<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRESTIGE COSMETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
FLORIDA 2844 59-2224411
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1441 WEST NEWPORT CENTER DRIVE
DEERFIELD BEACH, FLORIDA 33442
(954) 480-9202
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
JACQUES COHEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRESTIGE COSMETICS CORPORATION
1441 WEST NEWPORT CENTER DRIVE
DEERFIELD BEACH, FLORIDA 33442
(954) 480-9202
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
GARY EPSTEIN, ESQ. RUBI FINKELSTEIN, ESQ.
GREENBERG TRAURIG HOFFMAN ORRICK, HERRINGTON & SUTCLIFFE LLP
LIPOFF ROSEN & QUENTEL, P.A. 666 FIFTH AVENUE
1221 BRICKELL AVENUE NEW YORK, NY 10103
MIAMI, FLORIDA 33131 PHONE: (212) 506-5000
PHONE: (305) 579-0500 FAX: (212) 506-5151
FAX: (305) 579-0717
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par value.... 2,645,000 shares(2) $7.00 $18,515,000
- -----------------------------------------------------------------------------------------------------------------
Representative's Warrants(3).... 230,000 warrants $ .001 --
- -----------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value.... 230,000 shares(5)(6) $8.40 $ 1,932,000
- -----------------------------------------------------------------------------------------------------------------
Total...........................
=================================================================================================================
<CAPTION>
================================ ======================
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
- -------------------------------- ----------------------
<S> <C>
Common Stock, $.01 par value.... $5,461.93
- -------------------------------------------------------------------------------
Representative's Warrants(3).... (4)
- ------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value.... $ 569.94
- -----------------------------------------------------------------------------------------------------------------
Total........................... $6,031.87
=================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes 345,000 shares subject to the Underwriters' over-allotment option.
(3) To be issued to the Representative of the Underwriters.
(4) Pursuant to Rule 457(g), no fee is being paid.
(5) Issuable upon exercise of the Representative's Warrants.
(6) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also covers such additional shares as may become issuable as a result of the
anti-dilution provisions contained in the Representative's Warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, JUNE 16, 1998
PROSPECTUS
2,300,000 SHARES
PRESTIGE COSMETICS CORPORATION
COMMON STOCK
------------------------
Prestige Cosmetics Corporation ("Prestige" or the "Company") hereby offers
2,300,000 shares of Common Stock, $.01 par value per share (the "Common Stock").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company and there can be no assurance that such a market
will develop after the Offering or, if developed, that it will be sustained. It
is currently anticipated that the initial public offering price of the Common
Stock will be between $6.00 and $7.00 per share. For information regarding the
factors to be considered in determining the initial public offering price see
"Underwriting." The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market System under the symbol "PRES."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 HEREOF FOR CERTAIN INFORMATION WHICH SHOULD BE
CAREFULLY CONSIDERED BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=============================================================================================================
</TABLE>
(1) Excludes additional compensation payable to Josephthal & Co. Inc., the
representative (the "Representative" or "Josephthal") of the several
underwriters (the "Underwriters"), in the form of a non-accountable expense
allowance. The Company has agreed to sell to the Representative, at a
nominal price, warrants (the "Representative's Warrants") to purchase up to
230,000 shares of Common Stock at an exercise price per share equal to 120%
of the initial public offering price. The Company has also agreed to
indemnify the Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated to be
$625,000, including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
345,000 additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Proceeds to Company will be
$ , $ and $ , respectively.
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by their counsel and to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
Offering without notice and to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock offered hereby will be made
against payment on or about , 1998 at the offices of Josephthal &
Co. Inc., New York, New York.
JOSEPHTHAL & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
[INSIDE FRONT COVER]
[PHOTOS]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THE COMPANY INTENDS TO FURNISH ANNUAL REPORTS TO SHAREHOLDERS CONTAINING
AUDITED FINANCIAL STATEMENTS AND MAKE AVAILABLE QUARTERLY REPORTS AND SUCH OTHER
PERIODIC REPORTS AS IT MAY DETERMINE TO BE APPROPRIATE OR AS MAY BE REQUIRED BY
LAW.
2
<PAGE> 4
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto, appearing elsewhere
in this Prospectus.
The Company intends to acquire (the "Acquisition Transactions"), prior to
the consummation of this Offering, all of the outstanding capital stock of each
of Les Cosmetiques P.C. Inc., a Canadian corporation, Prestige Cosmetics PTY, an
Australian corporation, and Prestige Cosmetics SRL, an Italian corporation, each
of which is currently engaged principally in distributing the Company's products
in foreign markets. Except as otherwise noted, all information in this
Prospectus (i) assumes no exercise of the Underwriters' over-allotment option,
the Representative's Warrants or outstanding options, (ii) gives effect to the
consummation of the Acquisition Transactions, and (iii) gives effect to a
12,906-for-1 stock split effected in June 1998. The fiscal years ended September
30, 1995, 1996 and 1997 are referred to herein as "Fiscal 1995," "Fiscal 1996"
and "Fiscal 1997," respectively. References in this Prospectus to the historical
results of operations of the Company mean the Company's results of operations
without giving effect to the Acquisition Transactions. References in this
Prospectus to the pro forma results of operations of the Company mean the
Company's results of operations giving effect to the Acquisition Transactions.
The Company was incorporated in the State of Florida on February 21, 1980 under
the name Sinequanone Mfg. of America, Inc., changed its name to Lancetti
Cosmetics Corporation in September 1992, and has been doing business as Prestige
Cosmetics since 1985. In June 1998, the Company changed its name to Prestige
Cosmetics Corporation. Except as otherwise noted, all references to the Company
include the foreign companies to be acquired pursuant to the Acquisition
Transactions, Les Cosmetiques P.C. Inc., Prestige Cosmetics PTY and Prestige
Cosmetics SRL. See "Prospectus Summary -- Acquisition Transactions" and Pro
Forma Financial Statements.
THE COMPANY
The Company manufactures, markets and distributes, domestically and
internationally, a full line of cosmetic products under its proprietary
"Prestige"(R) and "Studio Make-Up"(TM) brand names, and, to a lesser extent,
manufactures private label products for cosmetic and other specialty retailers.
The Company believes that it is one of the fastest growing niche cosmetic
companies. The Company's marketing strategy emphasizes distinctive,
high-fashion, premium color cosmetic products that are sold at prices that
compare favorably to those of competitive products. Despite relatively limited
capital resources, the Company has experienced significant growth in revenues
and profits. The Company's historical net sales increased to approximately $20.3
million in Fiscal 1997 from approximately $13.8 million in Fiscal 1996,
representing an increase of approximately 47%, and its historical net income
increased to approximately $1.0 million in Fiscal 1997 from approximately
$84,000 in Fiscal 1996. The Company's pro forma net sales for the year ended
September 30, 1997 were approximately $26.6 million.
The Company distributes its "Prestige" products through a variety of
national and regional "self-select" distribution channels. This type of
distribution channel, in which customers select their own purchases without the
assistance of an in-store demonstrator, includes independent and chain drug
stores, mass volume retailers, and supermarkets. In the United States, the
Company markets and sells its products nationwide, in many large retail chains
including Eckerd Drugs, Thrifty-Payless, Rite-Aid and Wal-Mart stores, as well
as on a promotional basis in Walgreens and CVS. The Company has increased its
distribution in retail outlets from approximately 7,000 outlets in Fiscal 1995,
to 8,300 outlets in Fiscal 1996 and to 10,000 outlets in Fiscal 1997. In
addition, the Company has recently commenced distribution into over 500 SAV-ON
stores. Further, the Company has been realizing significant growth in sales of
its products within existing outlets, including an increase of approximately 25%
in sales of the Company's products within the same Wal-Mart stores during the
12-month period ended January 1998. The Company has successfully completed tests
of its basic "Prestige" line in 30 K-Mart stores and its "Studio Make-Up" line
in 53 Sears stores, and has recently expanded into 100 K-Mart stores and 385
Sears stores. Since completion of testing, the linear footage of the Company's
product
3
<PAGE> 5
space has increased 150% in K-Mart stores and 300% in Sears stores. The Company
has recently received an opening order from Sears of $ .
The Company has operations based in three foreign countries and its
products are currently sold in 28 countries, as compared to five countries in
1995. Internationally, the Company sells its products in leading mass, drug
and/or department store chains, including Shoppers Drug Mart and London Drugs in
Canada, Kaufhof and Karstadt in Germany, Les Galeries Lafayette in France and
Myer and David Jones in Australia. The Company tailors its marketing strategy to
meet the consumer trends in each country in which it sells its products. The
major overseas markets in which the Company currently sells its products include
Canada, Italy, Germany, Spain, Norway, Sweden, Greece, Australia, Hong Kong,
Taiwan, France and Austria. In addition, the Company sells its products in such
emerging markets as Kuwait, Lithuania, Brazil, Korea, Singapore and Argentina.
In June 1997, the Company commenced distribution in Japan and anticipates
additional significant sales in the Far East, including China, where the Company
has recently begun sales of its products in a major retail chain. The Company
believes that its foreign distribution network will enable it to expand in
existing and new international markets and intends to use a portion of the net
proceeds of this Offering for international expansion.
In the United States, the Company believes that it generates retail sales
of $2,500 to $9,000 per linear foot per year on products with suggested retail
price points principally of $2.95 to $4.95, with most of the Company's volume in
the $3,000 to $4,000 range per linear foot. According to syndicated industry
sources, for the 52-week period ended December 7, 1997, sales of the Company's
lip products within domestic drug stores increased approximately 73% on a dollar
basis and 54% on a unit basis and sales of the Company's eye makeup products
within domestic drug stores increased approximately 21% on a dollar basis and
12% on a unit basis.
The drug store industry has been experiencing a consolidation trend. In
addition, there has been significant growth among mass volume retailers. These
large retail chains typically seek vendors with the capability to offer a broad
line of innovative products and to respond quickly to changing trends. The
Company has positioned itself to capitalize on the consolidation trend in the
drug store industry through its ability to (i) manufacture a broad selection of
innovative high quality, competitively priced cosmetic products, (ii) respond
quickly to changes in consumer trends by utilizing its management information
systems which serve to differentiate it from many of its direct niche
competitors and enable it to satisfy the requirements of the large retail
chains, (iii) maintain lower levels of inventory than a number of its
competitors who are dependent on third party manufacturers, and (iv) support a
just-in-time delivery system.
The Company currently manufactures most of its products in a 50,000 square
foot modern facility in Deerfield Beach, Florida, at which the Company
manufactures and/or processes, tests, packages and labels cosmetic products
including lipstick, cosmetic pencils, lip gloss, powder, eyeshadow, blush,
concealers, mascara, foundation and nail lacquer. The Company also owns and
operates distribution facilities in Montreal, Canada, Melbourne, Australia and
Bologna, Italy. The Company intends to commence manufacturing cosmetics at its
Italian facility for the European and Middle Eastern markets thereby greatly
reducing its cost of goods as well as shipping and distribution costs and
allowing the Company to rapidly respond to local customer demands.
The Company's strategy is to (i) strengthen and enhance the Prestige brand
through marketing and advertising, (ii) further penetrate the self-select
distribution channel, (iii) continue to expand in existing and new international
markets, (iv) continue to extend its line of cosmetic products and expand into
alternative markets, (v) continue to improve operating efficiencies, customer
service and product quality by upgrading management information systems and
manufacturing capabilities, and (vi) evaluate possible acquisitions of or
investments in businesses and products that are complementary to those of the
Company.
The Company's principal executive offices are located at 1441 West Newport
Center Drive, Deerfield Beach, Florida 33442, and its telephone number is (954)
480-9202.
4
<PAGE> 6
THE OFFERING
Common Stock offered hereby......... 2,300,000 shares
Common Stock to be outstanding after
the Offering........................ 10,300,000 shares(1)
Use of proceeds..................... For the repayment of indebtedness,
including loans from shareholders,
upgrade of the Company's in-store
displays, expansion of advertising,
marketing and sales efforts,
acquisition of equipment, international
expansion, possible acquisitions,
working capital and other general
corporate purposes. See "Use of
Proceeds."
Risk factors........................ The shares of Common Stock offered
hereby are speculative in nature and
involve a high degree of risk and
immediate substantial dilution and
should not be purchased by investors
who cannot afford the loss of their
entire investment. See "Risk Factors"
and "Dilution."
Proposed Nasdaq National Market
System symbol....................... "PRES"
- ---------------
(1) Does not include (i) 415,000 shares of Common Stock reserved for issuance
upon exercise of stock options, at an exercise price equal to the initial
public offering price, granted under the Company's 1998 Stock Option Plan
(the "Plan"), (ii) 335,000 shares of Common Stock reserved for issuance upon
exercise of stock options which may be granted under the Plan and (iii)
230,000 shares of Common Stock reserved for issuance pursuant to the
Representative's Warrants. See "Management -- 1998 Stock Option Plan" and
"Underwriting."
ACQUISITION TRANSACTIONS
The Company intends to acquire all of the outstanding capital stock of each
of Les Cosmetiques P.C. Inc., a Canadian corporation ("Prestige Canada"),
Prestige Cosmetics PTY, an Australian corporation ("Prestige Australia"), and
Prestige Cosmetics SRL, an Italian corporation ("Prestige Italy" and, together
with Prestige Canada and Prestige Australia, the "Foreign Subsidiaries"), prior
to the consummation of this Offering. Each of the Foreign Subsidiaries is
currently engaged principally in distributing the Company's products in foreign
markets. The Company anticipates that it will acquire all of the outstanding
capital stock of Prestige Canada, Prestige Australia and Prestige Italy in
exchange for the issuance of 123,000, 424,000 and 1,000,000 shares of Common
Stock, respectively. See "Certain Transactions."
5
<PAGE> 7
SUMMARY FINANCIAL DATA
The historical summary financial data set forth below reflect the results
of operations of the Company without giving effect to the Acquisition
Transactions. The pro forma summary financial data set forth below give effect
to the Acquisition Transactions as if they had occurred as of March 31, 1998 or
at the beginning of the periods presented. The pro forma summary statement of
operations data for the year ended September 30, 1997 include the Company's
results of operations for the year ended September 30, 1997, Prestige Canada's
results of operations for the year ended December 31, 1997, Prestige Australia's
results of operations for the year ended June 30, 1997 and Prestige Italy's
results of operations for the year ended December 31, 1997. The pro forma
summary statement of operations data for the six months ended March 31, 1998
include the results of operations of the Company and each of the Foreign
Subsidiaries for the same period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $10,469 $13,771 $20,252 $26,596 $10,817 $7,383 $11,511
Cost of goods sold.......... 5,440 7,042 9,022 10,929 4,610 3,153 4,274
------- ------- ------- ------- ------- ------ -------
Gross profit................ 5,029 6,729 11,230 15,667 6,207 4,230 7,237
Total operating expenses.... 5,237 6,452 9,101 11,852 4,241 3,604 5,737
------- ------- ------- ------- ------- ------ -------
Operating income (loss)..... (208) 277 2,129 3,815 1,966 626 1,500
Other (expense)............. (108) (133) (216) (360) (103) (184) (251)
Provision (benefit) for
income taxes.............. (120) 60 890 1,466 778 185 542
------- ------- ------- ------- ------- ------ -------
Net income (loss)........... $ (196) $ 84 $ 1,023 $ 1,989 $ 1,085 $ 257 $ 707
======= ======= ======= ======= ======= ====== =======
Net income (loss) per
share..................... $ (.03) $ .01 $ .16 $ .25 $ .17 $ .04 $ .09
Weighted average shares
outstanding............... 6,453 6,453 6,453 8,000 6,453 6,453 8,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31, 1998
-------------------------- ----------------------------------------
PRO FORMA AS
1995 1996 1997 ACTUAL PRO FORMA ADJUSTED(1)
------ ------ ------ ------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 4 $ -- $ -- $ -- $ 692 $11,371
Working capital (deficit).......... (10) (900) (395) (251) 338 13,617
Total assets....................... 3,562 6,585 9,036 8,427 19,941(2) 30,620(2)
Total liabilities.................. 3,100 6,039 7,467 6,601 10,000 7,400
Total shareholders' equity......... 462 546 1,569 1,826 9,941 23,220
</TABLE>
- ---------------
(1) Gives effect to the sale of the 2,300,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $6.50 and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
(2) Includes $7,381,000 of goodwill relating to acquisitions of the Foreign
Subsidiaries.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered by this Prospectus.
STRONG COMPETITION
The Company faces significant competition in the marketing and sale of its
products. The Company's products compete for consumer recognition and shelf
space with competitors who have longer operating histories, significantly
greater financial, technical, manufacturing, distribution and marketing
resources, significantly greater name recognition and substantially greater
customer bases than the Company. The Company's principal competitors in the
industry include large multi-national companies such as Revlon, Inc., L'Oreal
Groupe, The Procter & Gamble Company, and smaller companies such as Del
Laboratories, Inc., Renaissance Cosmetics, Inc. and Bonne Bell Company. The
cosmetic industry is characterized by frequent introductions of new products,
accompanied by substantial promotional campaigns. Many of these competitors may
be able to respond more quickly to new or emerging changes in consumer
preferences and demands and to devote greater financial resources to the
development, promotion and sale of their products than the Company. There can be
no assurance that the Company's current or potential competitors will not
develop products comparable or superior to those developed by the Company or
adapt more quickly than the Company to evolving industry trends or changing
customer preferences.
Brand recognition, together with product quality, performance and price and
the extent to which consumers are educated on product benefits, have a marked
influence on consumers' choices among competing products and brands.
Advertising, promotion, merchandising and packaging, as well as the timing of
new product introductions and line extensions, also have a significant impact on
buying decisions, and the structure and quality of the sales force affect
product reception, in-store position, permanent display space and inventory
levels in retail outlets.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially and adversely affect the
Company's business, results of operations and financial condition. The Company's
products also compete with similar products sold door-to-door or through mail
order or telemarketing by representatives of direct sales companies. In
addition, as the Company expands internationally, it may face new competition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, or that competitive pressures faced by
the Company will not have a material adverse effect on its business, results of
operations and financial condition.
DEPENDENCE ON CUSTOMERS
As is typical in the cosmetic industry, the Company does not have long-term
or exclusive contracts with any of its customers and sells products pursuant to
purchase orders placed from time to time in the ordinary course of business. The
Company is dependent on a limited number of customers for a significant portion
of its revenues. During Fiscal 1996, Thrifty-Payless was the Company's single
largest customer and accounted for approximately 6% of the Company's historical
net sales. During Fiscal 1997, Rite-Aid, Eckerd Drugs and Wal-Mart were the
Company's three largest customers, and accounted for approximately 13%, 6%, and
6%, respectively, of the Company's historical net sales. During the six months
ended March 31, 1998, Wal-Mart and Rite-Aid accounted for approximately 11% and
7%, respectively, of the Company's historical net sales. No single customer
accounted for more than 10% of the Company's pro forma net sales during the
years ended September 30, 1996 or 1997 or the six months ended March 31, 1998.
The loss of any of the Company's significant customers, especially Rite-Aid,
Eckerd Drugs or Wal-Mart, or a decrease in orders from any such customers, could
have a material adverse effect on the Company and its business. There can be no
assurance that sales to any of these customers will continue at historic levels,
if at all. See "Business -- Customers."
7
<PAGE> 9
RISKS OF INTEGRATION
The Foreign Subsidiaries have been operating as separate legal entities and
there can be no assurance that the Company will be able to integrate the
operations of these businesses successfully or institute the necessary
Company-wide systems and procedures to manage the combined enterprise
profitably. The Foreign Subsidiaries use different strategies and technologies
and target different marketplaces. These differences increase the risk inherent
in successfully completing such integration. The inability of the Company to
integrate the Foreign Subsidiaries successfully would have a material adverse
effect on the Company's business, results of operations and financial condition.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS
The Company is currently dependent on a sole source manufacturer for all of
its pencil products, which account for approximately 45% of its net sales. The
Company does not maintain a written agreement with such pencil manufacturer and,
accordingly, such manufacturer could terminate its relationship at any time. The
Company is dependent on the ability of its pencil manufacturer to adhere to the
Company's product, price and quality specifications and scheduling requirements.
The Company's operations require it to have production orders in place in
advance of shipment to the Company's warehouses (product deliveries typically
take 60 days). Any delay by such manufacturer in supplying finished pencil
products to the Company would adversely affect the Company's ability to deliver
products on a timely and competitive basis. In addition, raw materials necessary
for the manufacture of the Company's products are purchased from third-party
suppliers. The Company does not maintain agreements with any such suppliers and
is subject to risks of periodic price fluctuations, shortages and delays. Delays
in the delivery of raw materials, components or packaging products from
suppliers could have a material adverse effect on the financial condition and
results of operations of the Company. See "Business -- Manufacturing and Related
Operations." Any material interruption in the availability or significant price
increases for raw materials would have a material adverse effect on the
Company's operating margins. See "Business -- Raw Materials; Suppliers."
RELIANCE ON SINGLE MANUFACTURING FACILITY
The Company manufactures substantially all of its products, except for its
pencils, at its Florida facility. The Company's manufacturing operations use
certain custom designed equipment which, if damaged or otherwise rendered
inoperable or unavailable, could result in the disruption of the Company's
manufacturing operations. Any extended interruption of operations at the
Company's manufacturing facility could have a material adverse effect on the
business of the Company. See "Business -- Manufacturing and Related Operations."
MANAGEMENT OF GROWTH
The Company believes that expansion of its operations will be required in
order to address potential market opportunities. Such growth may place
substantial strain on the Company's management, operational and financial
resources and systems. To manage its growth, the Company must implement, improve
and effectively utilize its operational, management, marketing and financial
systems and expand, train and manage its employees. In addition, it may become
necessary for the Company to increase the capacity of its software, hardware and
telecommunications systems on short notice. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations or
that the Company's systems, procedures or controls will be adequate to support
the Company's operations. Any failure of management to effectively manage the
Company's growth would have a material adverse effect on the Company's business,
results of operations and financial condition.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
The Company has operations based in three foreign countries and its
products are currently sold in 28 countries. The Company intends to continue to
expand internationally and expects that its international operations will be
subject to most of the risks inherent in its business generally. In addition,
the Company has
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<PAGE> 10
been and will continue to be subject to risks inherent in doing business in
international markets, such as changes in regulatory requirements, tariffs,
import quotas and other trade barriers, fluctuations in currency exchange rates,
potentially adverse tax consequences, costs associated with the shipping of the
Company's products, longer payment cycles and difficulties in collecting
accounts receivable, political instability and difficulties in managing or
overseeing foreign operations. The Company's results of operations and the value
of its foreign assets are affected by fluctuations in foreign currency exchange
rates, which may favorably or adversely affect reported earnings and,
accordingly, the comparability of period-to-period results of operations. The
Company incurred a foreign exchange loss of $161,285 for Fiscal 1995 primarily
as a result of unfavorable currency exchange rates. The Company currently does
not engage in any hedging transactions to reduce the risks associated with
fluctuations in foreign currency exchange rates. There can be no assurance that
one or more of such factors would not have a material adverse effect on the
Company's current or future international operations and, consequently, on the
Company's business, results of operations and financial condition.
RELIANCE ON NEW PRODUCT DEVELOPMENT AND CONSUMER TRENDS
The Company's ability to anticipate changes in technologies, markets and
industry trends and to successfully develop and introduce new and enhanced
products on a timely basis will be a critical factor in its ability to grow and
remain competitive. There can be no assurance that new products will be
completed or that such products can be marketed successfully. In addition, the
anticipated development schedules for new or improved products are inherently
difficult to predict and are subject to change as a result of shifting
priorities in response to customers' requirements and competitors' new product
introductions. The Company expects to devote substantial resources, including
expenditures aggregating approximately $1.0 million, to product development
efforts over the next two years. The costs of such efforts will be expensed as
they are incurred, notwithstanding that the benefits, if any, from such efforts
(in the form of increased revenues or decreased product costs) may not be
reflected until subsequent periods. There can be no assurance that any new
products introduced by the Company will achieve any significant degree of market
acceptance or that any acceptance that is achieved will be sustained for any
significant amount of time. The failure of new product lines or product
innovations to achieve or sustain market acceptance could have a material
adverse effect on the Company's business, results of operations and financial
condition.
In addition, the Company expects that the formulation of its cosmetics and
other products will be modified from time to time as a result of the Company's
ongoing product development and testing programs. As a result of such
modifications, products that the Company produces in the future may differ from
those that were the subject of earlier research and testing. In that event, the
Company may be required to make significant additional expenditures on
developing and testing of these new formulations. Furthermore, there can be no
assurance that future product formulations will be commercially viable.
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have been, and continue to be,
substantially upgraded to provide comprehensive order processing, production and
accounting support for the Company's business. Many of the Company's key
accounts utilize the electronic data interchange ("EDI") system whereby a retail
store or distribution center automatically and electronically orders additional
Prestige products from the Company to replace products it has sold. Certain
other large retail chains also require that the Company utilize their
computerized order and reorder systems. The Company recently spent approximately
$110,000 on upgrading the Company's management information systems and expects
to continue upgrading these systems in the future. Such costs included the cost
of software updates required to allow the systems to process data attributable
to the year 2000 and thereafter. The Company believes that its management
information systems are year 2000 compliant. The Company has determined that no
additional expenditures will be required to upgrade the computer systems of the
Foreign Subsidiaries for year 2000 solutions. The Company's major customers have
informed the Company that they are year 2000 compliant. There can be no
assurance that the Company's current management information systems will be
sufficient or effective, or that suppliers will complete compatible technology
upgrades, or that significant further investments in management information
systems will not be necessary.
