SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: JUNE 30, 1995 Commission File No.: 0-14756
The Cosmetic Center, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1266697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8839 GREENWOOD PLACE
SAVAGE, MARYLAND 20763
(Address of principal executive offices)
(301) 497-6800
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class A Common Stock, par value $.01 per share, outstanding as
of July 20, 1995-2,721,472 shares
Class B Common Stock, par value $.01 per share, outstanding as
of July 20, 1995-1,562,780 shares
<PAGE>
THE COSMETIC CENTER, INC.
Table of Contents
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 4-8
Item 2. Management's Discussion and Analysis 9-11
of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
PART I
ITEM 1. Financial Statements PAGE
Consolidated Balance Sheet
As of June 30, 1995 (unaudited) and
September 30, 1994 4-5
Consolidated Statements of Operations (unaudited)
Three months and nine months ended
June 30, 1995 and June 24, 1994 6
Consolidated Statements of Cash Flows (unaudited)
Nine months ended June 30, 1995
and June 24, 1994 7
Notes to Consolidated Financial Statements (unaudited)
Three months and nine months ended
June 30, 1995 and June 24, 1994 8
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . $ 1,310 $ 1,382
Accounts receivable, net. . . . . . . . . . . . . . . 888 1,557
Inventories . . . . . . . . . . . . . . . . . . . 54,537 50,422
Prepaid expenses . . . . . . . . . . . . . . . . . 1,420 552
Prepaid income taxes . . . . . . . . . . . . . . . . 353 159
Deferred income tax benefit. . . . . . . . . . . . . . 521 521
Total current assets. . . . . . . . . . . . . . . . . 59,029 54,593
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment. . . . . . . . . . . . 11,039 8,705
Leasehold improvements. . . . . . . . . . . . . . . . 4,285 2,680
Leased property-capitalized . . . . . . . . . . . . . 1,670 1,670
16,994 13,055
Accumulated depreciation and amortization . . . . . . . . . 7,379 5,940
9,615 7,115
DEPOSITS AND OTHER ASSETS . . . . . . . . . . . . . . 391 254
DEFERRED INCOME TAX BENEFIT . . . . . . . . . . . . . 172 172
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $69,207 $62,134
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . $ 11,519 $ 9,922
Notes payable-bank . . . . . . . . . . . . . . . . 9,985 5,025
Accrued expenses . . . . . . . . . . . . . . . . . 2,983 3,335
Current portion of obligation under capital leases. . . . . . 286 272
Total current liabilities. . . . . . . . . . . . . . 24,773 18,554
OBLIGATION UNDER CAPITAL LEASES. . . . . . . . . . . 495 711
DEFERRED RENT. . . . . . . . . . . . . . . . . . . 1,333 1,207
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . 26,601 2,472
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized
5,000,000 shares; issued and outstanding 2,721,472 shares 27 27
Class B Common stock, $.01 par value; authorized
5,000,000 shares; issued and outstanding 1,562,780 shares 16 15
Additional paid-in capital. . . . . . . . . . . . . . . 21,740 21,387
Retained earnings. . . . . . . . . . . . . . . . . .
