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
For the fiscal year ended September 29, 1995
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period
Commission file number 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) (Zip Code)
(301) 497-6800
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:
Class A Common Stock, par value $.01 per share
Class B Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 filer pursuant to Item
405 of 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.
Yes (X) No ( )
As of December 6, 1995, the aggregate market value of the Class B Common
Stock (voting) held by non-affiliates of the registrant was approximately
$5,386,000.
As of December 6, 1995, the number of shares of Class A Common Stock of the
registrant issued and outstanding was 2,721,472 and of Class B Common Stock was
1,594,924.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for annual shareholders' meeting to be held
March 8, 1996 . . . Part III, Items 11 - 13
Exhibit index appears on page 35.
<PAGE>
THE COSMETIC CENTER, INC.
Table of Contents
PART I
Item Page
1. Business. . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . 8
3. Legal Proceedings. . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders . . . . . 9
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . 10
6. Selected Financial Data . . . . . . . . . . . . . . . 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . 12
8. Financial Statements and Supplementary Data . . . . . . . . 17
9. Disagreements on Accounting and Financial Disclosures . . . . . 32
PART III
10. Directors and Executive Officers of the Registrant. . . . . . . 33
11. Executive Compensation. . . . . . . . . . . . . . . . 34
12. Security Ownership of Certain Beneficial Owners and Management . . 34
13. Certain Relationships and Related Transactions. . . . . . . . 34
PART IV
14. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 35
2
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PART I
Item 1. Business
General
The Cosmetic Center, Inc. (the "Company"), a Delaware corporation, is
primarily engaged in the retail sale and secondarily in the wholesale
distribution of a wide range of brand name cosmetic, fragrance, beauty aid and
related items (sometimes referred to herein as "cosmetic products"). The Company
believes that it is one of the leading specialty retailers of cosmetic products
in the United States and that its stores offer a larger selection of cosmetic
products than other retailers in the Company's market areas.
Historically, the primary retailers of cosmetic products have been
department stores, drug stores and discount stores. Department stores offer
primarily higher priced prestige items, usually at the manufacturers' suggested
retail price. Traditional drug stores generally offer lower priced,
mass-merchandised items and a limited selection of prestige items typically at
the manufacturers' suggested retail price. Discount stores feature lower prices,
but generally only offer mass-merchandised cosmetic products. The Company
believes that the traditional industry marketing practices present an
opportunity for a specialty retailer and that its distinctive combination of
value pricing, breadth and depth of product selection, customer service,
strategic store concentration and aggressive marketing creates a competitive
advantage over other cosmetic product retailers.
Retail Division
The Company's retail division, through the Company's wholly owned
subsidiaries: Susan Kay Cosmetics, Inc., Anita Jean Cosmetics, Inc., and Adam
Michael Cosmetics, Inc., sells cosmetic products. The Company's stores, which
operate under the name "The Cosmetic Center(R)", are located in the metropolitan
areas of Washington, D.C.; Richmond, Virginia; Baltimore, Maryland; Chicago,
Illinois; Charlotte/Raleigh/Durham, North Carolina; Philadelphia, Pennsylvania;
and Atlanta, Georgia.
The Company's retail division operated 77 specialty stores under the name
"The Cosmetic Center(R)" as of December 6, 1995. The stores offer a broad
selection of approximately 25,000 brand name prestige and mass-merchandised
cosmetic products, including items in different sizes and colors, for women, men
and children at everyday prices generally ranging from 10% to 50% below the
manufacturers' suggested retail price, with most items priced from 10% to 20%
below such price. The Company features selected weekly advertised items priced
up to 70% below the manufacturers' suggested retail price. The stores'
merchandise includes, among other things, perfume, cologne, after-shave, makeup,
lipstick, eyeshadow, nail polish, skin care and treatment products, shampoo,
hair color, hair spray, soap, bath and body products, sun tan products, eye care
products, hair dryers, curling irons, hosiery, cosmetic accessories and novelty
items.
The Company's retail division operates hair salons in 67 of its 77
specialty stores. The Salon at The Cosmetic Center ("The Salon") emphasizes
quality haircutting and manicure services at moderate prices for the entire
family. The Salon offers the following major services: shampooing, conditioning,
haircutting and styling, hair coloring, permanent waving and in some salons
manicure
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services. In addition to professional services The Salon sells various
professional hair and nail care products.
Stores are open every day of the year (except Easter, Thanksgiving and
Christmas) generally from 10:00 A.M. to 9:00 P.M., Monday through Friday; 10:00
A.M. to 7:00 P.M. on Saturday; and 11:00 A.M. to 6:00 P.M. on Sunday. The stores
range in size from approximately 5,000 to 10,000 square feet and are designed to
provide a combination of full-service and self-service shopping. Merchandise is
generally displayed on mirror backed wall displays, color-coordinated aisle
shelving units and in lighted, mirrored showcases in accordance with a detailed,
standardized shelving plan. Products are displayed by department, manufacturer
and size, permitting departments to expand or contract rapidly in response to
changes in customer demand. Store interiors generally include wall-to-wall
carpeting, color-coordinated custom designed fixtures, recessed and track
lighting and background music.
Each store is supervised by a management team comprised of a store manager
and a minimum of two assistant managers. Store management personnel receive
bonuses based on achievement of sales and expense control objectives by their
respective stores. Store staffing includes full service sales personnel familiar
with the Company's multiple product lines and other hourly employees. Managers,
assistant managers and sales personnel from time to time receive training about
the cosmetic products sold by the Company.
Control over store operations is the responsibility of the Company's Vice
President of Retail Operations, one regional manager and eight district
managers. It is Company policy for the district managers to visit each store no
less than once a week in order to ensure the quality of merchandise
presentation, proper staffing and adherence to Company standards.
Approximately 61% of the Company's sales are made for cash with the
balance under major credit card plans for which the Company assumes no credit
risk. The stores accept the return of merchandise.
Wholesale Division
The Company's wholesale division, through the Company's wholly owned
subsidiary M. Steven Cosmetic Company, Inc., distributes cosmetic products to
independent drug stores, regional retail chains and other wholesale distributors
throughout the United States.
The Company's wholesale division emphasizes a breadth and depth of
selection of brand name cosmetic products, ranging from higher priced prestige
items to lower priced massmerchandised items. The wholesale division offers its
customers approximately 25,000 cosmetic products, which the Company believes to
be among the broadest merchandise selections offered by any cosmetic product
wholesaler in the United States. The wholesale division's products are kept in
stock in the Company's distribution center in Savage, Maryland, generally
enabling shipment within 48 hours of receipt of an order. The division mails a
catalog twice a year to all of its customers and once a year, before the
Christmas season, to selected independent drug stores and regional retail
chains. It also sends out a flyer several times a year featuring special
promotional items. The wholesale division uses a telemarketing staff to solicit
orders from independent drug stores and regional retail chains via a toll-free
telephone number, as well as by mail. Independent sales representatives working
on a commission basis also service many independent drug stores.
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Distribution Division
The Company's distribution division, through the Company's wholly owned
subsidiary Courtney Brooke, Inc., purchases cosmetic products produced by
manufacturers pursuant to Courtney Brooke's specifications for sale under the
"Courtney Brooke(R)" label. These products are sold in the Company's stores, by
the Company's wholesale division and to a small extent by independent sales
representatives. This subsidiary continually looks for opportunities to develop
additional cosmetic products that may be sold under the "Courtney Brooke(R)"
label or other names.
Expansion
The following table summarizes the number of stores opened by fiscal year
by metropolitan market area as of December 6, 1995.
<TABLE>
<CAPTION>
FISCAL WASHINGTON CHICAGO BALTIMORE RICHMOND NORTH ATLANTA PHILADELPHIA
YEAR TOTAL D.C. IL MD VA CAROLINA GA PA
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986
(and prior) 10 8 2
1987 6 2 1 3
1988 5 4 1
1989 4 4
1990 4 2 2
1991 5 2 3
1992 5 3 1 1
1993 8 3 3 1 1
1994 14 2 2 1 3 4 2
1995 12 4 1 2 2 3
1996 4 1 1 2
--- ---- --- ---- --- --- --- ---
77 27 22 6 4 5 8 5
</TABLE>
The Company plans to open approximately five to ten new stores in fiscal
1996. The Company has opened four stores subsequent to fiscal year 1995, has
signed one additional lease for a store to open in 1996 and is presently
reviewing additional retail locations. The opening of additional stores will be
subject to a number of factors, including general economic and business
conditions affecting consumer purchases, the availability of suitable store
sites and the procurement of acceptable leases.
Purchasing
In purchasing merchandise, the Company generally seeks to obtain purchases
based on the most favorable combination of prices, quantities and merchandise
selection available and, accordingly, the extent and nature of the Company's
purchases from various vendors change constantly. For the 1995 fiscal year, the
Company estimates that approximately 81% of its cosmetic products were purchased
directly from manufacturers and their representatives (primary sources) and
approximately 19% were purchased from wholesalers and retailers (secondary
sources). Over the last several years, the percentage purchased from primary
sources has increased from approximately 40% in fiscal year 1985 to its current
level. The Company purchases merchandise from approximately 560 vendors. For the
1995 fiscal year, more than $100,000 of purchases were made from each of
approximately 170 different vendors, the largest
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primary source vendor and secondary source vendor each accounted for
approximately 7% of total purchases. As is customary in the cosmetic product
industry, the Company has no long-term or exclusive contract with any vendor.
Although the loss of either 7% vendor could have a short-term material adverse
effect on the Company, the Company believes that it would not have a material
adverse effect on the Company's long-term operations.
Some of the cosmetic products purchased by the Company from its secondary
sources may include cosmetic products that were originally sold to department
stores and other retailers (resold merchandise). From time to time, certain
manufacturers have taken steps to prohibit or restrict the resale of such
products by department stores and other retailers. Some of the cosmetic products
purchased by the Company from its secondary sources also may include trademarked
products manufactured in foreign countries or trademarked products manufactured
in the United States that have been sold to foreign distributors (foreign market
merchandise). Periodically, United States trademark holders and their trade
associations have initiated litigation or administrative agency proceedings
seeking to halt the importation into the United States of such foreign market
merchandise, and federal legislation for such purpose has in the past been
proposed but not adopted. The Company's secondary sources generally will not
disclose the identity of their supply sources, which they consider to be
proprietary trade information, and, as a result, the Company cannot reliably
determine the portion of the 19% of its cosmetic products purchased from
secondary sources that is foreign market merchandise or resold merchandise. The
Company believes that in the event of any prohibition or restriction on the
importation of foreign market merchandise or the resale of merchandise, the
Company could obtain alternative sources for most of its cosmetic products. In
addition, certain manufacturers have not been willing to sell products to
retailers who sell merchandise received from secondary sources or who offer
value pricing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Hair Salon Strategy".
Inventory and Distribution Management
The Company's retail and wholesale divisions are served from a
103,000-square foot distribution center located in Savage, Maryland. The Company
believes that the distribution center, which opened in September 1990, has the
capacity to service approximately 100 specialty retail stores as well as the
Company's wholesale operations. The Company uses a computerized inventory
control and reporting system which utilizes sales data collected by an
electronic point-of-sale system at each store, integrates data from the
Company's operations and is a key element in the Company's planning, purchasing
and distribution decisions. The computer system prepares price labels and
picking orders and provides for automated reordering, minimum and maximum
stocking levels and optimum order quantities based on sales. The system also
permits analysis of sales data based on product groups, items and manufacturers
so that the Company may respond rapidly to changes in sales patterns. The
automated stock replenishment system provides the Company with a competitive
advantage by reducing store personnel expenses and enabling store personnel to
focus on customer service.
Products delivered to the Company's stores are generally marked with the
Company's selling price, as well as the manufacturer's suggested retail price,
and are delivered to the stores in Company-operated trucks. Deliveries generally
are made once a week, with more frequent deliveries during the six-week
Christmas season. Frequent deliveries permit the stores to minimize storage
space, increasing the space used for display and sale of merchandise.
Merchandise for wholesale customers is shipped by common carriers.
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The Company currently uses an IBM Model AS400 Model F70 which was upgraded
in January 1994. In fiscal years 1993 and 1994, the Company upgraded its
point-of-sale system in all of its stores to provide greater data processing and
analysis capacity.
Advertising
The Company's retail division uses newspaper print and insert advertising
in major metropolitan newspapers in the Company's market areas, seasonally
supplemented with radio and television advertising. In order to increase store
traffic and sales, the Company features selected weekly advertised items priced
up to 70% below the manufacturers' suggested retail price. The wholesale
division relies primarily on telemarketing, catalogs and flyers for sales
promotion. The Company has been able to obtain cooperative advertising
allowances from a majority of its vendors. The Company groups its stores in
selected market areas, among other reasons, to obtain economies of scale on
advertising expenditures.
Trade Names and Service Marks
The Company's stores use the trade name and service mark "The Cosmetic
Center(R)." The Company has registered "The Cosmetic Center(R)" as a service
mark with the United States Patent and Trademark Office and with the State of
Maryland. In some states, however, other businesses may use similar names and
the Company's rights to open new stores under the name "The Cosmetic Center(R)"
may be limited in such states. The Company uses the slogan "A Beautiful Way to
Save(R)" in all of its retail advertising, for which it has obtained
registration with the United States Patent and Trademark Office. The Company
purchases cosmetic products produced by manufacturers for sale under the
Company's "Courtney Brooke(R)" and "Biny o Biny(R)" labels. The Company has
obtained federal registration for the "Courtney Brooke(R)," mark and the "Biny o
Biny(R)" mark for substantially all of those classes of goods sold under the
"Courtney Brooke(R)" mark and the "Biny (bullet) Biny(R)" mark.
Employees
At September 29, 1995, the Company had approximately 1,720 employees, of
whom 866 were full-time and 854 were part-time. The Company pays wages and
salaries and provides fringe benefits which it believes are competitive with
those of its competitors in its geographic market areas. None of the Company's
employees are covered by a collective bargaining agreement and no work stoppages
have been experienced. The Company believes that its relationship with its
employees are satisfactory.
