SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: DECEMBER 27, 1996 Commission File No.: 0-14756
----------------- -------
THE COSMETIC CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1266697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8839 GREENWOOD PLACE
SAVAGE, MARYLAND 20763
(Address of principal executive offices)
(301) 497-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class A Common Stock, par value $.01 per share, outstanding as
of January 31, 1997 - 2,717,104 shares
Class B Common Stock, par value $.01 per share, outstanding as
of January 31, 1997 - 1,582,780 shares
<PAGE>
THE COSMETIC CENTER, INC.
Table of Contents
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis 9 - 12
of Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
2
<PAGE>
PART I
ITEM 1. Financial Statements PAGE
Consolidated Balance Sheets
As of December 27, 1996 (unaudited) and
September 27, 1996 4 - 5
Consolidated Statements of Earnings (unaudited)
Three months ended December 27, 1996
and December 29, 1995 6
Consolidated Statements of Cash Flows (unaudited)
Three months ended December 27, 1996
and December 29, 1995 7
Notes to Consolidated Financial Statements (unaudited)
Three months ended December 27, 1996
and December 29, 1995 8
3
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 27, September 27,
1996 1996
(unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 2,959 $ 979
Accounts receivable, net .......................... 1,962 1,860
Inventories ....................................... 50,674 56,479
Prepaid expenses .................................. 624 442
Prepaid income taxes .............................. 1,735 1,735
Deferred income tax benefit ....................... 1,549 1,631
------- -------
Total current assets ................................ 59,503 63,126
------- -------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment ................. 11,014 10,989
Leasehold improvements ............................ 5,028 5,022
Leased property - capitalized ..................... 1,652 1,652
------- -------
17,694 17,663
Accumulated depreciation and amortization ......... 9,823 9,256
------- -------
7,871 8,407
------- -------
DEPOSITS AND OTHER ASSETS ........................... 535 378
------- -------
DEFERRED INCOME TAX BENEFIT ......................... 523 611
------- -------
TOTAL ASSETS ........................................ $68,432 $72,522
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 27, September 27,
1996 1996
(unaudited)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 9,776 $ 15,956
Accrued expenses ................................. 5,747 4,044
Income taxes payable ............................. 288 --
Current portion of obligation under capital leases 276 311
---------- ----------
Total current liabilities ........................ 16,087 20,311
NOTE PAYABLE - BANK ................................ 12,000 12,220
OBLIGATION UNDER CAPITAL LEASES .................... 68 109
DEFERRED RENT ...................................... 1,246 1,305
OTHER LIABILITIES .................................. 1,090 1,396
---------- ----------
TOTAL LIABILITIES .................................. 30,491 35,341
---------- ----------
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value; authorized
5,000,000 shares; issued
2,717,104 shares and
2,713,354 shares, respectively ................ 27 27
Class B common stock, $.01 par value; authorized
5,000,000 shares; issued 1,582,780 shares and
1,582,780 shares, respectively ................ 16 16
Additional paid-in capital ....................... 21,401 21,386
Retained earnings ................................ 16,497 15,752
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ......................... 37,941 37,181
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 68,432 $ 72,522
========= ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 27, December 29,
1996 1995
<S> <C>
Net sales .................................. $ 38,907 $ 41,580
---------- ----------
Cost of sales including buying, occupancy
and distribution ......................... 30,226 32,420
Selling, general and administrative expenses 7,121 7,646
------- -------------
Total operating expenses ................... 37,347 40,066
---------- -------------
Income from operations ..................... 1,560 1,514
Other income, net .......................... 26 29
Interest expense ........................... (334) (316)
---------- -------------
Earnings before income taxes ............... 1,252 1,227
Income taxes ............................... 507 497
---------- -------------
Net earnings ............................... $ 745 $ 730
========== ==========
Net earnings per common share
Primary .................................. $ 0.17 $ 0.17
========== ==========
Weighted average shares outstanding
Primary .................................. 4,327,604 4,316,010
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 27, December 29,
1996 1995
<S> <C>
Cash flows from operating activities:
Net earnings ...................................... $ 745 $ 730
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization ................... 573 704
Change in assets and liabilities:
Accounts receivable, net ...................... (102) (629)
Inventories ................................... 5,805 6,827
Prepaid expenses .............................. (188) 12
Prepaid income taxes .......................... -- 491
Deposits and other assets ..................... (157) (8)
Deferred income tax benefit ................... 170 --
Accounts payable .............................. (6,180) (5,525)
Accrued expenses .............................. 1,703 1,705
Restructuring provision ....................... (237) --
Income taxes payable .......................... 288 (234)
Deferred rent ................................. (59) (4)
Other liabilities ............................. (69) (77)
------- ----------
Net cash provided by operating activities ..... 2,292 3,992
------- ----------
Cash flows from investing activities:
Capital expenditures, net ......................... (31) (662)
------- -------
Net cash used in investing activities ......... (31) (662)
------- --------
Cash flows from financing activities:
Net repayments under line-of-credit agreement ..... (220) (3,035)
Repayments of capital lease obligations ........... (76) (71)
Exercise of stock options ......................... 15 --
------- -------
Net cash used in financing activities ......... (281) (3,106)
------- ---------
Net increase in cash and cash equivalents ........... 1,980 224
Cash and cash equivalents at beginning of period .... 979 1,320
------- ---------
Cash and cash equivalents at end of period ......... $ 2,959 $ 1,544
======= =========
Supplemental Disclosures of Cash Flow Information and
Non-cash Activities:
Cash payments for interest .........................$ 257 $ 279
Cash payment for income taxes ...................... 185 239
Treasury stock ...................................... -- 214
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
DECEMBER 27, 1996 AND DECEMBER 29, 1995
(Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements of The Cosmetic Center,
Inc., (the "Company") for the year ended September 27, 1996.
