As filed with the Securities and Exchange Commission on January 31, 1997
Registration No. 333-18321
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE COSMETIC CENTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 5999 52-1266697
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
or organization) Code No.)
8839 Greenwood Place
Savage, Maryland 20763
(301) 497-6700
(Address of Principal Executive Offices, Including Zip Code)
Bruce Strohl
8839 Greenwood Place
Savage, Maryland 20763
(301) 497-6700
(Name, Address and Telephone Number
of Agent for Service)
The Commission is requested to send
copies of all communications to:
Jeffrey E. Jordan, Esq. Robert K. Kretzman, Esq.
Arent Fox Kintner Plotkin & Kahn Revlon Consumer Products Corporation
1050 Connecticut Avenue, N.W. 625 Madison Avenue
Washington, DC 20036-5339 New York, NY 10022
(202) 857-6473 (212) 527-5695
(202) 857-6395 (facsimile) (212) 527-5693 (facsimile)
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY 30, 1997
THE COSMETIC CENTER, INC.
8839 Greenwood Place
Savage, Maryland 20763
TO THE STOCKHOLDERS OF THE COSMETIC CENTER, INC.:
The Boards of Directors of The Cosmetic Center, Inc. ("Cosmetic"), Revlon
Consumer Products Corporation ("Revlon") and Prestige Fragrance & Cosmetics,
Inc., a wholly owned subsidiary of Revlon ("PFC"), have approved an Agreement
and Plan of Merger dated November 27, 1996 (the "Merger Agreement"). Upon the
approval of the Merger Agreement by the holders of Cosmetic Class B common stock
(the only class of Cosmetic stock entitled to vote on the Merger Agreement) and
the satisfaction of certain other conditions, PFC will be merged into Cosmetic
(the "Merger"), with Cosmetic surviving the Merger (the "Combined Company") as a
subsidiary of Revlon.
As a result of the Merger, Cosmetic stockholders will receive for each
share of Cosmetic Class A or Class B common stock they hold one share of
Cosmetic Class C common stock (the only class of Cosmetic stock outstanding
after the Merger) or, at each stockholder's election and subject to the
limitation discussed below, $7.63 in cash (the "Cash Election"). Holders of
options to purchase Cosmetic Class A or Class B common stock with an exercise
price of less than $7.63 may elect to receive for each such option they hold an
equivalent option to purchase Cosmetic Class C common stock or, at each such
optionholder's election and subject to the limitation discussed below, cash
equal to the difference between $7.63 and the exercise price per share of such
options. The right of stockholders and optionholders to receive cash is limited
to an aggregate of 2,829,065 shares and options for shares, and to the extent
that holders of more than 2,829,065 shares and options for shares elect to
receive cash, the Cash Election will be provided to such holders pro rata. See
"The Merger Agreement -- Cash Election" in the attached Proxy
Statement/Prospectus for a more detailed description of the right to elect to
receive Cosmetic Class C common stock or cash.
Assuming that the Cash Election is made for all of the 4,299,884
outstanding shares of Cosmetic Class A and Class B common stock and 205,200
outstanding options with an exercise price of less than $7.63 per share,
Cosmetic stockholders will receive in the aggregate approximately 1,600,000
shares of Cosmetic Class C common stock (or approximately 16% of the Cosmetic
Class C common stock to be outstanding immediately after the Merger) and
approximately $20.9 million in cash, and Revlon will receive 8,479,335 shares of
Cosmetic Class C common stock (or approximately 84% of the Cosmetic Class C
common stock to be outstanding immediately after the Merger) for its one share
of PFC common stock as a result of the Merger. Assuming that the Cash Election
is made for all of the 4,299,884 outstanding shares of Cosmetic Class A and
Class B common stock and all of the 205,200 outstanding options with an exercise
price of less than $7.63 per share, each share of Cosmetic Class A and Class B
common stock would be converted into 0.372 of a share of Cosmetic Class C common
stock and approximately $4.79 in cash. However, since fractional shares of
Cosmetic Class C common stock will not be issued as a result of the Merger and
the Cash Election, all fractional shares held by a stockholder will be
aggregated and such stockholder will receive a number of shares of Cosmetic
Class C common stock equal to the resulting whole number of all such aggregated
fractional shares and a cash payment in lieu of a fractional share for any
remaining fractional share of Cosmetic Class C common stock equal to the
fraction of $7.63 that the fractional share represents.
