on the fair value at the grant dates for options granted with the method
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-based Compensation", the Company's net income available to common
shareholders and earnings per share would have been changed to the pro forma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                 1996     1995
                                                               -------- --------
     <S>                                                       <C>      <C>
     Net Income:
       As reported............................................ $973,259 $229,879
                                                               ======== ========
       Pro forma.............................................. $925,385 $229,879
                                                               ======== ========
     Earnings per share:
       As reported............................................ $   0.25 $   0.08
                                                               ======== ========
       Pro forma.............................................. $   0.23 $   0.08
                                                               ======== ========
</TABLE>
 
The fair value of each option grant used to compute pro forma net income and
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 1996 and 1995: expected volatility 60.14%; a risk free
interest rate of 6.38%; and an expected holding period of 6 years.
 
  Stock Warrants--In connection with the issuance of 11.5% junior subordinated
notes on August 12, 1996, the Company issued warrants to purchase 265,335
shares of common stock for an aggregate exercise price of $500,000 ($1.8844
per share). The warrants expire on September 30, 1999. The notes have been
discounted using an effective interest rate of 21.5%, which represents the
Company's borrowing rate for junior subordinated debt at the date of the
transaction. The remainder of the consideration paid totaling $119,061 was
assigned to the warrants and was booked as an addition to additional paid-in
capital.
 
10. RESTRUCTURING CHARGES
 
  During 1995, the Company restructured by consolidating its operations in one
geographic area in order to reduce costs and utilize resources more
efficiently. Specifically, restructuring charges include:
 
<TABLE>
     <S>                                                                <C>
     Office Closure Costs.............................................. $212,860
     Employee Severance................................................  300,083
                                                                        --------
       Total........................................................... $512,943
                                                                        ========
</TABLE>
 
  Included in accrued expenses at December 28, 1996 and December 30, 1995 are
accrued restructuring related charges of $0 and $151,976, respectively.
 
                                      34
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. INCOME TAXES
 
  The provision for income taxes consists of the following at December 28,
1996, December 30, 1995 and December 31, 1994:
 
<TABLE>
<CAPTION>
                                                        1996     1995     1994
                                                      -------- -------- --------
     <S>                                              <C>      <C>      <C>
     Current:
       Federal....................................... $ 30,696 $    --  $  5,046
       State.........................................    4,097    5,756  147,614
                                                      -------- -------- --------
                                                        34,793    5,756  152,660
                                                      -------- -------- --------
     Deferred:
       Federal.......................................  517,866  298,196  293,500
       State.........................................   91,388   52,623   51,794
                                                      -------- -------- --------
                                                       609,254  350,819  345,294
                                                      -------- -------- --------
         Total....................................... $644,047 $356,575 $497,954
                                                      ======== ======== ========
</TABLE>
 
  Deferred income tax assets and liabilities consist of the following at
December 28, 1996 and December 30, 1995:
 
<TABLE>
<CAPTION>
                                                             1996       1995
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Deferred income tax assets:
       Net operating loss carryforwards.................. $6,582,150 $7,229,484
       Operating reserves................................    154,476    200,165
       Inventory.........................................    312,484    226,990
       Other.............................................     28,452      5,044
                                                          ---------- ----------
                                                           7,077,562  7,661,683
                                                          ---------- ----------
     Deferred income tax liabilities:
       Deferred catalog costs............................    882,456    850,259
       Other.............................................     25,004     32,068
                                                          ---------- ----------
                                                             907,460    882,327
                                                          ---------- ----------
     Net deferred income tax asset....................... $6,170,102 $6,779,356
                                                          ========== ==========
</TABLE>
 
  Reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 is as follows:
 
<TABLE>
<CAPTION>
                                                               1996  1995  1994
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Statutory Federal income tax rate........................ 34.0% 34.0% 34.0%
     State taxes, net of Federal income tax benefits..........  5.8   6.6   7.2
                                                               ----  ----  ----
                                                               39.8% 40.6% 41.2%
                                                               ====  ====  ====
</TABLE>
 
  The Company has recorded a deferred tax asset of $6,170,102 reflecting the
benefit of $16,455,376 of net operating loss carryforwards which expire in
varying amounts between 2005 and 2010, for federal purposes. Realization is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. The use of the net 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. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized.
 