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<PAGE> 11
MERCHANDISE RETURNS AND REFUNDS
In general, the cosmetics industry in the United States has a flexible
return policy. Typically, the Company is not contractually obligated to accept
returns. However, the Company emphasizes customer service and may accept returns
in order to assure customer satisfaction. The Company believes that its return
policy is standard for the cosmetic industry in the United States. Refunds and
merchandise credits issued under the Company's return policy in Fiscal 1995,
1996, 1997 and the six months ended March 31, 1998 were approximately, 8%, 7%,
8% and 4%, respectively, of historical net sales. The Company makes allowances
in its financial statements for anticipated merchandise returns and refunds
based on historical return rates. While the Company maintains reserves for
product returns which it considers adequate, the possibility exists that the
Company could experience returns at a rate significantly exceeding its
historical levels, which could have a material adverse impact on the Company's
business, results of operations and financial condition.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated significantly from quarter
to quarter, in part because of the timing of promotions, changes in product
colors, the addition of new customers and changes in existing customer buying
patterns. The Company updates the colors in its product lines annually and
supplements its product lines seasonally with promotional colors which causes
increases in revenues and returns in quarters in which the updates occur. The
Company's operating results also vary significantly due to the timing of
customer reset orders, pursuant to which a customer places a large order to
replace all of its displays of the Company's merchandise. In addition, the
consolidation trend in the drug store industry may result in gains or losses of
outlets in which the Company's products are sold. The Company's operating
expenses also fluctuate due to expenditures for the purchase of new display
units for the Company's products. The Company's operating results for any
particular quarter are not necessarily indicative of results for any future
period or for the full year.
RISKS RELATING TO INDEBTEDNESS
As of March 31, 1998, on a pro forma basis, the Company had outstanding
indebtedness of approximately $4.8 million, including approximately $2.4 million
under a line of credit with First Union National Bank (the "Bank") which is due
on demand, and $1.4 million under notes payable to Jacques Cohen and Gabriel
Cohen, principal shareholders, executive officers and directors of the Company
(the "Shareholder Notes") which are also due on demand. As of March 31, 1998,
the outstanding indebtedness of Prestige Italy included unsecured loans of
approximately $264,261 and $171,428 maturing in November 2000 and October 2001,
respectively, and approximately $169,000 under an unsecured line of credit. As
of March 31, 1998, the outstanding indebtedness of Prestige Australia included
approximately $151,659 under an unsecured line of credit, which is due upon
demand. In addition, the Company and Jacques Cohen and Gabriel Cohen,
individually, have guaranteed a bank loan of C&C General Partnership, an
affiliate of the Company, of which approximately $1.1 million was outstanding as
of March 31, 1998. The Company repaid an aggregate of approximately $180,000 in
principal amount of the Shareholder Notes in April and May 1998. Substantially
all of the Company's assets in the United States are pledged to the Bank as
collateral and the Company is subject to restrictions on the incurrence of
additional indebtedness, which could, under certain circumstances, limit the
Company's ability to obtain financing in the future for working capital needs,
capital expenditures and possible acquisitions. In addition, the agreements with
the Bank subject the Company to various covenants which, among other things: (i)
require the Company to maintain certain levels of net worth and minimum
financial ratios, (ii) restrict the payment by the Company of dividends or other
distributions to shareholders and (iii) prohibit the sale by the Company of all
or substantially all of its assets. At September 30, 1997, the Company was not
in compliance with certain covenants relating to the maintenance of minimum
financial ratios. In January 1998, the Bank waived such non-compliance. Although
the Company was in compliance with such covenants at March 31, 1998, there can
be no assurance that the Company will be able to comply with the terms of its
financing agreements in the future. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
10
<PAGE> 12
TRADEMARKS AND PROPRIETARY RIGHTS; RISK OF THIRD PARTY CLAIMS FOR INFRINGEMENT
The Company holds United States trademark registrations for the "Prestige"
and the "Wear Ever" names, and has filed for trademark registrations for certain
other names, including "Prestige Studio Make-Up," "Studio Make-Up," "Quick
Stick," "Lip Loofa," "Secret Agent," "Daily Dose," "Extreme Cover," "Everyday
Cover," "Spot Check" and "Complexion Equalizer." In addition, the Company holds
trademark registrations for the "Prestige" name in a number of foreign
countries. The Company also uses other names for which it has not applied for
registration. The Company believes that its rights in these names is a
significant part of the Company's business and that its ability to create demand
for its products is dependent to a large extent on its ability to exploit its
trademarks. There can be no assurance as to the breadth or degree of protection
that trademarks afford the Company, that the Company's marks are in fact of
value, that such marks do not or will not violate the proprietary rights of
others, or that any trademark applications will result in registered trademarks
or that trademarks will not be invalidated if challenged. In addition, there can
be no assurance that the Company will be able to secure adequate protection for
its trademarks in foreign countries other than those in which the Company
already has registered trademark rights. Many foreign countries have a "first to
file" trademark registration system and thus the Company may be prevented from
registering its marks in certain countries if third parties have previously
filed applications to register or have registered the same or similar markets.
It is possible that competitors of the Company or others will adopt product or
service names similar to the Company's, thereby impeding the Company's ability
to build brand identity and possibly leading to customer confusion. The
inability of the Company to protect the name of its marks adequately would have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company is not aware of independent claims or other
challenges to any of the Company's trademarks. See "Business -- Proprietary
Rights and Trademarks."
The Company's success and ability to compete depend in large part on the
protection of its proprietary processes and formulas. The Company seeks to
protect such processes through confidentiality agreements with certain key
employees who have access to such processes. However, there can be no assurance
that such agreements will provide meaningful protection for the Company's trade
secrets, know-how or other proprietary information in the event of unauthorized
use or disclosure. Any such unauthorized disclosure or use could have a material
adverse effect on the Company.
GOVERNMENT REGULATION
The manufacturing, processing, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Federal Trade Commission (the "FTC"), the Food and Drug
Administration (the "FDA"), the Consumer Product Safety Commission and the
Occupational Safety and Health Administration as well as by various other
federal, state and local regulatory authorities. The Company is also subject to
foreign consumer laws in the foreign countries where its products are sold.
Compliance with federal, state, local and foreign laws and regulations has not
had a material adverse effect on the Company to date. Nonetheless, federal,
state and local regulations in the United States that are designed to protect
consumers have had, and can be expected to have, an impact on product claims,
production methods, product content, and packaging. In addition, any expansion
by the Company of its operations to produce cosmetic and related products that
include over-the-counter drug ingredients would result in the Company becoming
subject to additional FDA regulation as well as a higher degree of inspection
and greater burden of regulatory compliance than currently exist. The Company
believes that it is in compliance with all governmental laws and regulations and
maintains all permits and licenses required for its operations. Nevertheless,
there can be no assurance that the Company will continue to be in compliance
with current laws and regulations or that the Company will be able to comply
with any future laws and regulations and licensing requirements. Failure by the
Company to comply with applicable laws and regulations could subject the Company
to civil remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions.
The failure by the Company to comply with current or future environmental
regulations could result in the imposition of fines on the Company, suspension
of production, or a cessation of operations. Compliance with such regulations
could require the Company to acquire costly equipment or to incur other
significant
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<PAGE> 13
expenses. The Company believes that it is in substantial compliance with
applicable federal, state and local rules and regulations regarding
environmental issues. There are no significant capital expenditures for
environmental control matters anticipated in the current year or expected in the
near future. See "Business -- Government Regulation."
PRODUCT LIABILITY AND INSURANCE
As a manufacturer and marketer of cosmetic products, the Company is subject
to product liability claims from consumers. The nature and use of cosmetic
products could give rise to product liability claims if one or more users of the
Company's products were to suffer adverse reactions following their use of the
products. Such reactions could be caused by various factors, many of which are
beyond the Company's control, including allergic sensitivity and the possibility
of tampering with the Company's products. In the event of such an occurrence,
the Company could incur substantial litigation expense, adverse publicity and a
loss of sales. To date, the Company has never been subject to any product
liability claims. The Company maintains product liability insurance in the
amount of $1.0 million per occurrence (with an annual limit of $2.0 million),
which it believes is adequate for the types of products currently offered by the
Company, and umbrella insurance in the amount of $4.0 million per occurrence.
The Foreign Subsidiaries do not maintain separate product liability insurance.
There can be no assurance, however, that such insurance will be sufficient to
cover potential claims or that adequate levels of coverage will be available in
the future at a reasonable cost. In the event of a partially or completely
uninsured successful claim against the Company, the Company's financial
condition and reputation would be materially affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends, in significant part, upon the
continued service of its senior management and other key personnel, including
Jacques Cohen, Chairman of the Board, President and its Chief Executive Officer,
Gabriel Cohen, its Vice President, Thomas Winarick, its Executive Vice
President, Marc Feller, its Chief Financial Officer, Giorgio Ventura, President
of Prestige Italy and Chris Dow, President of Prestige Australia. The Company
has entered into employment agreements with each of Jacques Cohen, Gabriel
Cohen, Thomas Winarick, Marc Feller, Chris Dow and Giorgio Ventura. The Company
intends to purchase "key man" life insurance with respect to Jacques Cohen, in
the amount of $1.0 million. However, the loss of the services of one or more of
these executive officers or other key employees could have a material adverse
effect on the Company, and there can be no assurance that the Company will be
able to retain its key personnel. See "Management -- Executive Officers and
Directors."
The Company's future success also depends on its continuing ability to
attract and retain highly qualified financial, technical and managerial
personnel. Competition for such personnel is intense. There can be no assurance
that the Company will be able to attract or retain a sufficient number of highly
qualified employees in the future. If the Company is unable to hire and retain
personnel in key positions, the Company's business, results of operations and
financial condition could be materially adversely affected.
BENEFITS TO RELATED PARTIES
The Company intends to use approximately $1.5 million of the net proceeds
of this Offering to reduce amounts outstanding under its line of credit with the
Bank, which will reduce the personal liability of Messrs. Jacques Cohen and
Gabriel Cohen under their personal guarantees. The Company will seek to release
Messrs. Jacques Cohen and Gabriel Cohen from their personal guarantees following
this Offering. The Company also intends to use a portion of the net proceeds of
the Offering to repay the remaining amounts due under the Shareholder Notes,
including any accrued interest thereon. "Use of Proceeds" and "Certain
Transactions."
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of this Offering, Jacques Cohen and Gabriel Cohen will
beneficially own approximately 63% of the outstanding Common Stock
(approximately 61% of the outstanding Common Stock assuming full
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<PAGE> 14
exercise of the Underwriters' over-allotment option). As a result, Jacques Cohen
and Gabriel Cohen, if they act as a group, will be able to elect the entire
Board of Directors of the Company and to control the vote on all other matters
submitted to a vote of the Company's shareholders, including approval of
significant corporate transactions, including increasing the authorized capital,
dissolving or merging the Company and selling the assets of the Company. Control
by Jacques Cohen and Gabriel Cohen may discourage certain types of transactions
involving an actual or potential change in control of the Company including
transactions in which the shareholders might receive a premium for their shares
above prevailing market prices. See "Management," "Principal Shareholders" and
"Description of Capital Stock."
MANAGEMENT'S DISCRETION AS TO USE OF NET PROCEEDS
The Company has designated specific uses for a substantial portion of the
net proceeds from the sale by the Company of the Common Stock offered hereby.
The Board of Directors and management of the Company, however, will have
discretion and some flexibility in applying the net proceeds of this Offering.
In addition, a significant portion of such net proceeds has been allocated to
working capital and general corporate purposes. Accordingly, the Company will
have broad discretion as to the application of such proceeds. The failure of
management to apply such net proceeds effectively could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Use of Proceeds."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this Offering. The initial public
offering price will be determined by negotiation between the Company and the
Representative based upon several factors and may not be indicative of future
market prices. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The trading price
of the Company's Common Stock could be subject to fluctuations in response to
quarterly variations in results of operations, announcements of technological
innovations or new services or products by the Company or its competitors,
changes in financial estimates by securities analysts, the operating and stock
price performance of other companies and other events or factors. In addition,
the stock market has experienced volatility that often has been unrelated to the
operating performance of companies in the cosmetic industry. These broad market
fluctuations may adversely affect the trading price of the Common Stock. See
"Underwriting."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS UNDER FLORIDA LAW AND THE COMPANY'S
CHARTER AND BYLAWS
The Company is organized under the laws of the State of Florida. Certain
provisions of Florida law may have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, certain provisions
of the Company's Amended and Restated Articles of Incorporation (the "Articles")
and Amended and Restated Bylaws (the "Bylaws") may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder might consider in its best interest. The Articles will authorize the
Board to determine the rights, preferences, privileges and restrictions of
unissued series of preferred stock and to fix the number of shares of any series
of preferred stock and the designation of any such series, without any vote or
action by the Company's shareholders. Thus, the Board can authorize and issue
shares of preferred stock with voting or conversion rights that could adversely
affect the voting or other rights of holders of the Common Stock. In addition,
the issuance of preferred stock may have the effect of delaying, deferring or
preventing a change of control of the Company, since the terms of the preferred
stock that might be issued could potentially prohibit the Company's consummation
of any merger, reorganization, sale of substantially all of its assets,
liquidation or other extraordinary corporate transaction without the approval of
the holders of the outstanding shares of the Common Stock. See "Description of
Capital Stock -- Anti-Takeover Effects of Florida Law" and "-- Certain Effects
of Authorized but Unissued Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; FUTURE EQUITY ISSUANCES
Sales of substantial amounts of Common Stock in the public market following
this Offering, or the perception that such sales will occur, could have an
adverse effect on the market price of the Company's
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<PAGE> 15
Common Stock. After the completion of this Offering, 10,300,000 shares of Common
Stock will be outstanding. Of such shares, only the 2,300,000 shares sold
pursuant to this Offering will be tradable in the public market without
restriction. The remaining 8,000,000 shares of Common Stock to be outstanding
after the Offering are "restricted securities" within the meaning of Rule 144
("Rule 144") under the Securities Act of 1933, as amended (the "Securities
Act"), and may not be publicly resold, except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144. Beginning 90 days after the
date of this Prospectus, 6,453,000 of these shares of Common Stock will be
eligible for resale in the public market, subject to certain volume, timing and
other requirements of Rule 144 and to the lock-up agreements. See "Shares
Eligible for Future Sale -- Lock-Up Agreements and Registration of Options."
The Company and each of its existing shareholders has agreed not to offer,
sell or contract to sell or otherwise dispose of any Common Stock for a period
of nine months after the date of this Prospectus without the prior written
consent of Josephthal. Sales of substantial amounts of Common Stock in the
public market following this Offering could have an adverse effect on the market
price of the Common Stock.
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of shares of Common Stock offered hereby may be sold
to customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of shares of Common Stock through or with
the Representative. Although it has no obligation to do so, the Representative
intends to make a market in the Common Stock and may otherwise affect
transactions in the Common Stock. If the Representative participates in such
market, the Representative may influence the market, if one develops, for the
Common Stock. Such market-making activity may be discontinued at any time.
Moreover, if the Representative sells the securities issuable upon exercise of
the Representative's Warrants, it may be required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), to temporarily suspend its
market-making activities. The prices and liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Representative's
participation in such market. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in this Offering will incur an immediate,
substantial dilution, assuming an initial public offering price of $6.50 per
share, of $4.96 (76%) in the pro forma net tangible book value per share of the
Common Stock from the initial public offering price. See "Dilution."
NO DIVIDENDS
Although the Company has previously paid dividends to shareholders, the
Company does not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends on its Common Stock is prohibited by the terms of the
Company's financing agreements with the Bank. See "Dividend Policy."
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,300,000 shares of Common Stock offered hereby, assuming an initial public
offering price of $6.50 per share, are estimated to be $13,278,500 ($15,330,388
if the Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company currently intends to use the estimated net proceeds from this
Offering approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE DOLLAR PERCENTAGE OF NET
APPLICATION OF PROCEEDS AMOUNT PROCEEDS
- ----------------------- ------------------ -----------------
<S> <C> <C>
Repayment of indebtedness (1)....................... $ 2,600,000 19.6%
Upgrade of in-store displays (2).................... 2,500,000 18.8
Advertising, marketing and sales (3)................ 2,500,000 18.8
Acquisition of equipment (4)........................ 1,000,000 7.5
International expansion (5)......................... 500,000 3.8
Working capital (6)................................. 4,178,500 31.5
----------- -----
Total use of proceeds..................... $13,278,500 100.0%
=========== =====
</TABLE>
- ---------------
(1) The Company intends to reduce the amount outstanding under its line of
credit with the Bank by approximately $1.5 million. Borrowings under the
line of credit vary daily based on the Company's working capital
requirements. At March 31, 1998, approximately $2.4 million was outstanding
under the line of credit. Interest accrues on advances made under the line
of credit at the prime rate established by the Bank (8.5% at March 31,
1998). Borrowings under the line of credit are due on demand. Advances under
the line of credit have been used to finance increased levels of
inventories, equipment, upgrades in MIS systems, and accounts receivable.
The Company also intends to repay all remaining amounts due under the
Shareholder Notes. At March 31, 1998, approximately $1.4 million was due and
payable under the Shareholder Notes, of which an aggregate of approximately
$180,000 was repaid in April and May 1998. The Shareholder Notes bore
interest at a rate of 9% per annum during Fiscal 1996 and 10% per annum
during Fiscal 1997, and currently bear interest at the rate of 10% per annum
for the year ended September 30, 1998. Amounts due under the Shareholder
Notes are due on demand. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources" and "Certain Transactions."
(2) Represents anticipated costs associated with the purchase and installation
of approximately 7,500 new in-store displays.
(3) Represents amounts to be used in connection with the expansion of worldwide
advertising, marketing and sales activities, including increases in
advertising in consumer magazines and areas other than print and preparation
of sales materials. See "Business -- Business Strategy" and "-- Marketing
and Sales."
(4) Represents anticipated costs associated with purchasing manufacturing
equipment for further automation at the Company's Florida facility and
manufacturing equipment for its Italian manufacturing facility.
(5) Represents anticipated costs to expand the Company's distribution
capabilities internationally through additional service personnel and
worldwide trade shows.
(6) Working capital may be used, among other things, to pay for inventories,
product development, possible acquisitions and other general corporate
purposes.
From time to time, the Company expects to evaluate possible acquisitions of
or investments in businesses, products and technologies that are complementary
to those of the Company, for which a portion of the net proceeds of this
Offering may be used. The Company presently has no commitments or understandings
for any such acquisitions, and is not presently engaged in any negotiations for
any such acquisitions, and no portion of the net proceeds has been allocated for
any specific acquisition.
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<PAGE> 17
Based on currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this Offering, together
with projected cash flow from operations and available cash resources, including
its line of credit, will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
Offering. In the event that the Company's plans change (due to changes in market
conditions, competitive factors or new or different business opportunities that
may become available in the future), its assumptions change or prove to be
inaccurate or if the proceeds of this Offering or cash flow prove to be
insufficient to implement the Company's proposed expansion strategy (due to
unanticipated expenses, operating difficulties or otherwise), the Company may
find it necessary to reallocate a portion of the proceeds within the
above-described categories, use proceeds for other purposes, seek additional
financing or curtail its expansion activities. There can be no assurance that
additional financing, if required, will be available to the Company on
commercially reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
DIVIDEND POLICY
Although the Company has previously paid dividends to shareholders, the
Company does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. In addition, the
Company's line of credit agreement with the Bank contains covenants that
prohibit the Company from paying dividends.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
Acquisition Transactions, and (iii) on a pro forma as adjusted basis to give
effect to (a) the Acquisition Transactions and (b) the sale of the 2,300,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $6.50 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
the Company's Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ -------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term obligations................................... $3,899 $ 4,444 $ 1,844
====== ======= =======
Long-term obligations.................................... $ 42 $ 330 $ 330
------ ------- -------
Shareholders' equity(1):
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding actual, pro
forma or pro forma as adjusted......................... -- -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 6,453,000 shares actual; 8,000,000 shares
pro forma; 10,300,000 shares pro forma as adjusted
issued and outstanding................................. 65 80 103
Additional paid-in capital............................... -- 7,854 21,110
Foreign currency translation adjustment.................. -- (1) (1)
Retained earnings........................................ 1,761 2,008 2,008
------ ------- -------
Total shareholders' equity.......................... 1,826 9,941 23,220
------ ------- -------
Total capitalization........................... $1,868 $10,271 $23,550
====== ======= =======
</TABLE>
- ---------------
(1) Does not include (i) 415,000 shares of Common Stock reserved for issuance
upon exercise of stock options, at an exercise price equal to the initial
public offering price, granted under the Plan, (ii) 335,000 shares of Common
Stock reserved for issuance upon exercise of options which may be granted
under the Plan, and (iii) 230,000 shares of Common Stock reserved for
issuance pursuant to the Representative's Warrants. See "Management -- 1998
Stock Option Plan," "Description of Capital Stock -- Warrants and Options"
and "Underwriting."
17
<PAGE> 19
DILUTION
The difference between the initial public offering price per share and the
pro forma net tangible book value per share of Common Stock after this Offering
constitutes the dilution to investors in this Offering. Net tangible book value
per share of Common Stock on any given date is determined by dividing the net
tangible book value of the Company (total tangible assets less total
liabilities) on that date, by the number of shares of Common Stock. The pro
forma net tangible book value of the Company as of March 31, 1998, was
$2,560,000, or $.32 per share of Common Stock, after giving effect to the
Acquisition Transactions. After giving effect to the sale of the 2,300,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $6.50 per share, after deducting the estimated underwriting discount
and estimated expenses to be paid by the Company, and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of March 31, 1998 would have been $15,839,000, or $1.54 per share.
This represents an immediate increase in such pro forma net tangible book value
of $1.22 per share to existing stockholders and an immediate dilution of $4.96
per share to new investors purchasing shares in this Offering. The following
table summarizes, on a pro forma basis as of March 31, 1998, this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $6.50
-----
Pro forma net tangible book value per share at March 31,
1998...................................................... $ .32
-----
Increase per share attributable to new investors............ 1.22
-----
Pro forma net tangible book value per share as of March 31,
1998 after giving effect to Offering...................... 1.54
-----
Dilution per share to new investors......................... $4.96
=====
</TABLE>
The following table summarizes as of March 31, 1998, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price paid per share by existing shareholders and by the
purchasers of the shares of Common Stock offered hereby at an assumed initial
offering price of $6.50 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 8,000,000 77.7% $ 131,000 0.9% $ .02
New investors............... 2,300,000 22.3% 14,950,000 99.1% $ 6.50
---------- ----- ----------- ------
Total............. 10,300,000 100.0% $15,081,000 100.0%
========== ===== =========== ======
</TABLE>
The above computations do not include (i) 415,000 shares of Common Stock
reserved for issuance upon exercise of stock options, at an exercise price equal
to the initial public offering price, granted under the Plan, (ii) 335,000
shares of Common Stock reserved for issuance upon exercise of options which may
be granted under the Plan and (iii) 230,000 shares of Common Stock issuable upon
the exercise of the Representative's Warrants. See "Management -- 1998 Stock
Option Plan," "Description of Capital Stock -- Warrants and Options" and
"Underwriting."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following table sets forth certain historical and pro forma selected
financial data of the Company as of and for the dates indicated. The historical
selected financial data as of September 30, 1996 and 1997, and for the years
ended September 30, 1995, 1996 and 1997, have been derived from the financial
statements that have been audited by Arthur Andersen LLP, independent certified
public accountants, and are included elsewhere herein. The historical selected
financial data as of September 30, 1993, 1994 and 1995, and for the years ended
September 30, 1993 and 1994, have been derived from the Company's financial
statements that have been audited by Goldstein Lewin & Co., independent
certified public accountants, and are not included herein. The historical
selected financial data as of and for the six months ended March 31, 1997 and
1998 have been derived from the Company's unaudited interim financial statements
included elsewhere herein, and in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. Results for the six
months ended March 31, 1998 are not necessarily indicative of the results for
the entire year. The pro forma selected financial data have been derived from
the Company's unaudited pro forma financial statements included elsewhere
herein. The pro forma selected financial data give effect to the Acquisition
Transactions as though such transactions occurred as of March 31, 1998 or the
beginning of the periods presented. The pro forma summary statement of
operations data for the year ended September 30, 1997 include the Company's
results of operations for the year ended September 30, 1997, Prestige Canada's
results of operations for the year ended December 31, 1997, Prestige Australia's
results of operations for the year ended June 30, 1997 and Prestige Italy's
results of operations for the year ended December 31, 1997. The pro forma
selected statement of operations data for the six months ended March 31, 1998
include the results of operations of the Company and each of the Foreign
Subsidiaries for the same period. The selected financial data set forth below is
qualified by reference to and should be read in conjunction with the Company's
financial statements, related notes and other financial information included in
this Prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $10,275 $10,752 $10,469 $13,771 $20,252 $26,596 $10,817 $7,383 $11,511
Cost of goods sold....... 5,079 4,981 5,440 7,042 9,022 10,929 4,610 3,153 4,274
------- ------- ------- ------- ------- ------- ------- ------ -------
Gross profit............. 5,196 5,771 5,029 6,729 11,230 15,667 6,207 4,230 7,237
Operating expenses:
Selling, general and
administrative
expenses............. 3,264 3,779 4,183 5,785 7,311 10,227 3,858 3,236 5,023
Shareholders'
compensation......... 1,584 1,844 705 505 1,513 789 274 256 341
Provision for doubtful
accounts............. -- -- 72 115 220 221 82 57 57
Depreciation and
amortization......... -- -- 144 174 256 768 117 94 348
Foreign exchange (gain)
loss................. -- -- 133 (127) (199) (153) (90) (39) (32)
------- ------- ------- ------- ------- ------- ------- ------ -------
Total operating
expenses...... 4,848 5,623 5,237 6,452 9,101 11,852 4,241 3,604 5,737
------- ------- ------- ------- ------- ------- ------- ------ -------
Operating income
(loss)................. 348 148 (208) 277 2,129 3,815 1,966 626 1,500
Other (expense).......... -- (13) (108) (133) (216) (360) (103) (184) (251)
Provision (benefit) for
income taxes........... 139 55 (120) 60 890 1,466 778 185 542
------- ------- ------- ------- ------- ------- ------- ------ -------
Net income (loss)........ $ 209 $ 80 $ (196) $ 84 $ 1,023 $ 1,989 $ 1,085 $ 257 $ 707
======= ======= ======= ======= ======= ======= ======= ====== =======
Net income (loss) per
share.................. $ .03 $ .01 $ (.03) $ .01 $ .16 $ .25 $ .17 $ .04 $ .09
Weighted average shares
outstanding............ 6,453 6,453 6,453 6,453 6,453 8,000 6,453 6,453 8,000
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31, 1998
------------------------------------------ ---------------------------------
PRO PRO FORMA
1993 1994 1995 1996 1997 ACTUAL FORMA AS ADJUSTED(1)
------ ------ ------ ------ ------ ------ ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 25 $ -- $ 4 $ -- $ -- $ -- $ 692 $11,371
Working capital (deficit)........... 224 671 (10) (900) (395) (251) 338 13,617
Total assets........................ 3,910 3,617 3,562 6,585 9,036 8,427 19,941(2) 30,620(2)
Total liabilities................... 3,232 2,960 3,100 6,039 7,467 6,601 10,000 7,400
Total shareholders' equity.......... 678 657 462 546 1,569 1,826 9,941 23,220
</TABLE>
- ---------------
(1) Gives effect to the sale of the 2,300,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $6.50 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(2) Includes $7,381,000 of goodwill relating to acquisitions of the Foreign
Subsidiaries.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's historical results
of operation and financial condition should be read together with the financial
statements and notes thereto included elsewhere herein.
