SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MEM COMPANY, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.05 per share, of MEM Company, Inc.
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(2) Aggregate number of securities to which transaction applies:
2,604,934
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined): $7.50
per share
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(4) Proposed maximum aggregate value of transaction: $19,537,005
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(5) Total fee paid: $3,907.40
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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MEM COMPANY, INC.
UNION STREET EXTENSION
NORTHVALE, NEW JERSEY 07647
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 25, 1996
TO THE SHAREHOLDERS OF MEM COMPANY, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Special Meeting") of MEM Company, Inc., a New York corporation (the
"Company"), will be held on Friday, October 25, 1996, at 10:00 a.m., local
time, at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 26th Floor,
Conference Room 2600 A/B, 1585 Broadway, New York, New York to consider and
vote upon the adoption of an Agreement and Plan of Merger, dated as of August
6, 1996 (the "Merger Agreement"), by and among Renaissance Cosmetics, Inc., a
Delaware corporation ("Renaissance"), Renaissance Acquisition, Inc., a New
York corporation and a wholly owned subsidiary of Renaissance ("RAI"), and
the Company, and any other matters as may properly come before the Special
Meeting and any postponements or adjournments thereof.
The Merger Agreement provides for the merger (the "Merger") of RAI with
and into the Company, with the Company surviving the Merger. Effective as of
the Merger, all then-outstanding shares of the Company's common stock, par
value $0.05 per share (the "Shares") (other than Shares held by RAI,
Renaissance or any of their subsidiaries, or in the treasury of the Company,
all of which will be cancelled, and Shares held by shareholders who perfect
their appraisal rights under Section 623 of the New York Business Corporation
Law), will be converted into the right to receive $7.50 per Share in cash,
without interest. As a result of the Merger, the Company will become a
wholly-owned subsidiary of Renaissance. Information regarding the proposed
Merger is contained in the Proxy Statement attached to this notice. Please
give this material your careful attention.
The Board has fixed September 17, 1996 as the record date (the "Record
Date") for determining shareholders entitled to notice of and to vote at the
Special Meeting and any adjournment(s) or postponements thereof. Only holders
of record of the Shares as of the Record Date are entitled to vote at such
meeting or any adjournment(s) thereof.
When the proxies are executed and returned, the Shares represented thereby
will be voted in accordance with the indicated instructions either "for" or
"against." IF NO INSTRUCTIONS HAVE BEEN SPECIFIED ON A RETURNED PROXY, THE
SHARES REPRESENTED THEREBY WILL BE COUNTED FOR DETERMINING WHETHER A QUORUM
IS PRESENT AND WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT. Abstentions and broker non-votes will have the effect of a vote
against the adoption of the Merger Agreement.
THE BOARD OF DIRECTORS AND A SPECIAL COMMITTEE COMPRISED OF OUTSIDE
DIRECTORS WHICH WAS FORMED TO EVALUATE STRATEGIC ALTERNATIVES FOR THE COMPANY
UNANIMOUSLY RECOMMEND A VOTE BY SHAREHOLDERS FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
The affirmative vote of two-thirds of the outstanding Shares is required
to approve the adoption of the Merger Agreement. Gay A. Mayer, a director and
executive officer of the Company, and Laurette M. Beach, a director of the
Company, have advised the Company that they and certain members of their
family (collectively, the "Mayer Family") intend to vote for the approval and
adoption of the Merger Agreement. The Mayer Family beneficially owns
1,824,996 Shares, representing approximately 70.1% of the outstanding Shares.
Mr. Mayer has also advised the Company that he has given a proxy to
Renaissance with respect to 353,565 Shares that he owns, representing
approximately 13.6% of the outstanding Shares.
You are cordially invited to attend the Special Meeting. Attendance at the
Special Meeting is limited to shareholders, their proxies and invited guests
of the Company. Whether or not you expect to attend, please complete, sign,
date and return the accompanying proxy card without delay in the enclosed
postpaid envelope.
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YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED BY FILING WITH
THE SECRETARY OF THE COMPANY EITHER AN INSTRUMENT REVOKING THE PROXY OR A
DULY EXECUTED PROXY BEARING A LATER DATE. ANY SHAREHOLDER ATTENDING THE
SPECIAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
Under New York law, dissenting holders of the Company's common stock have
a right of appraisal in connection with the approval of the Merger Agreement.
Such rights are described in the accompanying Proxy Statement under the
caption "The Merger -- Appraisal Rights."
By Order of the Board of
Directors,
Margaret A. Powers
Secretary
Northvale, New Jersey
September 23, 1996
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR SHARES OF COMMON STOCK
AT THIS TIME.
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MEM COMPANY, INC.
PROXY STATEMENT
This Proxy Statement is being furnished by MEM Company, Inc., a New York
corporation (the "Company"), in connection with a special meeting of
shareholders to be held on Friday, October 25, 1996 at 10:00 a.m., local
time, at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 26th Floor,
Conference Room 2600 A/B, 1585 Broadway, New York, New York, and any and all
adjournments or postponements thereof (the "Special Meeting").
This Proxy Statement and the accompanying form of proxy are being mailed
to all shareholders of record of the Company as of September 17, 1996 (the
"Record Date") and are first being sent to such shareholders on or about the
date hereof. ONLY HOLDERS (THE "SHAREHOLDERS") OF THE COMPANY'S COMMON STOCK,
PAR VALUE $0.05 PER SHARE (THE "SHARES"), OF RECORD ON THE RECORD DATE ARE
ENTITLED TO VOTE AT THE SPECIAL MEETING.
At the Special Meeting, Shareholders will be asked to consider and vote
upon the adoption of the Agreement and Plan of Merger, dated as of August 6,
1996 (the "Merger Agreement"), by and among Renaissance Cosmetics, Inc., a
Delaware corporation ("Renaissance"), Renaissance Acquisition, Inc., a New
York corporation and a wholly owned subsidiary of Renaissance ("RAI"), and
the Company, and any other matters as may properly come before the Special
Meeting and any postponements or adjournments thereof. The Merger Agreement
provides for the merger (the "Merger") of RAI with and into the Company, with
the Company surviving the Merger. Pursuant to the Merger Agreement, all
then-outstanding Shares (other than Shares held by RAI, Renaissance or any of
their subsidiaries, or in the treasury of the Company, all of which will be
cancelled, and Shares held by Shareholders who perfect their appraisal rights
under Section 623 of the New York Business Corporation Law ("NYBCL")) will be
converted into the right to receive $7.50 per Share in cash, without
interest. Effective as of the Merger, the Company will become a wholly-owned
subsidiary of Renaissance.
THE BOARD OF DIRECTORS AND A SPECIAL COMMITTEE COMPRISED OF OUTSIDE
DIRECTORS WHICH WAS FORMED TO EVALUATE STRATEGIC ALTERNATIVES FOR THE COMPANY
UNANIMOUSLY RECOMMEND A VOTE BY SHAREHOLDERS FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
The affirmative vote of two-thirds of the outstanding Shares is required
to approve the adoption of the Merger Agreement. Gay A. Mayer, a director and
executive officer of the Company, and Laurette M. Beach, a director of the
Company, have advised the Company that they and certain members of their
family (collectively, the "Mayer Family") intend to vote for the approval and
adoption of the Merger Agreement. The Mayer Family beneficially owns
1,824,996 Shares, representing approximately 70.1% of the outstanding Shares.
Mr. Mayer has also advised the Company that he has given a proxy to
Renaissance with respect to 353,565 Shares that he owns, representing
approximately 13.6% of the outstanding Shares.
The Company's principal executive offices are located at Union Street
Extension, Northvale, New Jersey 07647, and its telephone number is (201)
767-0100. The cost of solicitation of proxies will be borne by the Company.
The date of this Proxy Statement is September 23, 1996.
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TABLE OF CONTENTS
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PAGE
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SUMMARY ...................................................... 1
The Special Meeting ......................................... 1
Date, Time and Place .................................... 1
Quorum .................................................. 1
Record Date; Shareholders Entitled to Vote .............. 1
Purpose of Special Meeting .............................. 1
Voting Requirements ..................................... 1
The Merger .................................................. 2
Principal Effects of the Merger ......................... 2
Effective Time .......................................... 2
Recommendation; Fairness Opinion ........................ 2
Certain Federal Income Tax Consequences ................. 2
Dissenters' Rights ...................................... 2
Certain Interests of Management ......................... 2
Sources and Amount of Funds ............................. 3
Business Of The Company ..................................... 3
Business Of Renaissance And RAI ............................. 3
THE MERGER ................................................... 4
Principal Effects Of The Merger ............................. 4
General ................................................. 4
Conversion Of Shares .................................... 4
Certain Terms Of The Merger Agreement ....................... 5
The Merger .............................................. 5
Consideration to be Paid in the Merger .................. 5
Business of the Company Pending the Merger .............. 5
Company Options ......................................... 6
Representations and Warranties .......................... 6
Conditions to the Merger ................................ 6
Indemnification of Directors ............................ 7
Termination ............................................. 7
Fees and Expenses ....................................... 8
Background Of The Merger .................................... 8
Opinion Of The Financial Advisor ............................. 9
The Company's Common Stock Performance .................. 11
Premium Analysis ........................................ 11
Analysis of Selected Publicly Traded Comparable Companies 11
Analysis of Selected Comparable Transactions ............ 12
Discounted Cash Flow Analysis ........................... 12
Source And Amount Of Funds .................................. 13
Certain Federal Income Tax Consequences ..................... 13
Accounting Treatment ........................................ 14
Certain Interests Of Management ............................. 14
Interests in Shares and Stock Options ................... 14
Indemnification and D&O Insurance ....................... 14
Employment Agreement .................................... 14
Stockholder Agreement ................................... 14
Letter Agreement ........................................ 15
Other Interests of Management ........................... 15
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PAGE
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Regulatory Matters .......................................... 15
Antitrust Matters ....................................... 15
Environmental Matters ................................... 15
Other Governmental Approvals ............................ 15
Appraisal Rights ............................................ 16
Legal Proceedings ........................................... 17
PRICE RANGE OF SHARES AND DIVIDENDS .......................... 18
BENEFICIAL OWNERSHIP OF SECURITIES ........................... 19
Directors and Executive Officers ............................ 19
Beneficial Owners ........................................... 20
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY ......... 21
BUSINESS OF THE COMPANY ...................................... 22
INFORMATION CONCERNING RENAISSANCE AND RAI ................... 22
INDEPENDENT ACCOUNTANTS ...................................... 24
AVAILABLE INFORMATION ........................................ 24
EXHIBITS ..................................................... 24
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Agreement and Plan of Merger, dated as of August 6, 1996, by and among
Exhibit A: Renaissance, RAI and the Company
Exhibit B: Fairness Opinion of Peter J. Solomon Company Limited
Exhibit C: Section 623 of New York Business Corporation Law
Exhibit D: The Company's Annual Report for the fiscal year ended December 31, 1995
Exhibit E: The Company's Quarterly Report for the fiscal quarter ended June 30, 1996
Exhibit F: Renaissance's Annual Report for the fiscal year ended March 31, 1996
Exhibit G: Renaissance's Quarterly Report for the fiscal quarter ended June 30, 1996
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and does not purport to be complete. All statements in
the following Summary are qualified by and are made subject to the more
detailed information contained elsewhere in this Proxy Statement and the
Exhibits hereto. The Exhibits attached to this Proxy Statement constitute a
part of this Proxy Statement and should be considered as such. Shareholders
are urged to read this Proxy Statement in its entirety. The full text of the
Merger Agreement is attached hereto as Exhibit A and should be read in its
entirety.
THE SPECIAL MEETING
DATE, TIME AND PLACE. The Special Meeting of the Shareholders of the
Company, will be held on Friday, October 25, 1996, at 10:00 a.m., local time,
at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 26th Floor,
Conference Room 2600 A/B, 1585 Broadway, New York, New York.
QUORUM. A majority of the Shares entitled to vote, represented in person
or by proxy, will constitute a quorum at the Special Meeting. Abstentions,
broker non-votes and proxies returned without instructions will be counted
for purposes of determining whether a quorum is present at the Special
Meeting.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE. The Shares are the only class
of voting securities of the Company. Holders of record of Shares on the books
of the Company on September 17, 1996 are entitled to notice of and to vote at
the Special Meeting. On the Record Date, there were 2,604,934 Shares
outstanding, which were held of record by approximately 410 persons.
PURPOSE OF SPECIAL MEETING. At the Special Meeting, Shareholders will be
asked to consider and vote upon the approval and adoption of the Merger
Agreement among Renaissance, RAI and the Company and any other matters as may
properly come before the Special Meeting and any postponement or adjournment
thereof. The Merger Agreement provides for the Merger of RAI with and into
the Company, with the Company surviving the Merger. Effective as of the
Merger, all then-outstanding Shares (other than Shares held by RAI,
Renaissance or any of their subsidiaries, or in the treasury of the Company,
all of which will be cancelled, and Shares held by Shareholders who perfect
their appraisal rights under Section 623 of the NYBCL) will be converted into
the right to receive $7.50 per Share in cash, without interest (the "Merger
Consideration"). As a result of the Merger, the Company will become a
wholly-owned subsidiary of Renaissance.
VOTING REQUIREMENTS. Approval and adoption of the Merger Agreement
require the affirmative vote of the holders of two-thirds of the outstanding
Shares. Each holder of record of Shares will be entitled to one vote per
Share regarding the approval and adoption of the Merger Agreement at the
Special Meeting or any and all adjournments or postponements thereof. A PROXY
RETURNED WITHOUT INSTRUCTIONS WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. Abstentions and broker non-votes will have the effect
of a vote against adoption of the Merger Agreement. Any proxy given may be
revoked either by a written notice duly signed and delivered to the Secretary
of the Company prior to the exercise of the proxy, by execution of a
subsequent proxy or by voting in person at the Special Meeting.
The Mayer Family has advised the Company that they intend to vote for the
approval and adoption of the Merger Agreement. The Mayer Family beneficially
owns 1,825,609 Shares, representing approximately 70.1% of the outstanding
Shares. Mr. Mayer has also advised the Company that he has given a proxy to
Renaissance with respect to 353,565 Shares that he owns, representing
approximately 13.6% of the outstanding Shares.
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THE MERGER
PRINCIPAL EFFECTS OF THE MERGER. As a result of the Merger, each
outstanding Share (other than Shares held by RAI, Renaissance or any of their
subsidiaries, or in the treasury of the Company, all of which will be
cancelled, and Shares held by Shareholders who perfect their appraisal rights
under Section 623 of the NYBCL) will be converted into the right to receive
the Merger Consideration, and the Company will become a wholly-owned
subsidiary of Renaissance. See "The Merger -- Principal Effects Of The
Merger."
EFFECTIVE TIME. The Merger will become effective (the "Effective Time")
upon the filing of the certificate of merger with the Secretary of State of
the State of New York. It is anticipated that, subject to the satisfaction or
waiver, if permissible, of the conditions set forth in the Merger Agreement,
such filing will be made promptly after the Merger Agreement has been
approved by the Shareholders. See "The Merger."
RECOMMENDATION; FAIRNESS OPINION. The Board of Directors and a Special
Committee comprised of outside directors which was formed to evaluate
strategic alternatives for the Company both have unanimously approved the
Merger Agreement and recommend that Shareholders vote for the approval and
adoption of the Merger Agreement. The Company engaged Peter J. Solomon
Company Limited ("PJSC") to act as its financial advisor in connection with
the Merger and related matters. On August 6, 1996, PJSC delivered to the
Board its oral opinion, which was subsequently confirmed in writing, that the
Merger Consideration to be received by holders of Shares pursuant to the
Merger is fair to such holders from a financial point of view.
The full text of the opinion of PJSC, which sets forth the procedures
followed, matters considered and assumptions made in connection with
rendering such opinion, as well as certain interests and relationships of
PJSC with the Company, is attached as Exhibit B to this Proxy Statement. The
opinion of PJSC will not be updated and is limited to the facts and
circumstances on August 6, 1996, the date on which the opinion was delivered
to the Board. See "The Merger -- Opinion Of The Financial Advisor."
SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Shareholders' receipt of
cash for Shares pursuant to the Merger will be a taxable transaction for
federal income tax purposes and may also be a taxable transaction under
applicable state, local and other tax laws. See "The Merger -- Certain Federal
Income Tax Consequences."
DISSENTERS' RIGHTS. Shareholders may demand an appraisal by the
appropriate New York State court of the "fair value" of their Shares under
Section 623 of the NYBCL, in lieu of accepting the Merger Consideration. A
Shareholder electing to demand an appraisal must deliver to the Company,
before the taking of the vote on the Merger, a written demand for appraisal
of such Shareholder's Shares. A proxy or vote against the Merger or an
abstention or broker non-vote will not constitute such a demand. A vote in
favor of the Merger by a Shareholder will have the effect of waiving his
appraisal rights. See "The Merger -- Appraisal Rights."
CERTAIN INTERESTS OF MANAGEMENT. As of the Record Date, directors and
executive officers of the Company beneficially owned an aggregate of
1,809,741 Shares (including 45,300 Shares covered by unexercised stock
options). Pursuant to the Merger Agreement, the Company will cause prior to
the Effective Time all holders of outstanding employee and director stock
options (together, the "Options") to either exercise all Options held by them
or surrender such Options in exchange for cash payments by Renaissance.
Assuming all of the directors and executive officers surrender their Options,
they will receive payments aggregating approximately $153,900. See
"Beneficial Ownership of Securities."
In addition, Gay A. Mayer, the Chairman of the Board, President and Chief
Executive Officer of the Company, has entered into an employment agreement
with Renaissance which will become effective at the Effective Time. Under the
two and one-half year contract, Mr. Mayer will serve as a Group Vice
President of Renaissance and be paid a salary of $250,000 per year and
participate in Renaissance's bonus program. Mr. Mayer will also receive
ten-year options to purchase 5,000 shares of Renaissance's common stock at
$104.00 per share. The Company has also entered into a severance agreement
with Michael G.
2
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Kazimir, Jr., Executive Vice President and Chief Operating and Financial
Officer of the Company. Pursuant to the agreement, if Mr. Kazimir's
employment with the Company is terminated without cause following a change of
control of the Company (which would include a transaction like the Merger),
Mr. Kazimir will be entitled to a severance payment equal to the product of
his prorated weekly salary times the sum of twenty-four and the number of
complete years of service he has provided to the Company. The effect of the
agreement is to increase the amount of the severance payment that would be
paid to Mr. Kazimir to an amount which is in excess of that provided under
the Company's normal severance policy.
The Company's employees, including executive officers of the Company, may
also receive a cash distribution in connection with the termination of the
Company's defined benefit pension plan. Approximately 30 people, including
the Company's executive officers, have entered into stay bonus agreements
with the Company for payments aggregating approximately $400,000. A stay
bonus, however, will only be payable in the event that the Merger is not
consummated. Renaissance may also adopt a stay bonus program pursuant to
which participating executive officers of the Company may receive additional
compensation for their continuing service to the Surviving Corporation (as
defined herein) for a period of time following the Effective Time.
The Merger Agreement also contains certain provisions relating to
indemnification and liability insurance for officers and directors, employee
agreements and benefits and other matters relating to the interests of
management. See "The Merger -- Certain Interests of Management" and
"Beneficial Ownership of Securities."
SOURCES AND AMOUNT OF FUNDS. The total amount of funds required by
Renaissance for the payment of the Merger Consideration, to repay certain
indebtedness owed by the Company, and to pay related fees and expenses, is
expected to be approximately $33.8 million *. Renaissance has advised the
Company that it will pay for such obligations primarily from the proceeds of
a sale of certain of its capital stock and from borrowings under a new credit
facility to be entered into by Renaissance prior to the Effective Time.
BUSINESS OF THE COMPANY
The business of the Company principally consists of manufacturing, selling
and distributing a diversified line of toiletries in several fragrance
groups. These are marketed under the nationally advertised trademarks English
Leather(Registered Trademark), British Sterling(Registered Trademark), Heaven
Sent(Registered Trademark), LOVE'S(Registered Trademark), and
Tinkerbell(Registered Trademark). The Company also markets Acqua di
Selva(Registered Trademark), a premium priced imported line of men's
toiletries, through a subsidiary.
BUSINESS OF RENAISSANCE AND RAI
Renaissance, together with its wholly-owned subsidiaries, is a leading
manufacturer and marketer of mass-market fragrances, artificial fingernails
and related products. RAI is a newly formed New York corporation that has not
conducted any business except in connection with the transactions related to
the Merger. See "Information Concerning Renaissance and RAI."
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* Estimate based on outstanding indebtedness at June 30, 1996. The amount of
outstanding indebtedness of the Company is expected to be higher than the
balance as of June 30, 1996 and will depend on the exact timing of the
Effective Time.
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THE MERGER
The information contained in this Proxy Statement with respect to the
Merger is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is attached to this Proxy Statement as Exhibit A and
incorporated by reference herein. Except as set forth herein with respect to
certain terms the meaning of which is not readily apparent, capitalized terms
used and not otherwise defined herein have the meanings given to such terms
in the Merger Agreement. SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT
IN ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER.
PRINCIPAL EFFECTS OF THE MERGER
GENERAL. The Merger will become effective upon the filing of a certificate
of merger with the Secretary of State of the State of New York in such form
as required by, and executed in accordance with, the applicable provisions of
the NYBCL. It is anticipated that, subject to the satisfaction or waiver, if
permissible, of the conditions set forth in the Merger Agreement, such filing
will be made promptly after the Merger Agreement has been adopted by the
holders of two-thirds of the outstanding Shares. If the Merger is
consummated, the Company will become a wholly-owned subsidiary of
Renaissance, and current Shareholders will no longer have an equity interest
in the Company and will not share in its future earnings or growth, if any.
Instead, each such Shareholder (other than those who perfect appraisal rights
under Section 623 of the NYBCL) will have the right to receive the Merger
Consideration in payment for each Share held by such Shareholder immediately
prior to the Merger.
CONVERSION OF SHARES. Prior to the Effective Time, Renaissance will
authorize Registrar and Transfer Company, Cranford, New Jersey, to act as
exchange agent with respect to the Merger (the "Exchange Agent"). On or
before the Effective Time, Renaissance will make available to the Exchange
Agent sufficient funds to make all payments for Shares pursuant to the Merger
Agreement. Pending payment of such funds to the holders of Shares, such funds
shall be held and invested by the Exchange Agent as RAI, or the Company as
the corporation surviving the Merger (as such, the "Surviving Corporation"),
directs. Any net profit resulting from, or interest or income produced by,
such investments will be payable to Renaissance or the Surviving Corporation.
The Surviving Corporation will promptly replace any monies lost through any
investment made pursuant to its direction.
Each holder (other than RAI, Renaissance or any of their subsidiaries, the
Company and Shareholders who perfect their appraisal rights under Section 623
of the NYBCL) of a certificate or certificates which prior to the Effective
Time represented Shares (a "Stock Certificate") will be entitled to receive,
upon surrender to the Exchange Agent of any Stock Certificates for
cancellation and subject to any required withholding of taxes, the aggregate
Merger Consideration into which the Shares previously represented by such
Stock Certificates were converted in the Merger. Until surrendered to the
Exchange Agent, each Stock Certificate (other than the Shares owned by RAI,
Renaissance, or any of their subsidiaries, or in the treasury of the Company
and Shareholders who perfect their appraisal rights under Section 623 of the
NYBCL) will be deemed for all purposes to evidence only the right to receive
upon such surrender the aggregate Merger Consideration into which the Shares
represented thereby will have been converted, subject to any required
withholding taxes. No interest will be paid on the cash payable upon the
surrender of any Stock Certificate.
Instructions with regard to the surrender of Stock Certificates (as
defined herein) which prior to the Effective Time represented Shares,
together with a letter of transmittal (a "Transmittal Letter") to be used for
this purpose, will be forwarded to Shareholders as promptly as practicable
following the Effective Time. Shareholders should surrender their Stock
Certificates only after receiving a Transmittal Letter. SHAREHOLDERS SHOULD
NOT SEND ANY STOCK CERTIFICATES AS THIS TIME.
Any cash delivered or made available to the Exchange Agent and not
exchanged for Stock Certificates within nine months after the Effective Time
will be returned by the Exchange Agent to the Surviving Corporation which
thereafter will act as exchange agent, and any former Shareholders who have
not theretofore complied with the instructions for exchanging their Stock
Certificates will thereafter look only to the Surviving Corporation for
payment of the Merger Consideration set forth in the Merger Agreement,
without any interest thereon, but will have no greater rights against the
Surviving
4
CAPITAL PRINTING SYSTEMS]
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Corporation than may be accorded to general creditors thereof under
applicable law. Notwithstanding the foregoing, none of the Exchange Agent,
Renaissance, RAI or the Surviving Corporation will be liable to a Shareholder
for any cash or interest thereon delivered to a public official pursuant to
applicable abandoned property, escheat and similar laws.
Promptly after the Effective Time, the Exchange Agent will mail to each
record holder of Stock Certificates a form of Transmittal Letter and
instructions for use thereof in surrendering such Stock Certificates which
will specify that delivery will be effected and risk of loss and title to the
Stock Certificates will pass to the Exchange Agent only upon proper delivery
of the Stock Certificates to the Exchange Agent in accordance with the terms
of delivery specified in the Transmittal Letter and instructions for use
thereof in surrendering such Stock Certificates and receiving the Merger
Consideration for each Share previously represented by such Stock
Certificates.
From and after the Effective Time, holders of Stock Certificates
immediately prior to the Effective Time will have no right to vote or to
receive any dividends or other distributions with respect to any Shares which
were theretofore represented by such Stock Certificates, other than any
dividends or other distributions payable to holders of record of Shares as of
a date prior to the Effective Time, and will have no other rights other than
as provided in the Merger Agreement or by law or as described herein.
After the Effective Time, there will be no transfers on the books of the
Surviving Corporation of the Shares which were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Stock Certificates are
presented (with proper endorsements) to the Surviving Corporation such Stock
Certificates will be cancelled, retired and exchanged for the Merger
Consideration as provided for in the Merger Agreement.
At the Effective Time, each share of common stock of RAI issued and
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and become one share of common stock of the Surviving Corporation.
CERTAIN TERMS OF THE MERGER AGREEMENT
THE MERGER. The Merger Agreement provides that, unless the Merger
Agreement is terminated or abandoned (see "Termination" below), as soon as
practicable following fulfillment or waiver, if permissible, of the
conditions described below under "Conditions to the Merger," at the Effective
Time, RAI will be merged with and into the Company, whereupon the separate
existence of RAI will cease and the Company will be the Surviving
Corporation. The Merger Agreement further provides that the certificate of
incorporation and the by-laws of RAI as in effect at the Effective Time will
become the certificate of incorporation and the by-laws of the Surviving
Corporation.
CONSIDERATION TO BE PAID IN THE MERGER. The Merger Agreement provides that
each Share outstanding immediately prior to the Effective Time (other than
Shares held in the treasury of the Company, Shares owned by Renaissance, RAI,
and any other direct or indirect subsidiary of Renaissance, and other than
Shares held by Shareholders who perfect their appraisal rights under Section
623 of the NYBCL) will, at the Effective Time, be cancelled and retired and
be converted into a right to receive the Merger Consideration upon the
surrender of the Stock Certificates formerly representing such Shares, and
each Share held in the treasury of the Company, and each Share held by
Renaissance, RAI or any other direct or indirect subsidiary of Renaissance
immediately prior to the Effective Time will, at the Effective Time, be
cancelled and retired and no payment will be made with respect thereto.
BUSINESS OF THE COMPANY PENDING THE MERGER. During the period from the
date of the Merger Agreement and continuing until the earlier of the
termination of the Merger Agreement or the Effective Time, the Company has
agreed that, unless Renaissance otherwise agrees in writing, the Company
will: (a) conduct its business, and cause the businesses of its subsidiaries
to be conducted, in the ordinary course of business and consistent with past
practice; (b) use all reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its employees
and business relationships with its customers; and (c) maintain with
adequately capitalized insurance companies insurance coverage for its assets
and its businesses in such amounts and against such risks and losses as are
consistent with past practice. The Company has further agreed that it will
not do any of the following
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without the prior written consent of Renaissance: (a) amend or otherwise
change the Company's certificate of incorporation or amend the terms of the
Company's common stock; (b) initiate or solicit any proposal or offer to
acquire all or any substantial part of the business or properties of the
Company and its subsidiaries or any of its capital stock; (c) incur or become
contingently liable for any material indebtedness except as expressly
provided in the Merger Agreement; or (d) enter into or amend any employment
agreements or compensation arrangements the Company has with its employees.
COMPANY OPTIONS. The Merger Agreement provides that the Company will cause
the holders of any Options to either exercise all Options held by them or to
surrender such Options in exchange for cash payments equal to the difference
between $7.50 and the exercise price per share for such underlying shares.
Assuming all of the Options are surrendered, Renaissance will pay an
aggregate of approximately $249,544 to the holders of such Options, including
$153,900 to the directors and executive officers of the Company.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties by the Company relating to, among other
things, (a) the organization of the Company and other corporate matters, (b)
the capital structure of the Company, (c) the subsidiaries of the Company,
(d) the authorization, execution, delivery and consummation of the
transactions contemplated by the Merger Agreement, (e) documents filed by the
Company with the Securities and Exchange Commission (the "Commission"),
including this Proxy Statement, and the accuracy of the information contained
therein, (f) the absence of undisclosed liabilities, (g) the absence of
certain changes or events, (h) litigation, (i) compliance with laws and
certain environmental matters, (j) tax, insurance and labor matters, (k) the
business and prospects of the Company, (l) matters relating to Title IV of
the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations promulgated thereunder, (m) the title to the assets of
the Company, (n) trademarks and intellectual property compliance, (o)
material agreements and transactions with related parties, (p) receivables,
customers and suppliers, (q) product liability claims, and (r) inventory. In
addition, the Merger Agreement contains representations and warranties by
Renaissance and RAI related to, among other things, (a) the organization of
Renaissance and RAI and other corporate matters, (b) the authorization,
execution, delivery and consummation of the transactions contemplated by the
Merger Agreement, and (c) litigation.
CONDITIONS TO THE MERGER. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) the Merger Agreement and the transactions contemplated thereby will have
been approved and adopted by the requisite vote of the Shareholders of the
Company under applicable law and applicable listing requirements; (b) the
waiting period applicable to the consummation of the Merger under the HSR Act
(as defined herein) will have expired or been terminated; (c) no preliminary
or permanent injunction or other order or decree by any federal or state
court which prevents the consummation of the Merger will have been issued and
remain in effect; (d) no action will have been taken, and no statute, rule or
regulation will have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation
of the Merger or make the consummation of the Merger illegal; (e) all
governmental waivers, consents, orders and approvals legally required for the
consummation of the Merger and the transactions contemplated thereby will
have been obtained and be in effect at the Effective Time; (f) all required
consents and approvals of lenders who have advanced $10,000,000 or more to
Renaissance or the Company (other than Fremont Financial Corporation) and
lessors of material leases will have been obtained and be in effect at the
Effective Time; provided, however, that the failure to obtain such consents
or approvals shall not be due to the default or delay of the party
responsible for obtaining such consents and approvals; and (g) the Company
will have received from PJSC (or another nationally recognized investment
banking firm reasonably acceptable to the Company) an opinion reasonably
acceptable to the Company to the effect that the consideration to be received
by the Shareholders in the Merger is fair, from a financial point of view, to
the Shareholders (which condition has been satisfied) and such opinion will
not have been withdrawn.
In addition to the foregoing, the obligation of the Company to effect the
Merger is also subject to the following conditions: (a) Renaissance and RAI
will have performed in all material respects their agreements contained in
the Merger Agreement required to be performed on or prior to the Closing Date
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and the representations and warranties of Renaissance and RAI contained in
the Merger Agreement will be true and correct in all respects on and as of
the date made and on and as of the Closing Date as if made at and as of such
date, and the Company will have received a certificate from two executive
officers of RAI to that effect; (b) the Company will have received a legal
opinion dated the Closing Date which is reasonably satisfactory to the
Company; and (c) no governmental authority will have promulgated any statute,
rule or regulation which, when taken together with all such promulgations,
would materially impair the value to the Company of the Merger.
In addition to the foregoing, the obligation of Renaissance and RAI to
effect the Merger is also subject to, among other things, the following
conditions: (a) the Company will have performed in all material respects its
agreements contained in the Merger Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of the
Company contained in the Merger Agreement will be true and correct in all
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date (except as otherwise provided) and Renaissance
will have received a certificate from two executive officers of the Company
to that effect; (b) Renaissance will have received a legal opinion dated the
Closing Date which is reasonably satisfactory to Renaissance; (c) since the
date of the Merger Agreement, there will have been no changes that
constitute, and no event or events shall have occurred which have resulted in
or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other) or results of operations
of the Company and its subsidiaries, taken as a whole; (d) no governmental
authority shall have promulgated any statute, rule or regulation which, when
taken together with all such promulgations, would materially impair the value
to Renaissance of the Merger; (e) certain waivers and terminations will have
been executed by certain employees of the Company and delivered to
Renaissance; (f) all Options will have been exercised or surrendered for cash
payments by Renaissance; and (g) Renaissance will have entered into a new
credit facility on terms and conditions acceptable to Renaissance in its sole
and absolute discretion.
INDEMNIFICATION OF DIRECTORS. Pursuant to the Merger Agreement,
Renaissance has agreed to cause the Surviving Corporation to indemnify,
defend and hold harmless the present and former officers and directors of the
Company and its subsidiaries. Renaissance also has agreed to cause the
Surviving Corporation to use its best efforts to cause to be maintained in
effect for a period of six years following the Effective Date the current
policies of directors' and officers' liability insurance presently maintained
by the Company. See "Certain Interests of Management -- Indemnification and
D&O Insurance."
TERMINATION. The Merger Agreement provides that the agreement may be
terminated and the Merger contemplated thereby may be abandoned at any time
prior to the Effective Time, whether before or after approval by the
Shareholders of the Company: (a) by either Renaissance or the Company, if the
Merger is not consummated prior to November 30, 1996 (except that the right
to terminate the Merger Agreement pursuant to this provision is available to
a party whose failure to fulfill any obligation under the Merger Agreement
has been the cause of, or resulted in, the failure of the Effective Time to
occur on or before November 30, 1996); (b) by either Renaissance or the
Company, if the Merger is enjoined by a final, unappealable court order which
was not requested or supported by such party or such party's 5% shareholders
or any of their affiliates; (c) by either Renaissance or the Company, if the
other party fails to perform in any material respect any of its covenants in
the Merger Agreement and such other party does not cure such default in all
material respects within 30 days after written notice of such default; (d) by
the Company if, subject to certain conditions, (i) the Company determines in
good faith after consulting with its independent financial advisors that
another proposed transaction for all or a substantial part of the Company's
assets or capital stock would be more favorable to the Shareholders from a
financial point of view than the Merger and (ii) the Board of Directors of
the Company concludes in good faith after consultation with legal counsel
that such action is necessary in order for the Board of Directors of the
Company to act in a manner that is consistent with its fiduciary obligations
under applicable law; (e) by Renaissance, if Renaissance and RAI are unable
for any reason to close the financing of the transactions associated with the
Merger on terms and conditions and in such amounts as are acceptable to
Renaissance and RAI in their sole and absolute discretion; and (f) by
Renaissance, if holders of more than 5% of the outstanding Shares exercise
their rights of appraisal in accordance with Section 910 of the NYBCL. In the
event of any termination and abandonment pursuant to the Merger Agreement, no
party
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to the Merger Agreement (or any of its directors or officers) will have any
liability or further obligation to any other party to the Merger Agreement,
except for certain express obligations under the Merger Agreement and except
that no party will be relieved from liability for any breach of the Merger
Agreement.
FEES AND EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby will be paid by the party incurring such
costs and expenses; provided, however, that in the event of a termination of
the Merger Agreement (i) by the Company pursuant to clause (d) of the
immediately preceding paragraph or (ii) by Renaissance pursuant to clause (e)
of the immediately preceding paragraph, then such party terminating the
Merger Agreement will be obligated to pay the other party (if such other
party is in compliance with all of its representations, warranties and
covenants in the Merger Agreement) $1,000,000. Additionally, if the Merger is
not consummated because Renaissance breaches a representation or warranty or
fails to satisfy a covenant or condition contained in the Merger Agreement or
Renaissance fails to obtain the financing necessary for the Merger,
Renaissance will be obligated to reimburse the Company for its obligations
under the stay bonus program in an amount not to exceed $500,000.
BACKGROUND OF THE MERGER
In light of the ongoing consolidation of the fragrance industry and the
increasingly competitive business environment for smaller fragrance
producers, the Company determined in the fall of 1995 to review the various
strategic alternatives which were available to it, including the sale of all
or a part of its assets in one or more transactions, the acquisition(s) of
additional brands, the divestiture of certain of its brands, and the taking
of no major strategic action.
As part of this review, the Company authorized, in September 1995, Horvitz
& Associates, Inc. ("Horvitz"), a market consultant, to discuss with selected
fragrance and cosmetics companies a possible transaction with the Company.
The Company formally retained Horvitz on October 16, 1995.
During the next several months, five companies (including Renaissance)
contacted by Horvitz expressed an interest in exploring a possible
transaction with the Company. Each of these companies signed a
confidentiality agreement and received certain non-public financial and
operating information about the Company. None of these contacts (other than
Renaissance) resulted in an offer to purchase all or a part of the assets of
the Company.
On October 10, 1995, Gay A. Mayer, President of the Company, and Horvitz
met with Thomas V. Bonoma, the Chairman, President and Chief Executive
Officer of Renaissance, and William J. Kidd, a director of Renaissance.
Messrs. Mayer and Bonoma met again on November 1, 1995. Based on these
discussions, Renaissance entered into a confidentiality agreement with the
Company on November 10, 1995.
Members of management of each of the companies held additional meetings in
December 1995 and January 1996 to explore various alternatives, including a
potential strategic alliance. On January 22, 1996, senior executives of
Renaissance presented to the management of the Company and its independent
auditors and outside counsel the history and business plan of Renaissance.
A subsequent meeting was held with select representatives of each of the
companies on February 12, 1996. Based on the results of this meeting,
Renaissance submitted to the Company on February 14, 1996 a preliminary
indication of interest to acquire all of the outstanding Shares which was
subsequently revised on February 20, 1996.
On February 22, 1996, at a regularly scheduled meeting of the Board of
Directors of the Company, the directors discussed the strategic options
available to the Company, including a transaction with Renaissance. A special
committee of the Board of Directors (the "Special Committee") consisting of
Bruce J. Klatsky, Derek B. Van Dusen, Paul Hallingby, Jr. and Robert E.
Mulcahy III was formed to review, study and evaluate strategic alternatives.
The formation of the Special Committee was publicly announced the following
day.
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On February 28, 1996, Renaissance advised the Company that it was
terminating its discussions with the Company.
On March 5, 1996, the Special Committee met and determined to negotiate
with PJSC to retain its services. During the next few weeks, various board
members and senior executives of the Company met with representatives of PJSC
to discuss possible strategic actions.
On April 17, 1996, PJSC met with the Special Committee and discussed the
strategic alternatives available to the Company. At such meeting, the Special
Committee determined that, in light of the Company's losses, its projected
operating performance and its existing credit facilities, as well as ongoing
industry consolidation, a merger or sale of all of the Company's assets was
likely to be the best alternative to maximize the value of the Company's
assets to Shareholders. PJSC began to contact various potential acquirers of
all or a portion of the Company's assets. A number of these potential
acquirers expressed interest and entered into confidentiality agreements with
the Company and were provided with certain non-public financial and operating
data about the Company.
The Company and Renaissance again entered into discussions which resulted
in a telephone conference on May 2, 1996 during which two possible
transactions were discussed. The renewed discussions were reviewed at a
meeting of the Special Committee on May 9, 1996. Based on this meeting,
members of the management of the two companies met on May 16, 1996 and
discussed the general terms of a merger. During the next several weeks, the
companies negotiated the material terms of the Merger and on June 23, 1996
reached an agreement in principle, which was publicly announced on June 24,
1996. Thereafter, the companies negotiated the terms of the definitive Merger
Agreement.
The Board of Directors of the Company met on August 6, 1996. At such
meeting, the Board of Directors reviewed with certain of its executive
officers, legal counsel and PJSC the discussions and negotiations between the
Company and RAI. Following such discussions, the Board of Directors heard
presentations by its legal counsel on the terms and conditions contained in
the proposed merger agreement and related agreements and by PJSC on its
analysis of the fairness of the proposed transaction from a financial point
of view to the Company's Shareholders. The Board of Directors then recessed
and the Special Committee convened with its counsel to discuss the
presentations and analyze the terms of the proposed merger agreement.
The Special Committee considered a number of factors, including the
financial and other conditions of the proposed merger, the opinion by PJSC,
the possible alternatives to the transaction in light of the ongoing
consolidation of the fragrance industry, the fact that the Merger Agreement
could be terminated by the Board of Directors if the Company were to receive
a higher offer from a third party and the fact that the terms of the Merger
Agreement should not unduly discourage other third parties from making bona
fide proposals subsequent to the execution of the Merger Agreement which the
Board, subject to its fiduciary duties, could consider. The Special Committee
did not assign relative weights to the factors or determine any single factor
was of particular importance in approving the Merger Agreement. Rather, the
Special Committee viewed its position and recommendation as being based on
the totality of the information presented to, and considered by, it.
At the conclusion of the meeting of the Special Committee, the Board of
Directors reconvened. During this meeting, the Special Committee discussed
with the Board of Directors the factors it considered in approving the Merger
Agreement and recommended that the Board of Directors approve the Merger
Agreement. After considering the information presented to the Board of
Directors and the recommendation of the Special Committee, the Board of
Directors unanimously approved the Merger Agreement. The execution of the
Merger Agreement was publicly announced on August 8, 1996.
THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE UNANIMOUSLY RECOMMEND A
VOTE BY SHAREHOLDERS FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF THE FINANCIAL ADVISOR
The Company retained PJSC to act as the Company's financial advisor and to
render an opinion to the Company's Board of Directors in connection with the
Merger and related matters. On August 6, 1996
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PJSC delivered its oral opinion, which opinion was confirmed in a written
opinion dated August 6, 1996 ("PJSC's Opinion"), to the Company's Board of
Directors that, as of the date of such opinion, the Merger Consideration to
be received by the Shareholders pursuant to the Merger was fair from a
financial point of view.
THE FULL TEXT OF PJSC'S OPINION, WHICH SETS FORTH ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS ON AND SCOPE OF THE
REVIEW BY PJSC IN RENDERING PJSC'S OPINION, IS ATTACHED TO THIS PROXY
STATEMENT AS EXHIBIT B AND IS INCORPORATED BY REFERENCE HEREIN. PJSC'S
OPINION IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS AND TO THE FAIRNESS
OF THE MERGER CONSIDERATION TO BE RECEIVED BY THE SHAREHOLDERS PURSUANT TO
THE MERGER FROM A FINANCIAL POINT OF VIEW, AND IT DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW TO VOTE AT THE SPECIAL MEETING. THE SUMMARY OF PJSC'S
OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF PJSC'S OPINION. SHAREHOLDERS ARE ENCOURAGED TO
READ PJSC'S OPINION IN ITS ENTIRETY.
In connection with PJSC's Opinion, PJSC: (i) analyzed certain publicly
available financial statements and other information of the Company; (ii)
reviewed certain internal financial statements and other financial and
operating data prepared by the management of the Company; (iii) reviewed
certain financial projections for the Company prepared by the management of
the Company; (iv) discussed the past and current operations, financial
condition and the prospects of the Company with senior executives of the
Company; (v) reviewed the reported prices and trading activity for the
Company's common stock; (vi) compared the financial performance of the
Company and the prices and trading activity of the Company's common stock
with those of certain comparable publicly traded companies and their common
stock; (vii) reviewed publicly available information regarding the financial
terms of certain comparable acquisition transactions; (viii) participated in
certain discussions among representatives of the Company and Renaissance and
their legal advisors; (ix) reviewed the Merger Agreement; (x) reviewed the
description of the pending acquisition of the Company in a Private Placement
Memorandum (dated June 26, 1996) prepared by CIBC Wood Gundy Securities Corp.
on behalf of Renaissance; and (xi) performed such other analyses as PJSC
deemed appropriate.
At the direction of the Board of Directors, PJSC contacted those potential
buyers the Board of Directors and management, in consultation with PJSC,
deemed most likely to acquire the Company. None of the potential buyers
expressed an interest in acquiring or merging with the Company at a price
comparable to the offer put forth by Renaissance.
In rendering PJSC's Opinion, PJSC assumed and relied without independent
verification on the accuracy and completeness of the information reviewed by
PJSC for the purposes of PJSC's Opinion. With respect to the financial
projections, PJSC assumed that the financial projections were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of the Company. PJSC expresses
no view as to such projections or the assumptions on which they are based.
PJSC did not make any independent valuation or appraisal of the assets or
liabilities of the Company, nor was PJSC furnished with any such appraisals.
PJSC's Opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to it as of August 6,
1996. It should be understood that, although subsequent developments may
affect PJSC's Opinion, PJSC does not have any obligation to update, revise or
reaffirm its opinion.
PJSC does not express any view as to any terms of the Merger, including,
without limitation, the financing condition set forth in Section 8.3(g) of
the Merger Agreement, other than the fairness from a financial point of view
to the Shareholders of the consideration to be received by the Shareholders
pursuant to the Merger.
The following summarizes significant financial analyses performed by PJSC
and reviewed with the Company's Board of Directors on August 6, 1996 in
connection with PJSC's Opinion to the Company's Board of Directors on such
date:
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THE COMPANY'S COMMON STOCK PERFORMANCE. PJSC's analysis of the Company's
common stock performance consisted of an analysis of closing prices and
trading volumes from July 1, 1991 to August 5, 1996 and the Company's indexed
price performance from July 1, 1991 to August 5, 1996 relative to the S&P 400
index and a comparable company index, which was comprised of Alfin, Inc.,
BeautiControl Cosmetics, Inc., CCA Industries, Inc., Del Laboratories, Inc.,
Dep Corporation, Jean Philippe Fragrances, Inc., Parlux Fragrances, Inc., and
Tristar Corporation. The shares of the Company's common stock have generally
traded below the S&P 400 index, and such comparable company index during this
time period. During the period from July 1, 1991 to August 5, 1996, the high
closing price for the Company's common stock was $10.00 per share on February
24, 1992 and the low closing price was $2.75 per share on January 3, 1996.
PREMIUM ANALYSIS. PJSC performed a comparison of the premium to be paid
for the Company's common stock pursuant to the Merger to premiums offered in
acquisition transactions of less than $25.0 million in equity value
("Comparable Acquisitions") during the three years ended August 5, 1996. PJSC
found that the Merger Consideration represented a premium of 87.5% to the
Company's closing price one week prior to the date of the initial
announcement of the proposed Merger on June 24, 1996 (the "Announcement
Date"), as compared to a median premium for Comparable Acquisitions of 28.4%;
and a premium of 96.7% to the Company's closing price one month prior to the
Announcement Date, as compared to a mean premium for Comparable Acquisitions
of 29.2%.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. Using publicly
available information, PJSC compared selected financial data of the Company
with similar data of selected publicly traded companies engaged in businesses
considered by PJSC to be comparable to the operations of the Company.