Revlon previously has stated publicly that the Merger is the first step in
its plan to withdraw from operating retail cosmetic stores so that Revlon's
management can focus on its core business of the manufacture and sale of
cosmetic products. Although Revlon has not yet determined the timing or form
that any such transaction might take, Revlon could, among other things, sell
some or all of the shares of Cosmetic Class C common stock that it receives in
the Merger in public or private transactions or cause the Combined Company to
conduct primary offerings of Cosmetic common stock, issue Cosmetic common stock
to acquire additional businesses or merge with another entity, any of which
transactions would have the effect of reducing the interest of Revlon as well as
other stockholders (and could have the effect of diluting the interests of
existing stockholders) in the Combined Company. In connection with any such
transaction, there can be no assurance as to the value that holders of Cosmetic
Class C common stock might receive, and such value could be lower than the
amount of cash offered in connection with the Cash Election available to
Cosmetic stockholders in the Merger. See "Risk Factors -- Authorization of
Additional Common Stock for Future Issuance." In addition, if any such
transaction resulted in a change of control of the Combined Company, as defined
in certain employment and consulting agreements to be entered into with Mark S.
Weinstein, Anita J. Weinstein and Susan K. Magenheim, the principal stockholders
of Cosmetic, such persons would be entitled to all amounts payable to them under
such agreements. Finally, there can be no assurance that Revlon will withdraw
from operating retail cosmetic stores. See "Interests of Directors and Officers
in the Merger."
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE
APPROVED THE COSMETIC CLASS C COMMON STOCK TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROXY STATEMENT/PROSPECTUS DATED FEBRUARY , 1997 AND
FIRST MAILED TO STOCKHOLDERS ON FEBRUARY , 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Merger requires the approval of the holders of a majority of the
outstanding Cosmetic Class B common stock. The annual meeting of the Cosmetic
stockholders has been scheduled for , February , 1997 at 10:00
a.m., at located at , Maryland
(the "Meeting"). At the Meeting, holders of Cosmetic Class B common stock will
vote upon the Merger Agreement (which provides for the Merger, an amendment to
Cosmetic's Certificate of Incorporation authorizing the issuance of up to
40,000,000 shares of Cosmetic Class C common stock, the conversion of Cosmetic
Class A and Class B common stock into Cosmetic Class C common stock and the
appointment of nine directors upon consummation of the Merger who will replace
the Cosmetic Board of Directors) and also will vote upon (i) an amendment to
Cosmetic's Certificate of Incorporation repealing the classification of the
Cosmetic Board of Directors, (ii) the election of two Class II directors (who
will be replaced in connection with the appointment of nine directors upon
consummation of the Merger) and (iii) the approval of the Cosmetic 1997 Stock
Option Plan, which provides for the grant of options on the Cosmetic Class C
common stock. Therefore, approval of the Merger Agreement will constitute, in
addition to the approval of the Merger, the approval of an amendment to
Cosmetic's Certificate of Incorporation authorizing the issuance of up to
40,000,000 shares of Cosmetic Class C common stock, the approval of the
conversion of Cosmetic Class A and B common stock into Cosmetic Class C common
stock and the approval of the appointment of the nine directors listed under
"Election of Directors; Management of Cosmetic Following the Merger -- Directors
Following the Merger" upon consummation of the Merger. Only holders of record of
Cosmetic Class B common stock at the close of business on January , 1997 will
be entitled to notice of, and to vote at, the Meeting. Holders of Cosmetic Class
A common stock are not entitled to vote at the Meeting.
Cosmetic stockholders have no right under the Delaware General Corporation
Law to an appraisal of the value of their shares of Cosmetic Class A or Class B
common stock in connection with the Merger.