Competition
The retail and wholesale cosmetic product business and professional salon
services are very competitive. The Company's retail competitors include
department stores, independent drug stores, national and regional drug chains,
discount stores, other retail stores, large and small professional hair salon
chains, and independently owned salons. Some of these competitors sell cosmetic
products and professional hair services at discount prices, and many are part of
large national or regional chains that have substantially greater resources and
name recognition than
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the Company. The Company's stores compete on the basis of selling price,
merchandise selection and variety, customer service, store location and
ambiance. The Company believes that its distinctive combination of value
pricing, breadth and depth of product selection, customer service, strategic
store concentration, and aggressive marketing provides a strong basis for
competition with other cosmetic product retailers. However, there can be no
assurance that others using a similar approach will not become competitors of
the Company.
The Company's wholesale division competes directly with other cosmetic
wholesalers nationwide. Some of these wholesalers have substantially greater
resources than the Company. The Company's wholesale division competes on the
basis of merchandise selection and availability, selling price and rapid
delivery.
Item 2. Properties
Store Properties
The Company's stores range in size from approximately 5,000 to 10,000
square feet, with the average store comprising 6,190 square feet. All of the
Company's stores operate under leases with the initial term expiring at varying
dates until January 2006. The average remaining initial term of the store leases
is approximately four years. Certain of the leases contain renewal options up to
fifteen years, with the average renewal term being five years. The base rental
rates on leases average approximately $13.96 per square foot. Substantially all
of the Company's leases provide for additional percentage rents. Sixteen of the
Company's leases terminate within the next two years. The Company believes it
will be able to negotiate a new lease for these properties or lease other space
in the vicinity of the current locations. The Company leases an industrial park
store from a partnership in which A. Weinstein, Vice Chairman, Vice President,
Secretary, and Director of the Company, holds a 35.67% limited partnership
interest.
See Item 1. Business -- Expansion for information as to the number of
stores and market areas.
Distribution Center and Corporate Headquarters
All of the Company's stores are served by a 103,000-square foot
distribution center and corporate headquarters located in Savage, Maryland. This
facility is leased by the Company subject to a lease agreement expiring in
September 2000, with a five-year renewal option. All support services for the
stores are centralized in the facility, including purchasing, data processing,
advertising and general administration. The distribution center supplies all of
the merchandise requirements of the Company's stores. The Company believes that
this facility can service approximately 100 specialty retail stores as well as
the Company's wholesale operations, and that its store locations, distribution
center and inventory are adequately covered by insurance.
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Item 3. Legal Proceedings
No material legal proceedings are pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year ended September 29, 1995.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Common Stock, Class A (nonvoting) and Class B (voting), of the Company
is quoted in the over-the-counter market on the NASDAQ National Market System
under the symbols COSCA and COSCB, respectively. The following table sets forth
the high and low closing sale prices of the common stock, for the periods
indicated.
<TABLE>
<CAPTION>
MARKET PRICE
Class A Class B
Fiscal Year Quarter High Low High Low
<S> <C> <C> <C> <C> <C>
1994 First $18 1/4 $14 3/4 $18 $14 3/4
Second $20 5/8 $17 3/8 $20 1/2 $17 1/2
Third $19 1/4 $16 1/2 $19 1/4 $15
Fourth $19 1/4 $15 3/4 $18 3/4 $14 3/4
1995 First $19 $12 3/4 $18 3/4 $12 5/8
Second $14 $ 7 $14 $ 7 3/4
Third $ 9 1/4 $ 7 1/2 $11 $ 8
Fourth $10 $ 7 1/2 $10 $ 7 3/4
</TABLE>
As of December 6, 1995, there were 202 holders of record of the
Company's Class A Common Stock and 140 holders of record of the Company's Class
B Common Stock, excluding holders whose stock is held in nominee or street name.
Dividend Policy
It is the Company's current policy to retain earnings to support the
growth of the Company's business. Any payment of cash dividends in the future
will be within the discretion of the Company's Board of Directors and will
depend upon the Company's financial condition, capital requirements, earnings,
and other relevant factors. The Company has paid no dividends since its initial
public offering in 1986 and does not anticipate paying cash dividends in the
foreseeable future.
The Company's certificate of incorporation provides that any cash
dividends on the Class A Common Stock must be at least equal to cash dividends
on the Class B Common Stock.
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Item 6. Selected Financial Data.
The following selected financial data has been derived from the
Company's consolidated financial statements, which have been audited by
independent public accountants. The selected financial data should be read in
conjunction with the consolidated financial statements and accompanying notes to
consolidated financial statements.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts Fiscal Years
1995 1994 1993 1992 1991
-------- ------- ------- ------- ------
Earnings statement data:
<S> <C> <C> <C> <C> <C>
Net sales by division:
Retail. . . . . . . . . . . . . $129,677 $119,975 $104,827 $95,443 $ 81,743
Wholesale. . . . . . . . . . . . 2,627 3,576 4,659 5,732 5,885
----------- ----------- ---------- ----------- -----------
Total net sales . . . . . . . . . . . 132,304 123,551 109,486 101,175 87,628
---------- ---------- ---------- ---------- ----------
Cost of sales including buying,
occupancy and distribution . . . . . . 105,094 96,574 86,514 80,323 68,910
Selling, general and administrative
expenses . . . . . . . . . . . . 27,033 19,929 17,115 16,251 14,692
---------- ---------- ----------- ----------- ----------
Total operating expenses . . . . . . . . 132,127 116,503 103,629 96,574 83,602
---------- ---------- ---------- ----------- ----------
Income from operations. . . . . . . . . 177 7,048 5,857 4,601 4,026
Other income, net. . . . . . . . . . . 670 110 84 49 193
Interest expense. . . . . . . . . . . (725) (166) (97) (559) (1,096)
---------- ------------ ------------ ------------ -----------
Earnings before income taxes . . . . . . 122 6,992 5,844 4,091 3,123
Income taxes (benefit) provision. . . . . . (157) 2,804 2,267 1,657 1,265
----------- ----------- ----------- ----------- -----------
Net earnings. . . . . . . . . . . . $ 279 $ 4,188 $ 3,577 $ 2,434 $ 1,858
=========== =========== =========== =========== ==========
Net earnings per common share
Primary. . . . . . . . . . . . $ .06 $ 0.95 $ 0.82 $ 0.68 $ 0.60
=========== =========== =========== =========== ===========
Fully Diluted. . . . . . . . . . $ .06 $ 0.95 $ 0.82 $ 0.68 $ 0.60
=========== =========== =========== =========== ===========
Weighted average shares outstanding
Primary. . . . . . . . . . . . 4,358,339 4,414,462 4,375,114 3,577,618 3,100,187
=========== =========== =========== =========== ===========
Fully Diluted. . . . . . . . . . 4,358,339 4,421,883 4,388,278 3,577,618 3,100,187
=========== =========== =========== =========== ===========
Stores open at end of period . . . . . . 73 61 47 39 34
Balance sheet data at end of period:
Working capital. . . . . . . . . . . $ 33,090 $ 36,039 $ 33,386 $ 29,918 $ 13,102
Property and equipment net . . . . . . . 10,801 7,115 5,468 4,307 3,554
Total assets. . . . . . . . . . . . 77,967 62,134 54,765 49,914 48,627
Short-term debt. . . . . . . . . . . 12,276 5,297 222 195 14,987
Long-term debt . . . . . . . . . . . 420 711 814 555 146
Shareholders' equity . . . . . . . . . 41,941 41,662 37,436 33,855 17,028
</TABLE>
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Item 7. 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 77 stores under
the name "The Cosmetic Center(R)" located in the greater metropolitan market
areas of Washington, D.C.; Richmond, Virginia; Baltimore, Maryland; Chicago,
Illinois; Charlotte/Raleigh/Durham, North Carolina; Philadelphia, Pennsylvania;
and Atlanta, Georgia. The Company sells approximately 25,000 brand name prestige
and mass-merchandised cosmetic products.
Hair Salon Strategy
Traditionally, the manufacturers of professional hair care products have
allowed their products to be sold by retail hair salons only. Historically, the
Company was able to purchase professional hair care products from secondary
sources, and sales of these products generally accounted for 5% to 6 % of the
Company's annual retail sales. The Company's purchases of these products and
sale at value prices to consumers was not looked upon favorably by these
manufacturers. With the growth of the Company over the past three years
sufficient quantities of top selling professional hair care products became
increasingly difficult to purchase through secondary sources. As a result, the
Company decided to add hair salons in its existing stores as an add-on beauty
service and with the anticipation of developing a direct relationship with the
manufacturers of professional hair care products.
In the latter half of fiscal 1994, the Company opened hair salons in
twelve of the thirteen new stores in the Philadelphia, Pa., Charlotte/Raleigh,
N.C. and Atlanta, Ga. market areas. In February 1995, the Company began to
retrofit existing stores in its Washington D.C. and Chicago, IL. market areas.
As of December 6, 1995, the Company has built or retrofited 67 of its 77 stores
to include hair salons.
In the Spring of 1995, the Company obtained a verbal commitment from one
of the four major professional hair care products manufacturers to sell to the
Company on a direct basis. However, in order to receive these products on a
direct basis, the Company was asked to remove from all of its retail stores, all
professional hair care products that were purchased from a secondary source. In
order to build a relationship with this manufacturer, the Company agreed to the
manufacturer's requirements in June 1995. Approximately 30 days later, the
Company began to receive professional hair care products directly from this
manufacturer and continues to receive such products today. However, this
manufacturer represents one third of the 6% of sales volume the Company
surrendered in order to build the direct purchase relationship. The loss of
these professional hair care product sales has adversely affected retail sales
and profits. The Company is attempting to develop a similar relationship with
the other three major manufacturers, but there are no assurances this will be
achieved.
Although the Company has lost sales and profits during the transition
stages of this arrangement, the Company believes that there are future benefits
to be derived from maintaining and expanding the arrangement. The gross margin
on professional hair care products purchased
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on a direct basis are significantly higher than the gross margin on professional
hair care products purchased on a secondary source basis. In addition, because
of the direct relationship, the Company is able to maintain sufficient
quantities of professional hair care products in stock, which it could not
otherwise maintain.
Results of Operations
The Company's fiscal year ends on the last Friday of September. Fiscal
years for the following discussion ended on September 29, 1995, September 30,
1994, and September 24, 1993. Fiscal years 1995 and 1993 each consisted of 52
weeks and fiscal year 1994 consisted of 53 weeks.
Fiscal Year Ended September 29, 1995
Consolidated net sales for the year ended September 29, 1995 were $132.3
million, an increase of $8.7 million, or 7.0%, from the $123.6 million in
consolidated net sales for the year ended September 30, 1994.
Retail sales for the year ended September 29, 1995 were $129.7 million, an
increase of $9.7 million, or 8.1%, from the $120.0 million in retail sales for
the year ended September 30, 1994. The increase in retail sales was primarily
attributable to the twelve stores opened at various dates in fiscal 1995 and the
ten stores opened in the second half of fiscal year 1994 which were in operation
for a full year in fiscal year 1995. Comparable store retail sales for the
fiscal year were $110.4 million as compared to $119.8 million for the 1994
fiscal year, a decline of $9.4 million of which approximately $1.9 million is
attributable to the extra week in fiscal year 1994. Comparable store sales have
also been adversely affected by a softening in fragrance sales for most of the
year and by the transition in the process of purchasing professional hair care
products described above. The Company operated 73 stores at September 29, 1995
as compared to 61 stores at September 30, 1994.
Wholesale sales for the year ended September 29, 1995 were $2.6 million, a
decrease of $1.0 million, or 27.8%, from the $3.6 million in wholesale sales for
the year ended September 30, 1994. The decrease in the wholesale business is
attributable to a general softening in retail sales nationwide and a continued
shrinking of the independent drug store market. These market conditions are
expected to continue for the foreseeable future. The Company continues to
emphasize customer service and value as key elements in its efforts to stabilize
wholesale sales. The Company has focused greater attention on its retail
business but continues to serve its remaining market of independent drug and
merchandise stores. Management continues to evaluate the viability of the
wholesale division.
Cost of sales, including buying, occupancy and distribution expense, was
$105.1 million (79.4% of sales) for the year ended September 29, 1995, versus
$96.6 million (78.2% of sales) for the year ended September 30, 1994. The dollar
increase was primarily attributable to cost of sales and occupancy costs
associated with the twelve stores opened in fiscal 1995, the ten stores opened
in the second half of fiscal year 1994, which were in operation for a full year
in fiscal year 1995, and additional buying and distribution expenses to support
the new stores. Cost of sales including buying, occupancy and distribution
expenses as a percentage of sales increased for the 1995 fiscal year because of
increased buying, occupancy and distribution expenses associated with the
aforementioned new stores, whose sales volume has not yet grown to the level
experienced
13
<PAGE>
by mature stores. The percentage was also adversely affected by the decline in
comparable store sales.
Selling, general and administrative ("S G & A") expenses were $27.0
million (20.4% of sales) for the year ended September 29, 1995, versus $19.9
million (16.1% of sales) for the year ended September 30, 1994. S G & A expenses
increased $7.1 million for fiscal year 1995 versus fiscal year 1994. Of this
increase $5.0 million was associated with the twelve stores opened in fiscal
1995 and the ten stores opened in the second half of fiscal 1994. These
twenty-two stores, or 30% of all stores, generated additional sales of $18.2
million, thus their S G & A expenses as a percentage of sales was 27.5%, thus
increasing the overall S G & A percentage. New stores generally have a higher S
G & A percentage until their sales volume matures.
S G & A expenses for the fiscal year 1995 also included some one-time
expenses. The Company absorbed an $800,000 payroll expense for salary
continuation benefits under the remaining term of the employment contract of the
Company's Chairman, Louis R. Weinstein, who died on July 8, 1995. This expense
was partially funded by $550,000 of proceeds under a life insurance contract,
which is included in other income. Additionally, the Company absorbed
approximately $340,000 of S G & A expenses, which included a $150,000 lease
termination fee, on a "close out" store concept which was opened and closed
within the 1995 fiscal year.
The remaining increase in S G & A expenses for the fiscal year 1995 was
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
adversely affected by the relatively lower sales volume of the twenty-two stores
discussed above and by the reduced comparable store sales volume for fiscal year
1995.
Interest expense was $725 thousand (0.5% of sales) for the year ended
September 29, 1995, versus $166 thousand (0.1% of sales) for the year ended
September 30, 1994. The increase in interest expense was 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.
The income tax provision for fiscal year 1995 includes a tax benefit of
approximately $216,000 because the proceeds from the life insurance contract is
not taxable for tax purposes.