Specifically, PJSC included in its review Alfin, Inc., BeautiControl
Cosmetics, Inc., CCA Industries, Inc., Del Laboratories, Inc., Dep
Corporation, Jean Philippe Fragrances, Inc., Parlux Fragrances, Inc., and
Tristar Corporation (the "Comparable Companies"). Historical financial
information used in connection with this analysis was as of the most recent
financial statements publicly available for each company as of August 5,
1996.
PJSC calculated and compared various financial multiples and ratios,
including, among other things, the market price per share as of August 5,
1996 as a multiple of earnings per share ("EPS") for the latest twelve months
("LTM"), estimated EPS for calendar 1996 and calendar 1997 based upon EPS
estimates from the International Brokers Estimate System ("IBES"), and
aggregate value (which represents total equity value plus book values of
total debt, preferred stock and minority interests less cash) ("Aggregate
Value") as a multiple of LTM net sales, earnings before interest and taxes
("EBIT") and earnings before interest, taxes, depreciation and amortization
("EBITDA"). As of August 5, 1996, this analysis resulted in (i) a range of
closing stock prices to LTM EPS of 9.0x to 18.0x for the Comparable Companies
compared to a negative multiple for the Company at the Merger Consideration;
(ii) a range of closing stock prices to 1996 estimated EPS of 8.0x to 12.0x
for the Comparable Companies compared to 99.6x for the Company at the Merger
Consideration; (iii) closing stock price to 1997 estimated EPS of 9.0x for
the Comparable Companies compared to a not meaningful multiple for the
Company at the Merger Consideration; (iv) a range of equity value to tangible
book value of equity of 175% to 375% for the Comparable Companies compared to
192.3% for the Company at the Merger Consideration; (v) a range of Aggregate
Value to LTM net sales of 50.0% to 80.0% for the Comparable Companies
compared to 79.8% for the Company at the Merger Consideration; (vi) a range
of Aggregate Value to LTM EBIT of 6.0x to 14.0x for the Comparable Companies
compared to a negative multiple for the Company at the Merger Consideration;
and (vii) a range of Aggregate Value to LTM EBITDA of 5.5x to 9.0x for the
Comparable Companies compared to a negative multiple for the Company at the
Merger Consideration.
Because of relatively few independent comparable companies and the
inherent differences between the business, operations and prospects of the
Company and the businesses, operations and prospects of the Comparable
Companies, PJSC believed that it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the analysis, and accordingly also
made qualitative judgments concerning differences between the financial and
operating characteristics of the Company and the Comparable Companies that
would affect the valuations of the Company and the Comparable Companies.
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ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS. Using publicly available
information, PJSC performed an analysis of selected precedent transactions
involving fragrance/cosmetics companies from January 1, 1991 to August 5,
1996 (the "Comparable Transactions"). This analysis resulted in (i) a range
of equity value to LTM net income of 18.0x to 25.0x for the Comparable
Transactions compared to a negative multiple for the Company at the Merger
Consideration; (ii) a range of equity value to tangible book value of equity
of 100% to 400% for the Comparable Transactions compared to 192.3% for the
Company at the Merger Consideration; (iii) a range of Aggregate Value to LTM
net sales of 50.0% to 100.0% for the Comparable Transactions compared to
79.8% for the Company at the Merger Consideration; (iv) a range of Aggregate
Value to LTM EBIT of 10.0x to 20.0x for the Comparable Transactions compared
to a negative multiple for the Company at the Merger Consideration; and (v) a
range of Aggregate Value to LTM EBITDA of 8.0x to 10.0x for the Comparable
Transactions compared to a negative multiple for the Company at the Merger
Consideration.
No transaction utilized in the comparable transactions analysis is
identical to the Merger. Accordingly, an analysis of the results' of the
foregoing necessarily involves complex considerations and judgements
concerning financial and operating characteristics of the Company and other
factors that could affect the acquisition value of the companies to which it
is being compared. Mathematical analysis (such as determining the average or
median) is not itself a meaningful method of using comparable transaction
data.
DISCOUNTED CASH FLOW ANALYSIS. PJSC performed a discounted cash flow
analysis of the Company for the fiscal years ended 1996 through 2000 based on
financial projections prepared by the management of the Company. Free cash
flow of the Company was calculated as after-tax EBIT plus depreciation and
amortization and other non-cash expenses less the sum of capital expenditures
and investment in non-cash working capital. PJSC calculated terminal values
by applying a range of multiples to projected fiscal 2000 EBITDA. The free
cash flow streams and terminal values were then discounted to the present
using a range of discount rates, representing an estimated range of the
weighted average cost of capital for the Company. Based on this analysis,
PJSC calculated per share values for the Company ranging from $4.35 to $9.03.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. PJSC
believes that its analysis must be considered as a whole and that selecting
portions of its analysis, without considering all analyses, would create an
incomplete view of the process underlying PJSC's Opinion. In addition, PJSC
may have given certain analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than other
assumptions, so that the range of valuations resulting for any particular
analysis described above should not be taken to be PJSC's view of the actual
value of the Company.
In performing its analyses, PJSC made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by PJSC are not necessarily indicative of actual value, which may
be significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as a part of PJSC's analysis of whether the
consideration to be received by the holders of the Company's common stock
pursuant to the Merger was fair from a financial point of view to the holders
of the Company's common stock and were conducted in connection with the
delivery of PJSC's oral opinion on August 6, 1996. The analyses do not
purport to be appraisals or to reflect prices at which the Company might
actually be sold. Because such estimates are inherently subject to
uncertainty, none of the Company, PJSC, or any other person assumes
responsibility for their accuracy. In addition, as described above, PJSC's
Opinion and the information provided by it to the Company's Board of
Directors were two of many factors taken into consideration by the Company's
Board of Directors in making its determination to approve the Merger. PJSC's
Opinion does not address the relative merits of the Merger and any other
transactions or business strategies that may have been considered by
management or the Board of Directors of the Company or the underlying
business decision of the Board of Directors to proceed with the Merger.
Consequently, PJSC analyses described above should not be viewed as
determinative of the opinion of the Company's Board of Directors or the view
of the Company's management with respect to the value of the Company or of
whether the Company's Board of Directors or the management of the Company
would have been willing to agree to different consideration.
12
<PAGE>
The consideration to be received by the Shareholders pursuant to the
Merger was determined through negotiations between the Company and
Renaissance and was approved by the Company's Board of Directors and the
Special Committee. During the course of the negotiations, PJSC did not make a
recommendation with respect to the amount or form of consideration to be
received by the Shareholders.
As part of its investment banking activities, PJSC is regularly engaged in
the evaluation of businesses and their securities in connection with mergers
and acquisitions, restructurings and valuations for corporate or other
purposes.
Pursuant to the terms of a letter agreement dated May 9, 1996 (the
"Engagement Letter"), PJSC was retained by the Company as its exclusive
financial advisor and to render an opinion to the Company's Board of
Directors with respect to the Merger. Under the Engagement Letter, the
Company has paid PJSC a retainer of $200,000 and a fairness opinion fee of
$150,000 and has agreed to pay PJSC an additional fee of $400,000 upon
consummation of the Merger. The Company has also agreed to reimburse PJSC for
reasonable expenses incurred by PJSC and to indemnify PJSC against certain
liabilities, including liabilities under the federal securities laws.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by Renaissance for the payment of the
Merger Consideration, to repay certain indebtedness owed by the Company and
to pay related fees and expenses, is expected to be approximately $33.8
million *. Renaissance has advised the Company that it will pay for such
obligations primarily from the proceeds of a sale of certain of its capital
stock and from borrowings under a new credit facility to be entered into by
Renaissance prior to the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. The tax
consequences of such receipt pursuant to the Merger may vary depending upon,
among other things, the particular circumstances of the Shareholder. In
general, a Shareholder who receives the Merger Consideration for Shares
pursuant to the Merger will recognize gain or loss for federal income tax
purposes equal to the difference between the amount of cash received in
exchange for the Shares sold and such Shareholder's adjusted tax basis in
such Shares. Provided that the Shares constitute capital assets in the hands
of the Shareholder, such gain or loss will be capital gain or loss, and will
be long-term capital gain or loss if the holder has held the Shares for more
than one year at the time of sale.
The foregoing discussion may not be applicable to certain types of
Shareholders, including Shareholders who acquired Shares pursuant to the
exercise of employee stock options or otherwise as compensation, individuals
who are not citizens or residents of the United States, foreign corporations
and entities that are otherwise subject to special tax treatment under the
Internal Revenue Code of 1986, as amended, such as insurance companies,
tax-exempt entities and regulated investment companies.
Holders of Options who surrender their Options in exchange for a cash
payment equal to the difference between the Purchase Price and the exercise
price per Share for the underlying common stock will recognize gain for
federal income tax purposes equal to the amount of such cash payment. Such
gain will be taxable as ordinary income and subject to any required
withholding taxes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE
MINIMUM TAX AND STATE, LOCAL AND FOREIGN TAX LAWS.
- ------------
* Estimate based on outstanding indebtedness at June 30, 1996. The amount of
outstanding indebtedness of the Company is expected to be higher than the
balance as of June 30, 1996 and will depend on the exact timing of the
Effective Time.
13
<PAGE>
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of
accounting, whereby the purchase price will be allocated based on fair values
of the assets and liabilities of the Company.
CERTAIN INTERESTS OF MANAGEMENT
INTERESTS IN SHARES AND STOCK OPTIONS. The Merger Agreement provides that
the Company will cause all holders of all Options held by employees and
directors of the Company to exercise all Options held by them or to surrender
such Options in exchange for an amount equal to the difference between $7.50
and the exercise price per Share for such underlying Shares. If all such
Options are surrendered, the holders thereof, including certain directors and
executive officers of the Company, will receive an aggregate amount of
approximately $249,544. Of that amount, Gay A. Mayer, the Chairman, President
and Chief Executive Officer of the Company, the two next highest compensated
executive officers of the Company in 1995 (collectively with Mr. Mayer, the
"Named Executives"), all executive officers of the Company as a group (the
"Executive Officer Group") and all directors of the Company as a group would
receive approximately the following amounts: Mr. Mayer, $0; Michael G.
Kazimir, Jr., $36,938; Robert O. Hurry, $14,375; the Executive Officer Group,
$106,625; and all directors of the Company (other than Mr. Mayer) as a group,
$47,275.
INDEMNIFICATION AND D&O INSURANCE. Pursuant to the Merger Agreement,
Renaissance has agreed, that at all times after the Effective Time, it will
cause the Surviving Corporation to indemnify the Company's officers and
directors (in their capacity as such) to the fullest extent permitted by law
from and against any losses, claims, damages, liabilities, costs, expenses,
judgments and amounts paid by them in settlement (with Renaissance's consent,
which consent shall not be unreasonably withheld) in connection with any
threatened, pending or contemplated action, suit or proceeding or
investigation arising out of or pertaining to any of the transactions
contemplated by the Merger Agreement or any other matter arising out of any
action or omission occurring prior to the Effective Time, and to cause the
Surviving Corporation to advance, on a periodic basis, the expenses of such
officers and directors (including reasonable attorney fees incurred by them
to counsel selected by such officers and directors) to the extent permitted
by applicable law. Renaissance also has agreed to cause the Surviving
Corporation to use its best efforts to cause to be maintained in effect for a
period of six years from the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company and
its subsidiaries (or substitute policies providing for continuing coverage on
terms and conditions which are no less advantageous so long as no lapse in
coverage occurs as a result of such substitution) with respect to all
matters, including the transactions contemplated in connection with the
Merger, occurring prior to and including the Effective Time; provided that,
in the event that any claim or claims are asserted or made within such
six-year period, such insurance will be continued in respect of any such
claims; provided further that, if the Surviving Corporation is unable to
obtain the insurance required by the Merger Agreement it will obtain
comparable insurance for an annual premium not in excess of 200% of the last
annual premium paid by the Company for such insurance coverage.
EMPLOYMENT AGREEMENT. Mr. Mayer, the Chairman, President and Chief
Executive Officer of the Company, has agreed to serve as a Group Vice
President of Renaissance. Under the two and one-half year contract, Mr. Mayer
will be paid a salary of $250,000 per year and participate in Renaissance's
bonus program. Mr. Mayer will also receive ten-year options to purchase 5,000
shares of Renaissance common stock at $104.00 per share.
STOCKHOLDER AGREEMENT. Mr. Mayer has entered into a stockholder agreement
(the "Stockholder Agreement") with Renaissance and RAI under which he has
agreed, until the earlier of the Effective Time or the termination of the
Merger Agreement, at any meeting of the holders of Shares or in connection
with any written consent of Shareholders, among other things, to vote the
Shares he owns and holds in his name in favor of the approval and adoption of
the Merger Agreement. Mr. Mayer further appointed Renaissance and its
officers his proxy in connection with any meeting or written consent of the
Shareholders.
14
<PAGE>
LETTER AGREEMENT. Mr. Mayer has entered into a letter agreement with
Renaissance and RAI under which he has agreed to use his reasonable best
efforts to obtain from the Company's directors and officers liability insurer
any consent or waiver which may be necessary to avoid the implementaion of
certain limitations on coverage under the Directors, Officers and Corporate
Liability Insurance Policy of the Company. In the event that the consent or
waiver is received, Mr. Mayer will use his reasonable best efforts to cause
certain designated Shareholders to become parties to the Stockholder
Agreement.
OTHER INTERESTS OF MANAGEMENT. The Company has entered into a severance
agreement with Michael G. Kazimir, Jr., Executive Vice President and Chief
Operating and Financial Officer of the Company. Pursuant to the agreement, if
Mr. Kazimir's employment with the Company is terminated without cause
following a change of control of the Company (which would include a
transaction like the Merger), Mr. Kazimir will be entitled to a severance
payment equal to the product of his prorated weekly salary times the sum of
twenty-four and the number of complete years of service he has provided to
the Company. The effect of the agreement is to increase the amount of the
severance payment that would be paid to Mr. Kazimir to an amount which is in
excess of that provided under the Company's normal severance policy.
Executive officers of the Company may also receive a cash distribution in
connection with the termination of the Company's defined benefit pension
plan. Approximately 30 people, including the executive officers of the
Company, have entered into stay bonus agreements with the Company for
payments aggregating approximately $400,000. A stay bonus under the Company
plan, however, would only be payable in the event that the Merger is not
consummated. Renaissance may also adopt a stay bonus program pursuant to
which participating executive officers of the Company may receive additional
compensation for their continuing service to the Surviving Corporation for a
period of time following the Effective Time.
REGULATORY MATTERS
ANTITRUST MATTERS. Title II of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), provides that certain
acquisition transactions may not be consummated until certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the Federal Trade Commission (the "FTC") and the
waiting period under the HSR Act has been terminated. The waiting period
under the HSR Act with respect to RAI's acquisition of Shares pursuant to the
Merger was terminated on September 16, 1996.
Transactions such as the Merger may be investigated by the Antitrust
Division or the FTC. Notwithstanding the termination of the waiting period
applicable to the Merger under the HSR Act, before or after the consummation
of such transaction, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the transaction or seeking divestiture
of the Shares so acquired or divestiture of substantial assets of Renaissance
and/or the Company. Private parties may also bring legal action under
antitrust laws under certain circumstances.
ENVIRONMENTAL MATTERS. Before the Merger can take place, the Company must
comply with the requirements of New Jersey Industrial Site Recovery Act,
N.J.S.A. 13:1K-6 et seq. ("ISRA") with respect to its two facilities located
in New Jersey. ISRA requires the submission, to the New Jersey Department of
Environmental Protection ("NJDEP"), of detailed environmental information and
data concerning the past and current use of the facilities to ascertain
whether any contamination may be present that requires remediation or related
actions. If there has been no discharge of hazardous substances or wastes at
the facilities (or if any such discharge has been fully remediated), the
NJDEP will issue a negative declaration allowing the Merger to take place. If
a negative declaration is not obtainable for any reason, the NJDEP could
require, before the Merger can be effected, that the Company (or another
NJDEP approved responsible entity) enter into a Remediation Agreement
pursuant to which the Company or such other entity would agree to take action
necessary to investigate and clean up any contamination and to provide an
adequate remediation funding source for such activities.
OTHER GOVERNMENTAL APPROVALS. Other than the issuance of a certificate of
merger by the Secretary of State of New York, the Company is aware of no
other federal or state regulatory requirements that must be complied with or
approvals that must be obtained prior to the consummation of the Merger.
15
<PAGE>
APPRAISAL RIGHTS
Pursuant to Section 910 of the NYBCL, a Shareholder may demand an
appraisal of the "fair value" of the Shareholder's Shares in lieu of
accepting the payment to be made pursuant to the Merger. Any dissenting
Shareholder wishing to exercise such appraisal rights must fully comply with
Section 623 of the NYBCL.
The following is a summary of Section 623 and the procedures that must be
followed to perfect appraisal rights thereunder. The complete text of Section
623 is set forth as Exhibit C to this Proxy Statement. Under Section 623, a
corporation must notify each of its shareholders entitled to appraisal rights
as of the record date of the meeting that such appraisal rights are available
and include in such notice a copy of Section 623. THIS PROXY STATEMENT
CONSTITUTES SUCH NOTICE TO THE SHAREHOLDERS. Shareholders wishing to exercise
appraisal rights are urged to review carefully the complete text of Section
623.
Each Shareholder electing to demand an appraisal must deliver to the
Company, before the taking of the vote on the Merger, a written objection to
the Merger with respect to such Shareholders's Shares. Such objection must
include a notice of such Shareholder's election to dissent, the name and
residence address of the Shareholder, the number of shares as to which the
dissent applies and a demand for payment of the "fair value" of such shares
if the action is taken. A proxy or vote against the Merger or an abstention
will not constitute such a demand; a Shareholder electing to take such action
must do so by a separate written demand. Such demands should be mailed or
delivered to Ms. Margaret A. Powers, Secretary, MEM Company, Inc., Union
Street Extension, Northvale, New Jersey 07647.
Upon consummation of the corporate action, the Shareholder shall cease to
have any of the rights of a Shareholder except the right to be paid the "fair
value" of his Shares. Within ten days after the Effective Time, the Surviving
Corporation will notify each Shareholder who has made a proper written demand
and who has not voted in favor of or consented to the Merger as of the
Effective Time. A vote in favor of the Merger by a Shareholder will have the
effect of waiving his appraisal rights.
The right of appraisal may be lost if the procedural requirements of
Section 623 are not followed exactly. If the right of appraisal is lost, the
Shareholder will be entitled to receive the Merger Consideration, without
interest, for each Share owned at the Effective Time upon surrender of the
Stock Certificates representing such Shares.
At the time of filing the notice of election to dissent or within one
month thereafter, the Shareholder shall submit the Stock Certificates
representing his Shares to the Company. The Company will note conspicuously
thereon that a notice of election has been filed and return the Stock
Certificates to the Shareholder. Any Shareholder who fails to submit his
Stock Certificates for such notation will, at the option of the Company
exercised by written notice to him within 45 days from the date of filing of
such notice of election to dissent, lose his dissenter's rights unless a
court otherwise directs.
Within fifteen days after the expiration of the period within which
Shareholders may file their notices of election to dissent, or within fifteen
days after the consummation of the proposed corporate action as to which
objection has been filed, whichever is later (but in no case later than 90
days from the Shareholders' authorization date), the Surviving Corporation
must make a written offer by registered mail to each Shareholder who has
filed such notice of election to pay for his Shares at a specific price which
the Company considers to be their "fair value." Such offer must be
accompanied by a statement setting forth the aggregate number of shares with
respect to which notices of election to dissent have been received and the
aggregate number of holders of such shares. If the corporate action has been
consummated, such offer must also be accompanied by (1) advance payment to
each such Shareholder who submitted his Stock Certificates to the Company of
an amount equal to 80% of the amount of such offer or (2) as to each
Shareholder who has not yet submitted his Stock Certificates, a statement
that advance payment to him of an amount equal to 80% of the amount of such
offer will be made by the Surviving Corporation promptly upon submission of
his Stock Certificates. Every advance payment or statement as to advance
payment must include advice to the Shareholder to the effect that acceptance
of such payment does not constitute a waiver of any dissenters' rights. If
the corporate action to which
16
<PAGE>
objection has been filed has not been consummated upon the expiration of the
90 day period after it was authorized by the Shareholders, the offer may be
conditioned upon the consummation of such corporate action. Such offer must
be made at the same price per Share to all dissenting Shareholders of the
same class. If within 30 days after the making of such offer, the Company and
any Shareholder agree upon the price to be paid for his Shares, payment
therefor must be made within 60 days after the making of such offer or the
consummation of the corporate action to which such Shareholder objected,
whichever is later, upon the surrender of the Stock Certificates representing
such Shares.
A notice of election may be withdrawn by the Shareholder at any time prior
to his acceptance in writing of an offer made by the Surviving Corporation,
but in no case later than 60 days from the date of the consummation of the
corporate action. Upon expiration of such time, withdrawal of a notice of
election will require the written consent of the Surviving Corporation. If a
notice of election is withdrawn, a Shareholder will have such rights as
provided by Section 623.
The following procedures apply if the Company fails to make such offer
within such period of fifteen days, or if it makes the offer and any
dissenting Shareholder fails to agree with it within the period of 30 days
thereafter upon the price to be paid for their Shares:
(a) The Company must, within 20 days after the expiration of whichever is
applicable of the two periods last mentioned, institute a special proceeding
in the appropriate New York State court to determine the rights of dissenting
Shareholders and to fix the "fair value" of their Shares.
(b) If the Company fails to institute such proceeding within such period
of 20 days, any dissenting Shareholder may institute such proceeding for the
same purpose not later than 30 days after the expiration of such 20 day
period. If such proceeding is not instituted within such 30 day period, all
dissenter's rights will be lost unless the court otherwise directs.
(c) All dissenting Shareholders, excepting those who have agreed with the
Company upon the price to be paid for their Shares, must be made parties to
such proceeding, which will have the effect of an action quasi in rem against
their Shares. The jurisdiction of the court will be plenary and exclusive.
(d) The court will fix the value of the Shares which will be the "fair
value" as of the close of business on the day prior to the date of the
Special Meeting, considering the nature of the transaction giving rise to the
Shareholders' right to receive payment for Shares and its effects on the
corporation and its Shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
Shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors.
Within 60 days after final determination of the proceeding, the Surviving
Corporation must pay to each dissenting Shareholder the amount found to be
due him, upon surrender of the Stock Certificates representing such Shares.
The foregoing does not purport to be a complete statement of the
provisions of Section 623 and is qualified in its entirety by reference to
said section, which is reproduced in full in Exhibit C to this Proxy
Statement.
ANY SHAREHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS BUT WHO DOES NOT
FOLLOW THE PROCEDURES PROVIDED UNDER SECTION 623 IN A PROPER AND TIMELY
MANNER WILL BE UNABLE TO PERFECT APPRAISAL RIGHTS. IN THAT CASE, THE SHARES
OWNED BY SUCH SHAREHOLDER IMMEDIATELY PRIOR TO THE EFFECTIVE TIME WILL BE
CONVERTED INTO THE RIGHT TO RECEIVE THE MERGER CONSIDERATION, WITHOUT
INTEREST, PURSUANT TO THE MERGER.
LEGAL PROCEEDINGS
Randall v. MEM Company, Inc., et al. On or about July 31, 1996, Tom
Randall ("Randall"), on behalf of himself and all other Shareholders (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 Shareholders under the terms of the transactions
contemplated by the agreement in principle
17
<PAGE>
with Renaissance announced June 24, 1996 is inadequate and grossly unfair to
the Shareholders 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 common stock in a
manner designed to obtain the highest possible price for the Shareholders.
Randall seeks, among other things, an order of the Court requiring the
defendants to seek other buyers of the Company and, in the event that the
proposed transactions with Renaissance and RAI are consummated, Randall seeks
to recover damages caused by the alleged breach of fiduciary duties owed by
the individual defendants to the Shareholders, together with fees and
expenses. The time by which the Company and the director defendants must
respond to the complaint has been extended to September 30, 1996. The Company
believes that the putative class action suit is without merit and intends to
defend it vigorously.
PRICE RANGE OF SHARES AND DIVIDENDS
The common stock of the Company is traded on the American Stock Exchange
under the ticker symbol MEM. As of the Record Date, the number of record
holders of common stock was approximately 410 persons. The quarterly high and
low sales prices for the periods indicated are as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1994
- ------------------------------------
First Quarter ....................... $4.50 $3.88
Second Quarter ...................... 4.50 3.88
Third Quarter ....................... 6.38 3.88
Fourth Quarter ...................... 5.63 3.75
1995
- ------------------------------------
First Quarter ....................... $4.63 $3.13
Second Quarter ...................... 4.00 3.25
Third Quarter ....................... 3.75 3.25
Fourth Quarter ...................... 3.75 2.75
1996
- ------------------------------------
First Quarter ....................... $6.00 $2.75
Second Quarter ...................... 7.38 3.50
Third Quarter (through September 16) 7.19 6.00
</TABLE>
On June 21, 1996, the last full trading day prior to the announcement of
the agreement in principle regarding the Merger, the reported closing sales
price per Share on the ASE Composites Tape was $6.63. On August 7, 1996, the
last full trading day prior to the announcement of the Merger Agreement, the
reported closing sales price per Share on the AMEX Composites Tape was $6.13.
On September 16, 1996, the last full trading day prior to the date of this
Proxy Statement, the closing sales price of the Shares on the AMEX Composites
Tape was $7.06 per Share. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE SHARES.
The Company has not declared any cash dividends for the past five years,
and does not anticipate that dividends will be paid in the foreseeable
future. Restrictions on dividend payments contained in the Company's
financing agreement currently prohibit the declaration of dividends if the
Company operates at a loss. The Company has agreed in the Merger Agreement
not to, and does not intend to, pay cash dividends with respect to the Shares
prior to the Effective Time.
18
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth the
beneficial ownership (as defined in the rules of the Commission) as of the
Record Date of the Company's common stock of the directors, the Company's
chief executive officer and its two most highly compensated other executive
officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED (1) CLASS
- ----------------------------------------- --------------- ----------
<S> <C> <C>
Paul Hallingby, Jr. (2) .................. 3,500 *
Gay A. Mayer (3) ......................... 1,350,081(4) 51.8%
Derek B. Van Dusen (2) ................... 6,300 *
Robert E. Mulcahy III (2) ................ 3,200 *
Laurette M. Beach (2)(5) ................. 1,181,571(6) 45.4%
Bruce J. Klatsky ......................... 1,000(7) *
Michael G. Kazimir, Jr. .................. 21,500(8) *
Robert O. Hurry .......................... 6,700(9) *
All executive officers and directors as a
group (15 persons) ...................... 1,809,741(10) 69.5%
</TABLE>
- ------------
*Less than 1% of class.
(1) All shares owned are common stock, par value $.05 per share.
(2) Includes 3,200 shares which may be acquired upon the exercise of
options granted under the 1993 Non-Employee Stock Incentive Plan.
(3) Gay A. Mayer is the brother of Laurette M. Beach.
(4) See Note (4) to the table under "Beneficial Ownership of Securities
-- Beneficial Owners."
(5) Laurette M. Beach is the sister of Gay A. Mayer.
(6) See Note (5) to the table under "Beneficial Ownership of Securities
-- Beneficial Owners."
(7) Includes 1,000 shares which may be acquired upon the exercise of
options granted under the 1993 Non-Employee Stock Incentive Plan.
(8) Includes 11,500 shares which may be acquired upon the exercise of
options granted under the 1991 Stock Incentive Plan.
(9) Includes 4,500 shares which may be acquired upon the exercise of
options granted under the 1991 Stock Incentive Plan.
(10) Includes shares as described in Notes (4), (6), and (7), 31,500 shares
which may be acquired upon the exercise of options granted under the
1991 Stock Incentive Plan and 13,800 shares which may be acquired upon
the exercise of options granted under the 1993 Non-Employee Stock
Incentive Plan.
19
<PAGE>
BENEFICIAL OWNERS. The only persons known by the management of the Company
to be the beneficial owners of more than five percent of the outstanding
shares of the Company's Common Stock, as of the Record Date (except as
otherwise indicated), are indicated below:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED CLASS
- ----------------------------------------------------------- ------------------- ----------
<S> <C> <C>
Elizabeth C. Mayer Grantor Trust dated December 14, 1988
c/o Gay A. Mayer, Trustee(1) ............................... 520,190 shares(2) 20.0%
United States Trust Company of New York and Gay A. Mayer,
as Trustees
c/o United States Trust Company of New York
114 West 47th Street New York, NY 10036 .................... 310,000 shares 11.9%
Gay A. Mayer(1) ............................................ 1,350,081 shares(4) 51.8%
Laurette M. Beach(1) ....................................... 1,181,571 shares(5) 45.4%
Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 ..................................... 191,000 shares(6) 7.3%
Renaissance Cosmetics, Inc.
955 Massachusetts Avenue
Cambridge, MA 02139 ........................................ 353,565 shares(7) 13.6%
</TABLE>
- ------------
(1) The address of such beneficial owner is MEM Company, Inc., Union Street
Extension, Northvale, NJ 07647.
(2) The Trustee is Gay A. Mayer.
(3) United States Trust Company of New York and Gay A. Mayer are joint
trustees of each of four trusts. Gay A. Mayer is a beneficiary of two
of such trusts, and Laurette M. Beach is a beneficiary of the other two
trusts. Each of the trustees may be deemed, pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, to
be the beneficial owner of the Shares held in the related trusts
because it shares the power, subject to the direction of Mr. Mayer, to
dispose, or to direct the disposition, of such Shares and to vote, or
to direct the voting of, such Shares.
(4) Consists of: (a) 353,565 Shares owned directly (see Note (7) below),
(b) 22,290 Shares as trustee for his children, (c) 59,875 Shares as a
director of the Family Mayer Foundation, Inc., a charitable foundation,
(d) 520,190 Shares as a trustee and residuary beneficiary of the
Elizabeth C. Mayer Grantor Trust dated December 14, 1988, (e) 310,000
Shares as co-trustee of the trusts referred to in Note (3) above, (f)
32,661 Shares owned by his spouse, as to which he disclaims beneficial
ownership, and (g) 51,500 Shares as a trustee of the Stephen H. Mayer
Life Insurance Trust.
(5) Consists of: (a) 283,844 Shares owned directly, (b) 49,856 Shares as
trustee for her children, (c) 23,732 Shares as custodian for her
children, (d) 59,875 Shares as a director of the Family Mayer
Foundation, Inc., a charitable foundation, (e) 520,190 Shares as a
residuary beneficiary of the Elizabeth C. Mayer Grantor Trust dated
December 14, 1988, (f) 158,450 Shares as a beneficiary of two of the
trusts referred to in Note (3) above, (g) 31,524 Shares owned by her
spouse, as to which she disclaims beneficial ownership, (h) 2,600
Shares owned by her children, as to which she disclaims beneficial
ownership, (i) 51,500 Shares as a trustee of the Stephen H. Mayer Life
Insurance Trust, and (j) 3,200 Shares which may be acquired upon the
exercise of options granted under the 1993 Non-Employee Stock Incentive
Plan.
(6) Such Shares are owned by the advisory clients of Dimensional Fund
Advisors, Inc., an investment advisor registered under the Investment
Advisors Act of 1940 ("Dimensional"), no one of which, to the knowledge
of Dimensional, owns more than 5% of the outstanding Shares of the
Company's common stock. Persons who are officers of Dimensional also
serve as officers of DFA Investment Dimensions Group Inc. (the "Fund")
and The DFA Investment Trust Company (the "Trust"), each an open-end
management investment company registered under the Investment Company
Act of 1940. In their capacities as officers of the Fund and the Trust,
these persons vote 8,000 and 53,300 Shares (included in the table
above) which are owned by the Fund and the Trust, respectively.
Information as to Dimensional, the Fund, the Trust and their officers
has been taken from a Schedule 13G filed by Dimensional with the
Commission in February 1996.
(7) Consists of 353,565 Shares owned directly by Gay A. Mayer as to which
Mr. Mayer has granted Renaissance Cosmetics, Inc. an irrevocable proxy.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following table sets forth selected financial data of the Company as
of and for the six months ended June 30, 1996 and 1995, and as of and for
each of the years in the five fiscal year period ended December 31, 1995.
Such selected information is qualified by, and should be read in conjunction
with, the detailed information and the financial statements and the notes
related thereto appearing in the Company's Form 10-K for the fiscal year
ended December 31, 1995 attached hereto as Exhibit D and the Company's Form
10-Q for the fiscal quarter ended June 30, 1996 attached hereto as Exhibit E.
The selected financial data for the six months ended June 30, 1996 and 1995
are unaudited but, in the opinion of management, includes all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation
of the financial and operating data for such periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales ........................... $ 9,181 $10,985 $44,825 $53,094 $38,454 $44,751 $57,949
Net income (loss) ................... (4,426) (3,196) (2,982) (1,328) (2,570) (4,300) 44
Net income (loss) per share ......... (1.71) (1.24) (1.16) (.52) (1.00) (1.67) .02
Dividends declared .................. -- -- -- -- -- -- --
Weighted average shares outstanding 2,583 2,580 2,581 2,576 2,572 2,571 2,570
FINANCIAL POSITION (AT END OF
PERIOD):
Working capital ..................... $ 7,098 $11,712 $11,971 $15,602 $18,068 $19,636 $24,471
Property, plant and
equipment --net .................... 4,785 5,297 5,181 5,324 5,513 6,084 6,685
Total assets ........................ 41,470 45,107 45,824 47,261 34,282 39,514 43,626
Long term notes ..................... 2,274 3,832 3,370 4,907 699 -- 838
Stockholders' equity ................ 20,215 24,361 24,657 27,496 28,919 31,589 36,310
Stockholders' equity per share ..... 7.83 9.44 9.55 10.66 11.24 12.29 14.13
Shares outstanding at end of period 2,583 2,580 2,583 2,580 2,573 2,571 2,570
</TABLE>
21
<PAGE>
BUSINESS OF THE COMPANY
The Company was incorporated in 1948 under the laws of the State of New
York. The business of the Company principally consists of manufacturing,
selling and distributing a diversified line of toiletries in several
fragrance groups. These are marketed under the nationally advertised
trademarks English Leather(Registered Trademark), British Sterling(Registered
Trademark), Heaven Sent(Registered Trademark), LOVE'S(Registered Trademark),
and Tinkerbell(Registered Trademark). The Company also markets Acqua di
Selva(Registered Trademark), a premium priced imported line of men's
toiletries, through a subsidiary.
Additional information regarding the business and properties of the
Company is contained in the Company's Form 10-K for the fiscal year ended
December 31, 1995 and Form 10-Q for the fiscal quarter ended June 30, 1996,
which are attached as Exhibit D and Exhibit E, respectively, to this Proxy
Statement. See "Exhibits."
INFORMATION CONCERNING RENAISSANCE AND RAI
The following information has been provided by Renaissance.
The principal executive office of Renaissance is 955 Massachusetts Avenue,
Cambridge, Massachusetts 02139, and the telephone number is (617) 497-5584.
The principal executive office of RAI is 635 Madison Avenue, New York, New
York 10022, and the telephone number is (212) 751-3700. Renaissance, through
its subsidiaries, manufacturers and markets a variety of artificial
fingernail and fragrance products in the United States and internationally.
There is no established public trading market for Renaissance's common stock.
RAI is a newly formed New York corporation that has not conducted any
business except in connection with the transactions related to the Merger.
Additional information regarding the business and operations of Renaissance
is contained in Renaissance's Form 10-K for the fiscal year ended March 31,
1996 and Form 10-Q for the fiscal quarter ended June 30, 1996, which are
attached as Exhibit F and Exhibit G, respectively, to this Proxy Statement.
Renaissance is subject to the informational filing requirements of the
Exchange Act and is required to file reports and other information with the
Commission under the Exchange Act relating to its business, financial
condition and other matters. Reports and other information relating to
Renaissance may be inspected and copies may be obtained from the office of
the Commission. See "Available Information."
22
<PAGE>
The following table sets forth selected financial data of Renaissance and
its subsidiaries for the periods indicated. Such selected information is
qualified by, and should be read in conjunction with, the detailed
information and the financial statements and the notes related thereto in the
Form 10-K of Renaissance for the fiscal year ended March 31, 1996 attached
hereto as Exhibit F, and the unaudited results for the three months ended
June 30, 1996 and 1995 appearing in the Form 10-Q for the fiscal quarter
ended June 30, 1996 of Renaissance attached hereto as Exhibit G. The selected
financial data for the three months ended June 30, 1996 and 1995 are
unaudited but, in the opinion of management of Renaissance, include all
adjustments (consisting of normal recurring accruals) necessary for the fair
presentation of financial and operating data for such periods.
<TABLE>
<CAPTION>
RENAISSANCE THE COSMAR PREDECESSOR
--------------------------------------------------- --------------------------------------------
PERIOD FROM PERIOD FROM
APRIL 15, JANUARY 1,
THREE MONTHS ENDED YEAR ENDED (INCEPTION) TO 1994 TO
JUNE 30, MARCH 31, MARCH 31, AUGUST 17, YEAR ENDED DECEMBER 31,
---------------------- ------------ -------------- ------------- ------------------------------
1996 1995 1996 1995 1994 1993 1992 1991
---------- ---------- ------------ -------------- ------------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales ........... $ 30,688 $ 26,635 $131,285 $ 57,714 $18,301 $25,844 $17,926 $9,500
Operating income .... 682 2,872 8,450 2,744 3,326 5,063 3,899 1,378
Interest expense .... 5,201 4,434 19,458(1) 8,694(1) 61 132 37 14
Net income (loss) ... (4,913) (1,615) (12,057) (5,459) 3,364 4,801 3,768 1,357
Net loss applicable
to common stock-
holders(2) ......... (4,681) (1,905) (13,390) (6,174) 3,364 4,801 3,768 1,357
Net loss per
common share ....... (6.49) (2.65) (18.62) (8.50) -- -- -- --
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets ........ $193,386 $170,721 $184,619 $162,253 -- $ 8,489 $ 7,216 $3,907
Long-term debt,
net of current
portion ............ 72,139 112,408 72,009 103,190 -- 294 181 146
Redeemable preferred
stock(3) ........... 12,049 10,655 11,698 10,365 -- -- -- --
Common stockholders'
equity ............. 1,025 18,459 6,452 20,189 -- 5,390 4,278 2,973
Net intangible assets
(goodwill and
trademarks) ........ 76,088 81,744 76,895 82,499 -- -- -- --
</TABLE>
- ------------
(1) Interest expense includes amortization of deferred financing costs,
accretion of interest on obligations for minimum royalty payments, and
accretion of debt discounts and non-cash interest totaling $1,860 and
$3,934 for the period from April 15, 1994 (Inception) to March 31, 1995,
and the year ended March 31, 1996.
(2) Represents net loss less preferred dividends, if any.
(3) The carrying value of the redeemable preferred stock has been reduced by
an allocation of proceeds to the common stock warrants and has been
increased by the accumulated dividends and accretion on such redeemable
preferred stock through the respective balance sheet data.
23
<PAGE>
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, the Company's independent accountants for the year
ended December 31, 1995, will not have a representative at the Special
Meeting.
AVAILABLE INFORMATION
Each of the Company and Renaissance is subject to the informational filing
or submission requirements of the Securities Exchange Act of 1934, as
amended, and in accordance therewith are required to file or submit periodic
reports and other information with the Commission under the Exchange Act
relating to their business, financial condition and other matters. Such
reports, proxy statements and other information may be inspected, without
charge, and copies may be obtained at prescribed rates, at the Commission's
public reference facility at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located in Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World
Trade Center, 13th Floor, New York, New York 10048 and can also be reviewed
through the Commission's Electronic Data Gathering, Analysis and Retrieval
System which is publicly available through the Commission's Web site
(http://www.sec.gov).
EXHIBITS
Each of the following Exhibits constitutes a part of this Proxy Statement
and should be considered as such.
24
<PAGE>
EXHIBIT A
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RENAISSANCE COSMETICS, INC. ("PARENT"),
RENAISSANCE ACQUISITION, INC. ("RAI")
AND
MEM COMPANY, INC. ("COMPANY")
DATED AS OF AUGUST 6, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER
SECTION 1.1 The Merger................................. 1
SECTION 1.2 Effective Time of the Merger............... 1
ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
SECTION 2.1 Certificate of Incorporation............... 2
SECTION 2.2 By-laws.................................... 2
SECTION 2.3 Officers................................... 2
SECTION 2.4 Directors.................................. 2
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 Conversion of Company Shares in the
Merger..................................... 2
SECTION 3.2 Consideration.............................. 3
SECTION 3.3 Cancellation of Company Common Stock
Certificates............................... 3
SECTION 3.4 Closing.................................... 4
SECTION 3.5 Closing of the Company's Transfer Books.... 4
SECTION 3.6 Dissenting Shares.......................... 5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.1 Organization and Qualification............. 5
SECTION 4.2 Capitalization............................. 6
SECTION 4.3 Subsidiaries............................... 6
SECTION 4.4 Authority; Non-Contravention; Approvals.... 7
SECTION 4.5 Reports and Financial Statements........... 9
SECTION 4.6 Absence of Undisclosed Liabilities......... 9
SECTION 4.7 Absence of Certain Changes or Events....... 10
SECTION 4.8 Litigation................................. 10
SECTION 4.9 Proxy Statement............................ 10
SECTION 4.10 No Violation of Law........................ 10
SECTION 4.11 Compliance with Agreements................. 11
SECTION 4.12 Taxes...................................... 11
SECTION 4.13 Employee Benefit Plans; ERISA.............. 12
i
<PAGE>
SECTION 4.14 Labor Controversies........................ 14
SECTION 4.15 Environmental Matters...................... 14
SECTION 4.16 Title to Assets............................ 16
SECTION 4.17 Company Stockholders' Approval............. 17
SECTION 4.18 No Excess Parachute Payments............... 17
SECTION 4.19 Trademarks and Intellectual Property
Compliance................................. 17
SECTION 4.20 Material Agreements........................ 18
SECTION 4.21 Transactions with Related Parties.......... 18
SECTION 4.22 Insurance.................................. 18
SECTION 4.23 Receivables................................ 19
SECTION 4.24 Customers and Suppliers.................... 19
SECTION 4.25 Product Liability Claims................... 19
SECTION 4.26 Inventories................................ 19
SECTION 4.27 Warranties and Returns..................... 20
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
PARENT AND RAI
SECTION 5.1 Organization and Qualification............. 20
SECTION 5.2 Authority; Non-Contravention; Approvals.... 20
SECTION 5.3 Litigation................................. 22
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 Conduct of Business by the Company
Pending the Merger......................... 22
SECTION 6.2 Acquisition Transactions................... 23
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 Access to Information...................... 25
SECTION 7.2 Proxy Statement............................ 26
SECTION 7.3 Stockholder Approval....................... 26
SECTION 7.4 Expenses and Fees.......................... 27
SECTION 7.5 Agreement to Cooperate..................... 27
SECTION 7.6 Public Statements.......................... 28
SECTION 7.7 Stock Option Plans and Stock Options....... 28
SECTION 7.8 Notification of Certain Matters............ 28
SECTION 7.9 Directors' and Officers'
Indemnification............................ 29
SECTION 7.10 Corrections to the Proxy Statement......... 30
SECTION 7.11 Employment Agreements, Severance
Agreements, Stay Bonuses and Related
Employment Matters......................... 30
SECTION 7.12 Stockholder Agreement...................... 31
ii
<PAGE>
SECTION 7.13 Parent Stay Bonus Program.................. 31
SECTION 7.14 Company Stay Bonus Program................. 31
ARTICLE VIII
CONDITIONS
SECTION 8.1 Conditions to Each Party's Obligation to
Effect the Merger.......................... 32
SECTION 8.2 Conditions to Obligation of the Company
to Effect the Merger....................... 33
SECTION 8.3 Conditions to Obligations of Parent and
RAI to Effect the Merger................... 33
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 Termination................................ 35
SECTION 9.2 Effect of Termination...................... 36
SECTION 9.3 Amendment.................................. 36
SECTION 9.4 Waiver..................................... 36
ARTICLE X
TERMINATION OF REPRESENTATIONS AND WARRANTIES
SECTION 10.1 Termination of Representations and
Warranties................................. 36
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1 Brokers.................................... 37
SECTION 11.2 Notices.................................... 37
SECTION 11.3 Interpretation............................. 38
SECTION 11.4 Miscellaneous.............................. 39
SECTION 11.5 Counterparts............................... 39
SECTION 11.6 Parties In Interest........................ 39
SECTION 11.7 Exhibits and Schedules..................... 39
iii
<PAGE>
EXHIBITS
Exhibit 7.12-1 Form of Stockholder Agreement
SCHEDULES
Schedule 2.3 List of Officers of the Surviving Corporation
Schedule 2.4 List of Directors of the Surviving Corporation
Schedule 4.2 Company Capitalization
Schedule 4.3 Company Subsidiaries
Schedule 4.4 Company Third Party Consents
Schedule 4.5 Company Reports and Financial Statements
Schedule 4.6 Certain Liabilities
Schedule 4.8 Company Litigation
Schedule 4.10 Violation of Laws by Company
Schedule 4.11 Company Compliance
Schedule 4.12 Company Taxes
Schedule 4.13 Company Employee Benefit Matters
Schedule 4.14 Company Labor Controversies
Schedule 4.15 Company Environmental Matters
Schedule 4.16 Company Assets
Schedule 4.18 Company Parachute Payments
Schedule 4.19 Company Intellectual Property Rights
Schedule 4.20 Company Material Agreements
Schedule 4.22 Company Insurance Policies
Schedule 4.23 Company Receivables
Schedule 4.24 Company Customers and Suppliers
Schedule 4.25 Company Product Liability Claims
Schedule 4.26 Company Inventories
Schedule 4.27 Company Warranties and Returns
Schedule 5.2 Parent and RAI Third Party Consents
Schedule 5.3 Parent Litigation
Schedule 7.11(a) Company Change of Control Agreements
Schedule 7.11(b) Company Employment Agreements
Schedule 7.11(c) Company Severance Agreements
Schedule 7.11(d) Company Stay Bonus Agreements
Schedule 7.11(e) Company Severance Policy
Schedule 11.1(a) Company's Buyer's Brokers Fees
Schedule 11.1(b) Parent's and RAI's Brokers Fees
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 6, 1996 (the
"Agreement"), by and among RENAISSANCE COSMETICS, INC., a Delaware corporation
("Parent"), RENAISSANCE ACQUISITION, INC., a New York corporation and a
wholly-owned subsidiary of Parent ("RAI"), and MEM COMPANY, INC., a New York
corporation (the "Company");
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Parent and the Company have
determined that the merger of RAI with and into the Company (the "Merger") is
consistent with and in furtherance of the long-term business strategy of
Parent and the Company and is fair to, and in the best interests of, Parent
and the Company and their respective stockholders.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section
1.2) in accordance with the New York Business Corporation Law (the "BCL"), RAI
shall be merged with and into the Company and the separate existence of RAI
shall thereupon cease. The Company shall be the surviving corporation in the
Merger and is hereinafter sometimes referred to as the "Surviving
Corporation."
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as shall be stated in a
Certificate of Merger, in a form mutually acceptable to Parent and the
Company, to be filed with the Secretary of State of the State of New York in
accordance with the BCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.5.
<PAGE>
ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
SECTION 2.1 CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Surviving Corporation shall be amended and restated at
and as of the Effective Time to read as did the Certificate of Incorporation
of the RAI immediately prior to the Effective Time (except that the name of
the Surviving Corporation shall remain unchanged).