Whether or not you plan to attend the Meeting, if you are a holder of
Cosmetic Class B common stock, please take time to vote by completing and
mailing the enclosed proxy card to us. A stockholder who has executed and
returned a proxy may revoke it at any time before it is voted by delivering to
Cosmetic's Secretary a signed notice of revocation or a signed proxy bearing a
later date or by attending the Meeting and voting in person. Attendance at the
Meeting will not in itself constitute the revocation of a proxy.
Mark S. Weinstein, Anita J. Weinstein, Susan K. Magenheim and their family
members own approximately 51.4% of the outstanding Cosmetic Class B common stock
and have advised Cosmetic that they intend to vote in favor of the Merger
Agreement, the amendments to Cosmetic's Certificate of Incorporation, the
election of directors and the Cosmetic 1997 Stock Option Plan. See "The
Stockholders Agreement." Accordingly, the approval of the Merger Agreement, the
amendments to Cosmetic's Certificate of Incorporation (except the repeal of the
classification of the Cosmetic Board of Directors, which requires the
affirmative vote of the holders of 80% of the outstanding Cosmetic Class B
common stock), the election of directors and the approval of the Cosmetic 1997
Stock Option Plan are assured without the vote of any other stockholder.
The attached Proxy Statement/Prospectus provides you with detailed
information about the proposed Merger, the other matters to be voted on at the
Meeting, Cosmetic and PFC. We encourage you to read this entire document
carefully.
By order of the Board of Directors,
MARK S. WEINSTEIN
CHAIRMAN OF THE BOARD
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER................................................................................. 1
SUMMARY................................................................................................................ 3
RISK FACTORS........................................................................................................... 11
FORWARD-LOOKING STATEMENTS............................................................................................. 15
THE MERGER............................................................................................................. 15
Background of the Merger............................................................................................. 15
Reasons for the Merger; Recommendation of the Cosmetic Board......................................................... 22
Financing............................................................................................................ 23
Operations After the Merger.......................................................................................... 24
Amendments to Cosmetic's Certificate of Incorporation................................................................ 24
Regulatory Filings and Approvals..................................................................................... 25
Accounting Treatment................................................................................................. 25
No Appraisal Rights.................................................................................................. 25
Certain Federal Income Tax Consequences.............................................................................. 25
OPINION OF FINANCIAL ADVISOR........................................................................................... 29
The Offer............................................................................................................ 30
Comparable Companies Analysis........................................................................................ 31
Acquisition Premiums Analysis........................................................................................ 32
Comparable Transactions Analysis..................................................................................... 33
Discounted Cash Flow Analysis........................................................................................ 33
Leveraged Buyout Analysis............................................................................................ 34
Asset Liquidation Analysis........................................................................................... 34
Other Factors........................................................................................................ 34
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER...................................................................... 35
Employment and Non-Competition Agreements with Mark S. Weinstein and Anita J. Weinstein.............................. 35
Consulting and Non-Competition Agreement with Susan K. Magenheim..................................................... 36
Employment Agreement with Ben S. Kovalsky............................................................................ 36
Stockholders Agreement with Principal Stockholders................................................................... 36
Cosmetic Stock Options............................................................................................... 37
Compensation of Committee Members.................................................................................... 37
MARKET PRICES OF COSMETIC'S SECURITIES................................................................................. 38
SELECTED FINANCIAL DATA OF COSMETIC.................................................................................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COSMETIC...................... 40
General.............................................................................................................. 40
Expansion............................................................................................................ 40
Hair Salon Strategy.................................................................................................. 40
Results of Operations................................................................................................ 41
Fiscal Year Ended September 27, 1996 Compared to Fiscal Year Ended September 29, 1995................................ 41
Fiscal Year Ended September 29, 1995 Compared to Fiscal Year Ended September 30, 1994................................ 41
Liquidity and Capital Resources...................................................................................... 42
Seasonality.......................................................................................................... 43
Inflation............................................................................................................ 43
SELECTED FINANCIAL DATA OF PFC......................................................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PFC........................... 45
Overview............................................................................................................. 45
Results of Operations................................................................................................ 45
</TABLE>
i
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For the Nine Month Period Ended September 30, 1996 Compared to the Nine Month Period Ended
September 30, 1995................................................................................................ 45
For the Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994.................................... 46