Fiscal Year Ended September 30, 1994
Consolidated net sales for the year ended September 30, 1994 were $123.6
million, an increase of $14.1 million, or 12.9%, from the $109.5 million in
consolidated net sales for the year ended September 24, 1993.
Retail sales for the year ended September 30, 1994 were $120.0 million, an
increase of $15.2 million, or 14.5%, from the $104.8 million in retail sales for
the year ended September 24, 1993. The increase in retail sales was attributable
to the fourteen stores opened at various dates in fiscal 1994, the eight stores
opened in fiscal year 1993 which were in operation for a full year in fiscal
year 1994 and comparable store sales growth. The Company operated 61 stores at
September 30, 1994 as compared to 47 stores at September 24, 1993. Comparable
store retail sales for the year increased $4.4 million, or 4.2%.
14
<PAGE>
Wholesale sales for the year ended September 30, 1994 were $3.6 million, a
decrease of $1.1 million, or 23.4%, from the $4.7 million in wholesale sales for
the year ended September 24, 1993.
Cost of sales, including buying, occupancy and distribution expense was
$96.6 million (78.2% of sales) for the year ended September 30, 1994, versus
$86.5 million (79.0% of sales) for the year ended September 24, 1993. The dollar
increase was primarily attributable to cost of sales and occupancy costs
associated with the fourteen stores opened in fiscal 1994 and the eight stores
opened in fiscal year 1993, which were in operation for a full year in fiscal
year 1994. Cost of sales as a percentage of sales improved as a result of the
Company continuing to increase its merchandise purchases from direct sources,
which contributes higher gross margins, and from the Company emphasizing its
private label products which also contribute higher gross margins.
S G & A expenses were $19.9 million (16.1% of sales) for the year ended
September 30, 1994, versus $17.1 million (15.6% of sales) for the year ended
September 24, 1993. The dollar increase was primarily attributable to S G & A
expenses associated with the fourteen stores opened in fiscal 1994. S G & A
expenses in dollars and as percent to sales increased in the fourth quarter of
fiscal year 1994 for the following reasons: (1) Seven of the fourteen stores
opened for the year were opened in the fourth quarter. A new store generally has
a higher level of S G & A expense percentage because of its immature sales
volume. (2) The Company absorbed start up operating expenses related to the
introduction of hair salons in the Company's three new expansion markets. (3)
The Company increased its advertising expenditures in its expansion markets.
Interest expense was $166 thousand (0.1% of sales) for the year ended
September 30, 1994, versus $97 thousand (0.1% of sales) for the year ended
September 24, 1993. The increase in interest expense was primarily attributable
to increased borrowing to support the retail store expansion and capital lease
obligations related to the point-of-sale equipment purchases.
Liquidity and Capital Resources
The Company's working capital was $33.1 million at September 29, 1995
compared to $36.0 million at September 30, 1994. The ratio of current assets to
current liabilities was 2.0 at September 29, 1995 and 2.9 at September 30, 1994.
Net cash used in operating activities amounted to $1,152,000 for the
fiscal year ended September 29, 1995. The principal use of cash was to purchase
inventory not financed through accounts payable or funds from operations after
adding back depreciation and amortization.
Net cash used in investing activities amounted to $5,598,000 for the
fiscal year ended September 29, 1995. This investment is primarily attributable
to the twelve stores opened during the period and the retrofit construction of
hair salons in existing stores.
Net cash provided by financing activities amounted to $6,688,000 for the
fiscal year ended September 29, 1995. Under the Company's credit facility the
Company had net borrowings of $6,960,000 to finance the inventory and fixed
asset costs of new stores opened during the period and the installation of hair
salons. The Company also repaid capital lease obligations in the amount of
$272,000.
At September 29, 1995, the Company had an unsecured credit facility (the
"Facility") with a bank for maximum borrowing of $15.0 million. The Facility,
which expires on March 10, 1996, is
15
<PAGE>
subject to repayment on demand and bears interest, payable monthly, at an annual
rate equal to three-quarters of one percent (3/4 of 1%) below the bank's prime
rate or at LIBOR plus 115 basis points. The Facility requires compliance with
certain restrictive covenants including maintenance of minimum tangible net
worth. At September 29, 1995, there was an outstanding balance of $11,985,000
under the Facility. The Company is presently negotiating an extension of the
Facility with its bank.
The Company's future capital needs primarily result from its plan to open
additional new stores and completing the installation of hair salons in a few
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 five to ten
stores during the fiscal year 1996. 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 next year.
Seasonality
The Company's business is seasonal. The highest volume of sales for both
the retail and wholesale divisions occurs during the first fiscal quarter.
Inflation
While inflation has not had, and the Company does not expect it to have, a
material impact upon operating results, there can be no assurance that the
Company's business will not be affected by inflation in the future.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Consolidated Financial Statements Page
Report of Independent Public Accountants ........................ 18
Consolidated Balance Sheets
as of September 29, 1995 and September 30, 1994 .............. 19
Consolidated Statements of Earnings ............................. 21
Fifty-two weeks ended September 29, 1995
Fifty-three weeks ended September 30, 1994
Fifty-two weeks ended September 24, 1993
Consolidated Statements of Shareholders' Equity ................. 22
Fifty-two weeks ended September 29, 1995
Fifty-three weeks ended September 30, 1994
Fifty-two weeks ended September 24, 1993
Consolidated Statements of Cash Flows ........................... 23
Fifty-two weeks ended September 29, 1995
Fifty-three weeks ended September 30, 1994 Fifty-two weeks
ended September 24, 1993
Notes to Consolidated Financial Statements ...................... 24
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cosmetic Center, Inc.:
We have audited the accompanying consolidated balance sheets of The Cosmetic
Center, Inc. (a Delaware corporation), and subsidiaries as of September 29,
1995, and September 30, 1994, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the three fiscal
years in the period ended September 29, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Cosmetic Center, Inc., and
subsidiaries as of September 29, 1995, and September 30, 1994, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended September 29, 1995, in conformity with generally accepted
accounting principles.
/S/ ARTHUR ANDERSEN LLP
Washington, D.C.,
November 10, 1995
18
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
1995 1994
--------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 1,320 $ 1,382
Accounts receivable, less allowance for
doubtful accounts of $20 in 1995 and 1994 ........... 881 1,557
Inventories ............................................ 61,891 50,422
Prepaid expenses ....................................... 529 552
Prepaid income taxes ................................... 1,142 159
Deferred income tax benefit ............................ 970 521
------- -------
Total current assets ..................................... 66,733 54,593
------- -------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment ...................... 11,410 8,705
Leasehold improvements ................................. 4,932 2,680
Leased property -- capitalized ......................... 1,670 1,670
------- -------
18,012 13,055
Accumulated depreciation and amortization .............. 7,211 5,940
------- -------
10,801 7,115
------- -------
DEPOSITS AND OTHER ASSETS ................................ 307 254
------- -------
DEFERRED INCOME TAX BENEFIT .............................. 126 172
------- -------
TOTAL ASSETS ............................................. $77,967 $62,134
======= =======
See notes to consolidated financial statements.
19
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
1995 1994
------------ --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 17,309 $ 9,922
Note payable -- bank ........................... 11,985 5,025
Accrued expenses ............................... 3,628 3,335
Income taxes payable ........................... 430 --
Current portion of obligation
under capital leases ......................... 291 272
-------- -------
Total current liabilities ...................... 33,643 18,554
OBLIGATION UNDER CAPITAL LEASES .................. 420 711
DEFERRED RENT .................................... 1,339 1,207
OTHER LIABILITIES ................................ 624 --
-------- -------
TOTAL LIABILITIES ................................ 36,026 20,472
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY: (Note 4)
Class A common stock, $.01 par value;
authorized 5,000,000 shares; issued
and outstanding 2,721,472 shares
and 2,681,292 shares, respectively .......... 27 27
Class B common stock, $.01 par value;
authorized 5,000,000 shares; issued
1,594,924 shares and 1,554,742
shares, respectively ........................ 16 15
Additional paid-in capital ..................... 21,740 21,387
Retained earnings .............................. 20,512 20,233
Treasury stock-Class B common stock,
32,144 shares at cost ....................... (354) --
-------- -------
TOTAL SHAREHOLDERS' EQUITY ....................... 41,941 41,662
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ........................................ $ 77,967 $62,134
======== =======
See notes to consolidated financial statements.
20
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ........................................ $ 132,304 $ 123,551 $ 109,486
----------- ----------- -----------
Cost of sales including buying, occupancy
and distribution ................................. 105,094 96,574 86,514
Selling, general and administrative expenses ..... 27,033 19,929 17,115
----------- ----------- -----------
Total operating expenses ......................... 132,127 116,503 103,629
----------- ----------- -----------
Income from operations ........................... 177 7,048 5,857
Other income, net ................................ 670 110 84
Interest expense ................................. (725) (166) (97)
----------- ----------- -----------
Earnings before income taxes ..................... 122 6,992 5,844
Income taxes (benefit) provision ................. (157) 2,804 2,267
----------- ----------- -----------
Net earnings ..................................... $ 279 $ 4,188 $ 3,577
=========== =========== ===========
Net earnings per common share
Primary .......................................... $ .06 $ 0.95 $ 0.82
=========== =========== ===========
Fully Diluted .................................... $ .06 $ 0.95 $ 0.82
=========== =========== ===========
Weighted average shares outstanding
Primary .......................................... 4,358,339 4,414,462 4,375,114
=========== =========== ===========
Fully Diluted .................................... 4,358,339 4,421,883 4,388,278
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Class A Class B Additional Total
Common Common Paid-in Retained Treasury Shareholders'
Stock Stock Capital Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balances at
September 25, 1992 .................... $27 $15 $21,345 $12,468 $-- $33,855
Exercise of stock
options, 1,000 shares ............... -- -- 4 -- -- 4
Net earnings ......................... -- -- -- 3,577 -- 3,577
------- ------- -------- ------ ------- --------
Balances at
September 24, 1993 .................... 27 15 21,349 16,045 -- 37,436
Exercise of stock
options, 6,050 shares ............... -- -- 38 -- -- 38
Net earnings ......................... -- -- -- 4,188 -- 4,188
------- ------- ----------- -------- ------- -------
Balances at
September 30, 1994 .................... 27 15 21,387 20,233 -- 41,662
------- ------- --------- -------- ------- -------
Exercise of stock options,
32,144 Class B common shares
tendered for 40,180
Class A common shares and 40,182
Class B common shares ............... -- 1 353 -- (354) --
Net earnings ........................ -- -- -- 279 -- 279
------- ------- ----------- -------- ------- ---------
Balances at
September 29, 1995 .................. $27 $16 $21,740 $20,512 $(354) $41,941
======= ======= =========== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . $ 279 $ 4,188 $ 3,577
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization. . . . . . . . . . . 2,341 1,580 1,392
Loss on disposal of assets. . . . . . . . . . . . . -- -- 23
Change in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . 676 (484) 12
Inventories. . . . . . . . . . . . . . . . . (11,469) (5,420) (3,785)
Prepaid expenses. . . . . . . . . . . . . . . . (406) (341) (247)
Prepaid income taxes. . . . . . . . . . . . . . (983) (103) 144
Deposits and other assets. . . . . . . . . . . . (53) (140) (94)
Accounts payable. . . . . . . . . . . . . . . 7,387 (2,895) 937
Accrued expenses. . . . . . . . . . . . . . . 293 903 47
Deferred rent. . . . . . . . . . . . . . . . 132 163 --
Other liabilities. . . . . . . . . . . . . . 624 -- --
Income taxes payable. . . . . . . . . . . . . . 430 -- --
Deferred income tax benefit. . . . . . . . . . . (403) 207 (36)
------------- ---------- -----------
Net cash (used in) provided by operating activities . . (1,152) (2,342) 1,970
------------- --------- -----------
Cash flows from investing activities:
Capital expenditures, net. . . . . . . . . . . . . . (5,633) (2,861) (1,860)
Proceeds from sale of equipment . . . . . . . . . . 35 -- 27
---------- ----------- ----------
Net cash used in investing activities. . . . . . . . (5,598) (2,861) (1,833)
--------- ---------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement . . . . 6,960 5,025 --
Repayments of capital lease obligations . . . . . . . (272) (245) (316)
Exercise of stock options. . . . . . . . . . . . . . -- 38 4
----------- ---------- -----------
Net cash provided by (used in) financing activities . 6,688 4,818 (312)
--------- ----------- ----------
Net decrease in cash and cash equivalents . . . . . . (62) (385) (175)
Cash and cash equivalents at beginning of year . . . . 1,382 1,767 1,942
--------- ---------- ------------
Cash and cash equivalents at end of year . . . . . . . $ 1,320 $ 1,382 $ 1,767
========= =========== ==========
Supplemental Disclosures of Cash Flow Information and
Non Cash Activities:
Cash payments for interest. . . . . . . . . . . . . . $ 696 $ 146 $ 97
Cash payments for income taxes. . . . . . . . . . . 837 2,700 2,159
Capital lease obligations incurred. . . . . . . . . . . -- 192 602
Treasury stock (Note 4 ). . . . . . . . . . . . . . . . 354 -- --
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of The Cosmetic
Center, Inc. and its wholly owned subsidiaries (the "Company"). The Company
sells cosmetic, fragrance, beauty aid and related items on a retail basis under
the name "The Cosmetic Center(R)" in Georgia, Illinois, Maryland, New Jersey,
North Carolina, Pennsylvania, and Virginia, on a wholesale basis through M.
Steven Cosmetic Company, Inc., and on a distribution basis through Courtney
Brooke, Inc. and Dumonde Distributors, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue at the point of sale on its retail business
and the point of shipment on its wholesale business.
Fiscal Year
The Company's fiscal year ends on the last Friday of September. Fiscal
years for the accompanying financial statements ended on September 29, 1995,
September 30, 1994, and September 24, 1993 are referred to herein as 1995, 1994
and 1993, respectively. Fiscal years 1995 and 1993 each consisted of 52 weeks
and fiscal year 1994 consisted of 53 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with a maturity of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and accounts receivable. The
Company's cash and cash equivalents are deposited with major banks and financial
institutions. The Company's accounts receivable result primarily from
advertising rebates and construction allowances. The Company routinely assesses
the financial strength of its financial institutions. As a consequence it feels
that its concentration of credit risk is limited.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method.
24
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments at the beginning of the
lease term.