SECTION 2.2 BY-LAWS. The By-laws of the Surviving Corporation shall
be amended and restated at and as of the Effective Time to read as did the
By-laws of the RAI immediately prior to the Effective Time (except that the
name of the Surviving Corporation shall remain unchanged).
SECTION 2.3 OFFICERS. The officers of the Surviving Corporation
shall be as designated in Schedule 2.3, and such officers shall serve in
accordance with the By-laws of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
SECTION 2.4 DIRECTORS. The directors of the Surviving Corporation
shall be as designated in Schedule 2.4, and such directors shall serve in
accordance until the next annual meeting of the Surviving Corporation or until
their successors are duly elected and qualified.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER. At the
Effective Time, by virtue of the Merger and without any action on the part of
any holder of any shares of Company Common Stock, par value $.05 per share of
the Company ("Company Common Stock"):
(a) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares as
defined in Section 3.6) shall be converted into, and shall thereafter
represent only, the right to receive the Merger Consideration (as defined in
Section 3.2).
(b) Each share of Company Common Stock owned by Parent or any
subsidiary of Parent or held in treasury by the Company or any Subsidiary of
the Company (each a "Non-Converting Share") immediately prior to the Effective
Time, if any, shall be cancelled and shall cease to exist from and after the
Effective Time.
2
<PAGE>
(c) At the Effective Time, by virtue of the Merger and without any
action on the part of Parent as the sole stockholder of RAI, each issued and
outstanding share of common stock, no par value, of RAI ("RAI Common Stock")
shall be converted into one share of common stock, no par value, of the
Surviving Corporation.
(d) No share of Company Common Stock (other than Dissenting Shares)
shall be deemed to be outstanding or to have any rights other than those set
forth in this Section 3.1 after the Effective Time.
SECTION 3.2 CONSIDERATION.
(a) The consideration to be issued in the Merger for each share (or
fraction thereof) of Company Common Stock shall be Seven Dollars and Fifty
Cents ($7.50) per share of Company Common Stock (the "Merger Consideration")
to be distributed in accordance with Section 3.3(c) below.
(b) The Merger Consideration shall be subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock
split or other change in the number of shares of Company Common Stock
outstanding prior to Closing (as defined in Section 3.5).
SECTION 3.3 CANCELLATION OF COMPANY COMMON STOCK
CERTIFICATES.
(a) From and after the Effective Time, all Company Common Stock
shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of a certificate
representing shares of Company Common Stock (other than Dissenting Shares as
defined in Section 3.6(a) below) shall cease to have any rights with respect
thereto, except the right to receive in exchange therefor, upon surrender
thereof to Registrar and Transfer Company (the "Exchange Agent"), the amount
of Merger Consideration to which each holder of Company Common Stock is
entitled pursuant to the terms hereof.
(b) Promptly after the Effective Time, Parent shall make available
to the Exchange Agent the total amount of Merger Consideration required to
effect the exchanges referred to in paragraph (a) above.
(c) Promptly after the Effective Time, the Exchange Agent shall
mail to each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (other than Dissenting Shares as defined in Section
3.6(a) below) (the "Company Certificates") (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title
3
<PAGE>
to the Company Certificates shall pass, only upon actual delivery of the
Company Certificates to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of the Company Certificates in exchange for the Merger
Consideration. Upon surrender of Company Certificates for cancellation to the
Exchange Agent, together with a duly executed letter of transmittal and such
other documents as the Exchange Agent shall reasonably require, the holder of
such Company Certificates shall be entitled to receive in exchange therefore
the Merger Consideration into which the shares of Company Common Stock
theretofore represented by the Company Certificates so surrendered shall have
been converted pursuant to the provisions of Section 3.1, and the Company
Certificates so surrendered shall be cancelled.
(d) Promptly following the date which is nine (9) months after the
Effective Time, the Exchange Agent shall deliver to Parent all Merger
Consideration, property and other documents in its possession relating to the
transactions described in this Agreement, and the Exchange Agent's duties
shall terminate. Thereafter, each holder of a Company Certificate may
surrender such Company Certificate to Parent and (subject to applicable
abandoned property, escheat and similar laws) receive in exchange therefore
the Merger Consideration to which such person is entitled, without any
interest thereon. Notwithstanding the foregoing, none of the Exchange Agent,
Parent, RAI or the Surviving Corporation shall be liable to a holder of
Company Common Stock for any Merger Consideration delivered to a public
official pursuant to applicable abandoned property, escheat and similar laws.
SECTION 3.4 CLOSING. The closing (the "Closing") of the
transactions contemplated by this Agreement shall take place at a location
mutually agreeable to Parent and the Company on the third (3rd) business day
immediately following the date on which the last of the conditions set forth
in Article VIII hereof is fulfilled or waived, or at such other time and place
as Parent and the Company shall reasonably agree (the date on which the
Closing occurs is referred to in this Agreement as the "Closing Date").
SECTION 3.5 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At and after
the Effective Time, holders of Company Common Stock shall cease to have any
rights as stockholders of the Company, except for the rights described herein.
At the Effective Time, the stock transfer books of the Company shall be closed
and no transfer of shares of Company Common Stock which were outstanding
immediately prior to the Effective Time shall thereafter be made. If, after
the Effective Time, subject to the terms and conditions of this Agreement,
Company Certificates formerly representing Company Common Stock are presented
to Parent, they shall be cancelled and exchanged for Merger Consideration in
accordance with this Article III.
4
<PAGE>
SECTION 3.6 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the
contrary, shares of Company Common Stock that are outstanding immediately
prior to the Effective Time and which are held by stockholders who have not
voted such shares in favor of the Merger or consented thereto in writing and
who shall have available to them and who shall have demanded properly in
writing appraisal for such shares of Company Common Stock in accordance with
Sections and 623 and 910 of the BCL (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive the Merger
Consideration, but such stockholders shall be entitled only to such rights as
are granted by Section 910 of the BCL. Such stockholders shall be entitled to
receive payment of the appraised value of such shares of Company Common Stock
held by them in accordance with the provisions of such Section 910, except
that all Dissenting Shares held by stockholders who shall have failed to
perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Company Common Stock under such Section 910 shall
thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 3.3, of the certificate or certificates that formerly
evidenced such shares.
(b) The Company shall give Parent (i) prompt notice of any demands
for appraisal received by the Company, withdrawals of such demands and any
other instruments served pursuant to the BCL and received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under the BCL. The Company shall not, except with the
prior written consent of Parent, make any payment with respect to any demands
for appraisal or offer to settle or settle any such demands.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and RAI as of the
date hereof as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of New York and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. The Company is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to
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be so qualified and in good standing will not have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other) or results of operations of the Company and its Subsidiaries taken as a
whole (a "Company Material Adverse Effect"). True, accurate and complete
copies of the Company's Certificate of Incorporation and By-laws, in each case
as in effect on the date hereof, including all amendments thereto, have
heretofore been delivered to Parent.
SECTION 4.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
6,000,000 shares of Company Common Stock. As of August 5, 1996, 2,583,184
shares of Company Common Stock were issued and outstanding. All of such issued
and outstanding shares of Company Common Stock are validly issued and are
fully paid, nonassessable and free of preemptive rights. No Subsidiary of the
Company holds any shares of the capital stock of the Company.
(b) Except as set forth on Schedule 4.2 attached hereto, as of the
date hereof (i) there were no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, instrument or other agreement and also including any rights plan or
other anti-takeover agreement, obligating the Company or any Subsidiary of the
Company to issue, deliver or sell, or cause to be issued, delivered or sold or
otherwise to become outstanding, additional shares of the capital stock of the
Company or obligating the Company or any Subsidiary of the Company to grant,
extend or enter into any such agreement or commitment, and (ii) there are no
voting trusts, proxies or other agreements or understandings to which the
Company or any Subsidiary of the Company is a party or is bound with respect
to the voting of any shares of capital stock of the Company and, to the
knowledge of the Company, there are no such trusts, proxies, agreements or
understandings by, between or among any of the Company's stockholders with
respect to Company Common Stock. There are no outstanding or authorized stock
appreciation rights, phantom stock, profit participation or similar rights
with respect to the Company.
SECTION 4.3 SUBSIDIARIES. Schedule 4.3 lists all of the
corporations in which the Company owns, directly or indirectly, fifty percent
(50%) or more of the securities of such corporation that are entitled to vote
at a meeting of the stockholders thereof ("Subsidiaries"). Except where any
failure would not have a Company Material Adverse Effect, each direct and
indirect Subsidiary of the Company is duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization and has the requisite power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. Each
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Subsidiary of the Company is qualified to do business, and is in good
standing, in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing will not, when taken together with all such other failures, have
a Company Material Adverse Effect. All of the outstanding shares of capital
stock of each Subsidiary of the Company are validly issued, fully paid,
nonassessable and free of preemptive rights and are owned directly or
indirectly by the Company free and clear of any liens, claims or encumbrances,
except that such shares are pledged to secure the Company's credit facilities.
There are no subscriptions, options, warrants, rights, calls, contracts,
voting trusts, proxies or other commitments, understandings, restrictions or
arrangements relating to the issuance, sale, voting, transfer, ownership or
other rights with respect to any shares of capital stock of any Subsidiary of
the Company, including any right of conversion or exchange under any
outstanding security, instrument or agreement.
SECTION 4.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter
into this Agreement and, subject to the Company Stockholders' Approval (as
defined in Section 7.3(a)) and the Company Required Statutory Approvals (as
defined in Section 4.4(c)), to consummate the transactions contemplated
hereby. This Agreement has been approved by the Board of Directors of the
Company, and no other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery of this Agreement or, except
for the Company Stockholders' Approval, the consummation by the Company of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by Parent and RAI, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally and (ii) general
equitable principles.
(b) The execution and delivery of this Agreement by the Company do
not violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company or
any of its Subsidiaries under any of the terms, conditions or provisions of
(i) the respective charters or By-laws of the Company or any of its
Subsidiaries, (ii) any statute, law,
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ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its Subsidiaries or any of their respective properties or assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or
agreement of any kind to which the Company or any of its Subsidiaries is now a
party or by which the Company or any of its Subsidiaries or any of their
respective properties or assets may be bound. The consummation by the Company
of the transactions contemplated hereby will not result in any violation,
conflict, breach, termination, acceleration or creation of liens under any of
the terms, conditions or provisions described in clauses (i) through (iii) of
the preceding sentence, subject (x) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the
Effective Time) the Company Required Statutory Approvals and the Company
Stockholders' Approval and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the
Effective Time) consents required from lenders, lessors or other third parties
described on Schedule 4.4 attached hereto. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms,
conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate, have a
Company Material Adverse Effect.
(c) Except for (i) the filings by Parent and the Company required
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), (ii) the filing of the Proxy Statement (as defined in Section 4.9
below) with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) the
making of the Merger Filing with the Secretary of State of the State of New
York in connection with the Merger, (iv) the filings and approvals required
pursuant to the New Jersey Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et
seq. ("ISRA") with respect to the real property of the Company located in New
Jersey, and (v) the other consents and filings described on Schedule 4.4
attached hereto (the filings and approvals referred to in clauses (i) through
(v) are collectively referred to as the "Company Required Statutory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions contemplated
hereby, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not made or obtained, as the
case may be, would not, in the aggregate, have a Company Material Adverse
Effect.
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SECTION 4.5 REPORTS AND FINANCIAL STATEMENTS. Except as set forth
on Schedule 4.5 attached hereto, since December 31, 1993, the Company has
filed with the SEC all forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by it under
each of the Securities Act, the Exchange Act and the respective rules and
regulations thereunder, all of which, as amended if applicable, complied in
all material respects with all applicable requirements of the appropriate act
and the rules and regulations thereunder. The Company has previously delivered
to Parent copies of its (a) Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as filed with the SEC, (b) proxy and information
statements relating to (i) all meetings of its stockholders (whether annual or
special) and (ii) actions by written consent in lieu of a stockholders'
meeting from December 31, 1995, until the date hereof, and (c) all other
reports, including quarterly reports, or registration statements filed by the
Company with the SEC since December 31, 1995 (other than Registration
Statements filed on Form S-8) (the documents referred to in clauses (a), (b)
and (c) are collectively referred to as the "Company SEC Reports"). As of
their respective dates, the Company SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of the Company included in such reports (collectively, the "Company
Financial Statements") have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of their operations and changes in financial position for the periods
then ended, subject, in the case of the unaudited interim financial
statements, to normal year-end and audit adjustments and any other adjustments
described therein.
SECTION 4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed
in the Company SEC Reports or in Schedule 4.6 attached hereto, neither the
Company nor any of its Subsidiaries had at June 30, 1996, or has incurred
since that date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except: (a) liabilities, obligations
or contingencies (i) which are accrued or reserved against in the Company
Financial Statements or reflected in the notes thereto or (ii) which were
incurred after June 30, 1996 and were incurred in the ordinary course of
business and consistent with past practices or (iii) which were incurred in
connection with this Agreement and the transactions contemplated hereby and
which exceed individually $10,000 (all of which are listed on Schedule 4.6
hereto); (b) liabilities, obligations or contingencies which (i) would not, in
the aggregate, have a Company Material Adverse Effect, or
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(ii) have been discharged or paid in full prior to the date hereof; and (c)
liabilities and obligations which are of a nature not required to be reflected
in the consolidated financial statements of the Company and its Subsidiaries
prepared in accordance with generally accepted accounting principles
consistently applied and which were incurred in the normal course of business.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of
the most recent Company SEC Report, there has not been any change in the
business, operations, properties, assets, liabilities, condition (financial or
other) or results of operations of the Company and its Subsidiaries, taken as
a whole, including as a result of any change in capital structure, employee
compensation arrangement (including severance rights and benefit plans),
accounting method or applicable law which would, in the aggregate, have a
Company Material Adverse Effect.
SECTION 4.8 LITIGATION. Except as referred to in the Company SEC
Reports or in Schedule 4.8 attached hereto, there are no claims, suits,
actions or proceedings pending or, to the knowledge of the Company, threatened
against, relating to or affecting the Company or any of its Subsidiaries,
before any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator that seek to restrain the consummation of the
Merger or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to cause a Company Material
Adverse Effect. Except as referred to in the Company SEC Reports or in
Schedule 4.8 attached hereto, neither the Company nor any of its Subsidiaries
is subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator which prohibits or restricts the consummation of the
transactions contemplated hereby or would have any Company Material Adverse
Effect.
SECTION 4.9 PROXY STATEMENT. None of the information supplied or to
be supplied by the Company or its Subsidiaries for inclusion in its proxy
statement to its stockholders (the "Proxy Statement") or any amendments
thereof or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at the time of the
meetings of stockholders of the Company to be held in connection with the
transactions contemplated by this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
SECTION 4.10 NO VIOLATION OF LAW. Except as disclosed in the
Company SEC Reports or in Schedule 4.10 attached hereto, neither the Company
nor any of its Subsidiaries is in violation of or has been given notice or
been charged with any violation of, any
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law, statute, order, rule, regulation, ordinance or judgment (including,
without limitation, any applicable environmental law, ordinance or regulation)
of any governmental or regulatory body or authority, except for violations
which, in the aggregate, could not reasonably be expected to have a Company
Material Adverse Effect. Except as disclosed in the Company SEC Reports, to
the knowledge of the Company, no investigation or review by any governmental
or regulatory body or authority is pending or threatened, nor has any
governmental or regulatory body or authority indicated to the Company an
intention to conduct the same, other than, in each case, those the outcome of
which, as far as reasonably can be foreseen, will not have a Company Material
Adverse Effect. The Company and its Subsidiaries have all permits, licenses,
franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct their businesses
as presently conducted (collectively, the "Company Permits"), except for
permits, licenses, franchises, variances, exemptions, orders, authorizations,
consents and approvals the absence of which, alone or in the aggregate, would
not have a Company Material Adverse Effect. The Company and its Subsidiaries
are not in violation of the terms of any Company Permit, except for delays in
filing reports or violations which, alone or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect.
SECTION 4.11 COMPLIANCE WITH AGREEMENTS. Except as disclosed in the
Company SEC Reports or in Schedule 4.11 attached hereto, the Company and each
of its Subsidiaries are not in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has
occurred which, with notice or lapse of time or action by a third party, could
result in a default under, (a) the respective charters, by-laws or similar
organizational instruments of the Company or any of its Subsidiaries; or (b)
any contract, commitment, agreement, indenture, mortgage, loan agreement,
note, lease, bond, license, approval or other instrument to which the Company
or any of its Subsidiaries is a party or by which any of them is bound or to
which any of their property is subject, which breaches, violations and
defaults, in the case of clause (b) of this Section 4.11, would have, in the
aggregate, a Company Material Adverse Effect.
SECTION 4.12 TAXES. Except as disclosed in Schedule 4.12, the
Company and its Subsidiaries have (i) duly filed with the appropriate
governmental authorities all Tax Returns (as defined below) required to be
filed by them for all taxable periods ending on or prior to the Effective
Time, other than those Tax Returns the failure of which to file would not have
a Company Material Adverse Effect, and such Tax Returns are true, correct and
complete in all material respects, and (ii) duly paid in full or made adequate
provision in the most recent Company Financial Statements for the payment of
all Taxes (as defined below) for all taxable periods ending at or prior to the
Effective Time (whether or not shown on any Tax Return), except where the
failure to pay such Taxes would
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not have a Company Material Adverse Effect. The liabilities and reserves for
Taxes reflected in the Company balance sheet included in the latest Company
SEC Report are expected to be adequate to cover all Taxes for all periods
ending at or prior to the Effective Time and there are no material liens for
Taxes upon any property or asset of the Company or any Subsidiary thereof,
except for liens for Taxes not yet due. There are no notices of deficiency or
assessments from the IRS or any other governmental taxing authority with
respect to Taxes of the Company or any of its Subsidiaries which, if decided
adversely, singly or in the aggregate, would have a Company Material Adverse
Effect. Neither the Company nor any of its Subsidiaries is a party to any
agreement providing for the allocation or sharing of Taxes with any entity
that is not, directly or indirectly, a wholly-owned corporate Subsidiary of
the Company. Neither the Company nor any of its corporate Subsidiaries has,
with regard to any assets or property held, acquired or to be acquired by any
of them, filed a consent to the application of Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "Code").
For purposes of this Agreement, the term "Taxes" shall mean all
taxes, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupation, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees
and charges, windfall profits, severance, customs, import, export, employment
or similar taxes, charges, fees, levies or other assessments imposed by the
United States, or any state, local or foreign government or subdivision or
agency thereof, whether computed on a separate, consolidated, unitary,
combined or any other basis, and such term shall include any interest, fines,
penalties or additional amounts and any interest in respect of any additions,
fines or penalties attributable or imposed or with respect to any such taxes,
charges, fees, levies or other assessments.
For purposes of this Agreement, the term "Tax Return" shall mean
any return, report or other document or information required to be supplied to
a taxing authority in connection with Taxes.
SECTION 4.13 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Except as set forth in the Company SEC Reports or as disclosed
in Schedule 4.13 attached hereto, the Company and its Subsidiaries do not
maintain or contribute to or have any obligation or liability to or under any
employee benefit plans, programs, arrangements and practices covering
employees of the Company and its Subsidiaries (or their beneficiaries) (such
plans, programs, arrangements and practices of the Company and its
Subsidiaries being referred to as the "Company Plans"), including employee
benefit plans within the meaning set forth in Section 3(3) of ERISA, or other
similar material arrangements for the provision
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of benefits (excluding any "Multi-employer Plan" within the meaning of Section
3(37) of ERISA or a "Multiple Employer Plan" within the meaning of Section
413(c) of the Code). Schedule 4.13 attached hereto lists all Multi-employer
Plans and Multiple Employer Plans which any of the Company or its Subsidiaries
maintains or to which any of them makes contributions or has any liability,
contingent or otherwise.
(b) Except as disclosed in the Company SEC Reports and except to
the extent that there would be no Company Material Adverse Effect, (i) neither
the Company nor any of its Subsidiaries has engaged in any prohibited
transaction within the meaning of Section 406 or 407 of ERISA or Section 4975
of the Code with respect to any of the Company Plans that could reasonably be
expected to result in penalties, taxes or liabilities which, singly or in the
aggregate, could have a Company Material Adverse Effect, (ii) except for
premiums due, there is no outstanding material liability, whether measured
alone or in the aggregate, under Title IV of ERISA with respect to any of the
Company Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any
plan administrator has instituted proceedings to terminate any of the Company
Plans subject to Title IV of ERISA other than in a "standard termination"
described in Section 4041(b) of ERISA, (iv) none of the Company Plans has
incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, as of the last day
of the most recent fiscal year of each of the Company Plans ended prior to the
date of this Agreement, (v) the present value of all accumulated benefit
obligations under each of the Company Plans which is subject to Title IV of
ERISA did not, as of its latest valuation date, exceed the then current value
of the assets of such plan allocable to such benefit liabilities by more than
the amount, if any, disclosed in the Company SEC Reports as of December 31,
1995, based upon reasonable actuarial assumptions currently utilized for such
Company Plan, (vi) each of the Company Plans has been operated and
administered in all material respects in accordance with applicable laws
during the period of time covered by the applicable statute of limitations,
(vii) each of the Company Plans which is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified and, to the knowledge of the Company, such
determination has not been modified, revoked or limited by failure to satisfy
any condition thereof or by a subsequent amendment thereto or a failure to
amend, except that it may be necessary to make additional amendments
retroactively to maintain the "qualified" status of such Company Plans, and
the period for making any such necessary retroactive amendments has not
expired, (viii) with respect to Multi-employer Plans, neither the Company nor
any of its Subsidiaries has, made or suffered a "complete withdrawal" or a
"partial withdrawal," as such terms are defined in Sections 4203, 4204 and
4205 of ERISA, respectively, and, to the knowledge of the Company and its
Subsidiaries, no event has occurred which presents
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a material risk of a complete or partial withdrawal under said Sections 4203,
4204 and 4205, (ix) to the knowledge of the Company and its Subsidiaries,
there are no material pending or threatened claims involving any of the
Company Plans other than claims for benefits in the ordinary course, and (x)
the Company and its Subsidiaries have no current material liability, whether
measured alone or in the aggregate, for plan termination or complete
withdrawal or partial withdrawal under Title IV of ERISA based on any plan to
which any entity that would be deemed one employer with the Company and its
Subsidiaries under Section 4001 of ERISA or Section 414 of the Code
contributed during the period of time covered by the applicable statute of
limitations (the "Company Controlled Group Plans"). None of the Company
Controlled Group Plans has an "accumulated funding deficiency" (as defined in
Section 302 of ERISA and 412 of the Code).
(c) The Company SEC Reports, as supplemented by Schedule 4.13
attached hereto, contain a true and complete summary or list of or otherwise
describe all material employment contracts and other employee benefit
arrangements with "change of control" or similar provisions and all severance
agreements with executive officers.
SECTION 4.14 LABOR CONTROVERSIES. Except as set forth in the
Company SEC Reports or as disclosed in Schedule 4.14 attached hereto, (a)
there are no material controversies pending or, to the knowledge of the
Company, threatened between the Company or its Subsidiaries and any
representatives of any of their employees, (b) to the knowledge of the
Company, there are no material organizational efforts presently being made
involving any of the presently unorganized employees of the Company or its
Subsidiaries, (c) the Company and its Subsidiaries have, to the knowledge of
the Company, complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (d) no person has, to the knowledge of the
Company, asserted that the Company or any of its Subsidiaries is liable in any
material amount for any arrears of wages or any taxes or penalties for failure
to comply with any of the foregoing, except for such controversies,
organizational efforts, non-compliance and liabilities which, singly or in the
aggregate, could not reasonably be expected to cause a Company Material
Adverse Effect.
SECTION 4.15 ENVIRONMENTAL MATTERS. To the Company's knowledge and
except as set forth in the Company SEC Reports or as disclosed in Schedule
4.15 attached hereto, (i) the Company and its Subsidiaries have conducted
their respective businesses in compliance with all applicable Environmental
Laws (as defined below), including, without limitation, having all permits,
licenses and other approvals and authorizations necessary for the operation
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of their respective businesses as presently conducted, (ii) none of the
properties owned by the Company or any of its Subsidiaries contains any
Hazardous Substance (as defined below) as a result of any activity of the
Company or any of its Subsidiaries in amounts exceeding the levels permitted
by applicable Environmental Laws, (iii) neither the Company nor any of its
Subsidiaries has received any notices, demand letters or requests for
information under CERCLA (as hereinafter defined) from any Federal, state,
local or foreign governmental entity or third party indicating that the
Company or any of its Subsidiaries may be in violation of, or liable under,
any Environmental Law in connection with the ownership or operation of their
businesses, (iv) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings pending or, to
the knowledge of the Company, threatened against the Company or any of its
Subsidiaries relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be
filed, by the Company or any of its Subsidiaries concerning the release, or
threatened release, of any Hazardous Substance under any Environmental Law,
(vi) no Hazardous Substance has been disposed of, released or transported in
violation of any applicable Environmental Law from any properties owned by the
Company or any of its Subsidiaries as a result of any activity of the Company
or any of its Subsidiaries during the time such properties were owned, leased
or operated by the Company or any of its Subsidiaries, except in compliance
with any applicable Environmental Law or a permit issued by any environmental
regulatory agency, (vii) there are no underground storage tanks on, in or
under any properties owned by the Company or any of its Subsidiaries and no
underground storage tanks have been closed or removed from any of such
properties during the time such properties were owned, leased or operated by
the Company or any of its Subsidiaries, (viii) there is no asbestos or
asbestos containing material present in any of the properties owned by the
Company and its Subsidiaries, and no asbestos has been removed from any of
such properties during the time such properties were owned, leased or operated
by the Company or any of its Subsidiaries, and (ix) neither the Company, its
Subsidiaries nor any of their respective properties are subject to any
material liabilities or expenditures (fixed or contingent) relating to any
suit, settlement, court order, administrative order, regulatory requirement,
judgment or claim asserted or arising under any Environmental Law, with
respect to the foregoing clauses (i) through (ix), except for violations,
non-compliances, liabilities or conditions at the properties owned or operated
by the Company or its Subsidiaries that, singly or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect.
For purposes of this Agreement, "Environmental Law" means any
Federal, state, local or foreign law, statute, ordinance, rule, regulation,
code, license, permit, authorization, approval,
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consent, order, judgment, decree, injunction, requirement or agreement with
any governmental entity relating to (x) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource) or to
human health or safety or (y) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances, in each case as
amended and as in effect on the Closing Date. The term Environmental Law
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("CERCLA"), the Superfund
Amendments and Reauthorization Act, the Federal Water Pollution Control Act of
1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the Hazardous and
Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each
as amended and as in effect on the Closing Date, or any state counterpart
thereof, and (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries, damages or penalties due to, or threatened as a result of, the
presence of, effects of or exposure to any Hazardous Substance.
For purposes of this Agreement, "Hazardous Substance" means any
substance presently listed, defined, designated or classified as hazardous,
toxic or radioactive, or otherwise regulated, under any Environmental Law.
Hazardous Substance includes any substance to which exposure is regulated by
any government authority or any Environmental Law including, without
limitation, any toxic waste, pollutant, contaminant, hazardous substance,
toxic substance, hazardous waste, special waste, industrial substance or
petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos or asbestos containing material, urea formaldehyde, foam
insulation, lead or polychlorinated biphenyls.
SECTION 4.16 TITLE TO ASSETS. Schedule 4.16 contains a description
of all fixed assets of the Company having a book value in excess of $25,000
per asset. The Company and each of its Subsidiaries has good and marketable
title in fee simple to all of its real property and good title to all its
leasehold interests and other properties, as reflected in the most recent
balance sheet included in the Company Financial Statements, except for
properties and assets that have been disposed of in the ordinary course of
business since the date of such balance sheet, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever,
except (i) the lien for current Taxes, payments
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of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not material in character, amount
or extent and do not materially and adversely affect the value or interfere
with the present use of the property subject thereto or affected thereby, or
otherwise materially impair the Company's business operations (in the manner
presently carried on by the Company), (iii) as disclosed in the Company SEC
Reports or (iv) mortgages incurred in the ordinary course of business, and
except for such matters which, singly or in the aggregate, could not
reasonably be expected to cause a Company Material Adverse Effect. All leases
under which the Company leases real or personal property and which provide for
an annual rental (on a per lease basis) in excess of $10,000 have been
delivered to Parent, and all leases under which the Company leases real or
personal property are in good standing, valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any
existing default or event which with notice or lapse of time or both would
become a default other than defaults under such leases which in the aggregate
will not have a Company Material Adverse Effect.
SECTION 4.17 COMPANY STOCKHOLDERS' APPROVAL. The affirmative vote
of stockholders of the Company required for approval and adoption of this
Agreement and the Merger is two-thirds of the outstanding shares of Company
Common Stock.
SECTION 4.18 NO EXCESS PARACHUTE PAYMENTS. Except as set forth on
Schedule 4.18, the Company has no contracts, arrangements or understandings
pursuant to which any person may receive any amount or entitlement from the
Company or any of its Subsidiaries (including cash or property or the vesting
of property) that may be characterized as an "excess parachute payment" (as
such term is defined in Section 280G(B)(1) of the Code) (any such amount being
an "Excess Parachute Payment") as a result of any of the transactions
contemplated by this Agreement. Except as set forth on Schedule 4.18, to the
best knowledge of the Company, no person is entitled to receive any additional
payment from the Company, its Subsidiaries or any other person (a "Parachute
Gross-up Payment") in the event that the 20 percent (20%) parachute excise tax
of Section 4999(a) of the Code is imposed on such person. Except as set forth
on Schedule 4.18, the Board of Directors of the Company has not during the six
months prior to the date of this Agreement granted to any officer, director or
employee of the Company any right to receive any Parachute Gross-Up Payment.
SECTION 4.19 TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. The
Company and its Subsidiaries own or have the right to use, without any
material payment to any other party, all of the rights set forth on Schedule
4.19 ("Intellectual Property Rights"), and the consummation of the
transactions contemplated hereby will not alter or impair such rights in any
material respect. To the
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knowledge of the Company, no claims are pending by any person with respect to
the ownership, validity, enforceability or use of any such Intellectual
Property Rights challenging or questioning the validity or effectiveness of
any of the foregoing which claims could reasonably be expected to have a
Company Material Adverse Effect. Schedule 4.19 attached hereto lists all of
the Company's Intellectual Property Rights and all filing information relating
thereto.
SECTION 4.20 MATERIAL AGREEMENTS. Except as set forth on Schedule
4.20, the Company has no material agreements other than those filed as
exhibits to the Company SEC Reports.
SECTION 4.21 TRANSACTIONS WITH RELATED PARTIES. Except as set forth
in the Company SEC Reports, (a) there have been no transactions by the Company
or its Subsidiaries with any officer or director of the Company or beneficial
owner of more than five percent (5%) of the Company Common Stock or their
affiliates ("Related Parties") since December 31, 1995, which are required to
be disclosed pursuant to the Exchange Act and (b) there are no material
agreements or understandings now in effect between the Company or its
Subsidiaries and any Related Party.
SECTION 4.22 INSURANCE. Except to the extent there would be no
Company Material Adverse Effect, all of the Company's and its Subsidiaries'
liability, theft, life, health, fire, title, worker's compensation and other
forms of insurance, surety bonds and umbrella policies, insuring the Company
and its Subsidiaries and their directors, officers, employees, independent
contractors, properties, assets and business, are valid and in full force and
effect and without any premium past due or pending notice of cancellation,
are, in the reasonable judgment of the Company, adequate for the business of
the Company and its Subsidiaries as now conducted, and there are no claims,
singly or in the aggregate, under such policies in excess of $50,000, which,
in any event, are not in excess of the limitations of coverage set forth in
such policies. The Company and its Subsidiaries have taken all actions
reasonably necessary to insure that their independent contractors obtain and
maintain adequate insurance coverage. All of the insurance policies referred
to in this Section 4.22, other than the Directors and Officers Liability
Insurance and the Employee Benefit Liability Insurance, are "occurrence"
policies and no such policies, other than the Directors and Officers Liability
Insurance and the Employee Benefit Liability Insurance, are "claims made"
policies. Neither the Company nor any of its Subsidiaries has knowledge of any
fact indicating that such policies will not continue to be available to the
Company and its Subsidiaries upon substantially similar terms subsequent to
the Effective Time. Except as disclosed on Schedule 4.22 attached hereto, the
provision and/or reserves in the most recent Company Financial Statements are
adequate for any and all self insurance programs maintained by the
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Company or its Subsidiaries. Schedule 4.22 attached hereto lists all insurance
policies of the Company.
SECTION 4.23 RECEIVABLES. Except as set forth in the Company SEC
Reports or as disclosed on Schedule 4.23 attached hereto, the trade accounts
and other receivables of the Company set forth on the most recent Company
Financial Statements are bona fide receivables, arose in the ordinary course
out of arms' length transactions and are recorded correctly on the books and
records of the Company. The reserves for doubtful accounts set forth on the
most recent Company Financial Statements are adequate based on historical
trends. Except as set forth in Schedule 4.23, such accounts and other
receivables are not subject to any counterclaim or set-off not reflected in
the reserves set forth on the most recent Company Financial Statements other
than in the ordinary course of business.
SECTION 4.24 CUSTOMERS AND SUPPLIERS. Except as set forth in the
Company SEC Reports or as disclosed on Schedule 4.24 attached hereto, there
has not been any material adverse change in the business relationship of the
Company with any of its principal customers or suppliers, and there is no
pending or, to the knowledge of the Company, threatened loss of any such
customer or supplier. To the knowledge of the Company, the consummation of the
transactions contemplated by this Agreement will not result in any customer or
supplier reducing or terminating its business with the Company. The business
relationship of the Company with each such customer or supplier is an arms'
length relationship and no affiliation, relationship or transaction (financial
or otherwise) exists or has existed, directly or indirectly, between any such
parties (or officers, directors, employees or agents of such parties) except
as is expressly described in Schedule 4.24.
SECTION 4.25 PRODUCT LIABILITY CLAIMS. Schedule 4.25 lists all
product liability claims seeking damages in excess of $10,000 asserted against
the Company (or in respect of which the Company received notice) with respect
to the products of the Company between June 30, 1993 and the date of this
Agreement; and the product liability claims not listed on Schedule 4.25 do not
aggregate more than $35,000.
SECTION 4.26 INVENTORIES. Except as set forth in the Company SEC
Reports or as disclosed on Schedule 4.26 attached hereto, the inventories of
the Company set forth on the most recent Company Financial Statements have
been valued at the lower of cost (on FIFO) or market (in accordance with
GAAP), and the value of obsolete materials and materials of below standard
quality has been written down in accordance with GAAP. Except as set forth in
the Company SEC Reports or as disclosed on Schedule 4.26 attached hereto, as
of the date of this Agreement, the Company is not under any liability or
obligation with respect to the return of inventory or merchandise in the
possession of wholesalers, distributors,
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retailers or other customers other than for returns in the ordinary course,
consistent with the Company's prior practice.
SECTION 4.27 WARRANTIES AND RETURNS. Schedule 4.27 sets forth a
summary of the present practices and policies followed by the Company with
respect to warranties and returns of any products manufactured or sold by it,
whether such practices are oral or in writing or are deemed to be legally
enforceable. Except as set forth in the Company SEC Reports or as disclosed in
Schedule 4.27 attached hereto, there is not presently, nor has there been
since January l, 1993, any defect in any product sold by the Company that has
required, or that may require, a general recall or replacement campaign or
similar action with respect to such product or a reformulation or change of
such product, nor has there been any acceptance by the Company of returns of
any such defective goods of the Company in excess of $100,000 in the aggregate
for all such defects with respect to products sold by them during the
three-year calendar period ended December 31, 1995.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
PARENT AND RAI
Parent and RAI each represent and warrant to the Company as of the
date hereof as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. Each of Parent and RAI
is a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation and has the requisite corporate power
and authority to carry on its business as it is now being conducted.
SECTION 5.2 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent and RAI each have full corporate power and authority to
enter into this Agreement and, subject to the Parent Required Statutory
Approvals (as defined in Section 5.2(c)), to consummate the transactions
contemplated hereby. This Agreement has been approved by the Boards of
Directors of Parent and RAI and the stockholders of RAI, and no other
corporate proceedings on the part of Parent or RAI are necessary to authorize
the execution and delivery of this Agreement or the consummation by Parent and
RAI of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Parent and RAI, and, assuming the due
authorization, execution and delivery hereof by the Company, constitutes a
valid and legally binding agreement of each of Parent and RAI enforceable
against each of them in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles.
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(b) The execution and delivery of this Agreement by each of Parent
and RAI do not violate, conflict with or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or result in a right of termination
or acceleration under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of Parent
or any of its subsidiaries under any of the terms, conditions or provisions of
(i) the respective charters or By-laws of Parent or any of its subsidiaries,
(ii) any statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to Parent or any of its subsidiaries or any of their respective
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Parent or any of its
subsidiaries is now a party or by which Parent or any of its subsidiaries or
any of their respective properties or assets may be bound. The consummation by
Parent and RAI of the transactions contemplated hereby will not result in any
violation, conflict, breach, termination, acceleration or creation of liens
under any of the terms, conditions or provisions described in clauses (i)
through (iii) of the preceding sentence, subject (x) in the case of the terms,
conditions or provisions described in clause (ii) above, to obtaining (prior
to the Effective Time) the Parent Required Statutory Approvals and (y) in the
case of the terms, conditions or provisions described in clause (iii) above,
to obtaining (prior to the Effective Time) consents required from lenders,
lessors or other third parties described on Schedule 5.2 attached hereto.
Excluded from the foregoing sentences of this paragraph (b), insofar as they
apply to the terms, conditions or provisions described in clauses (ii) and
(iii) of the first sentence of this paragraph (b), are such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances that would not have a
material adverse effect on Parent (a "Parent Material Adverse Effect").
(c) Except for (i) the filings by Parent and the Company required
by the HSR, (ii) the making of the Merger Filings with the Secretary of State
of the State of New York in connection with the Merger, and (iii) the other
consents and filings described on Schedule 5.2 attached hereto (the filings
and approvals referred to in clauses (i) through (iii) above are collectively
referred to as the "Parent Required Statutory Approvals"), no declaration,
filing or registration with, or notice to, or authorization, consent or
approval of, any governmental or regulatory body or authority is necessary for
the execution and delivery of this Agreement by Parent or RAI or the
consummation by Parent or RAI of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or
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approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, have a Parent Material Adverse Effect or affect RAI's ability
to consummate the Merger.
SECTION 5.3 LITIGATION. Except as set forth in Schedule 5.3
attached hereto, neither Parent nor or any of its subsidiaries is subject to
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority or any arbitrator
which prohibits or restricts the consummation of the transactions contemplated
hereby.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Except as otherwise contemplated by this Agreement, after the date hereof and
prior to the Effective Time or earlier termination of this Agreement, unless
Parent shall otherwise agree in writing, the Company shall, and shall cause
its Subsidiaries to:
(a) conduct their respective businesses in the ordinary
and usual course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters or
By-laws, (ii) split, combine or reclassify their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a wholly-owned Subsidiary of the Company;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of or otherwise cause to become outstanding, any additional
shares of, or any options, warrants or rights of any kind to acquire any
shares of their capital stock of any class or any debt or equity securities
convertible into or exchangeable for such capital stock, except that the
Company may issue shares upon conversion of convertible securities and
exercise of options outstanding on the date hereof;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (x) borrowings in the ordinary
course of business under credit facilities in existence on the date hereof,
(y) borrowings in the ordinary course which permit prepayment without penalty
or (z) borrowings to refinance existing indebtedness, the terms of which shall
be reasonably satisfactory to Parent, (ii) redeem, purchase, acquire or offer
to purchase or acquire any shares of its capital stock or any options,
warrants or rights to acquire any of its capital stock or any security
convertible into or exchangeable for its capital stock, (iii) make any
acquisition of any assets or businesses other than expenditures for fixed or
capital assets in
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the ordinary course of business which, in such cases of $25,000 or more, shall
be on terms reasonably acceptable to Parent, (iv) sell, pledge, dispose of or
encumber any assets or businesses other than sales in the ordinary course of
business which, in such cases involving $25,000 or more, shall be on terms
reasonably acceptable to Parent, or (v) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill and
business relationships with customers and others having business relationships
with them and not engage in any action, directly or indirectly, with the
intent to adversely impact the transactions contemplated by this Agreement;
(f) confer on a regular and frequent basis with one or more
representatives of Parent to report operational matters of materiality and the
general status of ongoing operations;
(g) not enter into or amend any employment, severance, stay bonus,
special pay arrangement with respect to termination of employment or other
similar arrangements or agreements with any directors, officers or key
employees;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law; and
(i) maintain with adequately capitalized insurance companies
insurance coverage for its assets and its businesses in such amounts and
against such risks and losses as are consistent with past practice.
SECTION 6.2 ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time or
earlier termination of this Agreement, the Company shall not, and shall not
permit any of its Subsidiaries to, initiate or solicit, and the Company shall,
and shall use its best efforts to cause each of its Subsidiaries to, cause any
officer, director or employee of, or any attorney, accountant, investment
banker, financial advisor or other agent retained by it, not to initiate or
solicit, any proposal or offer to acquire all or any substantial part of the
business and properties of the Company and its Subsidiaries or any capital
stock of the Company and its Subsidiaries, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any other
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consideration or combination thereof (any such transactions being referred to
herein as "Acquisition Transactions").
(b) Notwithstanding any other provision of this Agreement, in
response to an unsolicited proposal or inquiry with respect to an Acquisition
Transaction, (i) the Company may engage in discussions or negotiations
regarding such proposal or inquiry with a third party who (without any
solicitation or initiation, directly or indirectly, by or with the Company or
any Company representative after the date of this Agreement) seeks to initiate
such discussions or negotiations and may negotiate with and furnish to such
third party information concerning the Company and its business, properties
and assets, and (ii) if such Acquisition Transaction is a tender offer subject
to the provisions of Section 14(d) under the Exchange Act, the Company's Board
of Directors may take and disclose to the Company's stockholders a position
contemplated by Rule 14e-2(a) under the Exchange Act.
(c) In the event the Company shall determine to provide any
information or negotiate as described in paragraph (b) above, or shall receive
any offer of the type referred to in paragraph (b) above, it shall (i)
immediately provide Parent a copy of all information provided to the third
party, (ii) inform Parent that information is to be provided, that
negotiations are to take place or that an offer has been received, as the case
may be, and (iii) furnish to Parent the identity of the person receiving such
information or the proponent of such offer, if applicable, and, if an offer
has been received, unless the Board of Directors of the Company concludes that
such disclosure is inconsistent with its fiduciary duties under applicable
law, a description of the material terms thereof.
(d) The Company may terminate this Agreement, withdraw, modify or
not make its recommendation referred to in Section 7.3, and enter into a
definitive agreement for an Acquisition Transaction if but only if (i) the
Company shall have determined in good faith after consultation with the
independent financial advisors of the Company that such Acquisition
Transaction would be more favorable to the Company's stockholders from a
financial point of view than the Merger, (ii) the Board of Directors of the
Company shall conclude in good faith after consultation with its legal counsel
that such action is necessary in order for the Board of Directors of the
Company to act in a manner that is consistent with its fiduciary obligations
under applicable law and (iii) the Company shall have furnished the Parent
with a copy of the definitive agreement at least five business days prior to
its execution and Parent shall have failed within such five business day
period to offer to amend the terms of this Agreement so that the Merger would
be, in the good faith determination of the Board of Directors of the Company,
at least as favorable to the Company's stockholders from a financial point of
view as the Acquisition Transaction.
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(e) The Company (i) acknowledges that a breach of any of its
covenants contained in this Section 6.2 will result in irreparable harm to the
Parent and RAI which will not be compensable in money damages, and (ii) agrees
that such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to the
other party for a breach of such covenant. In any event, if Company enters
into an Acquisition Transaction with a party other than Parent, it will
immediately pay to Parent the sums described in Section 7.4(b) below.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 ACCESS TO INFORMATION.
(a) The Company and its Subsidiaries shall afford to Parent and RAI
and their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") full access during normal
business hours throughout the period after the date hereof and prior to the
Effective Time to all Company properties, books, contracts, commitments and
records (including, but not limited to, Tax Returns) and, during such period,
shall furnish promptly to Parent (i) a copy of each report, schedule and other
document filed or received by any of them pursuant to the requirements of
federal or state securities laws or filed with the SEC or which may have a
material effect on its businesses, properties or personnel, and (ii) such
other information concerning its businesses, operations, properties, assets,
condition (financial or other) results of operations and personnel as the
Company shall reasonably request; provided, however, that any inspection of
the properties relating to environmental matters or compliance with
Environmental Laws shall be undertaken by a nationally recognized
environmental consultant acceptable to the Company and, unless recommended by
said environmental consultant in a Phase I report, shall be non- intrusive in
that it shall not include sampling or testing of the environmental media.
Parent and its subsidiaries shall hold and shall use their reasonable best
efforts to cause the Parent Representatives to hold in strict confidence all
non-public documents and information furnished to Parent and RAI in connection
with the transactions contemplated by this Agreement, except that (i) each of
Parent and RAI may disclose such information as may be necessary in connection
with seeking the Parent Required Statutory Approvals and (ii) each of Parent
and RAI may disclose any information that it is required by law or judicial or
administrative order to disclose.
(b) In the event that this Agreement is terminated in accordance
with its terms, each of Parent and its subsidiaries shall, and Parent and its
subsidiaries shall cause each Parent
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Representative to, promptly redeliver to the Company all non-public material
in written or machine readable form provided pursuant to this Section 7.1 and
shall not retain any copies, extracts or other reproductions in whole or in
part of such material. In such event, all documents, memoranda, notes and
other writings in written or machine readable form prepared by Parent based on
the information in such material shall be destroyed (and Parent shall use its
reasonable best efforts to cause their advisors and representatives to
similarly destroy their documents, memoranda and notes), and such destruction
(and reasonable best efforts) shall be certified in writing by an authorized
officer supervising such destruction.
(c) The Company shall promptly advise Parent in writing of any
change or the occurrence of any event after the date of this Agreement having,
or which, insofar as can reasonably be foreseen, in the future may have, any
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of the Company and its
Subsidiaries.
SECTION 7.2 PROXY STATEMENT. The Company shall file with the SEC as
soon as is reasonably practicable after the date hereof (but in no event later
than twenty (20) days following the date hereof) the Proxy Statement. The
information provided and to be provided by the Company for use in the Proxy
Statement shall be true and correct in all material respects without omission
of any material fact which is required to make such information not misleading
as of the date thereof and in light of the circumstances under which given or
made.
SECTION 7.3 STOCKHOLDER APPROVAL. The Company shall, as promptly as
practicable, submit this Agreement and the transactions contemplated hereby
for the approval of its stockholders at a meeting of stockholders and, subject
to the fiduciary duties of the Board of Directors of the Company under
applicable law, shall use its reasonable best efforts to obtain stockholder
approval and adoption (the "Company Stockholders' Approval") of this Agreement
and the transactions contemplated hereby. The Company shall, through its Board
of Directors, but subject to the fiduciary duties of the members thereof,
recommend to its stockholders approval of the transactions contemplated by
this Agreement. The Company (i) acknowledges that a breach of its covenant
contained in this Section 7.3 to convene a meeting of its stockholders and
call for a vote thereat with respect to the approval of this Agreement and the
Merger will result in irreparable harm to Parent which will not be compensable
in money damages and (ii) agrees that such covenant shall be specifically
enforceable and that specific performance and injunctive relief shall be a
remedy properly available to Parent for a breach of such covenant.