GENERAL
The Company manufactures, markets and distributes, domestically and
internationally, a full line of cosmetic products under its proprietary
"Prestige"(R) and "Studio Make-Up"(TM) brand names, and, to a lesser extent,
manufactures private label products for retailers. The Company's marketing
strategy emphasizes distinctive, high-fashion premium products that are sold at
prices that compare favorably to those of competitive products.
At the time of shipment of products, the Company records sales and
establishes reserves for estimated returns, allowances, customer discounts and
rebates, which reserves are deducted from accounts receivable.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's statements
of operations:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- --------------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................. 52.0 51.1 44.5 42.6 42.7
----- ----- ----- ----- -----
Gross profit....................................... 48.0 48.9 55.5 57.4 57.3
Selling, general and administrative expenses....... 40.0 42.0 36.1 35.7 43.8
Shareholders' compensation......................... 6.7 3.7 7.5 2.5 3.5
Provision for doubtful accounts.................... 0.7 0.8 1.1 0.8 0.8
Depreciation and amortization...................... 1.4 1.3 1.3 1.1 1.3
Foreign exchange (gain) loss....................... 1.2 (0.9) (1.0) (.8) (.5)
----- ----- ----- ----- -----
Operating income (loss)............................ (2.0) 2.0 10.5 18.1 8.4
----- ----- ----- ----- -----
Income (loss) before provision for income taxes.... (3.0) 1.0 9.4 17.2 6.0
----- ----- ----- ----- -----
Net income (loss).................................. (1.9)% 0.6% 5.1% 10.0% 3.5%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1997
Net sales. Net sales decreased by $3,434,109 or 32% during the six months
ended March 31, 1998 when compared with the six months ended March 31, 1997.
This is principally due to two significant non-recurring sales aggregating
approximately $2.6 million during the six months ended March 31, 1997. Included
in such sales during the six months ended March 31, 1997, were sales of $850,000
to a customer that was acquired by a large chain that does not currently carry
the Company's products. Accordingly, no sales were made to this customer during
the six months ended March 31, 1998. Also included during the six months ended
March 31, 1997, were sales of approximately $1.7 million to a customer who was
completing a periodic reset. Pursuant to a reset order, the customer places a
large order to replace all of its displays of the Company's merchandise. The
Company did not receive any significant reset orders during the six months ended
March 31, 1998. The balance of the decrease is the result of lower overall
sales.
Gross Profit. Gross profit decreased by $1,976,487 or 32% during the six
months ended March 31, 1998 when compared with the six months ended March 31,
1997. This is principally due to the lower level of sales during the same
period. As a percentage of net sales, gross profit remained constant at 57%
during each of the six months ended March 31, 1998 and 1997.
21
<PAGE> 23
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $622,145 or 16% during the six months ended
March 31, 1998 when compared with the six months ended March 31, 1997. This is
principally due to a decrease in commissions paid on sales during the six months
ended March 31, 1998 when compared to the same period during the prior year. As
a result of lower sales, the respective commissions and fees paid to establish
and service the accounts during the six months ended March 31, 1998 were
approximately $400,000 lower than those paid during the same period in the prior
year. Additionally, shipping costs decreased by $70,000. As a percentage of net
sales, selling, general and administrative expenses increased by 8.2%. A portion
of such expenses are fixed, and accordingly, do not fluctuate as a result of
fluctuations in sales.
Shareholders' Compensation. There were no material fluctuations incurred
in shareholders' compensation during the six months ended March 31, 1998 when
compared to the six months ended March 31, 1997. The Company has entered into
employment agreements with certain shareholders. Pursuant to the terms of these
agreements, the aggregate base salaries will be $425,000 on an annualized basis.
Operating Income. Operating income decreased by $1,339,648 or 68% during
the six months ended March 31, 1998 when compared with the six months ended
March 31, 1997. This is principally due to the net effect of the previously
described decrease in sales. Additionally, during the six months ended March 31,
1998, the Company had unrealized foreign exchange losses of $49,168 compared to
$0 during the six months ended March 31, 1997.
Other (Expense). Total other expenses increased by $80,618 or 79% during
the six months ended March 31, 1998 when compared with the six months ended
March 31, 1997. This is principally due to the increase in interest expense
incurred as a result of increased borrowings under the line of credit and the
amounts due to shareholders.
Net Income. Net income decreased by $827,745 or 76% during the six months
ended March 31, 1998 when compared with the six months ended March 31, 1997.
This is principally due to the net effect of the previously described decrease
in sales. Additionally, during the six months ended March 31, 1998, the Company
had interest expense of $183,311 compared to $89,957 during the six months ended
March 31, 1997.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net sales. Net sales increased by $6,481,449 or 47% during Fiscal 1997
when compared with Fiscal 1996. This is principally due to an increased volume
of sales during 1997 resulting from added promotional programs, new private
label customers, increased outlets, increased wholesale distribution and
increased sales to foreign affiliates. The Company also initiated a price
increase on January 1, 1997 of approximately 5% on most of its major products.
Gross Profit. Gross profit increased by $4,501,618 or 67% during Fiscal
1997 when compared with Fiscal 1996. This is principally due to the previously
mentioned increased level of sales. As a percentage of net sales, gross profit
improved to 56% during Fiscal 1997 compared to 49% during Fiscal 1996. The
Company continued to improve profit margins on sales through increased operating
efficiencies in the Company's production process, the decreased cost of foreign
source product as a result of the strengthening US dollar and the previously
mentioned price increase on merchandise sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1,525,620 or 26% during Fiscal 1997 when
compared with Fiscal 1996. This is partially due to the increase in sales during
Fiscal 1997. When compared with Fiscal 1996, this resulted in approximately
$400,000 of increased commissions and fees paid to establish and service the new
and existing customer accounts and approximately $140,000 in increased shipping
costs.
Shareholders' Compensation. Shareholders' compensation increased by
$1,008,245 during Fiscal 1997 when compared to Fiscal 1996. This is principally
the result of bonuses taken during Fiscal 1997 as a result of corporate
profitability.
22
<PAGE> 24
Operating Income. Operating income increased by $1,852,603 during Fiscal
1997 when compared with Fiscal 1996. This is principally due to the net effect
of the previously described increase in sales.
Other (Expense). Total other expenses increased by $83,699 or 63% during
Fiscal 1997 when compared with Fiscal 1996. This is principally due to the
increase in interest expense incurred during the same period as a result of
increased borrowings under the line of credit and the amounts due to
shareholders.
Net Income. Net income increased by $938,863 during Fiscal 1997 when
compared with Fiscal 1996. This is principally due to the net effect of the
previously described increase in sales.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net sales. Net sales increased by $3,302,180 or 32% during Fiscal 1996
when compared with Fiscal 1995. This is principally due to an increased volume
of sales during 1996 resulting from new private label customers, increased
wholesale distribution and increased sales to foreign affiliates.
Gross Profit. Gross profit increased by $1,700,249 or 34% during Fiscal
1996 when compared with Fiscal 1995. This is principally due to the previously
mentioned increased level of sales during the same period. As a percentage of
net sales, gross profit improved to 49% during Fiscal 1996 compared to 48%
during Fiscal 1995. This is principally due to increased operating efficiencies
as a result of the Company's move into its current production facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1,600,960 or 38% during Fiscal 1996 when
compared with Fiscal 1995. This is partially due to the increase in sales during
Fiscal 1996. When compared with the results of Fiscal 1995, the Company
experienced an increase of approximately $235,000 in commissions and fees paid
to establish and service the new and existing customer accounts and
approximately $175,000 in increased shipping costs.
Shareholders' Compensation. Shareholders' compensation decreased by
$199,534 during Fiscal 1996 when compared to Fiscal 1995. This is principally
the result of smaller bonuses taken during Fiscal 1996.
Operating Income. Operating income increased by $485,376 during Fiscal
1996 when compared with Fiscal 1995. This is principally due to the net effect
of the previously described increase in sales.
Other (Expense). Total other expenses increased by $25,123 or 23% during
Fiscal 1996 when compared with Fiscal 1995. This is principally due to the
increase in interest expense incurred during the same period as a result of
increased borrowings under the line of credit and the amounts due to
shareholders.
Net Income. Net income increased by $280,147 during Fiscal 1996 when
compared with Fiscal 1995. This is principally due to the net effect of the
previously described increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, on a pro forma basis, the Company had outstanding
indebtedness of approximately $4.8 million. As of March 31, 1998, the
outstanding indebtedness of Prestige Italy included unsecured loans of
approximately $264,261 and $171,428 maturing in November 2000 and October 2001,
respectively, and approximately $169,000 under an unsecured line of credit. As
of March 31, 1998, the outstanding indebtedness of Prestige Australia included
approximately $151,659 under an unsecured bank line of credit, which is due upon
demand. The Company has entered into a credit agreement with First Union
National Bank (the "Bank"), which provides for borrowings under a line of credit
of up to $3.5 million. At March 31, 1998, approximately $2.4 million was
outstanding under the line of credit. Borrowings under the line of credit bear
interest at the Bank's prime rate (8.5% at March 31, 1998) payable monthly and
are due on demand. The Company's account at the Bank is swept daily to reduce
borrowings under the line of credit. In December 1997, the Company entered into
a term loan agreement with the Bank providing for a term loan of $500,000. The
term loan bore interest at the Bank's prime rate plus 1% payable monthly and was
payable in full on March 1, 1998. In March 1998, the term loan was consolidated
with the line of credit. The Company
23
<PAGE> 25
intends to use a portion of the net proceeds of this Offering to reduce the
amount outstanding under the line of credit by $1.5 million.
The Company's principal sources of funds have been borrowings under its
line of credit with the Bank, cash flow from operations and borrowings from its
shareholders. The Company had a working capital deficit at March 31, 1998 of
$250,958 compared to a deficit of $394,966 at September 30, 1997.
Substantially all of the Company's assets in the United States, consisting
of accounts receivable, inventory and equipment, are pledged to the Bank as
collateral. The Company is subject to restrictions on the incurrence of
additional indebtedness, which could, under certain circumstances, limit the
Company's ability to expand. In addition, the credit agreement with the Bank
subjects the Company to various covenants which, among other things: (i) require
the Company to maintain certain levels of net worth and minimum financial
ratios, (ii) restrict the payment by the Company of dividends or other
distributions to shareholders and (iii) prohibit the sale by the Company of all
or substantially all of its assets. At September 30, 1997, the Company was not
in compliance with certain covenants relating to the maintenance of minimum
financial ratios. In January 1998, the Bank waived such non-compliance. The
Company was in compliance with such covenants at March 31, 1998. To date, the
Company has relied on the personal guarantees of Jacques Cohen and Gabriel
Cohen, the Company's Chairman of the Board, President and Chief Executive
Officer and Vice President, respectively, in connection with its bank
borrowings. It is not anticipated that such persons will provide personal
guarantees following consummation of this Offering.
At March 31, 1998, the Company had outstanding Shareholder Notes in the
principal amount of approximately $1.4 million. The notes, which are due on
demand, bore interest at a rate of 9% per annum for Fiscal 1996 and 10% per
annum for Fiscal 1997 and currently bear interest at a rate of 10% per annum for
the year ended September 30, 1998. An aggregate of approximately $180,000 due
under the Shareholder Notes was repaid in April and May 1998. The Company
intends to repay the balance due under the Shareholder Notes with the proceeds
of the Offering.
During the six months ended March 31, 1998, net cash used by the Company's
operating activities was $467,926 as compared to net cash provided of $52,081
during the six months ended March 31, 1997. The decrease in liquidity was
principally due to a decrease in trade accounts payable of approximately $1.5
million as a result of the Company's efforts to minimize excess merchandise
inventory which was reduced by $772,066. Net cash used in investing activities
was $175,371 and $137,167 during the six months ended March 31, 1997 and 1998,
respectively, which was principally the result of purchases of property and
equipment. Net cash provided by financing activities was $123,290 and $605,093
during the six months ended March 31, 1997 and 1998, respectively. Net cash
provided by financing activities during the six months ended March 31, 1998 was
principally the result of increased borrowings from shareholders of $644,712.
Net cash used in operating activities was $456,892 in Fiscal 1997 compared
to net cash provided by operating activities of $239,170 in Fiscal 1996. The
increase in net cash used in operating activities was primarily the result of an
increase in inventories and a decrease in accounts payable. Net cash used in
investing activities was $1,206,374 and $510,026 in Fiscal 1996 and Fiscal 1997,
respectively, representing the purchase of property and equipment. Net cash
provided by financing activities was $964,004 and $966,918 in Fiscal 1996 and
Fiscal 1997, respectively, representing borrowings under its financing
arrangements with the Bank and borrowings from shareholders.
The Company's principal cash requirements arise from the purchase of raw
materials, inventories, in-store displays and equipment. At March 31, 1998,
neither the Company nor any of the Foreign Subsidiaries had commitments for
material capital expenditures. Based upon the Company's current level of
operations and anticipated growth as a result of its business strategy, the
Company expects that the proceeds of this Offering, together with cash flows
from operations and borrowings under its existing line of credit will be
sufficient to enable the Company to meet its anticipated cash requirements for
at least 12 months following consummation of this Offering.
The Company recently spent approximately $110,000 on upgrading the
Company's management information systems and expects to continue upgrading these
systems in the future. Such costs included the
24
<PAGE> 26
cost of software updates required to allow the systems to process data
attributable to the year 2000 and thereafter. The Company believes that its
management information systems are year 2000 compliant. The Company has
determined that no additional expenditures will be required to upgrade the
computer systems of the Foreign Subsidiaries for year 2000 compliance. The
Company's major customers have informed the Company that they are year 2000
compliant.
QUARTERLY RESULTS
The Company's operating results have fluctuated significantly from quarter
to quarter, in part because of the timing of promotions, changes in product
colors, the addition of new customers and changes in existing customer buying
patterns. The Company updates the colors in its product lines annually and
supplements its product lines seasonally with promotional colors which causes
increases in revenues and returns in quarters in which the updates occur. The
Company's operating results also vary significantly due to the timing of
customer reset orders, pursuant to which a customer places a large order to
replace all of its displays of the Company's merchandise. In addition, the
consolidation trend in the drug store industry may result in gains or losses of
outlets in which the Company's products are sold. The Company's operating
expenses also fluctuate due to expenditures for the purchase of new display
units for the Company's products. The Company's operating results for any
particular quarter are not necessarily indicative of results for any future
period or for the full year.
The following table presents certain unaudited historical quarterly
financial data for each of the quarters in Fiscal 1997 and the six months ended
March 31, 1998. This information has been prepared on the same basis as the
Financial Statements appearing elsewhere in the Prospectus and include, in the
opinion of management, all adjustments (consisting of all normal recurring
adjustments) necessary to present fairly the quarterly results when read in
conjunction with the Financial Statements and the notes thereto.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
1997 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $5,952 $4,865 $4,700 $4,735 $3,374 $4,009
Gross profit......................... 3,593 2,614 2,398 2,625 2,080 2,150
Net income (loss).................... 777 308 (244) 182 27 230
Earnings (loss) per share............ .12 .05 (.04) .03 -- .04
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("SFAS No. 128"). SFAS No. 128 simplifies the standards for computing
and presenting earnings per share ("EPS") and makes them comparable to
international EPS standards. SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS No. 128 became effective for financial
statements issued for periods ending after December 15, 1997 and requires
restatement of all prior periods presented. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during such period. Diluted EPS includes the potential impact
of convertible securities and dilutive common stock equivalents using the
treasury stock method of accounting. The Company had no common stock equivalents
outstanding at September 30, 1997 or March 31, 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the change
in equity during the financial
25
<PAGE> 27
reporting period of a business enterprise resulting from non-owner sources. The
Company does not currently have income which would be considered in other
comprehensive income and therefore does not believe the adoption of SFAS No. 130
will have a significant impact on its financial statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131") which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments including, among other things, a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. The Company has not yet determined the impact that implementation of
SFAS No. 131 will have on its financial statement presentation.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 prospectively beginning January 1, 1999. Adoption of this
Statement will not have a material impact on the Company's financial position or
results of operations.
26
<PAGE> 28
BUSINESS
GENERAL
The Company manufactures, markets and distributes, domestically and
internationally, a full line of cosmetic products under its proprietary
"Prestige"(R) and "Studio Make-Up"(TM) brand names, and, to a lesser extent,
manufactures private label products for cosmetic and other specialty retailers.
The Company believes that it is one of the fastest growing niche cosmetic
companies. The Company's marketing strategy emphasizes distinctive,
high-fashion, premium color cosmetic products that are sold at prices that
compare favorably to those of competitive products. Despite relatively limited
capital resources, the Company has experienced significant growth in revenues
and profits. The Company's historical net sales increased to approximately $20.3
million in Fiscal 1997 from approximately $13.8 million in Fiscal 1996,
representing an increase of approximately 47%, and its historical net income
increased to approximately $1.0 million in Fiscal 1997 from approximately
$84,000 in Fiscal 1996. The Company's pro forma net sales for the year ended
September 30, 1997 were approximately $26.6 million.
The Company distributes its "Prestige" products through a variety of
national and regional "self-select" distribution channels. This type of
distribution channel, in which customers select their own purchases without the
assistance of an in-store demonstrator, includes independent and chain drug
stores, mass volume retailers, and supermarkets. In the United States, the
Company markets and sells its products nationwide, in many large retail chains
including Eckerd Drugs, Thrifty-Payless, Rite-Aid and Wal-Mart stores, as well
as on a promotional basis in Walgreens and CVS. The Company has increased its
distribution in retail outlets from approximately 7,000 outlets in Fiscal 1995,
to 8,300 outlets in Fiscal 1996 and to 10,000 outlets in Fiscal 1997. In
addition, the Company has recently commenced distribution into over 500 SAV-ON
stores. Further, the Company has been realizing significant growth in sales of
its products within existing outlets, including an increase of approximately 25%
in sales of the Company's products within the same Wal-Mart stores during the
12-month period ended January 1998. The Company has successfully completed tests
of its basic "Prestige" line in 30 K-Mart stores and its "Studio Make-Up" line
in 53 Sears stores, and has recently expanded into 100 K-Mart stores and 385
Sears stores. Since completion of testing, the linear footage of the Company's
product space has increased 150% in K-Mart stores and 300% in Sears stores. The
Company has recently received an opening order from Sears of $ .
The Company has operations based in three foreign countries and its
products are currently sold in 28 countries, as compared to five countries in
1995. Internationally, the Company sells its products in leading mass, drug
and/or department store chains, including Shoppers Drug Mart and London Drugs in
Canada, Kaufhof and Karstadt in Germany, Les Galeries Lafayette in France and
Myer and David Jones in Australia. The Company tailors its marketing strategy to
meet the consumer trends in each country in which it sells its products. The
major overseas markets in which the Company currently sells its products include
Canada, Italy, Germany, Spain, Norway, Sweden, Greece, Australia, Hong Kong,
Taiwan, France and Austria. In addition, the Company sells its products in such
emerging markets as Kuwait, Lithuania, Brazil, Korea, Singapore and Argentina.
In June 1997, the Company commenced distribution in Japan and anticipates
additional significant sales in the Far East, including China, where the Company
has recently begun sales of its products in a major retail chain. The Company
believes that its foreign distribution network will enable it to expand in
existing and new international markets and intends to use a portion of the net
proceeds of this Offering for international expansion.
MARKET OVERVIEW
During the 52-week period ended June 30, 1996, over $1 billion was spent in
drug stores on make-up items. During such period, mass retail stores accounted
for over $919 million in sales, up 12.3% from the previous comparable period,
and 37% of cosmetic dollars were spent in mass retail outlets, up from 35% in
the previous comparable period. According to industry sources, it is expected
that 91.6 million U.S. women aged 18 and older will be cosmetic users in 2000.
The following provides certain general information about the industry.
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<PAGE> 29
U.S. MASS COLOR COSMETIC INDUSTRY REVIEW
(FOR THE 52 WEEK PERIOD ENDED JUNE 30, 1996)
<TABLE>
<CAPTION>
$ SALES % CHG. % SHARE OF
(IN MILLIONS) V. YR. AGO TOTAL MARKET
------------- ---------- ------------
<S> <C> <C> <C>
Total Market............................................ 2,484.4 4.3% 100%
Mass Cosmetic Sales By Distribution Channel
- Food................................................ 352.5 5.3% 14%
- Drug................................................ 1,212.3 -1.3% 49%
- Mass volume retailer................................ 919.6 12.3% 37%
Mass Cosmetic Sales By Product Category
- Lip................................................. 509.6 10.6% 21%
- Eye................................................. 679.9 4.6% 27%
- Face................................................ 821.0 3.2% 33%
- Nail................................................ 247.7 1.6% 10%
- Misc. .............................................. 226.2 unknown 9%
</TABLE>
- ---------------
* Source: Information Resources, Inc. Business Strategy
Historically, the large cosmetic companies dominated the sale of cosmetic
products in drug stores and mass retail stores. In recent years, there has been
a shift in consumer buying patterns to niche brand cosmetic products. The
Company has recently outperformed major brands in terms of percentage annual
growth in net sales, and believes that as a result of the shift in consumer
buying patterns, new opportunities have been created for niche marketers of
cosmetic products. The Company believes that it is one of the fastest growing
niche marketers of cosmetic products.
BUSINESS STRATEGY
The Company's business strategy includes the following components:
Strengthen Prestige Brand. The Company seeks to strengthen its brand name
by increasing its exposure within the stores in which its products are sold. One
of the Company's strategies for increasing its exposure is to upgrade its
in-store displays with new, innovative displays which will hold more products
per linear foot and enhance its consumer sales. The Company also intends to
increase the number of in-store demonstrations and the training of in-store
personnel regarding Prestige products through third-party independent
contractors. As part of the strategy to strengthen and broaden its brand name,
the Company has increased and plans to further increase its investment in
advertising and promotion with a portion of the net proceeds of the Offering.
The Company coordinates its advertising efforts through its in-house advertising
department. The Company believes that maintaining an in-house advertising
department enables it to better control advertising, execute creative concepts
quickly, and reduce costs, such as agency commissions. To augment its
advertising, which has primarily consisted of print advertising and in-store
displays, the Company will seek to expand its advertising to include exposure in
leading fashion and beauty magazines.
Further Penetrate Self-Select Distribution Channel. The Company believes
that the self-select distribution channel in the United States represents the
fastest-growing channel of distribution for cosmetics and personal care
products. The Company intends to capitalize on its established presence and
experience in marketing into the self-select distribution channel to increase
market share in this channel. For example, the Company intends to continue to
seek to increase its sales in Wal-Mart, which carries Prestige products in only
about 600 of over 2,000 of its stores and to secure distribution in other major
drug store chains. During the twelve month period ended January 1998, sales of
the Company's products within the same Wal-Mart stores increased approximately
25%. The Company has recently expanded further into SAV-ON, Sears and K-Mart and
intends to open new national accounts with a number of additional retail chains.
The Company believes that it can attract consumers from department stores and
specialty stores, existing consumers in the self-select distribution channel,
and new cosmetics consumers by providing them with fashion-forward quality
products
28
<PAGE> 30
at competitive prices. The Company also provides point-of-sale testers on some
of the Company's display units which provide information about the Company's
products and permit consumers to test the products, thereby achieving the
benefits of an in-store demonstrator without the corresponding cost. The Company
develops jointly with retailers carefully tailored advertising, point of
purchase and other focused marketing programs. The Company believes that strong
relationships with retailers and consumer traffic generated by its innovative
marketing programs will enable the Company to increase its market share in the
self-select distribution channel.
International Expansion. The Company believes that international markets
for cosmetics and skin care and personal care products represent a significant
growth opportunity. The Company believes that the Company's existing
international presence, together with the Company's strengths in the self-select
distribution channel, provide platforms from which to gain further significant
international penetration. The Company intends to achieve growth (i) through
increasing distribution into the expanding self-select distribution channels in
Europe, Canada, Australia, the Far East (including China and Japan) and South
America, (ii) entering new and emerging markets and (iii) pursuing strategic
acquisitions of international cosmetic companies.
Product Extensions and Alternative Markets. The Company has successfully
completed tests of its "Studio Make-Up" line in 53 Sears stores. Following these
successful tests, the Company is expanding distribution of its "Studio Make-Up"
line into 385 Sears stores. In addition, the Company has begun to manufacture
private label cosmetic products for several well-known retailers and direct
sales companies. The Company believes that it can compete successfully in the
area of contract manufacturing given its high-quality products, its flexible
manufacturing capabilities, low-production costs and its ability to provide
"turn-key" cosmetic programs. The Company believes that its private label
manufacturing will continue to increase, resulting in additional growth in the
Company's business. The Company also intends to pursue acquisitions of brands
and businesses which expand the Company's market share and product lines,
although the Company does not currently have any agreements with respect to any
acquisitions.
Continue to Improve Operating Efficiencies, Customer Service and Product
Quality. The Company intends to continue programs initiated in Fiscal 1997 to
increase efficiencies in its sourcing, manufacturing and distribution processes.
The Company is obtaining sell-through data from retailers which enables it to
replenish inventory based on consumer purchasing trends with reduced paperwork
and to allocate manufacturing capacity more efficiently. The Company has
recently upgraded its management information systems to provide an integrated
system for forecasting, production, inventory management, distribution,
procurement and accounting. As part of its efforts to improve operating
efficiencies, the Company attempts to ensure that a significant portion of its
capital expenditures are devoted to improving operating efficiencies.
Improvements in manufacturing, sourcing and systems have contributed to improved
customer service levels, improved product quality, an increase in gross profit
as a percentage of net sales and improved management of working capital. The
Company believes that such improvements are essential to maintaining a
diversified line of cosmetics at price points below that of comparable
competitive products.
