FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-5292
MEM COMPANY, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 13-5546930
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State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
UNION STREET EXTENSION, NORTHVALE, NEW JERSEY 07647
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(Address of principal executive offices, zip code)
(201) 767-0100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 2,604,934 shares of
Common Stock were outstanding at September 30, 1996.
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<CAPTION>
PART I
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
9/30/96 12/31/95
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<S> <C> <C>
ASSETS:
Current assets:
Cash ........................................................... $ 468,725 $ 957,562
Accounts receivable, less allowance for doubtful accounts
of $644,621 at 9/30/96 and $680,319 at 12/31/95 ........ 12,966,038 13,381,468
Inventories, at lower of cost (first-in, first out) or market:
Finished goods ......................................... 8,528,299 6,021,947
Raw materials and work in process ...................... 9,510,215 8,582,573
Prepaid expenses ............................................... 987,029 825,377
------------ ------------
Total current assets ........................................... 32,460,306 29,768,927
Property, plant and equipment, at cost ......................... 19,437,440 19,106,128
Less accumulated depreciation .................................. (14,770,521) (13,924,996)
------------ ------------
Net property, plant and equipment .............................. 4,666,919 5,181,132
Other assets:
Advance royalty payments - net ................................. 460,530 567,450
Other assets ................................................... 76,717 208,132
Intangibles - net .............................................. 9,740,707 10,098,702
------------ ------------
Total assets ................................................... $ 47,405,179 $ 45,824,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to financial institutions and banks .............. $ 15,879,572 $ 10,791,385
Accounts payable ............................................... 5,178,849 3,523,504
Accrued expenses ............................................... 2,576,427 1,928,989
Notes payable - current portion ................................ 1,554,043 1,553,990
------------ ------------
Total current liabilities ...................................... 25,188,891 17,797,868
Long-term notes ................................................ 2,047,294 3,369,813
Commitments and contingencies
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<CAPTION>
PART I
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
(continued)
9/30/96 12/31/95
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<S> <C> <C>
STOCKHOLDERS' EQUITY
Common stock, $.05 par value; 6,000,000 shares authorized,
3,000,000 shares issued ................................ 150,000 150,000
Additional paid-in capital ..................................... 3,090,110 3,090,110
Retained earnings .............................................. 21,850,673 26,460,779
Less: Common stock in treasury, at cost ....................... (4,488,680) (4,597,430)
Cumulative translation adjustment ..................... (433,109) (446,797)
------------ ------------
Total stockholders' equity ..................................... 20,168,994 24,656,662
------------ ------------
Total liabilities and stockholders' equity ..................... $ 47,405,179 $ 45,824,343
============ ============
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<CAPTION>
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1996 1995 1995
QUARTER YEAR TO DATE QUARTER YEAR TO DATE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 13,396,336 $ 22,577,167 $ 16,699,114 $ 27,684,336
Costs and expenses:
Cost of sales ...................... 8,182,743 13,846,143 8,894,995 15,097,363
Selling and shipping expense ....... 3,969,150 8,178,273 5,407,422 10,215,308
General and administrative expense . 1,224,904 3,904,142 1,323,450 3,764,704
------------ ------------ ------------ ------------
Total costs and expenses .... 13,376,797 25,928,558 15,625,867 29,077,375
------------ ------------ ------------ ------------
19,539 (3,351,391) 1,073,247 (1,393,039)
Other income (expense):
Royalties, interest and other income 107,492 239,572 77,013 254,183
Amortization of intangibles ........ (119,382) (358,143) (119,394) (358,083)
Merger expenses .................... (419,178) (707,454) -- --
Proceeds from settlement of lawsuit 691,669 691,669 -- --
Interest expense ................... (433,826) (1,018,872) (440,244) (1,028,138)
Financing expense .................. (30,026) (105,487) (36,586) (116,881)
------------ ------------ ------------ ------------
Net profit (loss) .................. $ (183,712) $ (4,610,106) $ 554,036 $ (2,641,958)
============ ============ ============ ============
Net profit (loss) per share ........ $ (.07) $ (1.78) $ .22 $ (1.02)
============ ============ ============ ============
Average shares outstanding ......... 2,594,059 2,587,534 2,580,184 2,580,184
Net income (loss) per share was determined by dividing net income (loss) by the
average number of shares outstanding during the respective period.