                                      35
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. RELATED PARTY TRANSACTIONS
 
  The Company has a note receivable from a stockholder in the amount of
$140,174 at December 28, 1996 and December 30, 1995. The note bears interest
at 9.25% and is repayable in varying annual installments between December 31,
1996 and December 31, 1999. The note was issued in November 1994 in exchange
for shares of Common Stock and 13% Preferred Stock and is collateralized by
26,535 shares of Common Stock and $80,186 of Subordinated Notes. On March 18,
1997 this note receivable was forgiven in lieu of repaying a portion of the
Subordinated Notes (See Note 7).
 
13. COMMITMENTS AND CONTINGENCIES
 
  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 noncancelable operating
leases as of December 28, 1996:
 
<TABLE>
<CAPTION>
            YEAR                                  AMOUNT
            ----                                 --------
            <S>                                  <C>
            1997................................ $123,376
                                                 ========
</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 for the years ended December 28, 1996, December 30, 1995 and December
31, 1994 was $362,676, $438,450 and $569,212, respectively.
 
  Employment and Bonus Agreements--The Company has employment and bonus
agreements with two executive officers through December 31, 1999. The
Company's salary commitment under these agreements aggregates $1,575,000 at
December 28, 1996 as follows:
 
<TABLE>
            <S>                                <C>
            1997.............................. $  505,000
            1998..............................    525,000
            1999..............................    545,000
                                               ----------
                                               $1,575,000
                                               ==========
</TABLE>
 
  In addition, the two executive officers may earn certain other bonuses based
on the Company's achievement of certain operating criteria.
 
14. EMPLOYEE BENEFIT PLANS
 
  The Company maintains a qualified defined contribution plan, under the
provisions of Section 401(k) of the Internal Revenue Code, covering
substantially all employees. Under the terms of the plan, eligible employees
may make contributions up to 15% of pay, subject to statutory limitations.
Contributions not exceeding 5% of an employee's pay are matched 40% 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% for each completed year of service, becoming fully
vested after five years of service. Matching contributions by the Company
under the plan were $71,176, $67,188 and $59,594 in 1996, 1995 and 1994,
respectively. No discretionary contributions have been made to the plan.
 
 
15. QUARTERLY RESULTS (UNAUDITED)
 
  Summarized quarterly financial data for the third and fourth quarter of 1996
are displayed in the following table:
 
<TABLE>
<CAPTION>
       1996                                                3RD QTR    4TH QTR
       ----                                               ---------- ----------
       <S>                                                <C>        <C>
       Net Sales......................................... $8,209,754 $9,307,168
       Gross Profit......................................  5,516,524  6,192,718
       Net Income........................................    343,848    480,110
       Net Income per common share.......................      $0.10      $0.09
</TABLE>
 
 
                                      36
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
16. SUBSEQUENT EVENTS
 
  In December 1996, the Company was given notice of the termination as of
March 1997 of the lease on one of its facilities. The Company has signed a new
five year and five month lease beginning April 1, 1997 for a 50,000 square
foot facility in an adjacent town. The new lease contains an annual fixed
rental rate of $196,026.
 
  As discussed in Note 7, the Company entered into a new credit agreement with
the First National Bank of Boston on March 12, 1997 for the purpose of
refinancing the existing senior and subordinated debt and to provide for the
capital expenditures and working capital needs of the Company.
 