For the Year Ended December 31, 1994 Compared to the Year Ended December 31, 1993.................................... 46
Financial Condition, Liquidity and Capital Resources................................................................. 47
Seasonality.......................................................................................................... 47
Inflation............................................................................................................ 47
PRO FORMA FINANCIAL INFORMATION........................................................................................ 48
THE MERGER AGREEMENT................................................................................................... 54
General.............................................................................................................. 54
Consideration to be Received in the Merger........................................................................... 54
Cash Election........................................................................................................ 54
Exchange of Stock Certificates....................................................................................... 54
Conditions to the Merger............................................................................................. 55
Representations and Warranties....................................................................................... 56
Conduct of Business Prior to Merger.................................................................................. 56
Certain Covenants.................................................................................................... 56
Termination; Amendment; Waiver....................................................................................... 57
Expenses............................................................................................................. 57
Termination Fee...................................................................................................... 58
THE STOCKHOLDERS AGREEMENT............................................................................................. 58
AGREEMENTS WITH REVLON................................................................................................. 60
Holmdel Lease........................................................................................................ 60
PFC Employee Store Leases............................................................................................ 60
Services Agreement................................................................................................... 60
Supply Agreement..................................................................................................... 61
Tax Sharing Agreement................................................................................................ 61
Registration Rights Agreement........................................................................................ 62
THE MEETING............................................................................................................ 62
Time and Place; Purposes............................................................................................. 62
Voting Rights; Votes Required for Approval........................................................................... 62
Proxies.............................................................................................................. 63
BUSINESS OF COSMETIC................................................................................................... 64
General.............................................................................................................. 64
Retail Division...................................................................................................... 64
Atlanta, Georgia Marketplace......................................................................................... 65
Wholesale Division................................................................................................... 65
Distribution Division................................................................................................ 65
Retail Stores........................................................................................................ 65
Purchasing........................................................................................................... 65
Inventory and Distribution Management................................................................................ 66
Advertising.......................................................................................................... 66
Trade Names and Service Marks........................................................................................ 66
Employees............................................................................................................ 67
Legal Proceedings.................................................................................................... 67
Competition.......................................................................................................... 67
Store Properties..................................................................................................... 67
Distribution Center and Corporate Headquarters....................................................................... 67
BUSINESS OF PFC........................................................................................................ 68
General.............................................................................................................. 68
Store Locations...................................................................................................... 68
Store Operations and Management...................................................................................... 69
Information Systems.................................................................................................. 70
</TABLE>
ii
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<TABLE>
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Store Expansion and Closings......................................................................................... 70
Distribution Operations.............................................................................................. 71
Purchasing........................................................................................................... 71
Trade Name and Service Mark.......................................................................................... 72
Competition.......................................................................................................... 72
Merchandise and Marketing............................................................................................ 72
Properties........................................................................................................... 72
Employees............................................................................................................ 73
Legal Proceedings.................................................................................................... 73
Stockholder Matters.................................................................................................. 73
Certain Relationships and Related Party Transactions................................................................. 73