21,177 20,233
Treasury stock-Class B, 32,144 shares at cost. . . . . . . . . (354) --
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . 42,606 41,662
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . . . $ 69,207 $ 62,134
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
Three Months Ended Nine months Ended
June 30, June 24, June 30, June 24,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $ 31,289 $ 28,339 $ 102,567 $ 92,628
Cost of sales including buying, occupancy
and distribution. . . . . . . . . . . 24,641 21,789 81,380 72,360
Selling, general and administrative
expenses. . . . . . . . . . . . . 6,771 5,083 19,192 14,497
Total operating expenses. . . . . . . . . 31,412 26,872 100,572 86,857
Income (loss) from operations. . . . . . . (123) 1,467 1,995 5,771
Other income, net . . . . . . . . . . 21 28 88 89
Interest expense . . . . . . . . . . . (217) (21) (496) (105)
Earnings (loss) before income taxes . . . . . (319) 1,474 1,587 5,755
Income taxes . . . . . . . . . . . . (129) 597 643 2,331
Net earnings (loss) . . . . . . . . . . $ (190) $ 877 $ 944 $ 3,424
Net earnings (loss) per common share
Primary . . . . . . . . . . . . . $ (.04) $ 0.20 $ 0.22 $ 0.78
Fully Diluted. . . . . . . . . . . . $ (.04) $ 0.20 $ 0.22 $ 0.78
Weighted average shares outstanding
Primary . . . . . . . . . . . . . . 4,335,105 4,412,922 4,361,703 4,415,294
Fully Diluted. . . . . . . . . . . . 4,326,857 4,401,839 4,319,492 4,400,799
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months Ended
June 30, June 24,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . $ 944 $ 3,424
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . . . . . 1,769 1,160
Change in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . 669 (83)
Inventories . . . . . . . . . . . . . . . . . (4,115) (1,945)
Prepaid expenses. . . . . . . . . . . . . . . . (1,198) (289)
Prepaid income taxes . . . . . . . . . . . . . . (194) 305
Deferred income tax benefit . . . . . . . . . . . . -- (24)
Deposits and other assets. . . . . . . . . . . . . (137) (96)
Accounts payable. . . . . . . . . . . . . . . . 1,597 (1,925)
Accrued expenses. . . . . . . . . . . . . . . . (352) 160
Income taxes payable . . . . . . . . . . . . . . -- 50
Deferred rent. . . . . . . . . . . . . . . . . 126 --
Net cash (used) provided by operating activities . . . . . (891) 737
Cash flows from investing activities:
Capital expenditures, net . . . . . . . . . . . . . . (3,939) (1,392)
Net cash used by investing activities. . . . . . . . . (3,939) (1,392)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement . . . . . . . 4,960 300
Repayments of capital lease obligations . . . . . . . . . (202) (180)
Exercise of incentive stock options. . . . . . . . . . . -- 38
Net cash provided by financing activities . . . . . . . 4,758 158
Net decrease in cash and cash equivalents . . . . . . . . . (72) (497)
Cash and cash equivalents at beginning of period . . . . . . . 1,382 1,767
Cash and cash equivalents at end of period . . . . . . . . . $ 1,310 $ 1,270
Supplemental Disclosures of Cash Flow Information and
Non Cash Activities:
Cash payments for interest . . . . . . . . . . . . . . $ 477 $ 103
Cash payments for income taxes. . . . . . . . . . . . . 837 2,000
Capital lease obligations incurred . . . . . . . . . . . -- 192
Treasury stock (Note 2) . . . . . . . . . . . . . . . 354 --
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
June 30, 1995 and June 24, 1994
(Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements contained herein should be read
in conjunction with the consolidated financial statements of The Cosmetic
Center, Inc. (the "Company") for the year ended September 30, 1994.
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation at June 30,
1995 and June 24, 1994 and for the three and nine month periods then ended.
The accounting policies applied in the consolidated financial statements
are consistent with the accounting policies applied in the consolidated
financial statements of the Company for the year ended September 30, 1994.
The results for the three and nine month periods ended June 30, 1995
and June 24, 1994 are not necessarily indicative of results expected for
the entire year.
Merchandise Inventories
The Company's inventories, consisting primarily of cosmetic, fragrance,
beauty aid, and related items, are valued at the lower of cost or market.
Cost is determined using the weighted average cost method.
Rental Expenses
Certain store leases provide for minimum rentals plus additional
rentals computed as a percentage of sales in excess of amounts specified in
the lease as minimum rentals. The Company accrues percentage rent expense
during interim periods based on actual sales in excess of the prorated
annual amounts specified in the related lease.
NOTE 2 TREASURY STOCK
During the quarter ended June 30, 1995, certain officers exercised
80,362 incentive stock options ("ISO's"). The $353,593 aggregate exercise
price for these ISO's was substantially paid for by tendering to the
Company, 32,144 shares of previously owned Class B Common Stock. The
32,144 shares of Treasury Stock were valued at fair market value on the
date of exercise.
NOTE 3 SUBSEQUENT EVENT
On July 8, 1995, Louis R. Weinstein, Chairman of the Board of
Directors, died of cancer. Under his employment contract the Company is
obligated to pay his current salary of $348,675 per year through February
28, 1998 and at his estate's option, repurchase any in-the-money stock
options. At this time the Company can not ascertain its total obligations,
however, the Company's obligations will be partially offset by the proceeds
of a $500,000 life insurance policy on Mr. Weinstein in which the Company
is the beneficiary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company was founded in 1957, with its initial operations consisting
of the sales of cosmetic products to wholesale customers. The Company
opened its first retail store in 1973 and grew to nine stores in 1986,
prior to its initial public offering. In September 1990, the Company
relocated its distribution center to Savage, Maryland, a facility which the
Company believes has the capacity to service approximately 100 specialty
retail stores as well as the Company's wholesale operations. Currently,
the Company operates 71 stores under the name "The Cosmetic Center(R)"
located in the greater metropolitan market areas of Washington, D. C.;
Chicago, Illinois; Baltimore, Maryland; Richmond, Virginia;
Charlotte/Raleigh, North Carolina; Philadelphia, Pennsylvania; and Atlanta,
Georgia. The Company sells approximately 25,000 brand name prestige and
mass-merchandised cosmetic products.