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<CAPTION>
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ................................. $ (4,610,106) $ (2,641,958)
Depreciation and amortization ..................... 1,304,785 1,268,186
Provision for losses on accounts receivable ....... 225,398 163,589
(Increase) decrease in accounts receivable ........ 193,760 (2,649,881)
(Increase) decrease in inventory .................. (3,418,488) (5,208,810)
(Increase) decrease in other current assets ....... (153,747) 118,870
(Increase) decrease in other assets ............... 131,415 (13,854)
Increase (decrease) in accounts payable ........... 1,652,764 473,229
Increase (decrease) in accrued expenses ........... 646,790 1,742,695
------------ ------------
Net cash provided by (used in) operating activities (4,027,429) (6,747,934)
Cash Flows from Investing Activities:
Additions to plant and equipment .................. (324,488) (783,343)
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Net cash (used in) investing activities ........... (324,488) (783,343)
Cash Flows from Financing Activities:
Short-term borrowings ............................. 11,495,718 14,238,231
(Repayments of) short-term borrowings ............. (6,416,264) (6,316,076)
Sale of treasury stock on exercise of stock options 108,750 --
(Payments of) long-term notes ..................... (1,323,339) (1,311,868)
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Net cash (used in) provided by financing activities 3,864,865 6,610,287
Effect of exchange rate changes on cash ........... (1,785) 25,340
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Net (decrease) in cash ............................ (488,837) (895,650)
Cash at the beginning of the year ................. 957,562 1,128,897
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Cash at the end of the period ..................... $ 468,725 $ 233,247
============ ============
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MEM COMPANY, INC. AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the MEM Company, Inc. and Subsidiaries' annual report on
Form 10-K for the year ended December 31, 1995.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended September 30, 1996 and 1995
Net sales for the first nine months were 18% lower than in 1995. The
major portion of the decline resulted from reduced shipments of men's
fragrances, principally British Sterling and Timberline, lower sales of
Tinkerbell products in the United States, principally due to lower volume with a
major customer, and to a lesser extent, reduced sales of Love's and Heaven Sent
women's products. Based on the relatively modest performance by retailers for
the 1995 Christmas season, the Company has provided for 1996 estimated returns
at a higher level than in 1995. Tinkerbell net sales in the United Kingdom were
the same as in 1995. Canadian business continued to be very weak, with lower
gross sales and higher returns than in the first nine months of 1995. Modest
sales price increases on some products were effective at the beginning of 1996,
but did not have a significant impact on revenues. The effects of inflation and
exchange rate fluctuations were not material.
Cost of sales increased in relation to sales in 1996 compared to 1995.
In 1996, the Company has increased its efforts to decrease the level of
investment in inventories and to reduce the number of items in the various
product lines. Accordingly, the gross profit percentage was reduced in 1996 by a
higher level of sales of merchandise at prices lower than normal sales prices
and by higher provisions for net realizable value adjustments. In addition, the
higher level of provisions for future returns adversely impacted the gross
profit margins.
Selling and shipping expense decreased slightly in relation to sales in
1996. Marketing expenses declined from 20% of sales in 1995 to 17% in 1996 based
on anticipated levels of advertising committed for this holiday season. The
decline in marketing expenses was mostly offset by higher levels of selling
expense in relation to sales due to the relatively fixed nature of the Company's
selling expenses. General and administrative expense increased by $139,000,
primarily due to a higher provision for doubtful accounts, higher expenses for
management information systems and increases in compensation expenses.
Merger expenses of $707,000 through September 30, 1996, were mostly
professional fees incurred in connection with the work of the Special Committee
of the Board of Directors and their advisors. In September, 1996 the Company
received $692,000 as the result of a final judgement entered by the Supreme
Court of the State of New York in an action brought by the Company against the
owners of the Heaven Sent trademark. The court held that the defendant failed to
protect the Company's United States trademark license by refusing to participate
in efforts to stop the gray-market import of goods into the United States.