                                      37
<PAGE>
 
                            SPECIALTY CATALOG CORP.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                           COLUMN A   COLUMN B   COLUMN C   COLUMN D  COLUMN E
                          ---------- ---------- ---------- ---------- ---------
                                           ADDITIONS
                                     ---------------------
                          BALANCE AT CHARGED TO  CHARGED               BALANCE
                          BEGINNING  COSTS AND   TO OTHER              AT END
DESCRIPTION               OF PERIOD   EXPENSES   ACCOUNTS  DEDUCTIONS OF PERIOD
-----------               ---------- ---------- ---------- ---------- ---------
<S>                       <C>        <C>        <C>        <C>        <C>
Year ended December 28,
 1996:
  Allowance for doubtful
   accounts..............  $160,000   $ 22,000         --  $  109,803 $ 72,197
  Reserve for returns....  $641,266        --   $7,574,181 $7,699,850 $515,597
Year ended December 30,
 1995:
  Allowance for doubtful
   accounts..............  $ 42,068   $146,004         --  $   28,072 $160,000
  Reserve for returns....  $997,299        --   $8,298,427 $8,654,460 $641,266
Year ended December 31,
 1994:
  Allowance for doubtful
   accounts..............  $ 20,500   $ 34,112         --  $   12,612 $ 42,000
  Reserve for returns....  $847,000        --   $8,617,427 $8,467,128 $997,299
</TABLE>
 
                                       38
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS REGISTRANT
 
  The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's Proxy Statement relating
to the 1997 Annual Meeting of Shareholders.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The response to this item is incorporated by reference from the discussion
responsive thereto under the following captions in the Company's Proxy
Statement relating to the 1997 Annual Meeting of Shareholders:
 
    "Election of Directors" and "Executive Compensation"
 
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 1997 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 1997 Annual Meeting of Shareholders.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
   <C> <C> <S>
   (A)  1. FINANCIAL STATEMENTS
           The financial statements are listed under Part II, Item 8 of this
           Report
        2. FINANCIAL STATEMENT SCHEDULES
           The financial statement schedules are listed under Part II, Item 8
           of this Report
        3. EXHIBITS
           The exhibits are listed below under Part IV, Item 14(C) of this
           Report.
   (B)     REPORTS ON FORM 8-K
           None.
</TABLE>
 
                                      39
<PAGE>
 
   (C) EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  *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   1996 Stock Option Plan. Filed as Exhibit 10.01 to Specialty Catalog
         Corp.'s Form S-1, File No. 333-10793.
 *10.2   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.
 *10.3   Employment Agreement dated as of October 4, 1996 between the
         Registrant and Stephen M. O'Hara. Filed as Exhibit 10.03 to Specialty
         Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.4   Credit Agreement dated November 24, 1994 between the Bank Nationale de
         Paris ("BNP") and Wigs By Paula, Inc., predecessor to the Registrant
         ("Wigs"). Filed as Exhibit 10.04 to Specialty Catalog Corp.'s Form S-
         1, File No. 333-10793.
 *10.5   First Amendment, Waiver and Consent to the Credit Agreement dated
         August 16, 1995 between BNP and the Registrant. Filed as Exhibit 10.05
         to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.6   Second Amendment, Waiver and Consent to the Credit Agreement dated
         August 14, 1996 between BNP and the Registrant. Filed as Exhibit 10.06
         to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.7   Security Agreement dated as of November 23, 1994 between Wigs and BNP.
         Filed as Exhibit 10.07 to Specialty Catalog Corp.'s Form S-1, File No.
         333-10793.
 *10.8   Trademark and Copyright Security Agreement dated as of November 23,
         1994 between Wigs, BNP and other guarantors named therein. Filed as
         Exhibit 10.08 to Specialty Catalog Corp.'s Form S-1, File No. 333-
         10793.
 *10.9   Pledge Agreement dated as of November 23, 1994 between SC Corporation
         and BNP. Filed as Exhibit 10.09 to Specialty Catalog Corp.'s Form S-1,
         File No. 333-10793.
 *10.10  Pledge Agreement dated as of November 23, 1994 between the Registrant,
         SC Holdings, L.L.C. and BNP. Filed as Exhibit 10.10 to Specialty
         Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.11  Guaranty dated November 23, 1994 between the Registrant, Western
         Schools, Inc., Royal Advertising & Marketing, Inc., BNP and the Hedge
         Banks. Filed as Exhibit 10.11 to Specialty Catalog Corp.'s Form S-1,
         File No. 333-10793.
 *10.12  Guaranty dated November 23, 1994 between SC Corporation, BNP, and the
         Hedge Banks. Filed as Exhibit 10.12 to Specialty Catalog Corp.'s Form
         S-1, File No. 333-10793.
 *10.13  Guaranty dated November 30, 1994 between the Registrant, SC Holdings
         L.L.C., BNP, and the Hedge Banks. Filed as Exhibit 10.13 to Specialty
         Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.14  Agreement dated June 1, 1996 between SC Direct, Inc., the Registrant
         and Martin E. Franklin. Filed as Exhibit 10.14 to Specialty Catalog
         Corp.'s Form S-1, File No. 333-10793.
 *10.15  Debtor Securities Purchase Agreement dated November 23, 1994 between
         WIGS, L.P. and SC Corporation. Filed as Exhibit 10.15 to Specialty
         Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.16  Pledge and Security Agreement dated November 30, 1994 between WIGS,
         L.P. and SC Corporation. Filed as Exhibit 10.16 to Specialty Catalog
         Corp.'s Form S-1, File No. 333-10793.
</TABLE>
 