Depreciation on property and equipment is calculated on a straight-line
basis over the estimated useful lives of the assets. Leasehold improvements and
equipment under capital leases are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset.
New Store Opening Costs
Personnel recruitment, training, supplies, payroll and related costs
incurred in connection with opening a new store are capitalized and included in
prepaid expenses until the store opens, at which time such costs are amortized
over a twelve-month period.
Accounts Payable
Accounts payable includes unfunded disbursement checks which have not been
presented to the bank for payment of $1,679,000 and $1,073,000 at September 29,
1995, and September 30, 1994, respectively.
Self-Insurance
The Company is self-insured for its employee medical benefit program which
covers eligible hourly and salaried employees. The Company maintains stop loss
insurance coverage both on an individual and aggregate basis.
Deferred Income Taxes
Effective September 25, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109)". Under
SFAS 109, deferred tax assets or liabilities are computed based on the
difference between financial statement and income tax bases of assets and
liabilities using the enacted-marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period. Prior to September 25, 1993, under APB No. 11, deferred income tax
expenses or credits were recorded to reflect the tax consequences of timing
differences between the recording of income and expenses for financial reporting
purposes and for purposes of filing federal income tax returns at income tax
rates in effect when the difference arose. The cumulative effect of adopting
this change was not material to the financial statements.
25
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued)
Earnings Per Common Share
Earnings per common share has been computed on the basis of the weighted
average common shares outstanding for all periods presented. Weighted average
common shares outstanding for 1995, 1994 and 1993 includes the exercise of all
stock options having exercise prices less than the average market price of the
common stock for primary earnings per share and the greater of the average
market price and the ending market price for fully diluted earnings per share,
using the treasury stock method.
Note 2 - Note Payable - Bank
The Company has an unsecured credit facility (the "Facility") with a bank
for a maximum borrowing of $15,000,000. The Facility, which expires on March 10,
1996, is subject to repayment on demand and bears interest, payable monthly, at
an annual rate equal to three-quarters of one percent (3/4 of 1%) below the
bank's prime rate or at LIBOR plus 115 basis points. The Facility requires
compliance with certain restrictive covenants including maintenance of minimum
tangible net worth. At September 29, 1995, the Facility had an outstanding
balance of $11,985,000 at interest rates ranging from 7.025% to 8.0%. At
September 30, 1994, the Facility had an outstanding balance of $5,025,000 at 7%
interest. The weighted average interest rate on short term borrowings was 7.9%
in 1995 and 5.7% in 1994.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate cap and
swap agreements are used to reduce the potential impact of increases in interest
rates on the floating rates credit facility. During 1995, the Company entered
into an interest rate cap on a $2 million notional amount which expires in
August 1996. The agreement entitles the Company to receive payments from the
counterparties in any period during which the floating rate on its credit
facility exceeds 8%. The premium paid is being amortized over the cap period.
The Company also entered into an interest rate swap for a notional amount
of $4 million which expires in February 1997. This agreement effectively changes
the Company's exposure on $4 million of its credit facility to a fixed rate of
7.46%
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate caps and swaps. The Company anticipates,
however, that the counterparties (major financial institutions) will be able to
fully satisfy their obligations under the contracts.
26
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Accrued Expenses
At September 29, 1995 and September 30, 1994, accrued expenses consisted
of the following:
(Dollars in thousands)
1995 1994
-------- ------
Payroll and payroll taxes $ 1,423 $ 1,142
Other operating expenses 911 843
Fixed assets 415 560
Sales tax 345 467
Advertising expenses 511 225
Group medical 23 98
--------- --------
$ 3,628 $ 3,335
======== ========
Note 4 - Shareholders' Equity
The Class A Common Shares (nonvoting) and Class B Common Shares (voting)
are similar in characteristics except that the voting power for the election of
directors and all other purposes is vested exclusively in the Class B
shareholders, except as otherwise required by law or the Certificate of
Incorporation.
Under the 1991 Stock Option Plan (Note 7), 616,408 shares of Class A
Common Stock and 92,180 shares of Class B Common Stock are reserved for
issuance.
In fiscal 1995, certain officers exercised options for 40,180 and 40,182
shares of Class A and Class B common stock, respectively. The exercise price of
approximately $354,000 was paid with 32,144 shares of Class B common stock and
as a result, is recorded as treasury stock in the accompanying financial
statements.
Note 5 - Income Taxes
The Company accounts for income taxes under SFAS 109. Under SFAS 109,
deferred tax assets and liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. SFAS 109 requires that the net deferred tax asset be
reduced by a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of the net deferred tax
asset will not be realized. The Company has not recorded an valuation allowance
against its net deferred tax assets.
27
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income Taxes (Continued)
At September 29, 1995 and September 30, 1994, the components of the net
deferred tax asset consisted of the following:
(Dollars in thousands)
1995 1994
-------- ------
Deferred tax assets (liabilities):
UNICAP ...................... $ 565 $ 433
Deferred rent ............... 623 487
Depreciation and amortization (570) (339)
Preopening costs ............ (40) (112)
Accrued vacation ............ 159 132
Accrued group medical ....... 2 31
Employment contract ......... 269 --
Deferred legal .............. 40 37
Deferred compensation ....... 48 24
------- -----
Net deferred tax asset ............ $ 1,096 $ 693
======= =====
Income tax (benefit) expense consists of:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . $202 $2,126 $1,857
State. . . . . . . . . . 44 471 412
----------- ---------- ----------
246 2,597 2,269
----------- ---------- ---------
Deferred:
Federal. . . . . . . . . (330) 181 4
State. . . . . . . . . . (73) 26 (6)
----------- ----------- ----------
(403) 207 (2)
----------- ----------- -----------
$ (157) $ 2,804 $ 2,267
========== ========== =========
</TABLE>
A reconciliation of the actual tax expense to the expected tax expense
(computed by applying the federal corporate income tax rate of 34% to earnings
before income taxes) follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
------------------- ------------------- -----------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Expense at statutory federal rate . . . . $ 42 34.0 % $ 2,377 34.0 % $ 1,987 34.0%
Increase in income taxes resulting from:
State income taxes, net of
Federal income tax benefit. . . . . . 6 4.6 % 325 4.6 % 272 4.7%
Life insurance proceeds. . . . . . . (216) (176.3)% - - - -
Other, net . . . . .. . . . . 11 9.0 % 102 1.5 % 8 0.1%
--------- ------ -------- ---- -------- ----
$ (157) (128.7)% $ 2,804 40.1 % $ 2,267 38.8%
======== ====== ======== ==== ======== ====
</TABLE>
28
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income Taxes (Continued)
The sources of deferred income taxes and their effects for 1993 under APB
11 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1993
<S> <C>
Inventory cost capitalized for tax purposes. . . $ (28)
Accrued rent expense. . . . . . . . . . . . . (71)
Accrued vacation expense. . . . . . . . . . . . (23)
Accrued benefit plans. . . . . . . . . . . . . 45
Difference between tax and financial statement
depreciation. . . . . . . . . . . . . . . . . 59
Other . . . . . . . . . . . . . . . . . . . 16
-------
$ (2)
</TABLE>
Note 6 - Employee Benefit - Retirement Plans
The Company's Employee Retirement Plan (the "Retirement Plan") covers
all eligible employees. The Retirement Plan includes both a profit sharing
option and 401K option. The Board of Directors approved total contributions of
$38,000, $114,000 and $117,000 for fiscal years 1995, 1994 and 1993,
respectively. The contributions for the profit sharing plan are discretionary
and are allocated based upon each participant's salary. The contribution for the
401K is determined by matching a percentage of each employee's elective salary
deferral.
Generally, the Company offers no post-employment or post-retirement
benefits to employees. (Note 9)
Note 7 - Stock Option Plan
The 1991 Stock Option Plan (the "Plan"), as amended, authorizes options
for the purchase of 500,000 shares of common stock. In 1995, the Board approved
an increase in the shares reserved for granting to 800,000 by adding 300,000
shares of Class A common stock to the plan. The Plan is intended to provide an
incentive to directors, officers and key employees of the Company by providing
those persons with opportunities to purchase shares of the Company's common
stock under either incentive stock options, as defined under Section 422A of the
Internal Revenue Code of 1986, or other stock options.
Incentive stock options may be granted at a price not less than 100% of
fair market value at the date of grant for a term not to exceed ten years. Other
stock options may be granted at a price not to be less than 50% of the fair
market value at the date of grant for a term not to exceed eleven years. With
respect to any director, officer or key employee who is a ten percent
shareholder, incentive options may be granted at a price not less than 110% of
fair market value at the date of grant for a term not to exceed five years.
29
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stock Option Plan (Continued)
The Plan is administered by a Stock Option Committee (the "Committee")
consisting of two or more members of the Board. The Committee receives annual
non-discretionary grants provided shares are available under the Plan. Any
non-employee director shall receive annually on January 15th, a fully vested
option for 1,000 shares, at an option price of 100% of the fair market value and
for a term of ten years. Any employee director shall receive annually on January
15th, a fully vested option for 20,000 shares, at an option price of 100% of
fair market value (110% with respect to a ten percent shareholder) and for a
term of 10 years (5 years with respect to a ten percent shareholder).
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------- ----------------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Available for grant:
Beginning . . . . . . . 70,776 -- 135,776 -- 200,776 --
========= ========= ========= =========== ========= ==========
Under option:
Beginning . . . . . . . 285,812 132,362 224,612 134,612 160,112 135,112
Granted ($13.75-15.95/share) -- -- -- -- 65,000 --
Granted ($15.75-21.17/share) -- -- 65,000 -- -- --
Granted ($ 7.00- 9.62/share) 113,000 -- -- -- -- --
Exercised ($4.00/share) . . -- -- -- -- (500) (500)
Exercised ($4.00-11.37/share) -- -- (3,800) (2,250) -- --
Exercised ($4.40/share) . . (40,180) (40,182) -- -- -- --
Cancelled ($11.37-17.32/share) (72,000) -- -- -- -- --
-------- ----------- ----------- ----------- ----------- ----------
Under option - end . . . . 286,632 92,180 285,812 132,362 224,612 134,612
======== ======== ======== ======== ======== ========
Authorized increase . . . . 300,000 -- -- -- -- --
======== =========== =========== =========== =========== ==========
Options exercisable . . . . 252,921 92,180 227,885 130,106 155,942 121,206
======== ======== ======== ======== ======== ========
Available for grant - end . 329,776 -- 70,776 -- 135,776 --
========= =========== ======== ========= ======== =========
</TABLE>
During 1995 the Company reduced the exercise price of 72,000 options to
the than current fair market value of $7.00 per share.
30
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related-Party Transactions
The Company leases an industrial park store from a partnership which is
owned 35.67% by the Vice Chairman of the Board of Directors. Lease payments made
to the partnership during fiscal years 1995, 1994 and 1993, were approximately
$59,000 each year.
Note 9 - Commitments and Contingencies
The Company is party to certain capital lease agreements for computer
equipment. The gross amount of these capital leases included in property and
equipment is as follows:
1994 1995
---------- ----------
Computer equipment ..... . $1,670,000 $1,670,000
Accumulated amortization (1,030,000) (754,000)
---------- ----------
$ 640,000 $ 916,000
========== ==========
The Company is obligated under several noncancellable operating leases
primarily for warehouse, office and retail space and equipment at various
locations. Some leases provide for additional rentals based on sales in excess
of specified amounts. Additionally, certain store leases have stated annual
rental increases or rent abatements. Total rent expense for fiscal years 1995,
1994 and 1993, was approximately $7,091,000, $5,448,000, and $4,906,000,
respectively.
Future minimum lease payments under noncancellable leases and the present
value of future minimum capital lease payments as of September 29, 1995, are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
Year ending September:
1996 . . . . . . . . . . . . 331,000 7,460,000
1997 . . . . . . . . . . . . 331,000 6,760,000
1998 . . . . . . . . . . . . 98,000 6,028,000
1999 . . . . . . . . . . . . 15,000 5,089,000
2000 . . . . . . . . . . . -- 4,058,000
2001 and future years . -- 8,581,000
----------- ------------
Total minimum lease payments . $ 775,000 $ 37,976,000
========== ============
Less amount representing interest . (64,000)
------------
Present value of future minimum capital lease payments . 711,000
Less current maturities of obligation under capital
leases . . . . . . . . . . . . . . . . . . . . . . . (291,000)
------------
Obligation under capital leases, excluding current
maturities $ 420,000
============
</TABLE>
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, this litigation will not have a material
effect on the Companies' financial position.
31
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingencies (Continued)
The Company has employment agreements with certain employees that call for
minimum annual salaries totaling approximately $885,000. Certain agreements will
automatically renew for a twelve month period unless notice to terminate is
given by either party twenty-four months prior to the expiration date. Certain
agreements provide that if the respective employee dies, is disabled or is
terminated by the Company, other than for "good cause" (as defined therein) or
if there is a change in control of the Company, the Company is obligated to pay
the employee the balance of salary due over the remaining term of the agreement.
Additionally, the Company may be obligated to buy back all of the employee's
options (vested or unvested), which totalled 101,681 options at September 29,
1995. Payments will be based upon the difference between the market value of the
appropriate class of the Company's common stock on the event date and the
exercise price of the options.
During 1995, the Company's Chairman died. As a result, under the
Chairman's employment agreement, the Company was required to record a salary
continuation liability of approximately $920,000, $852,000 of which is
outstanding as of September 30, 1995. This liability was partially funded by
life insurance proceeds of $550,000 which is included in other income. There was
no required payment under the stock option buy back provision, as the Chairman's
beneficiary elected not to exercise this provision.
Item 9. Disagreements on Accounting and Financial Disclosures
None
32
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
<S> <C> <C>
Mark S. Weinstein 43 Chairman of the Board of Directors
Anita J. Weinstein 66 Vice Chairman, Vice President, Secretary, and Director
Ben S. Kovalsky 57 President, Chief Executive Officer, Chief Operating Officer,
and Director
Susan K. Magenheim 38 Vice President, Assistant Secretary and Director
Donald R. Rogers 49 Director
Ronald M. Hirschel 45 Director
Allan Goldman 41 Senior Vice President - Marketing
Norman D. Everett 51 Vice President - Management Information Systems
Taner Kiranbay 51 Vice President - Warehousing, Distribution and Transportation
Michael J. Lewis 56 Vice President - Retail Operations
Bruce E. Strohl 45 Vice President - Finance and Chief Financial Officer
</TABLE>
Mr. Louis R. Weinstein who founded the Company in 1957 and who has
served as the Chairman of the Board of Directors of the Company since June 1985,
died on July 8, 1995.