Possible Acquisitions. The Company believes that the cosmetic industry is
fragmented and intends to seek out opportunities, on a highly selective basis,
to acquire other cosmetic brands, distribution channels and businesses, both
internationally and domestically. The Company believes that through strategic
acquisitions the Company will be able to utilize its existing infrastructure to
expand its business.
DOMESTIC AND INTERNATIONAL OPERATIONS
During Fiscal 1996 and Fiscal 1997, sales to Foreign Subsidiaries and other
foreign customers accounted for approximately 10% of the Company's historical
net sales in each period. During the year ended September 30, 1997, sales by the
Foreign Subsidiaries and sales by the Company to other customers in foreign
countries accounted for approximately 32% of the Company's pro forma net sales.
The Company's international operation is increasing distribution through the
expanding self-select distribution channels such as department stores, drug
stores/chemists, perfumeries, mass volume retailers, specialty stores and
variety stores, as the Company's lines gain acceptance in the marketplace. The
Company continues to pursue
29
<PAGE> 31
strategies to establish its presence in new and emerging markets including
China, Japan, Eastern Europe, Southeast Asia and South America.
PRODUCTS
The Company sells a full line of cosmetics designed to fulfill specifically
identified consumer needs, including lip, eye and face make-up. The Company's
products are principally priced in the moderate range of the self-select
distribution channel and are marketed to women of all age groups. The Company's
advertising typically focuses on products, so that the age and appearance of the
model is not a factor in determining the target customer.
The Company has trademark rights to the "WearEver" lipstick line, which
includes 16 shades of silicone-free, long-lasting and smudge-proof color, to
supplement its sales of 40 shades of classic lipstick. The Company also sells a
variety of colors of vitamin E-enriched lipstick crayons and lip glosses,
including aromatherapy lip glosses infused with natural ingredients. The
Company's facial make-up includes foundation, powder, blush and concealers, all
under the Prestige brand name. The Company's eye make-up products include
mascaras, eyeshadows and eyeliners and the Company offers a variety of seasonal
colors. The Company has recently launched "The Correctives" line of concealers,
which are designed to cover facial imperfections. The Company also sells a
variety of waterproof eye and lip liners, vitamin E-enriched mascara and a long
lash formula mascara. In April 1997, the Company began to market a 32-color
assortment of nail lacquers. The "Studio Make-Up" line is an upscale product
line and presentation featuring a number of products sold at higher price points
than the basic Prestige line.
The Prestige line includes 272 SKUs, and the "Studio Make-Up" line is being
expanded to 258 SKUs. The Company's Prestige products principally retail at
$2.95 to $6.00 per item. The Company's Studio Make-Up products retail at $7.50
to $12.50 per item. The following charts provide a summary of the Company's
products, the number of shades of color for each product and the typical
suggested U.S. retail price as of March 31, 1998:
PRESTIGE PRODUCT LINES
<TABLE>
<CAPTION>
NUMBER SUGGESTED
PRODUCT CATEGORY OF SHADES U.S. RETAIL PRICE
- ---------------- --------- -----------------
<S> <C> <C>
EYE
---
Classic Kohl Eye Pencils.................................... 12 $2.95
Eyebrow Pencils............................................. 4 $2.95
Waterproof Eyeliners........................................ 8 $4.25
Waterproof Mechanical Eyeliners............................. 12 $4.25
Liquid Eyeliner............................................. 6 $4.95
Vitamin Enriched Mascara.................................... 4 $3.95
Long Lash Mascara........................................... 3 $3.95
Eyeshadow Compacts.......................................... 15 $3.25
LIPS
----
Classic Lip Liner Pencils................................... 12 $2.95
Waterproof Lipstick Liner Pencils........................... 20 $4.25
Waterproof Mechanical Lip Liners............................ 16 $4.25
Matte Lipstick Crayons...................................... 16 $4.50
Aromatherapy Lipgloss Pots.................................. 10 $2.95
Classic Lipstick............................................ 24 $3.95
Shimmering Pearl Lipstick................................... 8 $3.95
Sheer Finish Lipstick....................................... 8 $3.95
WearEver Lipstick........................................... 16 $4.95
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
NUMBER SUGGESTED
PRODUCT CATEGORY OF SHADES U.S. RETAIL PRICE
- ---------------- --------- -----------------
<S> <C> <C>
FACE
----
Blush Compacts.............................................. 12 $3.25
Foundation.................................................. 7 $3.95
CORRECTIVES
-----------
Everyday Cover.............................................. 3 $4.00
Complexion Equalizers....................................... 3 $4.00
Extreme Cover Concealer Cream............................... 8 $6.00
ACCESSORIES
-----------
Sharpeners.................................................. 3 $1.75-$2.95
Make-up Brushes............................................. 10 $1.75-$12.00
NAIL
----
Nail Lacquers............................................... 32 $2.95
</TABLE>
STUDIO MAKE-UP PRODUCT LINES
----------------------------
<TABLE>
<CAPTION>
NUMBER SUGGESTED
PRODUCT CATEGORY OF SHADES U.S. RETAIL PRICE
- ---------------- ---------------- -----------------
<S> <C> <C>
EYE
---
Eyeliner Pencils............................................ 9 $7.50
Eye Brow Pencils............................................ 3 $7.50
Eye Shadows................................................. 28 $7.50
Mascara..................................................... 4 $7.50
4 Color Kits................................................ 4 $12.50
Eye Make-up Remover......................................... 1 $5.00
LIP
---
Lipliner Pencils............................................ 24 $7.50
Lipsticks................................................... 60 $7.50
Lipgloss.................................................... 8 $7.50
FACE
----
Moisturizing Foundation..................................... 12 $7.50
Oil-Free Foundation......................................... 12 $7.50
Wet/Dry Foundation.......................................... 12 $7.50
Soft Face Powder............................................ 6 $7.50
Loose Powder................................................ 4 $7.50
Concealers.................................................. 6 $7.50
Color Correctors............................................ 3 $7.50
All-Over Shimmer............................................ 3 $7.50
Blush....................................................... 12 $7.50
Bronzing Powder............................................. 2 $7.50
ACCESSORIES
-----------
Applicators................................................. 1 $3.00
Sponges..................................................... 1 $3.00
Puffs....................................................... 1 $3.00
Wedges...................................................... 1 $3.00
Brushes..................................................... 9 $5.00-$15.00
NAILS
-----
Nail Lacquers............................................... 32 $5.00
</TABLE>
31
<PAGE> 33
In addition to the Prestige line of products, the Company has developed
"private label" lines of color cosmetics for several well-known retailers and
direct-sales companies. During Fiscal 1996 and Fiscal 1997, sales of "private
label" products accounted for 7% and 9%, respectively, of the Company's
historical net sales.
MANUFACTURING AND RELATED OPERATIONS
The Company's manufacturing facilities provide the Company with the
capability to manufacture, assemble and package a wide range of cosmetics and
other personal care products. At its Florida facility, the Company manufactures
all of its products other than its pencil products, which it imports from
Europe. Manufacturing operations performed by the Company include compounding
and blending individual ingredients into bulk products, which are then filled
and packaged into finished products.
The Company's strategy is to maintain state-of-the-art manufacturing
capabilities which, combined with its product development initiatives, allow it
to respond quickly to customer orders and changes in consumer preferences. The
Company's sophisticated manufacturing, sourcing and related operations have
contributed to high levels of customer service, including timeliness in order
fulfillment and new product and promotion deliveries. The Company has automated
a significant portion of the manufacturing process, including the processing,
packaging and labeling of its cosmetics. Such improvements have caused a
reduction in labor intensive tasks and resulted in lower manufacturing costs.
The Company intends to use a portion of the net proceeds from the Offering to
purchase additional equipment, to increase automation and further reduce labor
costs.
The Company assures that extensive safety and quality tests on the
Company's products are undertaken, including microbiology and package testing.
In addition to the Company's quality control procedures, in certain instances
the Company develops with the customer a customized quality control program to
monitor the production of a specific product order. The Company's quality
control program includes laboratory testing and assures that the product
conforms to desired specifications. The Company also utilizes its two in-house
chemists and its plant manager to monitor the appearance of finished products
and to confirm that each product includes the required product quantity or
weight. The Florida manufacturing facility is registered with the FDA as a drug
manufacturing establishment. The Company retains an international consultant
based in France to ensure compliance with certain product standards established
in the Company's foreign markets.
The Company currently has a distribution facility in Italy where it is
developing manufacturing capabilities which are expected to become fully
operational during the 1999 calendar year. When developed and operational, the
facility would manufacture products for distribution and sale to customers
located in Europe and the Middle East. The Company also maintains distribution
facilities in Canada and Australia.
RAW MATERIALS; SUPPLIERS
The Company devotes a significant portion of its capital budget to the
enhancement of operating efficiencies. The Company purchases raw materials and
components throughout the world, continuously pursuing reductions in cost of
goods through the global sourcing of raw materials and components from qualified
vendors and utilizing its purchasing capacity to maximize cost savings. The
Company requires that materials supplied by its vendor meet the Company's
quality standards. The global sourcing of raw materials and components from such
vendors also ensures the quality of the raw materials and components. The raw
materials used in the Company's manufacturing includes pigments, waxes, oils and
preservatives. In those instances where there may be only a limited number of
suppliers for a particular ingredient, there generally are available a number of
alternate ingredients that are functionally equivalent. The Company has no
long-term contractual relationships with any of its suppliers. The Company has
obtained all of its supply of pencil products from a European-based manufacturer
for over 20 years. The Company believes it currently has a good relationship
with such manufacturer, which supplied approximately 43% and 46% of the
Company's raw materials in Fiscal 1997 and for the six months ended March 31,
1998, respectively. Other than its pencil products, none of the Company's
suppliers provide more than 10% of the Company's raw materials. The Company
believes that alternate sources of raw materials including pencils exist and
does not anticipate any significant shortages of, or difficulty in obtaining,
such materials.
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<PAGE> 34
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have been, and continue to be,
substantially upgraded to provide comprehensive order processing, production and
accounting support for the Company's business. Many of the Company's key
accounts utilize the EDI system whereby a retail store or a distribution center
automatically and electronically orders additional Prestige products from the
Company to replace products it has sold. The Company also subscribes to
Wal-Mart's "Retail Link," an on-line business management system designed to
assist manufacturers in meeting Wal-Mart's order and category management
demands. Certain other large retail chains also require that the Company utilize
their computerized order and reorder systems. The Company intends to continue to
upgrade management information systems in 1998, which will include further
conversion to EDI billing and other improved systems for forecasting,
production, inventory management and order processing. The Company has expended
approximately $110,000 on updating the Company's management information systems
and expects to continue upgrading these systems in the future. Such cost
included the cost of software updates required to allow the systems to process
data attributable to the year 2000 and thereafter. The Company has determined
that no additional expenditures will be required to upgrade the computer systems
of the Foreign Subsidiaries for year 2000 solutions. The Company's major
customers have informed the Company that they are year 2000 compliant.
The Company anticipates that these systems and improvements will continue
to be instrumental in contributing to the reduction of the time from order entry
to shipment and improved forecasting of demand and overall operating
efficiencies. The Company believes that its current management information
system provides the Company with an additional competitive advantage.
MARKETING AND SALES
The Company's strategy is to provide glamour and excitement through
innovative quality products at affordable prices. The Company's marketing
efforts are designed to implement this strategy. The Company uses print
advertising and point-of-sale merchandising, including displays and in-store
samples. The Company coordinates advertising campaigns with in-store promotional
and other marketing activities, and has developed joint advertising,
point-of-purchase and other focused marketing programs with key retailers.
In the United States, the Company believes that it efficiently generates
sales of $2,500 to $9,000 per linear foot per year on products with suggested
retail price points principally of $2.95 to $4.95, with most of the Company's
volume in the $3,000 to $4,000 range per linear foot. According to an industry
trade journal, New Products Report, A Confidential Analysis of Drug, Cosmetic
and Appliance Trends, the Company has outperformed certain of its competition in
terms of sales per linear foot per year.
The Company's domestic sales force consists of approximately 100
independent sales representatives who are compensated solely on a commission
basis, and whose efforts are coordinated by a national sales manager. Virtually
all key national accounts are handled directly by senior executives of the
Company supported by the independent sales force. To promote the Company's
understanding of, and responsiveness to, the needs of its key accounts, the
Company's management interacts directly with marketing and merchandising
executives at these accounts. The Company has a network of distributors through
which it markets its products internationally. The Company generally has
contractual arrangements with its international distributors pursuant to which
the distributor is granted the exclusive right to market the Company's products
in the defined territory. The distributor is typically not required to meet
sales quotas to maintain its relationship with the Company, however the
distributor's performance is monitored on a regular basis by the Company. The
Company's international distributors purchase its products for resale to their
customers. As a result of its commitment to customer service and innovative
marketing programs which are market specific, as well as the consumer traffic
generated by its products, the Company believes that it has established
significant relationships with self-select distribution cosmetic retailers both
domestically and internationally.
The Company has been able to capitalize on the recent demand for "make-up
artist" and "professional" cosmetics with a full line of color products. For
these products, the Company occasionally runs in-store demo promotions. During
1997, 97% of customers who participated in such promotions purchased Prestige
products. The Company intends to utilize a significant portion of the proceeds
of this Offering to upgrade its in-store
33
<PAGE> 35
displays and expand its marketing and sales programs, including aggressive
advertising of its brand name products and penetrating new distribution outlets.
The Company also utilizes "co-op" advertising, in which the Company
provides an allowance equal to a percentage of sales to certain retail chains
and, in turn, the Company's products are featured in a glossy, color
advertisement in such chain's sales circulars. The Company also uses coupons
which provide prospective buyers with rebates upon purchases.
CUSTOMERS
The Company's principal customers include chain drug stores, specialty and
variety stores, and large mass volume retailers, including such well known
retailers as Wal-Mart, Eckerd Drugs, Rite-Aid, Thrifty-Payless, SAV-ON and
Sears. During Fiscal 1997, sales to the Company's three largest customers,
Rite-Aid, Eckerd Drugs, and Wal-Mart accounted for approximately 13%, 6% and 6%,
respectively, of historical net sales. For the six months ended March 31, 1998,
Wal-Mart and Rite-Aid accounted for approximately 11% and 7%, respectively, of
the Company's historical net sales. No single customer accounted for more than
10% of pro forma combined net sales during the years ended September 30, 1996 or
1997 or the six months ended March 31, 1998. The Company does not have any
long-term contractual relationships with any of its customers, nor are any of
the Company's customers subject to any contractual provisions or other
restrictions which preclude them from purchasing products from the Company's
competitors.
PRODUCT DEVELOPMENT
The Company is developing innovative cosmetic products. The Company's
marketing and product development personnel identify consumer needs and shifts
in consumer preferences in order to develop new product introductions, tailor
line extensions and promotions and redesign or reformulate existing products to
satisfy such needs or preferences. The Company's product development personnel
work closely with the Company's sales and marketing groups to keep current with
changes in consumer tastes and new product developments in the industry at
large. Specifically, the Company has retained a New York-based fashion and color
forecasting consulting firm to keep the Company in the forefront of national and
international trends in fashion and color. The Company updates the colors in its
product lines annually and supplements its product lines seasonally with
promotional colors.
The Company principally relies on the experience of its staff in conducting
research on a wide range of areas in developing new and innovative products and
improving its existing formulations. As a result of its relationships with key
suppliers worldwide, the Company has been able to cooperate in the formulation
of new products and has introduced a number of innovative products.
The Company's laboratory services comprise a key element of its business
strategy and provide for the timely development and production of a wide variety
of cosmetics. The Company has two chemists on its laboratory staff whose
services include the development of product formulas, analytical assays,
reformulations and quality control. The Company provides, or arranges for, all
necessary toxicological, microbiological and stability testing.
COMPETITION
The Company's principal competitors in the industry include large
multi-national companies such as Revlon, Inc., L'Oreal Groupe, The Procter &
Gamble Company, and smaller companies such as Del Laboratories, Inc.,
Renaissance Cosmetics, Inc. and Bonne Bell Company. The Company competes with
such companies by offering quality cosmetic products at competitive prices. The
Company believes that it has a quicker response time to consumer trends and is
capable of developing and manufacturing new products faster than most of its
larger competitors. Further, the Company believes that it is better positioned
to capitalize on opportunities for future growth than most of its smaller
competitors because of its manufacturing and distribution capabilities,
experienced management, and in-house creative talent. The Company believes
continued expansion in marketing, sales, manufacturing and distribution will
enable it to compete effectively in the future.
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<PAGE> 36
GOVERNMENT REGULATION
The manufacturing, processing, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Federal Trade Commission (the "FTC"), the Food and Drug
Administration (the "FDA"), the Consumer Product Safety Commission and the
Occupational Safety and Health Administration, as well as by various other
federal, state and local regulatory authorities. The Company is also subject to
foreign consumer laws in the foreign countries where its products are sold.
Compliance with federal, state, local and foreign laws and regulations has not
had a material adverse effect on the Company to date. Nonetheless, federal,
state and local regulations in the United States, as well as foreign
regulations, that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, and packaging. In addition, any expansion by the Company of its
operations to produce cosmetic and related products that include over-the-
counter drug ingredients would result in the Company becoming subject to
additional FDA regulation as well as a higher degree of inspection and greater
burden of regulatory compliance than currently exist. The Company's Florida
facility is registered with the FDA. There are no pending reviews or
investigations of the Company by the FDA or any other government entity. The
Company believes that it is in substantial compliance with applicable federal,
state and local rules and regulations regarding environmental issues. There are
no significant capital expenditures for environmental control matters
anticipated in the current year or expected in the near future.
PROPRIETARY RIGHTS AND TRADEMARKS
The Company's success and ability to compete depend in large part on the
protection of its proprietary processes and formulas. The Company seeks to
protect such processes through confidentiality agreements with certain key
employees who have access to such processes. The Company does not own any
patents on any of its technology. The Company believes that the trademarks it
owns on certain product names have significant value and are important to the
marketing of its products.
The Company holds United States trademark registrations for the "Prestige"
and the "Wear Ever" names, has filed for trademark registrations for certain
other names, including "Prestige Studio Make-Up," "Studio Make-Up," "Quick
Stick," "Lip Loofa," "Secret Agent," "Daily Dose," "Extreme Cover," "Everyday
Cover," "Spot Check" and "Complexion Equalizer." The Company uses other names
for which it has not applied for registration. The Company believes that its
rights in these names is a significant part of the Company's business and that
its ability to create demand for its products is dependent to a large extent on
its ability to exploit its trademarks. There can be no assurance as to the
breadth or degree of protection that trademarks afford the Company, or that any
trademark applications will result in registered trademarks or that trademarks
will not be invalidated if challenged. The Company is currently not aware of
independent claims or other challenges to any of the Company's trademarks. The
Company also has registered the "Prestige" name in numerous foreign countries
including Mexico, France, Colombia, Ecuador, Brazil, Argentina and Peru, filed
for registration of the "Prestige" name in Singapore, Taiwan and Korea, and is
in the process of acquiring rights to the "Prestige" name in approximately 30
additional foreign countries. The Company has also instituted proceedings to
claim exclusive right to use the "Prestige" name in Australia.
PROPERTIES
The Company's manufacturing, laboratory, distribution, storage, sales and
administrative operations are maintained in an approximately 50,000 square foot
building located in Deerfield Beach, Florida. The building is occupied pursuant
to a lease expiring on May 31, 2002 which may be extended by the Company for two
additional five year terms. The Company's rent paid pursuant to this lease is
approximately $25,000 per month, gradually increasing to approximately $31,000
per month during the last year of the lease's current term. The building is
owned by C & C Partnership, a partnership in which Jacques Cohen and Gabriel
Cohen, principal shareholders, executive officers and directors of the Company,
are the sole general partners. The Company's packing and distribution operations
in Italy are maintained in an approximately 10,000 square foot building under a
lease with an annual rent of approximately U.S. $67,000, gradually increasing to
approximately U.S. $89,000 during the last two years of the lease term, such
lease expiring in January 2004 with an
35
<PAGE> 37
option to extend the lease for an additional term of five years. The building is
owned by the in-laws of Giorgio Ventura, the President of Prestige Italy. The
Company's distribution operations in Canada are maintained in an approximately
5,000 square foot building under a lease with an annual rent of U.S. $27,000,
such lease expiring on March 31, 2000 with an option to extend the lease for an
additional term of two years. The Company's distribution operations in Australia
are maintained in an approximately 3,000 square foot building under a lease with
an annual rent of approximately U.S. $36,000. The Company's lease for the
Australian distribution facility expires in calendar 1998, and the Company is
currently negotiating the terms of a lease for a new distribution facility in
Australia. The Company believes that its existing facilities are adequate for
its current requirements and that additional space can be obtained on
commercially reasonable terms to meet its future requirements. See "Certain
Transactions."
EMPLOYEES
As of March 31, 1998, the Company employed 101 full-time persons in the
United States, of whom 76 were engaged in manufacturing and distribution
operations, 3 were engaged in laboratory services, and 22 were engaged in
management and administration, including 5 in marketing and customer service.
None of the Company's employees are members of a labor union. The Company
believes that its employee relations are satisfactory. As of March 31, 1998, the
Foreign Subsidiaries employed 45 full-time persons, consisting of 19 employees
in Italy, 10 employees in Canada and 16 employees in Australia. Of such
employees, 16 were engaged in manufacturing and distribution operations, 16 were
engaged in marketing and sales and 13 were engaged in management and
administration.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse outcome
of which, individually or in the aggregate, would have a material adverse effect
on the Company's financial condition or results of operations.
36
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jacques Cohen...................... 51 Chairman, Chief Executive Officer and President
Gabriel Cohen...................... 45 Vice President and Director
Thomas Winarick.................... 38 Executive Vice President and Director
Marc Feller........................ 38 Chief Financial Officer
Ronald Korn........................ 56 Director Nominee
</TABLE>
Jacques Cohen is a co-founder and one of the principal shareholders of the
Company. He has served as Chairman of the Board, President and Chief Executive
Officer of the Company since its inception, and his responsibilities include
overseeing all aspects of the operations of the Company, including marketing and
sales, manufacturing and distribution, research and development and management
and administration. Jacques Cohen is the brother of Gabriel Cohen.
Gabriel Cohen is a co-founder and one of the principal shareholders of the
Company. He has served as Vice President and a Director of the Company since its
inception and as President of Prestige Canada since its inception in 1975, and
his responsibilities include serving as director of administrative systems in
the United States. Gabriel Cohen is the brother of Jacques Cohen.
Thomas Winarick has served as Executive Vice President of the Company since
August 1997 and as a Director of the Company since June 1998, and served as Vice
President of Operations -- Marketing of the Company from November 1994 until
July 1997. From October 1992 to October 1994, Mr. Winarick served as the
President of Signature Beauty Care, a Florida based cosmetics company.
Marc Feller has served as Chief Financial Officer of the Company since May
1998. From January 1997 to April 1998, Mr. Feller served as Vice-President,
Treasurer and Chief Financial Officer of International Hospitality, Inc., a
Canadian based public company. From August 1992 to January 1997, Mr. Feller was
Executive Vice President and Chief Operating Officer of Farm Stores, a Florida
based company.
Ronald Korn will become a director of the Company upon the consummation of
this Offering. Since July 1991, Mr. Korn has served as President of Ronald Korn
Consulting, a business consulting firm, and as Chairman of the Board of Carol
Korn Interiors, Inc., an interior design firm. From 1961 to 1991, Mr. Korn was a
partner with the certified public accounting firm of KPMG Peat Marwick,
including six years in which Mr. Korn served as Managing Partner of KPMG Peat
Marwick's Miami, Florida office. Since October 1991, Mr. Korn has served as a
director and Chairman of the Compensation and Audit Committees of the Board of
Directors of Engle Homes, Inc., a company whose common stock is traded on the
NASDAQ National Market. Since 1996, Mr. Korn has also served as a director of
Magicworks Entertainment Incorporated, a public company.
Effective upon the consummation of this Offering, the Company's Board of
Directors will be comprised of six members. All directors are elected annually
and hold office until the next annual meeting of shareholders of the Company and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. Except for the
relationship between Jacques Cohen and Gabriel Cohen, there are no family
relationships among the directors and officers of the Company.
The Company has agreed that, for a period of five years following the
completion of this Offering, the Representative will have the right to designate
one individual to be elected to the Company's Board of Directors. As of the date
of this Prospectus, no person has been identified by the Representative for
election as a director.
37
<PAGE> 39
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors intends to establish, effective upon
consummation of this Offering, an Audit Committee which will be composed of two
non-employee directors. The Audit Committee will be responsible for reviewing
audit functions, including accounting and financial reporting practices of the
Company, the adequacy of the Company's system of internal accounting control,
the quality and integrity of the Company's financial statements and relations
with independent auditors. The Company also plans to establish, effective upon
consummation of this Offering, a Compensation Committee which will be
responsible for establishing the compensation of the Company's directors,
officers and employees, including salaries, bonuses, commissions, and benefit
plans, administering the Company's stock option plans and other forms of or
matters relating to compensation.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will receive an annual
retainer of $ . The Company will reimburse its directors for
out-of-pocket expenses incurred in connection with their rendering of services
as directors. Directors who are also officers of the Company will not be
compensated for their services as a director.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth all
compensation awarded to, earned by or paid for services rendered to the Company
in all capacities during Fiscal 1997 by the Company's Chief Executive Officer
and its other two executive officers (the "Named Executive Officers"). No other
executive officer's salary and bonus equaled or exceeded $100,000 for services
rendered to the Company during such year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- --------- ---------
<S> <C> <C>
Jacques Cohen(2)............................................ $296,000 $533,120
Chairman, President and Chief Executive Officer
Gabriel Cohen............................................... $150,100 $534,150
Vice President
Thomas Winarick............................................. $154,350 $ 76,000
Executive Vice President
</TABLE>
- ---------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in such column. The aggregate amount
of perquisites and other personal benefits provided to each Named Executive
Officer is less than the lesser of $50,000 or 10% of the total annual salary
and bonus of such officer.