                                       40
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
 *10.17  Promissory Note dated November 23, 1994 in the principal amount of
         $147,583 from WIGS, L.P. to SC Corporation. Filed as Exhibit 10.17 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.18  Lease dated July 10, 1985 between Simon D. Young, Trustee of the
         Sandpy Realty Trust, ("Trustee") , and Wigs 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.
 *10.19  First Amendment of Lease, dated March 15, 1986, between the Trustee
         and Wigs. Filed as Exhibit 10.19 to Specialty Catalog Corp.'s Form S-
         1, File No. 333-10793.
 *10.20  Second Amendment to Lease, dated March 1, 1989, between the Trustee
         and Wigs. Filed as Exhibit 10.20 to Specialty Catalog Corp.'s Form S-
         1, File No. 333-10793.
 *10.21  Third Amendment to Lease, dated October 22, 1993 between the Trustee
         and Wigs. Filed as Exhibit 10.21 to Specialty Catalog Corp.'s Form S-
         1, File No. 333-10793.
 *10.22  Letter Agreement, dated February 21, 1995 between the Trustee and SC
         Corporation. Filed as Exhibit 10.22 to Specialty Catalog Corp.'s Form
         S-1, File No. 333-10793.
 *10.23  Lease, dated October 20, 1995 between Fredric Snyderman as Trustee of
         JV Realty Trust and SC Direct Inc. for the premises at 23 Norfolk
         Avenue. Filed as Exhibit 10.23 to Specialty Catalog Corp.'s Form S-1,
         File No. 333-10793.
 *10.24  Printing Agreement, dated January 1, 1995 between Quebecor Printing
         (USA) Corp. and the Registrant, as amended. Filed as Exhibit 10.24 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.25  Amended and Restated Registration Rights Agreement, dated October 3,
         1996 between the Registrant and certain of the Registrant's
         stockholders, as amended. Filed as Exhibit 10.25 to Specialty Catalog
         Corp.'s Form S-1, File No. 333-10793.
 *10.26  First Amended and Restated Joint Plan of Reorganization of SC
         Corporation, Western Schools, Inc. and Wigs by Paula dated September
         21, 1994. Filed as Exhibit 10.26 to Specialty Catalog Corp.'s Form S-
         1, File No. 333-10793.
 *10.27  AT&T Contract Tariff Order dated February 9, 1995 between AT&T and the
         Registrant. Filed as Exhibit 10.27 to Specialty Catalog Corp.'s Form
         S-1, File No. 333-10793.
 *10.28  Shareholder's Agreement dated as of November 30, 1994 between the
         Registrant, SC Holdings L.L.C., SC Corporation and certain
         shareholders. ("Shareholder's Agreement"). Filed as Exhibit 10.28 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.29  Amendment No. 1 to Shareholder's Agreement. Filed as Exhibit 10.29 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.30  SC Holdings L.L.C. Limited Liability Company Agreement. Filed as
         Exhibit 10.30 to Specialty Catalog Corp.'s Form S-1, File No. 333-
         10793.
 *10.31  Supplemental Defined Contribution Plan. Filed as Exhibit 10.31 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.32  Form of Indemnification Agreement of Directors. Filed as Exhibit 10.32
         to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.33  Form of Warrant, dated August 12, 1996. Filed as Exhibit 10.33 to
         Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.34  Form of Subordinated Note, dated August 12, 1996. Filed as Exhibit
         10.34 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
 *10.35  Fee Letter. Filed as Exhibit 10.35 to Specialty Catalog Corp.'s Form
         S-1, File No. 333-10793.
</TABLE>
 