The Board of Directors for election purposes is divided into three
classes, with the terms of Mrs. Magenheim and Mr. Hirschel expiring at the 1996
annual meeting, the terms of Mr. Mark Weinstein and Mr. Rogers expiring at the
1997 annual meeting and the terms of Mr. Kovalsky and Mrs. Anita Weinstein
expiring at the 1998 annual meeting of shareholders. The Company's officers are
appointed by and serve at the pleasure of the Board of Directors. Mark
Weinstein and Susan Magenheim are the son and daughter of Anita Weinstein.
Mr. M. Weinstein succeeded his father as Chairman of the Board of
Directors in July 1995. Until this time, Mr. M. Weinstein was Vice Chairman of
the Board of Directors and Chief Executive Officer of the Company since April
1989 and a Director of the Company since September 1982. From June 1985 to April
1989, he served as the Company's President. From June 1981 to May 1985, Mr. M.
Weinstein served as the Company's Vice President. From 1973 to June 1981, he
served in various other capacities with the Company.
Mrs. A. Weinstein became Vice Chairman of the Board of Directors in July
1995. Mrs. A. Weinstein has served as a Director and Secretary of the Company
since September 1982, and as a Vice President of the Company since April 1989.
She has served in various other offices and capacities with the Company, which
she co-founded with L. Weinstein, since 1957.
Mr. B. Kovalsky has served as a Director, President, Chief Executive
Officer, and Chief Operating Officer of the Company since July 1995. From April
1989 to July 1995 he served as a Director, President and Chief Operating Officer
of the Company.
Mrs. S. Magenheim has served as a Director of the Company since 1989 and
as Vice President and Assistant Secretary of the Company since April 1986.
33
<PAGE>
Mr. D. Rogers has served as a Director of the Company since February 1983.
For more than the past five years, he has been a member of the law firm of
Shulman, Rogers, Gandal, Pordy & Ecker, P.A. in Rockville, Maryland. Mr. Rogers
is a director of Allegiance Bank, N.A.
Mr. R. Hirschel has served as a Director of the Company since November
1994. Mr Hirschel has been a member of the law firm of Hirschel, Savitz, Parker
& Hollman, P.A. (formerly Savitz, Kronthal & Hirschel, P.A.) since its inception
in 1991. From 1988 to 1991, Mr. Hirschel was a consultant and lawyer in private
practice. Mr. A. Goldman joined the Company in March 1995 as Senior Vice
President - Marketing. From July 1988 to February 1995, Mr. Goldman was Vice
President - Merchandising for Rite Aid Corporation.
Mr. N. Everett joined the Company in August 1990 as Vice President --
Management Information Systems.
Mr. M. Lewis joined the Company in January 1990 as Vice President --
Retail Operations.
Mr. B. Strohl joined the Company in April 1989 as Vice President --
Finance and Chief Financial Officer.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
The information called for by Items 11 -- 13 is incorporated by reference
from the The Cosmetic Center, Inc. Annual Meeting of Shareholders -- Notice and
Proxy Statement -- 1995 (to be filed pursuant to Regulation 14A not later than
120 days after the close of the fiscal year) in accordance with General
Instruction G to the Annual Report on Form 10-K.
34
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K.
(A) 1. Consolidated Financial Statements
Included in Part II, Item 8 of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets
as of September 29, 1995 and September 30, 1994
Consolidated Statements of Earnings Fifty-two weeks ended
September 29, 1995 Fifty-three weeks ended September 30,
1994 Fifty-two weeks ended September 24, 1993
Consolidated Statements of Shareholders' Equity Fifty-two weeks
ended September 29, 1995 Fifty-three weeks ended September
30, 1994 Fifty-two weeks ended September 24, 1993
Consolidated Statements of Cash Flows Fifty-two weeks ended
September 29, 1995 Fifty-three weeks ended September 30,
1994 Fifty-two weeks ended September 24, 1993
3. Exhibits. (Listed according to the number assigned in the table in
Item 601 of Regulations S-K)
EXHIBIT NO. DESCRIPTION
* 3 (C) Certificate of Incorporation of the Company, as amended
* 3 (D) Bylaws of the Company, as amended
*** 4 (I) Revolving Loan Promissory Note dated February 28, 1995 between
NationsBank, N.A. and The Cosmetic Center, Inc. and its
Subsidiaries.
* 10 (D) 1991 Stock Option Plan, as amended.
** 10 (E) Employment Agreement dated February 28, 1991 by and between the
Company and Louis R. Weinstein.
** 10 (F) Employment Agreement dated February 28, 1991 by and between the
Company and Mark S. Weinstein.
35
<PAGE>
EXHIBIT NO. DESCRIPTION (Continued)
** 10 (G) Employment Agreement dated February 28, 1991 by and between the
Company and Ben S. Kovalsky.
*** 10 (H) Employment Agreement dated August 1, 1995 by and between the
Company and Michael J. Lewis.
*** 22 Subsidiaries of the Registrant.
*** 24 Consent of Accountants
*** 27 Financial Data Schedule
* Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1 dated February 28, 1992, File No. 33-46094.
** Incorporated by reference to the Company's Form 10-K for the year ended
September 27, 1991.
*** Filed herewith.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1995.
36
<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 of the undersigned, thereunto duly authorized.
THE COSMETIC CENTER, INC.
By /S/ MARK S. WEINSTEIN
Mark S. Weinstein
Date: December 18, 1995 Chairman of the Board of Directors
By /S/ ANITA J. WEINSTEIN
Anita J. Weinstein
Date: December 18, 1995 Vice Chairman of the Board of Directors
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 on the dates indicated.
<TABLE>
Date
<S> <C> <C>
12/18/95 /s/ MARK S. WEINSTEIN Chairman of the Board of Directors
Mark S. Weinstein
12/18/95 /s/ ANITA J. WEINSTEIN Vice Chairman, Vice President,
Anita J. Weinstein Secretary, and Director
12/18/95 /s/ BEN S. KOVALSKY President, Chief Executive Officer, Chief
Ben S. Kovalsky Operating Officer and Director
12/18/95 /s/ SUSAN K. MAGENHEIM Vice President, Assistant Secretary
Susan K. Magenheim and Director
12/18/95 /s/ DONALD R. ROGERS Director
Donald R. Rogers
12/18/95 /s/ RONALD M. HIRSCHEL Director
Ronald M. Hirschel
12/18/95 /s/ BRUCE E. STROHL Vice President - Finance
Bruce E. Strohl and Chief Financial Officer
12/18/95 /s/ ARLENE H. WRIGHT Controller and Chief Accounting Officer
Arlene H. Wright
</TABLE>
37
REVOLVING LOAN PROMISSORY NOTE
Bethesda, Maryland February 28, 1995
Company: The Cosmetic Center, Inc.
M. Steven Cosmetic Company, Inc.
Anita Jean Cosmetics, Inc.
Susan Kay Cosmetics, Inc.
Courtney Brooke, Inc.
Adam Michael Cosmetic, Inc.
Dumonde Distributors, Inc.
Maximum Amount: $15,000,000
Termination Date: February 28, 1996
Interest Rate Options (check options available):
Applicable Margin
X Base Rate - . 75 %
------- ----------
X Eurodollar Rate + 1.15 %
This Note evidences Loans made by Lender to each Company pursuant to a
commitment in the Maximum Amount. From the date hereof to the Termination Date,
each Company, subject to the terms and conditions of this Note, may borrow,
repay and reborrow Loans up to the Maximum Amount.
Each Company, for value received, promises to pay to the order of
NATIONSBANK, N.A. ("Lender"), at its office in Bethesda, Maryland, or at any
other place specified in writing by Lender, in immediately available Dollars
prior to 11:00 a.m. on each date due, and without deduction or setoff for Taxes
or any other amounts, the principal amount of each Loan, together with interest
on the unpaid principal balance of such Loan at the applicable rate set forth
herein.
This Note is issued upon the following terms and conditions:
ARTICLE I.
THE LOANS
1.1. Definitions. Unless defined elsewhere herein, defined
terms used herein shall have the meanings given to them in Article III
hereof.
1.2. Making the Loans. Each Eurodollar Rate Loan shall be in an
aggregate amount which is an integral multiple of $100,000. Each Loan shall be
made by irrevocable notice to Lender (stating the Type Loan, the amount of the
Loan, the date of the Loan, the maturity date of the Loan (in the case of a Loan
having an agreed upon maturity date prior to the Termination Date) and the
initial Interest Period for the Loan), given by any Company to Lender not later
than 11:30 a.m., (a) as to any Eurodollar Rate Loan, at least three (3) Business
Days prior to the date of such Type Loan, and (b) as to any Base Rate Loan, on
the date of such Type Loan. Lender shall, not later than 1:00 p.m., on the date
of each Loan, deposit the proceeds of such Loan in immediately available Dollars
in the general deposit account of the Companies with Lender.
1.3. Repayment. Each Company shall repay the principal balance of each
Loan on the earliest of (a) a declaration by Lender pursuant to Section 1.10
hereof, (b) the Termination Date or (c) the maturity date of such Loan (in the
case of a Loan having an agreed upon maturity date prior to the Termination
Date).
1.4. Prepayments. Each Company may prepay any Base Rate Loan, in whole
or in part, without penalty or premium. No prepayment of any Eurodollar Rate
Loan or any part thereof shall be permitted prior to the last day of the current
Interest Period therefor without the prior consent of Lender; provided, that if
Lender determines that it may not lawfully maintain a Eurodollar Rate Loan to
the last day of the current Interest Period therefor, each Company shall prepay
such Eurodollar Rate Loan on the date required by Lender. Notwithstanding such
prohibition, if there is a prepayment of any Eurodollar Rate Loan prior to the
last day of the current Interest Period therefor, whether by consent or
requirement of Lender or because of acceleration or otherwise, each Company
shall, within fifteen (15) days of any request by Lender, pay to Lender any loss
or expense which Lender may incur or sustain as a result of any such prepayment.
A statement as to the amount of such loss or expense, prepared in good faith and
in reasonable detail by Lender and submitted by Lender to the Companies shall be
conclusive and binding absent manifest error in computation. Calculation of all
amounts payable to Lender under this Section 1.4 shall be made as though Lender
shall have actually funded or committed to fund the relevant Eurodollar Rate
Loan through the purchase of an underlying deposit in an amount equal to the
amount of such Loan and having a maturity comparable to the current Interest
Period for such Eurodollar Rate Loan; provided, however, that Lender may fund
any Eurodollar Rate Loan in any manner it sees fit and the foregoing assumption
shall be utilized only for the purpose of calculation of amounts payable under
this Section 1.4.
1.5. Yield Protection and Indemnity. If, after the date hereof, Lender
(which shall include, for purposes of this Section 1.5, any corporation
controlling Lender) determines that the adoption or modification of any
applicable Law regarding Lender's required levels of reserves, deposits,
insurance or capital (including any allocation of capital requirements or
conditions), or any interpretation or administration thereof by any governmental
authority or agency charged with the interpretation, administration or
compliance of Lender with any of such requirements, has or would have the effect
of (a) increasing Lender's costs relating to the obligation hereunder, or (b)
reducing the rate of return of Lender on the obligation hereunder to a level
below that which Lender could have achieved but for such adoption or
modification each Company shall, within fifteen (15) days of any request by
Lender, pay to Lender such additional amounts as will compensate Lender for such
increase in costs or reduction in rate of return of Lender. A certificate of
Lender claiming compensation under this Section and setting forth the additional
amount or amounts to be paid to it hereunder shall be conclusive, provided that
the determination thereof is made on a reasonable basis. In determining such
amount or amounts, Lender may use any reasonable averaging and attribution
methods.
1.6. Interest.
(a) Base Rate Loans. The unpaid principal balance of each Base Rate Loan
shall bear interest at the Base Rate minus the Applicable Margin, which interest
rate shall change without notice with each change in the Base Rate as of the
date of any such change. Interest on each Base Rate Loan shall be payable on the
last day of each Interest Period therefor. Unless Lender otherwise agrees in its
sole discretion and subject to Section 1.6(e), after the occurrence and during
the continuation of an Event of Default all Loans shall be made, continued after
the then current Interest Period or converted at the end of the then current
Interest Period as or into Base Rate Loans.
(b) Eurodollar Rate Loans. The unpaid principal balance of each
Eurodollar Rate Loan shall bear interest at the Eurodollar Rate for such
Eurodollar Rate Loan plus the Applicable Margin. Interest on each Eurodollar
Rate Loan shall be payable on the last day of each Interest Period therefor and,
if such Interest Period is more than three months, every three months during
such Interest Period. A Eurodollar Rate Loan shall not be available if Lender
determines that such Eurodollar Rate Loan would be unlawful or that the
Interbank Rate does not fairly reflect the cost to Lender of funding such
Eurodollar Rate Loan.
(c) Continuations or Conversions. Subject to the terms and conditions
hereof, each Company shall have the right (i) with respect to any Eurodollar
Rate Loan, on the last day of the Interest Period applicable thereto, or (ii)
with respect to any Base Rate Loan, on any Business Day, to continue any Type
Loan as the same Type Loan or convert any Type Loan to another Type Loan;
provided that (A) no such continuation or conversion shall result in the
outstanding principal balance of any Eurodollar Rate Loan being less than
$100,000, and (B) unless Lender otherwise agrees in its sole discretion, no Loan
may be continued as a Eurodollar Rate Loan or converted into a Eurodollar Rate
Loan at any time that an Event of Default has occurred and is continuing. Each
such continuation or conversion shall be effected by irrevocable notice to
Lender (stating the Type and amount of the Loan to be continued or converted,
the Type Loan or Loans which will be outstanding after such continuation or
conversion and the new Interest Period for each such Type Loan) given by such
Company to Lender not later than 11:30 a.m. (x) as to any Loan to be continued
as or converted into a Eurodollar Rate Loan, at least three (3) Business Days
prior to the first day of the new Interest Period, and (y) as to any Loan to be
continued as or converted into a Base Rate Loan, on the first day of the new
Interest Period. If any Company fails to give a notice of continuation or
conversion as provided herein, the applicable Loan shall be continued as or
converted into a Base Rate Loan on the last day of the current Interest Period
for such Loan.