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation at December 27, 1996 and
December 29, 1995 and for the three-month periods then ended. The accounting
policies applied in the consolidated financial statements are consistent with
the accounting policies applied in the consolidated financial statements of the
Company for the year ended September 27, 1996.
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenue and expenses to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
The results for the three-month periods ended December 27, 1996 and
December 29, 1995 are not necessarily indicative of results expected for the
entire year.
Merchandise Inventories
The Company's inventories, consisting primarily of cosmetic, fragrance,
beauty aid, and related items, are valued at the lower of cost or market. Cost
is determined using the weighted average cost method.
Rental Expenses
Certain store leases provide for minimum rentals plus additional rentals
computed as a percentage of sales in excess of amounts specified in the lease as
minimum rentals. The Company accrues percentage rent expense during interim
periods based on actual sales in excess of the prorated annual amounts specified
in the related lease.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
All statements contained herein that are not historical facts, including
but not limited to, statements regarding the amount of required capital
expenditures, including costs associated with store openings and closings, the
Company's ability to develop relationships with the manufacturers of
professional hair care products, expectations as to the Company's cash flows
from operations, and other statements preceded by, followed by or that include
the words "believes", "expects", "anticipates" or similar expressions are based
on current expectations. These statements are forward looking in nature and are
subject to a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially from those expressed in forward looking statements are the following:
the inability to generate sufficient cash flows from operations to fund new
store openings, unanticipated capital expenditures, including costs associated
with store openings and closings, actions by competitors that may have greater
capital resources than the Company, including combinations within the retail
industry and successful new retail store concepts, the lack of viability of the
Company's salon business, the unavailability of product or the loss of
suppliers, including secondary source suppliers, the inability to secure
sufficient professional hair care products, general business and economic
conditions, and other risk factors described from time to time in the Company's
reports filed with the SEC. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speaks only as of the date made.
General
The Company was founded in 1957, with its initial operations consisting of
the sales of cosmetic products to wholesale customers. At December 27, 1996, the
Company operated 69 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; and Philadelphia, Pennsylvania. The Company sells approximately 25,000
brand name prestige and mass-merchandised cosmetic products.
During the past three fiscal years the Company embarked upon several major
projects which affected the results of operations. These projects included
expansion on a more expedited basis than in the past and the introduction of
hair salons within its retail stores.
Expansion
Over the past three fiscal years the Company opened 31 retail stores to
add to its base of 47 retail stores at the end of the 1993 fiscal year, an
increase of 66%. During this same time period the Company opened three new
geographic market areas: Charlotte/Raleigh/Durham, N.C.; Philadelphia, Pa.; and
Atlanta, Ga. Generally, new stores do not begin to contribute to the absorption
of corporate overhead until after their second year of operation or until their
sales level has matured. In a new market, where it takes additional time to
build name recognition, the time period to begin to contribute to absorption of
corporate overhead may be even longer.
Although the Philadelphia, Pa. and North Carolina market areas have
performed to the Company's expectations, the Atlanta Ga. marketplace was a
disappointment. During the 1996 fiscal year, the Company's stores in the Atlanta
marketplace suffered an operating loss of $1.1 million. As a result, on August
4, 1996, the Company closed its eight retail stores in the Atlanta marketplace
and recorded a restructuring provision of $4.0 million, including the cost of
future lease obligations, a write off of
9
<PAGE>
certain assets and a severance package for its Atlanta employees. The expected
future cash flow requirement of the restructuring provision at December 27, 1996
is $1.9 million and will be paid over the remaining one to four year terms of
the Atlanta leases.