Interest and financing expense was at the same level as in 1995. Interest on
slightly higher average loans outstanding was offset by lower rates paid during
the period. The Company has significant tax loss carryforwards available to
offset future taxable income.
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Quarter Ended September 30, 1996 and 1995
Net sales in the third quarter declined 20% from the year earlier
period as a result of lower shipments and also from higher provisions for
estimated returns based on 1996 shipments. Increased shipments of English
Leather products were offset by declines in shipments of the Company's other
major brands. Tinkerbell sales in the United Kingdom were ahead of the same
quarter last year, and Canadian business continued weak. Cost of sales increased
in relation to sales from 53% in 1995 to 61% in 1996. The reasons for the change
are substantially the same as those mentioned in the nine months discussion.
Marketing expenses declined from 21% of sales in 1995 to 17% in 1996. This
decline was partially offset by higher levels of shipping and distribution
expenses in relation to sales in the quarter. General and administrative expense
declined $99,000 in the quarter compared to 1995, mostly from a reduction in
professional fees and management information systems expenses. The reasons for
changes in other income (expense) are substantially the same as discussed
previously.
Liquidity and Capital Resources
The Company's business is highly seasonal. In the first nine months of
the year, cash is required to buy and manufacture inventories. The peak shipping
months are from August through November and funds are required to finance
accounts receivable from shipment date to December and January, when the Company
receives significant cash collections. To finance these needs, the Company uses
its working capital, which was $11,971,000 at the end of 1995 and a revolving
credit agreement with financial institutions. This agreement was amended May 1,
1996 and now provides for total borrowings (including the outstanding term loan)
of $20,000,000 which may be increased to $22,000,000 during peak seasonal
periods if the excess is supported by eligible collateral. At September 30,
1996, the term loan outstanding was $2,323,000 and $14,893,000 was outstanding
under working capital loans.
In the first half of the year, the Company collects accounts receivable
from the previous Holiday season. Initial positive cash flow is used to repay
short-term borrowings and then short-term borrowings are utilized to acquire
inventory for goods to be shipped for the upcoming Holiday season. In the first
nine months of 1996, less funds were required to finance receivables due to the
lower level of sales, and the increase in inventories in 1996 is significantly
less than in 1995 due to lower purchases and the effects of the programs to
lower the investment in inventories. The increase in payables and accrued
expenses reflects the timing of payments and was about the same in both years.
The lower amount of new short term borrowings incurred relates to the lower
amount of purchases and inventory levels and higher amounts of accounts payable
compared to a year ago.
The financing agreement contains a prohibition on the payment of
dividends if the Company operates at a loss. There are no material commitments
for property, plant and equipment expenditures.
In late February, 1996, the Company announced that a Special Committee
of the Board of Directors had been appointed to explore strategic alternatives
for the Company. In April, 1996, the Company announced that it had retained
Peter J. Solomon Company Limited, an investment banking firm, to work with the
Company and the Special Committee of the Board.
On June 24, 1996, the Company announced that it had reached an
agreement in principle to be acquired by Renaissance Cosmetics, Inc. at $7.50
per share, subject to various conditions.
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The Company entered into a merger agreement dated as of August 6, 1996
(the "Merger Agreement") with Renaissance Cosmetics, Inc. ("RCI") and
Renaissance Acquisition, Inc. ("RAI"), a wholly-owned subsidiary of RCI,
pursuant to which RAI is to merge with and into the Company, with the Company
surviving the merger. Upon the effectiveness of the merger, all outstanding
shares of the Company's common stock will be converted into the right to receive
$7.50 per share in cash (other than such shares held by RAI, RCI or any other
subsidiaries, or in the treasury of the Company, all of which will be cancelled,
and such shares held by shareholders who perfect their appraisal rights under
Section 623 of the New York Business Corporation Law). As a result of the
merger, the Company will become a wholly-owned subsidiary of RCI. The Merger
Agreement has been approved by the Board of Directors of each company and by the
shareholders of the Company at an October 25, 1996 Special Meeting of
Shareholders. Consummation of the merger is subject to, among other things,
certain regulatory approvals and financing. There can be no assurance that the
merger will be consummated.