(d) Computations. Interest on each Eurodollar Rate Loan shall be
calculated on the basis of actual days elapsed, but computed as if each year
consisted of 360 days, and interest on each Base Rate Loan shall be calculated
on the basis of actual days elapsed, but computed as if each year consisted of
365 or 366 days, as the case may be. The books and records of Lender shall be
prima facie evidence of all sums due Lender under this Note.
(e) Past Due Principal and Interest. All past due principal of and, to
the extent permitted by Law, all past due interest on any Loan and any other
past due amount owing under or pursuant to this Note shall bear interest from
the date due until paid at the Default Rate.
1.7. Representations and Warranties. On the date hereof and
on the date of each Loan made hereunder, each Company represents and
warrants to Lender as follows:
(a) Existence. Each Company and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the Laws of the state of
its organization and is duly qualified to do business and in good standing in
each other state where the nature or extent of its business activities requires
such qualification. No Company has a Subsidiary which is not also a signatory to
this Note.
(b) Power and Authority. Each Company and its Subsidiaries has all
requisite power and authority to own or lease its properties, conduct its
business as now conducted and to execute, deliver and perform the Loan Documents
to which it is a party.
(c) Authorization and Enforceability. The execution, delivery and
performance of the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action of each Company and its
Subsidiaries and require no consent of any Person which has not been obtained,
and the Loan Documents constitute valid and binding obligations of each Company
party thereto, enforceable in accordance with their terms, except as such
enforceability may be limited by Debtor Relief Laws and by general principles of
equity.
(d) No Violation. The execution, delivery and performance of the Loan
Documents do not and will not violate any Company's charter, bylaws, or other
organizational documents, any Laws applicable to any Company or any agreement to
which such Company is a party or by which such Company is bound.
(e) Financial Statements. The Financial Statements of each Company most
recently delivered to Lender have been prepared in accordance with GAAP and
fairly present the consolidated financial condition and results of operations of
each Company and its Subsidiaries as of the date thereof and for the period
covered thereby, and no material adverse change has occurred in such financial
condition since the date of the Financial Statements most recently delivered to
Lender prior to the date of this Note.
(f) Litigation. Except as disclosed in Financial Statements (or the
notes thereto) or other writings heretofore delivered to Lender, there is no
litigation pending or, to the knowledge of any Company, threatened against any
Company or any of its Subsidiaries which could reasonably be expected to have a
Materially Adverse Effect.
(g) General. All Financial Statements, reports and other information
heretofore delivered by each Company to Lender, when taken as a whole, do not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(h) Tradenames. No Company currently utilizes any tradenames in the
conduct of its business, other than "The Cosmetic Center", "Courtney Brooke"
and "Michelle Dumonde."
1.8. Conditions Precedent. If Lender is otherwise committed to do so
under this Note, Lender shall not be obligated to make any Loan unless, on the
date of such Loan, (a) no Default Condition or Event of Default has occurred and
is continuing, (b) since the date of the Financial Statements most recently
delivered to Lender prior to the date of this Note, no material adverse change
shall have occurred and be continuing in the financial condition or business
operations of each Company and its Subsidiaries, taken as a whole, (c) such Loan
is not prohibited by Law, and (d) each Company shall have executed and/or
delivered to Lender such other documents and instruments as Lender may
reasonably request in order to enable such Company to qualify for such Loan
under the Loan Documents.
1.9. Covenants. Unless and until this Note has been paid in
full or Lender otherwise agrees in writing, each Company agrees as follows:
(a) Financial Statements, etc. Each Company will deliver to Lender, (i)
within 90 days after the last day of each of its fiscal years, consolidated
Financial Statements showing the financial condition and results of operations
of each Company and its Subsidiaries as of the last day of, and for, such fiscal
year, which Financial Statements shall be prepared in accordance with GAAP and
be accompanied by the unqualified audit report of a firm of independent
certified public accountants reasonably acceptable to Lender and by a
certificate executed by a responsible officer of each Company certifying that
such Company and each of its Subsidiaries is in compliance with the terms and
conditions of the Loan Documents to which it is a party, (ii) within 45 days
after the last day of each of its fiscal quarters, consolidated Financial
Statements showing the financial condition and results of operations of each
Company and its Subsidiaries as of the last day of such fiscal quarter and for
such fiscal quarter and portion of the fiscal year ending on the last day of
such fiscal quarter, which Financial Statements shall be prepared in accordance
with GAAP and be accompanied by a certificate executed by a responsible officer
of such Company certifying that such Financial Statements are true and correct
and that such Company and each of its Subsidiaries is in compliance with the
terms and conditions of the Loan Documents to which it is a party, and (iii)
promptly after request therefor, such other information regarding the financial
condition or business operations of any Company and each of its Subsidiaries as
Lender may reasonably request.
(b) Notices. Each Company will deliver to Lender, promptly after such
Company obtains knowledge thereof, notice of the occurrence of any Default
Condition or Event of Default under this Note, of the institution or threat of
any litigation against such Company or any of its Subsidiaries which could
reasonably be expected to have a Materially Adverse Effect, and of any other
material adverse change in the financial condition or business operations of
such Company and its Subsidiaries, taken as a whole.
(c) Books and Records. Each Company will keep, and cause each of its
Subsidiaries to keep, its financial books and records in accordance with GAAP
and permit Lender to inspect and to discuss with its officers, directors and
accountants such books and records and its properties and business operations
during reasonable business hours.
(d) Existence and Qualification. Each Company will maintain, and cause
each of its Subsidiaries to maintain, its corporate existence and its
qualification to do business and good standing where necessary and all necessary
permits and licenses, except to the extent a failure to so maintain could not
reasonably be expected to have a Materially Adverse Effect.
(e) Obligations, etc. Each Company will timely pay and perform, and
cause each of its Subsidiaries to timely pay and perform, all of its material
taxes and other obligations, except to the extent being contested by appropriate
proceedings; each Company will maintain, and cause each of its Subsidiaries to
maintain, insurance (including self insurance) in such amounts, with such
deductibles, and against such risks as is customary for similarly situated
businesses; and each Company will observe and comply with, and cause each of its
Subsidiaries to observe and comply with, all material applicable Laws (including
environmental Laws) and all material agreements to which it is a party or by
which it is bound.
(f) Tradenames. Each Company will promptly notify Lender of the
adoption of any additional tradenames or its intent to change its name.
(g) Use of Proceeds. Each Company will use the proceeds of each Loan
solely to acquire or carry on a business or commercial enterprise.
(h) Tangible Net Worth. The tangible net worth of The Cosmetic Center,
Inc., reported on a consolidated basis and computed in accordance with GAAP,
shall not, on the last day of each fiscal quarter of such Company, be less than
the sum of the net worth as reported in the audited fiscal year-end Financial
Statements as of September 27, 1993, plus one and one half percent (1.5%) of the
consolidated accumulated gross sales of such Company during the period since
such date.
(i) Contingent Liabilities. No Company will endorse, guarantee or become
surety for the obligation of any person or entity, except that each Company may
endorse checks and negotiable instruments for collection or deposit in the
ordinary course of business.
(j) Merger or Acquisition. No Company will enter into any merger or
consolidation agreement or other agreement to acquire all or substantially all
the assets of any Person which requires such Company on a consolidated basis to
pay, issue stock, promise to pay in the future, or exchange or deliver assets in
an aggregate amount or value greater than $100,000, or which does not provide
that such Company is the surviving entity.
(k) Transfer of Assets. No Company will sell, lease (excluding any
sub-lease), assign, pledge (except as provided in subsection (l) below) or
otherwise dispose of any of such Company's properties or assets, whether now or
owned or hereafter acquired, except in the ordinary course of business or for
fair value.
(l) Leases. No Company will, as lessee, create, incur, assume or suffer
to exist any lease obligations in an aggregate amount greater than
$2,500,000.00, other than leases for the financing of personal property and
lease obligations incurred in the ordinary course of such Company's business.
(m) Loans. No Company will make any loans to or repay any
existing loans made to it by any of its officer, directors or stockholders.
(n) Indebtedness. No Company will borrow money or incur any debt in
excess of $25,000, other than debt (a) for goods or materials purchased or
services obtained in the ordinary course of such Company's business, (b)
constituting other trade payables incurred in the ordinary course of such
Company's business, (c) as provided in subsection (l) above or (d) Loans under
this Note.
(o) Security Interests. No Company will, except for leases permitted
under subsection (l) above, and any sub-lease, and any purchase money security
interest entered into the ordinary course of such Company's business grant, a
security interest or a lien on or assign any of such Company's assets.
1.10. Events of Default. It shall be an event of default ("Event
of Default") under this Note and each of the other Loan Documents if any one
of the following shall occur:
(a) Any Company shall fail to make any payment of principal, interest or
other amounts owing under this Note when due;
(b) Any Company, any of its Subsidiaries or any guarantor of this Note
shall fail to observe or perform any of their respective obligations (other than
obligations covered by clause (a) preceding) under the Loan Documents when due
and such failure continues for a period of thirty (30) days after notice from
Lender;
(c) Any Company, any of its Subsidiaries or any guarantor of this Note
shall fail to make any payment when due on any material Debt (other than this
Note) which any Company, any of it Subsidiaries or any guarantor of this Note is
obligated to pay as borrower, guarantor or in any other capacity or any default
or event of default shall occur under any agreement evidencing or securing any
such material Debt;
(d) Any voluntary or involuntary proceeding under any Debtor Relief Law
is commenced by or against any Company, any of its Subsidiaries or any guarantor
of this Note or any of its assets, and, if involuntary, such proceeding is not
dismissed within 60 days after the commencement thereof; or
(e) Any representation or warranty made by any Company, any of its
Subsidiaries or any guarantor of this Note under any of the Loan Documents shall
be false or incorrect in any material respect when made or deemed made.
If one or more of the foregoing Events of Default shall occur, Lender
may, at its option, declare all or any part of the outstanding principal of this
Note plus accrued unpaid interest on this Note and any other accrued unpaid
amount owing under this Note or any of the other Loan Documents to be
immediately due and payable, and Lender shall have no further obligation to make
Loans under this Note, and Lender may exercise any and all available rights and
remedies under any Loan Document or under applicable Law. Notwithstanding the
foregoing, if an Event of Default occurs under clause (d) preceding, the
outstanding principal of this Note plus accrued unpaid interest on this Note and
any other accrued unpaid amount owing under this Note or any of the other Loan
Documents shall automatically and immediately become due and payable without any
action by Lender.
ARTICLE II.
MISCELLANEOUS
2.1. Waivers and Consents. Each Company and all endorsers, sureties and
guarantors of this Note hereby severally waive demand and notice of demand,
presentment for payment, protest, notice of protest, notice of acceleration of
the maturity of this Note, notice of intention to accelerate the maturity of
this Note, diligence in collection, the bringing of any suit against any Person,
and any notice of or defense on account of any extensions, renewals, partial
payments or changes in this Note or in any of its terms, provisions and
covenants, or any releases or substitutions of any security for this Note, or
any delay, indulgence or other act of any holder hereof, whether before or after
maturity.
2.2. [Intentionally Omitted]
2.3. Expenses; Amendments. Each Company agrees to pay Lender all
reasonable costs and expenses, including reasonable attorneys' fees, incurred by
Lender in connection with the preparation of this Note and any other Loan
Documents, making the Loans hereunder, enforcing or collecting the Loans, and
all amendments, consents and waivers related to the Loans and requests therefor
by such Company. No such amendment, consent or waiver shall be effective unless
in writing and signed by the party against which the enforcement thereof is
asserted.
2.4. Governing Law. This Note shall be construed and enforced
in accordance with and governed by the Laws of the State in which this Note is
payable and the Federal Laws of the United States of America. To the extent
applicable, Tex. Rev. Civ. Stat. Ann. art. 5069 Ch. 15 (which regulates
certain revolving credit loan accounts and revolving tri-party accounts) shall
not apply to the Loans evidenced by this Note.
2.5 Joint and Several Liability. The liability of each
Company for any covenants, agreements, obligations or other undertakings by
all of the Companies under the Loan Documents shall be joint and several.
2.6. Binding Effect. This Note shall be binding upon and inure to the
benefit of each Company and Lender and their respective successors and assigns,
except that no Company shall have the right to assign its rights or obligations
hereunder or any interest herein without the prior written consent of Lender.
Lender may assign to one or more financial institutions all or any part of, or
may grant participations to one or more financial institutions in or to all or
any part of, any Loan or Loans and this Note and the other Loan Documents, and
to the extent of any such assignment or participation (except where otherwise
stated) the assignee or purchaser of such assignment or participation shall have
the rights and benefits with respect to each Loan or Loans and this Note,
including Section 1.5 hereof, as it would have if it was Lender hereunder.
2.7. No Waivers, Cumulative Rights; Severability. No failure or delay by
Lender in exercising any right hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Lender
hereunder shall be cumulative and not exclusive of each other or of any other
right now or hereafter provided at Law or in equity. A determination that any
provision of this Note is unenforceable or invalid shall not affect the
enforceability or validity of any other provision of this Note.
2.8. Notices; Time. Whenever a time is referred to in this Note, such
time shall be the local time in the city in which this Note is payable. Notices
hereunder must be given in writing (which may be a facsimile transmission) to be
effective and shall be effective upon receipt by any Company or Lender at the
address set forth on the signature page hereof or at such other address as such
Company or Lender may notify the other.
2.9. SUBMISSION TO JURISDICTION; WAIVER. EACH COMPANY HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS NOTE OR ANY OTHER LOAN DOCUMENT TO THE NON-EXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE IN WHICH THIS NOTE IS PAYABLE,
THE DISTRICT COURTS OF THE UNITED STATES OF AMERICA LOCATED IN SUCH STATE AND
THE APPELLATE COURTS FROM ANY THEREOF;
(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD OR CLAIM
THE SAME;
(c) WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND AGREES
THAT ALL SUCH SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO SUCH COMPANY AT ITS
ADDRESS SET FORTH BELOW ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH
LENDER SHALL HAVE BEEN NOTIFIED PURSUANT HERETO; AND
(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR LIMIT OR
OTHERWISE AFFECT THE RIGHT OF LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST
SUCH COMPANY OR ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS.