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SECTION 7.4 EXPENSES AND FEES. Each party hereto agrees to bear its
own expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement, except:
(a) Parent shall pay the fees and expenses incurred in connection
with the HSR Act filing; provided, however, that all of the fees and expenses
referred to in this Section 7.4(a) shall be shared equally by Parent and the
Company if this Agreement is terminated pursuant to Section 9 hereof.
(b) If the Merger is not consummated because the Company terminates
the Agreement pursuant to Section 6.2 at a time when Parent and RAI are in
compliance with all of their representations, warranties, covenants and
agreements contained herein and within twelve (12) months from the date of
this Agreement consummates or enters into an agreement or other arrangement to
consummate an Acquisition Transaction with any party other than Parent, the
Company shall pay to Parent the sum of $1,000,000.
(c) If the Merger is not consummated because the Parent or RAI
terminates this Agreement as a result of the failure to satisfy the condition
set forth in Section 8.3(g) at a time when the Company is in compliance with
all of its representations, warranties, covenants and agreements contained
herein, the Parent shall pay to the Company the sum of $1,000,000.
SECTION 7.5 AGREEMENT TO COOPERATE.
(a) Subject to the terms and conditions herein provided, each of
the parties hereto shall use all reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable pursuant to all agreements, contracts, indentures or other
instruments to which the parties hereto are a party, or under any applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using its reasonable efforts to (i)
obtain all necessary or appropriate waivers, consents and approvals from
lenders, landlords, security holders or other parties whose waiver, consent or
approval is required to consummate the Merger, (ii) effect all necessary
registrations, filings and submissions and (iii) lift any injunction or other
legal bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible) and (iv) in the case of the Parent and RAI to use
their reasonable best efforts to obtain the financing required to consummate
the transactions contemplated herein, subject, however, to the requisite votes
of the stockholders of the Company.
(b) Without limitation of the foregoing, each of Parent and the
Company undertakes and agrees to file as soon as practicable after the date
hereof a Notification and Report Form under the HSR Act with the Federal Trade
Commission (the "FTC") and
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the Antitrust Division of the Department of Justice (the "Antitrust
Division"). Each of Parent and the Company shall (i) use its reasonable
efforts to comply as expeditiously as possible with all lawful requests of the
FTC or the Antitrust Division for additional information and documents, and
(ii) not extend any waiting period under the HSR Act or enter into any
agreement with the FTC or the Antitrust Division not to consummate the
transactions contemplated by this Agreement, except with the prior written
consent of the other parties hereto.
(c) In the event any litigation is commenced by any person or
entity relating to the transactions contemplated by this Agreement, including
any Acquisition Transaction, Parent shall have the right, at its own expense,
to participate therein, and the Company will not settle any such litigation
without the consent of Parent, which consent will not be unreasonably
withheld.
SECTION 7.6 PUBLIC STATEMENTS. Unless required by law, the parties
(i) shall consult with each other prior to issuing any press release or any
written public statement with respect to this Agreement or the transactions
contemplated hereby, and (ii) shall not issue any such press release or
written public statement prior to such consultation. Notwithstanding anything
herein to the contrary, the parties agree to jointly issue a press release, in
form and substance satisfactory to both parties, concerning the execution and
delivery of this Agreement before the close of business on the date hereof.
SECTION 7.7 STOCK OPTION PLANS AND STOCK OPTIONS. Prior to the
Effective Time, with respect to all stock options (whether or not then vested)
that would otherwise, by their terms, survive the Merger, the Company shall
either (a) cause outstanding stock options of the Company to be exercised or
(b) terminate and cancel such outstanding stock options or (c) cause holders
of such outstanding options to enter into agreements with the Company and the
Parent providing that such outstanding options, at the Effective Time and
without further action on the part of the option holder, shall be converted
into the right to receive, for each share of Company Common Stock underlying
such options, cash in an amount equal to the Merger Consideration less the
exercise price per share for such underlying shares, such that, on and as of
the Effective Time, there shall be no outstanding stock options of the
Company.
SECTION 7.8 NOTIFICATION OF CERTAIN MATTERS. Each of the Company,
Parent and RAI agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (i) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to
be untrue or inaccurate in any material respect at any time from
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the date hereof to the Effective Time, and (ii) any material failure on its
part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 7.8 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
SECTION 7.9 DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) At all times after the Effective Time, Parent shall (i) cause
the Surviving Corporation to indemnify the Company's officers and directors
(in their capacity as such) to the fullest extent permitted by law from and
against any losses, claims, damages, liabilities, costs, expenses, judgments
and amounts paid by them in settlement (with the Parent's consent, which
consent shall not be unreasonably withheld) in connection with any threatened,
pending or contemplated action, suit or proceeding or investigation arising
out of or pertaining to any of the transactions contemplated by this Agreement
or any other matter arising out of any action or omission occurring prior to
the Effective Time, and to cause the Surviving Corporation to advance, on a
periodic basis, the expenses of such officers and directors (including
reasonable attorney fees incurred by them to counsel selected by such officers
and directors) to the extent permitted by applicable law and (ii) not amend
the provisions of the Certificate of Incorporation and/or Bylaws of the
Surviving Corporation for a period of six years from the Effective Time
dealing with the indemnification, and limitation of liability, of directors
and officers of the Surviving Corporation. Prior to the Effective Time, RAI
shall, and Parent shall cause RAI to, amend its Certificate of Incorporation
and Bylaws to adopt substantially the provisions set forth in Article SEVENTH
of the Certificate of Incorporation, as amended, of the Company and Article XI
of the Bylaws, as amended, of the Company dealing with the indemnification,
and limitation of liability, of directors and officers.
(b) The Parent shall cause the Surviving Corporation to use its
best efforts to cause to be maintained in effect for a period of six years
from the Effective Time the current policies of directors and officers'
liability insurance maintained by the Company and its Subsidiaries (provided
that the Surviving Corporation may substitute therefor policies providing for
continuing coverage on terms and conditions which are no less advantageous so
long as no lapse in coverage occurs as a result of such substitution) with
respect to all matters, including the transactions contemplated hereby,
occurring prior to and including the Effective Time; provided that, in the
event that any claim or claims are asserted or made within such six-year
period, such insurance shall be continued in respect of any such claim or
claims until final disposition of any and all such claims; provided
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further that if the Surviving Corporation is unable to obtain the insurance
required by this Section 7.9(b) it shall obtain as much comparable insurance
as can be obtained for an annual premium not in excess of 200% of the last
annual premium paid by the Company for such insurance coverage.
SECTION 7.10 CORRECTIONS TO THE PROXY STATEMENT. Prior to the date
of approval of the Merger by the Company stockholders, the Company shall
correct promptly any information provided by it to be used specifically in the
Proxy Statement that shall have become false or misleading in any material
respect and shall take all steps necessary to file with the SEC and have
declared effective or cleared by the SEC any amendment or supplement to the
Proxy Statement so as to correct the same and to cause the Proxy Statement as
so corrected to be disseminated to the stockholders of the Company to the
extent required by applicable law.
SECTION 7.11 EMPLOYMENT AGREEMENTS, SEVERANCE
AGREEMENTS, STAY BONUSES AND RELATED EMPLOYMENT MATTERS.
(a) Prior to Closing, except as set forth on Schedule 7.11(a), any
and all employees of the Company who are parties to agreements that would
provide to them cash compensation upon a change of control (as defined
therein) of the Company (the "Change of Control Agreements") shall execute
waivers (in a form reasonably acceptable to Parent) of the cash compensation
provisions applicable upon such a change of control (as defined therein).
(b) Prior to Closing, except as set forth on Schedule 7.11(b), any
and all employees of the Company who are parties to employment agreements with
the Company (the "Employment Agreements") shall execute termination agreements
with respect to such employment agreements (in a form reasonably acceptable to
Parent) or the Company shall take such other action as is necessary to
terminate such Employment Agreements.
(c) Prior to Closing, except as set forth on Schedule 7.11(c), any
and all employees of the Company who are parties to severance agreements with
the Company (the "Severance Agreements") shall execute termination agreements
with respect to such severance agreements (in a form reasonably acceptable to
Parent) or the Company shall take such other action as is necessary to
terminate such Severance Agreements.
(d) Prior to Closing, except as set forth on Schedule 7.11(d), any
and all employees of the Company who are parties to stay bonus agreements with
the Company (the "Stay Bonus Agreements") shall execute termination agreements
with respect to such stay bonus agreements or the Company shall take such
other action as is necessary to terminate such Stay Bonus Agreements.
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(e) The Company's current policy with respect to severance benefits
is set forth in Schedule 7.11(e) hereto. Prior to Closing, the Company agrees
that it will not amend, modify or change such policy so as to increase the
severance benefits under such policy. The Parent agrees to cause the Surviving
Corporation to comply with such policy with respect to employees of the
Company whose employment with the Surviving Corporation is terminated after
the Closing.
SECTION 7.12 STOCKHOLDER AGREEMENT. Upon the execution hereof, the
Company will cause the parties, signatory thereto, to execute and deliver to
Parent the Stockholder Agreement in the form attached as Exhibit 7.12-1
hereto.
SECTION 7.13 PARENT STAY BONUS PROGRAM. At or prior to Closing, the
Parent shall (a) establish a stay bonus program for selected employees of the
Company (the "Parent Stay Bonus Program"), the terms of which will be
determined by the Parent in its sole and absolute discretion, (b) enter into
stay bonus agreements with such selected employees pursuant to the terms of
the Parent Stay Bonus Program and (c) fully fund an escrow (the "Escrow") with
an independent third party unrelated to Parent and RAI (the "Escrow Agent")
(such Escrow Agent to be appointed by Parent at or prior to Closing)
established pursuant to the escrow agreement relating to the Parent Stay Bonus
Program (the "Escrow Agreement"), the terms of which will be determined by the
Parent in its sole and absolute discretion.
SECTION 7.14 COMPANY STAY BONUS PROGRAM. Parent agrees that the
Company may adopt its own stay bonus program that will provide for the payment
of stay bonuses to Company employees if and only if the Merger is not
consummated (the "Company Stay Bonus Program"). If, prior to the Closing of
the Merger, the Company adopts a Company Stay Bonus Program and the Merger is
not consummated because (i) the Company terminates the Agreement as permitted
under Section 9.1(a)(iv) below at a time when the Company is in compliance, in
all material respects, with all of its representations, warranties, covenants
and agreements contained herein, (ii) the Company elects not to close because
the conditions set forth in Sections 8.2(a) or 8.2(d) have not been satisfied,
or (iii) the Parent and RAI shall not have closed the financing of the
transactions herein contemplated on or before November 30, 1996, the Parent
shall, after receiving written demand therefore from the Company (which demand
shall specify, in reasonable detail, the amount due from the Company), pay to
the Company an amount up to (but not in excess of) the first $500,000 legally
owed by the Company to the participants under the Company Stay Bonus Program.
31
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ARTICLE VIII
CONDITIONS
SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. Unless waived by the Parties, the respective obligations of each party
to effect the Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) this Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the stockholders of
the Company and RAI (if required) under applicable law and applicable listing
requirements;
(b) the waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated;
(c) no preliminary or permanent injunction or other order or decree
by any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation
of the Merger or make the consummation of the Merger illegal;
(e) all governmental waivers, consents, orders and approvals
legally required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect at the Effective
Time;
(f) all required consents and approvals of lenders who have
advanced $10,000,000 or more to Parent or the Company (other than Fremont
Financial Corporation) and lessors of material leases shall have been obtained
and be in effect at the Effective Time; provided, however, that the failure to
obtain such consents or approvals shall not be due to the default or delay of
the party responsible for obtaining such consents and approvals; and
(g) the Company shall have received from Peter J. Solomon Company
Limited (or another nationally recognized investment banking firm reasonably
acceptable to the Company) an opinion reasonably acceptable to the Company,
dated as of the date on which the Proxy Statement is first distributed to the
stockholders of the Company, to the effect that the consideration to be
received by the stockholders of the Company in the Merger is fair, from a
financial
32
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point of view, to the holders of Company Common Stock, and such opinion shall
not have been withdrawn.
SECTION 8.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following additional conditions:
(a) Parent and RAI shall have performed in all material respects
their agreements contained in this Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of Parent and
RAI contained in this Agreement shall be true and correct in all respects on
and as of the date made and on and as of the Closing Date as if made at and as
of such date, and the Company shall have received a certificate of the Chief
Executive Officer, the President or a Vice President of Parent and of the
Chief Executive Officer, President or a Vice President of RAI, in form and
substance reasonably satisfactory to the Company, to that effect;
(b) the Company shall have received an opinion from Brownstein
Hyatt Farber & Strickland, P.C., special counsel to Parent and RAI, dated the
Closing Date, in form and substance reasonably satisfactory to the Company;
(c) no governmental authority shall have promulgated any statute,
rule or regulation which, when taken together with all such promulgations,
would materially impair the value to the Company of the Merger; and
(d) the Parent Stay Bonus Program shall have been adopted by the
Parent, the stay bonus agreements thereunder shall have been executed and
delivered by the Parent, the Escrow Agreement shall have been executed and
delivered by the Parent and the Escrow shall have been fully funded by the
Parent.
SECTION 8.3 CONDITIONS TO OBLIGATIONS OF PARENT AND RAI TO EFFECT
THE MERGER. Unless waived by Parent and RAI, the obligations of Parent and RAI
to effect the Merger shall be subject to the fulfillment at or prior to the
Closing Date of the additional following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Company
contained in this Agreement shall be true and correct in all respects on and
as of the date made and on and as of the Closing Date as if made at and as of
such date (except with respect to the exercise, termination, cancellation or
conversion of the Company's stock options in accordance with the requirements
of Section 7.7 above and except that none of the
33
<PAGE>
Company representations and warranties shall be deemed untrue or incorrect in
any respect based upon changes (including but not limited to a reduction in
sales or production) occurring as a result of the termination of the
employment of one or more employees of the Company), and Parent shall have
received a Certificate of the Chief Executive Officer, President or a Vice
President of the Company, in form and substance reasonably satisfactory to
Parent to that effect;
(b) Parent shall have received an opinion from Proskauer Rose Goetz
& Mendelsohn LLP, special counsel to the Company, effective as of the Closing
Date, in form and substance reasonably satisfactory to Parent;
(c) since the date hereof, there shall have been no changes that
constitute, and no event or events shall have occurred which have resulted in
or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other) or results of operations of
the Company and its subsidiaries, taken as a whole; provided, however, that no
such material adverse change which may occur (including but not limited to a
reduction in sales or production) as a result of the termination of the
employment of one or more employees of the Company shall permit Parent or RAI
to decline to effect the Merger;
(d) no governmental authority shall have promulgated any statute,
rule or regulation which, when taken together with all such promulgations,
would materially impair the value to Parent of the Merger;
(e) the waivers or terminations referred to in Section
7.11 shall have been executed and delivered to Parent;
(f) the requirements regarding the exercise, cancellation,
termination or conversion of all outstanding stock options of the Company
described in 7.7 shall have been satisfied; and
(g) the Parent and RAI shall have closed the financing of the
transactions herein contemplated on terms and conditions and in such amounts
as shall be acceptable to Parent and RAI in their sole and absolute
discretion.
(h) RAI shall have adopted the amendments to its Certificate of
Incorporation and Bylaws as provided in the last sentence of Section 7.9(a),
and those amendments shall remain in full force and effect.
34
<PAGE>
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 TERMINATION. This Agreement may be terminated by the
mutual consent of the parties or at any time prior to the Closing Date,
whether before or after approval by the stockholders of the Company, as
follows:
(a) The Company shall have the right to terminate this
Agreement:
(i) if the Merger is not completed by November 30,
1996, other than on account of delay or default on the part of
the Company;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of the Company or
any of its 5% stockholders or any of their affiliates or associates;
(iii) if the terms and conditions of Section 6.2(d)
are satisfied; or
(iv) if Parent (A) fails to perform in any material respect
any of its covenants in this Agreement and (B) does not cure such
default in all material respects within 30 days after written notice of
such default is given to Parent by the Company.
(b) Parent shall have the right to terminate this
Agreement:
(i) if the Merger is not completed by November 30,
1996, other than on account of delay or default on the part of
Parent or RAI;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of Parent or any of
its 5% stockholders or any of their affiliates or associates or RAI;
(iii) if the Company (A) fails to perform in any material
respect any of its covenants in this Agreement and (B) does not cure
such default in all material respects within 30 days after written
notice of such default is given to the Company by Parent;
(iv) the Parent and RAI shall be unable for any reason to
close the financing of the transactions herein contemplated on terms and
conditions and in such amounts as
35
<PAGE>
shall be acceptable to Parent and RAI in their sole and
absolute discretion; or
(iv) holders of more than five percent (5%) of the total
outstanding shares of Company Common Stock exercise their rights of
appraisal in accordance with Section 910 of the BCL.
SECTION 9.2 EFFECT OF TERMINATION. In the event of termination of
this Agreement by either Parent or the Company as provided in Section 9.1,
this Agreement shall forthwith become void and there shall be no further
obligation on the part of the Company, Parent, RAI or their respective
officers or directors (except as set forth in this Section 9.2 and in Sections
7.1, 7.4, 7.6 and 7.14, all of which shall survive the termination). Nothing
in this Section 9.2 shall relieve any party from liability for any breach of
this Agreement.
SECTION 9.3 AMENDMENT. This Agreement may not be amended except by
action taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf
of each of the parties hereto and in compliance with applicable law.
SECTION 9.4 WAIVER. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any such waiver shall not be deemed
to be continuing or to apply to any future obligation or requirement of any
party hereto provided herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE X
TERMINATION OF REPRESENTATIONS AND WARRANTIES
SECTION 10.1 TERMINATION OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in this Agreement shall not survive
the Merger and, after the effectiveness of the Merger, the Company, Parent,
RAI and their respective officers, directors and shareholders shall have no
further obligations with respect thereto.
36
<PAGE>
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1 BROKERS. The Company represents and warrants that no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission (except for the fees payable to Peter J. Solomon
Company Limited and Horvitz & Associates described in Schedule 11.1(a)) in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. Parent and RAI
represent and warrant that no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission (except for the fee
payable to McCabe & Co. described in Schedule 11.1(b)) in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or RAI.
SECTION 11.2 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, mailed by registered or certified mail (return receipt requested)
or sent via facsimile to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to Parent or RAI to:
Renaissance Cosmetics, Inc.
635 Madison Avenue
New York, New York 10022
Attention: Thomas V. Bonoma, Chairman, Chief
Executive Officer and President
Telephone No. 212-751-3700
Telecopy No. 212-371-7868
Renaissance Acquisition, Inc.
c/o Renaissance Cosmetics, Inc.
635 Madison Avenue
New York, New York 10022
Attention: Thomas V. Bonoma, Chairman, Chief
Executive Officer and President
Telephone No. 212-751-3700
Telecopy No. 212-371-7868
37
<PAGE>
and to the Company, after the Effective Time:
MEM Company, Inc.
c/o Renaissance Cosmetics, Inc.
635 Madison Avenue
New York, New York 10022
Attention: Thomas V. Bonoma, Chairman, Chief
Executive Officer and President
Telephone No. 212-751-3700
Telecopy No. 212-371-7868
with a copy to:
Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street, Suite 2200
Denver, Colorado 80202
Attention: John L. Ruppert, Esq.
Telephone No. 303-534-6335
Telecopy No. 303-623-1956
(b) If to the Company, to:
MEM Company, Inc.
Union Street Extension
Northvale, New Jersey 07647
Attention: Gay A. Mayer, Chairman, Chief Executive
Officer and President
Telephone No.: 210-767-0100
Telecopy No. 210-767-0698
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Allan R. Williams, Esq.
Telephone No. 212-969-3000
Telecopy No. 212-969-2900
SECTION 11.3 INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. In this Agreement, unless a
contrary intention appears, (i) the words "herein", "hereof" and "hereunder"
and other words of similar import refer to this Agreement as a whole and not
to any particular Article, Section or other subdivision, and (ii) reference to
any Article or Section means such Article or Section hereof. No provision of
this Agreement shall be interpreted or construed against any party hereto
solely because such party or its legal representative drafted such provision.
38
<PAGE>
SECTION 11.4 MISCELLANEOUS. This Agreement (including the documents
and instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof (other than that certain Confidentiality Agreement, dated November 9,
1995, between Parent and the Company which shall continue in full force and
effect through the Effective Time if the Merger is consummated or through the
term of the Confidentiality Agreement if this Agreement is terminated for any
reason), (b) is not intended to confer upon any other person any rights or
remedies hereunder, except for rights of indemnified Parties under Section
7.9, and (c) shall not be assigned by operation of law or otherwise, except
that RAI may assign this Agreement to any other wholly-owned subsidiary of
Parent. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY,
INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 11.5 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement. Each of the parties agrees
to accept and be bound by facsimile signatures hereto.
SECTION 11.6 PARTIES IN INTEREST. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and except as set
forth in the exception to Section 11.4(b), nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
SECTION 11.7 EXHIBITS AND SCHEDULES. All Exhibits and Schedules
referred to in this Agreement shall be attached hereto and are incorporated
herein by reference.
* * * * * *
39
<PAGE>
IN WITNESS WHEREOF, Parent, RAI and the Company have caused this
Agreement to be signed by their respective officers as of the date first
written above.
RENAISSANCE COSMETICS, INC.
By: /s/ John R. Jackson
__________________________
Name: John R. Jackson
Title: Vice President
RENAISSANCE ACQUISITION, INC.
By: /s/ John R. Jackson
__________________________
Name: John R. Jackson
Title: Vice President
MEM COMPANY, INC.
By: /s/ Gay A. Mayer
__________________________
Name: Gay A. Mayer
Title: Chairman, Chief Executive
Officer and President
40
EXHIBIT B
[COMPANY LETTERHEAD]
PETER J. SOLOMON COMPANY
LIMITED
350 PARK AVENUE
NEW YORK, NY 10022
TEL 212-935-9770
FAX 212-935-9770
August 6, 1996
The Board of Directors
MEM Company, Inc.
Union Street Extension
Northvale, NJ. 07647-0928
Dear Members of the Board:
You have asked us to advise you with respect to the fairness to the
stockholders of MEM Company, Inc. (the "Company") from a financial point of
view of the consideration to be received by the holders of shares of the
Company's common stock pursuant to the terms of the Agreement and Plan of
Merger, dated as of August 6, 1996 (the "Merger Agreement"), among the
Company, Renaissance Cosmetics, Inc. ("Renaissance") and Renaissance
Acquisition, Inc. ("RAI"), a wholly-owned subsidiary of Renaissance.
The Merger Agreement provides for the merger (the "Merger") of RAI with and
into the Company and the Company will continue as the surviving corporation
and a wholly-owned subsidiary of Renaissance. Subject to the terms and
conditions of the Merger Agreement, each of the Company's issued and
outstanding shares (or fraction thereof) of common stock, $0.05 par value,
("Company Common Stock"), not owned directly or indirectly by Renaissance or
the Company, will be converted into the right to receive a cash payment equal
to Seven Dollars and Fifty Cents ($7.50) per share of Company Common Stock.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial
statements and other information of the
Company;
(ii) reviewed certain internal financial
statements and other financial and operating
data prepared by the management of the
Company;
(iii) reviewed certain financial projections for
the Company prepared by the management of the
Company;
(iv) discussed the past and current operations,
financial condition and the prospects of the
Company with senior executives of the
Company;
<PAGE>
(v) reviewed the reported prices and trading
activity for Company Common Stock;
(vi) compared the financial performance of the
Company and the prices and trading activity of
Company Common Stock with those of certain
comparable publicly traded companies and their
common stock;
(vii) reviewed publicly available information
regarding the financial terms of certain
comparable acquisition transactions;
(viii) participated in certain discussions among
representatives of the Company and
Renaissance and their legal advisors;
(ix) reviewed the Merger Agreement;
(x) reviewed the description of the pending
acquisition for the Company in the Private
Placement Memorandum dated June 26, 1996
prepared by CIBC Wood Gundy Securities Corp.
on behalf of Renaissance; and
(xi) performed such other analysis as we have
deemed appropriate.
At the direction of the Board, PJSC contacted those potential buyers the Board
and management, in consultation with PJSC, deemed most likely to acquire the
Company. None of the potential buyers expressed an interest in acquiring or
merging with the Company at a price comparable to the offer put forth by
Renaissance.
We have assumed and relied without independent verification on the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that the
financial projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial
performance of the Company. We express no view as to such projections or the
assumptions on which they are based. We have not made any independent
valuation or appraisal of the assets or liabilities of the Company, nor have
we been furnished with any such appraisals. Our opinion is necessarily based
on economic, market and other conditions as in effect on, and the information
made available to us as of, the date hereof. It should be understood that,
although subsequent developments may affect this opinion, we do not have any
obligation to update, review or reaffirm this opinion.
We do not express any view as to any terms of the Merger, including, without
limitation, the financing condition set forth in Section 8.3(g) of the Merger
Agreement, other than the fairness from a financial point of view to the
holders of Company Common Stock of the consideration to be received by holders
of Company Common Stock pursuant to the Merger. We express no opinion and make
no recommendations as to how the holders of Company Common Stock should vote
at the stockholders' meeting held in connection with the Merger.
We have acted as financial advisor to the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services, a
portion of which is contingent upon closing of the Merger. This opinion does
not address the relative merits of the Merger and any other transactions or
business strategies that may have been considered by management or the Board
of Directors of the Company or the underlying business decision of the Board
of Directors to proceed with the Merger.
<PAGE>
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by the Company or Renaissance with the Securities
and Exchange Commission with respect to the Merger.
Based on, and subject to, the foregoing, we are of the opinion that on the
date hereof, the consideration to be received by the holders of Company Common
Stock pursuant to the Merger is fair from a financial point of view to the
holders of Company Common Stock.
Very truly yours,
Peter J. Solomon Company Limited
By: /s/ Jeffrey H. Kuhr
--------------------------
Jeffrey H. Kuhr
Principal
<PAGE>
EXHIBIT C
ss. 623 PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR
SHARES.
(a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate
action referred to therein is taken shall file with the corporation, before
the meeting of shareholders at which the action is submitted to a vote, or at
such meeting but before the vote, written objection to the action. The
objection shall include a notice of his election to dissent, his name and
residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares if the action is
taken. Such objection is not required from any shareholder to whom the
corporation did not give notice of such meeting in accordance with this
chapter or where the proposed action is authorized by written consent of
shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date,
which term as used in this section means the date on which the shareholders'
vote authorizing such action was taken, or the date on which such consent
without a meeting was obtained from the requisite shareholders, the
corporation shall give written notice of such authorization or consent by
registered mail to each shareholder who filed written objection or from whom
written objection was not required, excepting any shareholder who voted for or
consented in writing to the proposed action and who thereby is deemed to have
elected not to enforce his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares.
Any shareholder who elects to dissent from a merger under section 905 (Merger
of subsidiary corporation) or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations) or from a share exchange
under paragraph (g) of section 913 (Share exchanges) shall file a written
notice of such election to dissent within twenty days after the giving to him
of a copy of the plan of merger or exchange or an outline of the material
features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the
shares, as to which he has a right to dissent, held by him of record, that he
owns beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder
shall cease to have any of the rights of a shareholder except the right to be
paid the fair value of his shares and any other rights under this section. A
notice of election may be withdrawn by the shareholder at any time prior to
his acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer
is made. Upon expiration of such time, withdrawal of a notice of election
shall require the written consent of the corporation. In order to be
effective, withdrawal of a notice of election must be accompanied by the
return to the corporation of any advance payment made to the shareholder as
provided in paragraph (g). If a notice of election is withdrawn, or the
corporate action is rescinded, or a court shall determine that the shareholder
is not entitled to receive payment for his shares, or the shareholder shall
otherwise lose his dissenter's rights,
<PAGE>
he shall not have the right to receive payment for his shares and he shall be
reinstated to all his rights as a shareholder as of the consummation of the
corporate action, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such
rights have expired or any such dividend or distribution other than in cash
has been completed, in lieu thereof, at the election of the corporation, the
fair value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or
within one month thereafter the shareholder of shares represented by
certificates shall submit the certificates representing his shares to the
corporation, or to its transfer agent, which shall forthwith note
conspicuously thereon that a notice of election has been filed and shall
return the certificates to the shareholder or other person who submitted them
on his behalf. Any shareholder of shares represented by certificates who fails
to submit his certificates for such notation as herein specified shall, at the
option of the corporation exercised by written notice to him within forty-five
days from the date of filing of such notice of election to dissent, lose his
dissenter's rights unless a court, for good cause shown, shall otherwise
direct. Upon transfer of a certificate bearing such notation, each new
certificate issued therefor shall bear a similar notation together with the
name of the original dissenting holder of the shares and a transferee shall
acquire no rights in the corporation except those which the original
dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within
which shareholders may file their notices of election to dissent, or within
fifteen days after the proposed corporate action is consummated, whichever is
later (but in no case later than ninety days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to
pay for his shares at a specified price which the corporation considers to be
their fair value. Such offer shall be accompanied by a statement setting forth
the aggregate number of shares with respect to which notices of election to
dissent have been received and the aggregate number of holders of such shares.
If the corporate action has been consummated, such offer shall also be
accompanied by (1) advance payment to each such shareholder who has submitted
the certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such
offer, or (2) as to each shareholder who has not yet submitted his
certificates a statement that advance payment to him of an amount equal to
eighty percent of the amount of such offer will be made by the corporation
promptly upon submission of his certificates. If the corporate action has not
been consummated at the time of the making of the offer, such advance payment
or statement as to advance payment shall be sent to each shareholder entitled
thereto forthwith upon consummation of the corporate action. Every advance
payment or statement as to advance payment shall include advice to the
shareholder to the effect that acceptance of such payment does not constitute
a waiver of any dissenters' rights. If the corporate action has not been
consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not
less than a twelve month period ended on the date of such balance sheet or, if
the corporation was not in existence throughout such twelve month period, for
the portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish
2
<PAGE>
a balance sheet or profit and loss statement or statements to any shareholder
to whom such balance sheet or profit and loss statement or statements were
previously furnished, nor if in connection with obtaining the shareholders'
authorization for or consent to the proposed corporate action the shareholders
were furnished with a proxy or information statement, which included financial
statements, pursuant to Regulation 14A or Regulation 14C of the United States
Securities and Exchange Commission. If within thirty days after the making of
such offer, the corporation making the offer and any shareholder agree upon
the price to be paid for his shares, payment therefor shall be made within
sixty days after the making of such offer or the consummation of the proposed
corporate action, whichever is later, upon the surrender of the certificates
for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer
and any dissenting shareholder or shareholders fail to agree with it within
the period of thirty days thereafter upon the price to be paid for their
shares:
(1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last
mentioned, institute a special proceeding in the supreme court in
the judicial district in which the office of the corporation is
located to determine the rights of dissenting shareholders and to
fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic
corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such
proceeding within such period of twenty days, any dissenting
shareholder may institute such proceeding for the same purpose not
later than thirty days after the expiration of such twenty day
period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme
court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as
provided in paragraph (g), have agreed with the corporation upon
the price to be paid for their shares, shall be made parties to
such proceeding, which shall have the effect of an action quasi in
rem against their shares. The corporation shall serve a copy of the
petition in such proceeding upon each dissenting shareholder who is
a resident of this state in the manner provided by law for the
service of a summons, and upon each nonresident dissenting
shareholder either by registered mail and publication, or in such
other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his shares.
If the corporation does not request any such determination or if
the court finds that any dissenting shareholder is so entitled, it
shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close
of business on the day prior to the shareholders' authorization
date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the
shareholder's right to receive payment for shares and its effects
on the corporation and its shareholders, the concepts and methods
then customary in the relevant securities and financial markets for
determining fair value of shares of a corporation engaging in a
similar transaction under comparable circumstances and all other
relevant factors. The court shall determine the fair value of the
shares without a jury and without referral to an appraiser or
referee. Upon application by the
3
<PAGE>
corporation or by any shareholder who is a party to the proceeding,
the court may, in its discretion, permit pretrial disclosure,
including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended
for use at the trial in the proceeding and notwithstanding
subdivision (d) of section 3101 of the civil practice law and
rules.
(5) The final order in the proceeding shall be entered
against the corporation in favor of each dissenting shareholder who
is a party to the proceeding and is entitled thereto for the value
of his shares so determined.
(6) The final order shall include an allowance for
interest at such rate as the court finds to be equitable, from the
date the corporate action was consummated to the date of payment.
In determining the rate of interest, the court shall consider all
relevant factors, including the rate of interest which the
corporation would have had to pay to borrow money during the
pendency of the proceeding. If the court finds that the refusal of
any shareholder to accept the corporate offer of payment for his
shares was arbitrary, vexatious or otherwise not in good faith, no
interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own
costs and expenses, including the fees and expenses of its counsel
and of any experts employed by it. Notwithstanding the foregoing,
the court may, in its discretion, apportion and assess all or any
part of the costs, expenses and fees incurred by the corporation
against any or all of the dissenting shareholders who are parties
to the proceeding, including any who have withdrawn their notices
of election as provided in paragraph (e), if the court finds that
their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its
discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the
corporation if the court finds any of the following: (A) that the
fair value of the shares as determined materially exceeds the
amount which the corporation offered to pay; (B) that no offer or
required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the
corporation in complying with its obligations as provided in this
section was arbitrary, vexatious or otherwise not in good faith. In
making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the
fair value of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting
shareholder the amount found to be due him, upon surrender of the
certificates for any such shares represented by certificates.
(i) Shares acquired by the corporation upon the payment of the
agreed value therefor or of the amount due under the final order, as provided
in this section, shall become treasury shares or be cancelled as provided in
section 515 (Reacquired shares), except that, in the case of a merger or
consolidation, they may be held and disposed of as the plan of merger or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
4
<PAGE>
(1) Withdraw his notice of election, which shall in such
event be deemed withdrawn with the written consent of the
corporation; or
(2) Retain his status as a claimant against the
corporation and, if it is liquidated, be subordinated to the rights
of creditors of the corporation, but have rights superior to the
non-dissenting shareholders, and if it is not liquidated, retain
his right to be paid for his shares, which right the corporation
shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such
option under subparagraph (1) or (2) by written notice filed with
the corporation within thirty days after the corporation has given
him written notice that payment for his shares cannot be made
because of the restrictions of this paragraph. If the dissenting
shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to
him within twenty days after the expiration of such period of
thirty days.
(k) The enforcement by a shareholder of his right to receive
payment for his shares in the manner provided herein shall exclude the
enforcement by such shareholder of any other right to which he might otherwise
be entitled by virtue of share ownership, except as provided in paragraph (e),
and except that this section shall not exclude the right of such shareholder
to bring or maintain an appropriate action to obtain relief on the ground that
such corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any
notice to be given by a corporation to a shareholder under this section shall
be given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e) (2) of section 907 (Merger or consolidation of
domestic and foreign corporations).
5
EXHIBIT D
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1995
( ) 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.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 13-5546930
- ------------------------------- -----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
UNION STREET EXTENSION
NORTHVALE, NEW JERSEY 07647
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 767 - 0100
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------- -----------------------
Common stock, $.05 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: NONE
Page 1 of 16 pages
Exhibit Index is on page 16
1
<PAGE>
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
There were 2,583,184 shares of the Registrant's Common Stock outstanding at
March 13, 1996. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant (based upon the closing price of the stock on
the American Stock Exchange as reported in the Wall Street Journal) on March
13, 1996 was $2,955,000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or portions thereof, have been incorporated herein by
reference:
(i) portions of the Registrant's definitive proxy statement to be furnished in
connection with its Annual Meeting of Shareholders to be held April 23, 1996
(the "Definitive Proxy Statement") have been incorporated by reference in Part
III hereof.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
MEM Company, Inc. (the "Company" or the "Registrant") was incorporated in 1948
under the laws of the State of New York. The business of the Company
principally consists of manufacturing, selling and distributing a diversified
line of toiletries in several fragrance groups. These are marketed under the
nationally advertised trademarks English Leather(R) , British Sterling(R),
Heaven Sent(R), LOVE'S(R), and Tinkerbell(R). The Company also markets Acqua
di Selva(R), a premium priced imported line of men's toiletries, through a
subsidiary.
2
In May 1994, the Company acquired the trademark and inventories relating
to the British Sterling(R) fragrance line of men's products. In mid 1994, the
Company introduced the Timberline(R) fragrance line for young men in the
"Generation X" category and in the women's product category, the Company began
marketing its Heaven Sent Vanilla line and also introduced the Love's
Frenzy(R) and Love's Clean & Natural product lines. In 1995, the Company began
marketing its Love's White Vanilla line.
The Company manufactures and markets Heaven Sent(R), a line of women's
fragrance items, in the United States and Canada and owns the distribution
rights in Puerto Rico and elsewhere in the Western Hemisphere. The Company
also manufactures and distributes, under the trademark LOVE'S(R), a line of
toiletries, cosmetics and accessories for teenage girls which are distributed
through franchised dealers consisting primarily of chain and independent drug
stores, mass merchandisers and department stores in the United States and
Canada.
Tom Fields, Ltd. ("Tom Fields") operates as a division of the Company.
Tom Fields manufactures and markets a line of children's cosmetics and
accessories principally under the trademark Tinkerbell(R). A subsidiary, Tom
Fields (U.K.) Ltd., markets this line of children's products in the United
Kingdom and in Europe.
The principal market for all of the above products is the United States.
No significant change occurred during the fiscal year 1995 in kinds of
products, markets or methods of distribution.
(b) Financial Information About Industry Segments
The Company operates in one industry segment: the production and
distribution of toiletries and accessories for men, women and children.
Consolidated financial information relating to product lines, domestic
and foreign operations and export sales for the years ended December 31 is as
follows ($000 omitted):
3
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sales by product lines:
English Leather and other men's ....... $ 22,226 $ 29,484 $ 17,287
Women's ............................... 11,452 12,623 11,171
Tinkerbell ............................ 11,147 10,987 9,996
-------- -------- --------
$ 44,825 $ 53,094 $ 38,454
======== ======== ========
Sales to unaffiliated customers:
United States ......................... $ 37,130 $ 46,029 $ 31,798
Canada ................................ 2,884 2,894 2,709
United Kingdom ........................ 3,907 3,144 2,502
Export sales to other countries ....... 904 1,027 1,445
-------- -------- --------
$ 44,825 $ 53,094 $ 38,454
======== ======== ========
Income (loss) before interest and taxes:
United States ......................... $ (1,390) $ (169) $ (1,665)
Canada ................................ (133) (15) (316)
United Kingdom ........................ 143 (32) (100)
-------- -------- --------
$ (1,380) $ (216) $ (2,081)
======== ======== ========
Identifiable assets:
United States ......................... $ 40,205 $ 42,772 $ 29,983
Canada ................................ 3,057 2,763 2,881
United Kingdom ........................ 2,562 1,726 1,418
-------- -------- --------
$ 45,824 $ 47,261 $ 34,282
======== ======== ========
</TABLE>
(c) Narrative Description of Business
The Company is principally engaged in the manufacture, sale and
distribution of a diversified line of toiletries and accessories under the
nationally advertised trademarks English Leather(R), British Sterling(R),
Timberline(R), Love's(R), Heaven Sent(R) and Tinkerbell(R). The principal
market for these products is the continental United States with a distribution
service network consisting of three warehouse locations.
The primary shipping location is Northvale, New Jersey and two other
distribution warehouses are located in Texas and California. The toiletries
industry is highly competitive and, based on available industry sources, the
Company believes that it is among the leading producers of products sold
within the same price range as its products.
4
<PAGE>
Although the Company and its subsidiaries are not dependent upon a single
customer or a very few customers for their business, one national customer
represented 13% of net sales in 1995 and 14% in 1994. The Company has done
substantial business with this customer for several years and feels they have
a good business relationship. Although the total loss of business with the
customer would have a material adverse effect, the Company considers that
possibility to be remote. Due to the seasonal nature of the business and the
heavy volume of shipments made in the last half of the year, there was no
significant backlog of orders as of December 31, 1995 or 1994. In 1995 and
1994 the last half of the calendar year accounted for 75% and 79% of net
sales, respectively. The related inventory requirements and accounts
receivable are financed by the Company's revolving credit agreement. Present
supply sources are adequate for the requirements of the business and several
alternate sources are available if needed. For the protection against misuse
by others, the trademarks under which most of the toiletry and accessory
products are sold by the Company have been registered in the United States
Patent Office and in many other countries. At December 31, 1995, the Company
and its subsidiaries employed 391 persons.
The Company's terms of sale do not provide the purchaser any right to
return merchandise to the Company. Returns of merchandise which has been
damaged and of seasonal merchandise must be approved by the Company before the
customer receives credit, which the Company does not unreasonably withhold.
Orders are generally shipped promptly after receipt and cancellations have
been negligible.
The Company owns the majority of the trademarks under which it makes its
products for which it pays no royalties. It uses certain trademarks pursuant
to licensing agreements which generally provide for royalties based on the net
sales volume of trademarked products. In 1993 the Company exercised its option
to make a one time $500,000 payment under a licensing agreement in lieu of
making any future royalty payments under the agreement. Royalties were not a
material portion of the Company's costs during the Company's last three fiscal
years. All the licenses are of perpetual duration.
The Company's expenditures for research and development were immaterial
during the years ended December 31, 1995, 1994 and 1993.
5
<PAGE>
Item 1A. Executive Officers of the Registrant (See Item 10 herein)
All of the officers set forth below have been elected to serve until the
next Annual Meeting of the Company's Board of Directors or until their
successors are elected and qualified.
<TABLE>
<CAPTION>
Officer
Name Office Held Age Since
- ---- ----------- --- -------
<S> <C> <C> <C>
Gay A. Mayer Chairman of the Board, 53 1966
President, Chief Executive Officer
Michael G. Kazimir, Jr. Executive Vice President, 52 1990
Chief Operating Officer,
Chief Financial Officer
Brian C. McNally Senior Vice President, Sales 39 1995
Steven M. Feigenbaum Vice President, Sales 48 1991
Robert O. Hurry Vice President, Finance and Treasurer 57 1966
Donald E. Jensen Vice President, Operations 51 1994
Nicholas J. Marinacci Vice President, Marketing 48 1994
Nicholas A. Villanova Vice President, Purchasing & 48 1995
Package Development
Margaret A. Powers Secretary 61 1983
</TABLE>
All officers serve at the pleasure of the Board of Directors. All of the
above executive officers have served as such for the past five years except
Messrs. Kazimir, McNally, Feigenbaum, Jensen, Marinacci and Villanova.
Mr. Kazimir was elected Executive Vice President and Chief Operating
Officer in March, 1993. Previously, he had been Senior Vice President of
Finance and Administration, Chief Financial Officer since November, 1990. He
had been the President of his own consulting firm for two years prior to
joining MEM. Before that he was with Elizabeth Arden, Inc. in various
financial and operating capacities.
Mr. McNally previously had been Director of National Accounts and Trade
Relations at Church & Dwight, Inc., a consumer packaged goods company, from
1994 to 1995. From 1988 to 1994, he was Director of Field Sales USA for
Beiersdorf, Inc., also a consumer packaged goods company.
6
<PAGE>
Mr. Feigenbaum, before becoming Vice President of Sales in 1991, was
National Sales Manager since 1989.
Mr. Jensen, before becoming Vice President of Operations in 1994, was
Director of Operations since 1993. Prior to that, he was Director of
Manufacturing since his employment in 1986.
Mr. Marinacci, prior to becoming Vice President of Marketing in 1994, had
been employed by Houbigant, Inc. since 1989 in various capacities. From March
1993 to April 1994, he was Vice President of Operations and in 1992 and 1993
he was Vice President, Corporate Marketing. From 1989 to 1992 he held various
marketing positions. Houbigant, Inc. entered Chapter 11 proceedings in
November, 1993, and Mr. Marinacci also served as acting Chief Operating
Officer from December, 1993 to April, 1994.
Mr. Villanova previously had been Vice President of Purchasing and
Package Development at Dawson Home Fashions, a manufacturer of bath
accessories, from 1993 to 1995. Prior to that he was Vice President of
Operations at Perfumers Workshop, Ltd., a manufacturer of fragrances, from
1991 to 1992. Previously he held several positions at Cosmair, a manufacturer
of hair care and cosmetics, from 1983 to 1991, the most recent of which was
Director of Logistics.
ITEM 2. PROPERTIES
The facilities and plant machinery and equipment owned by the Company and
its subsidiaries are, in the opinion of management, adequate for the conduct
of its business, and are well maintained and in good condition.
The Company's executive offices and main plant are located in a 206,000
square foot building located on 16.3 acres in Northvale, New Jersey and owned
by the Company. The Tom Fields plant is located in a 53,000 square foot
building in Northvale, New Jersey and is owned by a subsidiary of the Company.
Manufacturing facilities in Canada are located in a 32,000 square foot plant
in Boucherville, Quebec which is owned by MEM Company (Canada) Ltd. Tom Fields
(U.K.) assembles products in leased facilities in Folkestone, Kent.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings, other than ordinary routine litigation
incidental to the business, are pending to which the Company or any of its
subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Quarterly Market and Dividend Information
The common stock of the Company is traded on the American Stock Exchange
under the ticker symbol MEM. As of March 6, 1996, the number of record holders
of common stock was 416. The quarterly high and low sales prices for the past
two years are as follows:
<TABLE>
<CAPTION>
Price Range of Common Stock
1995 1994
----------------- -----------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter .................. $4.63 $3.13 $4.50 $3.88
Second Quarter ................. 4.00 3.25 4.50 3.88
Third Quarter .................. 3.75 3.25 6.38 3.88
Fourth Quarter ................. 3.75 2.75 5.63 3.75
</TABLE>
The Company has not declared any cash dividends for the past five years, and
does not anticipate that dividends will be paid in the foreseeable future.
Restrictions on dividend payments contained in the Company's financing
agreement currently prohibit the declaration of dividends if the Company
operates at a loss.
ITEM 6. SELECTED FINANCIAL DATA. (IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales .................. $ 44,825 $ 53,094 $ 38,454 $ 44,751 $ 57,949
Net income (loss) .......... $ (2,982) $ (1,328) $ (2,570) $ (4,300) $ 44
Per share .............. $ (1.16) $ (.52) $ (1.00) $ (1.67) $ .02
Dividends declared ......... $ -- $ -- $ -- $ -- $ --
Weighted average shares
outstanding ............ 2,581 2,576 2,572 2,571 2,570
Year-End Financial Position:
Working capital ............ $ 11,971 $ 15,602 $ 18,068 $ 19,636 $ 24,471
Property, plant and
equipment-net .......... $ 5,181 $ 5,324 $ 5,513 $ 6,084 $ 6,685
Total assets ............... $ 45,824 $ 47,261 $ 34,282 $ 39,514 $ 43,626
Long term notes ............ $ 3,370 $ 4,907 $ 699 $ -- $ 838
Stockholders' equity ....... $ 24,657 $ 27,496 $ 28,919 $ 31,589 $ 36,310
Stockholders' equity
per share .............. $ 9.55 $ 10.66 $ 11.24 $ 12.29 $ 14.13
Shares outstanding at end
of year ................ 2,583 2,580 2,573 2,571 2,570
</TABLE>
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1995 COMPARED TO 1994
Consolidated net sales in 1995 were 16% lower than in 1994. Almost all of
the decline occurred in the men's product lines. Net sales of Timberline,
which was introduced in 1994, declined by $4,200,000, reflecting the decision
by several major customers not to re-purchase the line in 1995. Sales of
English Leather fragrance products declined $1,300,000 and British Sterling
sales were $900,000 lower than in 1994. Sales of women's products declined
$1,200,000, principally due to lower sales of Heaven Sent products. Sales of
Love's Baby Soft products were about the same as in 1994. Sales of Love's
White Vanilla, introduced in 1995, offset sales declines in Love's Frenzy and
Love's Clean & Natural product lines. Overall Tinkerbell sales increased
modestly over the prior year, with a 24% sales growth in the United Kingdom.