<PAGE>
Part II
MEM Company, Inc.
1. Legal Proceedings
On July 31, 1996, Tom Randall ("Randall"), on behalf of himself and all
other shareholders of the Company (other than the defendants), filed a purported
class action suit in Supreme Court, State of New York, against the Company and
four of its current and former directors, Gay A. Mayer, Elizabeth C. Mayer,
Bruce J. Klatsky and Paul Hallingby, Jr., seeking equitable relief and
unspecified compensatory damages. The suit alleges, among other things, that the
consideration proposed to be paid to public shareholders of the Company under
the terms of the transactions contemplated by the agreement in principle with
Renaissance Cosmetics, Inc. ("RCI") announced June 24, 1996 is inadequate and
grossly unfair to the public shareholders of the Company and further that the
individual defendants, in violation of their fiduciary obligations to maximize
shareholder value, have not considered potential purchasers of the Company or
its stock in a manner designed to obtain the highest possible price for the
Company's public shareholders. Randall seeks, among other things, an order of
the Court requiring defendants to seek other buyers of the Company, and in the
event that the proposed transactions with RCI are consummated, Randall seeks to
recover damages caused by the alleged breach of fiduciary duties owed by the
individual defendants to the shareholders of the Company, together with fees and
expenses.
Although the Company and Renaissance believe that the putative class
action suit is without merit, because of the expense of continued proceedings
and the uncertain outcome of any litigation, the Company has reached an
agreement in principle with the named plaintiff to settle the putative class
action suit without the admission of liability or wrongdoing by the defendants.
The terms of the settlement include some additional disclosure to shareholders
through the settlement notice, a payment for plaintiffs' attorneys fees, and the
exchange of releases by the parties. The settlement is subject to, among other
things, the execution of final settlement documents by the parties and final
approval by the court. The amount of the proposed settlement is immaterial.
<PAGE>
PART II
MEM COMPANY, INC.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 25, 1996, a Special Meeting of Shareholders of the Company
was held to consider and vote upon the adoption of an Agreement and Plan of
Merger, dated August 6, 1996, by and among Renaissance Cosmetics, Inc.,
Renaissance Acquisition, Inc. and the Company. At the meeting, the Merger
Agreement was approved by the Shareholders as follows:
Shares voted in favor of the merger - 2,167,023
Shares voted against the merger - 6,550
Shares abstained - 8,518
Item 6. Exhibits and Reports on Form 8-K
Item 6a. Exhibits - None
Item 6b. Reports - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEM COMPANY, INC.
BY: /S/ Michael G. Kazimir, Jr.
-----------------------
MICHAEL G. KAZIMIR, JR.
Executive Vice President
Duly Authorized Officer &
Chief Financial Officer
November 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 468,725
<SECURITIES> 0
<RECEIVABLES> 13,610,659
<ALLOWANCES> (644,621)
<INVENTORY> 18,038,514
<CURRENT-ASSETS> 32,460,306
<PP&E> 19,437,440
<DEPRECIATION> (14,770,521)
<TOTAL-ASSETS> 47,405,179
<CURRENT-LIABILITIES> 25,188,891
<BONDS> 2,047,294
0
0
<COMMON> 150,000
<OTHER-SE> 20,018,994
<TOTAL-LIABILITY-AND-EQUITY> 47,405,179
<SALES> 22,577,167
<TOTAL-REVENUES> 22,577,167
<CGS> 13,846,143
<TOTAL-COSTS> 25,928,558
<OTHER-EXPENSES> 134,356
<LOSS-PROVISION> 225,398
<INTEREST-EXPENSE> 1,124,359
<INCOME-PRETAX> (4,610,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,610,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,610,106)
<EPS-PRIMARY> (1.78)
<EPS-DILUTED> (1.78)
</TABLE>