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 purchased 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 direct relationships with the manufacturers of
professional hair care products, which required discontinuing sales of
professional hair care products obtained from secondary sources.
In the summer and fall of 1994, the Company opened hair salons in twelve
of its thirteen new stores in the Pa., N.C. and 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 27, 1996, the Company had built or
retrofitted 60 of its 69 stores to include hair salons.
In July 1995, the Company began receiving shipments of professional hair
care products from one of the four major professional hair care manufacturers
and continues to receive such products today. This manufacturer, however,
represents only one-third of the historical 6% of sales volume. The loss of the
remaining professional hair care product sales has adversely affected retail
sales and profits. The Company is attempting to develop direct relationships
with the other three major manufacturers, though there can be no assurances this
will be achieved or that the one manufacturer will continue to supply the
Company.
Although results of operations continue to be affected by costs associated
with the operation of hair salons and lost sales and profits associated with the
discontinuance of professional hair care products from secondary sources, the
Company believes that there may be future benefits to be derived from
maintaining and expanding the arrangement. The gross margin on professional hair
care products purchased on a direct basis is significantly higher than the gross
margin on professional hair care products purchased on a secondary source basis.
In addition, the direct relationship enables the Company to maintain in stock
sufficient quantities of professional hair care products of the manufacturer
with which the Company has such relationship.
Results of Operations
Consolidated net sales for the three months ended December 27, 1996 were
$38.9 million, a decrease of $2.7 million, or 6.4%, from the $41.6 million in
consolidated net sales for the three months ended December 29, 1995.
Retail sales for the three months ended December 27, 1996 were $38.5
million, a decrease of $2.6 million, or 6.3%, from the $41.1 million in sales
for the three months ended December 29, 1995. Of this decrease, $2.3 million is
attributable to the nine stores closed in fiscal year 1996. Comparable store
retail sales for the period were $38.1 million, a decrease of $0.6 million or
1.6% as compared to store retail sales of $38.7 million of the same period last
year. Comparable store retail sales were adversely affected by soft fragrance
sales. The Company operated 69 stores at December 27, 1996
10
<PAGE>
and 77 stores at December 29, 1995.
Wholesale sales for the three months ended December 27, 1996 were $0.4
million, a decrease of $0.1 million, or 16.7%, from the $0.5 million in sales
for the three months ended December 29, 1995. 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 expenses, was
$30.2 million (77.7% of sales) for the three months ended December 27, 1996
versus $32.4 million (78.0% of sales) for the three months ended December 29,
1995. The dollar decrease is primarily attributable to the nine stores closed in
fiscal year 1996 that were not in operation during the current period and the
decrease in comparable store retail sales. Cost of sales, including buying,
occupancy and distribution expenses, as a percentage of sales decreased
marginally, primarily from the direct purchase of professional hair care
products.
Selling, general and administrative ("S G & A") expenses were $7.1 million
(18.3% of sales) for the three months ended December 27, 1996 versus $7.6
million (18.4% of sales) for the three months ended December 29, 1995. S G & A
expenses decreased $0.5 million over the comparable period of last year. S G & A
expenses decreased by $0.6 million as a result of the nine stores closed in
fiscal year 1996 and increased $0.1 million in comparable stores operating
expenses.
Interest expense was $0.3 million (0.9% of sales) for the three months
ended December 27, 1996 versus $0.3 million (0.8% of sales) for the three months
ended December 29, 1995.
Liquidity and Capital Resources
The Company's working capital was $43.4 million at December 27, 1996
compared to $42.8 million at September 27, 1996. The ratio of current assets to
current liabilities was 3.7 at December 27, 1996 compared to 3.1 at September
27, 1996.
Net cash provided by operating activities amounted to $2.3 million for the
three months ended December 27, 1996, resulting primarily from net income,
depreciation and amortization and a decrease in inventories which were partially
offset by a net decrease in accounts payable and accrued expenses.
Net cash used by investing activities amounted to $31,000 for the three
months ended December 27, 1996. This investment is attributable to the purchase
of fixed assets used in operations.
Net cash used by financing activities amounted to $0.3 million for the
three months ended December 27, 1996. During the three months ended December 27,
1996 the Company reduced its credit facility by $0.2 million and repaid capital
lease obligations in the amount of $0.1 million.