                                       41
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                DESCRIPTION
 -------                              -----------
 <C>     <S>
  10.36  Net Building Lease dated March 7, 1997 between Campanelli Investment
         Properties and the Registrant for premises located at 525 Campanelli
         Industrial Drive, Brockton, MA.
  10.37  Credit Agreement dated March 12, 1997 between The First National Bank
         of Boston and the Registrant.
  10.38  Amendment No. 2 to Printing Agreement, dated January 1, 1995 between
         Quebecor Printing (USA) Corp. and the Registrant, as amended, dated
         December 31, 1996.
  11.1   Statement Regarding Computation of Per Share Earnings.
 *21.1   Subsidiaries of the Registrant. Filed as Exhibit 21.01 to Specialty
         Catalog Corp.'s Form S-1, File No. 333-10793.
  27.1   Financial Data Schedule (for EDGAR filing purposes only).
</TABLE>
--------
* Indicates exhibit previously filed with the Securities and Exchange
  Commission on the Registrant's registration statement on Form S-1
  (registration No. 333-10793) and is hereby incorporated by reference.
 
                                      42
<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.
 
                                          Specialty Catalog Corporation
 
                                                    /s/ Steven L. Bock
                                          By: _________________________________
                                                      STEVEN L. BOCK
                                               CHAIRMAN AND CHIEF EXECUTIVE
                                                          OFFICER
 
 
                                                   /s/ J. William Heise
                                          By: _________________________________
                                                     J. WILLIAM HEISE
                                              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.
 
             SIGNATURES                        TITLE                 DATE
 
 
         /s/ Stephen L. Bock           Director and Chief       March 24, 1997
_____________________________________   Executive Officer
           STEVEN L. BOCK               (Principal
                                        Executive Officer)
 
        /s/ Stephen M. O'Hara          President                March 24, 1997
_____________________________________
          STEPHEN M. O'HARA
 
        /s/ J. William Heise           Senior Vice              March 24, 1997
_____________________________________   President and Chief
          J. WILLIAM HEISE              Financial Officer
                                        (Principal
                                        Financial and
                                        Accounting Officer)
 
         /s/ Alan S. Cooper            Director                 March 24, 1997
_____________________________________
           ALAN S. COOPER
 
       /s/ Martin E. Franklin          Director                 March 24, 1997
_____________________________________
         MARTIN E. FRANKLIN
 
         /s/ Samuel L. Katz            Director                 March 24, 1997
_____________________________________
           SAMUEL L. KATZ
 
           /s/ Guy Naggar              Director                 March 24, 1997
_____________________________________
             GUY NAGGAR
 
                                      43