2.10. WAIVER OF JURY TRIAL. EACH COMPANY AND LENDER EACH HEREBY
INTENTIONALLY AND VOLUNTARILY WAIVE ANY RIGHT WHICH EITHER OF THEM MAY HAVE TO A
TRIAL BY JURY IN CONNECTION WITH ANY MATTER DIRECTLY OR INDIRECTLY RELATING TO
THIS NOTE OR ANY OTHER LOAN DOCUMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE
ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS.
ARTICLE III
DEFINITIONS
As used in and for all purposes of this Note, the terms defined in this
Article III shall have the following meanings, and the singular shall include
the plural, and vice versa, unless otherwise specifically required by the
context:
"Applicable Margin" means the applicable percentage set forth under the
"Applicable Margin" column on the first page of this Note.
"Base Rate" means, for any day, a simple rate per annum equal to the
higher of (a) the Prime Rate for such day and (b) the sum of one-half (1/2) of
1% plus the Federal Funds Rate for such day.
"Base Rate Loan" means a Loan which bears interest at the time in
question based on the Base Rate.
"Business Day" means a day on which Lender is open for the conduct of
substantially all of its banking business at its principal office and if the
applicable Business Day relates to any Eurodollar Rate Loan, a day on which
dealings are carried on in the applicable interbank Eurodollar market.
"Debt" of any Person means all obligations, contingent or otherwise,
which in accordance with GAAP should be classified upon such Person's balance
sheet as liabilities or disclosed in footnotes thereto, but in any event
including liabilities secured by any lien existing on property owned or acquired
by such Person or a Subsidiary thereof (whether or not the liability secured
thereby shall have been assumed) and obligations which have been or under GAAP
should be capitalized for financial reporting purposes.
"Debtor Relief Laws" means the Bankruptcy Code of the United States of
America and all other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, suspension
of payments, or similar debtor relief Laws from time to time in effect affecting
the rights of creditors generally.
"Default Condition" means the occurrence of any event, condition, act or
omission which, after satisfaction of any requirement for the giving of notice
or the lapse of time, or the happening of any other condition, or any
determination by Lender, or any combination of the foregoing, would unless cured
or waived become an Event of Default.
"Default Rate" means an interest rate per annum equal to two (2) percent
above the Base Rate.
"Dollars" and the sign "$" means dollars or such coin or currency of the
Untied States of America as at the time of payment shall be legal funds for the
payment of public and private debts in the United States.
"Eurodollar Rate" means, with respect to any Eurodollar Rate Loan for
the Interest Period applicable thereto, a rate per annum determined pursuant to
the following formula:
Eurodollar Rate = Interbank Offered Rate
1 - Eurodollar Reserve Percentage
"Eurodollar Rate Loan" means each Loan which bears interest at the time
in question based on the Eurodollar Rate.
"Eurodollar Reserve Percentage" means, for any day, that percentage
(expressed as a decimal) which is in effect from time to time under Regulation D
of the Board of Governors of the Federal Reserve System (or any successor), as
such regulation may be amended from time to time or any successor regulation, as
the maximum reserve requirement (including, without limitation, any basic,
supplemental, emergency, special, or marginal reserves) applicable with respect
to Eurocurrency liabilities as that term is defined in Regulation D (or against
any other category of liabilities that includes deposits by reference to which
the interest rate of Eurodollar Rate Loans is determined), whether or not Lender
has any Eurocurrency liabilities subject to such reserve requirement at that
time. Eurodollar Loans shall be deemed to constitute Eurocurrency liabilities
and as such shall be deemed subject to reserve requirements without benefits of
credits for proration, exceptions or offsets that may be available from time to
time to Lender. The Eurodollar Rate shall be adjusted automatically on and as of
the effective date of any change in the Eurodollar Reserve Percentage.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward to the nearest 1/100th of 1%) equal to the weighted average of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding such day,
provided that (a) if such day is not a Business Day, the Federal Funds Rate for
such day shall be such rate on such transactions on the next preceding Business
Day, and (b) if no such rate is so published on such next succeeding Business
Day, the Federal Funds Rate for such day shall be the average rate quoted to
Lender on such day on such transactions as determined by Lender.
"Financial Statements" means, as may be applicable, balance sheets,
statements of income, cash flow statements, statements of changes in
stockholders equity, and reconciliations of partnership accounts.
"GAAP" means generally accepted accounting principles in the United
States applied on a consistent basis.
"Governmental Authority" means any government or political subdivision
or any agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury or arbitrator, in
each case whether foreign or domestic.
"Interbank Offered Rate" means, with respect to any Eurodollar Rate Loan
for the Interest Period applicable thereto, the average (rounded upward to the
nearest one-sixteenth (1/16) of one percent) per annum rate of interest
determined by the office of Lender then determining such rate (each such
determination to be conclusive and binding) as of two Business Days prior to the
first day of such Interest Period, as the effective rate at which deposits in
immediately available funds in Dollars are being, have been, or would be offered
or quoted by Lender to major banks in the applicable interbank market for
Eurodollar deposits at any time during the Business Day which is the second
Business Day immediately preceding the first day of such Interest Period, for a
term comparable to such Interest Period and in the amount of the Eurodollar Rate
Loan. If no such offers or quotes are generally available for such amount, then
Lender shall be entitled to determine the Eurodollar Rate by estimating in its
reasonable judgment the per annum rate (as described above) that would be
applicable if such quotes or offers were generally available.
"Interest Period" means (a) with respect to each Eurodollar Rate Loan,
the period commencing on the Business Day such Loan is made or otherwise becomes
a Eurodollar Rate Loan and ending one, two, three or six months thereafter, as
each Company may elect; provided that:
(i) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day unless such Business Day falls in another calendar month, in which case such
Interest Period shall end on the next preceding Business Day;
(ii) any Interest Period which begins on the last Business Day
of a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall, subject to
clause (iii) below, end on the last Business Day of a calendar month; and
(iii) no Interest Period may end after the earlier of the
Termination Date and the agreed upon maturity date of the Loan; and
(b) with respect to each Base Rate Loan, the period commencing on the
Business Day such Loan is made or otherwise becomes a Base Rate Loan and ending
thirty (30) days thereafter; provided that:
(i) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day; and
(ii) any Interest Period which begins before the earlier of
the Termination Date and the agreed upon maturity date of the Loan and would
otherwise end after the earlier of the Termination Date and the agreed upon
maturity date of the Loan shall end on the earlier of Termination Date and the
agreed upon maturity date of the Loan.
"Law" means any law (including common law), constitution, statute,
treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree
or award of any Governmental Authority.
"Loan" means a Base Rate Loan or a Eurodollar Rate Loan.
"Loan Documents" means this Note, any documents or instruments executed
by any Company, any of its Subsidiaries, or any other Person in connection
herewith (including any commitment letter from Lender accepted by any Company)
or as security herefor and any amendments, modifications, renewals, extensions,
or restatements of any of the foregoing.
"Materially Adverse Effect" means (a) a material adverse effect on the
business, operations or condition (financial or otherwise) of any Company and
its Subsidiaries, taken as a whole, (b) a material adverse effect on the ability
of any Company or any other Person to perform or comply with any of the terms or
conditions of any Loan Document to which it is a party or (c) an adverse effect
on the legality, validity, binding effect, enforceability or admissibility into
evidence of any Loan Document or the ability of Lender to enforce any rights or
remedies under or in connection with any Loan Document.
"Person" means an individual, group, corporation, partnership, trust,
unincorporated association, joint venture, joint-stock company, Governmental
Authority or any other entity.
"Prime Rate" means the per annum rate of interest established from time
to time by Lender at its principal office as its Prime Rate. Any change in the
interest rate resulting from a change in the Prime Rate shall become effective
as of 12:01 a.m. of the Business Day on which each change in the Prime Rate is
announced by Lender. The Prime Rate is a reference rate used by Lender in
determining interest rates on certain loans and is not intended to be the lowest
rate of interest charged on any extension of credit to any debtor.
"Subsidiary" means, as to any Person, (a) any corporation of which fifty
percent (50%) or more of the outstanding stock having ordinary voting power to
elect a majority of its board of directors (or other governing body), regardless
of the existence at the time of a right of the holders of any class or classes
(however designated) of securities of such corporation to exercise such voting
power by reason of the happening of any contingency, or any partnership of which
fifty percent (50%) or more of the outstanding partnership interests is, at the
time, owned by such Person, or by one or more Subsidiaries of such Person, or by
such Person and one or more Subsidiaries of such Person, and (b) any other
entity which is controlled or capable of being controlled by such Person, or by
one or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" of a Company in this Note shall refer to a
Subsidiary or Subsidiaries of such Company or a Subsidiary or Subsidiaries of
such Subsidiary or Subsidiaries.
"Taxes" means all taxes, assessments, fees, levies, imposts, duties,
deductions, withholdings, or other charges of any nature whatsoever from time to
time or at any time imposed by any Law or Governmental Authority.
"Type Loan" shall mean with respect to a Loan, a Base Rate Loan or a
Eurodollar Rate Loan.
<PAGE>
COMPANY:
The Cosmetic Center, Inc.
M. Steven Cosmetic Company, Inc.
Anita Jean Cosmetics, Inc.
Susan Kay Cosmetics, Inc.
Courtney Brooke, Inc.
Adam Michael Cosmetic, Inc.
Dumonde Distributors, Inc.
By: /s/ BEN S. KOVALSKY
President of each of the
Companies
By: /S/ BRUCE E. STROHL
Vice President, Finance of
each of the Companies
Address for each Company:
8839 Greenwood Place
Savage, Maryland 20762
Address of Lender:
NationsBank, N.A.
6610 Rockledge Drive
First Floor
Bethesda, Maryland 20817
<PAGE>
February 28, 1995
Mr. Bruce Strohl
Chief Financial Officer
The Cosmetic Center Inc.
8839 Greenwood Place
Savage, Maryland 20763
Re: NationsBank, N.A. $15,000,000.00 Line of Credit
Dear Bruce:
NationsBank, N.A. (formerly NationsBank of Maryland, N.A., "NationsBank") is
pleased to advise you that we have amended the Promissory Note ("Note") dated
March 30, 1994 made by The Cosmetic Center, Inc. and payable to NationsBank, as
follows: the Termination Date shall be changed from February 28, 1995 to March
10, 1995. All other terms of the Note shall remain in full force and effect.
Please acknowledge your acceptance of the payment due date extension by signing
below. NationsBank shall attach a counterpart of this letter to the Note as an
allonge thereto.
Sincerely,
/s/ MICHAEL R. HEREDIA
Michael R. Heredia
Vice President
Agreed and Accepted this 28th day of February 1995.
The Cosmetic Center, Inc.
By: /s/ BRUCE STROHL
Title: Vice-President Finance
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of August 1995, by and between The Cosmetic Center, Inc. a
Delaware corporation qualified to do business in Maryland with its principal
place of business located at 8839 Greenwood Place, Savage, Maryland 20763
("COMPANY"), and Michael J. Lewis, now residing at 46 Farmhouse Court,
Pikesville, Maryland 21208 ("EMPLOYEE").
RECITALS
1. The COMPANY is engaged in the specialty retail sale and wholesale
distribution of a wide range of brand name cosmetic, fragrance, beauty aides and
related items.
2. EMPLOYEE is Vice President - Retail Operations of the COMPANY.
3. The COMPANY desires to employ and retain the unique experience,
ability and services of EMPLOYEE and EMPLOYEE desires and is willing to
undertake and continue such employment with the COMPANY, all upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the recitals, and of the mutual
covenants and agreements herein contained, and of other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
COMPANY hereby employs EMPLOYEE, and EMPLOYEE hereby accepts employment with the
COMPANY, upon the terms and conditions set forth in this Agreement:
1
<PAGE>
1. EMPLOYMENT AND DUTIES
During the term of this Agreement, EMPLOYEE shall continue in
the employ of the COMPANY and shall devote his entire time and attention to the
business and affairs of the COMPANY. During such period EMPLOYEE shall serve as
Vice President - Retail Operations and shall serve in such other capacities and
perform such duties as the COMPANY shall require from time to time.
Further, with respect to any sole proprietorship, firm,
company, corporation, joint venture, general or limited partnership, trust or
other entity (collectively a "Business Entity") which is a subsidiary or
otherwise affiliated with the COMPANY, whether or not controlled by the COMPANY
(collectively, an "Affiliate"), EMPLOYEE hereby agrees, at the request of the
President of the COMPANY made at any time and from time to time, to serve in
such other offices, positions and/or capacities with an Affiliate as to which he
may be elected or appointed, and to perform the duties required of him as such.
2. TERM OF EMPLOYMENT
A. Term. The term of EMPLOYEE'S employment hereunder shall
commence on August 1, 1995 and continue until July 31, 1996 (the "Original
Term"). The term of EMPLOYEE's employment hereunder shall be automatically
extended for successive additional twelve (12) month periods ("Additional
Terms") unless a notice to terminate this Agreement is given by the COMPANY to
EMPLOYEE, or by EMPLOYEE to the COMPANY, at least ninety (90) days prior to the
2
<PAGE>
expiration of the Original Term or of the then-applicable Additional Term (if
any). The Original Term and any Additional Terms are together referred to herein
as the "Entire Term" of this Agreement. On or before the last day of EMPLOYEE's
employment hereunder, EMPLOYEE shall execute and deliver to the COMPANY a letter
of resignation from all offices then held by EMPLOYEE with the COMPANY and with
any Affiliates effective upon said last day of employment hereunder.
B. Earlier Termination. Notwithstanding the aforesaid
provisions of this Section 2, this Agreement may be terminated
pursuant to the terms and conditions of Section 6 prior to what
would otherwise be the expiration of this Agreement's Term.
3. COMPENSATION OF EMPLOYEE
A. Salary. The COMPANY hereby agrees to pay to EMPLOYEE
for all services to be rendered by EMPLOYEE in any capacity
hereunder (including, but not limited to, services as an officer of
the COMPANY and/or of any Affiliate, and with respect to any other
offices, positions and/or capacities to which he is elected, or
which are assigned to him by the President of the COMPANY and/or by
the President of any Affiliate) an annual base salary ("Base
Salary") of One Hundred Fifty Thousand Three Hundred Eighty Dollars
($150,380.00), which shall be paid in accordance with the COMPANY's
normal payroll schedule, as maybe increased from time to time by
the President.