(2) Does not include royalties paid to Jacques Cohen by Prestige Italy. See
"Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Jacques
Cohen, Chairman of the Board, President and Chief Executive Officer of the
Company, Gabriel Cohen, Vice President, Thomas Winarick, Executive Vice
President, Marc Feller, Chief Financial Officer, Chris Dow, President of
Prestige Australia, and Giorgio Ventura, President of Prestige Italy, each of
which expires on December 2, 2002 (the "Employment Agreements"). Each of the
Employment Agreements is automatically renewable for an additional period of one
year, unless either party gives written notice of an intent not to renew within
six months prior to the expiration date. Pursuant to the Employment Agreements,
Messrs. Cohen, Cohen, Winarick, Feller, Dow and Ventura will receive annual base
salaries of $225,000, $200,000, $175,000, $150,000, $105,000 and $153,000,
respectively, and such bonuses as may be awarded from time to time by the Board
of Directors or any compensation committee thereof. If an Employment Agreement
is terminated by the Company other than by reason of death, Disability (as
defined) or Cause (as defined), or by the executive
38
<PAGE> 40
for Good Reason (generally defined as a material breach by the Company of the
Employment Agreement), such executive will be entitled to receive (i) any unpaid
salary through the effective date of such termination, (ii) all incentive
compensation accrued but unpaid through the effective date of termination, (iii)
all base salary through the expiration date of such Employment Agreement and
(iv) a pro rata portion of incentive compensation for such bonus period in which
such termination occurred.
1998 STOCK OPTION PLAN
Under the Company's 1998 Stock Option Plan (the "Plan"), which will be
effective on , 1998, 750,000 shares of Common Stock are reserved for
issuance upon exercise of stock options granted under the Plan. The Plan is
designed as a means to retain and motivate qualified and competent persons who
provide services to the Company and its subsidiaries. The Board of Directors or
a committee (the "Committee") of outside directors appointed by the Board of
Directors will administer and interpret the Plan. The Board of Directors and the
Committee each shall be authorized to grant options thereunder to all eligible
employees, directors (whether or not also employees of the Company or any of its
subsidiaries), consultants and independent contractors of the Company or its
subsidiaries. In the event of a change in the Common Stock due to a stock
dividend or recapitalization, the Plan provides for appropriate adjustment in
the number of shares available for grant under the Plan and the number of shares
and the exercise price per share under any option then outstanding under the
Plan, so that the same percentage of the Company's issued and outstanding shares
shall remain subject to being optioned under the Plan or subject to purchase at
the same aggregate exercise price under any such outstanding option, as
applicable. Unless otherwise provided in any option, the Committee or the Board
of Directors may change the option price and/or number of shares under any
outstanding option when, in their discretion, such adjustment becomes
appropriate so as to preserve but not increase benefits under the Plan. The
aggregate number of shares subject to options granted to any one optionee under
the Plan may not exceed subject to adjustment as described above.
However, no incentive stock options (as defined in Section 422 of the Internal
Revenue Code) may be granted to a person who is not also an employee of the
Company or a subsidiary.
The Plan provides for the granting of both incentive stock options and
nonqualified stock options. Options may generally be granted under the Plan on
such terms and at such prices as determined by the Committee or the Board of
Directors, except that the per share exercise price of any incentive stock
options cannot be less than the fair market value of a share of the Common stock
on the date of grant. Each option is exercisable after the period or periods
specified in the option agreement, but no option may become exercisable after
the expiration of ten years from the date of grant. The Board of Directors or
the Committee may accelerate the exercisability or vesting of any option or
shares previously acquired by the exercise of any options, and, in the event of
a change in control (as defined in the Plan), unless otherwise provided in the
option, each outstanding option will become immediately fully exercisable.
Incentive stock options granted to an individual who owns (or is deemed to own)
at least 10% of the total combined voting power of all classes of stock of the
Company or any of its subsidiaries must have an exercise price of at least 110%
of the fair market value of the Common Stock subject to such option on the date
of grant and a term of no more than five years. Incentive stock options granted
under the Plan are not transferable other than by will or by the laws of descent
and distribution. Nonqualified stock options are also not transferable unless
the prior written consent of the Committee or the Board of Directors is obtained
and such transfer does not violate Rule 16b-3 under the Securities Exchange Act
of 1934. Unless otherwise provided in any option, and subject to such guidelines
as the Committee or the Board of Directors may establish, the option price may
be paid by cash, certified or official bank check, personal check if accepted by
the Committee or the Board of Directors, money order, shares of Common Stock,
withholding of shares of Common Stock, any cashless exercise procedure approved
by the Committee or the Board of Directors, other consideration deemed
appropriate by the Committee or the Board of Directors, or a combination of the
above. The Plan also authorizes the Company to make or guarantee loans to
optionees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at the prime rate of the
Company's principal lender, (iii) be secured by the shares of Common Stock
purchased, and (iv) contain such other terms as the Committee or the Board of
Directors in its sole discretion shall reasonably require. The Board of
Directors or the Committee has the authority to amend or terminate the Plan or
any options, provided that no such action may substantially impair the rights
39
<PAGE> 41
or benefits of the holder of any outstanding option without the consent of such
holder, and provided further that certain amendments to the Plan are subject to
shareholder approval. Unless terminated sooner, the Plan will continue in effect
until all options granted thereunder have expired or been exercised, provided
that no options may be granted after , 2008.
Options granted under the Plan will be exercisable in accordance with the
option agreement executed in connection with such grant. The Company has granted
incentive stock options under the Plan, effective upon consummation of this
Offering, to purchase an aggregate of 415,000 shares of Common Stock to
employees, including options to purchase shares to ,
respectively. Such options are immediately exercisable at an exercise price
equal to the initial public offering price per share of the shares offered
hereby (110% of such public offering price per share in the case of shareholders
holding more than 10% of the outstanding shares of Common Stock of the Company).
The Company will agree with the Representative that for a 9-month period
immediately following the effective date of the Registration Statement of which
this Prospectus forms a part, the Company will not, without the consent of the
Representative, adopt or propose to adopt any plan or arrangement permitting the
grant, issue or sale of any shares of its Common Stock or issue, sell or offer
for sale any of its Common Stock, or grant any option for its Common Stock which
shall: (x) have an exercise price per share of Common Stock less than the
greater of (a) the initial public offering price of the Common Stock offered in
this Prospectus or (b) the fair market value of the Common Stock on the date of
grant; or (y) be granted to any direct or indirect beneficial holder of more
than 10% of the issued and outstanding Common Stock of the Company. No option or
other right to acquire Common Stock granted, issued or sold during the 9-month
period immediately following the effective date of the Registration Statement of
which this Prospectus forms a part shall permit (a) the payment with any form of
consideration other than cash, (b) the payment of less than the full purchase or
exercise price for such shares of Common Stock or other securities of the
Company on or before the date of issuance, or (c) the existence of stock
appreciation rights, phantom options or similar arrangements.
40
<PAGE> 42
CERTAIN TRANSACTIONS
ACQUISITION OF THE FOREIGN SUBSIDIARIES
In June 1998, the Company intends to acquire all of the outstanding stock
of each of Prestige Canada, Prestige Australia and Prestige Italy, each of which
is currently engaged principally in distributing the Company's products in
foreign markets. The Company anticipates that it will acquire all of the
outstanding capital stock of Prestige Canada, Prestige Australia and Prestige
Italy in exchange for the issuance of 123,000, 424,000 and 1,000,000
unregistered shares of Common Stock, respectively. The Company anticipates that,
pursuant to the acquisition agreements, the current shareholders of the Foreign
Subsidiaries will make certain representations and warranties to the Company,
and will indemnify the Company with respect to breaches of such representations
and warranties, including with respect to certain tax matters.
LEASE WITH AFFILIATE
The Company leases its Deerfield Beach, Florida headquarters from C&C
General Partnership, a partnership in which Jacques Cohen and Gabriel Cohen are
the general partners, pursuant to a lease expiring on May 31, 2002 for $25,200
per month, plus real estate and sales taxes, insurance and other costs. The
Company has the option to extend the lease for two additional five year terms.
Rent expense on this facility totaled $203,520, $310,368 and $160,272 for Fiscal
1996 and 1997 and the six months ended March 31, 1998, respectively.
LEASE OF ITALIAN FACILITY
The Company leases its Bologna, Italy distribution facility from Finelli
Dante and Vechi Rosina, the in-laws of Giorgio Ventura, the President of
Prestige Italy, pursuant to a lease expiring in January, 2004. Rent expense on
this facility totaled $68,571, $68,571, $68,571, $34,286, for Fiscal 1995, 1996
and 1997 and the six months ended March 31, 1998, respectively.
GUARANTEES AND LOANS BY CERTAIN STOCKHOLDERS
Jacques Cohen and Gabriel Cohen have personally guaranteed the Company's
$3.5 million bank line of credit and have received no compensation for such
guaranty. To the extent that the Company applies a portion of the net proceeds
of this Offering to reduce the Company's bank debt, Messrs. Cohen will be
relieved of their personal guarantee of such indebtedness. The Company will seek
to release Messrs. Jacques Cohen and Gabriel Cohen from their personal
guarantees following this Offering. See "Use of Proceeds."
During Fiscal 1997, each of Jacques Cohen and Gabriel Cohen loaned the
Company $491,536 and $176,490, respectively, for working capital purposes. These
loans bore interest at a rate of 9% per annum for Fiscal 1996, and 10% per annum
for Fiscal 1997 and currently bear interest at the rate of 10% per annum for the
year ended September 30, 1998. Amounts due under the Shareholder Notes are due
upon demand. During Fiscal 1997, the Company repaid $390,144 and $109,606 to
Jacques Cohen and Gabriel Cohen, respectively. In the six months ended March 31,
1998, the Company repaid $150,000 to Jacques Cohen, and borrowed an additional
$471,314 and $173,398 from each of Jacques Cohen and Gabriel Cohen,
respectively, during the same period. In April and May, 1998, the Company repaid
$100,000 and $80,000 to Jacques and Gabriel Cohen, respectively.
FOREIGN SUBSIDIARY TRANSACTIONS
The Company purchases goods from, and sells goods to, certain of the
Foreign Subsidiaries. Purchases from Prestige Canada aggregated $80,742,
$41,599, $61,908, $56,609 and $6,053 for Fiscal 1995, 1996 and 1997, and for the
six months ended March 31, 1997 and 1998, respectively. Sales to Prestige Canada
aggregated $143,397, $542,845, $549,397, $218,751 and $413,145 for Fiscal 1995,
1996 and 1997, and for the six months ended March 31, 1997 and 1998,
respectively. Sales to Prestige Italy aggregated $0, $157,048, $784,534,
$554,688 and $204,488 for Fiscal 1995, 1996 and 1997, and for the six months
ended March 31,
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<PAGE> 43
1997 and 1998, respectively. Sales to Prestige Australia aggregated $124,544,
$509,932, $710,406, $184,710 and $355,490 for Fiscal 1995, 1996 and 1997, and
for the six months ended March 31, 1997 and 1998, respectively.
ROYALTY AGREEMENT
Prestige Italy had a royalty agreement with Jacques Cohen, Chairman,
President and Chief Executive Officer of the Company, which provided for the
payment of a royalty of 12% of certain revenue of Prestige Italy. The royalty
agreement expired on January 1, 1998. Total royalties incurred during the year
ended December 31, 1997 were approximately $543,423. As of December 31, 1997 and
March 31, 1998, approximately $353,143 and $210,286, respectively, was due to
Mr. Cohen under the royalty agreement.
GUARANTEE OF C&C GENERAL PARTNERSHIP DEBT
The Company and each of Jacques Cohen and Gabriel Cohen, individually, have
guaranteed a bank loan of C&C General Partnership, of which Jacques Cohen and
Gabriel Cohen are the general partners, of which approximately $1.1 million was
outstanding as of March 31, 1998.
The Company believes that the terms of the foregoing transactions with the
affiliates are no less favorable to the Company than could be obtained in arms'
length negotiations with unaffiliated third parties. Any future transactions
with affiliates will be approved by a majority of disinterested directors then
serving on the Board of Directors.
It is not anticipated that Messrs. Cohen will continue to provide funds to
the Company or guarantee the Company's indebtedness following consummation of
this Offering.
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<PAGE> 44
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the outstanding Common Stock as of June 16, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or entity known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director, director nominee
and Named Executive Officer of the Company and (iii) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF SHARES --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Jacques Cohen...................................... 3,871,800 48.4% 37.6%
Gabriel Cohen...................................... 2,581,200 32.3% 25.1%
Thomas Winarick.................................... --
Giorgio Ventura(2)................................. 964,800 12.1% 9.4%
Ronald Korn........................................ -- -- --
Marc Feller........................................ -- -- --
All directors and executive officers of the Company
as a group (4 persons)........................... 6,453,000 80.7% 62.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 1441 West Newport Center Drive, Deerfield Beach, FL 33442.
Except as otherwise indicated, such beneficial owners have sole voting and
investment power with respect to all shares of Common Stock owned by them.
(2) Consists of (i) 60,000 shares owned by Giorgio Ventura, President of
Prestige Italy, (ii) 882,400 shares owned by So. Ge. Cos. S.A., a company
solely owned by Mr. Ventura, and (iii) 22,400 shares owned by the wife of
Giorgio Ventura.
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par
value. As of June 15, 1998, 8,000,000 shares of Common Stock were issued and
outstanding and no shares of Preferred Stock were outstanding.
COMMON STOCK
As of June 15, 1998, there were 8,000,000 shares of Common Stock
outstanding and held of record by ten shareholders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of the
2,300,000 shares of Common Stock offered hereby, there will be 10,300,000 shares
of Common Stock outstanding upon the closing of this Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which the Company may
designate and issue in the future. Upon the completion of this Offering, there
will be no shares of preferred stock outstanding.
WARRANTS AND OPTIONS
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase up to 230,000 shares of Common Stock. Upon consummation of this
Offering, the Company will have outstanding options for 415,000 shares of Common
Stock granted under the Company's 1998 Stock Option Plan. See
"Management -- 1998 Stock Option Plan" and "Underwriting."
PREFERRED STOCK
Upon the closing of this Offering, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
shareholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series. See "-- Anti-Takeover Provisions of Florida Law," "-- Advance
Notice Requirements for Shareholder Proposals and Director Nominations" and
"-- Certain Effects of Authorized But Unissued Stock." The Company has no
present plans to issue any shares of preferred stock.
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The "Control Share Acquisitions" section of the Florida
Business Corporation Act (the "FBCA") generally provides that shares acquired in
excess of certain specified thresholds, beginning at 20% of a corporation's
outstanding voting shares, will not possess any voting rights unless such voting
rights are approved by a majority vote of a corporation's disinterested
shareholders. The "Affiliated Transactions" section of the FBCA generally
requires majority approval by disinterested directors or supermajority approval
of disinterested shareholders of certain specified transactions (such as a
merger, consolidation, sale of assets, issuance of transfer of shares or
44
<PAGE> 46
reclassifications of securities) between a corporation and a holder of more than
10% of the outstanding shares of the corporation, or any affiliate of such
shareholder.
The directors of the Company are subject to the "general standards for
directors" provisions set forth in the FBCA. These provisions provide that in
discharging his or her duties and determining what is in the best interests of
the Company, a director may consider such factors as the director deems
relevant, including the long-term prospects and interests of the Company and its
shareholders and the social, economic, legal or other effects of any proposed
action on the employees, suppliers or customers of the Company, the community in
which the Company operates and the economy in general. Consequently, in
connection with any proposed action, the Board of Directors is empowered to
consider interests of other constituencies in addition to the Company's
shareholders, and directors who take into account these other factors may make
decisions which are less beneficial to some, or a majority, of the shareholders
than if the law did not permit consideration of such other factors.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
LIMITED LIABILITY AND INDEMNIFICATION
Under the FBCA, a director is not personally liable for monetary damages to
the corporation or any other person for any statement, vote, decision, or
failure to act unless (i) the director breached or failed to perform his duties
as a director and (ii) a director's breach of, or failure to perform, those
duties constitutes (1) a violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful, (2) a transaction from which the director
derived an improper personal benefit, either directly or indirectly, (3) a
circumstance under which an unlawful distribution is made, (4) in a proceeding
by or in the right of the corporation to procure a judgment in its favor or by
or in the right of a shareholder, conscious disregard for the best interest of
the corporation or willful misconduct, or (5) in a proceeding by or in the right
of someone other than the corporation or a shareholder, recklessness or an act
or omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety, or
property. A corporation may purchase and maintain insurance on behalf of any
director or officer against any liability asserted against him and incurred by
him in his capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the FBCA.
The Articles and Bylaws of the Company provide that the Company shall, to
the fullest extent permitted by applicable law, as amended from time to time,
indemnify all directors of the Company, as well as any officers or employees of
the Company to whom the Company has agreed to grant indemnification.
The Registrant has also entered into indemnification agreements with each
of its directors and executive officers where it has agreed to indemnify each of
them to the fullest extent permitted by law. In general, Florida law permits a
Florida corporation to indemnify its directors, officers, employees and agents,
and persons serving at the corporation's request in such capacities for another
enterprise, against liabilities arising from conduct that such persons
reasonably believed to be in, nor not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
45
<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,300,000 shares
of Common Stock outstanding. Of these shares, the 2,300,000 shares sold in this
Offering will be freely tradable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act (an "Affiliate"), which may generally be sold only in compliance
with Rule 144 as described below. The remaining 8,000,000 shares of Common Stock
will be "restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). All of the Restricted Shares will be subject to lock-up
agreements as described below. Beginning 90 days after the date of this
Prospectus, 6,453,000 of these shares of Common Stock will be eligible for
resale in the public market, subject to certain volume, timing and other
requirements of Rule 144 and to the lock-up agreements. Sales of Restricted
Shares in the public market, or the availability of such shares for sale, could
adversely affect the market price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
103,000 shares immediately after this Offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is filed with the Securities and Exchange
Commission. Such sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, a person who is not an affiliate and
has not been an affiliate for at least three months prior to the sale and who
has beneficially owned Restricted Shares for at least two years may resell such
shares without regard to the requirements described above. The Company is unable
to estimate accurately the number of Restricted Shares that ultimately will be
sold under Rule 144 because the number of shares will depend in part on the
market price for the Common Stock, the personal circumstances of the sellers and
other factors. See "Risk Factors -- Shares Eligible for Future Sale" and "Risk
Factors -- No Prior Public Market; Possible Volatility of Stock Price."
LOCK-UP AGREEMENTS AND REGISTRATION OF OPTIONS
All officers and directors of the Company and all existing holders of the
Common Stock and options to purchase Common Stock have agreed that they will
not, without the prior written consent of Josephthal, directly or indirectly,
offer to sell, sell, contract to sell or otherwise dispose of any shares of
Common Stock beneficially owned by them for a period of nine months after the
effective date of this Offering (the "Lock-up Period"). Josephthal may, in its
sole discretion and at any time, without notice, release all or any portion of
the securities subject to lock-up agreements.
Options to purchase a total of 415,000 shares ("Option Shares") of Common
Stock have been granted by the Company. All of the Options Shares are subject to
the lock-up agreements described above. An additional 335,000 shares of Common
Stock are available for future grants under the Plan. See "Management -- 1998
Stock Option Plan."
The Company intends to file a registration statement under the Securities
Act on Form S-8 to register all shares of Common Stock subject to outstanding
stock options and Common Stock issuable pursuant to the Company's stock plans,
promptly upon expiration of the Lock-up Period. Following the filing of the Form
S-8, shares issued under the Company's stock plans will be eligible for sale in
the public markets upon vesting and exercise of options or awards, subject to
the Rule 144 volume restrictions applicable to affiliates.
46
<PAGE> 48
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Josephthal &
Co. Inc. is acting as the Representative (the "Representative"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of shares of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Josephthal & Co. Inc........................................
---------
Total............................................. 2,300,000
=========
</TABLE>
The Underwriters are committed to purchase all the shares of Common Stock
offered hereby, if any of such shares are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to the
conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
initially propose to offer the Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $ per share of Common
Stock. Such dealers may re-allow a concession not in excess of $ per share
of Common Stock to other dealers. After the commencement of the Offering, the
public offering price, concession and reallowance may be changed by the
Representative.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed five percent of
the total number of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay the Representative an expense allowance on a non-accountable
basis equal to one and one-half percent of the gross proceeds of the Offering,
of which $25,000 has been paid to date.
The Underwriters have been granted an option by the Company, exercisable
within 45 days of the date of this Prospectus, to purchase up to an additional
345,000 shares of Common Stock at the initial public offering price per share of
Common Stock offered hereby, less underwriting discounts and the non-accountable
expense allowance (the "Over-Allotment Option"). Such option may be exercised
solely for the purpose of covering over-allotments, if any, incurred in the sale
of the shares offered hereby. To the extent such option is exercised, in whole
or in part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional shares of Common Stock
proportionate to its initial commitment.
The Company has agreed that, for five (5) years after the effective date of
this Prospectus, the Representative will have the right to designate one
individual to be elected to the Company's Board of Directors. Such individual
may be a director, officer, employee or affiliate of the Representative. In the
event the Representative elects not to designate a person to serve on the
Company's Board of Directors, the Representative may designate an observer to
attend meetings of the Board of Directors.
All of the Company's officers and directors and all existing holders of
Common Stock and holders of options to purchase Common Stock have executed
agreements pursuant to which they have agreed not to offer to sell, sell,
transfer, hypothecate or otherwise encumber or dispose of any beneficial
interest in any shares of Common Stock owned by them, directly or indirectly,
without the prior written consent of Josephthal, for a period of nine months
from the effective date of this Offering. An appropriate legend shall be marked
on the face of the certificates representing all such securities.
Upon consummation of this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the Representative's Warrants to
purchase from the Company 230,000 shares of Common
47
<PAGE> 49
Stock. The Representative's Warrants are initially exercisable at a price per
share equal to 120% of the initial public offering price for a period of four
years commencing one year after the date of this Prospectus and are restricted
from sale, transfer, assignment or hypothecation for a period of twelve months
from the date hereof, except to officers of Josephthal. The Representative's
Warrants also provide for adjustment in the number of shares of Common Stock
issuable upon the exercise thereof as a result of certain subdivisions and
combinations of the Common Stock. The Representative's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise of the Representative's Warrants.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representative and
is not necessarily related to the Company's asset value, net worth or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of establishing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 345,000 shares of Common Stock, by
exercising the Over-Allotment Option. In addition, the Representative may impose
"penalty bids" under contractual arrangements with the Underwriters, whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to the
copies of such agreements which are filed as exhibits to the Registration
Statement. See "Additional Information."
48
<PAGE> 50
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
Miami, Florida. Orrick, Herrington & Sutcliffe LLP New York, New York, has acted
as counsel for the Underwriters in connection with the Offering.
EXPERTS
The Financial Statements included in this Prospectus and Registration
Statement, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent certified public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended, with respect to the shares of Common Stock offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance, reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from such office upon
payment of the prescribed fees. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with annual
reports containing audited financial statements and such other periodic reports
as the Company deems appropriate or as may be required by law.
49
<PAGE> 51
PRESTIGE COSMETICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REGISTRANT
Report of Independent Certified Public Accountants........ F-3
Balance Sheets -- September 30, 1996 and 1997 and March
31, 1998 (Unaudited)................................... F-4
Statements of Operations -- For the Years Ended September
30, 1995, 1996 and 1997 and for the Six Months Ended
March 31, 1997 and 1998 (Unaudited).................... F-5
Statements of Shareholders' Equity -- For the Years Ended
September 30, 1995, 1996 and 1997 and for the Six
Months Ended March 31, 1998 (Unaudited)................ F-6
Statements of Cash Flows -- For the Years Ended September
30, 1995, 1996 and 1997 and for the Six Months Ended
March 31, 1997 and 1998 (Unaudited).................... F-7
Notes to Financial Statements............................. F-8
PRESTIGE COSMETICS S.r.l.
Report of Independent Certified Public Accountants........ F-17
Balance Sheets -- December 31, 1997 and March 31, 1998
(Unaudited)............................................ F-18
Statements of Income -- For the Year Ended December 31,
1997, and for the Three Months Ended March 31, 1998
(Unaudited)............................................ F-19
Statements of Shareholders' Equity -- For the Year Ended
December 31, 1997, and for the Three Months Ended March
31, 1998 (Unaudited)................................... F-20
Statements of Cash Flows -- For the Year Ended December
31, 1997, and for the Three Months Ended March 31, 1998
(Unaudited)............................................ F-21
Notes to Financial Statements............................. F-22
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction to Pro Forma Financial Statements............ F-29
Pro Forma Balance Sheet -- March 31, 1998................. F-30
Pro Forma Statement of Operations -- For the Six Months
Ended March 31, 1998................................... F-31
Pro Forma Statement of Operations -- For the Year Ended
September 30, 1997..................................... F-32
Notes to Pro Forma Financial Statements................... F-33
</TABLE>
F-1
<PAGE> 52
PRESTIGE COSMETICS CORPORATION
F-2
<PAGE> 53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Prestige Cosmetics Corporation:
We have audited the accompanying balance sheets of Prestige Cosmetics
Corporation (a Florida corporation) as of September 30, 1996 and 1997 and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Cosmetics
Corporation as of September 30, 1996 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.
Miami, Florida,
February 27, 1998 (except for the
matters discussed in Note 11, as to
which the date is June 16, 1998).