ELECTION OF DIRECTORS; MANAGEMENT OF COSMETIC FOLLOWING THE MERGER..................................................... 74
Election Of Directors................................................................................................ 74
Directors Following the Merger....................................................................................... 75
Executive Officers Following the Merger.............................................................................. 76
Executive Compensation............................................................................................... 77
Summary Compensation Table........................................................................................... 77
Option Grants in Last Fiscal Year.................................................................................... 77
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values.................................... 78
Employment Agreements................................................................................................ 79
Director Compensation................................................................................................ 79
1991 Option Plan..................................................................................................... 80
Report to Stockholders on Compensation............................................................................... 81
Performance Graph.................................................................................................... 83
COSMETIC 1997 STOCK OPTION PLAN........................................................................................ 84
PRINCIPAL STOCKHOLDERS OF COSMETIC..................................................................................... 86
DESCRIPTION OF COSMETIC CAPITAL STOCK.................................................................................. 88
Cosmetic Class A Common Stock........................................................................................ 88
Cosmetic Class B Common Stock........................................................................................ 88
Cosmetic Class C Common Stock........................................................................................ 90
Dividends............................................................................................................ 90
Transfer Agent....................................................................................................... 90
Nasdaq National Market Listing....................................................................................... 90
Federal Securities Laws Consequences................................................................................. 90
LEGAL MATTERS.......................................................................................................... 91
EXPERTS................................................................................................................ 91
INDEPENDENT PUBLIC ACCOUNTANTS......................................................................................... 91
FUTURE STOCKHOLDER PROPOSALS........................................................................................... 91
WHERE YOU CAN FIND MORE INFORMATION.................................................................................... 91
LIST OF DEFINED TERMS.................................................................................................. 92
INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1
ANNEX I: Agreement and Plan of Merger
ANNEX II: Form of Amendments to Cosmetic's Certificate of Incorporation
ANNEX III: Opinion of Legg Mason Wood Walker, Incorporated
ANNEX IV: Form of Cosmetic 1997 Stock Option Plan
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: WHY ARE COSMETIC AND PFC PROPOSING TO MERGE?
A: Cosmetic's Board of Directors (the "Cosmetic Board") believes that the
combination of Cosmetic and PFC should create an opportunity to achieve
accelerated earnings growth through cost savings, synergies and critical
mass. The Cosmetic Board also believes that the Cash Election should
provide Cosmetic stockholders liquidity at a premium to the market value
of the Cosmetic Class A and Class B common stock prior to the
announcement of the signing of the letter of intent with respect to the
Merger. To review the reasons for the Merger in greater detail, see
pages 22 through 24; to review the related risks, see pages 11 through
14.
Q: WHAT DO I NEED TO DO NOW?
A: If you hold Cosmetic Class B common stock, you should mail your signed
proxy card in the enclosed return envelope as soon as possible, so that
your shares may be represented at the Meeting. Also, if you hold
Cosmetic Class A or Class B common stock and you want to elect to
receive cash with respect to your shares, you must complete and mail
your signed form of election in the enclosed return envelope, so that
your election is received prior to 5:00 p.m., New York City time, on the
business day immediately preceding the Meeting. The Meeting will take
place on February , 1997. If your election is not properly completed
and signed or is not received by that time, you will lose the right to
receive cash with respect to your shares. If your shares are not held in
your name, but are held in the name of a broker, bank or other person,
and you want to make the Cash Election, you must contact the broker,
bank or other person holding your shares, and it must make the Cash
Election for you.
Q: PLEASE EXPLAIN THE ELECTION TO RECEIVE COSMETIC CLASS C COMMON STOCK OR
CASH.
A: As a result of the Merger, Cosmetic stockholders will receive for each
share of Cosmetic Class A or Class B common stock they hold one share of
Cosmetic Class C common stock or, at each stockholder's election and
subject to the limitation discussed below, $7.63 in cash. Holders of
options to purchase Cosmetic Class A or Class B common stock with an
exercise price of less than $7.63 per share may elect to receive for
each such option they hold an equivalent option to purchase Cosmetic
Class C common stock or, at each such optionholder's election and
subject to the limitation discussed below, cash equal to the difference
between $7.63 and the exercise price per share of such options. The
right of stockholders and optionholders to receive cash is limited to an
aggregate of 2,829,065 shares and options for shares, and to the extent
that holders of more than 2,829,065 shares and options for shares elect
to receive cash, the Cash Election will be provided to such holders pro
rata. Assuming that the Cash Election is made for all of the 4,299,884
outstanding shares of Cosmetic Class A and Class B common stock and all
of the 205,200 outstanding options with an exercise price of less than
$7.63 per share, each share of Cosmetic Class A and Class B common stock
would be converted into 0.372 of a share of Cosmetic Class C common
stock and approximately $4.79 in cash. However, since fractional shares
of Cosmetic Class C common stock will not be issued as a result of the
Merger and the Cash Election, all fractional shares held by a
stockholder will be aggregated and such stockholder will receive a
number of shares of Cosmetic Class C common stock equal to the resulting
whole number of all such aggregated fractional shares and a cash payment
in lieu of a fractional share for any remaining fractional share of
Cosmetic Class C common stock equal to the fraction of $7.63 that the
fractional share represents.