This was partially offset by lower sales to a large customer in the United
States. The decrease in overall sales was primarily the result of lower unit
sales. Unit sales price increases in 1995 were not significant.
Sales in the United States were 19% lower than in 1994, half of which was
the decline in Timberline sales. The retail environment continued to be very
nervous, with most major retailers continuing to reduce their commitments to
inventories of fragrance products. This, coupled with the loss of sales to
customers who had filed for bankruptcy protection earlier in the year,
resulted in a 26% decline in fourth quarter shipments. Sales of men's and
women's fragrances also continued to be impacted by competition from higher
priced "prestige" fragrances being sold in the Company's distribution channels
and from larger companies with greater resources to commit to advertising and
marketing programs.
Canadian sales were the same in 1995 as in 1994, but higher costs of
goods sold resulted in a higher operating loss than in 1994. Tinkerbell sales
in the United Kingdom continued their growth pattern and as a result, this
subsidiary produced a modest profit for the year. Overall, the effects of
inflation and exchange rate fluctuations were not material. The Company
continues to investigate opportunities to develop or acquire contra-seasonal
brands or products to compensate for the current seasonality of its business.
9
<PAGE>
Retailers continue to consider fragrance merchandise to be highly
promotional and seasonal, and request permission to return unsold goods.
During the past several years, management has worked closely with customers
concerning their level of anticipated sales. However, the generally weak
retail environment during 1995 resulted in an increase in actual and
anticipated returns of $250,000 compared to 1994 despite the lower sales level
in 1995, and the percentage of returns to gross sales increased to 18% in 1995
from 15% in 1994.
Cost of sales rose in relation to sales from 54% to 57% primarily as a
result of lower 1995 sales of Timberline products, which have a substantially
lower cost of goods than other products. In addition, the cost of goods
percentage was adversely affected by the higher per unit manufacturing costs
resulting from lower production levels in 1995. Shipping and distribution
expenses were slightly lower in relation to sales in 1995 than in 1994.
Selling expenses, which are relatively fixed in nature, declined modestly in
amount but rose in relation to sales. Marketing expenses declined
significantly from 23% to 19% of sales in 1995. This reduction is primarily
due to the substantial expenditures incurred in 1994 in the introduction of
the Timberline fragrance line which were not repeated in 1995. Marketing
expenses for other brands increased by approximately $750,000 in 1995. General
and administrative expense was at the same level as in 1994. A decrease of
$77,000 in the provision for doubtful accounts was offset by increases in
personnel and consulting expenses.
Royalty income increased as a result of higher amounts received from both
English Leather and Tinkerbell licensing arrangements. Interest income
declined as a result of the collection of a note receivable which was paid in
full in October, 1994. Amortization of intangibles increased as a result of
the inclusion of amortization of the British Sterling trademark for a full
year in 1995 compared to seven months in 1994. Interest expense increased
$43,000 as a result of the long term notes (net of repayments) issued in
connection with the British Sterling acquisition in May, 1994, and also
increased $447,000 as a result of higher short term loans outstanding during
1995 to finance higher receivables and inventories during the year and for
funds utilized to repay long term notes. Interest rates on borrowings were
approximately 100 basis points higher in 1995 than in 1994. The Company has
over $11,150,000 of domestic and foreign income tax loss carryforwards and
accordingly does not anticipate paying income taxes until future earnings
exceed the carryforwards.
10
<PAGE>
1994 COMPARED TO 1993
Consolidated net sales in 1994 were 38% higher than in 1993. This sales
increase resulted primarily from the acquisition of the British Sterling line
of men's toiletries in May, 1994 from the Speidel Division of Textron, Inc.
and from the introduction of the Timberline fragrance line for "Generation X"
young men. In addition, the Company introduced its Heaven Sent Vanilla line of
fragrance products, the Love's Frenzy product line and the Love's Clean &
Natural environmentally sensitive product line. All of these new brands and
products were sold through the Company's existing channels of distribution by
its regular salesforce. Sales of English Leather fragrances increased modestly
over 1993, and sales of Love's Baby Soft and Heaven Sent were slightly lower
than in 1993, excluding the new products. Sales of Tinkerbell products
increased almost $1,000,000, of which $642,000 came from the United Kingdom.
Lower domestic Tinkerbell sales of $1,090,000 were primarily the result of no
1994 sales to a customer with a sizable 1993 volume, and this decline was more
than offset by a decline in returns of $1,250,000. The increase in overall
consolidated sales was primarily the result of higher unit sales, as unit
sales price increases in 1994 were not significant.
Sales in the United States increased 45% as the result of new product
sales. This sales growth was achieved in spite of the fact that some retailers
continued to reduce their commitments to fragrance products, and most all
continued their efforts to minimize their inventory investment. Fragrance
sales were impacted by competition from "prestige" fragrances being sold to
the Company's customers and from companies with larger resources to commit to
advertising and marketing programs.
Canadian sales were up 13% in local currency and 7% in U. S. dollar
equivalent, and the operating loss was sharply reduced from the prior year.
Tinkerbell sales in the United Kingdom increased over 25% and are approaching
the volume necessary to achieve profitable operations. The effects of
inflation and exchange rate fluctuations were not material.
During the past few years, management has worked closely with the
customers concerning their level of anticipated sales. As a result, actual and
anticipated returns decreased by $100,000 in 1994 compared to 1993 despite the
significantly higher sales level in 1994, and the percentage of returns to
gross sales decreased to 15% in 1994 from 20% in 1993.
11
<PAGE>
Cost of sales declined in relation to sales from 59% of sales in 1993 to
54% in 1994. The primary reason for this improvement was the higher gross
margins on the new brands introduced in 1994, principally Timberline. In
addition, production costs were lower in 1994 due to higher manufacturing
volume. Selling and shipping expense increased from 34% of sales in 1993 to
37% in 1994. Shipping and distribution expenses were slightly lower in
relation to sales in 1994 than in 1993. Selling expenses remained the same
despite the large sales increase, reflecting the relatively fixed nature of
these expenses. Marketing expenses rose significantly from 17% of sales in
1993 to 23% in 1994 principally as a result of expenditures incurred in the
introduction of the Timberline fragrance line. General and administrative
expense increased $311,000, which resulted from an increase in the provision
for losses on accounts receivable. Personnel and other administrative costs
were the same as in 1993.
Royalty income decreased in 1994 due to lower amounts received from a
Tinkerbell licensee. Amortization of intangibles increased due to the
inclusion of amortization of the British Sterling trademark since June, 1994.
Interest expense increased $429,000 as the result of new long term debt
incurred during the year and increased $193,000 as the result of higher short
term loans outstanding during the year and a modest increase in interest rates
paid. Financing costs decreased in 1994 due to certain non-recurring charges
in early 1993 in connection with a prior financing agreement.
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 a financial institution expiring in
1999, which provides for a $17,500,000 line of credit, based on eligible
collateral. This line of credit may be increased to $20,000,000 during peak
seasonal periods. In 1995, the maximum amount outstanding on short-term
borrowings was $16,590,000. At December 31, 1995, short-term loans of
$10,296,000 were outstanding under the agreement. The borrowings were
subsequently reduced to $3,880,000 in February 1996. The revolving credit
agreement contains a prohibition on the payment of dividends if the Company
operates at a loss, and considers a material adverse change as a potential
event of default. There are no material commitments for capital expenditures.
12
<PAGE>
Net cash used in operating activities in 1995 was $2,071,000 and resulted
primarily from the loss incurred for the year. Depreciation and amortization
increased $175,000 due to a full year of British Sterling amortization in 1995
and a decrease in depreciation expense of $96,000. Accounts receivable
increased $2,072,000 due to a reduction in allowances for sales returns and
advertising from 1994 levels and decreased $1,171,000 as a result of lower
business activity in 1995. The decline in second half sales exceeded the
decline in receivables, reflecting slower payments by vendors. Inventories,
other current assets, accounts payable and other accrued expenses all
decreased as a result of the lower volume of business in 1995. The net cash
used in operations, for additions to plant and equipment and for payments of
long-term notes was mainly financed by an increase in short-term borrowings of
$4,263,000 at December 31, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, the Report of
Independent Auditors thereon and related schedule appear on pages F-2 to F-14.
See Index to Consolidated Financial Statements and Financial Statement
Schedules, page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is incorporated
by reference to the information under the caption "Election of Directors -
Information Concerning Nominees for Election as Directors" of the Definitive
Proxy Statement. Information with respect to the executive officers of the
Company is set forth in Item 1A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Item 11 is incorporated by reference to the
information under the caption "Election of Directors - Executive Compensation"
of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Item 12 is incorporated by reference to the
information under the caption "Election of Directors - Information Concerning
Nominees for Election as Directors" and "Election of Directors Principal
Shareholders" of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements - See accompanying Index to Consolidated
Financial Statements and Financial Statement Schedules, Page F-1.
(2) Financial Statement Schedules - See accompanying Index to
Consolidated Financial Statements and Financial Statement
Schedules, Page F-1.
(3) See Exhibit Index on page 16.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1995.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 19, 1996 By: /S/ Michael G. Kazimir, Jr.
---------------------------
Michael G. Kazimir, Jr.
Executive Vice President
Chief Operating Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ Michael G. Kazimir, Jr. /S/ Michael G. Kazimir, Jr.
- ---------------------------- ---------------------------
Michael G. Kazimir, Jr. Michael G. Kazimir, Jr.
as Attorney-in-Fact for: Executive Vice President
Gay A. Mayer, Chairman, Chief Financial and
President, Chief Executive Accounting Officer
Officer and Director March 19, 1996
Robert E. Mulcahy, III, Director
Paul Hallingby, Jr., Director
Laurette M. Beach, Director
Derek B. Van Dusen, Director
Bruce J. Klatsky, Director
March 19, 1996
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
3 (A) Certificate of Incorporation. Incorporated by reference
from the Registrant's Form 10-K for the fiscal
year ended December 31, 1980
3 (B) Amendment to the Certificate of Incorporation dated April 28, 1988.
Incorporated by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1988.
3 (C) Amendment to the Certificate of Incorporation dated June 19, 1988.
Incorporated by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1988.
3 (D) Amendment to the Certificate of Incorporation dated April 28, 1987.
Incorporated by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1987.
3 (E) Amendment to the Certificate of Incorporation dated April 28, 1994.
Filed herewith.
3 (F) By-Laws. Incorporated by reference from the Registrant's Form 10-K for
fiscal year ended December 31,1986.
10 Purchase and sale agreement, dated as of May 5, 1994, between
Textron, Inc. and MEM Company, Inc. Incorporated by reference
from the Registrant's Form 8-K dated May 20, 1994.
21 Subsidiaries of Registrant. Incorporated by reference from the
Registrant's Form 10-K for the fiscal year ended December 31,1992.
23 Consent of Accountants. Filed herewith.
24 Power of Attorney. Filed herewith.
27 Financial Data Schedule. Filed herewith.
</TABLE>
16
<PAGE>
MEM COMPANY, INC.
Index to Consolidated Financial Statements and Financial
Statement Schedules
The following consolidated financial statements of MEM Company, Inc. are
included in Item 8:
Page
----
Report of Independent Auditors F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4 & F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8
through
F-14
The following consolidated financial statement schedule of MEM
Company, Inc. is included in Item 14 (d):
II Valuation and Qualifying Accounts F-14
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
F-1
<PAGE>
Report of Independent Auditors
- ------------------------------
The Board of Directors and Stockholders
MEM Company, Inc.
We have audited the accompanying consolidated balance sheets of MEM
Company, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MEM Company, Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Hackensack, New Jersey
February 21, 1996
F-2
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales ........................ $ 44,825,314 $ 53,094,217 $ 38,453,774
Costs and expenses:
Cost of sales .................... 25,618,098 28,541,205 22,622,236
Selling and shipping expense ..... 15,108,538 19,612,873 13,281,251
General and administrative expense 5,215,135 5,202,902 4,892,234
------------ ------------ ------------
Total costs and expenses ..... 45,941,771 53,356,980 40,795,721
------------ ------------ ------------
(1,116,457) (262,763) (2,341,947)
Other income (expense):
Royalty income ................... 361,085 264,535 409,119
Interest income .................. 18,726 226,226 247,245
Amortization of intangibles ...... (477,460) (306,326) (57,936)
Other income (expense) ........... 5,124 11,816 (48,617)
Interest expense ................. (1,602,038) (1,112,403) (489,363)
Financing expense ................ (170,957) (149,362) (288,407)
------------ ------------ ------------
Net (loss) ....................... $ (2,981,977) $ (1,328,277) $ (2,569,906)
============ ============ ============
Per share, based on weighted
average shares outstanding .... $ (1.16) $ (.52) $ (1.00)
============ ============ ============
See accompanying notes.
</TABLE>
F-3
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
Assets
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash .............................................. $ 957,562 $ 1,128,897
Accounts receivable, less allowance for
doubtful accounts of $680,319 in 1995 and
$661,654 in 1994 ................................ 13,381,468 12,843,943
Inventories, at lower of cost (first-in, first-out)
or market:
Finished goods ................................ 6,021,947 6,095,908
Raw materials & work in process ............... 8,582,573 9,228,083
Prepaid expenses .................................. 825,377 1,163,589
------------ ------------
Total current assets .............................. 29,768,927 30,460,420
Property, plant & equipment, at cost:
Land .............................................. 341,752 340,829
Buildings & improvements .......................... 4,466,224 4,250,376
Machinery & equipment ............................. 11,812,562 11,174,123
Furniture & fixtures .............................. 2,485,590 2,347,180
------------ ------------
19,106,128 18,112,508
Less accumulated depreciation ..................... (13,924,996) (12,788,644)
------------ ------------
Net property, plant & equipment ................... 5,181,132 5,323,864
Other assets:
Advance royalty payments & license
agreements - net of accumulated amortization
of $747,050 in 1995 and $604,490 in 1994 ...... 567,450 710,010
Net cash value of life insurance and other assets . 208,132 193,729
Intangible assets - net of accumulated amortization
of $1,240,107 in 1995 and $761,765 in 1994 ..... 10,098,702 10,572,940
------------ ------------
Total assets ...................................... $ 45,824,343 $ 47,260,963
============ ============
See accompanying notes.
</TABLE>
F-4
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Loans payable .......................... $ 10,791,385 $ 6,528,016
Accounts payable ....................... 3,523,504 4,488,160
Accrued expenses ....................... 853,001 1,004,720
Accrued advertising and promotion ...... 1,075,988 1,303,667
Notes payable-current portion .......... 1,553,990 1,534,066
------------ ------------
Total current liabilities .............. 17,797,868 14,858,629
Long-term notes:
8% - payable to 1997 .............. 644,000 1,288,000
8.19% - payable to 1998 .............. 620,521 642,039
10.5% - payable to 1999 .............. 2,105,292 2,976,585
------------ ------------
Total long-term notes .................. 3,369,813 4,906,624
Commitments and contingencies
Stockholders' equity:
Common stock, $.05 par value;
shares authorized: 6,000,000;
issued: 3,000,000 .................. 150,000 150,000
Additional paid-in capital ............. 3,090,110 3,090,110
Retained earnings ...................... 26,460,779 29,442,756
------------ ------------
29,700,889 32,682,866
Less common stock in treasury,
at cost (1995 - 416,816 shares;
1994 - 419,816) ..................... (4,597,430) (4,607,180)
Cumulative translation adjustment ...... (446,797) (579,976)
------------ ------------
Total stockholders' equity ............. 24,656,662 27,495,710
------------ ------------
Total liabilities and stockholders'
equity .............................. $ 45,824,343 $ 47,260,963
============ ============
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
Additional
Common Paid-in Retained Treasury Translation
Stock Capital Earnings Stock Adjustment Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 ............ $ 150,000 $ 3,090,110 $ 33,340,939 $ (4,644,010) $ (348,135) $ 31,588,904
Issuance of treasury shares .......... -- -- -- 6,500 -- 6,500
Translation adjustment ............... -- -- -- -- (106,859) (106,859)
Net income (loss) .................... -- -- (2,569,906) -- -- (2,569,906)
-------------------------------------------------------------------------------------------
Balance December 31, 1993 ............ 150,000 3,090,110 30,771,033 (4,637,510) (454,994) 28,918,639
Issuance of treasury shares .......... -- -- -- 30,330 -- 30,330
Translation adjustment ............... -- -- -- -- (124,982) (124,982)
Net income (loss) .................... -- -- (1,328,277) -- -- (1,328,277)
-------------------------------------------------------------------------------------------
Balance December 31, 1994 ............ 150,000 3,090,110 29,442,756 (4,607,180) (579,976) 27,495,710
Issuance of treasury shares .......... -- -- -- 9,750 -- 9,750
Translation adjustment ............... -- -- -- -- 133,179 133,179
Net income (loss) .................... -- -- (2,981,977) -- -- (2,981,977)
-------------------------------------------------------------------------------------------
Balance December 31, 1995 ............ $ 150,000 $ 3,090,110 $ 26,460,779 $ (4,597,430) $ (446,797) $ 24,656,662
===========================================================================================
See accompanying notes.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
MEM COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ........................... $ (2,981,977) $ (1,328,277) $ (2,569,906)
Depreciation and amortization ............... 1,719,514 1,640,308 1,451,331
Provision for losses on accounts receivable . 368,330 445,065 119,098
(Increase) decrease in accounts receivable .. (901,284) (4,762,020) 1,705,326
(Increase) decrease in inventory ............ 748,628 (3,512,810) 2,079,755
(Increase) decrease in other current assets . 337,909 20,741 270,840
Increase (decrease) in accounts payable ..... (964,631) 2,205,017 (377,412)
Increase (decrease) in other accrued expenses (383,047) 980,500 (315,929)
(Increase) decrease in other assets ......... (14,403) (15,253) (27,941)
------------ ------------ ------------
Net cash (used in ) provided by operating
activities ............................... (2,070,961) (4,326,729) 2,335,162
Cash Flows from Investing Activities
Additions to plant and equipment ............ (946,333) (1,023,003) (719,030)
Payment in lieu of future royalties ......... -- -- (500,000)
Acquisition of intangibles .................. -- (6,409,215) --
Collection of note receivable ............... -- 2,635,989 240,473
------------ ------------ ------------
Net cash (used in) investing activities ..... (946,333) (4,796,229) (978,557)
Cash Flows from Financing Activities
Short-term borrowings ....................... 16,894,091 14,709,272 7,326,415
(Repayments of) short-term borrowings ....... (12,622,580) (9,209,825) (9,121,954)
Proceeds from long-term notes ............... -- 7,050,000 --
(Payments of) long-term notes ............... (1,535,260) (3,220,833) (12,691)
Issuance of treasury stock .................. 9,750 8,250 6,500
------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................... 2,746,001 9,336,864 (1,801,730)
Effect of exchange rate changes on cash ..... 99,958 (77,028) (11,643)
------------ ------------ ------------
Net increase (decrease) in cash ............. (171,335) 136,878 (456,768)
Cash at the beginning of the year ........... 1,128,897 992,019 1,448,787
------------ ------------ ------------
Cash at the end of the year ................. $ 957,562 $ 1,128,897 $ 992,019
============ ============ ============
Supplemental cash flow data:
Interest paid ............................ $ 1,581,743 $ 995,727 $ 530,488
============ ============ ============
See accompanying notes.
</TABLE>
F-7
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
NOTE 1. ACCOUNTING POLICIES
Nature of business: The Company's business consists of manufacturing, selling
and distributing a diversified line of toiletries and accessories to retailers
of all sizes. The Company operates in one industry segment. One national
customer represented 13% of net sales in 1995 and 14% in 1994. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Financial information about geographic
data is disclosed in Item 1(b) of the Company's 1995 Form 10-K.
Consolidation: The consolidated financial statements include the accounts of
the Company's subsidiaries. All material intercompany items have been
eliminated. The assets and liabilities of foreign subsidiaries have been
translated at the exchange rate at the balance sheet date. Revenues, expenses,
gains and losses are translated at the average rate for the year, determined
by averaging the rates at the end of each calendar quarter.
Deferred financing costs: Deferred financing costs are included in prepaid
expenses and are being amortized over the life of the loans.
Intangible assets: Intangible assets arising from the excess of purchase price
of subsidiaries acquired prior to 1971 over the fair value of the net assets
acquired have not been amortized. Other intangible assets are being amortized
on a straight-line basis over twenty to forty years. Impairments are
recognized whenever events or changes in circumstances indicate that the
carrying amount of intangible assets may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than its carrying
value. In 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121 and utilized its provisions in the evaluation of
intangible and other long-lived assets. The adoption of SFAS No. 121 had no
effect on the financial statements.
Depreciation: For financial accounting purposes, depreciation is provided on
the straight-line basis as follows: buildings and improvements - 3 to 25
years; machinery and equipment - 5 to 12 years; furniture and fixtures - 4 to
10 years. For income tax purposes, the Company generally uses accelerated
depreciation.
Advance royalty payments and license agreements: License agreements and
nonrefundable royalty payments in connection with a licensing agreement are
being amortized as selling expense on a straight-line basis which averages
seventeen years.
F-8
<PAGE>
Royalty income: Royalty income represents amounts earned by licensing the
English Leather and Tinkerbell trademarks for use by various third parties.
Revenue recognition: Revenues are recorded at the time of shipment of
merchandise.
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 in the financial statements
and accompanying notes. These estimates principally include provisions for
sales returns and allowances. Actual results could differ from those
estimates.
NOTE 2. BRITISH STERLING ASSET PURCHASE
On May 20, 1994, the Company acquired certain assets relating to the British
Sterling fragrance line of products from the Speidel Division of Textron, Inc.
for $9,182,000, of which $8,145,000 was for intangibles, $1,029,000 for
inventories and $8,000 for other assets. Other direct costs of the acquisition
were $196,215. The purchase was financed by a term loan of $7,050,000 and a
note for $1,932,000 payable to Textron. The balance of $396,215 was paid from
the Company's working capital.
NOTE 3. CREDIT ARRANGEMENTS AND NOTES PAYABLE
In March, 1993, the Company obtained a three year secured financing agreement
with a financial institution which provided for a revolving line of credit of
up to $15,000,000 based on eligible collateral, for working capital purposes.
The agreement contains certain covenants generally associated with this type
of financing including the pledging of substantially all assets as collateral,
a prohibition on the payment of dividends and considers a material adverse
change as a potential event of default. Interest on borrowings is at the Bank
of America prime rate (8 1/2% at December 31, 1995) plus 2% and an unused line
fee of 1/4% is payable at various levels of borrowing. Previous to June, 1995,
the interest rate had been prime plus 2.5%.
In connection with the acquisition described in Note 2 above, the agreement
was amended in May, 1994 to provide for a five year term loan of $7,050,000,
extend the maturity of the agreement by two years to April, 1998 and increase
the total permitted borrowings at any time to $17,500,000 (including the
outstanding term loan). During peak seasonal periods, this limit may be
increased to $20,000,000. The term loan was reduced by $2,465,076 in October,
1994 from the collection of a note receivable held by the Company. Principal
of the term loan is payable in equal monthly installments over five years, and
interest is determined on the same basis as the revolving line of credit. The
agreement was amended in June, 1995 to lower the interest rate and extend the
maturity by one year to April, 1999.
F-9
<PAGE>
Under the terms of the acquisition, the seller received an unsecured note
payable for $1,932,000 at 8% interest. This note is payable in three equal
annual installments which began June 1, 1995.
The Company's Canadian subsidiary has pledged its land and building as
security for a 8.19% note payable which is payable in monthly principal
installments of $3,233 until October, 1998 when the balance is due.
The aggregate payments due on all long-term notes payable during each of the
three years subsequent to December 31, 1996 are: 1997 - $1,553,990; 1998 -
$1,452,931; 1999 - $362,892.
The Company's United Kingdom subsidiary has a line of credit of $932,000 for
short term financing at various interest rates, of which $494,935 was
outstanding at December 31, 1995. This line is secured by the subsidiary's
accounts receivable and inventory.
The weighted average interest rate on short-term borrowings outstanding at
December 31, 1995 and 1994 was 10.4% and 11%, respectively.
NOTE 4. INCOME TAXES
At December 31, 1995, the Company had loss carryforwards for U. S. tax
purposes of approximately $9,609,000 of which $679,000 expires in 2006,
$3,834,000 in 2007, $1,703,000 in 2008, $625,000 in 2009 and $2,768,000 in
2010. The Company also had approximately $1,541,000 of foreign tax loss
carryforwards as of December 31, 1995. Approximately $751,000 of these loss
carryforwards will expire between 1998 and 2002 while the remaining $790,000
can be carried forward indefinitely. Under the provisions of SFAS No. 109, a
valuation allowance is established if, based on the weight of available
evidence, it is more likely than not that a portion of the deferred asset will
not be realized. Consequently, at December 31, 1995, the Company has
established a valuation allowance against a portion of the above loss
carryforwards.
Income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic .............. $(2,892,596) $(1,151,029) $(1,974,147)
Foreign ............... (89,381) (177,248) (595,759)
----------- ----------- -----------
$(2,981,977) $(1,328,277) $(2,569,906)
=========== =========== ===========
</TABLE>
F-10
<PAGE>
The components of the net deferred tax asset and liability as of December
31,1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment ........... $ 419,000 $ 443,000
----------- -----------
Total deferred tax liability ............ $ 419,000 $ 443,000
=========== ===========
Deferred tax assets:
Net operating loss carryforwards ........ $ 4,460,000 $ 3,360,000
Valuation allowance for deferred
tax assets ......................... (4,041,000) (2,917,000)
----------- -----------
Net deferred tax asset .................. 419,000 443,000
----------- -----------
Net deferred tax liability .............. $ 0 $ 0
=========== ===========
</TABLE>
The reconciliation of the (benefit) for federal income tax in the financial
statements and the (benefit) computed at the statutory rates are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(Benefit) at statutory rate ........ $(l,013,872) $(451,614) $(873,768)
Limitation on utilization of
domestic losses ............... 937,583 347,150 632,110
Limitation on utilization of
foreign losses ................ 30,389 60,264 202,558
Other - Net ........................ 45,900 44,200 39,100
----------- --------- ---------
$ 0 $ 0 $ 0
=========== ========= =========
</TABLE>
NOTE 5. LEASES
The Company rents warehouse and office space under a lease which expires in
2003. The Company is also responsible for the payment of insurance, taxes and
maintenance of the property. The future minimum rental commitment for this
lease is as follows: 1996 - $62,000; 1997 - $62,000; 1998 - $62,000; 1999 -
$62,000; 2000 - $62,000; thereafter - $186,000. Rental expense amounted to
$305,000 in 1995, $351,000 in 1994 and $342,000 in 1993.
F-11
<PAGE>
NOTE 6. STOCK OPTIONS
Under the 1987 Non-Qualified Stock Option Plan, 240,000 shares were authorized
for issuance. No options have been granted under the Plan.
Under the 1991 Stock Incentive Plan, 200,000 shares of common stock were
authorized for issuance to key employees at an option price which is the fair
market value on the date of the grant. Awards made under the Plan may be
options or contingent options. Contingent options will become exercisable in
whole or in part based upon an evaluation of the employee's performance during
the year in which the option is granted.
Under the 1993 Non-Employee Stock Incentive Plan, 50,000 shares of common
stock were authorized for issuance to non-employee members of the Board of
Directors and certain individuals who provide consulting services to the
Company at an option price which is the fair market value on the date of
grant.
Options issued under the Plans to date are exercisable in various
installments, and are exercisable in full after two years from grant.
Information with respect to options is as follows:
<TABLE>
<CAPTION>
Option Price
Number of Shares per Share
---------------- -------------
<S> <C> <C>
Outstanding - December 31, 1992 43,375 $5.00
Granted 35,750 $4.13 - $5.00
Exercised (500) $5.00
Cancelled (7,000) $5.00
-------
Outstanding - December 31, 1993 71,625 $4.13 - $5.00
Granted 20,700 $4.13
Cancelled (10,000) $4.13 - $5.00
-------
Outstanding - December 31, 1994 82,325 $4.13 - $5.00
Granted 31,000 $3.50 - $3.88
Cancelled (4,000) $3.50 - $5.00
-------
Outstanding - December 31, 1995 109,325 $3.50 - $5.00
=======
</TABLE>
Options on 74,275 shares were exercisable at December 31, 1995.
F-12
<PAGE>
NOTE 7. POSTRETIREMENT BENEFITS
The Company does not provide any postretirement health care, life insurance or
other welfare benefit programs to current or former employees except that the
Company maintains a defined benefit pension plan for employees who meet
certain eligibility requirements. Benefits under the plan are based on salary
and years of service. For the past three years, no contributions have been
required.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned
during the period ............... $ 190,300 $ 182,915 $ 226,383
Interest cost on projected
benefit obligation .............. 291,383 291,992 308,755
Investment return on plan assets ..... (929,056) 204,838 (471,152)
Other ................................ 452,161 (710,709) (31,352)
--------- --------- ---------
Net pension cost (benefit) .......... $ 4,788 $ (30,964) $ 32,634
========= ========= =========
Assumptions:
Discount rate ................... 8% 8% 8%
Compensation increases .......... 5% 5% 5%
Rate of return on assets ........ 8% 8% 8%
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation between the plan's funded status and the pension asset as
recorded in the Company's balance sheet is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Plan's assets at fair value,
primarily stocks and bonds ..... $ 5,115,894 $ 4,295,427 $ 5,121,274
Plan's projected benefit obligation (3,676,167) (3,699,488) (3,898,265)
----------- ----------- -----------
Funded status ..................... 1,439,727 595,939 1,223,009
Unrecognized net asset to be
amortized over 13 years ........ (565,624) (676,531) (787,438)
Unrecognized prior service cost ... 85,093 95,864 106,635
Unrecognized asset (gain)
over expected return ........... (947,985) 727 (557,171)
----------- ----------- -----------
Prepaid (accrued) pension cost .... $ 11,211 $ 15,999 $ (14,965)
=========== =========== ===========
Actuarial present value of
accumulated benefit obligation:
Vested ......................... $ 2,557,886 $ 2,636,587 $ 2,532,562
Not yet vested ................. 160,700 148,055 175,622
----------- ----------- -----------
Accumulated benefit obligation .... $ 2,718,586 $ 2,784,642 $ 2,708,184
=========== =========== ===========
</TABLE>
F-13
<PAGE>
NOTE 8. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a schedule of key financial data by quarter for the years 1995
and 1994.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Gross Average shares
Quarters Net sales profit Net income Net income outstanding
Ended (000) (000) (000) per share (000)
- -------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
03/31/94 $ 5,241 $ 2,159 $(1,087) $ (.42) 2,573
06/30/94 $ 5,647 $ 1,870 $(2,129) $ (.83) 2,573
09/30/94 $19,057 $ 9,797 $ 1,162 $ .45 2,575
12/31/94 $23,149 $10,727 $ 726 $ .28 2,576
03/31/95 $ 6,282 $ 2,813 $ (994) $ (.39) 2,580
06/30/95 $ 4,704 $ 1,970 $(2,202) $ (.85) 2,580
09/30/95 $16,699 $ 7,804 $ 554 $ .22 2,580
12/31/95 $17,140 $ 6,620 $ (340) $ (.14) 2,581
- ---------------------------------------------------------------------------------------
</TABLE>
Since the Company's business is seasonal in nature, comparisons among quarters
of the year are not necessarily indicative of a trend in the results of
operations, but principally reflect this seasonality.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
MEM COMPANY, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1994 and 1993
Additions Deductions
Balance at charged to write-off of Balance
beginning costs & uncollectible at end
Description of year expenses accounts of year
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Allowance for
doubtful
accounts:
1995 $661,654 $368,330 $349,665 $680,319
1994 $450,136 $445,065 $233,547 $661,654
1993 $496,368 $119,098 $165,330 $450,136
</TABLE>
Accounts receivable are stated net of a gross provision for merchandise
returns and other items in the amounts of $4,200,000 and $5,600,000 and
$3,700,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The net deferred tax asset is stated net of valuation allowances of
$4,041,000, $2,917,000 and $2,467,000 for the years ended December 31, 1995,
1994 and 1993, respectively. After deducting the deferred tax liability, the net
deferred tax asset was $-0- in each of the three years.
F-14
Exhibit E
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 JUNE 30, 1996
( ) 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.
-----------------
(Exact name of Registrant as specified in its charter)
NEW YORK 13-5546930
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
UNION STREET EXTENSION
NORTHVALE, NEW JERSEY 07647
----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 767 - 0100
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. 2,583,184 shares of
Common Stock were outstanding at June 30, 1996.
<PAGE>
PART I
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
6/30/96 12/31/95
------------ ------------
<S> <C> <C>
ASSETS:
- -------
Current assets:
Cash $ 160,670 $ 957,562
Accounts receivable, less allowance for doubtful accounts
of $648,355 at 6/30/96 and $680,319 at 12/31/95 5,045,762 13,381,468
Inventories, at lower of cost (first-in, first out) or market:
Finished goods 7,448,374 6,021,947
Raw materials and work in process 11,972,955 8,582,573
Prepaid expenses 1,450,637 825,377
------------ ------------
Total current assets 26,078,398 29,768,927
Property, plant and equipment, at cost 19,269,804 19,106,128
Less accumulated depreciation (14,485,038) (13,924,996)
------------ ------------
Net property, plant and equipment 4,784,766 5,181,132
Other assets:
Advance royalty payments - net 496,170 567,450
Other assets 250,516 208,132
Intangibles - net 9,859,941 10,098,702
------------ ------------
Total assets $ 41,469,791 $ 45,824,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loans payable to financial institutions and banks $ 10,032,496 $ 10,791,385
Accounts payable 5,764,558 3,523,504
Accrued expenses 1,629,645 1,928,989
Notes payable - current portion 1,553,990 1,553,990
------------ ------------
Total current liabilities 18,980,689 17,797,868
Long-term notes 2,274,005 3,369,813
Commitments and contingencies
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 22,034,385 26,460,779
Less: Common stock in treasury, at cost (4,597,430) (4,597,430)
Cumulative translation adjustment (461,968) (446,797)
------------ ------------
Total stockholders' equity 20,215,097 24,656,662
------------ ------------
Total liabilities and stockholders' equity $ 41,469,791 $ 45,824,343
============ ============
</TABLE>
-2-
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1996 1995 1995
QUARTER YEAR TO DATE QUARTER YEAR TO DATE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,258,979 $ 9,180,831 $ 4,703,688 $ 10,985,222
Costs and expenses:
Cost of sales 2,919,048 5,663,400 2,733,824 6,202,368
Selling and shipping expense 2,245,664 4,209,123 2,527,112 4,807,886
General and administrative expense 1,317,987 2,679,238 1,226,176 2,441,254
------------ ------------ ------------ ------------
Total costs and expenses 6,482,699 12,551,761 6,487,112 13,451,508
------------ ------------ ------------ ------------
(2,223,720) (3,370,930) (1,783,424) (2,466,286)
Other income (expense):
Royalties, interest and other income 43,035 132,080 72,405 177,170
Amortization of intangibles (119,381) (238,761) (119,358) (238,689)
Merger expenses (288,276) (288,276) -- --
Interest expense (303,961) (585,046) (323,900) (587,894)
Financing expense (42,293) (75,461) (47,898) (80,295)
------------ ------------ ------------ ------------
Net (loss) $ (2,934,596) $ (4,426,394) $ (2,202,175) $ (3,195,994)
============ ============ ============ ============
Net (loss) per share $ (1.13) $ (1.71) $ (.85) $ (1.24)
============ ============ ============ ============
Average shares outstanding 2,583,184 2,583,184 2,580,184 2,580,184
</TABLE>
Net income (loss) per share was determined by dividing net income (loss) by
the average number of shares outstanding during the respective period.
-3-
<PAGE>
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(4,426,394) $(3,195,994)
Depreciation and amortization 869,947 844,071
Provision for losses on accounts receivable 157,194 108,942
(Increase) decrease in accounts receivable 8,172,581 7,226,063
(Increase) decrease in inventory (4,814,564) (6,047,332)
(Increase) decrease in other current assets (624,633) (204,000)
(Increase) decrease in other assets (42,384) (13,838)
Increase (decrease) in accounts payable 2,241,316 729,137
Increase (decrease) in accrued expenses (298,931) (988,162)
----------- -----------
Net cash provided by (used in) operating activities 1,234,132 (1,541,113)
Cash Flows from Investing Activities:
Additions to plant and equipment (163,592) (496,887)
----------- -----------
Net cash (used in) investing activities (163,592) (496,887)
Cash Flows from Financing Activities:
Short-term borrowings 5,656,747 8,611,394
(Repayments of) short-term borrowings (6,416,264) (6,316,076)
(Payments of) long-term notes (1,095,809) (1,089,159)
----------- -----------
Net cash (used in) provided by financing activities (1,855,326) 1,206,159
Effect of exchange rate changes on cash (12,106) 1,304
----------- -----------
Net (decrease) in cash (796,892) (830,537)
Cash at the beginning of the year 957,562 1,128,897
----------- -----------
Cash at the end of the period $ 160,670 $ 298,360
=========== ===========
</TABLE>
The information on pages 2-4 reflects all adjustments of a normal recurring
nature which the Company considers necessary for a fair presentation of the
results for those periods.
-4-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended June 30, 1996 and 1995
- ---------------------------------------
Net sales for the first half of 1996 were 16% lower than in the prior
year period. Gross sales decreased 9% or $1,425,000 and returns and allowances
increased 10% or $380,000. The decline in gross sales is the result of lower
sales of Timberline and British Sterling men's fragrances, Tinkerbell products,
and to a lesser extent, Heaven Sent women's products. The sales decline
principally occurred in the first quarter of the year as a result of a
relatively modest performance at Christmas by major retailers with the
consequent carryover of inventories into the first quarter of 1996. This
carryover also contributed to an increase in returns and allowances in the
second quarter compared to the same period last year. Net sales in the United
Kingdom declined as a result of higher returns and allowances. Canadian
business continued to be weak, with lower gross sales and higher returns than
in the first six 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 primarily as a result of
the higher returns experienced in the second quarter of 1996 compared to 1995.
Cost of goods was also higher in relation to sales due to the impact of lower
than normal sales prices on certain inventories sold during the period and
other inventory valuation adjustments.
Selling and shipping expense increased from 44% of sales to 46% in
1996. The primary reason for this increase is the relatively fixed nature of
the Company's selling expense. Distribution and marketing expenses were
slightly lower in relation to sales in 1996 compared to 1995. General and
administrative expense increased $238,000, primarily due to increased
compensation expenses and also for increases in management information systems
expenses and a higher provision for doubtful accounts.
Royalties, interest and other income declined primarily due to
additional miscellaneous other expenses compared to the first half of 1995.
Merger expenses of $288,000 through June 30, 1996 were professional fees
incurred in connection with the work of the Special Committee of the Board of
Directors and their advisors. Interest expense was at the same level as in the
first half of 1995. Interest on 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.
-5-
<PAGE>
Quarter Ended June 30, 1996 and 1995
- ------------------------------------
Net sales declined by $445,000 as a result of a decline in gross sales
of $135,000 and an increase in returns and allowances of $310,000. The decline
in gross sales was due to lower sales of Tinkerbell products. The increase in
returns and allowances resulted from Tinkerbell returns in the United States,
and from higher returns and allowances in both Canada and the United Kingdom.
Cost of sales increased in relation to sales from 58% in 1995 to 68% in 1996.
The reasons for the change are substantially the same as those mentioned in the
six months discussion. Selling and shipping expense declined from 54% of sales
to 53%, primarily as a result of lower marketing expenses. General and
administrative expense increased $92,000 as a result of an increase in the
provision for doubtful accounts of $50,000 and the remainder was principally
from increases in compensation expense. 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. At June 30, 1996, the term loan outstanding was
$2,541,000 and $9,429,000 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. In
the first half of 1996, the Company reduced its receivables to a greater extent
than in 1995, reduced its investment in inventory, and increased its payables
and accrued expenses, resulting in cash provided by operations of $1,234,000 as
compared to cash used in operations of $1,541,000 in 1995.
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.
-6-
<PAGE>
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.
Part II
MEM Company, Inc.
Item 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 defendant 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.
-7-
<PAGE>
PART II
MEM COMPANY, INC.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 23, 1996, an annual meeting of shareholders of the Company
was held at which (i) directors were elected to serve until their successors
shall have been elected and shall have qualified and (ii) the selection of
Ernst & Young LLP as independent auditors for the Company for the fiscal year
ending December 31, 1996 was ratified. The number of votes cast for, against or
withheld/abstained with regard to the each nominee or matter are set forth
below.
Withheld
For Against Abstained
--- ------- ---------
Election of Directors
Elizabeth C. Mayer 2,493,805 N/A 11,884
Paul Hallingby, Jr. 2,440,516 N/A 65,173
Gay A. Mayer 2,493,605 N/A 12,084
Derek B. Van Dusen 2,494,805 N/A 10,884
Robert E. Mulcahy III 2,494,805 N/A 10,884
Laurette M. Beach 2,494,905 N/A 10,784
Bruce J. Klatsky 2,495,005 N/A 10,684
Ratification of Auditors 2,502,009 2,742 938
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
August 6, 1996
-8-
EXHIBIT F
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996.
Commission file number 33-87280
RENAISSANCE COSMETICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1396287
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
955 MASSACHUSETTS AVENUE
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip code)
(617) 497-5584
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the issuer (1) 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
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of June 15, 1996, there were outstanding 721,168 shares
of the registrant's common stock, $.01 par value per share.
Documents Incorporated By Reference: None.
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C>
PART I.......................................................................................................................4
Item 1. Business.................................................................................................4
Item 2. Properties..............................................................................................13
Item 3. Legal Proceedings.......................................................................................13
Item 4. Submission of Matters to a Vote of Security-Holders.....................................................14
PART II.....................................................................................................................15
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters...............................................................15
Item 6. Selected Financial Data.................................................................................15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................17
Item 8 Financial Statements and Supplementary Data..............................................................20
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................................................47
PART III....................................................................................................................48
Item 10. Directors and Executive Officers of the Registrant.....................................................48
Item 11. Executive Compensation.................................................................................52
Item 12. Security Ownership o f Certain Beneficial Owners and Management........................................54
Item 13. Certain Relationships and Related Transactions.........................................................56
PART IV.....................................................................................................................58
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................58
2
</TABLE>
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Form 10-K, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are typically identified by their inclusion of phrases such as "the
Company anticipates," "the Company believes" and other phrases of similar
meaning. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: general
economic and business conditions; competition; development and operating
costs; advertising and promotional efforts; brand awareness; acceptance of new
product offerings; changes in business strategy or development plans; quality
of management; availability, terms, and development of capital; and other
factors referenced in this Form 10-K.
3
<PAGE>
PART I
------------
ITEM 1. BUSINESS.
GENERAL
The Company was incorporated in Delaware in 1994. Its principal
executive offices are located at 955 Massachusetts Avenue, Cambridge,
Massachusetts and its telephone number is (617) 497-5584.
Renaissance Cosmetics, Inc., through its subsidiaries
(collectively, the "Company"), manufactures and markets a variety of
artificial fingernail and fragrance products in the United States and
internationally. The following table sets forth the principal brands
manufactured and marketed by the Company:
<TABLE>
<CAPTION>
ARTIFICIAL FINGERNAIL PRODUCTS Fragrances
<S> <C> <C> <C>
La Joie Quikfile Chantilly Tabu
Press & Go Quickshine Raffinee Ambush
Petite Press & Go Filepro Lutece Canoe
Sport Press & Go Pro 10 Alyssa Ashley Musk Canoe-Sport
Quik Fit Pro 10 Nail Lacquer Demi-Jour Herbissimo
Sculpture Quick UltraGel Gel Nails Monsieur Musk Classic Gardenia
Sculpture Quik II with Built-In Color French Garden Flowers White Chantilly
Wrap Quick Nail Fetish! English Waterlilys DREAMS BY TABU
Parfums Parquet's French Vanilla
</TABLE>
Each of the brands listed above is a trademark owned by or licensed to the
Company.
ARTIFICIAL FINGERNAIL PRODUCTS. The Company manufactures and
markets fingernail care products under the brand names of LaJoie and Pro10.
The LaJoie line is marketed as an easy-to-use line of artificial fingernail
products, acrylic applications and accessories. This line includes full-length
artificial fingernails, fingernail tips, and kits of basic "fingernail
sculpting" materials for simple self-application and related accessories.
The Pro10 line is a leading professional "salon-standard"
fingernail care line sold through retailers. This line includes artificial
fingernail tips, a selection of alternative coatings and salon-quality
abrasives. These products are similar to those commonly used by professional
fingernail technicians, but are designed, formulated, and packaged for retail
purchase. This line of products also permits customers to maintain their nails
in an unenhanced, "natural state," and therefore also includes a line of nail
strengtheners, nail builders, finish coats, and cuticle creams.
Each of the LaJoie and Pro10 lines includes products that permit
customers to apply an overlay, or a coating, over the natural fingernail or
the natural fingernail as extended by an
4
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artificial fingernail tip, in order to harden and smooth the fingernail
surface. The LaJoie overlay is an acrylic, while the Pro10 line offers
acrylic, silk wrap and gel overlay products.
FRAGRANCE PRODUCTS. The women's and men's fragrance products
manufactured and marketed by Dana include some of the oldest and most
recognized brand names in the industry. The Company markets these products
toward the high-quality, value-oriented mass-market segment of the market.
Among the Company's better-known brand names are Chantilly and
Tabu. Introduced in 1941 and 1931, respectively, Chantilly and Tabu are two of
the oldest brand name fragrances in the United States. Previously marketed
through department stores, in the 1970's Chantilly was redirected to the
mass-market and second-tier department stores where it is merchandised as a
high-end product. Both the Chantilly and the Tabu lines include a number of
fragrances, sprays, bath gels, powders and lotions. Based upon Chantilly's and
Tabu's longevity in the market and market share, the Company believes that the
Chantilly and Tabu brands enjoy significant customer loyalty and name
recognition and that many customers purchasing these products today have been
buying the product for more than 20 years.
A major men's fragrance brand of the Company is Canoe. Introduced
in the late 1950's, Canoe was originally sold as a department store fragrance,
and in the 1970's it was redirected to the mass-market segment of the
fragrance market.
The Company's Ambush line was introduced in 1962 to capitalize on
the large number of women who were buying Canoe for their own use. The
Company's Herbissimo line was originally introduced in Spain and then to the
U.S. market.
The Company's Raffinee fragrance was introduced in 1982 as a
department store fragrance. In 1994 Raffinee was marketed as a high-end
fragrance within the mass-market segment. In 1984, Lutece was launched as a
follow-on to the Raffinee line, designed and created to address the upscale,
glamour segment of the mass-market.