F-3
<PAGE> 54
PRESTIGE COSMETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 300 $ 300 $ 300
Accounts receivable, net............................. 2,094,428 1,226,418 1,156,819
Due from related parties............................. 220,275 840,342 750,711
Inventories.......................................... 2,349,010 4,621,983 3,849,917
Deferred income taxes................................ 307,527 253,865 500,784
Prepaid expenses and other current assets............ -- 20,259 24,005
---------- ---------- ----------
Total current assets.............................. 4,971,540 6,963,167 6,282,536
PROPERTY AND EQUIPMENT, net............................ 1,490,530 1,723,239 1,783,645
OTHER ASSETS........................................... 122,985 349,275 360,835
---------- ---------- ----------
Total assets................................. $6,585,055 $9,035,681 $8,427,016
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $3,212,892 $3,134,206 $1,665,738
Accrued expenses..................................... 176,789 233,056 130,197
Customer deposits.................................... 82,679 81,344 240,441
Line of credit....................................... 1,364,748 2,246,724 2,398,771
Current portion of long-term debt.................... 83,333 83,333 83,333
Notes payable -- shareholders........................ 754,320 922,596 1,417,308
Due to related parties............................... 26,492 15,057 23,745
Income taxes payable................................. 170,384 641,817 573,961
---------- ---------- ----------
Total current liabilities......................... 5,871,637 7,358,133 6,533,494
LONG-TERM DEBT, net of current portion................. 166,667 83,333 41,667
DEFERRED INCOME TAXES.................................. 919 25,367 25,367
---------- ---------- ----------
Total liabilities............................ 6,039,223 7,466,833 6,600,528
---------- ---------- ----------
COMMITMENTS (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value, 5,000,000 shares
authorized, no shares issued or outstanding....... -- -- --
Common stock, par value $.01 per share; 30,000,000
shares authorized 6,453,000 shares issued and
outstanding....................................... 64,530 64,530 64,530
Retained earnings.................................... 481,302 1,504,318 1,761,958
---------- ---------- ----------
Total shareholders' equity........................ 545,832 1,568,848 1,826,488
---------- ---------- ----------
Total liabilities and shareholders' equity... $6,585,055 $9,035,681 $8,427,016
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-4
<PAGE> 55
PRESTIGE COSMETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................ $10,468,747 $13,770,927 $20,252,376 $10,817,306 $7,383,197
COST OF GOODS SOLD............... 5,440,284 7,042,215 9,022,046 4,610,275 3,152,653
----------- ----------- ----------- ----------- ----------
Gross profit................ 5,028,463 6,728,712 11,230,330 6,207,031 4,230,544
----------- ----------- ----------- ----------- ----------
OPERATING EXPENSES:
Selling, general and
administrative expenses..... 4,183,622 5,784,582 7,310,202 3,858,215 3,236,070
Shareholders' compensation..... 704,659 505,125 1,513,370 273,525 256,320
Provision for doubtful
accounts.................... 72,047 115,127 220,161 81,639 56,643
Depreciation and
amortization................ 143,831 174,291 255,963 117,378 93,734
Foreign exchange (gain) loss... 161,285 (110,662) (179,101) (89,550) (87,567)
Unrealized foreign exchange
(gain) loss................. (28,626) (16,772) (19,889) -- 49,168
----------- ----------- ----------- ----------- ----------
Total operating expenses....... 5,236,818 6,451,691 9,100,706 4,241,207 3,604,368
----------- ----------- ----------- ----------- ----------
Operating income (loss)........ (208,355) 277,021 2,129,624 1,965,824 626,176
----------- ----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense............... (50,731) (89,916) (138,811) (64,303) (118,599)
Interest expense -- related
parties..................... (57,034) (52,255) (64,782) (25,654) (64,712)
Other.......................... -- 9,283 (12,994) (12,736) --
----------- ----------- ----------- ----------- ----------
Total other income
(expense)................. (107,765) (132,888) (216,587) (102,693) (183,311)
----------- ----------- ----------- ----------- ----------
Income (loss) before
provision (benefit) for
income taxes.............. (316,120) 144,133 1,913,037 1,863,131 442,865
PROVISION (BENEFIT) FOR INCOME
TAXES.......................... (120,126) 59,980 890,021 777,746 185,225
----------- ----------- ----------- ----------- ----------
Net income (loss)........... $ (195,994) $ 84,153 $ 1,023,016 $ 1,085,385 $ 257,640
=========== =========== =========== =========== ==========
EARNINGS PER SHARE:
Basic and diluted.............. $ (.03) $ .01 $ .16 $ .17 $ .04
=========== =========== =========== =========== ==========
Weighted average shares
outstanding................. 6,453,000 6,453,000 6,453,000 6,453,000 6,453,000
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 56
PRESTIGE COSMETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
BALANCE, September 30, 1994............................ $64,530 $ 593,143 $ 657,673
Net loss............................................. -- (195,994) (195,994)
------- ---------- ----------
BALANCE, September 30, 1995............................ 64,530 397,149 461,679
Net income........................................... -- 84,153 84,153
------- ---------- ----------
BALANCE, September 30, 1996............................ 64,530 481,302 545,832
Net income........................................... -- 1,023,016 1,023,016
------- ---------- ----------
BALANCE, September 30, 1997............................ 64,530 1,504,318 1,568,848
Net income (unaudited)............................... -- 257,640 257,640
------- ---------- ----------
BALANCE, March 31, 1998
(unaudited).......................................... $64,530 $1,761,958 $1,826,488
======= ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 57
PRESTIGE COSMETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (195,994) $ 84,153 $ 1,023,016 $ 1,085,385 $ 257,640
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization........... 143,831 174,291 255,963 117,378 93,734
Provision for doubtful accounts......... 72,047 115,127 220,161 81,639 56,643
Loss on disposition of property......... -- 3,453 258 -- --
Deferred income tax (benefit)
provision............................. (149,167) (138,264) 78,110 (121,772) (246,919)
Changes in operating assets and
liabilities:
Accounts receivable................... 304,091 (973,908) 647,849 (617,025) 12,956
Due from related parties.............. 29,125 (74,062) (620,067) (380,461) 17,377
Inventories........................... (223,307) (821,981) (2,272,973) (312,624) 772,066
Prepaid expenses and other current
assets............................. 8,042 12,446 (20,259) (79,576) (3,746)
Other assets.......................... 42,382 (116,013) (205,194) (30,039) (28,533)
Accounts payable...................... 156,981 1,766,660 (78,686) (938,900) (1,468,468)
Accrued expenses...................... (31,711) 58,061 56,267 366,038 (102,859)
Customer deposits..................... 9,527 10,702 (1,335) (46,745) 159,097
Due to related parties................ 12,146 (31,879) (11,435) 29,265 80,942
Income taxes payable.................. -- 170,384 471,433 899,518 (67,856)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities............. 177,993 239,170 (456,892) 52,081 (467,926)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................... (100,329) (1,291,944) (488,930) (104,442) (154,140)
(Increase) decrease in equipment
deposits................................ (67,779) 85,570 (21,096) (70,929) 16,973
---------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (168,108) (1,206,374) (510,026) (175,371) (137,167)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and
debt.................................... 1,475,000 12,624,605 21,536,146 10,076,593 8,571,256
Repayments on line of credit and debt..... (1,475,000) (11,759,856) (20,737,504) (9,806,349) (8,460,875)
Borrowings from shareholders.............. 289,548 229,255 668,026 204,652 644,712
Repayments to shareholders................ (295,933) (130,000) (499,750) (351,606) (150,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities............. (6,385) 964,004 966,918 123,290 605,093
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents................. 3,500 (3,200) -- -- --
CASH AND CASH EQUIVALENTS, beginning of
period.................................... -- 3,500 300 300 300
---------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.... $ 3,500 $ 300 $ 300 $ 300 $ 300
========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest.................................. $ 60,664 $ 89,917 $ 264,449 $ 62,110 $ 119,983
========== =========== =========== =========== ===========
Income taxes.............................. $ 4,950 $ 23,616 $ 334,794 $ 66,220 $ 500,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 58
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Description of Company
Prestige Cosmetics Corporation (the "Company", formerly known as Lancetti
Cosmetics Corporation) was incorporated in the State of Florida on February 21,
1980. The Company is a manufacturer and wholesaler of cosmetic products,
principally in the United States. The Company also has agreements with
affiliated and independent distributors of its products in Canada, Australia and
Italy (the "Affiliated Entities"). Subsequent to September 30, 1997, the Company
entered into agreements to acquire the Affiliated Entities (see Note 11).
Information as of March 31, 1998 and 1997 is unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash, petty cash and interest-bearing
deposits with original maturities of 90 days or less.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the respective assets or lease term,
if shorter, as follows:
<TABLE>
<CAPTION>
YEARS
-------------
<S> <C>
Building.................................................... 30
Furniture and equipment..................................... 5 - 7
Leasehold improvements...................................... Life of lease
</TABLE>
Repairs of property and equipment and minor replacements and renewals are
charged to maintenance expense, which is included in selling, general and
administrative expense, as incurred.
Inventories
Inventories consist of items purchased for resale and production and are
stated at the lower of cost (first-in, first-out) or market. Inventories are
comprised of material purchases and manufacturing costs for manufactured
products. Manufacturing costs principally represent allocated labor and overhead
costs incurred in the manufacturing of the product.
Revenue Recognition
Sales are recorded at the time of shipment of products. Typically, the
Company is not contractually obligated to accept returns. However, the Company
emphasizes customer service and may accept returns in order to assure customer
satisfaction. The Company establishes reserves for estimated returns and
allowances at the time of shipment. In addition, reserves for customer discounts
and rebates are recorded when revenues are recognized. All such reserves are
deducted from sales and accounts receivable in the accompanying statements of
operations and balance sheets.
While the Company maintains reserves for product returns which it considers
adequate the possibility exists that the Company could experience returns at a
rate significantly exceeding its historical sales, which could have a material
adverse impact on the Company's financial position and results of operations.
During the year ended September 30, 1996, the Company granted a single
customer extended payment terms for the purchase of approximately $1.1 million
of inventories. Except for approximately
F-8
<PAGE> 59
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$440,000 of this inventory for which the customer paid, revenue and the
associated cost of sales have not been recorded on this transaction.
Foreign Exchange
The Company purchases a significant amount of its inventories from foreign
vendors. The accounts payable balances with such vendors are translated to U.S.
dollars at the exchange rates in effect at each balance sheet date. The
resulting gain or loss between the translated amount at the balance sheet date
and the date of receipt of the vendor invoice is included in the accompanying
statements of operations as unrealized foreign exchange gain or loss. Payments
made to such vendors during the reporting period are translated to U.S. dollars
at the date of payment and the resulting gain or loss between the translated
amount at the time of payment and the date of receipt of the vendor invoice is
included in the accompanying statements of operations as foreign exchange gain
or loss.
Income Taxes
The Company provides Federal and state income taxes at the applicable
Federal and state statutory rates. Deferred income taxes are recorded to reflect
the tax consequences of future years of differences between the tax bases of
assets and liabilities and the amounts recorded for financial reporting purposes
in accordance with the Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes".
Advertising
The Company expenses the cost of advertising as incurred or when such
advertising initially takes place. Advertising expense was $258,500, $638,900
and $637,600 for the years ended September 30, 1995, 1996 and 1997,
respectively, and $182,029 (unaudited) and $273,258 (unaudited) for the six
months ended March 31, 1997 and 1998, respectively.
Fair Value of Financial Instruments
The Company's financial instruments, primarily consisting of cash and cash
equivalents, accounts receivable and borrowings, approximate fair value due to
their short-term nature or interest rates that approximate market.
Use of 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.
Interim Financial Statements
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1998, and the results of operations for the six month
periods ended March 31, 1997 and 1998. The results of operations and cash flows
for the six month period ended March 31, 1998 are not necessarily indicative of
the results of operations or cash flows which may be reported for the remainder
of 1998.
F-9
<PAGE> 60
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". This statement simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable to
international EPS standards. SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997 and requires
restatement of all prior periods presented. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted EPS includes the potential impact
of convertible securities and dilutive common stock equivalents using the
treasury stock method of accounting. The Company has no common stock
equivalents.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of statements of
financial position. Comprehensive income is defined as the change in equity
during the financial reporting period of a business enterprise resulting from
non-owner sources. The Company does not currently have income which would be
considered in other comprehensive income and therefore does not believe the
adoption of SFAS No. 130 will have a significant impact on its financial
statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is required to be adopted for
fiscal years beginning after December 15, 1997. This statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments including, among other things, a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. The Company has not yet determined the impact implementation of SFAS No.
131 will have on its financial statement presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable............................ $2,234,803 $1,555,324 $1,533,488
Less -- Allowance for doubtful accounts........ (140,375) (328,906) (376,669)
---------- ---------- ----------
Accounts receivable, net.................. $2,094,428 $1,226,418 $1,156,819
========== ========== ==========
</TABLE>
F-10
<PAGE> 61
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------- --------------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period.................... $ 57,312 $ 69,348 $140,375 $140,375 $328,906
Provision for doubtful
accounts............... 72,047 115,127 220,161 81,639 56,643
Write-offs................ (60,011) (44,100) (31,630) (5,733) (8,880)
-------- -------- -------- -------- --------
Balance, end of period...... $ 69,348 $140,375 $328,906 $216,281 $376,669
======== ======== ======== ======== ========
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $ 81,536 $ 94,481 $ 100,060
Finished goods................................. 2,267,474 4,527,502 3,749,857
---------- ---------- ----------
Inventories.................................. $2,349,010 $4,621,983 $3,849,917
========== ========== ==========
</TABLE>
Approximately 45% of the Company's inventories are purchased from European
suppliers.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building....................................... $ 115,000 $ 115,000 $ 115,000
Furniture and equipment........................ 1,661,806 1,846,299 2,000,439
Leasehold improvements......................... 599,275 609,914 609,914
---------- ---------- ----------
2,376,081 2,571,213 2,725,353
Less -- Accumulated depreciation and
amortization................................. (885,551) (847,974) (941,708)
---------- ---------- ----------
Property and equipment, net.......... $1,490,530 $1,723,239 $1,783,645
========== ========== ==========
</TABLE>
F-11
<PAGE> 62
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a bank, original principal amount
of $250,000, interest payable monthly at prime
plus .25% (8.75% at September 30, 1997), due in
thirty-six monthly installments of $6,944
beginning October 5, 1996, secured by the assets
of the Company................................... $250,000 $166,666 $125,000
Less -- Current maturities......................... (83,333) (83,333) (83,333)
-------- -------- --------
Long-term debt..................................... $166,667 $ 83,333 $ 41,667
======== ======== ========
</TABLE>
All of the Company's borrowings with a bank are cross-collateralized and
cross-defaulted.
Borrowings under the Company's $3 million revolving line of credit with a
bank bear interest payable monthly at prime (8.5% at September 30, 1997) and are
due on demand. The line is collateralized by substantially all of the assets of
the Company and guaranteed by the shareholders.
The revolving line of credit contains various covenants pertaining to
minimum ratios, dividends, net worth, shareholder debt, ownership and the sale
of assets. At September 30, 1997, the Company was not in compliance with certain
covenants related to financial ratios. As a result, the Company received a
waiver from the bank on January 28, 1998, waiving action on the violation of the
covenants. The Company was in compliance with all applicable covenants at March
31, 1998 (unaudited). On February 19, 1998, the Company increased its existing
line of credit in the amount of $3 million to $3.5 million and extended the term
until May 30, 1999.
On December 17, 1997, the Company entered into a $500,000 term loan
agreement with a bank. Interest only payments at prime plus 1% (9.5% at
September 30, 1997) are due on a monthly basis until March 1, 1998 at which time
all unpaid principal and interest is due. The loan is cross-collateralized and
cross-defaulted with the $3,000,000 line of credit. The funds were not received
by the Company until January 5, 1998.
7. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- ---------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current................. $ 29,041 $ 198,244 $811,911 $ 899,518 $ 432,144
Deferred................ (149,167) (138,264) 78,110 (121,772) (246,919)
--------- --------- -------- --------- ---------
Total......... $(120,126) $ 59,980 $890,021 $ 777,746 $ 185,225
========= ========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------------- --------------------
1995 1996 1997 1997 1998
--------- ------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal.................. $(102,739) $51,298 $761,202 $665,177 $158,416
State.................... (17,387) 8,682 128,819 112,569 26,809
--------- ------- -------- -------- --------
Total.......... $(120,126) $59,980 $890,021 $777,746 $185,225
========= ======= ======== ======== ========
</TABLE>
F-12
<PAGE> 63
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of each type of temporary differences that give rise to a
significant portion of deferred tax assets (liabilities) and the total deferred
tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized inventory costs....................... $ 84,870 $141,071 $141,071
Depreciation...................................... (9,927) (48,411) (48,411)
Allowance for doubtful accounts................... 174,423 123,767 189,912
Inventory reserves................................ -- -- 180,774
Accrued interest and other........................ 57,242 12,071 12,071
-------- -------- --------
$306,608 $228,498 $475,417
======== ======== ========
</TABLE>
The amounts have been presented in the financial statements as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred income tax assets................ $307,527 $253,865 $500,784
Non-current deferred income taxes................. (919) (25,367) (25,367)
-------- -------- --------
$306,608 $228,498 $475,417
======== ======== ========
</TABLE>
A reconciliation of the difference between the expected provision (benefit)
for income taxes using the Federal tax rate and the Company's actual provision
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------------- --------------------
1995 1996 1997 1997 1998
--------- ------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision at statutory
Federal tax rate of
34%.................... $(107,481) $49,005 $650,433 $633,465 $150,574
State income taxes....... (11,475) 5,730 85,020 82,802 19,682
Meals and
entertainment.......... 2,367 11,021 12,629 41,289 43,521
Other.................... (3,537) (5,776) 141,939 20,190 (28,552)
--------- ------- -------- -------- --------
$(120,126) $59,980 $890,021 $777,746 $185,225
========= ======= ======== ======== ========
</TABLE>
8. COMMITMENTS
Lease Commitments
In May 1997, the Company entered into a 60-month lease agreement for its
corporate headquarters with C&C Partnership, an entity owned by the Company's
shareholders, which expires in May 2002. The lease calls for monthly payments of
$25,200 plus real estate and sales taxes, insurance and other costs. The rent
increases every year in June and ranges from $25,200 per month for 1997-1998 to
$30,630 per month for 2001-2002.
Included in rental expense is $0, $203,520, $310,368, $152,640 (unaudited)
and $160,272 (unaudited) for the years ended September 30, 1995, 1996 and 1997
and for the six months ended March 31, 1997 and 1998, respectively, for related
party rent.
F-13
<PAGE> 64
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments are as follows:
<TABLE>
<CAPTION>
RELATED NON-RELATED
SEPTEMBER 30, PARTY PARTIES TOTAL
- ------------- ---------- ----------- ----------
<S> <C> <C> <C>
1998......................................... $ 325,886 $29,621 $ 355,507
1999......................................... 342,181 29,409 371,590
2000......................................... 359,289 17,715 377,004
2001......................................... 377,250 2,449 379,699
2002......................................... 259,742 -- 259,742
---------- ------- ----------
$1,664,348 $79,194 $1,743,542
========== ======= ==========
</TABLE>
Guaranties
The Company and its stockholders individually have guaranteed a bank loan
of C&C General Partnership. The balance in the bank loan was $1,137,372 as of
March 31, 1998 (unaudited). The loan agreement contains certain restrictive
covenants similar to those discussed in Note 6.
Litigation
As a manufacturer and marketer of cosmetic products, the Company is subject
to product liability claims from consumers. The nature and use of cosmetic
products could give rise to product liability claims if one or more users of the
Company's products were to suffer adverse actions following their use of the
products. The Company maintains insurance coverage for these claims; however, a
partially or completely uninsured successful claim against the Company could
have a material adverse effect on the Company's financial position and results
of operations.
Concentrations
The Company is dependent on a limited number of customers for a significant
portion of its revenues. During the year ended September 30, 1997, Rite-Aid,
Eckerd Drugs and Wal-Mart were the Company's three largest customers, and
accounted for approximately 13%, 6%, and 6%, respectively, of the Company's net
sales. No single customer accounted for more than 10% of the Company's sales
during the years ended September 30, 1995 or 1996. During the six months ended
March 31, 1998 (unaudited), Wal-Mart and Rite-Aid accounted for approximately
11% and 7%, respectively, of the Company's net sales. The loss of any of the
Company's significant customers, especially Rite-Aid, Eckerd Drugs, or Wal-Mart
or a decrease in orders from any such customers could have a material adverse
effect on the Company's financial position and results of operations.
The Company is currently dependent on a sole source manufacturer for all
its pencil products which accounts for approximately 45% of the Company's net
sales. The Company does not maintain a written agreement with such pencil
manufacturer and, accordingly, such pencil manufacturer could terminate its
relationship at any time.
10. RELATED PARTY TRANSACTIONS
The Company purchases goods from and sells goods to certain of the
Affiliated Entities. Purchases from certain of the Affiliated Entities
aggregated $80,742, $41,599, $61,908, $56,609 (unaudited) and $6,053 (unaudited)
for the years ended September 30, 1995, 1996 and 1997, and for the six months
ended March 31, 1997 and 1998, respectively. Sales to certain of the Affiliated
Entities aggregate $267,941, $1,209,825, $2,044,337, $958,149 (unaudited) and
$973,123 (unaudited) for the years ended September 30, 1995, 1996,
F-14
<PAGE> 65
PRESTIGE COSMETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and 1997 and for the six months ended March 31, 1997 and 1998, respectively.
Subsequent to September 30, 1997, the Company entered agreements to acquire
affiliated entities (see Note 11).
The Company has notes payable to shareholders which bear interest at 10%
for 1997 and 9% for 1996 and are due on demand.
11. SUBSEQUENT EVENTS
The Company is in the process of preparing an initial public offering of up
to 2,300,000 of its common shares. The Company will utilize the net proceeds of
the offering to repay borrowings and other general corporate purposes.
In connection with the Company's initial public offering, the Company's
Certificate of Incorporation will be amended to increase the number of
authorized shares of Common Stock from 500 to 30,000,000 shares and to change
the par value of the common stock to $.01 per share, and the Company will
declare a 12,906 for 1 stock split of the Company's Common Stock. The amended
outstanding shares and the stock split have been retroactively reflected in the
accompanying financial statements.
The Company is in the process of finalizing its agreements to acquire the
Affiliated Entities, for consideration of 1,547,000 shares of the Company's
common stock. Two of the acquisitions will be accounted for under the purchase
method of accounting. One of the acquisitions will be accounted for in a manner
similar to a pooling-of-interests since the merger is between entities under
common control.
F-15
<PAGE> 66
PRESTIGE COSMETICS S.r.l.
F-16
<PAGE> 67
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO PRESTIGE COSMETICS S.r.l.:
We have audited the accompanying balance sheet of Prestige Cosmetics S.r.l.
(an Italian corporation) as of December 31, 1997, and the related statements of
income, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with United States 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Cosmetics S.r.l. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in accordance with the accounting principles generally
accepted in the United States.
Miami, Florida,
May 20, 1998 (except for the
matter discussed in Note 11, as to
which the date is June 16, 1998).
F-17
<PAGE> 68
PRESTIGE COSMETICS S.r.l.
BALANCE SHEETS
(IN MILLIONS OF ITALIAN LIRE, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 296 1,056
Accounts receivable, net.................................. 2,322 1,861
Due from related parties.................................. 11 11
Inventories............................................... 831 874
Prepaid expenses and other current assets................. 161 157
----- -----
Total current assets................................... 3,621 3,959
PROPERTY AND EQUIPMENT, net................................. 1,279 1,253
OTHER ASSETS................................................ 17 8
----- -----
Total assets...................................... 4,917 5,220
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 849 1,230
Accrued expenses.......................................... 257 385
Capital lease obligation.................................. 218 197
Lines of credit........................................... 370 296
Current portion of long-term debt......................... 234 237
Due to Prestige Cosmetics Corporation and its
affiliates............................................. 984 494
Income taxes payable...................................... 206 399
----- -----
Total current liabilities.............................. 3,118 3,238
LONG-TERM DEBT, net of current portion...................... 586 525
RESERVE FOR TERMINATION INDEMNITIES......................... 783 856
----- -----
Total liabilities...................................... 4,487 4,619
----- -----
COMMITMENTS (Note 10)
SHAREHOLDERS' EQUITY:
Common stock, par value Lire 1,000 per share; 170,000
shares authorized, issued and outstanding.............. 170 170
Retained earnings......................................... 260 431
----- -----
Total shareholders' equity............................. 430 601
----- -----
Total liabilities and shareholders' equity........ 4,917 5,220
===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-18
<PAGE> 69
PRESTIGE COSMETICS S.r.l.
STATEMENTS OF INCOME
(IN MILLIONS OF ITALIAN LIRE, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... 8,611 2,107
COST OF GOODS SOLD.......................................... 3,710 859
----- -----
Gross profit........................................... 4,901 1,248
----- -----
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 2,449 666
Shareholder's compensation................................ 270 67
Royalties................................................. 951 --
Depreciation and amortization............................. 473 81
Termination indemnities................................... 143 36
Unrealized loss on foreign currency translation, net...... 79 13
----- -----
Total operating expenses............................... 4,365 863
----- -----
Operating income....................................... 536 385
----- -----
OTHER INCOME (EXPENSE):
Interest expense.......................................... (117) (31)
Other, net................................................ (130) 10
----- -----
Total other income (expense)........................... (247) (21)
----- -----
Income before provision for income taxes............... 289 364
PROVISION FOR INCOME TAXES.................................. 199 193
----- -----
Net income............................................. 90 171
===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-19
<PAGE> 70
PRESTIGE COSMETICS S.r.l.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS OF ITALIAN LIRE, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996.................................. 20 223 243
Net income................................................ -- 90 90
Distributions to shareholders............................. -- (53) (53)
Proceeds from sale of common stock........................ 150 -- 150
--- --- ---
BALANCE, December 31, 1997.................................. 170 260 430
Net income (unaudited).................................... -- 171 171
--- --- ---
BALANCE, March 31, 1998 (unaudited)......................... 170 431 601
=== === ===
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-20
<PAGE> 71
PRESTIGE COSMETICS S.r.l.
STATEMENTS OF CASH FLOWS
(IN MILLIONS OF ITALIAN LIRE, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ 90 171
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 473 81
Loss on disposal of trademark.......................... 18 --
Loss on disposal of property and equipment............. 51 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (675) 461
Due from related parties............................. (11) --
Inventories.......................................... (110) (43)
Prepaid expenses and other current assets............ (114) 4
Other assets......................................... 53 9
Accounts payable..................................... (692) 381
Accrued expenses..................................... (85) 128
Reserve for termination indemnities.................. 293 73
Due to Prestige Cosmetics Corporation and its
affiliates.......................................... 282 (490)
Income taxes payable................................. 199 193
---- -----
Net cash provided by (used in) operating
activities...................................... (228) 968
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (411) (55)
Proceeds from sale of property and equipment.............. 47 --
Proceeds from sale of common stock........................ 150 --
Distributions to shareholders............................. (53) --
---- -----
Net cash used in investing activities............. (267) (55)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt........................................ 500 --
Repayments of debt........................................ (89) (58)
Net repayments on lines-of-credit......................... (7) (74)
Payment on capital lease obligation....................... -- (21)
---- -----
Net cash provided by (used in) financing
activities...................................... 404 (153)
---- -----
Net increase (decrease) in cash and cash
equivalents..................................... (91) 760
CASH AND CASH EQUIVALENTS, beginning of period.............. 387 296
---- -----
CASH AND CASH EQUIVALENTS, end of period.................... 296 1,056
==== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
NON-CASH ACTIVITY:
Property and equipment acquired pursuant to capital
lease.................................................. 192 --
==== =====
CASH PAID DURING THE PERIOD FOR:
Interest.................................................. 95 24
==== =====
Income taxes.............................................. -- --
==== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE> 72
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF ITALIAN LIRE, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS
Prestige Cosmetics S.r.l. (a limited liability Corporation, the "Company")
was incorporated in Italy on August 1, 1994. The Company began operations at the
beginning of 1995, upon the acquisition of the operations of FR S.r.l., a
Company that produced articles for perfumeries with the trademark Fin-Ros. The
Company was fully owned by the Ventura family until October 1997, when
SO.GE.COS. S.A. (a Belgium Corporation) made an investment in the Company in the
amount of Lire 150.