On November 27, 1996, the Company entered into a merger agreement with
Revlon Consumer Products Corporation ("RCPC") and Prestige Fragrance &
Cosmetics, Inc. ("PFC") a wholly owned subsidiary of RCPC pursuant to which,
subject to the satisfaction of certain conditions, the Company would merge with
PFC with the Company remaining as the surviving corporation (the "Merger"). In
connection with the Merger, a new class of the Company voting common stock
("Class C common stock") would be created. RCPC would receive newly issued Class
C common stock such that immediately following the Merger, RCPC would own 65% of
the issued and outstanding Class C common stock of the Company. Also as a part
of the Merger, the holders of the Class A and Class B common stock can elect to
receive cash at $7.63 per share and holders of options with an exercise
11
<PAGE>
price of less than $7.63 can elect to receive cash of $7.63 less the exercise
price (the "Cash Election") with a limit of 2,829,065 shares and options as to
which the Cash Election will be accepted. Giving effect to the Cash Election,
RCPC could own at least 74% and up to 84% of the Company's outstanding common
stock. The completion of the Merger is subject to, among other things, the
approval of the shareholders of the Company, regulatory approval and financing
for the surviving corporation. No assurance can be given that the Merger can be
completed.
The Company had an unsecured credit facility with a bank for a maximum
borrowing of $15 million (the "Facility"). The Facility, which was scheduled to
expire on February 28, 1997, was subject to repayment on demand and accrued
interest was payable monthly, at an annual rate equal to the bank's prime rate
or at LIBOR plus 200 basis points. The Facility required compliance with certain
restrictive covenants including maintenance of minimum tangible net worth.
In October 1996, the Company paid the then outstanding balance of $14.2
million on the Facility with borrowings under a new loan and security agreement
(the "New Facility"). Under the New Facility, which expires October 31, 1999,
the Company may borrow the lesser of $25 million or 50% of eligible inventory,
as defined in the New Facility. Borrowings under the New Facility are secured by
all of the Company's assets except for fixed assets. Under the New Facility the
Company may borrow at LIBOR plus 200 basis points or at the bank's prime rate
plus 50 basis points. The Company also pays an unused line fee equal to
one-quarter of one percent per annum. Interest is payable on a monthly basis. If
the Company terminates the New Facility, the Company is obligated to pay a
prepayment penalty of $187,500 if termination is made before the first
anniversary date and $62,500 after the first anniversary date. The consent of
the lender will be required to consummate the Merger, and if such consent is not
obtained, the Company will be required to pay $187,500 of the prepayment
penalty. As a result of the Company's ability to refinance the prior Facility
with the New Facility, the balance of the Facility was classified as long-term
debt in the accompanying September 27, 1996 balance sheet. The New Facility
requires the Company to be in compliance with a minimum tangible net worth
covenant. At December 27, 1997, the New Facility had an outstanding balance of
$12,000,000.
The Company's future cash needs without giving effect to the Merger
primarily result from its plan to open additional new stores. The Company's
estimated cost of opening a new store is approximately $0.7 million, including
$0.5 million for initial inventory and $0.2 million for leasehold improvements,
furnishings and fixtures, point-of-sale equipment, hair salon equipment, and
other items. The Company may open additional stores during the fiscal year,
however, this would be dependent upon locating the property and negotiating the
economics of the leases. The Company believes that funds available from the New
Facility and internally generated funds would provide sufficient cash to meet
the Company's needs for the next year.
Seasonality
The Company's business is seasonal with the highest volume of sales for
both the retail and wholesale divisions occurring during the first fiscal
quarter (October to December).
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.
12
<PAGE>
PART II
Item 6. (A) Exhibits
EXHIBIT 27- Financial Data Schedule as of December 27, 1996
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter for which this report is filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COSMETIC CENTER, INC.
(Registrant)
Date: 2/6/97 By /s/ Ben S. Kovalsky
---------- -----------------------
BEN S. KOVALSKY
Chief Executive Officer, Chief Operating
Officer and President
Date: 2/6/97 By /s/ Bruce E. Strohl
---------- ---------------------------
BRUCE E. STROHL
Vice President - Finance
and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-END> SEP-27-1996
<CASH> 2,959
<SECURITIES> 0
<RECEIVABLES> 1,962
<ALLOWANCES> 10
<INVENTORY> 50,674
<CURRENT-ASSETS> 59,503
<PP&E> 17,694
<DEPRECIATION> 9,823
<TOTAL-ASSETS> 68,432
<CURRENT-LIABILITIES> 16,087
<BONDS> 12,068
0
0
<COMMON> 43
<OTHER-SE> 37,898
<TOTAL-LIABILITY-AND-EQUITY> 68,432
<SALES> 38,907
<TOTAL-REVENUES> 38,907
<CGS> 30,226
<TOTAL-COSTS> 37,347
<OTHER-EXPENSES> (26)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 1,252
<INCOME-TAX> 507
<INCOME-CONTINUING> 745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745
<EPS-PRIMARY> $0.17
<EPS-DILUTED> $0.17
</TABLE>