The Company's Alyssa Ashley Musk fragrance line, which was
introduced in 1972, was created to address the popular musk trend which
occurred at that time. The product achieved strong growth and customer loyalty
during the 1970s and 1980s and is currently sold in more than 13,000 retail
outlets. Within the musk family, the Company also offers Monsieur Musk for men
which includes a full range of products comprised of aftershave, cologne and
deodorant. The Monsieur Musk line is sold in approximately 2,500 retail
outlets.
The Company's other fragrance lines include French Vanilla, English
Waterlilys, French Garden Flowers and Demi-Jour. These fragrances are
generally marketed in a variety of formats including sprays, pour-bottles,
powders and lotions. The Company believes its fragrances have multi-ethnic and
multi-generational appeal to buyers in the mass-market.
5
<PAGE>
PRODUCT DEVELOPMENT AND NEW PRODUCTS
The Company's research and development activity primarily is
conducted by Company personnel, utilizing consumer focus groups, tests in
fingernail care salons and consumer questionnaires. By focusing on
product-development activities, the Company attempts to identify and develop
new products quickly and efficiently in response to market opportunities.
Within the artificial fingernail segment, the Company introduced a
line of nail lacquer under the Pro10 brand in February 1995. With its
successful launch, Pro10 is now outselling several major and minor brands. In
February 1996, the Company introduced UltraGel Gel Nails with Built-In Color,
a line of gel nails with a simple, two-step application, and in January 1996,
it launched Nail Fetish!, a line of nail art, lacquer, files, tips and glues
for the teenage consumer. In addition, the Company is developing a number of
additions to its existing product line, including fingernail treatments and
cuticle removers and treatments.
In the fragrance segment, the Company launched its Parfums
Parquet's French Vanilla line in October 1994. The product was created and
designed to address the emerging demand for fragrances based on the scent of
vanilla extract. This line consists of two fragrance sprays and has already
secured placement in over 9,000 retail outlets. In the Spring of 1995, the
Company introduced a new fragrance line, Classic Gardenia, which is geared for
women over 25 years of age and is positioned as a romantic fragrance, and in
August 1995, it launched White Chantilly, which, with a lighter scent and
prestige-like packaging at a mass-market price, aims toward a younger
audience. In February 1996, the Company introduced DREAMS BY TABU, a classic
"daytime" female fragrance, which will be marketed as Tabu's younger sister.
ACQUISITIONS
In 1994, the Company completed four acquisitions:
THE HOUBIGANT ACQUISITION. In July and August 1994, the Company
entered into three license agreements (collectively, the "Houbigant
Acquisition") pursuant to which it obtained certain exclusive worldwide rights
to manufacture and distribute the mass-market fragrances formerly marketed by
Houbigant, Inc. (the "Houbigant Fragrances"). The primary license (the
"Houbigant Western Hemisphere License") provides the Company with exclusive
rights in the western hemisphere (excluding Canada) to 11 of the Houbigant
Fragrances (including Chantilly, Lutece, Raffinee, and French Vanilla). The
second license provides the Company with exclusive rights in the eastern
hemisphere to 11 of the Houbigant Fragrances. Each of these two licenses is
with Houbigant, Inc. and has an initial term of seven years with options for
seven additional five-year terms, or a total of 42 years if all of the options
are exercised. Since November 18, 1993, Houbigant, Inc. has been the subject
of a proceeding under Chapter 11 of the United States Bankruptcy Code. The
third license, with Harby's Corporation NV, provides the Company with
exclusive western hemisphere rights to the Houbigant Fragrances
6
<PAGE>
that are marketed under the Alyssa Ashley name (including Alyssa Ashley Musk
and French Garden Flowers) for a total term of 25 years if all options for
additional terms are exercised.
THE COSMAR ACQUISITION. In August 1994, the Company purchased the
artificial fingernail assets and business of its predecessor for an aggregate
purchase price of $66.3 million (the "Cosmar Acquisition"), consisting of
$61.3 million in cash and $5.0 million aggregate principal amount of
subordinated notes due 2002 issued by the Company (which note is reflected on
the Company's balance sheet at March 31, 1996 at a value of $3.7 million).
THE DANA ACQUISITION. In December 1994, the Company purchased the
assets and business of a group of companies (the "Dana Group") that
manufactured and marketed internationally the Dana line of fragrance products
(including Tabu, Ambush, and Canoe) (the "Dana Fragrances") for a purchase
price of approximately $21.9 million (the "Dana Acquisition"). In connection
with this acquisition, (i) the Company entered into an option agreement (the
"Brazil Option Agreement") pursuant to which the Company has the option to
acquire the company ("Dana Brazil") marketing these products in Brazil for
$100,000 and (ii) the Company entered into a management agreement with Dana
Brazil whereby the Company managed the operations of Dana Brazil. In December
1995, the Company acquired Dana Brazil for $100,000 pursuant to the exercise
of the Brazil Option Agreement.
THE CANADIAN ACQUISITION. In December 1994, the Company acquired
(the "Canadian Acquisition") substantially all of the assets, and assumed
certain liabilities, of three companies (collectively, "Houbigant Ltee.")
engaged in the manufacture and sale of the Houbigant Fragrances in Canada. As
a result of the Canadian Acquisition, the Company obtained certain Canadian
license rights to the Houbigant Fragrances and related products and certain
manufacturing and production facilities. The Company is currently in
negotiation with Houbigant, Inc. with respect to a proposed amendment to these
license rights which would conform these rights to the Houbigant Western
Hemisphere License. The Company believes this proposed amendment will be
executed and will become effective upon bankruptcy court approval.
INDUSTRY OVERVIEW
DISTRIBUTION CHANNELS. The fragrance/cosmetics industry relies on
two primary channels of distribution: department/specialty stores which,
according to industry estimates, in 1995 accounted for approximately 42% of
total industry revenues and mass-market retailers which accounted for
approximately 58% of total industry revenues.
Fragrance and cosmetics products sold through the
department/specialty store channel are generally characterized as "prestige"
brands which are primarily marketed on perceived image and quality at
substantially higher prices than those sold in the mass-market channel.
Consequently, product offerings in this channel tend to be much more sensitive
than those in the mass-market to changes in fashion and more dependent upon
popular trends and/or
7
<PAGE>
designers, which results in a greater number of new product introductions. The
introduction of new products in department/specialty stores is facilitated, in
part, by a greater level of personal customer service during the sales process
through the use of sales personnel or in-store manufacturer representatives
who "push" new products to consumers. In addition, department/specialty
retailers generally reorganize their selling space and product mix several
times per year to accommodate changing trends, whereas mass-market retailers
generally do so only once per year. As a result, manufacturers are able to
introduce new products more easily and frequently through department/specialty
store distribution channels, as well as depend on in-store direct selling
efforts rather than broad-based consumer advertising to attract customers.
While this results in greater flexibility to change product offerings to match
current fashions, it also reduces brand stability and consumer loyalty.
The mass-market distribution channel for fragrances is comprised of
three segments: chain drug stores, mass merchandisers and supermarkets. In
1995, chain drug stores accounted for approximately 55% of total retail
revenues of this channel, mass merchandisers accounted for approximately 33%
and supermarkets, including combination supermarket/drug stores, accounted for
approximately 12%. Products sold through this distribution channel are
primarily value-oriented with a greater emphasis placed on price and utility
relative to products sold in department/specialty stores which are sold based
upon perceived image and fashion. Since mass-market retailers depend upon
self-selection and employ only a nominal amount of in-store personnel for
sales support, shelf space is the critical and predominant means of gaining
consumer exposure in this channel. Accordingly, mass-market retailers are
becoming more aware of the benefits of sophisticated category/space management
systems, such as those utilized by the Company, to maximize revenues generated
by their existing shelf space. Retailers are therefore reluctant to allow new
products to displace proven high-volume products without the guarantee of
extensive advertising support to generate consumer interest.
ARTIFICIAL FINGERNAIL MARKET. The domestic retail artificial
fingernail market, which generated retail revenues of approximately $161
million in 1995, is the fastest growing segment of the domestic retail
fingernail care products market (which had retail revenues in excess of $670
million in 1995), having grown at a compound annual rate of over 18% from 1984
to 1995. The mass-market distribution channel accounts for the majority of
retail sales of artificial fingernail products with the chain drug store
segment accounting for approximately 56% of total mass-market revenues, the
mass merchandiser segment, which is the fastest growing segment, accounting
for approximately 32% and the supermarket segment accounting for approximately
12%. The shift from salons to self-select retail products has resulted
primarily from an improvement in product quality (e.g., a more natural
appearance), simplified product application and a greater selection of
products. In addition, high repeat purchases by consumers, who typically
purchase up to 10-15 packages per year, provide market stability and high
inventory turnover resulting in greater retail shelf space allocation. The
total domestic market for artificial fingernail products, and fingernail
related products, including those sold in salons, has grown from $1.4 billion
in 1989 to $3 billion in 1995.
8
<PAGE>
FRAGRANCE MARKET. The domestic retail fragrance market, had
revenues of $1.5 billion in 1995; industry growth rates have varied between
- -5% and +5% for the last 10 years. The fragrance market is highly fragmented,
with the most popular brand having a share of less than 5%, although there are
several large competitors with significant aggregate market share. In 1995,
the Chantilly and Tabu brands were ranked among the top ten brand names of
women's fragrances sold in drug stores; Chantilly held 2.8% and Tabu held
2.01% of the total dollar share. Moreover, in 1995, the Company's entire line
of women's fragrances captured 6.0% of the dollar share of women's fragrances
sold in drug stores and mass merchandisers, up from 5.1% in the previous year.
This market is divided into two principal categories: "prestige" products and
mass products. The primary differences between prestige and mass products are
price, quality and perceived image. The quality of a fragrance product is
determined by its packaging as well as the concentration of the oils in the
fragrance formula. Perceived image is based upon fashion and popular trends as
well as the designer associated with the product. Prestige products are sold
primarily based upon perceived image and quality at substantially higher price
points than mass products. Initial consumer purchase decisions are generally
based upon the perceived quality of the product, regardless of whether it is a
prestige or mass fragrance brand. Repeat purchases, however, are primarily
based upon the performance (i.e., duration and aroma) of the product. To
survive in the mass-market, fragrance brands must generate high levels of
repeat purchases. The Company believes "classic" fragrance products, which
generally have more than 20 years of sales history and are characterized by
extensive brand name recognition and strong customer loyalty, obtain such
status based upon the performance of their scents. The Company estimates that
less than 1% of all fragrance brands introduced each year achieve such
"classic" status.
MARKETING AND DISTRIBUTION
The Company's products are sold principally through the domestic
mass-market, or self-select, distribution channel. The mass-market channel
includes chain drug stores (such as Revco, Walgreens, Thrifty and Payless),
mass merchandisers and discounters (such as Wal- Mart and Kmart) and
supermarkets and combination supermarket/drug stores (such as Safeway and
Smiths). The Company's brands are sold through over 1,000 retailers with
25,000 locations primarily in the United States. The Company has focused its
distribution efforts on the mass-market channel because the Company believes
the mass-market channel represents the fastest growing segment of the
fragrance and artificial fingernail care markets. The Company also sells a
limited amount of its artificial fingernail products through wholesale
distributors to beauty supply stores and hair, fingernail and skin salons.
Outside the United States, the Company sells its artificial fingernail
products and the Dana Fragrances in over 30 countries, and sells the Houbigant
Fragrances in Canada and, to a lesser extent, the United Kingdom. These
international sales are made principally through the use of local distributors
and licensees. During the year ended March 31, 1996, the Company had
international net sales of $22,910,000, or 17.5% of the Company's total net
sales. The Company anticipates that foreign sales may represent an increasing
percentage of the Company's business in future periods.
9
<PAGE>
To induce consumers' trial and repeat purchases, the Company relies
on price, quality, product packaging and in-store displays which generally
have been provided to retailers free of charge. In addition, the Company has
purchased ongoing trade advertising for its artificial fingernail products
directed toward chain drug retailers, mass merchandisers and supermarket
chains. The Company also utilizes substantial advertising campaigns for both
its artificial fingernail and fragrance products.
The Company's fingernail care products are sold primarily by a
network of over 75 independent sales representatives. These sales
representatives are supervised by the Company's internal staff of sales
personnel. In addition, the Company utilizes an outside service merchandiser
to monitor and improve the presentation of its products on retailers' shelves.
The Company's fragrance products are sold domestically through an
internal sales staff of 22 people, consisting of 15 account managers, three
regional managers and four key account managers, and also through eight
independent representatives. The key account managers are responsible for
selling the Company's products to major retailers such as Penney's, Sears,
Walmart and Eckerds. The Company intends to increase the number of retailers
serviced by its key account managers because it believes that the retailers'
confidence in the Company's products is increased by the continuity of
representation provided by its key account managers.
The Company's fragrances are currently sold in Europe, Asia, South
America, Central America, the United Kingdom, Canada, Australia, New Zealand,
the Middle East and Africa, through licensees and in Spain and Argentina where
Dana's subsidiaries sell products directly. The Company's artificial
fingernail products are currently sold by local distributors in Europe,
Canada, Mexico, Puerto Rico, Paraguay, Australia and China.
Management believes that opportunities exist to cross-distribute
the Company's fragrance and artificial fingernail product lines in Europe and
Latin America, areas where the Company's products are either unmarketed or
under represented. These opportunities would be supported in the fragrance
market by the Company's European and Latin American manufacturing facilities
acquired in the Dana acquisition.
Domestically, the Company communicates directly with artificial
fingernail consumers through its Consumer Assistance Hotline. The Company's
toll-free number for consumer assistance is displayed on each fingernail
product package. Consumers are supported on any questions that arise in using
the Company's products. The Company believes that its toll-free number has
served to reinforce customer loyalty.
See note 19 to the Company's consolidated financial statements
beginning on page 21 of this report for further information with respect to
the Company's fragrance and artificial fingernails segments.
10
<PAGE>
MANUFACTURING
ARTIFICIAL FINGERNAIL PRODUCTS. The Company manufactures its
artificial fingernail and fingernail care products principally at its Sparks,
Nevada facility. Certain packaging and shipping activities are performed at
the Company's Garden Grove, California facilities. The Company also sources
component materials and products from outside vendors where reliable, ongoing
and multiple sources can be secured at competitive prices.
FRAGRANCE PRODUCTS. Since April 1995, the Company has manufactured
all fragrances at its 155,000 square-foot Mountain Top, Pennsylvania facility.
In addition, the Company has manufacturing facilities in Argentina, Brazil,
Canada and Spain.
COMPETITION
The artificial fingernail and fragrance markets are highly
competitive. In the artificial fingernail market, the Company competes with a
small number of companies, whose brands include Nailene (Pacific World Corp.),
Lee Fancy Fingers (Lee Pharmaceuticals), Jonel (a division of Barristo Ltd.)
and Fing'rs (a division of Entrecap Corp.). Other competitors include Kiss
Professional Fingernail Products, Kristy Wells, Orly and Super Nails, a line
of American International Industries.
The Company believes that competition in this market is based in
large part upon (i) customer service, (ii) responsive retail order and
delivery systems, (iii) quality of products and packaging design, (iv)
point-of-sale and retailer marketing programs and (v) pricing.
In the fragrance market, the Company competes with numerous
companies domestically and internationally, including more than 500 brands
competing for market share in the mass-market chain drug store segment. Some
of these brands are innovative new fragrances that are being introduced to the
market at the same time as the Company is attempting to revive its classic
fragrances. Among the larger competitors in the fragrance industry, the
Company competes with such firms as Revlon, Procter & Gamble, Benckiser and
Cosmair.
In the overall cosmetics/fragrances market, the Company's
competitors and potential competitors range in size from small, specialized
producers to large, highly diversified companies, some of which have
substantially greater financial resources than the Company.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company believes that the trademarks relating to its brand and
product names are important to both its fragrance and artificial fingernail
products businesses. In addition to "Cosmar," an unregistered brand name used
in its artificial fingernail products business, the Company's principal
product trademarks are Chantilly, Lutece, Raffinee, Tabu, Ambush, Canoe,
Canoe-Sport, French Vanilla, Classic Gardenia, Herbissimo, White Chantilly and
11
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DREAMS BY TABU with respect to its fragrance products and Press & Go, Pro10,
Sculpture Quik, Quik Fit, LaJoie, UltraGel Gel Nails with Built-In Color and
Nail Fetish! with respect to its artificial fingernail products. Applications
to register Lutece and LaJoie in the United States are currently pending. The
other principal trademarks relating to products manufactured and sold by the
Company are registered in the United States and several are registered in
other countries.
The Company's fragrance products are manufactured based on patented
and non-patented formulas, technical information and know-how used by the
Company pursuant to its purchase of such information from the Dana Group and
the exclusive rights granted by the license agreements described above.
SUPPLIERS AND RAW MATERIAL
The principal raw materials used by the Company in the manufacture
of its artificial fingernail products are a common polymer, waxes, pigments,
dyes and other processing components, such as bottles and brushes, all of
which are readily available. The principal raw materials for the Company's
fragrance products are fragrance oils which are either purchased from third
parties or manufactured by the Company from individual raw materials as well
as bottles, caps, pumps and sprayers. While all raw materials are purchased
from outside sources, the Company is not dependent upon a single supplier in
any of its operations for any materials essential to its business that are not
otherwise commercially available to the Company. Historically, the Company has
been able to obtain an adequate supply of raw materials, and no shortage of
such materials is currently anticipated.
SEASONALITY
Sales of fragrances are highly seasonal, with the majority of
retail sales occurring during the calendar year-end holiday season. Thus,
lower than expected sales during this period would have a material adverse
effect upon the Company's results of operations. The Company's fragrance
division's sales are less seasonal than its retail customers. Sales of the
Company's artificial fingernail products are relatively stable throughout the
year.
REGULATION
The Company is subject to, and believes that it is in substantial
compliance with, federal, state, local and foreign laws and regulations
pertaining to foods and drugs (including laws and regulations under the
jurisdiction of the United States Food and Drug Administration), marketing,
advertising and sales practices (including laws and regulations under the
jurisdiction of the Federal Trade Commission), the content, labeling and
packaging of its products, as well as the protection of the environment.
12
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EMPLOYEES
The Company has approximately 822 employees of which the production
employees at Mountain Top, as well as at the plants located in Spain and
Argentina, are currently represented by unions. The Company considers its
relations with its employees to be good.
ITEM 2. PROPERTIES.
PROPERTIES
The Company's artificial fingernail business occupies facilities in
Huntington Beach, and Garden Grove, California with an aggregate of
approximately 137,000 square feet. One facility houses management, sales and
marketing personnel, and the other facility contains additional offices,
warehousing, production assembly operations, and a distribution warehouse. The
lease for the Garden Grove facility expires on December 31, 1997, and the
Company has a right to renew such lease through December 31, 2002. The lease
for the Huntington Beach facility expires in 1996. The Company performs most
of its manufacturing for its artificial fingernail business at its Sparks,
Nevada facility which has approximately 43,000 square feet and which is leased
pursuant to a lease that expires in 1996.
The Company manufactures its fragrances at its 155,000-square foot
Mountain Top, Pennsylvania facility and also at its facilities in Buenos
Aries, Argentina, Granollers, Spain, Sao Paulo, Brazil and Chomedey (Laval),
Canada. Each of these facilities includes production, warehouse and office
facilities. The Company owns the facilities in Pennsylvania, Argentina, Spain
and Brazil and leases the facility in Canada. The Company also leases
facilities in New York City, Greenwich, Connecticut and Cambridge,
Massachusetts at which it conducts executive and administrative activities.
ITEM 3. LEGAL PROCEEDINGS.
ACB Litigations. In April 1995, the Company and Houbigant, Inc.
secured a temporary restraining order barring the importation or sale in the
United States of certain trademarked goods in an action (the "New York
action") now pending in the United States District Court for the Southern
District of New York against ACB Fragrances and Cosmetics, Inc., and ACB
Mercantile Inc. (the "ACB Companies"), the principals of the ACB Companies,
and V&B Distributors, Harold Schiff, A. Rosenblum Sales, Inc. and Bernard
Rosenblum (the "Resellers"). The claims against the Resellers have been
settled. In June 1995, the ACB Companies filed an answer asserting
counterclaims for, inter alia, defamation, conspiracy, and cancellation of
trademarks. In October 1995 and January 1996 the court granted the Company's
motion to dismiss as to all counts of ACB's counterclaims against the Company
and its affiliates except for three counts against the Company's Canadian
affiliate, Houbigant (1995) Ltee ("PPI-
13
<PAGE>
Canada"), for breach of contract and tortious interference with business
relations, and two counts against the Company and its affiliates for tortious
interference.
In May 1995, PPI-Canada filed suit in the Superior Court of the
District of Montreal, Canada against the ACB Companies and the principals of
the ACB Companies, seeking damages and/or restitution in the amount of
approximately $8,000,000 (Canadian) for breach of contract and fraud in
connection with the Company's acquisition of substantially all of the assets
of the ACB Companies in December 1994 (the "Canadian action").
The parties to the New York action and the Canadian action are
discussing and are presently distributing drafts relating to a settlement of
all the litigations. Under the proposed settlement, ACB would dismiss its
remaining counterclaims against the Company and its affiliates and a payment
would be made to the Company in the sum of $850,000. The payment of the
$850,000 would be made substantially contemporaneously with the Company's
obligation to pay $2.7 million in connection with the purchase of certain
inventory from Houbigant in 1994.
Atlantis Litigation. The Company is a defendant in a lawsuit filed
in New York State Supreme Court in March 1995 by Atlantis International, Ltd.
("Atlantis") and Brian Appel. The complaint alleges defamation and intentional
interference with Atlantis' contractual and business relationships, and seeks
damages allegedly suffered in the amount of $6,000,000 and punitive damages in
the amount of $1,000,000. The Company has been given an indefinite extension
of time to answer or move against the complaint but intends to vigorously
defend this lawsuit and believes that it has substantial and meritorious
defenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
14
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's
Common Stock. As of June 15, 1996 there were 22 holders of the Company's
Common Stock. No cash dividends have been declared on the Company's Common
Stock nor is it anticipated that any dividends will be declared in the
foreseeable future due to contractual restrictions on the Company's ability to
declare dividends on this class of stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated selected
financial data of the Company and of Cosmar's predecessor (the "Cosmar
Predecessor"). Such information should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and the
financial statements of the Cosmar Predecessor and the notes thereto included
elsewhere herein.
See Note 2 to the Notes to the Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the Company's recent acquisitions.
15
<PAGE>
<TABLE>
<CAPTION>
The Company The Cosmar Predecessor
------------------------------ ---------------------------------------------------------
Period from Period from
Year April 15, 1994 January 1,
Ended (Inception) to 1994 to Year Ended December 31,
March 31, March 31, August 17, ---------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales $131,285 $57,714 $18,301 $25,844 $17,926 $ 9,500
Operating income 8,450 2,744 3,326 5,063 3,899 1,378
Interest expense 19,458(1) 8,694(1) 61 132 37 14
Net income (loss) (12,057) (5,459) 3,364 4,801 3,768 1,357
Net loss applicable to (13,390) (6,174) 3,364 4,801 3,768 1,357
common stockholders(2)
Net loss per common (18.62) (8.50) --- --- --- ---
share
Balance Sheet Data:
Total assets $184,619 $162,253 --- $ 8,489 $ 7,216 $ 3,907
Long-term debt, 72,009 103,190 --- 294 181 146
net of current portion
Redeemable preferred 11,698 10,365 --- --- --- ---
stock(3)
Common stockholders' 6,452 20,189 --- 5,390 4,278 2,973
equity
Net intangible assets 76,895 82,499 --- --- --- ---
(goodwill and trademarks)
</TABLE>
- --------
(1) Interest expense includes amortization of deferred financing costs,
accretion of interest on obligations for minimum royalty payments, and
accretion of debt discounts and non-cash interest totaling $1,860 and
$3,934 for the period from April 15, 1994 (Inception) to March 31, 1995,
and the year ended March 31, 1996, respectively.
(2) Represents net loss less preferred dividends, if any.
(3) The carrying value of the redeemable preferred stock has been reduced by
an allocation of proceeds to the common stock warrants and has been
increased by the accumulated dividends and accretion on such redeemable
preferred stock through the respective balance sheet dates.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The results of operations of the Company for the periods discussed
in this Item 7 may not be comparable as a result of the following acquisitions
(each of which acquisitions is discussed in greater detail in Item 1 of this
Form 10-K under the caption "Acquisitions") that have been consummated by the
Company (collectively, the "Acquisitions"):
1. The Houbigant Acquisition (July and August 1994), in
which the Company entered into various license agreements pursuant
to which it obtained certain exclusive rights to manufacture and
distribute Chantilly, Lutece, Alyssa Ashley, Raffinee, Demi-Jour,
Parfums Parquet French Vanilla, and all other mass market
fragrances formerly marketed by Houbigant, Inc. (the "Houbigant
Fragrances").
2. The Cosmar Acquisition (August 1994), in which
the Company acquired its artificial fingernail products and related
fingernail care accessories.
3. The Dana Acquisition (December 1994), in which the
Company acquired a group of companies engaged in the manufacturing
of Tabu, Ambush, Canoe, Canoe Sport and certain other mass-market
fragrance and fragrance products.
4. The ACB Acquisition (December 1994), in which the
Company acquired the rights to manufacture and market the Houbigant
Fragrances in Canada and which, when combined with the Houbigant
Acquisition, gave the Company the worldwide rights to manufacture
and market the Houbigant Fragrances.
OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
AND THE PERIOD APRIL 15, 1994 (INCEPTION)
THROUGH MARCH 31, 1995
NET SALES. The Company's net sales (in 000's) for the periods were:
<TABLE>
<CAPTION>
FY95 FY94
Division Net Sales % of Total Net Sales % of Total
<S> <C> <C> <C> <C>
Fragrance $ 63,864 48.6% $ 31,931 55.3%
Cosmetic 44,511 33.9% 19,514 33.8%
International 22,910 17.5% 6,269 10.9%
-------- ----- ------- -----
$131,285 100.0% $ 57,714 100.0%
</TABLE>
Total Company sales increased by $73,571 (or 127.5%) to $131,285.
Approximately $32,700 of this increase is attributable to internal growth
through the implementation of focused sales and marketing programs. The
remaining increase is a result of including a full year of operation in fiscal
1995 compared to a partial year of operations for the prior fiscal year
(depending on the particular timing of each acquisition).
17
<PAGE>
GROSS PROFIT. The Company's gross profit (in 000's) for the periods was:
<TABLE>
<CAPTION>
FY95 FY94
Division Gross Profit % of Net Sales Gross Profit % of Net Sales
<S> <C> <C> <C> <C>
Fragrance $39,338 61.6% $18,681 58.5%
Cosmetic 28,501 64.0% 10,998 56.4%
International 12,278 53.6% 3,482 55.5%
------ ----- ------ -----
$80,117 61.0% $33,161 57.5%
</TABLE>
Gross profit margin improvements in the Fragrance and Cosmetic
businesses are the result of the consolidation of manufacturing operations in
the Company's Mountaintop facility at the Fragrance Division and the
introduction of new, higher-margin products like Pro 10 Nail Lacquer, along
with cost containment efforts in the Cosmetic division. The Gross Profit
margin decrease in the International Division is attributable to an increase
in export sales and sales of fragrance products that typically carry a lower
gross margin than direct international sales and sales of cosmetic products,
respectively, resulting in a lower total International gross profit margin.
SELLING EXPENSE. The Company's selling expenses for fiscal 1995 and
fiscal 1994 were $52,781,000 (40.2% of Net Sales) and $18,246,000 (31.6% of
Net Sales), respectively. The increase in selling expenses as a percentage of
sales is principally attributable to increased advertising and promotional
spending relating to the Company's strategy of reinvigoration of existing
brand equities and the introduction of complementary new products.
GENERAL AND ADMINISTRATIVE EXPENSE. The Company's general and
administrative expenses for fiscal 1995 and fiscal 1994 were $ 13,679,000
(10.4% of Net Sales) and $10,127,000 (17.6% of Net Sales), respectively. The
decline in general and administrative expenses as a percentage of sales is
attributable to what Management believes is a high fixed component for such
expenses and Management's ability to control the increase in such expenses as
sales increased.
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS. Amortization of
intangible and other assets for fiscal 1995 and fiscal 1994 was $ 5,207,000
(4.0% of Net Sales) and $2,044,000 (3.5% of Net Sales), respectively. The
increased amortization in fiscal 1995 includes a full year of amortization
resulting from acquisitions. Fiscal 1994 includes goodwill amortization only
as of the effective date of the respective acquisitions. In addition, the
amortization of the minimum royalty took full effect this fiscal year.
OPERATING INCOME. Operating Income for fiscal 1995 and fiscal 1994
was $8,450,000 (6.5% of Net Sales) and $2,744,000 (4.8% of Net Sales),
respectively. Management believes an additional measurement, earnings before
interest, taxes, depreciation and amortization (EBITDA) is useful and
meaningful to an understanding of the operating performance of the Company.
However, EBITDA should not be considered by the reader as an alternative to
net income (loss) as an indicator of the Company's operating performance or to
cash flows (See "-- Liquidity and Capital Resources.") as a measurement of
liquidity. EBITDA is detailed in the table below:
18
<PAGE>
000's
-----------------------------------------
FY 95 FY 94
Operating Income $ 8,450 $ 2,744
Add Amortization 5,207 2,044
Add Depreciation 2,844 788
------- -------
EBITDA $ 16,501 $ 5,576
EBITDA % of Net Sales 12.6% 9.7%
INTEREST EXPENSE. The Company's total interest expense, for fiscal
1995 and fiscal 1994 was $19,458,000 and $8,694,000, respectively, while cash
interest for the periods was $15,524,000 and $6,834,000, respectively.
Interest expense for the periods consisted of:
Cash Interest Paid or Accrued (in 000's) FY95 FY94
- ----------------------------------------
Interest on Senior Notes $ 8,943 $ 5,577
Interest on Sellers Notes (Payable in 2002) 420 247
Interest on Credit Facility 5,948 971
Other Interest 213 39
------ ------
Total Cash Interest Expense $ 15,524 $ 6,834
Non-Cash Interest Expenses
Accretion of Senior Notes and Seller Notes $ 290 $ 154
Amortization of Deferred Financing Costs 2,623 993
Accretion of Interest on Obligations for 1,021 713
----- ---
Minimum Royalty Payment
Total Non-Cash Interest Expenses $ 3,934 $ 1,860
----- -----
Total Interest Expenses $ 19,458 $ 8,694
INCOME TAX EXPENSE/(BENEFIT). Income tax expense/(benefit) for the
periods were $1,303,671 (1.0% of net sales) and ($35,081) respectively. The
effective tax rates differ from the United States federal income tax rate of
34% due to state and foreign income taxes and limitations on utilization of
federal income tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had outstanding institutional
indebtedness of $124.3 million including $57.0 million under its Credit
Facility, $27.0 million of which is related to the revolving credit portion.
On September 8, 1995, the revolving credit portion of the Company's facility
was amended to increase the Company's availability to $30.0 million from $20.0
million. Due to the nature of the fragrance/cosmetics industry, both the
Company's need for working capital and its income stream are seasonal. The
most significant liquidity requirements occur prior to the sales surge in
connection with the production of inventory and
19
<PAGE>
shipment to customers in advance of the year-end holiday sales season and
other events such as new launches.
On May 29, 1996, the Company entered into a Securities Purchase
Agreement with an investor, under which the Company can issue up to $20.0
million aggregate value of Series A Senior Exchangeable Redeemable Preferred
Stock (Series A Preferred). If the Series A Preferred remains outstanding on
or after August 31, 1998, it will be exchangeable, at the option of the
Company, into an equal amount of Senior Notes. The Series A Preferred has a
dividend of 12% per annum, payable quarterly, in cash or additional preferred
stock at the option of the Company. The Holder of Series A Preferred may
exercise an option to purchase 4.3% of the Common Stock of the Company for
$5.0 million. On May 30, 1996, the Company issued $10.0 million of the Series
A Preferred Stock.
In addition to the $20.0 million Series A Preferred, on June 14,
1996, the financial institution with which the Company has its Current Credit
Facility has agreed to increase its revolving credit availability from $30.0
million to $40.0 million.
The Current Credit Facility matures in December 1996. The Company
is currently pursuing several financing alternatives, including both equity
and debt financing to replace the Current Credit Facility and provide funds
for new acquisitions. The Company is currently in discussions with several
financial institutions and believes that it will be able to obtain such
financing. However, the Company has no binding commitment from any financial
institution, and accordingly, there can be no assurance that such additional
financing alternatives will be available to the Company. If the Company is
unable to obtain the financing, it may be required to postpone and/or change
significant elements of its business strategy. In addition, although
management believes that the Company has made significant progress in
improving sales and operating efficiency, there can be no assurance that the
Company's future performance will not be adversely affected by economic,
financial, and business factors not subject to its control.
Net cash used by the Company in operating activities for the year
ended March 31, 1996 was $24,176,395, consisting primarily of the net loss of
$12,056,831, less the impact on non-cash items impacting net loss of
$12,019,092; increase in operating assets of accounts receivable, inventory,
and prepaid expenses and other current assets of $16,635,634, $7,560,525, and
$2,977,456, respectively; decrease in accrued expenses of $3,288,380, less the
impact of increase in accounts payable of $6,284,133.
Net cash used in investing activities was $6,140,629, consisting
primarily of capital expenditures. Net cash provided by financing activities
was $24,747,663, consisting primarily of net proceeds from the Company's
Credit Facility. The net decrease in cash and cash equivalents was $5,569,361.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information called for by this item is set forth in the financial
statements contained on the immediately following 26 pages.
20
<PAGE>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
- -----------------------------------------------------------------------------------------------------------------------------------
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT................................................................................................22
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND 1995 AND FOR THE
YEAR ENDED MARCH 31, 1996 AND FOR THE PERIOD FROM APRIL 15, 1994
(INCEPTION) TO MARCH 31, 1995:
Consolidated Balance Sheets..............................................................................................23
Consolidated Statements of Operations....................................................................................24
Consolidated Statements of Stockholders' Equity..........................................................................25
Consolidated Statements of Cash Flows....................................................................................26
Notes to Consolidated Financial Statements...............................................................................28
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts..........................................................................45
COSMAR CORPORATION AND AFFILIATE (PREDECESSOR)
Schedule II - Valuation and Qualifying Accounts..........................................................................46
All other schedules are not required
</TABLE>
21
<PAGE>
[TO COME -- RENAISSANCE'S INDEPENDENT AUDITORS' REPORT --
FROM ACCOUNTANTS]
22
<PAGE>
<TABLE>
<CAPTION>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,431,809 $ 7,001,170
Marketable securities 173,604 814,554
Accounts receivable - net 34,557,409 15,557,859
Inventories 30,236,739 21,906,326
Prepaid expenses and other current assets 6,539,828 4,030,231
---------------- ---------------
Total current assets 72,939,389 49,310,140
PROPERTY, PLANT AND EQUIPMENT - Net 14,535,363 8,508,123
DEFERRED FINANCING COSTS - Net 8,006,782 9,590,535
OTHER ASSETS - Net 12,242,090 12,345,686
INTANGIBLE ASSETS - Net 76,895,294 82,498,616
--------------- --------------
TOTAL ASSETS $ 184,618,918 $ 162,253,100
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 57,000,000 $ -
Accounts payable 19,462,868 12,699,355
Accrued expenses 15,157,127 13,008,982
Other current liabilities 2,700,000 2,700,000
--------------- -------------
Total current liabilities 94,319,995 28,408,337
-------------- --------------
LONG-TERM LIABILITIES:
Long-term debt 67,322,944 67,032,468
Notes payable - 30,000,000
Minimum royalty obligation 4,686,039 6,158,000
Deferred tax liability 140,619 100,000
---------------- ---------------
Total long-term liabilities 72,149,602 103,290,468
-------------- ------------
TOTAL LIABILITIES 166,469,597 131,698,805
------------- ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Par value $.01 - authorized, 40,000 shares; issued, 11,594 shares at March
31, 1996; 10,503 shares at March 31, 1995
11,697,624 10,364,802
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $.01 - authorized 3,000,000 shares:
issued 726,818 shares 7,268 7,268
Notes receivable from sale of common stock (517,609) (517,609)
Additional paid-in capital 26,786,732 26,786,732
Treasury stock, at cost (1996 - 5,650 shares; 1995 - 6,725 shares) (210,000) (250,000)
Deficit (19,563,738) (6,174,085)
Cumulative translation adjustment (50,956) 337,187
----------------- ----------------
Total common stockholders' equity 6,451,697 20,189,493
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,618,918 $ 162,253,100
============= =============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
------ -----
<S> <C> <C>
NET SALES $131,285,624 $ 57,714,409
COST OF GOODS SOLD 51,169,043 24,552,991
-------------- --------------
GROSS PROFIT 80,116,581 33,161,418
-------------- --------------
OPERATING EXPENSES:
Selling 52,780,737 18,245,950
General and administrative 13,679,180 10,127,482
Amortization of intangible and other assets 5,207,046 2,043,960
------------- ---------------
Total operating expenses 71,666,963 30,417,392
-------------- --------------
OPERATING INCOME 8,449,618 2,744,026
INTEREST EXPENSE (INCOME):
Interest expense 19,458,278 8,693,822
Interest income (255,500) (455,431)
------------ ----------------
LOSS BEFORE INCOME TAXES (10,753,160) (5,494,365)
INCOME TAX PROVISION (BENEFIT) 1,303,671 (35,081)
------------- -----------------
NET LOSS (12,056,831) (5,459,284)
PREFERRED STOCK DIVIDENDS 1,332,822 714,801
------------- ----------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (13,389,653) $ (6,174,085)
============= ==============
NET LOSS PER COMMON SHARE $ (18.62) $ (8.50)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 719,138 726,374
======== ========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
NOTES
RECEIVABLE TOTAL
FROM SALE ADDITIONAL CUMULATIVE COMMON
OF COMMON PAID-IN TREASURY STOCK TRANSLATION STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock 726,818 $7,268 $(517,609) $27,010,341 - $ - $ - $ - $6,500,000
Issuance of warrants in conjunction
with senior notes and redeemable
preferred stock - - - 1,260,000 - - - - 1,260,000
Accrued dividends and accretion on
redeemable preferred stock - - - - - - (714,801) - (714,801)
Predecessor basis accounting adjustment - - - (1,489,609) - - - - (1,483,609)
- - - - - - -
Purchase of treasury stock - - - - 6,725 (250,000) - - (250,000)
Cumulative translation adjustment - - - - - - - 337,187 337,187
Net loss - - - - - - (5,459,284) - (5,459,284)
------- ------- ---------- ------------ ------ - -------- ---------- ---------- -----------
BALANCE, MARCH 31, 1995 726,818 7,268 (517,609) 26,786,732 6,725 (250,000) (6,174,085) 337,187 20,189,493
- - - - - - - -
Accrued dividends and accretion on
redeemable preferred stock - - - - - - (1,332,822) - (1,332,822)
Purchase of treasury stock - - - - 3,632 (135,000) - - (135,000)
Sale of treasury stock - - - - (4,707) 175,000 - - 175,000
Cumulative translation adjustment - - - - - - - (388,143) (388,143)
Net loss - - - - - - (12,056,831) - (12,056,831)
-------- ------- ---------- ----------- ------- --------- ------------ -------- ---------
BALANCE, MARCH 31, 1996 726,818 $7,268 $(517,609) $26,786,732 5,650 $(210,000) $(19,563,738) $(50,956) $6,451,697
======== ======= =========== =========== ======= ========== ============ ========= ==========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,056,831) $ (5,459,284)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred taxes 40,619 (96,927)
Depreciation 2,843,535 787,733
Amortization of intangible assets 3,208,320 1,860,310
Amortization of minimum royalty and other assets 1,998,726 183,650
Amortization of deferred financing costs 2,616,472 993,307
Accrued interest on senior notes, subordinated seller notes and
minimum royalty obligation 1,311,420 866,802
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (16,635,634) (8,250,720)
Inventories (7,560,525) (6,802,298)
Prepaid expenses and other current assets (2,977,456) (1,026,695)
Other assets 427,349 (477,344)
Accounts payable 6,284,133 2,135,227
Accrued expenses (3,288,380) 5,605,116
Other current liabilities - (1,881,420)
Other (388,143) 304,605
------------------ ----------------
Net cash used in operating activities (24,176,395) (11,527,938)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired 1,384,120 (100,707,219)
Sale of marketable securities 640,950 134,863
Capital expenditures (8,165,699) (629,062)
----------------- ----------------
Net cash used in investing activities (6,140,629) (101,201,418)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 26,500,000
Issuance of senior notes - 63,378,900
Net proceeds from notes payable 27,000,000 30,000,000
Payment of minimum royalty obligation (1,259,618) (225,000)
Issuance of redeemable preferred stock - 9,650,000
Issuance of warrants - 1,260,000
Payment of deferred financing costs (1,032,719) (10,583,374)
Purchase of treasury stock (135,000) (250,000)
Sale of treasury stock 175,000 -
----------------- --------------
Net cash provided by financing activities 24,747,663 119,730,526
--------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (5,569,361) 7,001,170
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,001,170 -
---------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,431,809 $ 7,001,170
=============== =============
</TABLE>
(Continued)
See notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 14,603,651 $ 5,111,171
============== =============
Income taxes $ 880,415 $ 93,000
================ ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
TRANSACTIONS:
Accrued dividends and accretion on redeemable preferred stock $ 1,332,822 $ 714,801
Sale of common stock for notes $ - $ 517,609
Issuance of seller notes $ - $ 3,500,000
Other current liability - installment obligation for purchase of
inventory and accounts receivable from Houbigant, Inc. $ - $ 2,700,000
Other liability - present value of minimum royalties $ 1,398,080 $ 6,623,283
</TABLE>
See notes to consolidated financial statements.
(Concluded)
27
<PAGE>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. THE COMPANY
The consolidated financial statements of Renaissance Cosmetics,
Inc. (the "Company") include the accounts of the Company for the
period from April 15, 1994 (date of Inception), and its
wholly-owned subsidiaries from their respective dates of
acquisition, Cosmar Corporation from August 18, 1994, Parfums
Parquet Incorporated ("Parfums Parquet") from July 1, 1994,
Houbigant Ltee from December 13, 1994, Dana Perfumes Corporation
("Dana") from December 23, 1994 and Perfums Dana Do Brasil ("Dana
Brazil") from December 31, 1995. All significant intercompany
activity has been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company manufactures and sells its
fragrance and nail care products principally through the
mass-market or self-select distribution channel which includes drug
stores, mass merchandisers, discount stores, supermarkets and
combination supermarket/drug stores, throughout the United States.
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 the reported
amounts of revenues and expenses during the reporting period. The
preparation of financial statements in conformity with generally
accepted accounting principles also requires management to make
estimates and assumptions that affect the disclosures of contingent
assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
CASH EQUIVALENTS - Cash equivalents consist of highly liquid
investments with an original maturity of three months or less.
MARKETABLE SECURITIES - The Company classifies its investments in
debt and equity securities as available for sale, and accordingly,
reflects unrealized holding gains and losses as a separate
component of stockholders' equity.
INVENTORIES - Inventories are stated at the lower of cost (on the
first-in, first-out (FIFO) and last-in, first-out (LIFO) methods)
or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment
additions are stated at cost and depreciation is computed using the
straight-line and the declining-balance methods over the estimated
useful lives of the assets, ranging from three to forty years.
Amortization of leasehold improvements is computed using the
straight-line and the declining-balance methods over the lesser of
the estimated useful lives of the assets or the remaining life of
the lease.
28
<PAGE>
DEFERRED FINANCING COSTS - Deferred financing costs represent
direct costs relating to closing on the long-term debt and notes
payable. These costs are being amortized over the life of the
related debt.
FOREIGN CURRENCY TRANSLATION - For the Company's international
operations, assets and liabilities are translated at year-end
exchange rates and income statement amounts are translated at
average exchange rates prevailing during the year. Gains and losses
resulting from translating foreign currency financial statements
are recorded as a separate component of stockholders' equity.
Transaction gains and losses are included in results of operations
and were not material for any period presented.
INTANGIBLE ASSETS - Costs of acquisitions in excess of net tangible
assets acquired are stated at cost less accumulated amortization
and include trademarks and goodwill. These costs are being
amortized using the straight-line method over the periods
benefited, ranging from 25 to 40 years. The Company assesses the
recoverability of these costs on a regular basis by evaluating the
carrying value of the intangible assets based upon projected net
income and undiscounted future cash flows.
REVENUE RECOGNITION - Sales are recognized when goods are shipped.
An accrual for customer returns is recorded based upon historical
experience.
INCOME TAXES - The Company uses an asset and liability approach to
the computation of income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences of temporary differences between
the financial reporting and tax bases of assets and liabilities
based upon enacted tax rates in effect when such amounts are
expected to be realized or settled. The effects of changes in tax
laws or rates on deferred tax assets and liabilities are recognized
in the period that includes the enactment date.
LOSS PER COMMON SHARE - Loss per common share is based on the
weighted average number of common shares outstanding during the
year. The dilutive effect of stock options and warrants were not
considered since the effect would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash
and cash equivalents, marketable securities, accounts receivable,
accounts payable and accrued expenses approximate fair value
because of the short-term maturities of those instruments. The fair
values of the Company's long-term debt, notes payable and preferred
stock are disclosed in the notes.
ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement is effective for fiscal years beginning after
December 15, 1995. The Company does not expect that the adoption of
this statement will have a material affect on its consolidated
financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation. This
statement is effective for fiscal years beginning after December
15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
29
<PAGE>
Pursuant to this Standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee
stock-based transactions. The new standard also requires increased
footnote disclosures, regardless of the method chosen to measure
and recognize compensation, for employee stock-based arrangements.
The Company has not yet determined if it will elect to change to
the fair value method, nor has it determined the effect the new
Standard will have on net loss and loss per share should it elect
to make such a change.
RECLASSIFICATIONS - Certain reclassifications were made to the 1995
financial statements to conform to the current year's presentation.
3. ACQUISITIONS
The Company, Houbigant, Inc. ("Houbigant") and other parties
entered into license and sublicense agreements (the "Agreements"),
the first of which became effective as of July 1, 1994, whereby the
Company has obtained certain exclusive rights to manufacture and
sell on a worldwide basis (excluding Canada - see below) certain
fragrance products owned and licensed by Houbigant (the "Houbigant
Fragrances"), for initial periods of five and seven years. The
Company agreed to pay royalties generally at the rate of seven
percent of net sales, with annual minimums aggregating $2,730,000
during the initial terms of the Agreements. Total minimum payments
under the terms of the Agreements are $15,360,000, including the
$5,000,000 prepayment. The Company has the option to renew the
Agreements generally for up to seven successive five-year periods.
During each renewal period, annual minimum royalties are adjusted
based on increases in the Consumer Price Index.
Additionally, under the terms of the Agreements, the Company also
agreed to pay $6,000,000, in installments, for the existing
inventory, certain trade receivables and all product returns
received subsequent to the closing date of the Agreements. As of
March 31, 1996, $3,300,000 has been paid.