The Company manufactures and distributes make-up products, mainly
lipsticks, eyeliner, lipliner, nail lacquer and nail care products. Until June
1997, the Company also manufactured and distributed Fin-Ros products. In June
1997, the Company sold the trademark for Fin-Ros and the remaining inventory on
hand. As a result, the Company charged to expense the remaining unamortized
goodwill of approximately Lire 245 derived from the Fin-Ros acquisition. The net
loss from the sale of the Fin-Ros trademark was Lire 18 and is included as a
component of other income (expense) in the accompanying 1997 statement of
income. Information as of March 31, 1998 is unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles. The more significant
accounting policies employed by the Company are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash and interest bearing deposits with
original maturities of 90 days or less at the date of acquisition.
Inventories
Inventories are stated at the lower of purchase or production cost
(first-in, first-out method) or market. Inventory costs include material, labor
and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the respective assets or lease term,
if shorter, as follows:
<TABLE>
<CAPTION>
YEARS
----------------
<S> <C>
Leasehold improvements...................................... Shorter of asset
useful life or
lease term
Furniture and fixtures...................................... 8
Machinery and equipment..................................... 5 - 7
Vehicles.................................................... 4 - 5
</TABLE>
Repairs and maintenance costs are expensed as incurred.
Foreign Currency
Certain of the Company's accounts receivable and payable balances are
denominated in currency other than the Lira. These balances are translated into
Lira at each balance sheet date. The resulting gain or loss
F-22
<PAGE> 73
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
between the translated amount at the balance sheet date and the date of the
transaction generating the receivable or payable balance is included as a
component of income from operations.
Reserve for Termination Indemnities
Personnel
Italian Law requires that the Company record a reserve for employee
termination benefits which is calculated based upon compensation for each year
plus the revaluation of prior period balances using an index derived from the
annual increase in the Official Italian Cost of Living Index. The Emerging
Issues Task Force of the Financial Accounting Standards Board has determined
that this reserve is a defined benefit plan for the purpose of Statement of
Financial Accounting Standards ("SFAS") No. 87 and that the liability calculated
under Italian Law is more conservative than the amount that would be calculated
by SFAS No. 87. The difference would not have a material effect on the
accompanying financial statements.
Sales Agents
Under Italian National Collective Agreement, sales agents have the right to
receive, under certain circumstances, an indemnity upon termination. Such
indemnity is based on certain percentages of the commission earned during the
agency contract. The computation of the reserve for termination indemnities to
sales agents is made based on historical experience and other data and
represents the Company's best estimate of the actual liabilities to be paid to
sales agents.
Board of Directors
The Company accrues amounts due to the Board of Directors for benefits to
be paid by the Company upon termination of members of the Board of Directors. In
1995, the shareholders approved the following annual payments through 2001 to
the members of the Board of Directors:
Lire 150 to the Chairman -- Mr. Giorgio Ventura;
Lire 50 to the delegate Director -- Mrs. Giuliana Finelli (Mr. Ventura's
wife);
Lire 25 each to the remaining two Directors -- Mrs. Stefania Ventura and
Mrs. Claudia Ventura (Mr. Ventura's daughters).
The Company accrues the amount due to each Board member annually. The
expense for termination indemnities for the Chairman is included in
shareholder's compensation in the accompanying statements of income. In 1996,
the Board members agreed to reduce the amounts due to them by 50%.
Revenue Recognition
Sales are recorded at the time of shipment of products. The Company
establishes reserves for estimated returns and allowances at the time of
shipment. In addition, reserves for customer discounts and rebates are recorded
when revenues are recognized. All such reserves are deducted from sales and
accounts receivable in the accompanying balance sheets and statements of income.
Income Taxes
The Company provides Italian income taxes at the applicable statutory
rates. Deferred income taxes are recorded, if material, to reflect the tax
consequences of future years of tax provisions or benefits.
F-23
<PAGE> 74
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Advertising
The Company expenses the cost of advertising as incurred or when such
advertising initially takes place. Advertising expense was Lire 114 and Lire 62
(unaudited) for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively.
Fair Value of Financial Statements
The Company's financial instruments, primarily consisting of cash and cash
equivalents, accounts receivable and borrowings, approximate fair value due to
their short-term nature or interest rates that approximate market.
Use of Estimates
The preparation of financial statements in conformity with United States
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.
Interim Financial Statements
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments consisting of only normal recurring
adjustments necessary to present fairly the financial position of the Company as
of March 31, 1998, and the results of operations for the three month period
ended March 31, 1998 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of 1998.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net of allowance for doubtful accounts consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable......................................... 2,408 1,965
Less -- allowance for doubtful accounts..................... (86) (104)
----- -----
2,322 1,861
===== =====
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Raw materials.............................................. 282 296
Finished goods............................................. 549 578
--- ---
831 874
=== ===
</TABLE>
F-24
<PAGE> 75
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements...................................... 898 925
Furniture and fixtures...................................... 326 318
Machinery and equipment..................................... 345 413
Vehicles.................................................... 93 93
----- -----
1,662 1,749
Less -- accumulated depreciation............................ (383) (496)
----- -----
1,279 1,253
===== =====
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Loan with a bank, maturing November 2000, repayable in
quarterly installments, interest payable at prime less
1.5%...................................................... 500 462
Credit facility with a bank, maturing October 2001,
repayable in quarterly installments, interest payable at
prime plus 0.5%........................................... 320 300
---- ----
820 762
Less -- current portion..................................... (234) (237)
---- ----
586 525
==== ====
</TABLE>
The Company has lines of credit with certain banks that allow it to borrow
up to Lire 2,312 with interest rates to be determined at the date of borrowing.
At December 31, 1997 and March 31, 1998, Lire 370 and Lire 296 (unaudited),
respectively, are outstanding under these agreements at interest rates ranging
from 6.5% to 9.5%.
7. INCOME TAXES
Income tax expense in the accompanying financial statements represents
current income tax expense. There are no deferred taxes in the accompanying
balance sheets. The statutory income tax rate in Italy is 53%. The difference
between the statutory tax rate and the effective tax rate in the accompanying
statement of income for the year ended December 31, 1997 relates primarily to
the write-off of approximately Lire 245 of goodwill relating to the Fin-Ros
product line that is not deductible for tax purposes, partially offset by the
utilization of a net operating loss carried forward from prior years.
F-25
<PAGE> 76
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY
As of December 31, 1997, the ownership structure of the Company consists of
the following:
<TABLE>
<CAPTION>
CAPITAL
SHAREHOLDERS AMOUNT PERCENTAGE
- ------------ ------- ----------
<S> <C> <C>
SO.GE.COS. S.A.............................................. 150.0 88.24%
Mr. Giorgio Ventura......................................... 10.2 6.00
Mrs. Giuliana Finelli....................................... 3.8 2.24
Mrs. Stefania Ventura....................................... 3.0 1.76
Mrs. Claudia Ventura........................................ 3.0 1.76
----- ------
Total............................................. 170.0 100.00%
===== ======
</TABLE>
Italian Law requires that at least 5% of annual net income be appropriated
and transferred to a legal reserve until such reserve has reached 20% of paid in
capital. The legal reserve is not available for distribution and may be utilized
only to cover losses pursuant to approval by the shareholders. Retained earnings
in the accompanying financial statements include the required legal reserve as
of December 31, 1997 and March 31, 1998 (unaudited).
9. RELATED PARTY TRANSACTIONS
During 1997, the Company had hired MA.CO. S.a.s. di Federico Malventi
("MA.CO. S.a.s."), a company owned by Mr. Ventura's son-in-law, to perform
certain services for the Company. The Company incurred expenses of approximately
Lire 25 for the year ended December 31, 1997. No such expenses were incurred
during the three month period ended March 31, 1998 (unaudited). The Company has
a payable as of December 31, 1997 and March 31, 1998 (unaudited) of Lire 3
relating to these services, which is included as a component of accounts payable
in the accompanying balance sheets. Additionally, as of December 31, 1997 and
March 31, 1998 (unaudited), the Company had a receivable from MA.CO. S.a.s. of
Lire 11, for machinery to be used in the MA.CO. S.a.s. production process owned
by the Company and sold to MA.CO. S.a.s.
As of December 31, 1997 and March 31, 1998 (unaudited), MA.CO. S.a.s. uses
two of the Company's machines for no charge.
The Company has a royalty agreement with Mr. Jacques Cohen, owner of a U.S.
entity, Prestige Cosmetics Corporation ("Prestige U.S."). The agreement provides
for payment of a royalty of 12% of certain revenue of the Company to Mr. Cohen.
The agreement expires January 1, 1998. Total royalties incurred during the year
ended December 31, 1997 were Lire 951. As of December 31, 1997 and March 31,
1998, approximately Lire 618 and Lire 368 (unaudited), respectively, was due to
Mr. Cohen for royalty payments.
During the year ended December 31, 1997 and the three month period ended
March 31, 1998, the Company purchased products of approximately Lire 1,808 and
Lire 294 (unaudited), respectively, from Prestige U.S. and sold products of
approximately Lire 20 and Lire 2 (unaudited), respectively, to Prestige U.S. As
of December 31, 1997 and March 31, 1998, the Company has an outstanding payable
to Prestige U.S. of approximately Lire 366 and Lire 126 (unaudited),
respectively.
The building that the Company operates in is rented from related parties
(see Note 10).
F-26
<PAGE> 77
PRESTIGE COSMETICS S.r.l.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
Lease Commitments
Future minimum annual lease payments as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
RELATED NON-RELATED
DECEMBER 31, PARTIES PARTIES TOTAL
- ------------ ------- ----------- -----
<S> <C> <C> <C>
1998.................................................. 180 95 275
1999.................................................. 180 80 260
2000.................................................. 180 79 259
2001.................................................. 180 7 187
2002.................................................. 120 -- 120
--- --- -----
840 261 1,101
=== === =====
</TABLE>
Rent expense under the related party lease totaled Lire 120 for the year
ended December 31, 1997 and Lire 30 for the three months ended March 31, 1997.
On January 8, 1998, the Company renegotiated the terms of the leasing
contract with Mr. Finelli Dante and Mrs. Vecchi Rosina (the father-in-law and
mother-in-law of Mr. Giorgio Ventura) for the Company's warehouse and offices.
The new contract expires January 7, 2004. The total lease payments for the
duration of the rental will be Lire 840 as follows: Lire 120 per year for the
first two years, Lire 140 per year for the third and fourth year and Lire 160
per year for the last two years.
11. SUBSEQUENT EVENT
On , the Company was acquired by Prestige U.S. for
consideration of 1,000,000 shares of Prestige U.S.'s common stock. The
acquisition will be accounted for under the purchase method of accounting.
F-27
<PAGE> 78
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
F-28
<PAGE> 79
PRESTIGE COSMETICS CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to
acquisitions by the Company of its affiliates, Les Cosmetiques P.C. Inc.
("Canada"), Prestige Cosmetics PTY ("Australia") and Prestige Cosmetics S.r.l.
("Italy") (collectively, the "Affiliates") prior to the Offering.
The following is a summary of the ownership structure of Canada, Australia
and Italy:
<TABLE>
<CAPTION>
AFFILIATE OWNERS PERCENTAGE
- --------- ------ ----------
<S> <C> <C>
Canada............................. Sylvia Bouadena (sister of Jacques 100.00%
and Gabriel Cohen)
Australia.......................... Chris Dow 50.00%
Lyme Hall Pty Ltd. 50.00%
Italy.............................. So. Ge. Cos. S.A. 88.24%
Mr. Georgio Ventura 6.00%
Mrs. Giuliana Finelli 2.24%
Mrs. Stefania Ventura 1.76%
Mrs. Claudia Ventura 1.76%
</TABLE>
As the merger of the Company and Canada is between entities under common
control, such transaction will be accounted for in a manner similar to a
pooling-of-interests. On a historical basis, the results of operations and
financial position of Canada are not material to the combined results of the
Company. As such, the fiscal 1995 and 1996 financial statements of the Company
will not be restated. The acquisitions of Australia and Italy will be accounted
for as purchases with the excess of purchase price being allocated to
intangibles which will be amortized over their estimated useful lives.
Adjustments have been reflected to present the combined financial position
as of March 31, 1998 on a pro forma basis as if the mergers had occurred on
March 31, 1998, and the combined results of operations for the six month period
ended March 31, 1998 and the year ended September 30, 1997 as if the mergers had
occurred at the beginning of the period presented. Such pro forma results do not
purport to represent the actual combined financial position or combined results
of operations and may not be indicative of future combined operating results.
The accompanying unaudited pro forma statement of operations for the six
months ended March 31, 1998 includes results of operations for the six month
period ended March 31, 1998 of the Company and the affiliates.
The accompanying unaudited pro forma statement of operations for the year
ended September 30, 1997 includes the Company's results of operations for the
year ended September 30, 1997, Canada's results of operations for the year ended
December 31, 1997, Australia's results of operations for the year ended June 30,
1997 and Italy's results of operations for the year ended December 31, 1997.
The Company's pro forma operations include subsidiaries which are located
outside of the United States. Assets and liabilities as stated in the local
reporting currency are translated at the rate of exchange prevailing at the
balance sheet date. The gains or losses that result from this process are shown
in the "Cumulative translation adjustment" caption in the shareholders' equity
section of the pro forma consolidated balance sheet. Statement of operations
amounts are translated at the average rates for the period.
F-29
<PAGE> 80
PRESTIGE COSMETICS CORPORATION
PRO FORMA BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRESTIGE CANADA AUSTRALIA ITALY ADJUSTMENTS PRO FORMA
-------- ------ --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ -- $112 $ -- $ 580 $ -- $ 692
Accounts receivable, net................ 1,157 363 707 1,022 -- 3,249
Due from related parties................ 751 -- -- 6 (751)(a) 6
Inventories............................. 3,850 196 357 479 -- 4,882
Deferred income taxes................... 501 -- -- -- -- 501
Prepaid expenses and other current
assets................................ 24 62 11 86 -- 183
------ ---- ------ ------ ------ -------
Total current assets.................. 6,283 733 1,075 2,173 (751) 9,513
PROPERTY AND EQUIPMENT, net............... 1,784 29 181 689 -- 2,683
OTHER ASSETS.............................. 360 -- -- 4 7,381(b) 7,745
------ ---- ------ ------ ------ -------
Total assets..................... $8,427 $762 $1,256 $2,866 $6,630 $19,941
====== ==== ====== ====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $1,666 $235 $ 366 $ 675 $ -- $ 2,942
Accrued expenses........................ 130 81 -- 211 -- 422
Customer deposits....................... 241 -- -- -- -- 241
Line of credit.......................... 2,399 -- 192 162 -- 2,753
Current portion of long-term debt....... 83 -- -- 130 -- 213
Notes payable -- shareholders........... 1,417 -- 61 -- -- 1,478
Due to related parties.................. 24 198 460 272 (751)(a) 203
Income taxes payable.................... 574 1 20 219 -- 814
Capital lease payable................... -- -- -- 109 -- 109
------ ---- ------ ------ ------ -------
Total current liabilities............. 6,534 515 1,099 1,778 (751) 9,175
LONG-TERM DEBT, net of current portion.... 42 -- -- 288 -- 330
RESERVE FOR TERMINATION INDEMNITIES....... -- -- -- 470 -- 470
DEFERRED INCOME TAXES..................... 25 -- -- -- -- 25
------ ---- ------ ------ ------ -------
Total liabilities..................... 6,601 515 1,099 2,536 (751) 10,000
------ ---- ------ ------ ------ -------
SHAREHOLDERS' EQUITY
Common stock............................ 65 1 17 112 (115)(g) 80
Additional paid-in capital.............. -- -- -- -- 7,854(g) 7,854
Foreign currency translation
adjustment............................ -- (1) (3) (32) 35(g) (1)
Retained earnings (deficit)............. 1,761 247 143 250 (393)(g) 2,008
------ ---- ------ ------ ------ -------
Total shareholders' equity............ 1,826 247 157 330 7,381 9,941
------ ---- ------ ------ ------ -------
Total liabilities and
shareholders' equity........... $8,427 $762 $1,256 $2,866 $6,630 $19,941
====== ==== ====== ====== ====== =======
</TABLE>
F-30
<PAGE> 81
PRESTIGE COSMETICS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRESTIGE CANADA AUSTRALIA ITALY ADJUSTMENTS PRO FORMA
-------- ------ --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES.................................. $7,383 $1,097 $1,476 $2,528 $(973)(c) $11,511
COST OF GOODS SOLD......................... 3,153 633 441 1,020 (973)(c) 4,274
------ ------ ------ ------ ----- -------
Gross profit........................... 4,230 464 1,035 1,508 -- 7,237
------ ------ ------ ------ ----- -------
OPERATING EXPENSES:
Selling, general and administrative
expenses............................... 3,236 338 688 924 (163)(d) 5,023
Shareholders' compensation............... 256 30 27 72 (44)(h) 341
Provision for doubtful accounts.......... 57 -- -- -- -- 57
Depreciation and amortization............ 94 6 33 110 105(e) 348
Foreign exchange (gain) loss............. (88) -- -- -- -- (88)
Unrealized foreign exchange (gain)
loss................................... 49 -- -- 7 -- 56
------ ------ ------ ------ ----- -------
Total operating expenses............... 3,604 374 748 1,113 (102) 5,737
------ ------ ------ ------ ----- -------
Operating income (loss)................ 626 90 287 395 102 1,500
------ ------ ------ ------ ----- -------
OTHER INCOME (EXPENSE):
Interest expense......................... (119) -- (23) (31) -- (173)
Interest expense -- related parties...... (65) -- -- -- -- (65)
Other.................................... -- -- 12 (25) -- (13)
------ ------ ------ ------ ----- -------
Total other income (expense)........... (184) -- (11) (56) -- (251)
------ ------ ------ ------ ----- -------
Income before provision for income
taxes................................ 442 90 276 339 102 1,249
PROVISION FOR INCOME TAXES................. 185 18 -- 179 160(f) 542
------ ------ ------ ------ ----- -------
Net income............................. $ 257 $ 72 $ 276 $ 160 $ (58) $ 707
====== ====== ====== ====== ===== =======
EARNINGS PER SHARE:
Basic and diluted........................ $ .04 $ .09
====== =======
Weighted average shares outstanding...... 6,453 123 424 1,000 8,000
====== ====== ====== ====== =======
</TABLE>
F-31
<PAGE> 82
PRESTIGE COSMETICS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRESTIGE CANADA AUSTRALIA ITALY ADJUSTMENTS PRO FORMA
-------- ------ --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES................................. $20,252 $1,922 $1,464 $5,065 $(2,107)(c) $26,596
COST OF GOODS SOLD........................ 9,022 1,161 671 2,182 (2,107)(c) 10,929
------- ------ ------ ------ ------- -------
Gross profit.......................... 11,230 761 793 2,883 -- 15,667
------- ------ ------ ------ ------- -------
OPERATING EXPENSES:
Selling, general and administrative
expenses.............................. 7,311 565 826 2,084 (559)(d) 10,227
Shareholders' compensation.............. 1,513 50 50 159 (983)(h) 789
Provision for doubtful accounts......... 220 -- 1 -- -- 221
Depreciation and amortization........... 256 10 13 278 211(e) 768
Foreign exchange (gain) loss............ (179) -- -- -- -- (179)
Unrealized foreign exchange (gain)
loss.................................. (20) -- -- 46 -- 26
------- ------ ------ ------ ------- -------
Total operating expenses.............. 9,101 625 890 2,567 (1,331) 11,852
------- ------ ------ ------ ------- -------
Operating income (loss)............... 2,129 136 (97) 316 1,331 3,815
------- ------ ------ ------ ------- -------
OTHER INCOME (EXPENSE):
Interest expense........................ (139) (1) (15) (69) -- (224)
Interest expense -- related parties..... (64) -- -- -- -- (64)
Other................................... (13) 3 15 (77) -- (72)
------- ------ ------ ------ ------- -------
Total other income (expense).......... (216) 2 -- (146) -- (360)
------- ------ ------ ------ ------- -------
Income (loss) before provision
(benefit) for income taxes.......... 1,913 138 (97) 170 1,331 3,455
PROVISION FOR INCOME TAXES................ 890 27 -- 117 432(f) 1,466
------- ------ ------ ------ ------- -------
Net income (loss)..................... $ 1,023 $ 111 $ (97) $ 53 $ 899 $ 1,989
======= ====== ====== ====== ======= =======
EARNINGS PER SHARE:
Basic and diluted....................... $ .16 $ .25
======= =======
Weighted average shares outstanding..... 6,453 123 424 1,000 8,000
======= ====== ====== ====== =======
</TABLE>
F-32
<PAGE> 83
PRESTIGE COSMETICS CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following adjustments have been reflected to present the pro forma
financial position and results of operations of Prestige as if the acquisitions
of the Affiliates described in the Introduction to Pro Forma Financial
Statements had been consummated at March 31, 1998 for balance sheet purposes, or
at the beginning of the period presented for statement of operations purposes.
(a) Represents the elimination of amounts receivable from/payable to the Company
and the Affiliates for the sale/purchase of products.
(b) Represents the excess of the merger consideration for Australia and Italy
over the fair value of their merged net assets as follows:
<TABLE>
<S> <C>
Merger consideration (1,424,000 restricted common shares at
a value of $5.525 per share).............................. $7,868
Fair value of net assets acquired........................... 487
------
Intangible assets...................................... $7,381
======
</TABLE>
(c) Represents the elimination of intercompany sales/purchases. No elimination
of intercompany profit in ending inventory required as transactions are made
at substantially a cost basis.
(d) Represents the elimination of royalty fees expense incurred by Italy subject
to a royalty agreement with the owner of Prestige U.S. that expired January
1, 1998.
(e) Represents the amortization of intangible assets, which arise in connection
with the acquisitions of Australia and Italy, over their estimated average
life of 35 years
(f) Represents adjustment to reflect taxes at an overall effective tax rate of
approximately 40%, after consideration of non-deductible goodwill.
(g) Represents the elimination of the equity accounts of Australia and Italy and
the issuance of the merger shares.
(h) Represents the elimination of shareholders' compensation to shareholders who
will receive employment contracts and the recording of compensation as
required by the employment contracts.
F-33
<PAGE> 84
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS
OF WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Management............................ 37
Certain Transactions.................. 41
Principal Shareholders................ 43
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 46
Underwriting.......................... 47
Legal Matters......................... 49
Experts............................... 49
Additional Information................ 49
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,300,000 SHARES
[LOGO]
PRESTIGE COSMETICS CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
JOSEPHTHAL & CO. INC.
, 1998
======================================================
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
offering described in this registration statement excluding underwriting
discounts and commissions and the Representative's non-accountable expense
allowance will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 6,031.87
NASD filing fee............................................. 2,544.70
Nasdaq National Market listing fee.......................... 43,250.00
Printing expenses........................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Fees and expenses (including legal fees) for qualifications
under state securities laws............................... *
Transfer Agent's fees and expenses.......................... *
Miscellaneous............................................... *
----------
Total....................................................... *
==========
</TABLE>
- ---------------
* To be provided by amendment.
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the FBCA to
indemnify its directors and officers to the extent provided for in such statute.
The Registrant's Articles of Incorporation provide that the Registrant will
indemnify and may insure its officers and directors to the full extent permitted
by law. The Registrant has also entered into indemnification agreements with
each of its directors and executive officers where it has agreed to indemnify
each of them to the fullest extent permitted by law. In general, Florida law
permits a Florida corporation to indemnify its directors, officers, employees
and agents, and persons serving at the corporation's request in such capacities
for another enterprise, against liabilities arising from conduct that such
persons reasonably believed to be in, nor not opposed to, the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Florida law. In addition,
each director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful, (b)
deriving an improper personal benefit from a transaction, (c) voting for or
assenting to an unlawful distribution, and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or Federal environmental laws.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought from the Registrant, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification from the Registrant by
any officer or director.
II-1
<PAGE> 86
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities that were not registered under the Securities Act have been
issued or sold by the Company within the past three years except as follows:
<TABLE>
<CAPTION>
DATE OF SALE
AMOUNT AND TYPE OF SECURITIES OR ENTITLEMENT PURCHASER(S) CONSIDERATION
- ----------------------------- -------------- ------------ -------------
<S> <C> <C> <C>
</TABLE>
- ---------------
The aforementioned issuances and sales were made in reliance upon the
exemption from the registration provisions of the 1933 Act afforded by Section
4(2) thereof and/or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. The purchasers of the securities
described above acquired them for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the securities may not be offered, sold or transferred
other than pursuant to an effective registration statement under the 1933 Act,
or an exemption from such registration requirements. The Company will place stop
transfer instructions with its transfer agent with respect to all such
securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1 Proposed form of Underwriting Agreement*
3.1 Form of Amended and Restated Articles of Incorporation*
3.2 Form of Amended and Restated Bylaws*
4.1 Form of Representative's Warrant Agreement, including Form
of Representative's Warrants*
4.2 Form of Common Stock Certificate*
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A. as to the validity of the Common Stock being
registered*
10.1 Credit and Security Agreement, dated September 28, 1995, by
and between First Union National Bank of Florida and the
Company.*
10.2 Demand, Renewal and Consolidated Revolving Promissory Note,
dated as of April __, 1998, by and between First Union
National Bank of Florida and the Company.*
10.3 Second Additional Term Promissory Note, dated April __ ,
1998 by and between First Union National Bank and the
Company.