Results of Operations
Consolidated net sales for the nine months ended June 30, 1995 were
$102,567,000, an increase of $9,939,000, or 10.7%, from the $92,628,000 in
consolidated net sales for the nine months ended June 24, 1994.
Consolidated net sales for the three months ended June 30, 1995 were
$31,289,000, an increase of $2,950,000, or 10.4%, from the $28,339,000 in
consolidated net sales for the three months ended June 24, 1994.
Retail sales for the nine months ended June 30, 1995 were $100,432,000,
an increase of $10,594,000, or 11.8%, from the $89,838,000 in sales for the
nine months ended June 24, 1994. Comparable store retail sales for the
period decreased by $4,643,000, or 5.2%. Retail sales for the three months
ended June 30, 1995 were $30,734,000, an increase of $3,189,000, or 11.6%,
from the $27,545,000 in sales for the three months ended June 24, 1994.
Comparable store retail sales for the period decreased by $1,422,000, or
5.2% as a result of a softening in fragrance sales this year. In addition,
during the quarter ended June 24, 1994 the Company experienced increased
sales in several skin treatment items whose popularity was short-lived,
thus the negative impact on sales this year. The Company operated 71
stores at June 30, 1995 and 54 stores at June 24, 1994.
Wholesale sales for the nine months ended June 30, 1995 were
$2,135,000, an decrease of $655,000, or 23.5%, from the $2,790,000 in
sales for the nine months ended June 24, 1994. Wholesale sales for the
three months ended June 30, 1995 were $555,000, an decrease of $239,000, or
30.1%, from the $794,000 in sales for the three months ended June 24, 1994.
The Company has focused greater attention on its retail business but
continues to serve its remaining market of independent drug and merchandise
stores. Although the wholesale business is incremental to the Company's
overall operation, management continues to evaluate the viability of the
wholesale division.
Cost of sales, including buying, occupancy and distribution expenses,
was $81,380,000 (79.3% of sales) for the nine months ended June 30, 1995
versus $72,360,000 (78.1% of sales) for the nine months ended June 24,
1994. Cost of sales, including buying, occupancy and distribution
expenses, was $24,641,000 (78.8% of sales) for the three months ended June
30, 1995 versus $21,789,000 (76.9% of sales) for the three months ended
June 24, 1994. The dollar increase for the three months and nine months
ended June 30, 1995 is primarily attributable to cost of sales and
occupancy costs associated with the additional seventeen stores in
operation at June 30, 1995 as compared to June 24, 1994. Cost of sales
including buying, occupancy and distribution expenses as a percentage of
sales increased for the three months and nine months ended June 30, 1995
because of increased buying, occupancy and distribution expenses associated
with the aforementioned seventeen stores opened less than one year, who's
sales base has not yet grown to maturity. Additionally, in the quarter
ended June 30, 1995, the Company reduced its retail prices of professional
hair care products, that were previously purchased through secondary
sources, in order to liquidate such inventory in anticipation of receiving
future shipments directly from professional hair care manufacturers.
Selling, general and administrative ("S G & A") expenses were $19,192,000
(18.7% of sales) for the nine months ended June 30, 1995 versus $14,497,000
(15.7% of sales) for the nine months ended June 24, 1994. S G & A expenses were
$6,771,000 (21.6% of sales) for the three months ended June 30, 1995 versus
$5,083,000 (17.9% of sales) for the three months ended June 24, 1994. S G & A
expenses increased $4,695,000 for the nine months ended June 30, 1995 over the
comparable period of last year. Of this increase approximately $3,333,000 is
associated with the seventeen stores opened less than one year. S G & A
expenses increased $1,688,000 for the three months ended June 30, 1995 over the
comparable period of last year. Of this increase approximately $1,330,000 is
associated with the seventeen stores opened less than one year. The remaining
increase in S G & A expenses for the three months and nine months ended June 30,
1995 is attributable to payroll and operating expenses associated with the
operation of hair salons and marginal increases of S G & A expenses at
comparable stores and corporate overhead levels. S G & A expenses as a
percentage of sales were impacted for two reasons: 1) new stores generally have
a higher S G & A percentage because their sales volume has not matured and 2)
although comparable store and corporate S G & A increased marginally, the S G &
A percentage was negatively impacted by reduced comparable stores sales volume
in the three and nine month periods ended June 30, 1995.