On August 18, 1994, the Company purchased certain assets and
assumed certain liabilities of Cosmar Corporation and its
affiliate, Precision Molded Plastics, Inc. ("Cosmar") for
$64,827,978. Consideration consisted of $61,327,978 in cash and
sellers notes with a face value of $5,000,000 and an estimated
market value of $3,500,000 based on an effective interest rate of
14.48%. Because the acquisition qualifies as a highly-leveraged
transaction and certain shareholders of Cosmar have or had a
continuing interest as shareholders of the Company, application of
leveraged buyout accounting resulted in a predecessor basis
adjustment to common stockholders' equity of $1,483,609.
On December 13, 1994, the Company acquired substantially all of the
assets of Houbigant Ltee for an aggregate purchase price of
$5,800,000. Houbigant Ltee includes three companies engaged in the
manufacture and sales of Houbigant Fragrances in Canada. There are
no minimum royalties required to be paid in connection with these
license rights.
On December 23, 1994, Dana purchased the assets and business of a
group of companies that manufactured and marketed internationally
the Dana line of fragrance products, for an aggregate cash purchase
price of $21,900,000. Such transaction was financed through term
loan borrowings from a financial institution, with an aggregate
value of $30,000,000.
On December 31, 1995, Dana exercised its option to purchase the
assets and liabilities of Dana Brazil for $100,000.
30
<PAGE>
The above acquisitions were all accounted for by the purchase
method of accounting for business combinations.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions had occurred at the
beginning of each period and do not purport to be indicative of
what would have occurred had the acquisitions been made as of that
date or of results which may occur in the future.
PRO FORMA
-----------------------------------------
PERIOD FROM
APRIL 15, 1994
YEAR ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1996 1995
(UNAUDITED)
Net sales $ 140,741,000 $ 109,912,000
============= ==============
Net loss $ (12,645,000) $ (17,313,000)
============== ==============
Net loss per common share $ (17.58) $ (23.83)
============== ==============
4. MARKETABLE SECURITIES
Marketable securities consist of the following:
MARCH 31,
1996 1995
Mutual funds $ 173,604 $ 772,554
Bonds - 42,000
--------------- ---------------
$ 173,604 $ 814,554
=============== ===============
At March 31, 1996 and 1995, fair value of marketable securities
approximated cost.
31
<PAGE>
5. INVENTORIES
The components of inventories are as follows:
MARCH 31,
1996 1995
Raw materials and advertising supplies $ 16,956,874 $11,859,958
Work in process 2,860,139 1,423,799
Finished goods 10,419,726 8,622,569
------------- -------------
$ 30,236,739 $21,906,326
============= =============
The above components are shown net of excess and obsolete inventory
reserves of approximately $1,540,000 and $3,449,000 at March 31,
1996 and 1995, respectively. At March 31, 1996 and 1995, 60.7% and
27.5%, respectively, of the Company's inventories are stated at the
lower of LIFO cost or market. The excess of current replacement
cost over the stated LIFO value was $-0- at March 31, 1996 and
1995.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31,
1996 1995
Land $ 476,691 $ 182,297
Buildings 4,896,008 5,570,042
Machinery and equipment 7,451,977 3,145,677
Computer equipment 4,880,815 -
Leasehold improvements 461,140 397,840
------------ -----------
18,166,631 9,295,856
Accumulated depreciation 3,631,268 787,733
------------- ------------
$ 14,535,363 $ 8,508,123
============= ===========
32
<PAGE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
MARCH 31,
1996 1995
Trademarks $42,144,000 $42,144,000
Goodwill 39,819,924 42,214,926
------------ ------------
81,963,924 84,358,926
Accumulated amortization 5,068,630 1,860,310
------------ -------------
$76,895,294 $82,498,616
=========== =============
Trademarks relate principally to Cosmar and Dana and are being
amortized, on a straight-line basis, over their estimated useful
lives, 25 and 40 years, respectively. Goodwill represents the
excess of the cost of purchased businesses over the fair value of
their net assets at date of acquisition and is being amortized by
the straight-line method over a 25-year period. Upon completion of
all the required valuations associated with the acquisitions,
goodwill increased during fiscal 1995 by approximately $5,000,000
from the Company's original estimate. Negative Goodwill of
approximately $2.3 million which was generated as a result of the
acquisition of Dana Brazil, and is being amortized over a life of 5
years, is also included in goodwill above.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
<S> <C> <C>
Current portion of minimum royalty obligation $ 3,597,884 $ 966,000
Accrued interest payable 2,380,384 1,675,176
Acquired plant consolidation and restructuring costs 244,000 1,842,000
Accrued marketing and advertising expenses 2,492,720 1,424,952
Accrued financing and acquisition costs - 1,955,000
Other 6,442,139 5,145,854
------------- ------------
$15,157,127 $13,008,982
=========== ===========
</TABLE>
33
<PAGE>
9. LONG-TERM DEBT
Long-term debt consist of the following:
MARCH 31,
1996 1995
Senior notes $63,623,473 $63,465,317
Subordinated seller notes 3,699,471 3,567,151
------------- -------------
$67,322,944 $67,032,468
============ ============
The Senior notes are senior unsecured obligations of the Company
with a principal amount of $65,000,000 at a stated interest rate of
13-3/4% with interest payable semi-annually beginning February 15,
1995 and due August 15, 2001. The notes were issued in units with
warrants to purchase 130,000 shares of common stock. The notes were
issued with an original discount of $711,100 and were further
discounted as a result of an allocation of $910,000 to the common
stock warrants. The effective interest rate on the Senior notes is
14.33%.
The Senior notes and warrants were detached in December 1994 prior
to the filing of the Company's registration statement with respect
to the Senior notes. The warrants are exercisable at any time and
expire on August 15, 2001. The exercise price of the warrants is
$.01 per share.
The Senior notes are fully and unconditionally guaranteed, on a
subordinated basis, as to principal and interest, jointly and
severally by all present and future subsidiaries of the Company.
The Seller notes are subordinated promissory notes of the Company
amounting to $5,000,000 and accruing interest at 8% initially and
escalating to 11% over an eight-year period with a balloon payment
of principal and accrued interest on August 15, 2002. Based on an
estimate of their fair market value, these notes were recorded at a
discount of $1,500,000, yielding an effective interest rate of
14.48%.
The fair value of the Senior notes at March 31, 1996 and 1995 were
$65,000,000 and $61,750,000, respectively. The fair value of the
warrants at March 31, 1996 and 1995 were $2,925,000 and $1,950,000,
respectively. Such fair values are estimated based on quoted market
prices for such notes and warrants.
The fair value of the subordinated seller notes is estimated based
on rates currently available to the Company for debt with similar
terms and remaining maturities. Such fair value was approximately
$4,617,000 and $3,721,000 at March 31, 1996 and 1995, respectively.
10. NOTES PAYABLE
On December 22, 1994, as amended, the Company and a financial
institution entered into a note purchase agreement (the "Current
Credit Facility"), which provides for revolving credit in an
34
<PAGE>
aggregate principal amount of $30,000,000, and term loans in an
aggregate principal amount of $30,000,000. Such loans bear interest
at the bank base rate (8.25% at March 31, 1996) plus 3% until June
30, 1995, 3.5% thereafter until December 31, 1995, 4% thereafter
until June 30, 1996 and 4.5% thereafter. The weighted average
interest rates on the notes payable were 12.19% and 11.66% for the
year ended March 31, 1996 and for the period from December 23, 1994
to March 31, 1995, respectively. The Company paid a commitment fee
of $500,000, a structuring fee of $500,000 and a funding fee of
$600,000 which was equal to 2% of the aggregate unpaid principal of
the term notes in excess of fees already paid. During fiscal 1996
the Company paid funding fees on the available portion of the
original revolving credit of $20,000,000, aggregating $400,000. On
September 8, 1995, the Company paid an additional commitment fee of
$400,000. The Company paid a continuation fee of $100,000 on each
of July 1, 1995 and January 2, 1996 and will be required to pay an
additional continuation fee of $100,000 on July 1, 1996 unless the
loans have been terminated.
Borrowings under the revolving credit portion are subject to a
borrowing base availability consisting of eligible inventory and
receivables. As of March 31, 1996, $3,000,000 of the revolving
credit portion of the Current Credit Facility was available to the
Company for additional borrowings.
The Current Credit Facility includes numerous affirmative and
negative covenants applicable to the Company, including
restrictions on indebtedness and payment of dividends, liens and
capital expenditures, and compliance with net worth, operating
earnings and various other financial ratios and covenants.
Based on rates currently available to the Company for debt with
similar terms and remaining maturities, fair value of the notes
payable is estimated to be $29,638,000 at March 31, 1995. At March
31, 1996, carrying value of the notes payable approximated fair
value.
The Current Credit Facility matures in December 1996 and is
collateralized by substantially all of the assets of the Company.
The Company is currently pursuing several financing alternatives,
including both equity and debt financing to replace the Current
Credit Facility and to provide funds for new acquisitions. The
Company is currently in discussions with several financial
institutions and believes that it will be able to obtain such
financing. However, the Company has no binding commitment from any
financial institution, and accordingly, there can be no assurance
that such additional financing alternatives will be available to
the Company. If the Company is unable to obtain the financing, it
may be required to postpone and/or change significant elements of
its business strategy.
11. INCOME TAXES
The Company records deferred tax liabilities and assets for
estimated future tax consequences attributable to temporary
differences. Such temporary differences exist when the tax basis
differs from the financial reporting amount of assets or
liabilities. A valuation allowance is recorded to reduce deferred
tax assets to amounts which, in management's judgment, are more
likely than not to be realized.
The income tax expense is comprised of state tax in the amount of
$311,467 and foreign taxes of $1,270,993, and a federal income tax
benefit of $278,789 resulting from a carryback of a net operating
loss. There is no Federal tax liability as a result of Federal tax
operating losses in the
35
<PAGE>
amount of approximately $13,677,000. Such losses expire in
accordance with provisions of applicable tax law and expire
beginning in 2010 as follows:
EXPIRATION
DATE AMOUNT
2010 $ 3,646,000
2011 10,031,000
The income tax expense (benefit) is composed of the following:
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
Current:
Federal $ (278,789) $ (200,000)
State 411,467 251,605
Foreign 1,111,025 10,241
----------- -----------
1,243,703 61,846
----------- -----------
Deferred:
Federal - (175,000)
State (100,000) 78,073
Foreign 159,968 -
------------ ----------
59,968 (96,927)
------------ -----------
Total income tax expense
(benefit) $ 1,303,671 $ (35,081)
=========== ===========
36
<PAGE>
The following reconciles the income tax expense (benefit) computed
at the Federal statutory income tax rate to the benefit recorded in
the statements of operations:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
<S> <C> <C>
Federal benefit at statutory rate $(3,656,074) $(1,923,028)
Limitation of utilization of tax benefits 5,164,532 1,528,300
Benefit of carryback not previously recorded (278,790) -
State income taxes 311,467 329,678
Foreign income (1,508,457) -
Foreign income taxes 1,270,993 10,241
Other - 19,728
------------- ------------
$ 1,303,671 $ (35,081)
============= ============
</TABLE>
37
<PAGE>
The significant components of the Company's deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
<S> <C> <C>
Current deferred income tax assets (liabilities):
Allowance for sales returns $2,195,425 $1,297,280
Inventory reserves 697,305 (207,500)
Other non-deductible reserves 1,997,260 539,500
Royalties 866,485 -
Other, net 46,630 -
------------------ -------------
5,803,105 1,629,280
Less valuation allowance (5,803,105) (1,629,280)
----------------- ----------------
$ - $ -
================= ================
Non-current deferred income tax assets (liabilities):
Depreciation (1,091,625) (1,522,220)
Amortization of intangible assets (1,058,915) (654,455)
Federal net operating loss carryforwards 4,650,170 1,647,590
State net operating loss carryforwards 1,276,565 -
Foreign tax credit carryforwards 790,065 -
Other - net - 749,075
------------------- -----------------
4,566,260 219,990
Less valuation allowance (4,566,260) (219,990)
----------------- -----------------
$ - $ -
================= =================
Deferred state tax liability $ - $ 100,000
================== =================
Deferred foreign tax liability $ 140,619 $ -
================== =================
</TABLE>
Foreign pretax income (loss) was $4,446,593 and $(551,200) for the
year ended March 31, 1996 and for the period from April 15, 1994
(inception) to March 31, 1995.
12. CAPITAL STOCK
a. Serial Preferred Stock - The Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred
Stock in one or more series of which 40,000 shares have
been designated as redeemable preferred stock.
b. Stock Option Plan - The Company's stock option plan
provides for nonqualified stock options for employees.
All options have been granted at exercise prices at or
above fair market value
38
<PAGE>
at the date of grant and vest over periods of up to ten
years. At March 31, 1996, 4,762 shares were available for
future grants under the plan.
The following table summarizes the activity of options in the stock
option plan:
<TABLE>
<CAPTION>
SHARES PRICE
<S> <C> <C>
Options granted 75,181 $ 37.17
Options canceled (9,318) 37.17
--------------- ---------------
Total options outstanding at March 31, 1995 65,863 37.17
Options granted 31,377 37.17
Options canceled (13,512) 37.17
--------------- ---------------
Total options outstanding at March 31, 1996 83,728 $ 37.17
=============== ===============
Total exercisable options at March 31, 1996 14,832 $ 37.17
=============== ===============
</TABLE>
No compensation expense was recognized in 1996 or 1995 relating to
such options.
13. REDEEMABLE PREFERRED STOCK
The Company issued for $10,000,000, 10,000 shares of cumulative
exchangeable preferred stock with a par value of $.01 per share.
Such preferred stock has an initial dividend of 10% per annum.
Commencing August 16, 1999 the dividend rate changes to 15% per
annum. The preferred stock was issued in units with warrants to
purchase 50,000 shares of common stock. Dividends are payable in
cash, additional shares of redeemable preferred stock or any
combination thereof, at the option of the Company, up to and
including the August 15, 1997 dividend, and in cash thereafter. The
proceeds from issuance of the preferred stock were reduced by an
allocation of $350,000 to the common stock warrants. Such warrants
are exercisable at any time and expire on August 15, 2001. These
warrants have an exercise price of $.01 per share. The effective
dividend rate on the preferred stock is approximately 12.01%.
The redeemable preferred stock must be redeemed on August 15, 2002
for $10,000,000, plus all accumulated and unpaid dividends. The
redeemable preferred stock is exchangeable for senior notes by the
Company at any time and under certain circumstances by the holders
of the preferred stock on or after August 15, 1997.
Based on rates currently available to the Company for debt with
similar terms, the fair value of the redeemable preferred stock is
estimated to be $10,907,000 and $8,673,000 at March 31, 1996 and
1995, respectively. Based on quoted market prices at March 31, 1996
and 1995 of the warrants, the fair value is estimated to be
$1,125,000 and $750,000, respectively.
39
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
a. Leases - The Company leases certain warehouses, office
facilities, and automobiles, under operating lease
agreements, certain of which are subject to escalation,
expiring at various dates through 2001.
Future minimum lease payments under noncancellable
operating leases as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, AMOUNT
<S> <C>
1997 $1,914,119
1998 1,486,949
1999 1,155,570
2000 748,700
2001 471,677
-----------
$5,770,015
============
</TABLE>
Rent expense associated with operating leases for the
year ended March 31, 1996 and the period from April 15,
1994 (Inception) to March 31, 1995 was $1,998,893 and
$336,945, respectively.
b. Royalties - Future minimum royalty payments at March 31,
1996, which resulted from acquisitions of companies,
together with the present value of minimum royalty
payments, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, AMOUNT
<S> <C>
1997 $3,597,884
1998 3,017,500
1999 550,000
2000 462,500
2001 2,572,500
Thereafter 562,500
----------
10,762,884
Amounts representing interest 2,478,961
----------
Present value of minimum
royalty payments 8,283,923
Current portion 3,597,884
----------
Long-term portion $4,686,039
==========
</TABLE>
40
<PAGE>
Royalty expense totaled $1,930,785 and $1,489,465 for the
year ended March 31, 1996 and the period from April 15,
1994 (Inception) to March 31, 1995, respectively.
c. Other Employee Stock Options - Mr. Thomas V. Bonoma has
been granted stock options whereby he has the right to
acquire a total of 93,182 shares of Common Stock of the
Company. The earliest date on which these options can
become exercisable generally is August 18, 1997, based on
the value of the Company's equity reaching certain
thresholds; however, the valuation date is accelerated
prior to that date (and if the thresholds are reached the
options become exercisable) upon a sale or merger of the
Company or public offering of the Company's Common Stock.
Notwithstanding whether the earnings of the Company
meet any of the tests enunciated in the stock option
agreement, Mr. Bonoma will be entitled to exercise these
options commencing on August 18, 2000. The exercise price
for each purchasable share under this stock option is
$37.17237.
The above stock options have been authorized by the Board
of Directors and granted outside of the Company's stock
option plan. No options have been exercised as of March
31, 1996.
15. LEGAL PROCEEDINGS
a. In April 1995 the Company and Houbigant Inc. commenced an
action against the ACB Companies (the former holders of
Houbigant's Canadian licenses) and their agents (the
"Resellers"), alleging that the ACB companies
manufactured and sold Houbigant trademarked products in
the US through the Resellers. This violated both
Houbigant's and the Company's rights pursuant to the
Agreements, as well as certain US federal laws. The
claims against the Resellers were settled. The ACB
Companies filed counterclaims, most of which were
subsequently dismissed.
Additionally, in May 1995, Houbigant Ltee filed an action
against the ACB companies for approximately $8,000,000
(Canadian) for breach of contract and fraud. The ACB
companies have not as yet asserted any counter claims.
The parties to both of the above cases have agreed in
principle to a settlement whereby the ACB companies will
dismiss its remaining asserted and unasserted
counterclaims, and will pay $850,000 to the Company in
settlement of all the remaining claims.
The Company does not believe that this litigation will
have a material adverse effect on its financial condition
or its results of operations.
b. The Company is a defendant in a lawsuit where the
plaintiff alleges defamation and interference with
business relationships, and is seeking $7,000,000 in
damages. The Company intends to vigorously defend this
lawsuit and believes it has substantial and meritorious
defenses. Management believes that the outcome of this
litigation will not have a material effect on the results
of operations or financial condition of the Company.
c. The Company is subject to legal proceedings and claims
which arise in the normal course of its business. In the
opinion of management, the amount of ultimate liability
with respect to
41
<PAGE>
these actions will not materially affect the financial
position or results of operations of the Company.
16. RETIREMENT PROGRAMS
In June 1995, the Company established a 401(k) Pension Plan (the
"Company Plan") for all U.S. employees, with the exception of Dana
union members for which the Company maintains a separate 401(k)
plan. The prior plan covering Dana non-union members was merged
into the Company Plan. Plans are available to all employees who
have been employed continuously for at least one year. The
participants contribution ceiling is 20% of their annual
compensation, as defined, and a matching contribution is provided
by the Company at 50% of the first 6% of the participants' salary
for the non-union members and 12 1/2% of the first 6% of the
participants' salary for the union plan. The participants become
fully vested after four years of service. The contributions made by
the Company during the year ended March 31, 1996 and the three
months ended March 31, 1995 (for the Dana Plans) were $166,290 and
$11,705, respectively. Certain of the administrative expenses are
paid by the Company, the Plans' sponsor.
17. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and trade accounts receivable. The Company places its cash
with high quality financial institutions.
Credit risk with respect to trade accounts receivable is generally
diversified due to the large number of entities comprising the
Company's customer base and their dispersion throughout the United
States. The Company generally does not require collateral, and the
majority of its trade receivables are unsecured. The Company does,
however, perform ongoing credit evaluations of its customers'
financial condition.
The Company sells a significant portion of its products through
third-party drug store and discount retailers and as a result,
maintains individually significant accounts receivable balances
with major retailers. If the financial condition and operation of
these retailers deteriorate below critical levels, the Company's
operating results could be adversely affected. An allowance for
doubtful accounts and sales returns is maintained at a level which
management believes is sufficient to cover potential credit losses.
The ten largest accounts receivable balances collectively
represented 54% and 50% of total accounts receivable at March 31,
1996 and 1995, respectively. Sales to ten customers represented 50%
and 46% of gross revenues during the year ended March 31, 1996 and
the period April 15, 1994 (Inception) to March 31, 1995. No single
customer accounted for greater than 10% of the Company's revenues
for the year ended March 31, 1996 or for the period April 15, 1994
(inception) to March 31, 1995.
18. RELATED PARTIES
Pursuant to a management agreement, the Company pays management
fees to Kidd, Kamm & Company ("KK & Co."), a related party, subject
to certain operating and financial ratios being met. During the
year ended March 31, 1996 and the period April 15, 1994 (Inception)
to March 31, 1995,
42
<PAGE>
the Company paid $-0- and $225,000, respectively, in management
fees to KK & Co. Deferred financing costs include approximately
$675,000 of financing fees paid to KK & Co.
In December 1995, the holders of the subordinated sellers notes
sold such notes to a third party who is a holder of a substantial
portion of the Company's redeemable preferred stock (the "Holder").
In a related transaction, the Company signed an agreement with the
Holder, whereby in exchange for $225,000, the Company agreed not to
pursue any claims against the Holder relating to the acquisition of
Cosmar. All other terms and provisions of the sellers' note
remained the same.
19. INFORMATION CONCERNING FINANCIAL REPORTING FOR SEGMENTS
AND OPERATIONS IN GEOGRAPHIC AREAS
The Company is engaged in two main businesses, the manufacturing
and marketing of fragrances and associated products and the
manufacturing and marketing of artificial fingernail care products.
<TABLE>
<CAPTION>
FRAGRANCES NAIL CARE CORPORATE CONSOLIDATED
<S> <C> <C> <C> <C>
Year ended March 31, 1996:
Net sales (A) $ 83,152,748 $ 48,132,876 $ - $ 131,285,624
================= ================= ================ ===================
Operating income (loss) $ 7,607,931 $ 9,159,638 $ (8,317,951) $ 8,449,618
Interest expense - net 3,738,863 12,169,302 3,294,613 19,202,778
Income tax provision (benefit) 1,328,163 3,593 (28,085) 1,303,671
----------------- ----------------- ---------------- -------------------
Net income (loss) $ 2,540,905 $ (3,013,257) $ (11,584,479) $ (12,056,831)
================= ================= ================ ===================
Indentifiable assets $ 90,709,215 $ 83,074,198 $ 10,835,505 $ 184,618,918
================= ================= ================ ===================
Depreciation and amortization $ 4,534,781 $ 3,304,496 $ 211,304 $ 8,050,581
================= ================= ================ ===================
Capital expenditures $ 4,338,514 $ 1,942,510 $ 1,884,675 $ 8,165,699
================= ================= ================ ===================
Period April 15, 1994 (Inception) to March 31, 1995:
Net sales (A) $ 33,602,772 $ 24,111,637 $ - $ 57,714,409
================= ================= ================ ===================
Operating income (loss) $ 2,889,464 $ 4,387,301 $ (4,532,739) $ 2,744,026
Interest expense - net 665,192 924,145 6,649,054 8,238,391
Income tax provision (benefit) - - (35,081) (35,081)
----------------- ----------------- ---------------- -------------------
Net income (loss) $ 2,224,272 $ 3,463,156 $(11,146,712) $ (5,459,284)
================= ================= ================ ===================
Indentifiable assets $ 71,092,482 $ 74,730,544 $ 16,430,074 $ 162,253,100
================= ================= ================ ===================
Depreciation and amortization $ 878,383 $ 1,953,310 $ 993,307 $ 3,825,000
================= ================= ================ ===================
Capital expenditures $ 33,243 $ 478,197 $ 117,622 $ 629,062
================= ================= ================ ===================
</TABLE>
43
<PAGE>
(A) There were no material intersegment sales during the year ended
March 31, 1996 and the period from April 15, 1994 (Inception) to
March 31, 1995.
Information related to the Company's operations in different
geographic areas is shown below:
<TABLE>
<CAPTION>
UNITED LATIN
STATES CANADA AMERICA EUROPE CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996:
Net sales (B)(C) $ 115,299,244 $ 8,026,473 $ 4,824,576 $ 3,135,331 $ 131,285,624
================== ================= ================= ================ ===================
Net income (loss) $ (15,332,431) $ 260,038 $ 1,435,796 $ 1,579,766 $ (12,056,831)
================== ================= ================= ================ ===================
Identifiable assets $ 156,951,317 $ 9,674,562 $ 7,107,409 $ 10,885,630 $ 184,618,918
================== ================= ================= ================ ===================
UNITED LATIN
STATES CANADA AMERICA EUROPE CONSOLIDATED
Period April 15, 1994 (Inception) to March 31, 1995:
Net sales (B)(C) $ 56,152,467 $ 633,411 $ 385,392 $ 543,139 $ 57,714,409
================== ================= ================= ================ ===================
Net income (loss) $ (5,145,843) $ (277,611) $ (185,732) $ 149,902 $ (5,459,284)
================== ================= ================= ================ ===================
Identifiable assets $ 155,389,035 $ 609,403 $ 1,891,969 $ 4,362,693 $ 162,253,100
================== ================= ================= ================ ===================
</TABLE>
(B) There were no material intercompany sales between geographic areas
during the year ended March 31, 1996 and the period from April 15,
1994 (Inception) to March 31, 1995.
(C) The above mentioned revenues for the United States include export
sales of $6,924,161 and $4,706,980 during the year ended March 31,
1996 and the period from April 15, 1994 (Inception) to March 31,
1995 respectively.
20. SUBSEQUENT EVENTS
On May 29, 1996, the Company entered into a Securities Purchase
Agreement with an investor, under which the Company can issue up to
$20,000,000 of Senior Exchangeable Preferred Stock, Series A. On
May 30, 1996, the Company issued $10,000,000 of such preferred
stock. The Preferred Stock has a dividend rate of 12% per annum,
payable quarterly, in cash or additional preferred stock, at the
option of the Company. If the Preferred Stock remains outstanding
on or after August 31, 1998, it will be exchangeable, at the option
of the Company into an equal amount of Senior Notes. Under certain
circumstances the Holder of the Preferred Stock, may exercise an
option to acquire Common Stock in exchange for a portion of the
Preferred Stock held.
On June 14, 1996, the financial institution with which the Company
has its Current Credit Facility, has agreed to increase its
revolving credit from the current $30,000,000 aggregate principal
amount to $40,000,000, upon the issuance of $20,000,000 of Senior
Exchangeable Preferred Stock, Series A.
* * * * * *
44
<PAGE>
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
ADDITIONS
-------------------------------------
CHARGED CHARGED
BALANCE AT TO PROFIT TO OTHER BALANCE
BEGINNING AND LOSS ACCOUNTS DEDUCTIONS AT END
OF PERIOD OR INCOME (DESCRIBE) (1) (DESCRIBE) (2) OF PERIOD
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996
Accounts receivable
Allowances (A) $ 1,775,057 $ 21,207,837 $ - $ 18,829,103 $ 4,153,791
================== ================= ================== ================= ===============
Inventory reserves $ 3,449,000 $ 5,000 $ - $ 1,914,000 $ 1,540,000
================== ================= ================== ================= ===============
Period from April 15, 1994 (inception) to March 31, 1995
Accounts Receivable
Allowances (A) $ - $ 6,478,386 $ 49,086 $ 4,752,415 $ 1,775,057
================== ================= ================== ================= ===============
Inventory reserves $ - $ 23,000 $ 3,426,000 (3) $ - $ 3,449,000
================== ================= ================== ================= ==============
</TABLE>
(A) Represents allowance for sales returns, doubtful accounts and discounts.
(1) Represents translation adjustments.
(2) Represents writeoffs applied against reserve balances.
(3) Represents reserves created at dates of acquisition of companies.
45
<PAGE>
COSMAR CORPORATION AND AFFILIATE (PREDECESSOR)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 17, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
ADDITIONS
-------------------------------------
CHARGED CHARGED
BALANCE AT TO PROFIT TO OTHER BALANCE
BEGINNING AND LOSS ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF PERIOD OR INCOME (DESCRIBE) (1) (DESCRIBE) OF PERIOD
<S> <C> <C> <C> <C> <C>
Accounts receivable
Allowances (A) $ 223,000 $ 672,913 $ -- $ 567,194 $ 328,719
===============================================================================================
</TABLE>
21.(A) Represents allowance for sales returns, doubtful accounts and discounts.
(1) Represents writeoffs applied against reserve balances.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
47
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the
executive officers, directors and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------
<S> <C> <C>
Thomas V. Bonoma 49 Chairman, Chief Executive Officer and
President, and Director
Ronald D. Bowen 52 Group Vice President, International
Albert E. DeChellis 45 Group Vice President and General Manager
Sean E. Greene 54 Group Vice President, Sales
Eric R. Hamburg 33 Director
John R. Jackson 38 Vice President and General Counsel
Kurt L. Kamm 53 Director
Thomas T.S. Kaung 58 Group Vice President and Chief Financial
Officer
William J. Kidd 55 Director
John H. Lynch 42 Director
E. Mark Noonan 43 Director
Marc L. Rovner 43 General Manager, Cosmar
Terry M. Theodore 32 Director
Keith H. Wagner 46 Group Vice President, Operations
</TABLE>
Thomas V. Bonoma, Chairman, Chief Executive Officer, President and
a director, is responsible for the overall administration and direction of the
Company. From 1987 to 1993, Mr. Bonoma was employed by Benckiser, GmbH
("Benckiser"), a $3 billion privately-held international manufacturer of
fragrances, cosmetics and cleaning products, as the chief executive officer of
its business in the United States, Canada and Latin America. In this capacity
Mr. Bonoma directed the acquisition of seven businesses with aggregate annual
gross revenues in excess of $800 million. Products under this management while
at Benckiser included Coty, Jovan and Quintessence brands in the fragrances
and cosmetics business and Calgon Bubble Bath, Cling Free Fabric Softener, and
Jet-Dry, in the cleaning products business. Since 1987, Mr. Bonoma has been a
partner of BGI, a consulting firm. From 1979 to 1990, he was Professor of
Business Administration at the Harvard Business School. Mr. Bonoma is a
director of Griffin Corp., an agricultural chemicals company.
Ronald D. Bowen, Group Vice President, International, joined the
Company in June 1994. From 1988 to 1994, Mr. Bowen served as Benckiser's Vice
President of Operations. In this capacity Mr. Bowen supervised all of
Benckiser's North American production activities, including manufacturing,
logistics and distribution and was actively involved in acquiring and
restructuring
48
<PAGE>
facilities and implementing production policies for certain businesses
acquired by Benckiser. Mr. Bowen worked closely with Mr. Bonoma on the
acquisition and integration of Beecham Household Products (Calgon), Germaine
Monteil (Revlon), Quintessence, Inc., and Coty, Inc. For seven years prior to
joining Benckiser, Mr. Bowen was employed by General Foods Corporation in
manufacturing, logistics, marketing and MIS positions and as a Vice President
of Calinova Group, a General Foods Corporation subsidiary. Mr. Bowen is a
graduate of Harvard University's Program for Management Development and the
United States Military Academy.
Albert E. DeChellis, Group Vice President, General Manager, joined
the Company in June 1994. From 1992 to 1994, Mr. DeChellis was the President
and Chief Operating Officer of Benckiser Consumer Products. Previously, Mr.
DeChellis was Benckiser's Vice President of Sales. Mr. DeChellis was
integrally involved with Mr. Bonoma in the acquisition and restructuring of
several companies while at Benckiser. Mr. DeChellis helped orchestrate the
acquisition and restructuring of Calgon, Inc., Quintessence, Inc. and Coty,
Inc., and was directly responsible for the restructuring of the sales
organizations for each of those acquired companies. Prior to 1987, Mr.
DeChellis was employed by Ecolab in various sales capacities for almost 15
years, where he held positions such as District Manager, Assistant Vice
President of Regional Sales and Vice President of Eastern Area Sales. Mr.
DeChellis is a graduate of Kent State University.
Sean E. Greene, Group Vice President, Sales, joined the Company in
June 1994. From 1991 to 1994, Mr. Greene served as Vice President of Sales of
Quintessence, Inc., which was acquired by Benckiser in 1991. In 1994, Mr.
Greene became Senior Vice President of Sales for Coty, Inc., another Benckiser
subsidiary. Prior to joining Benckiser, Mr. Greene was Senior Vice President
of Jovan, Inc., which was subsequently acquired by Benckiser. Prior thereto,
Mr. Greene was a Vice President of the Fine Fragrance Division of Faberge,
Inc. and a Vice President of Mary Quant Cosmetics, an international cosmetics
and fragrance company. Mr. Greene is a graduate of Belvedere College in
Dublin, Ireland.
Eric R. Hamburg, Director, was elected as a director in October
1994. He is currently a partner at Kidd, Kamm & Company, which he joined in
1993 after serving as a senior manager with Andersen Consulting from 1985 to
1993. While at Andersen Consulting, Mr. Hamburg led the design and
implementation of numerous business turnarounds and profit improvement
initiatives in a wide variety of industries. He has extensive experience in
just-in-time manufacturing, distribution, management information systems and
plant startups. Mr. Hamburg holds a B.S. degree in Operations Research and
Industrial Engineering from Cornell University.
John R. Jackson, Vice President and General Counsel, joined the
Company in June 1995. From 1994 to 1995, Mr. Jackson was the Vice President of
Acquisitions and General Counsel and Secretary for Brothers Gourmet Coffees,
Inc. From 1983 to 1988, he was engaged in the practice of law at the Denver
office of Kirkland and Ellis. From 1988 to 1994, Mr. Jackson was engaged in
the practice of law at the Denver, Colorado office of the firm of Ballard
Spahr Andrews & Ingersoll, where he became a partner in 1990. While engaged in
private practice, Mr. Jackson focused on merger and acquisition transactions
and private and public financing. Mr. Jackson taught Business
49
<PAGE>
Planning as an adjunct professor of law at the University of Denver Law School.
He holds a B.A. degree from Davidson College and a J.D. degree from Vanderbilt
Law School.
Kurt L. Kamm, Director, was elected as a director in October 1994.
Mr. Kamm graduated from Brown University in 1964 and received an LL.B. degree
from the Columbia University School of Law in 1967. He is a member of the New
York Bar and practiced law with the firm of Baker & McKenzie for approximately
one year following his graduation from law school. From 1968 to 1971, Mr. Kamm
was employed by the investment banking firm, Glore Forgan, Wm. R. Staats & Co.
From 1971 to 1974, he was a member of Cumberland Associates, a private
investment firm specializing in venture capital and hedge fund management
where he became a partner in 1973. From 1974 to 1979, Mr. Kamm was associated
with American European Associates, a private investment group now known as AEA
Investors. In 1979, he joined Lineberger Kidd Kamm & Company. He helped to
establish Kidd, Kamm & Company in 1987 and has continued there to present. Mr.
Kamm is a director of Wright Medical Technology, Inc., a manufacturer and
marketer of orthopaedic implant devices.
Thomas T.S. Kaung, Group Vice President and Chief Financial
Officer, joined the Company in July 1995. From 1991 to 1995, Mr. Kaung was
President of River International, Inc., a consulting firm. From 1990 to 1991
he was the Executive Vice President and Chief Financial Officer for Zale
Corporation, which operates a large national chain of fine jewelry stores.
Prior thereto, he spent 12 years at Cole National Corporation, a leading
specialty retailer, where he served as Executive Vice President,
Administration and Chief Financial Officer. In addition, Mr. Kaung rose to the
position of Divisional Vice President of Finance for the Dayton Hudson
Corporation after ten years of service. Mr. Kaung holds a B.S. degree from
Southwestern University and an M.S. degree from the University of Iowa.
William J. Kidd, Director, was elected as a director in May 1994.
Mr. Kidd graduated from Cornell University in 1963 and was awarded an MBA
degree from its Graduate School of Business and Public Administration in 1964.
Immediately thereafter, he was employed for approximately one year by the
Securities and Exchange Commission. From 1966 to 1970, Mr. Kidd was employed
by, and ultimately became an officer of, Morgan Guaranty Trust Company of New
York. During his last year of employment there, Mr. Kidd was a senior
operating officer of the bank's venture capital subsidiary. He left in 1970 to
become an associate of Lineberger, Lowe & Company. In 1974, Mr. Kidd helped to
form and became a principal of Lineberger, Kidd & Company which, in turn,
became Lineberger Kidd Kamm & Company in 1979. In 1987, Mr. Kidd helped to
establish Kidd, Kamm & Company and has continued there to the present. Mr.
Kidd is a director of Wright Medical Technology, Inc., a manufacturer and
marketer of orthopaedic implant devices.
John H. Lynch, Director, was elected as a director in March 1995.
Mr. Lynch has been the Vice Chairman since 1994 of The Knoll Group, a firm
engaged in the manufacture of office furniture. He has been a partner since
1987 of BGI, a consulting firm. From 1982 to 1990, Mr. Lynch was employed by
the Harvard Business School, as Assistant Dean and Director of the MBA program
from 1982 to 1988 and as Associate Dean from 1988 to 1990. Mr. Lynch is a
graduate of the University
50
<PAGE>
of New Hampshire, Harvard Business School and Georgetown University Law Center.
Mr. Lynch has been elected to the board of directors pursuant to the right of
Mr. Bonoma, under his employment agreement, to designate one additional
director.
E. Mark Noonan, Director, has been a Managing Director since 1990
of Triumph Capital Group, Inc., a firm engaged in investment banking and
investment management. He served as a Managing Director of Drexel Burnham
Lambert from 1984 to 1990. Mr. Noonan is a graduate of Harvard College and
Harvard Business School. Mr. Noonan has been elected to the board of directors
pursuant to the right of the holders of the Company's Cumulative Exchangeable
Preferred Stock to elect one director under the Company's restated certificate
of incorporation.
Marc L. Rovner, General Manager of Cosmar, joined the Company in
June 1995. Mr. Rovner's background spans 16 years of international sales and
marketing experience with Fortune 500 companies -- International Paper,
Unilever and Benckiser. From 1992 to 1995, he served as U.K. General Manager
at Benckiser. From 1981 to 1992, Mr. Rovner served as Divisional Category
Manager at Unilever, where he directed the launch of ten major detergent and
personal care products, both in the United States and Japan. From 1978 to
1980, he served as Product Manager at International Paper, where he was
responsible for the introduction of its first consumer products' ad campaign.
Mr. Rovner holds a B.A. degree from the University of Pennsylvania and an M.A.
degree from the University of Chicago.
Terry M. Theodore Director, was elected as a director in May 1994.
Mr. Theodore, a partner at Kidd Kamm & Company, joined Kidd, Kamm & Company in
1989 after serving in the Financial Institutions Group of Bear, Stearns & Co.
from 1988 to 1989. Prior to 1988, Mr. Theodore focused on the development and
implementation of capital raising strategies for both financial and corporate
acquirors at The First Boston Corporation. He holds a B.A. in Economics from
the University of California at Los Angeles.
Keith H. Wagner, Group Vice President, Operations, joined the
Company in June 1994. From 1991 to 1993, Mr. Wagner served as Quintessence,
Inc.'s Vice President of Operations and as Coty, Inc.'s Vice President of
Packaging and Purchasing from 1993 to 1994. From 1983 to 1990, Mr. Wagner
served in the additional capacity of director of manufacturing during the
period of ownership by Beecham PLC. From 1979 to 1983, he served as director
of engineering for Jovan, Inc. Mr. Wagner is a graduate of Loyola University
and Bradley University.
51
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to
the annual and long-term compensation for services rendered in all capacities
earned by the Company's Chief Executive Officer and the four most highly
compensated executive officers (collectively, the "Named Executive Officers")
during the fiscal period from April 15, 1994 (Inception) to March 31, 1995 and
the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Fiscal Shares Underlying All Other
Name and Principal Position Period Salary Bonus Options Granted Compensation
------ ------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas V. Bonoma..................................... 1996 $400,000 -- -- $ --
Chairman, Chief Executive Officer and President 1995 233,338 -- 93,182 -- (1)
Sean E. Greene....................................... 1996 250,000 -- -- --
Group Vice President, Sales 1995 145,836 $175,000 9,318 62,500(2)
Albert E. DeChellis.................................. 1996 225,000 -- -- --
Group Vice President and General Manager 1995 131,250 125,000 9,318 37,500(2)
Thomas T.S. Kaung.................................... .. 1996(3) 177,385 -- 9,318 --
Group Vice President and Chief Financial Officer
Ronald D. Bowen...................................... 1996 166,667 -- -- --
Group Vice President, International 1995 93,333 125,000 9,318 40,000(2)
</TABLE>
- ------------
(1) Does not include $85,500 paid to a company controlled by Mr. Bonoma
during May through July 1994 for consulting services.
(2) Represents amounts paid in respect of services rendered as a
consultant prior to the individual's employment by the Company.
(3) Mr. Kaung joined the Company during the fiscal year ended March 31,
1996.
52
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information with respect to grants
of stock options during the fiscal period from April 1, 1995 to March 31, 1996
to the Named Executive Officers.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------
NUMBER OF PERCENT OF
SHARES UN- TOTAL MARKET PRICE POTENTIAL REALIZABLE VALUE AT
DERLYING OPTIONS EXERCISE ON DATE OF ASSUMED ANNUAL RATES OF STOCK
OPTIONS GRANTED TO PRICE PER GRANT EXPIRATION APPRECIATION FOR
NAME GRANTED EMPLOYEES SHARE ($/SH) DATE OPTION TERM(1)
- ---- ------- --------- ------ -------- ------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0% 5% 10%
Thomas V. Bonoma -0-
Sean E. Greene -0-
Albert E. DeChellis -0-
Thomas T.S. Kaung 9,318(2) 29.7% $37.17 $37.17 7/1/05 -0- $ 58,755 $148,897
Ronald D. Bowen -0-
</TABLE>
- -------------------
(1) The 0%, 5% and 10% assumed annual rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future
Common Stock price.
(2) This option is not currently exercisable.
DIRECTORS
Directors of the Company are elected annually and hold office until
the next annual meeting of shareholders or until their successors are duly
elected and qualified. Officers of the Company are appointed by and serve at
the discretion of the Board of Directors of the Company. Under the Company's
restated certificate of incorporation, the holders of the outstanding shares
of the Company's cumulative exchangeable preferred stock have the right to
elect one member of the Company's board of directors. Mr. Noonan has been
elected to the board of directors pursuant to this right. In addition,
pursuant to Mr. Bonoma's employment agreement with the Company, Mr. Bonoma has
been elected a director and has the right to designate one additional
director. Mr. Lynch has been elected to the board of directors pursuant to
this right.
Directors of the Company are not compensated for their services as
directors. All non-employee directors of the Company are reimbursed for
ordinary and necessary expenses incurred in attending board or committee
meetings.
STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Plan") was approved by
the Company's Board of Directors and stockholders in January 1995. The Company
has reserved 111,320 shares of its common stock, par value $.01 per share (the
"Common Stock"), under the Plan. Options granted under the Plan may include
those qualified as incentive stock options and under Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock options.
All regular employees and all directors are eligible to participate in the
Plan. Non-employees may
53
<PAGE>
receive only non-qualified options. There are currently outstanding options
under the Plan with respect to 65,863 shares of Common Stock. These options
generally become exercisable with respect to 25% of their shares in each of
the four years 1995 through 1998, and expire in January 2005.
The Plan is administered by a Stock Option Committee of the Board
of Directors (the "Committee") consisting of Mr. Bonoma and Mr. Kidd. The
Committee has wide latitude in determining the recipients of options and
numerous other terms and conditions of the options.
The exercise price for the shares purchased upon exercise of all
options granted under the Plan is determined by the Committee. The exercise
price of an incentive stock option must be at least equal to the fair market
value of the Common Stock on the date such option is granted (110% of the fair
market value for stockholders who, at the time the option is granted, own more
than 10% of the total combined classes of stock of the Company or any
subsidiary).
No option may have a term of more than ten years (five years for
incentive stock options granted to 10% or greater stockholders). Options
generally may be exercised only if the option holder remains continuously
associated with the Company or a subsidiary from the date of grant to the date
of exercise. However, options may be exercised within certain specified
periods following termination of employment or ceasing to be a director by
reason of death, disability or retirement of the optionee (other than
termination of employment for cause or without the consent of the Company).
EMPLOYMENT AND NON-COMPETE AGREEMENTS
The Company entered into an employment agreement with Mr. Bonoma
for a term of three years beginning August 18, 1994. In addition to an annual
salary of $400,000, Mr. Bonoma is eligible to receive an annual bonus based on
performance criteria to be established by the Board of Directors. Under such
employment agreement, Mr. Bonoma has agreed not to compete with the Company in
the mass-market fragrance or color cosmetics business during the greater of
his employment period under the agreement or a period of two years from the
date of the agreement.
The Company and Mr. Greene entered into a non-compete agreement
dated August 18, 1994 under which Mr. Greene has agreed not to compete with
the Company in the mass-market fragrance or color cosmetics business for a
period of two years from the date of the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bonoma and Mr. Kidd functionally act as the Company's
compensation committee. Mr. Bonoma's salary is established by his employment
agreement with the Company. Mr. Bonoma and Mr. Kidd constitute the Stock
Option Committee of the Board of Directors. Messrs. Kidd, Lynch and Noonan
constitute the Audit Committee of the Board of Directors. There are no other
committees of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 15, 1996, information
with respect to the beneficial ownership of shares of the Company's Common
Stock by (i) each stockholder known
54
<PAGE>
by the Company to be the beneficial owner of more than 5% of such shares, (ii)
each director of the Company, the Company's Chief Executive Officer and each
of the other named executive officers in the Summary Compensation Table
contained in Item 11 and (iii) directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
NAME OF STOCKHOLDER NO. OF SHARES PERCENT
- ------------------- ------------- -------
<S> <C> <C>
Kidd, Kamm Equity Partners, L.P. 605,286 83.9%
c/o Kidd, Kamm & Company
Three Pickwick Plaza
Greenwich, Connecticut 06830
William J. Kidd(1) 605,286 83.9%
c/o Kidd, Kamm & Company
Three Pickwick Plaza
Greenwich, Connecticut 06830
Kurt L. Kamm(1) 605,286 83.9%
c/o Kidd, Kamm & Company
9454 Wilshire Boulevard
Beverly Hills, California 90212
Terry M. Theodore(1) 605,286 83.9%
c/o Kidd, Kamm & Company
9454 Wilshire Blvd.
Beverly Hills, California 90212
Eric R. Hamburg(1) 605,286 83.9%
c/o Kidd, Kamm & Company
Three Pickwick Plaza
Greenwich, Connecticut 06830
Thomas V. Bonoma(2) 26,902 3.7%
Ronald D. Bowen 3,632 *
Albert E. DeChellis 6,053 *
Sean E. Greene 8,070 1.1%
Thomas T.S. Kaung 2,690 *
John H. Lynch 2,690 *
E. Mark Noonan(3) 59,825 7.7%
Triumph Connecticut Limited Partnership (3) 59,825 7.7%
60 State Street, 21st Floor
Boston, Massachusetts 02109
All directors and executive officers as a group (13 persons) 720,528 92.3%
</TABLE>
55
<PAGE>
- -----------------------------
* Less than 1%.
(1) William J. Kidd, Kurt L. Kamm, Terry M. Theodore and Eric R.
Hamburg are principals of Kidd, Kamm & Company, an entity affiliated
with Kidd, Kamm Equity Partners, L.P., and for purposes of this
report may be deemed to beneficially own the shares owned of record
by Kidd, Kamm Equity Partners, L.P.
(2) Includes 26,902 shares held by a trust for the benefit of Thomas V.
Bonoma but excludes 93,182 shares of common stock issuable to Mr.
Bonoma under a stock option which is not currently exercisable.