10.5 Guaranty, dated as of September 28, 1995, by and among First
Union National Bank of Florida, the Company, and Gabriel
Cohen, as Guarantor.*
10.6 Amendment to Credit and Security Agreement, dated as of May
29, 1997, by and between First Union National Bank of
Florida and the Company.*
10.7 Second Amendment to Credit and Security Agreement, dated as
of December 17, 1997, by and between First Union National
Bank and the Company.*
10.8 Third Amendment to Credit and Security Agreement dated as of
April __ , 1998 by and between First Union National Bank and
the Company.
10.9 1998 Stock Option Plan of the Company.*
10.10 Employment Agreement, dated June , 1998, by and between
Jacques Cohen and the Company.*
10.11 Employment Agreement, dated June , 1998, by and between
Gabriel Cohen and the Company.*
</TABLE>
II-2
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.12 Employment Agreement, dated June , 1998, by and between
Thomas Winarick and the Company.*
10.13 Employment Agreement, dated June , 1998, by and between
Marc Feller and the Company.*
23.1 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A. (to be included in its opinion to be filed as Exhibit
5.1).*
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Director Nominee.
24.1 Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney contained
therein.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (the "Commission") are not
required under the related instructions, the required information is contained
in the financial statements and notes thereto or are not applicable, and
therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration
II-3
<PAGE> 88
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(3) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(5) To file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of this chapter
at the start of any delayed offering or throughout a continuous offering.
II-4
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Deerfield Beach, State of
Florida, on June 16, 1998.
PRESTIGE COSMETICS CORPORATION
By: /s/ JACQUES COHEN
------------------------------------
Jacques Cohen, Chairman, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Jacques Cohen and Thomas Winarick his true
and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, or any registration
statement relating to this Offering to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact or their substitutes, each acting alone, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JACQUES COHEN Chairman, President and Chief June 16, 1998
- --------------------------------------------------- Executive Officer (principal
Jacques Cohen executive officer)
/s/ MARC FELLER Chief Financial Officer (principal June 16, 1998
- --------------------------------------------------- financial and accounting officer)
Marc Feller
/s/ GABRIEL COHEN Vice President and Director June 16, 1998
- ---------------------------------------------------
Gabriel Cohen
Executive Vice President and June , 1998
- --------------------------------------------------- Director
Thomas Winarick
</TABLE>
II-5
<PAGE> 1
Exhibit 10.3
SECOND ADDITIONAL TERM PROMISSORY NOTE
$300,000.00 April , 1998
--------
FOR VALUE RECEIVED, LANCETTI COSMETICS CORPORATION, a Florida
corporation (herein called the "Borrower"), promises to pay to the order of
FIRST UNION NATIONAL BANK, a national banking association, (herein called the
"Bank"), the principal amount of THREE HUNDRED THOUSAND DOLLARS ($300,000) and
interest thereon, pursuant to that certain Credit and Security Agreement dated
September 28, 1995, as amended, pursuant to Amendment to Credit and Security
Agreement dated May 29, 1997, Second Amendment to Credit and Security Agreement
dated December 17, 1997, and Third Amendment to Credit and Security Agreement of
even date herewith (collectively, the "Agreement"), between Borrower and Bank.
Capitalized terms used in this Note without other definition shall have the
respective meanings specified in the Agreement.
The unpaid principal amount of this Note from time to time outstanding
shall bear interest from the date hereof until paid in full on the rate per
annum which should be the Bank's prime rate. Prime Rate means that rate of
interest announced from time to time thereunder as its Prime Rate. The Prime
Rate announced from time to time by Bank may not necessarily be the rate charged
to its most creditworthy borrowers.
Throughout the term of this Note (a) each change in the interest rate
shall be effective as of the date upon which the Prime Rate is changed; (b)
interest shall be computed upon a daily basis, based upon a three hundred sixty
(360) day year and be paid upon the actual number of days upon which the
principal balance remains outstanding from time to time; and (c) each
determination of the interest rate shall be made by the Lender and shall be
conclusive, absent manifest error.
The unpaid principal amount of this Note, from time to time
outstanding, shall be paid in monthly payments of interest only on all principal
sums from time to time remaining unpaid, to be paid on the 1st day of April,
1998, and on the first (1st) day of each month thereafter through and including
December 31, 1998, at which time Borrower shall make monthly payments of
principal in the amount necessary to fully amortize the outstanding principal
balance of this Note over a forty-eight (48) month period, plus interest. No
further advances under this Note shall be made after December 31, 1998. All
balances of principal and interest then remaining unpaid, together with all
fees, charges, costs and expenses which may then be due pursuant to the terms of
this Note, the Agreement or any of the other Loan Documents shall be due and
payable on December 31, 2003 ("Maturity Date").
NO ADVANCES UNDER THIS NOTE SHALL BE MADE UNTIL RECEIPT OF INVOICES
FROM BORROWER HEREUNDER. IN ADDITION, ANY ADVANCES MADE UNDER THIS NOTE SHALL BE
LIMITED TO SEVENTY-FIVE PERCENT (75%) OF THE INVOICE PRICE OF PURCHASED
EQUIPMENT.
This Note may be prepaid at any time without premium or fee.
1
<PAGE> 2
If an Event of Default shall occur in the payment of any monthly
installment of interest or any final payment upon demand under this Note, or if
the Borrower violates any of the terms or breaches any of the conditions of the
Agreement or any other Loan Document and any such Event of Default or breach
continues beyond any applicable period of grace, the entire principal sum and
accrued interest shall become due and payable at the option of the Bank. Failure
to exercise this option shall not constitute a waiver of the right to exercise
the same at any other time.
Upon the occurrence of any Event of Default or at any time after
maturity, the principal of this Note and any part thereof, and accrued unpaid
interest, if any, shall bear interest at the highest rate permitted by law, but
if no such rate is then specified by law or ascertainable, then at a rate equal
to the Prime Rate plus five percent (5%) per annum after Default until paid (the
"Default Rate"). The undersigned agrees to pay a late charge equal to five
percent (5%) of each payment of principal and/or interest which is not paid
within ten (10) days of the date on which it is due.
An event of default under this Note shall constitute an event of
default under that certain Demand, Renewal and Consolidated Revolving Promissory
Note by Borrower payable to the order of Lender of even date herewith in the
original principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS
($3,500,000) ("Consolidated Note"). An event of default under the Consolidated
Note shall constitute an event of default under this Note.
Borrower represents and warrants that the Loan evidenced by this Note
is being obtained for business purposes.
All payments of principal and interest on this Note shall be payable in
lawful currency of the United States of America at the Bank's office at 77 East
Camino Real, Boca Raton, Florida 33432, in available (but not the same day)
funds.
This Note is the "Second Additional Term Note" defined in the Agreement
and evidences certain indebtedness incurred under, and is subject to the terms,
covenants, conditions and provisions of the Agreement, to which reference is
hereby made for a statement of said terms, covenants, conditions and provisions.
In addition to and not in limitation of the foregoing and the
provisions of the Agreement, the Borrower further agrees, subject only to any
limitation imposed by applicable law, to pay all reasonable expenses, including
reasonable attorneys' fees, costs and expenses, incurred by the Bank or any
other holder of this Note in endeavoring to collect any amounts payable
hereunder which are not paid when due, whether by acceleration or otherwise.
Such expenses also shall include, without limitation, all reasonable attorneys'
fees, cost and expenses of investigation (including, without limitation,
expenses incurred in connection with appellate proceedings) and in connection
with any insolvency, bankruptcy, reorganization, arrangement or similar
proceedings involving the Borrower which affect the exercise by the Bank or any
other holder of this Note of its rights hereunder or under the Agreement. Such
expenses shall bear interest at the Default Rate.
Borrower and all sureties, endorsers and guarantors of this Note hereby
(a) waive demand, presentment for payment, notice of nonpayment, protest, notice
of protest and all other notice, filing of suit and diligence in collecting this
Note; (b) agree to the addition or release of any party or person primarily or
secondarily liable hereon; (c) agree that Bank shall not be required first to
institute any
2
<PAGE> 3
suit, or to exhaust its remedies against Borrower or any other person or party
to become liable hereunder in order to enforce payment of this Note; (d) consent
to any extension, rearrangement, renewal or postponement of time of payment of
this Note and to any other indulgence with respect hereto without notice,
consent or consideration to any of the foregoing (except upon the express
written release by Bank of any such person) and they shall be and remain jointly
and severally, directly and primarily, liable for all sums due under this Note,
the Agreement or any of the other Loan Documents.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected in
excess of such maximum lawful rate shall be applied as a credit against the
unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified
or waived only by written agreement executed by Borrower and Bank.
This Note is made under and governed by the laws of the State of
Florida, without regard to conflict of laws or principles.
WAIVER OF JURY TRIAL. BORROWER AND BANK HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION WITH
THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE BANK'S ACCEPTING THIS NOTE FROM BORROWER.
LANCETTI COSMETICS CORPORATION, a Florida
corporation
By:
--------------------------------------
Jacques Cohen, President
3
<PAGE> 4
AFFIDAVIT OF OUT-OF-STATE EXECUTION AND DELIVERY
(Corporate or Partnership)
STATE OF __________________ )
) SS
COUNTY OF ________________ )
Before me, this day personally appeared JACQUES COHEN ("Affiant"), who
being by me first duly sworn, deposes and says:
1. That Affiant is the President of LANCETTI COSMETICS CORPORATION, a
Florida corporation (the "Borrower").
2. On the date hereof, the Affiant, on behalf of the Borrower executed
in the State of Michigan, that certain Second Additional Term Promissory Note in
the original principal amount of THREE HUNDRED THOUSAND DOLLARS ($500,000) dated
as of March ____, 1998 ("Note"), between the Borrower and FIRST UNION NATIONAL
BANK, a national banking association;
3. On the date hereof, the Borrower delivered the Note by Federal
Express directly from the State of Michigan to First Union National Bank, 10
South Jefferson Street, 9th Floor, Mail Code VA 7375, Roanoke, Virginia 24011
for delivery and acceptance by First Union National Bank of Virginia, as agent
for and on behalf of First Union National Bank.
FURTHER AFFIANT SAYETH NOT:
Dated: ____________, 1998 SIGNATURE OF AFFIANT:
JACQUES COHEN
The foregoing affidavit was sworn to before me this day of
March, 1998, at , Michigan.
Notary Public, State of Michigan
Printed Name of Notary Public
My Commission Expires:
4
<PAGE> 5
AFFIDAVIT OF RECEIPT AND ACCEPTANCE
STATE OF VIRGINIA )
) SS
COUNTY OF ROANOKE )
BEFORE ME this day personally appeared __________________________ (the
"Affiant"), who being by me first duly sworn, deposes and says:
1. That Affiant is a duly authorized agent of FIRST UNION NATIONAL
BANK, a national banking association ("First Union"), for the purpose of
receiving delivery of and accepting on behalf of First Union, promissory notes
and other loan documents executed outside of the State of Florida by borrowing
customers of First Union.
2. On ________________, 1998, Affiant, acting as a duly authorized
agent of First Union, received delivery of and accepted within the State of
Virginia, that certain Second Additional Term Promissory Note in the original
principal amount of THREE HUNDRED THOUSAND DOLLARS ($300,000), dated as of
______________, 1998, between LANCETTI COSMETICS CORPORATION, a Florida
corporation (the "Borrower").
FURTHER AFFIANT SAYETH NOT.
Dated: _____________, 1998
The foregoing Affidavit was sworn to before me this day of
______________ 1998 --------- at Roanoke, Virginia.
Notary Public
Printed Name of Notary Public
My Commission Expires:
<PAGE> 1
Exhibit 10.8
THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
("Amendment") is dated as of the ___ day of April, 1998, between LANCETTI
COSMETICS CORPORATION, a Florida corporation ("Borrower") and FIRST UNION
NATIONAL BANK, a national banking association, successor by merger to FIRST
UNION NATIONAL BANK OF FLORIDA ("Bank").
R E C I T A L S:
A. Borrower and Bank entered into that certain Credit and Security
Agreement dated September 28, 1995, as amended by Amendment to Credit and
Security Agreement dated April 1, 1997, and further amended by Second Amendment
to Credit and Security Agreement dated December 17, 1997 (collectively the
"Agreement").
B. Bank has agreed to advance additional sums to Borrower and to renew
Borrower's existing Revolving Loan.
C. Borrower and Bank desire to modify and amend certain provisions of
the Agreement pursuant to this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and to induce the Bank to extend the additional credit to the Borrower,
the parties, each intending to be legally bound, do hereby agree as follows:
1. The foregoing recitals are true and are incorporated in this
Amendment by this reference.
2. Capitalized terms as used herein shall have the same meanings as set
forth in the Agreement unless the context indicates a different meaning.
3. Paragraph 1.1 of the Agreement is hereby amended by adding the
following definitions:
"$500,000 NOTE" shall mean that certain Demand Revolving
Promissory Note from Borrower to Bank of even date in the
original principal amount of FIVE HUNDRED THOUSAND DOLLARS
($500,000)."
"SECOND ADDITIONAL TERM LOAN" shall mean that certain THREE
HUNDRED THOUSAND DOLLAR ($300,000) term loan made by Bank to
Borrower as evidenced by the Second Additional Term Note.
"SECOND ADDITIONAL TERM NOTE" shall mean that certain THREE
HUNDRED THOUSAND DOLLAR ($300,000) Term Promissory
1
<PAGE> 2
Note made by Bank to Borrower dated of even date, and all
modifications and renewals thereto.
"CONSOLIDATED NOTE" shall mean that certain Demand Renewal and
Consolidated Revolving Promissory Note made by Bank to
Borrower dated of even date herewith, in the original
principal amount of THREE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($3,500,000), which Consolidated Note consolidates,
amends, and restates and renews the Notes described therein.
4. Section 1.1 is further modified to amend the definitions as follows:
""MAXIMUM LOAN AMOUNT" shall mean THREE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($3,500,000) as to the Revolving Loan, TWO
HUNDRED FIFTY THOUSAND DOLLARS ($250,000) as to the Term Loan,
and THREE HUNDRED THOUSAND DOLLARS ($300,000) as to the Second
Additional Term Loan or such other amount as the Bank may
consent to from time to time.
"NOTE" shall mean collectively the Consolidated Note, the Term
Note, the Second Additional Term Note, and any other
promissory note now or hereafter evidencing the indebtedness,
and all modifications, extensions or renewals thereto."
5. Paragraph 3.1 of the Agreement is hereby amended to change the
definition of "Maximum Revolving Loan Amount" from THREE MILLION DOLLARS
($3,000,000) to THREE MILLION FIVE HUNDRED DOLLARS ($3,500,000).
6. Paragraph 3.2 of the Agreement is hereby modified by deleting
subparagraph 2 thereof and substituting the following:
"(2) The "Borrowing Base" which shall equal seventy-five
percent (75%) of Eligible Accounts Receivable. At least
monthly, Borrower shall provide a certificate as to Eligible
Accounts Receivable (including an aging analysis), eligible
inventory and such other management and/or collateral
information as Bank may require. Advances shall be limited to
sixty percent (60%) of eligible inventory and shall be capped
at TWO MILLION DOLLARS ($2,000,000).
Concentration caps on eligible accounts receivable shall be
waived for "opening orders" defined as the initial order for a
new customer certified to Bank by Borrower. Concentration caps
for other accounts receivable shall be limited to ten percent
(10%) except for the following companies:
2
<PAGE> 3
Wal-Mart 35%
Rite Aide 35%
CVS 35%
Target 35%
American Drug Stores 35%
Eckerd 35%
K-Mart 20%
Sears 35%
Gryphon 35%
7. Exhibit 5.26 of the Agreement is deleted in its entirety and Exhibit
5.26 attached hereto and made a part hereof is hereby inserted in lieu thereof.
8. Paragraph 5.6(c) is hereby amended to delete the words "Within 90
days after the end of each calender year" and insert in lieu thereof the words
"Within one hundred twenty (120) days after Borrower's Fiscal year"
9. In case of any conflict or ambiguity between the terms and
provisions of this Amendment and the terms and provisions of the Agreement, the
terms and provisions of this Amendment shall control to the extent of such
conflict or ambiguity.
10. Except as modified hereby, the terms and provisions of the
Agreement are hereby ratified and confirmed.
BORROWER:
LANCETTI COSMETICS CORPORATION,
a Florida corporation
By:
---------------------------------------
Jacques Cohen, President
LENDER:
FIRST UNION NATIONAL BANK, a national
banking association, successor by merger to
FIRST UNION NATIONAL BANK OF FLORIDA
By:
---------------------------------------
Printed Name:
Title:
------------------------------------
3
<PAGE> 4
EXHIBIT 5.26
FINANCIAL COVENANTS
(a) Borrower shall, on a consolidated basis, if required, at all times
maintain a "Current Ratio" (as hereafter defined in this subparagraph)
equal to or in excess of 1.0 to 1.0.
"Current Ratio" means the ratio of "Current Assets" to "Current
Liabilities".
"Current Assets" means current assets under the standard practice of
generally accepted accounting principles, but excluding all amounts due
from affiliates.
"Current Liabilities" means current liabilities determined in
accordance with generally accepted accounting principles ("GAAP").
(b) Borrower shall, on a consolidated basis, if required, maintain a ratio
of "Total Liabilities" to "Tangible Net Worth" (as such terms are
hereafter defined) which shall not exceed 4.0 to 1.0. For purposes of
this subparagraph, the term "Total Liabilities" means all obligations
of Borrower, howsoever created, arising or evidenced, whether direct or
indirect, joint or several, absolute or contingent, or now or hereafter
existing, or due or to become due determined in accordance with GAAP;
"Tangible Net Worth" means, (upon a consolidated basis) the excess of
all assets of Borrower which, in accordance with GAAP, are tangible
assets, over all debts and liabilities of Borrower. In no event shall
there be included as tangibles any patents, trademarks, trade names,
copyrights, licenses, good will, advances to stockholders, affiliates
or subsidiaries. Subordinated Shareholder Debt shall be treated as
equity and shall be subtracted from Total Liabilities and added to
Tangible Net Worth.
(c) Minimum Tangible Net Worth of TWO MILLION DOLLARS ($2,000,000) shall be
maintained at fiscal year end (December 31, 1997) and shall increase
annually by fifty percent (50%) of net income.
(d) Borrower will maintain, at all times on a consolidated basis (if
required), a debt service coverage ratio of at least 1.5 to 1.0. The
numerator of the debt service coverage ratio shall be calculated as
follows: earnings before interest, tax, depreciation and amortization
(EBITDA). The denominator of the debt service coverage ratio shall be
interest expense plus scheduled current maturities of long term debt
plus dividends plus income taxes paid. Scheduled current maturities of
long term debt will be prorated for the quarter being tested (e.g.,
when testing June 30th, use seventy-five percent [75%] of scheduled
current maturities of long term debt as classified on balance sheet of
previous fiscal year end). Each quarterly test will be based on fiscal
year to date results (not quarterly results).
(e) The Maximum Dividend payable annually with respect to Borrower's common
or preferred stock shall not exceed fifty percent (50%) of Net Income.
Borrower shall pay no other dividends nor distributions of money.
Borrower shall not redeem or repurchase any of its common or preferred
stock so long as the Line shall remain outstanding and unpaid.
4
<PAGE> 5
(f) Borrower shall not make or permit to exist any advances or loans to, or
guaranty or become contingently liable, directly or indirectly, in
connection with the obligations, leases, stock or dividends of, or own,
purchase or make any commitment to purchase any stock, bonds, notes,
debentures or other securities of, or any interest in, or make any
capital contributions to (all of which are sometimes collectively
referred herein as "Investments") any person except for (i) purchase of
direct obligations of the Federal Government; (ii) deposits in
commercial banks having a TIER ONE capital ratio of not less than six
percent (6%) and then in an amount not exceeding ten percent (10%) of
the issuing bank's unimpaired capital and surplus; (iii) existing
investments in Borrower's subsidiaries; (iv) endorsement of negotiable
instruments for collection in the ordinary course of business; or (v)
loans which do not exceed FIFTY THOUSAND DOLLARS ($50,000) in the
aggregate.
(g) Subordinated Debt shall not be less than SEVEN HUNDRED FIFTY THOUSAND
DOLLARS ($750,000), on going.
(h) Capital Expenditures, during each fiscal year, shall not exceed SEVEN
HUNDRED FIFTY THOUSAND DOLLARS ($750,000).
5
<PAGE> 6
STATE OF FLORIDA )
) SS:
COUNTY OF BROWARD )
I HEREBY CERTIFY that on this day, before me, an officer duly
authorized in the State aforesaid and in the County aforesaid to take
acknowledgments, the foregoing instrument was acknowledged before me by ANGELA
ROSACKER, the Vice President of FIRST UNION NATIONAL BANK, a national banking
association, successor by merger to FIRST UNION NATIONAL BANK OF FLORIDA, freely
and voluntarily under authority duly vested in her by said association and that
the seal affixed thereto is the true corporate seal of said association. She is
personally known to me or who has produced ______________________ as
identification.
WITNESS my hand and official seal in the County and State last
aforesaid this ____ day of _________________, 1998.
Notary Public
Typed, printed or stamped name of Notary Public
My Commission Expires:
6
<PAGE> 7
SWORN ACKNOWLEDGMENT OF
THIRD AMENDMENT TO CREDIT & SECURITY AGREEMENT
STATE OF ____________________)
) ss:
COUNTY OF __________________)
I HEREBY CERTIFY that on this date, before me, a Notary Public duly
authorized in the jurisdiction named above to administer oaths and take
acknowledgments, personally appeared JACQUES COHEN, the President of LANCETTI
COSMETICS CORPORATION, a Florida corporation, to me well known and to me known
to be the person described above, and known to me to be the person who signed
the foregoing Third Amendment to Credit and Security Agreement, dated as of
____________________, 1998, in the City of ___________________________, County
of ________________, State of ________________, and he first being duly sworn
did depose and say as follows:
I am JACQUES COHEN and I have a street address of
______________________________ ______________________________________________. I
acknowledge the execution of the foregoing instrument by me on behalf of the
corporation at said place, and the physical delivery of the instrument at said
place to a representative of the Bank by manual delivery to be my free act and
deed on behalf of the corporation for the purposes and uses therein expressed.
JACQUES COHEN
SWORN to at City of ___________________________, County of
_________________, State of ________________________, this _____ day of
__________________, A.D., 1998.
Notary Public
Printed Name
My Commission Expires:
My Commission No. is:
7
<PAGE> 8
AFFIDAVIT FOR EXECUTION OF THIRD AMENDMENT TO CREDIT
AND SECURITY AGREEMENT WITHOUT THE STATE OF FLORIDA
STATE OF ______________________)
) ss:
COUNTY OF ____________________)
BEFORE ME, the undersigned Notary Public, duly authorized in the City
of _________________, County of ____________________, State of
______________________, to administer oaths and take acknowledgments, personally
appeared ______________________________________, having a street address of
____________________ ____________________________________, and
___________________________________, having a street address of
_________________________________________________________, to me well known and
to me known to be the persons described as witnesses to the foregoing Third
Amendment to Credit and Security Agreement ("Agreement"), and who witnessed the
execution and delivery of the foregoing Third Agreement, and who, first being
duly sworn by me did each depose, say and acknowledge before me that they were
present at the time that the said Agreement was executed, that they saw the same
executed and delivered by JACQUES COHEN, as President of LANCETTI COSMETICS
CORPORATION, a Florida corporation, at the City of _____________________, County
of ____________________, State of _______________, and that the subscribing
witnesses were likewise present and witnessed the execution and delivery of the
foregoing Agreement, to a representative of First Union National Bank at the
City of ________________________, County of __________________, State of
____________________, on the date written below via Federal Express addressed to
said representative at such place by delivery to Federal Express in the State
and County above written in accordance with the Sender's copy/receipt of a
Federal Express air bill attached as EXHIBIT "A" hereto.
Subscribing Witness
Printed Name
Subscribing Witness
Printed Name
SWORN TO at City of ______________________, County of
____________________, State of ______________________, this ____ day of
______________________, 1998.
Notary Public
Printed Name
My Commission Expires:
My Commission No. is:
8
<PAGE> 9
EXHIBIT "A" TO AFFIDAVIT FOR EXECUTION OF
AMENDMENT TO CREDIT & SECURITY AGREEMENT
WITHOUT THE STATE OF FLORIDA
Attach Air Bill
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports, and to all references to our firm, included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Miami, Florida
June 16, 1998.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF RONALD KORN
The undersigned, a nominee for director of Prestige Cosmetics
Corporation, a Florida corporation (the "Company"), hereby (i) consents to being
nominated for the position of director of the Company and agrees to serve as
such if elected, and (ii) consents to being named as a prospective director
and/or director nominee in the Company's Registration Statement on Form S-1
relating to the Company's initial public offering of its common stock, and in
the Prospectus contained therein proposed to be circulated in connection with
such offering, and all amendments thereto.
Executed this 16th day of June, 1998.
/s/ Ronald Korn
-----------------------------------
Ronald Korn
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> MAR-31-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> MAR-31-1998 SEP-30-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 1,533,488 1,555,324
<ALLOWANCES> (376,669) (328,906)
<INVENTORY> 3,849,917 4,621,983
<CURRENT-ASSETS> 6,282,536 6,963,167
<PP&E> 2,725,353 2,571,213
<DEPRECIATION> (941,708) (847,974)
<TOTAL-ASSETS> 8,427,016 9,035,681
<CURRENT-LIABILITIES> 6,533,494 7,358,133
<BONDS> 0 0
0 0
0 0
<COMMON> 64,530 64,530
<OTHER-SE> 1,761,958 1,504,318
<TOTAL-LIABILITY-AND-EQUITY> 8,427,016 9,035,681
<SALES> 7,383,197 20,252,376
<TOTAL-REVENUES> 0 0
<CGS> 3,152,653 9,022,046
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,547,725 8,880,545
<LOSS-PROVISION> 56,643 220,611
<INTEREST-EXPENSE> 183,311 203,593
<INCOME-PRETAX> 442,865 1,913,037
<INCOME-TAX> 185,225 890,021
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 257,640 1,023,016
<EPS-PRIMARY> .04 .16
<EPS-DILUTED> .04 .16
</TABLE>