Interest expense was $496,000 (0.5% of sales) for the nine months ended
June 30, 1995 versus $105,000 (0.1% of sales) for the nine months ended
June 24, 1994. Interest expense was $217,000 (0.7% of sales) for the three
months ended June 30, 1995 versus $21,000 (0.1% of sales) for the three
months ended June 24, 1994. The increase in interest expense is primarily
attributable to borrowings under the credit facility to support the fixed
asset and working capital requirements associated with new stores and the
retrofit construction of hair salons in existing stores.
Liquidity and Capital Resources
The Company's working capital was $34,256,000 at June 30, 1995 compared
to $36,039,000 at September 30, 1994. The ratio of current assets to
current liabilities was 2.4 at June 30, 1995 compared to 2.9 at September
30, 1994.
Net cash used by operating activities amounted to $891,000 for the nine
months ended June 30, 1995. The principal use of cash was to purchase
inventory, not financed through accounts payable or funds from operations,
and for new store openings
Net cash used by investing activities amounted to $3,939,000 for the
nine months ended June 30, 1995. This investment is primarily attributable
to the ten new store openings in fiscal 1995, the retrofit construction of
hair salon and assets purchased for future stores.
Net cash provided by financing activities amounted to $4,758,000 for the nine
months ended June 30, 1995 which represented net borrowings under the Company's
credit facility to finance the inventory and fixed asset costs of new stores
opened during the period. The Company also repaid capital lease obligations
in the amount of $202,000.
The Company has an unsecured credit facility (the "Facility") with a
bank for maximum borrowings of $15,000,000. The Facility, which expires on
February 28, 1996, is subject to repayment on demand and bears interest at
an annual rate equal to three-quarters of one percent (3/4 of 1%) below the
bank's prime rate, payable monthly. The Facility requires compliance with
certain restrictive covenants including maintenance of minimum tangible net
worth. At June 30, 1995, the outstanding balance under the Facility was
$9,985,000.
The Company's future capital needs primarily result from its plan to open
additional new stores and the installation of hair salons in existing stores.
The Company's estimated cost of opening a new store is approximately $725,000,
including $550,000 for initial inventory and $175,000 for leasehold
improvements, furnishings and fixtures, point-of-sale equipment, hair salon
equipment, and other items. The Company plans to open approximately fifteen
stores in fiscal year 1995 and ten stores in fiscal year 1996. The Company
plans to retrofit all existing stores with hair salons, where the leases will
permit. The anticipated cost of this project is approximately $1,500,000. The
Company believes that funds available from the Facility and internally generated
funds will provide sufficient capital to meet the Company's needs for the
foreseeable future.
<PAGE>
PART II
Item 6. (A) Exhibits
None
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
for which this report is filed.
<PAGE>
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.
THE COSMETIC CENTER, INC.
(Registrant)
Date: 8/2/95 By /s/ BEN S. KOVALSKY
BEN S. KOVALSKY
President and Chief Operating Officer
Date: 8/2/95 By /s/ BRUCE E. STROHL
BRUCE E. STROHL
Vice President-Finance
and Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,310
<SECURITIES> 0
<RECEIVABLES> 888
<ALLOWANCES> 25
<INVENTORY> 54,537
<CURRENT-ASSETS> 59,029
<PP&E> 16,994
<DEPRECIATION> 7,379
<TOTAL-ASSETS> 69,207
<CURRENT-LIABILITIES> 24,773
<BONDS> 495
<COMMON> 43
0
0
<OTHER-SE> 42,563
<TOTAL-LIABILITY-AND-EQUITY> 69,207
<SALES> 102,567
<TOTAL-REVENUES> 102,567
<CGS> 81,380
<TOTAL-COSTS> 100,572
<OTHER-EXPENSES> (88)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> 1,587
<INCOME-TAX> 643
<INCOME-CONTINUING> 944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