(3) Represents shares issuable upon exercise of common stock purchase
warrants acquired by Triumph-Connecticut Limited Partnership
("Triumph-Connecticut") in connection with the purchase by that
entity of shares of the Company's cumulative exchangeable preferred
stock (the "Preferred Stock"). Does not include 175 shares issuable
upon exercise of warrants held by Jeffrey Lane and Meri Lane
(collectively, the "Lanes"), as trustees of a trust that is not
affiliated with Triumph-Connecticut. Jeffrey Lane is affiliated
with Triumph-Connecticut. Mr. Noonan is a Managing Director of
Triumph Capital Group Inc., a general partner of Triumph-Connecticut
Capital Advisors, Limited Partnership, the general partner of
Triumph-Connecticut, and for purposes of this report Mr. Noonan may
be considered to be the owner of these shares. Triumph-Connecticut
and the Lanes also hold 10,728.307 shares and 37.681 shares,
respectively, of the Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Management Ownership and Compensation. Thomas V. Bonoma, together
with other members of senior management, acquired 68,922 shares of the Common
Stock of the Company in consideration of the payment of approximately $3
million. In addition, the Company has granted options to officers and other
employees under the Plan referred to in Item 11 under the caption "Stock
Option Plan" and additional options may be granted under the Plan to
directors, officers and other employees.
The Company has entered into a Management Agreement (the
"Management Agreement") with Kidd, Kamm & Company ("KK&Co."). Pursuant to the
Management Agreement, KK&Co. received a fee of $675,000 upon the closing of
the Cosmar Acquisition and, subject to certain restrictions contained in the
Indenture governing the Company's senior notes due August 2001, will receive
an annual management fee of $675,000 subject to increases as determined by the
board of directors of the Company, plus out-of-pocket expenses incurred for
management, consulting and related services to be rendered to the Company.
Such management fee was not paid during the fiscal year ended March 31, 1996
as a result of certain restrictions on such payments contained in the
Indenture. Principals of KK&Co. organized Kidd, Kamm Equity Partners, L.P.
("Kidd Kamm"), which is the owner of 83.9% of the Company's Common Stock. Each
of Messrs. Hamburg, Kamm, Kidd and Theodore are principals of KK&Co.
Stockholders Agreement. Management, Kidd Kamm and other equity
holders have entered into a stockholders agreement, dated August 18, 1994 with
the Company (the "Stockholders Agreement"), whereby each of such equity
holders of the Company are restricted in the transfer of his shares of Common
Stock of the Company for a period of eight years from that date unless such
transfer is made in accordance with the Stockholders Agreement. Kidd Kamm has
the right to designate a majority of the directors of the Company.
56
<PAGE>
Brokerage Fee. Certain principals of KK&Co., in their individual
capacities, have an equity interest in W. E. Myers & Co., which received
brokerage fees of $1.7 million in connection with the Company's acquisitions.
The Company believes that the fees paid to W. E. Myers & Co. were fair,
reasonable, and consistent with the terms of transactions the Company would
otherwise have entered into with third party non-affiliated entities for
comparable services.
57
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are included elsewhere in this report on Form
10-K and are incorporated herein by reference:
1. Financial Statements. The index to financial
statements and financial statement schedule, and the accompanying financial
statements and financial statement schedule are set forth beginning on page 21
above.
2. The following supplemental schedules can be found on
the indicated pages of this Form 10-K:
<TABLE>
<CAPTION>
ITEM PAGE
- ---- -------
<S> <C>
Renaissance Cosmetics, Inc. And Subsidiaries:
Schedule II - Valuation and Qualifying Accounts 45
Cosmar Corporation and Affiliate (Predecessor):
Schedule II - Valuation and Qualifying Accounts 46
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
3. The following exhibits are included in Item 14:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
3.1(1) Certificate of incorporation of Renaissance Cosmetics,
Inc. (the "Company") filed with the Secretary of State of
the State of Delaware on April 15, 1994.
3.1.2(1) Certificate of amendment of the certificate of
incorporation of the Company filed with the Secretary of
State of the State of Delaware on July 11, 1994.
3.1.3(1) Certificate of amendment of the certificate of
incorporation of the Company filed with the Secretary of
State of the State of Delaware on July 11, 1994.
3.1.4(1) Restated certificate of incorporation of the Company filed
with the Secretary of State of the State of Delaware on
August 17, 1994.
3.1.5 Certificate of Designation of Preferences and Rights of
the Senior Exchangeable Preferred Stock, Series A, par
value $.01 per share, of the Company" filed with the
Secretary of State of the State of Delaware on May 29,
1996.
3.2(1) By-laws of the Company effective as of May 13, 1994.
58
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
4.1(1) Indenture, dated August 18, 1994, among the Company, as
Issuer, the guarantors identified therein (the
"Guarantors"), and American Bank National Association,
as Trustee.
4.1.1(2) First supplemental indenture, dated as of November 15,
1994, among the Company, as issuer, New Dana, as
guarantor, and American Bank National Association, as
Trustee.
4.1.2(2) Second supplemental indenture, dated as of December 15,
1994, among the Company, as issuer, Houbigant (1995)
Limitee, as guarantor, and American Bank National
Association as trustee.
4.1.3(2) Third supplemental indenture, dated as of December 23,
1994, among the Company, as issuer, certain subsidiaries
of the Company, as guarantors, and American National Bank
Association, as trustee.
4.1.4 Fourth supplemental indenture, dated as of February 27,
1996, among the Company, as issuer, RSH 149 S.A.R.L., as
guarantor, and American Bank National Association, as
trustee.
4.2(1) Registration rights agreement, dated August 18, 1994,
among the Company, the Guarantors, and the purchasers of
the Notes.
4.3(1) Purchase agreement, dated August 18, 1994, among the
Company and the purchasers who are signatories thereto.
4.4(3) Form of the Exchange Notes.
4.5(3) Form of the 2002 Notes.
4.6(3) Form of the Exchange Shares.
10.1(2) Agreement for the purchase and sale of the assets of
Cosmar Corporation and Precision Molded Plastics, Inc.
dated May 19, 1994.
10.2(1) License agreement (the "Houbigant U.S. License
Agreement"), dated May , 1994, between Houbigant Inc., a
Delaware corporation ("Houbigant") and Parfums Parquet.
10.3(1) Amendment to the Houbigant U.S. License Agreement, dated
June 24, 1994.
10.3.1(2) Amendment to the Houbigant U.S. License Agreement, dated
May 12, 1994.
10.3.2(2) Amendment to the Houbigant U.S. License Agreement, dated
June 1, 1994.
10.4(1) Three additional amendments to the Houbigant U.S. License
Agreement, each dated July 1, 1994.
10.5(1) Letter of Agreement dated July 1, 1994, between Houbigant
and Parfums Parquet relating to the Houbigant U.S. License
Agreement.
10.6 [Not used]
10.7(1) Guaranty, dated July 1, 1994, by Cosmar in favor of
Houbigant of all obligations of Parfums Parquet under the
License Agreement.
59
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.8(1) Letter agreement, dated August 18, 1994, between Parfums
Parquet and Houbigant, with respect to Assumption and
Assignment Agreement.
10.8.1(2) Restated and Amended License Agreement dated August 16,
1994 between Harby's Corporation NV ("Harby's") and
Houbigant.
10.9(1) Assumption and assignment agreement (the "Assumption and
Assignment Agreement"), dated August 18, 1994, among
Houbigant, Harby's and Parfums Parquet.
10.10(1) Amendment, dated September 19, 1994, to the Assumption and
Assignment Agreement.
10.11(1) Letter Agreement, dated August 18, 1994, among Harby's,
Houbigant and Parfums Parquet, regarding certain rights
under a license agreement, dated August 16, 1994, between
Houbigant and Harby's.
10.12 [Not used]
10.13(1) Letter agreement, dated August 18, 1994, between the
Company and Dr. Thomas V. Bonoma, granting Dr. Bonoma
stock options.
10.14(1) Employment agreement, dated August 18, 1994, between the
Company and Dr. Thomas V. Bonoma.
10.15(1) Stockholders agreement, dated August 18, 1994, among the
Company and the stockholders listed in schedule 1 thereto.
10.16(1) Industrial Warehouse lease between Princeland Development
Company and Old Cosmar, dated May 17, 1993, and an
assignment of that lease, dated August 18, 1994, by Old
Cosmar in favor of Cosmar.
10.17(1) Industrial building lease between Princeland Development
Company and Old Cosmar, dated July 15, 1991, and an
assignment of that lease, dated August 18, 1994, by Old
Cosmar in favor of Cosmar.
10.18(1) Industrial building lease between Sparks Industrial Joint
Venture and Precision, dated November 20, 1991, and a
consent to assignment of that lease, dated June 7, 1994,
executed by Precision and Sparks Industrial Joint Venture.
10.19(1) Office lease between Fortune Financial and Old Cosmar,
dated January 1, 1992, and a consent to assignment of that
lease, dated June 21, 1994, executed by Old Cosmar and
Fortune Financial.
10.20(1) Various subleases for office space at 635 Madison Avenue,
New York, New York, between Saatchi & Saatchi Holdings
(USA) as sublessor, and Dana Perfumes Corp., as sublessee.
10.21(1) Option Agreement between New Dana and Trust Naniases, a
Liechtenstein trust, dated November 3, 1994, for the
purchase of all the issued and outstanding shares of
capital stock of Perfumes Dana do Brasil, S.A.
60
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------
10.22(1) Agreement for the purchase of all the capital stock of
Dana S.A., dated November 3, 1994, between New Dana and
Fimasa S.A., a Panamanian corporation.
10.23(1) Agreement for the purchase of all the capital stock of Les
Parfums de Dana, Inc., dated November 3, 1994, between New
Dana and Fidelia S.A., a Swiss corporation.
10.24(1) Agreement for the purchase of all of the capital stock of
Marcafin S.A. et al., dated as of November 3, 1994,
between New Dana and Trust Naniases, a Liechtenstein
trust.
10.25(2) Letter agreement, dated December 21, 1994, amending the
Dana purchase agreements.
10.26 [Not used]
10.27(2) Tie-in letter, dated November 3, 1994, from New Dana to
each of the Dana subsidiaries.
10.28 [Not used]
10.29(2) License Agreement dated August 10, 1994 by and between
Houbigant, Inc. and Houbigant, GMBH and Parfums Parquet
Incorporated.
10.30(2) Amendment dated August 16, 1994 to the License Agreement
dated August 10, 1994 between Houbigant, Inc. and
Houbigant, GMBH and Parfums Parquet Incorporated.
10.31(2) Amendment dated September 16, 1994 to the License
Agreement dated August 10, 1994 between Houbigant, Inc.
and Parfums Parquet Incorporated.
10.32(2) Letter Agreement dated September 21, 1994 amending the
Worldwide License Agreement, the Initial Agreement and the
Restated and Amended License Agreement by and between
Parfums Parquet Incorporated, Harby's Corporation NV,
Houbigant, Inc., and Houbigant GMBH.
10.33(2) Purchase Agreement dated December 12, 1994 by and among
Houbigant (1995) Limited (formerly 3088766 Canada Limited,
ACB Fragrances and Cosmetics, Inc., ACB Mercantile, Inc.,
Houbigant Limitee, Augustine Celaya, Giacomo Giuliano, and
Gilles Pellerin.
10.34 [Not used]
10.35(2) Employment Agreement dated December 12, 1994 between
Houbigant (1995) Limited and Giacomo Giuliano.
10.36(2) Employment Agreement dated December 12, 1994 between
Houbigant (1995) Limited and Gilles Pellerin.
10.37(2) Non-Competition Agreement dated December 12, 1994 between
Houbigant (1995) Limited and Augustine Celaya.
61
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.38(2) Note Purchase Agreement regarding up to $20,000,000
Variable Rate Senior Secured Revolving Notes Due 1996 and
$30,000,000 Variable Rate Senior Secured Term Notes due
1996, dated as of December 21, 1994 by and among Cosmar
Corporation, Renaissance Cosmetics, Inc., and Nomura
Holding America, Inc. (the "Nomura Note Purchase
Agreement").
10.39(2) Variable Rate Senior Secured Revolving Note Due 1996 to
Nomura Holding America Inc., by Cosmar Corporation in the
principal amount of $20,000,000.
10.40(2) Variable Rate Senior Secured Term Notes Due 1996 to Nomura
Holding America Inc., by Cosmar Corporation in the
aggregate principal amount of $30,000,000
10.41(2) Guarantee, dated December 22, 1994, by Renaissance
Cosmetics, Inc., for and in consideration of the purchase
by Nomura Holding America, Inc. of the Notes issued and to
be issued by Cosmar Corporation pursuant to the Note
Purchase Agreement dated as of December 21, 1994.
10.42(2) Guarantee, dated December 22, 1994, by Dana Perfumes
Corp., for and in consideration of the purchase by Nomura
Holding America, Inc. of the Notes issued and to be issued
by Cosmar Corporation pursuant to the Note Purchase
Agreement dated as of December 21, 1994.
10.43(2) Guarantee, dated December 22, 1994, by New Dana
Acquisition Corp., for and in consideration of the
purchase by Nomura Holding America, Inc. of the Notes
issued and to be issued by Cosmar Corporation pursuant to
the Note Purchase Agreement dated as of December 21, 1994.
10.44(2) Guarantee, dated December 22, 1994, by Les Parfums de
Dana, Inc., for and in consideration of the purchase by
Nomura Holding America, Inc. of the Notes issued and to be
issued by Cosmar Corporation pursuant to the Note Purchase
Agreement dated as of December 21, 1994.
10.45(2) Guarantee, dated December 22, 1994, by Roslyn Importers
Inc., for and in consideration of the purchase by Nomura
Holding America, Inc. of the Notes issued and to be issued
by Cosmar Corporation pursuant to the Note Purchase
Agreement dated as of December 21, 1994.
10.46(2) Guarantee, dated December 22, 1994, by Perfumes and
Cosmetics Importers, Inc., for and in consideration of the
purchase by Nomura Holding America, Inc. of the Notes
issued and to be issued by Cosmar Corporation pursuant to
the Note Purchase Agreement dated as of December 21, 1994.
62
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.47(2) Guarantee, dated December 22, 1994, by Parfums Dana Export
Corp., for and in consideration of the purchase by Nomura
Holding America, Inc. of the Notes issued and to be issued
by Cosmar Corporation pursuant to the Note Purchase
Agreement dated as of December 21, 1994.
10.48(2) Security Agreement, dated December 22, 1994, by and
between Cosmar Corporation and Nomura Holding America,
Inc.
10.49(2) Security Agreement, dated December 22, 1994, by and
between Renaissance Cosmetics, Inc., and Nomura Holding
America, Inc.
10.50(2) Intellectual Property Security Agreement, dated December
22, 1994, by and among Cosmar Corporation, Renaissance
Cosmetics, Inc., Parfums Parquet Incorporated, New Dana
Acquisition Corp., Parfums Dana Export Corp., Perfumes and
Cosmetics Importers, Inc., Les Parfums de Dana, Inc., Dana
Perfumes Corp., Roslyn Importers Inc. and Nomura Holding
America, Inc.
10.51(2) Security Agreement, dated December 22, 1994, by and
between Les Parfums de Dana, Inc., and Nomura Holding
America, Inc.
10.52(2) Security Agreement, dated December 22, 1994, by and
between Dana Perfumes Corp., and Nomura Holding America,
Inc.
10.53(2) Security Agreement, dated December 22, 1994, by and
between Parfums Parquet Incorporated, and Nomura Holding
America, Inc.
10.54(2) Security Agreement, dated December 22, 1994, by and
between New Dana Acquisition Corp., and Nomura Holding
America, Inc.
10.55(2) Security Agreement, dated December 22, 1994, by and
between Roslyn Importers Inc., and Nomura Holding America,
Inc.
10.56(2) Security Agreement, dated December 22, 1994, by and
between Parfums Dana Export Corp., and Nomura Holding
America, Inc.
10.57(2) Renaissance Cosmetics, Inc. 1994 Stock Option Plan.
10.58(4) Aircraft lease agreement dated February 13, 1995 between
the Company and General Electric Capital Corporation.
10.59(5) Amendment no. 1 and waiver dated as of April 7, 1995 with
respect to the Nomura Note Purchase Agreement.
10.60(5) License agreement (the "Canadian License"), dated April 1,
1993, between Houbigant, Inc. and ACB Mercantile, Inc.
(assigned to Houbigant (1995) Limited).
10.61(5) 1994 Stock Option Plan.
10.62(6) Notice dated November 29, 1995 of exercise of option to
purchase Parfums Dano do Brazil, S.A.
10.63(6) Filing dated October 11, 1995 to reflect on the public
stock records of Paris, France the purchase by the Company
of the shares of RSH 149 S.A.R.L.
63
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.64.1 Standard Industrial Lease (the "Lease") relating to
property known as 11700 Monarch Street, Garden Grove,
California, between Bixby Western Properties as Lessor and
A.H. Robins Company, Incorporated as Lessee (the
"Lessee"), dated June 25, 1979.
10.64.2 First Amendment to the Lease, between Trust Company of the
West as Trustee for TCW Realty Fund IV as successor Lessor
(the "Lessor") and the Lessee, dated November 10, 1989.
10.64.3 Second Amendment to the Lease, between the Lessor and the
Lessee, dated as of January 1, 1993.
10.64.4 Sublease of the Lessee's rights under the Lease to Cosmar
Corporation, dated as of March 1, 1996 (the "Sublease").
10.64.5 Consent of the Lessor to the Sublease, dated as of March
1, 1996.
10.65 Securities Purchase Agreement between the Company and CIBC
WG Argosy Merchant Fund 2, L.L.C. (the "Fund"), dated as
of May 29, 1996.
10.66 Registration Rights Agreement between the Company and the
Fund, dated as of May 29, 1996.
10.67 Common Stock Registration Rights Agreement between the
Company and the Fund, dated as of May 29, 1996.
10.68(6) Amendment no. 4 and waiver dated as of May 29, 1996 with
respect to the Nomura Note Purchase Agreement
10.69(5) Amendment no. 5 dated as of June 14, 1996 with respect to
the Nomura Note Purchase Agreement
21.1 List of subsidiaries.
99.1 Financial Statements of Cosmar Corporation and Affiliate
(Predecessor).
99.2 Company's Press Release dated June 14, 1996.
</TABLE>
- -------------
(1) Filed with the Company's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (the "SEC") on December
12, 1994, and incorporated herein by reference thereto.
(2) Filed with Amendment No. 1 to the Company's Registration Statement
on Form S-4 filed with the SEC on January 27, 1995, and incorporated
herein by reference thereto.
(3) Filed with Amendment No. 2 to the Company's Registration Statement
on Form S-4 filed with the SEC on February 9, 1995, and incorporated
herein by reference thereto.
(4) Filed with the Company's Quarterly Report on Form 10-Q filed with
the SEC on March 27, 1995, and incorporated herein by reference
thereto.
(5) Filed with the Company's Annual Report on Form 10-K filed with the
SEC on June 29, 1995, and incorporated herein by reference thereto.
(6) Filed with the Company's Quarterly Report on Form 10-Q filed with
the SEC on February 14, 1996, and incorporated herein by reference
thereto.
64
<PAGE>
(b) Reports on Form 8-K.
None.
(c) Exhibits: See (a)3. above for a listing of the exhibits submitted as
part of this report.
(d) Financial Statement Schedules: See (a)2. above for a listing of the
financial statement schedules submitted as part of this report.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RENAISSANCE COSMETICS, INC.
By: /S/THOMAS V. BONOMA
---------------------------------
Thomas V. Bonoma,
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/THOMAS V. BONOMA Chairman, Chief Executive Officer June 24, 1996
- -------------------- and President (principal executive
Thomas V. Bonoma officer) and Director
/S/THOMAS T.S. KAUNG Group Vice President and Chief June 24, 1996
- -------------------- Financial Officer (principal
Thomas T.S. Kaung financial officer and principal
accounting officer)
June 24, 1996
/S/ERIC R. HAMBURG Director
- --------------------
Eric R. Hamburg
/S/KURT L. KAMM Director June 24, 1996
- --------------------
Kurt L. Kamm
/S/WILLIAM J. KIDD Director June 24, 1996
- --------------------
William J. Kidd
/S/JOHN H. LYNCH Director June 24, 1996
- --------------------
John H. Lynch
/S/E. MARK NOONAN Director June 24, 1996
- --------------------
E. Mark Noonan
/S/TERRY M. THEODORE Director June 24, 1996
- --------------------
Terry M. Theodore
</TABLE>
66
<PAGE>
PAGES 67 THROUGH 70 IN THE REPORT FILED WITH THE SEC WERE COUNTERPART
SIGNATURE PAGES AND ARE OMITTED FROM THIS COPY.
67-70
EXHIBIT G
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996.
Commission file number 33-87280
RENAISSANCE COSMETICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1396287
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
955 MASSACHUSETTS AVENUE
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
(617) 497-5584
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) 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
As of August 12, 1996, there were outstanding
721,168 shares of the registrant's common stock,
$.01 par value per share.
- ------------------------------------------------------------------------------
<PAGE>
INTRODUCTION
The purpose of this filing is to correct certain information regarding
the net loss incurred by MEM Company, Inc. for the year ended December 31,
1995, as described in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
2
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-Q, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
typically identified by their inclusion of phrases such as "the Company
anticipates," "the Company believes" and other phrases of similar meaning.
Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: general
economic and business conditions; competition; development and operating
costs; advertising and promotional efforts; brand awareness; acceptance of new
product offerings; changes in business strategy or development plans; quality
of management; availability, terms, and development of capital; and other
factors referenced in this Form 10-Q.
3
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion and analysis relates to the results of operations of
Renaissance Cosmetics, Inc. (the "Company") and its major operating divisions,
Dana (the Company's domestic "Fragrance" business), Cosmar (the Company's
domestic "Cosmetics" business) and International (the Company's "International"
business) resulting from the following acquisitions consummated by the Company
(collectively, the "Acquisitions"), each of which acquisitions is discussed in
greater detail in Item 1 of the Company's Form 10-K for the year ended March
31, 1996 under the caption "Acquisitions."
1. The Houbigant Acquisition (July and August 1994), in which the
Company entered into various license agreements pursuant to which it obtained
certain exclusive rights to manufacture and distribute Chantilly, Lutuce,
Alyssa Ashley, Raffinee, Demi-Jour, Parfums Parquet French Vanilla, and other
mass market fragrances formerly marketed by Houbigant, Inc. (the "Houbigant
Fragrances").
2. The Cosmar Acquisition (August 1994), in which the Company acquired
its artificial fingernail products and related fingernail care accessories
business.
3. The Dana Acquisition (December 1994), in which the Company acquired
a group of companies engaged in the manufacturing of Tabu, Ambush, Canoe, Canoe
Sport and certain other mass-market fragrance and fragrance products.
4. The ACB Acquisition (December 1994), in which the Company acquired
the rights to manufacture and market the Houbigant Fragrances in Canada and
which, when combined with the Houbigant Acquisition, gave the Company the
worldwide rights to manufacture and market the Houbigant Fragrances.
OPERATIONS FOR THE PERIOD APRIL 1, 1996 THROUGH
JUNE 30, 1996, AND THE PERIOD APRIL 1, 1995
THROUGH JUNE 30, 1995
NET SALES. The Company's net sales were (in 000's, except %'s):
<TABLE>
<CAPTION>
1996 1995
Division Net sales % of Total Net sales % of Total
- -------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Fragrance $ 10,963 35.7% $ 12,275 46.1%
Cosmetic 11,751 38.3% 10,233 38.4%
International 7,974 26.0% 4,127 15.5%
------- ----- ------- -----
$ 30,688 100.0% $ 26,635 100.0%
</TABLE>
4
<PAGE>
Total Company sales increased 15.2% or $4,053, from $26,635 to
$30,688. Fragrance sales decreased 10.7% from $12,275 to $10,963 due in large
part to lower than expected sales resulting from the basic Christmas build
programs (sales of basic stock to retailers in addition to Christmas gift sets)
in June 1996. Management attributes this decline to a corresponding significant
increase (compared to last year) in commitments from retailers for the
Company's Christmas gift sets which will begin shipping in August. Cosmetic
sales increased by 14.8% from $10,233 to $11,751. Contributing to this increase
are current year sales of new products such as Ultra-Gel and Nail Fetish which
were launched subsequent to last year's period, and continued strong sales of
the Company's existing products. International sales increased 93.2% from
$4,127 to $7,974 due to the inclusion of sales of Dana's Brazil division which
was acquired during December 1995, and from a 5.1% increase in other
International sales.
GROSS PROFIT. The Company's gross profits were (in 000's, except %'s):
<TABLE>
<CAPTION>
1996 1995
Division Gross Profit % of Net sales Gross Profit % of Net sales
- -------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Fragrance $ 7,512 68.5% $ 8,393 68.4%
Cosmetic 7,011 59.7% 6,464 63.2%
International 4,659 58.4% 2,347 56.9%
------ ----- ------ -----
$ 19,182 62.5% $ 17,204 64.6%
</TABLE>
Gross profit margin in the Fragrance businesses remained relatively
stable at 68.5% compared with 68.4%. The decrease in gross profit margin in the
Cosmetic business to 59.7% from 63.2% is the result of lower sales of
higher-margin Pro-Ten Nail Lacquer (launched during the first quarter of 1995)
and an increase in lower-margin promotional sales on the Company's base
products done in conjunction with new product launches. The gross profit margin
increase in the International division to 58.4% from 56.9% is attributable to
higher sales and an increase in the proportion of direct international sales
(versus exports) to total international sales.
SELLING EXPENSE. The Company's selling expenses in the first quarters
of fiscal 1996 and fiscal 1995 were $11,332,000 (36.9% of net sales) and
$9,166,000 (34.4% of net sales), respectively. The increase in selling expenses
as a percentage of sales is principally attributable to increased advertising
and promotional spending relating to the Company's strategy of reinvigoration
of existing brand equities and the introduction of complementary new products.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expenses in the first quarter of fiscal 1996 and fiscal 1995 were $5,800,000
(18.9% of net sales) and $3,977,000 (14.9% of net sales), respectively. The
increase in general and administrative expenses is attributable to higher
legal, audit and other professional fees and to the addition of key personnel
by the Company to both its corporate and operating divisions in anticipation of
future operating needs.
5
<PAGE>
AMORTIZATION OF INTANGIBLES AND OTHER ASSETS. Amortization of
intangible and other assets was $1,368,000 (4.5% of net sales) and $1,189,000
(4.5% of net sales) for the first quarter of fiscal 1996 and fiscal 1995,
respectively.
OPERATING INCOME. Operating income for the first quarters of fiscal
1996 and 1995 was $682,000 (2.2% of net sales) and $2,872,000 (10.8% of net
sales), respectively. Management believes an additional measurement; earnings
before interest, taxes, depreciation and amortization ("EBITDA") is useful and
meaningful to an understanding of the operating performance of the Company.
However, EBITDA should not be considered by the reader as an alternative to net
income (loss) as an indicator of the Company's operating performance or to cash
flows as a measurement of liquidity. EBITDA is detailed in the table below:
(in 000's) 1996 1995
------ -----
Operating Income $ 682 $ 2,872
Add Amortization 1,368 1,189
Add Depreciation 869 525
-------- -------
EBITDA $ 2,919 $ 4,586
EBITDA % of Net sales 9.5% 17.2%
EBITDA declined $1,667 in the first quarter of fiscal 1996 compared to
the first quarter of fiscal 1995 from $4,586 to $2,919 as a result of (i) lower
EBITDA at the Company's Dana division in fiscal 1996 compared to fiscal 1995
due primarily to lower than expected sales resulting from the basic Christmas
build program, which management believes is due to a corresponding significant
increase in commitments from retailers for the Company's Christmas gift sets
which begin shipping in August, and (ii) an increase in general and
administrative expenses in fiscal 1996 compared to fiscal 1995 due to higher
legal, audit and professional fees and from the addition of key personnel at
the Company's corporate and operating divisions in anticipation of future
operating needs.
INTEREST EXPENSE. The Company's total interest expense for the first
quarters of fiscal 1996 and 1995 was $5,201,000 and $4,434,000, respectively;
while cash interest for the periods was $4,152,000 and $3,571,000,
respectively. Interest expense consists of:
6
<PAGE>
<TABLE>
<CAPTION>
Cash Interest Paid or Accrued (in 000's) 1996 1995
- ---------------------------------------- ------ -----
<S> <C> <C>
Interest on Senior Notes $ 2,234 $ 2,234
Interest on Sellers Notes (Payable in 2002) 108 100
Interest on Credit Facility 1,791 1,228
Other Interest 19 9
-------------- ---------------
Total Cash Interest Expense $ 4,152 $ 3,571
Non-Cash Interest Expenses
Accretion of Senior Notes and Seller Notes $ 81 $ 62
Amortization of Deferred Financing Costs 726 546
Accretion of Interest on Obligations for
Minimum Royalty Payment 242 255
------------- --------------
Total Non-Cash Interest Expenses $ 1,049 $ 863
Total Interest Expenses $ 5,201 $ 4,434
</TABLE>
INCOME TAX (BENEFIT)/EXPENSE.
Income tax (benefit)/expense were ($155,500) and $121,429 for the
first quarter of fiscal 1996 and fiscal 1995, respectively. The effective tax
rates differ from the United States federal income tax rate of 35% due to state
and foreign income taxes and limitations on utilization of federal income tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. Net cash used by the Company in operating activities for
the three months ended June 30, 1996 was $13,305,755, consisting primarily of a
Net Loss of $4,193,058, less the impact of non-cash items impacting Net Loss of
$3,336,043; an increase in operating assets of inventories and prepaid expenses
and other assets of $2,346,723 and $7,744,857, respectively, and a decrease in
accounts payable and accrued expenses of $5,849,519 and $1,529,876,
respectively, less the impact of decrease in accounts receivable of $5,767,689.
Net cash used in investing activities was $696,649, consisting
primarily of capital expenditures. Net cash provided by financing activities
was $20,143,645, consisting primarily of net proceeds from the Company's credit
facility (the "Existing Credit Facility") ($2,000,000) and the issuance of
Series A Preferred Stock ($18,955,000). The net increase in cash and cash
equivalents was $6,141,241. As of June 30, 1996, the Company had outstanding
institutional indebtedness of $126.4 million including $59.0 million under its
Existing Credit Facility, $29.0 million of which is related to the revolving
credit portion. On September 8, 1995, the revolving credit portion of the
Company's Existing Credit Facility was amended to increase the Company's
availability to $30.0 million from $20.0 million. Due to the nature of the
fragrance/cosmetics industry, both the Company's need for working capital and
its income stream are seasonal. The most significant
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<PAGE>
liquidity requirements occur prior to the sales surge in connection with the
production of inventory and shipment to customers in advance of the year-end
holiday sales season and other events such as new launches.
On May 29, 1996, the Company entered into a Securities Purchase
Agreement with a Fund, under which the Company issued $20.0 million aggregate
value of Series A Senior Exchangeable Redeemable Preferred Stock (Series A
Preferred). If the Series A Preferred remains outstanding on or after August
31, 1998, it will be exchangeable, at the option of the Company, into an equal
amount of Senior Notes. The Series A Preferred has a dividend of 12% per annum,
payable quarterly in cash or additional preferred stock at the option of the
Company. The Holders of Series A Preferred may exercise an option to purchase
4.6% of the fully diluted outstanding shares of Common Stock of the Company for
$5.0 million.
In addition to the $20.0 million Series A Preferred, on June 14, 1996,
the financial institution with which the Company has its Existing Credit
Facility agreed to increase its availability under the revolving credit
facility from $30.0 million to $40.0 million.
The Existing Credit Facility matures in December 1996. The Company is
seeking to secure a new credit facility (the "New Credit Facility") in order to
refinance the Existing Credit Facility which matures in December 1996 and to
provide capital for acquisitions and general corporate purposes. Although the
Company has not received a commitment letter from any financial institution or
entered into a binding agreement with respect to the New Credit Facility as of
the date of this report, the Company has received proposals from and commenced
discussions with prospective lenders. The Company is seeking to obtain a New
Credit Facility with approximately $100 million in maximum available
borrowings. However, the Company has no binding commitment from any financial
institution, and accordingly, there can be no assurance that such additional
financing alternatives will be available to the Company. If the Company is
unable to obtain the financing, it may be required to postpone and/or change
significant elements of its business strategy. In addition, although management
believes that the Company has made significant progress in improving sales and
operating efficiency, there can be no assurance that the Company's future
performance will not be adversely affected by economic, financial, and business
factors not subject to its control.
Proposed Series B Preferred Stock Financing. The Company recently
entered into a securities purchase agreement (the "Securities Purchase
Agreement") with certain investors pursuant to which the Company will issue to
those investors up to 80,000 Units, each of which consists of one share of the
Company's 14.0% Senior Redeemable Preferred Stock, Series B, par value $0.01
per share (the "Series B Preferred Stock"), and 2.693 Warrants (the "Warrants")
to purchase 2.693 shares of the Company's Common Stock. Annual dividends of
$140 per share on the Series B Preferred Stock will be cumulative and payable
quarterly in arrears on February 15, May 15, August 15 and November 15 of each
year, commencing November 15, 1996. Dividends may, at the option of the
Company, be paid in cash or by issuing additional shares of Series B Preferred
Stock with an aggregate liquidation preference equal to the amount of such
dividends through August 31, 2002, and in cash thereafter; provided that in the
event that the Company's existing Senior Notes issued pursuant
8
<PAGE>
to the Company's existing Indenture are redeemed, dividends shall be paid in
cash on the first dividend payment date following the earlier of one year from
the date of such redemption or August 31, 2002. The Series B Preferred Stock
has a liquidation preference of $1,000 per share, plus accrued and unpaid
dividends thereon.
The net proceeds from the sale of the Units will be used to redeem the
outstanding shares of Series A Preferred Stock, including accrued dividends
thereon, to finance the GAC Acquisition (including repayment of debt and the
payment of fees and expenses related thereto), which acquisition is described
below and is subject to satisfaction of the conditions to closing contained in
the GAC Acquisition Agreement (described below), to consummate the MEM
Acquisition (including the repayment of debt and the payment of fees and
expenses related thereto), which acquisition is described below and is subject
to the satisfaction of the conditions to closing contained in the MEM
Acquisition Agreement (described below) and the Company having entered into the
New Credit Facility, and the remaining net proceeds will be used for general
corporate purposes.
The Offering of the Units is expected to be consummated prior to the
closing of the Acquisitions and the New Credit Facility. There can be no
assurance that the Acquisitions will be completed or that the Company will be
successful in obtaining the New Credit Facility. The GAC Acquisition Agreement
and the MEM Acquisition Agreement are subject to customary closing conditions.
In addition, the Company does not expect to consummate the MEM Acquisition
until it has entered into the New Credit Facility. In the event that the New
Credit Facility is secured, the Company intends to use borrowings thereunder to
repay all indebtedness outstanding under the Existing Credit Facility and for
general corporate purposes. In the event that the GAC Acquisition or the MEM
Acquisition is not completed, the Company expects to use the excess net
proceeds from the above-described offering of Units that would have been used
to finance the GAC Acquisition or the MEM Acquisition to repay indebtedness
under the Existing Credit Facility and to finance additional acquisitions that
the Company expects to make in the future.
Pending Acquisition of Great American Cosmetics, Inc. On June 27,
1996, the Company, through its wholly-owned subsidiary Cosmar, entered into a
stock purchase agreement (the "GAC Acquisition Agreement") with Great American
Cosmetics, Inc. ("GAC"), and Messrs. Larry Pallini and Vincent Carbone, the
sole shareholders of GAC (the "Sellers"), to acquire all of the issued and
outstanding capital stock of GAC (the "GAC Acquisition"), which acquisition if
consummated is to be effective on and as of May 1, 1996.
GAC is a privately-owned company formed in 1990 that outsources,
markets, distributes, advertises, promotes and merchandises mid-priced,
mass-marketed lipsticks, eye make-up, nail polish products and related
accessories sold under the Nat Robbins trademark. According to GAC's audited
financial statements, GAC had revenues of approximately $7.8 million and net
income of approximately $1.1 million for the year ended December 31, 1995.
The purchase price for the GAC Acquisition is $15.25 million in cash,
$14.25 million of which is payable to the Sellers at the closing and the
remaining $1.0 million of which is payable into escrow
9
<PAGE>
to secure the Sellers' post-closing obligation to indemnify Cosmar for breaches
of the Sellers' representations, warranties and covenants contained in the GAC
Acquisition Agreement. The Company has deposited $600,000 with an escrow agent
(the "Deposit"), which may be applied in full toward the purchase price at the
closing of the GAC Acquisition. If the GAC Acquisition is not consummated on or
before August 31, 1996, the GAC Acquisition Agreement will be terminated and
the Deposit will be returned to the Company unless the failure to complete the
GAC Acquisition by such date was as a result of the Company's failure to obtain
financing for the transaction, in which case the Sellers shall be entitled to
retain the Deposit as liquidated damages. In connection with the closing of the
GAC Acquisition, the Company will repay approximately $1.6 million of GAC
indebtedness (the "GAC Bank Debt") (which estimate is based on indebtedness at
March 31, 1996). Such amount of indebtedness is expected to be lower on the
closing date of such acquisition. Also, in connection with the closing, GAC
will repay to the Sellers the amount outstanding under certain shareholder
loans, which were $181,500 at March 31, 1996.
The GAC Acquisition Agreement contains certain conditions to closing,
including the delivery of legal opinions, the absence of any orders, decrees or
injunctions preventing or delaying the closing, the execution of the consulting
agreements referred to below and the Company having obtained financing on terms
acceptable to it. Although the Company expects such conditions will be
satisfied, there can be no assurance that the GAC Acquisition will be
completed. The Company is entitled to indemnification under the GAC Acquisition
for losses suffered as a result of any breach by the Sellers of any
representation, warranty, covenant or agreement contained in the GAC
Acquisition Agreement. The Company may not seek indemnification until it has
claims exceeding 1% of the purchase price at which point the Sellers shall be
responsible for all amounts in excess of $50,000. Neither Seller is liable for
indemnification in an amount in excess of the amount of consideration received
by him.
Cosmar has agreed to retain Messrs. Pallini and Carbone as consultants
to Cosmar and its affiliates upon consummation of the GAC Acquisition. Mr.
Pallini's consulting agreement is for a term of three (3) years with annual
compensation of $200,000 per year, payable in thirty-six (36) equal monthly
installments. Mr. Carbone's consulting agreement is for a term of one (1) year
with annual compensation of $150,000, payable in twelve (12) equal monthly
installments.
Pending Acquisition of MEM Company, Inc. On August 6, 1996, the
Company, its newly-formed wholly owned subsidiary, Renaissance Acquisition,
Inc. ("RAI"), and MEM Company, Inc. ("MEM"), entered into an agreement and plan
of merger (the "MEM Acquisition Agreement") pursuant to which RAI will be
merged into MEM and each outstanding share of MEM common stock (the "MEM
Stock"), other than dissenter's shares, will be converted into the right to
receive $7.50 per share in cash (and each share subject to a stock option will
be converted into the right to receive the difference between $7.50 per share
and the per share exercise price of such option) (the "MEM Acquisition"). The
aggregate consideration for the MEM Stock (including the purchase price for the
outstanding MEM stock options that will be cashed out in the MEM Acquisition)
is approximately $33.8 million, including repayment of MEM's indebtedness
(which estimate is based on the balance
10
<PAGE>
of such indebtedness at June 30, 1996). Such amount of indebtedness is expected
to be higher (and could be materially higher) on the date the MEM Acquisition
is closed.
MEM, a publicly-traded American Stock Exchange company, distributes a
diversified line of fragrances and toiletries in the mass market distribution
channel. MEM's products are marketed under the nationally advertised trademarks
English Leather (Registered Trademark), British Sterling (Registered Trademark),
Heaven Sent (Registered Trademark), LOVE's (Registered Trademark), Tinkerbell
(Registered Trademark), Acqua di Selva (Registered Trademark), Timberline
(Registered Trademark), Love's Frenzy (Registered Trademark) and Love's Clean &
Natural product lines. Tom Fields, Ltd. ("Tom Fields"), a division of MEM,
manufactures and markets a line of children's cosmetics and accessories
principally under the trademark Tinkerbell(R). A subsidiary, Tom Fields (U.K.)
Ltd., markets this line of children's products in the United Kingdom and
elsewhere in Europe. The principal market for MEM's products is the United
States. According to MEM's audited financial statements, MEM had net sales of
approximately $44.8 million and a net loss of approximately $3.0 million for
the year ended December 31, 1995. According to MEM's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, one national customer accounted
for 13% of net sales in 1995 and 14% of net sales in 1994 and the loss of such
customer would have a material adverse effect. According to MEM's Form 10-Q for
the quarter ended June 30, 1996, net sales declined to $9.2 million during the
six months ended June 30,1996 from $11.0 million during the prior year's
comparable period and the net loss for the period increased to $4.4 million
from $3.2 million in the prior year's comparable period.
The MEM Acquisition Agreement does not provide for indemnification of
the Company for losses suffered as a result of breaches of representations,
warranties, covenants and agreements, and no escrow has been set aside for such
indemnification. The MEM Acquisition Agreement contains standard
representations and warranties for a transaction of this type, all of which
will terminate upon the effectiveness of the MEM Acquisition. Under the terms
of the MEM Acquisition Agreement, at or prior to the closing, the Company is
required to establish a stay bonus program for selected employees of MEM. Also,
prior to the closing, MEM may establish its own stay bonus program, and, if the
MEM Acquisition Agreement is terminated by MEM as a result of the Company's
breach of its obligations thereunder or the MEM Acquisition does not close
because the Company fails to obtain financing, the Company has agreed to
reimburse MEM for such stay bonus program up to an aggregate amount of
$500,000. The consummation of the MEM Acquisition will be subject to customary
closing conditions, including the approval of the stockholders of MEM, the
receipt of requisite regulatory and third party consents and approvals, the
absence of an order, decree or injunction preventing the transaction, the
receipt of a fairness opinion from MEM's independent investment banking firm,
the accuracy of all representations and warranties, the performance of all
covenants and agreements, the receipt of legal opinions, the absence of
material adverse changes and the obtaining by the Company of financing to
complete the MEM Acquisition on terms acceptable to it.
The MEM Acquisition Agreement may be terminated by MEM if the MEM
Acquisition is not completed by November 30, 1996 or at any time (i) if
required by MEM's board of directors in the exercise of its fiduciary duties or
(ii) if the Company has defaulted in the performance of the MEM Acquisition
Agreement and such default remains uncured for 30 days after notice thereof.
11
<PAGE>
If the MEM Acquisition is not consummated because MEM terminates the
MEM Acquisition Agreement as a result of exercising its fiduciary out at a time
when the Company and RAI are in compliance with all of their representations,
warranties, covenants and agreements contained therein and within 12 months
from the date of the MEM Acquisition Agreement, MEM consummates or enters into
an agreement or other arrangement to consummate an acquisition transaction with
any party other than the Company, MEM will be obligated to pay to the Company
the sum of $1.0 million.
If the MEM Acquisition is not consummated because the Company or RAI
terminates the MEM Acquisition Agreement as a result of the failure to close
the financing for the MEM Acquisition, the Company will be obligated to pay MEM
the sum of $1.0 million.
The Company does not intend to effect the MEM Acquisition unless and
until it obtains the New Credit Facility. In addition, consummation of the MEM
Acquisition may require the consent of holders of a majority of the principal
amount of the Senior Notes.
An action (seeking class action certification) was filed on July 31,
1996, on behalf of the shareholders of MEM against MEM and four of its current
and former directors, alleging that the compensation offered to the
shareholders in the MEM Acquisition is inadequate and grossly unfair and that
the defendants violated their fiduciary duties by not seeking additional
potential purchasers for MEM. The actions seeks, among other things, a court
order requiring the defendants to seek other purchasers, or, if the MEM
Acquisition is consummated, damages. MEM has advised the Company that MEM
believes that this action is without merit and that it intends to vigorously
defend such action.
Also on August 6, 1996, the Company entered into a definitive
employment agreement with Gay Mayer, the current Chairman, Chief Executive
Officer and President of MEM, pursuant to which the Company will retain Mr.
Mayer as an officer of the Company following the effective time of the MEM
Acquisition. Mr. Mayer's employment agreement will be for a term of 30 months
at an annual salary of $250,000, payable in equal semi-monthly payments. The
Company has agreed to grant an option to Mr. Mayer to acquire 5,000 shares of
the Company's common stock upon the closing of the MEM Acquisition. The per
share exercise price of the option will be equal to $104.00.
There can be no assurance that the Company will complete either the
GAC Acquisition or the MEM Acquisition.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RENAISSANCE COSMETICS, INC.
Dated: August , 1996 By:____________________________________
Thomas T.S. Kaung
Group Vice-President, Finance
and Chief Financial Officer
13
<PAGE>
MEM COMPANY, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS -- OCTOBER 25, 1996
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF MEM COMPANY, INC.
The undersigned shareholder of MEM COMPANY, INC. hereby appoints GAY A.
MAYER and PAUL HALLINGBY, JR., and each of them, as proxy or proxies of the
undersigned (the "Proxies"), each with full power of substitution, to
represent the undersigned and to vote all the shares of common stock, par
value $0.05 per share, of MEM Company, Inc., a corporation organized under
the laws of the State of New York (the "Company"), which the undersigned is
entitled in any capacity to vote if personally present at the special meeting
(the "Special Meeting") of shareholders of the Company to be held at the
offices of Proskauer Rose Goetz & Mendelsohn LLP, 26th Floor, Conference Room
2600 A/B, 1585 Broadway, New York, New York, at 10:00 a.m. local time, on
October 25, 1996, and at any and all adjournments or postponements thereof,
with respect to all matters set forth in the Proxy Statement dated September
23, 1996, and all supplements and amendments thereto and, in their
discretion, upon all matters incident to the conduct of such Special Meeting
and all matters presented at the Special Meeting but which are not known to
the Board of Directors of the Company at the time of the solicitation of this
proxy. The undersigned hereby revokes any proxy or proxies heretofore given
by the undersigned to vote at the Special Meeting or any adjournment or
postponement thereof.
THE BOARD RECOMMENDS A VOTE FOR PROPOSAL 1.
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated as
of August 6, 1996 (the "Merger Agreement"), by and among the Company,
Renaissance Cosmetics, Inc. a corporation organized under the laws of
the State of Delaware ("Renaissance"), and Renaissance Acquisition,
Inc., a corporation organized under the laws of the State of New York
and a direct wholly owned subsidiary of Renaissance.
[B] FOR [B] ABSTAIN [B] AGAINST
(continued, and to be signed and dated, on the other side)
<PAGE>
(continued from other side)
If properly executed, this proxy will be voted in accordance with
instructions appearing hereon and, at the discretion of the Proxies, as to
any other matter that may properly come before the Special Meeting. IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Proxy Statement (with all enclosures and
attachments) dated September 23, 1996, relating to the Special Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING.
Date: , 1996
---------------------------------------------
---------------------------------------------
---------------------------------------------
(Signature(s) of Holder(s)) (1)
(By:)
---------------------------------------------
(Please Print)
(Title:)
---------------------------------------------
(1) Please sign this proxy exactly as your
name(s) appears hereon. Joint owners
should each sign personally. An attorney,
administrator, trustee, executor,
guardian or other person signing in a
representative capacity should indicate
such capacity. An authorized officer
signing on behalf of a corporation should
indicate the name of the corporation and
such officer's capacity.