3
<PAGE>
B. Withholding. There shall be deducted from each
installment of EMPLOYEE's Salary, and from any other payments to or
for the benefit of EMPLOYEE pursuant to this Agreement, all amounts
which are at any time and from time to time by applicable laws,
(federal, state, county or municipal) required to be deducted by
reason of withholding taxes, Social Security contributions and
other requisite governmental imposed deductions from the income of
employees.
4. EMPLOYEE BENEFITS
During the Term of this Agreement, the COMPANY shall provide
EMPLOYEE with the following benefits, which may be adjusted from time to time:
A. Insurance Plans. The COMPANY shall provide EMPLOYEE with
benefits, including major medical health insurance for EMPLOYEE and his
immediate family, group life and accident insurance, disability income
insurance, or similar group insurance plans which the Company may from time to
time make available to other employees, all in accordance with the COMPANY's
Employee Handbook as then in effect. All matters of eligibility for benefits
under any plan or plans of group health, life, accident, disability, medical
expense or similar group insurance plans which the COMPANY may at any time and
from time to time make available shall be determined in accordance with the
provisions of the insurance policies.
B. Vacation and Sick Leave. EMPLOYEE shall be
4
<PAGE>
entitled to paid vacation and paid sick leave in the manner provided for in the
COMPANY's Employee Handbook as then in effect. Upon termination of EMPLOYEE'S
employment hereunder, Company shall pay EMPLOYEE for all unused vacation days at
the then prevailing salary rate.
C. Profit-Sharing and Pension Plans. To the same extent and on
the same basis as the COMPANY makes available to all other employees, EMPLOYEE
shall have the right to participate in any profit-sharing or pension plan
established by COMPANY under the terms and conditions therein contained in such
plans and as many be governed by rules established under ERISA.
D. Deferred Compensation Plan. To the same extent and on the
same basis as the COMPANY makes available to all other employees holding
comparable management positions to that of the EMPLOYEE, EMPLOYEE shall have the
right to participate in any deferred compensation plan established by COMPANY
under the terms and conditions therein contained.
5. PROPRIETARY DATA.
A. Trade Secrets and Other Confidential Information. During
the term of this Agreement and for three (3) years thereafter, EMPLOYEE shall
keep confidential any data, documents, or financial or other information of a
trade secret or confidential nature relating to the COMPANY's past, present or
future operations (the "Proprietary Data"), shall not disclose the Proprietary
Data to any third parties other than officers, employees or agents of the
COMPANY on a "need to know" basis,
5
<PAGE>
shall take all necessary steps to ensure that such officers, employees or agents
keep such Proprietary Data confidential, and shall use the Proprietary Data only
in connection with rendering services to the COMPANY. Upon the end EMPLOYEE's
employment with the COMPANY, EMPLOYEE shall promptly return to the COMPANY the
originals and all copies of the Proprietary Data in the possession of EMPLOYEE,
and shall not use any of the Proprietary Data for his own benefit or for the
benefit of any third parties. The covenants contained in this Section 5(a) shall
not apply to Proprietary Data which is or becomes a matter of general knowledge
in the industry otherwise than by a breach of the provisions of this Section
5(a).
B. Injunctive Relief. EMPLOYEE acknowledges that the covenants
contained in Sections 5(a) are necessary for the protection of the legitimate
business interests of the COMPANY and are reasonable limitations of activities,
that the rights of the COMPANY are of a specialized and unique character, and
that immediate and irreparable damage will result to the COMPANY if EMPLOYEE
fails to or refuses to perform or comply with such covenants. Therefore,
notwithstanding any election by the COMPANY to claim damages from EMPLOYEE as a
result of any such failure or refusal, the COMPANY may, in addition to any other
remedies and damages available, seek an injunction in a court of competent
jurisdiction to restrain any such failure or refusal (and no bond or other
security shall be required in connection therewith) as applicable to companies
that compete with the COMPANY or any of
6
<PAGE>
its subsidiaries and which operate within the same geographic
area as the COMPANY or any of its subsidiaries.
6. TERMINATION
A. Death. The term of this Agreement shall forthwith
terminate upon the death of EMPLOYEE, whereupon the COMPANY shall
not have any further obligations or liability hereunder except to
pay the EMPLOYEE's estate the unpaid portion, if any, of
EMPLOYEE's compensation accrued for the period up to the date of
EMPLOYEE's death, plus any other employee benefits due the
EMPLOYEE under Section 4 of this Agreement, in such manner as may
be prescribed in the applicable plan.
B. Total Disability. In the event of the Total Disability (as
that term is hereafter defined) of EMPLOYEE for a period of four (4) consecutive
calendar months, or for eighty percent (80%) or more of the normal working days
during a period of six (6) consecutive full calendar months, the COMPANY shall
have the right to end the term of this Agreement by giving EMPLOYEE ten (10)
days' written notice. Upon the expiration of such ten (10) days period, the term
of this Agreement shall end and the COMPANY shall not have any further
obligations hereunder except to pay EMPLOYEE the unpaid portion, if any, of
EMPLOYEE's compensation accrued for the period up to the date of termination of
EMPLOYEE's employment, plus any other employee benefits due the EMPLOYEE under
Section 4 of this Agreement, in such manner as may be prescribed in the
applicable plan. As used in this
7
<PAGE>
Agreement, the term "Total Disability" shall mean a mental or physical condition
which, in the opinion of the COMPANY and in the opinion of two consulting
physicians, renders EMPLOYEE unable or incompetent to carry out his obligations
hereunder.
C. With Cause. The COMPANY shall have the right to terminate
the employment of EMPLOYEE at any time for cause (as hereinafter defined) upon
at least five (5) days' written notice setting forth the specific details of the
action or inaction of EMPLOYEE which constitutes cause. For purposes of the
foregoing, "cause" shall mean (i) conviction of a felony or other crime
involving moral turpitude or pursuant to which EMPLOYEE is imprisoned, (ii) the
use of narcotics or alcohol by EMPLOYEE to an extent which materially interferes
with his performance of his duties under this Agreement, (iii) dishonesty of
EMPLOYEE in a material matter, (iv) repeated failure by EMPLOYEE to devote
proper time and attention to the business of the COMPANY and/or of an Affiliate
employing EMPLOYEE in accordance with this Agreement, (v) failure by EMPLOYEE to
carry out the directions, policies, instructions and/or decisions of the
President of the COMPANY, (vi) repeated and unexcused absenteeism by EMPLOYEE,
or (vii) the material breach by EMPLOYEE of any of his obligations or agreements
contained herein. Upon such termination, the COMPANY shall have no further
obligations or liability hereunder except to pay EMPLOYEE the unpaid portion, if
any, of EMPLOYEE's compensation accrued for the period up to the date of
termination of EMPLOYEE's employment, plus any other employee benefits due
8
<PAGE>
the EMPLOYEE under Section 4 of this Agreement, in such manner as may be
prescribed in the applicable plan.
D. Without Cause. If the COMPANY at any time during the term
of this Agreement desires to terminate EMPLOYEE for any reason other than for
cause, the COMPANY shall have the right to terminate the employment of EMPLOYEE
at anytime. If the COMPANY shall terminate the employment of EMPLOYEE pursuant
to this Section 6D, the term of this Agreement shall end and the COMPANY shall
not have any further obligations or liability hereunder except to pay EMPLOYEE
the unpaid portion, if any, of EMPLOYEE's compensation accrued for the period up
to the date of termination of EMPLOYEE's employment, plus any other employee
benefits due the EMPLOYEE under Section 4 of this Agreement, in such manner as
may be prescribed in the applicable plan, together with an additional amount of
one year's Base Salary, said payment is to be payable in accordance with the
COMPANY's normal payroll schedule and is to commence immediately following the
effective date of the termination of EMPLOYEE's employment hereunder.
E. By EMPLOYEE. If EMPLOYEE at any time is for any reason
dissatisfied with the terms and conditions of his employment hereunder, EMPLOYEE
shall have the right to terminate his employment upon no less than sixty days'
notice to the COMPANY; provided, however, the term of this Agreement shall
terminate upon the date set by EMPLOYER which shall in no event be greater than
sixty days' from the giving of EMPLOYEE's notice. If EMPLOYEE shall terminate
his employment pursuant to this
9
<PAGE>
Section 6E, the term of this Agreement shall end at the expiration of the notice
period and the COMPANY shall have no further obligations or liability hereunder
except to pay to EMPLOYEE the unpaid portion, if any, of EMPLOYEE's compensation
accrued for the period up to the date of termination, plus any other employee
benefits due the EMPLOYEE under Section 4 of this Agreement, in such manner as
may be prescribed in the applicable plan.
F. After the Expiration of the Term. In the event that,
following the expiration of the term of this Agreement, EMPLOYEE shall be
terminated by the COMPANY prior to his 65th birthday and the termination shall
be for other than "cause" , the COMPANY shall pay EMPLOYEE as a severance
allowance an amount equal to one year's annual compensation, plus any other
employee benefits due the EMPLOYEE under Section 4 of this Agreement, in such
manner as may be prescribed in the applicable plan. The EMPLOYEE's annual
compensation shall be the total of his base salary at the rate paid for the
month prior to such termination of employment.
7. ARBITRATION.
Any controversy or claim arising out of or in any way relating
to this Agreement, the performance of the parties thereunder, the termination
thereof, or the breach thereof, shall be settled by arbitration in Howard
County, Maryland, in
10
<PAGE>
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator may be
entered in any court of the State of Maryland having jurisdiction thereof. The
parties agree that any controversy or claim subject to arbitration will be
submitted to single arbitrator selected from the panels of Arbitrators of the
American Arbitration Rules unless some other method is agreed to by the parties
to this Agreement. Additionally, the discovery provisions of the Federal Rules
of Civil Procedure then in effect shall apply in any such arbitration and the
arbitrator is hereby directed to enforce such Rules. The losing party in any
such arbitration shall pay the prevailing party's legal fees and costs as well
as the costs of the arbitration. The foregoing agreement to arbitrate shall be
specifically enforceable.
8. NON-ASSIGNABILITY BY EMPLOYEE
EMPLOYEE shall have no right to assign this Agreement or any
of his rights or obligations hereunder to another party or parties.
9. ASSIGNABILITY BY THE COMPANY
the COMPANY shall have the right to assign this
Agreement or any of its rights or obligations hereunder, provided that such
assignment shall not alter the financial arrangements or basic duties of
EMPLOYEE as provided in this Agreement.
10. APPLICABLE LAW
This Agreement shall be governed by and construed in
11
<PAGE>
accordance with the laws of the State of Maryland applicable to contracts made
and to be performed therein, without giving effect to the principles of
conflicts of law.
11. NON-WAIVER OF BREACH
No failure of either party to exercise any power, right or
remedy given such party hereunder, or to insist upon the strict compliance by
the other party of any obligation, covenant, term, condition, warranty or
agreement hereunder, and no custom or practice at variance with the terms
hereof, shall constitute a waiver of such party's rights to demand exact
compliance with the terms hereof.
12. NUMBER AND GENDER
Where text required, words in the singular shall be deemed to
include the plural and vice-versa, and words of any gender shall be deemed to
include all genders.
13. HEADINGS NOT PART OF AGREEMENT
Any headings preceding the text of the several Sections and
subparagraphs of this Agreement are inserted solely for convenience of reference
and shall not constitute a part of this Agreement nor shall they affect its
meaning, construction or effect.
14. NOTICES
No notice, request, consent, approval, waiver or other
communication which may be or is required or permitted to be given under this
Agreement shall be effective unless the same is in writing and is delivered in
person, or sent by registered or
12
<PAGE>
certified mail, return receipt requested, first-class postage prepaid, (1) if to
the COMPANY to the first grammatical paragraph of this Agreement, Attention:
President, with a copy to Ronald M. Hirschel, Esquire, 481 North Frederick
Avenue, Suite 200, Gaithersburg, Maryland 20877, and (2) if to EMPLOYEE to the
address set forth in the first grammatical paragraph of this Agreement, or
(effective upon receipt) at any other address that may be given by one party to
the other by notice pursuant to this Paragraph 14. Such notices, if sent by
registered or certified mail, return receipt requested, first-class postage
prepaid, shall be deemed to have been given at the time of mailing.
15. ENTIRE AGREEMENT
This Agreement contains all of the agreements and
understandings between the parties hereto with respect to the employment of
EMPLOYEE by the COMPANY, and no oral agreements or written correspondence shall
be held to affect the provisions hereof.
16. PARTIAL INVALIDITY
Should any part of this Agreement for any reason be declared
or held invalid or unenforceable, such invalidity or unenforceability shall not
affect the validity and enforceability of any remaining portion, which remaining
portion shall remain in force and effect as of this Agreement had been executed
with the invalid or unenforceable portion thereof eliminated.
17. AMENDMENTS
Neither this Agreement nor any provision hereof may be
13
<PAGE>
amended, modified, changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
amendment, modification, change, waiver, discharge or termination is sought.
18. BURDEN AND BENEFIT
This Agreement is binding upon, and inures to the benefit of,
the parties hereto and their respective spouses, heirs, executors,
administrators, personal and legal representatives, successors and assigns.
19. COUNTERPARTS
This Agreement may be executed in one or more counterparts
and, in such event, all such counterparts shall constitute originals and all
such counterparts shall constitute a single agreement.
20. NO INFERENCE AGAINST AUTHOR
No provision of this Agreement shall be interpreted against
any party because such party or its legal representative drafted such provision.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year hereinabove first written.
COMPANY:
THE COSMETIC CENTER, INC.
/s/ BEN KOVALSKY (SEAL)
Ben Kovalsky,
President
WITNESS: /s/ BRUCE E. STROHL EMPLOYEE:
/s/ MICHAEL J. LEWIS (SEAL)
Michael J. Lewis
15
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
THE COSMETIC CENTER, INC.
(The registrant)
State of Incorporation
The Cosmetic Center, Inc. Delaware
M. Steven Cosmetic Company, Inc. Delaware
Susan Kay Cosmetics, Inc. Maryland
Anita Jean Cosmetics, Inc. Maryland
Adam Michael Cosmetics, Inc. Illinois
Courtney Brooke, Inc. Maryland
Dumonde Distributors, Inc. Maryland
38
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in the Form 10-K, into The Cosmetic Center's previously filed
Registration Statement on Form S-8, File No. 33-39846.
/S/ ARTHUR ANDERSEN LLP
Washington, D.C.,
December 18, 1995
39
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0
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