Mark S. Weinstein, Anita J. Weinstein, Susan K. Magenheim and a
partnership composed of Mr. Weinstein, Mrs. Weinstein and Mrs. Magenheim
(the "Principal Stockholders") have agreed to make the Cash Election for
all of their 1,392,723 shares of Cosmetic Class A and Class B common
stock and 61,000 options that have an exercise price of less than $7.63
per share. See "The Stockholders Agreement" at page 58. Accordingly, if
other persons holding more than 1,375,342 shares and options for shares
that have an exercise price of less than $7.63 elect to receive cash,
all holders who have made the Cash Election will be subject to
proration.
Examples:
If (i) you currently own 100 shares of Cosmetic Class A (or Class B)
common stock, (ii) you make the Cash Election for all of your shares and
(iii) all other stockholders and optionholders make the Cash Election
for all of their shares and options that have an exercise price of less
than $7.63 per share, then after the Merger you will be entitled to
receive 37 shares of Cosmetic Class C common stock and approximately
$480.53 in cash.
If (i) you currently own 100 shares of Cosmetic Class A (or Class B)
common stock, (ii) you make the Cash Election for all of your shares and
(iii) other stockholders and optionholders (including the Principal
Stockholders) make the
1
<PAGE>
Cash Election such that the Cash Election is made for an aggregate of
2,829,065 shares and options for shares, then after the Merger you will
be entitled to receive no shares of Cosmetic Class C common stock and
$763 in cash.
If you currently own 100 shares of Cosmetic Class A (or Class B) common
stock and do not make the Cash Election, then after the Merger you will
be entitled to receive 100 shares of Cosmetic Class C common stock and
no cash.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, we will send holders of Cosmetic
Class A and Class B common stock written instructions for exchanging
their stock certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We expect to complete the Merger promptly following the Meeting. The
Principal Stockholders and their family members own approximately 51.4%
of the outstanding Cosmetic Class B common stock (the only class of
Cosmetic stock entitled to vote at the Meeting) and they have advised
Cosmetic that they intend to vote in favor of the Merger Agreement.
Accordingly, the approval of the Merger Agreement is assured without the
vote of any other stockholder.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS?
A: The exchange of Cosmetic Class A or Class B common stock for Cosmetic
Class C common stock will be tax-free to Cosmetic stockholders for
federal income tax purposes. The exchange of Cosmetic Class A or Class B
common stock for cash will be taxable. To review the tax consequences to
Cosmetic stockholders in greater detail, see pages 26 through 29. We
also suggest that you discuss your personal tax situation with your own
tax advisor.
Q: HOW MUCH COSMETIC CLASS C COMMON STOCK WILL REVLON RECEIVE IN THE
MERGER?
A: The one outstanding share of PFC common stock will be converted into
8,479,335 shares of Cosmetic Class C common stock. As a result of the
Principal Stockholders' agreement to make the Cash Election, the
8,479,335 shares to be held by Revlon will represent at least 74% of the
Cosmetic Class C common stock outstanding immediately after the Merger
and will represent approximately 84% of such outstanding stock if in
addition to the Principal Stockholders' shares and options the Cash
Election is made in respect of all other outstanding shares and options
for shares with an exercise price of less than $7.63 per share.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT.
A LIST OF ALL CAPITALIZED TERMS USED IN THIS PROXY STATEMENT/PROSPECTUS MAY
BE FOUND BEGINNING ON PAGE 92.
THE COMPANIES
The Cosmetic Center, Inc., 8839 Greenwood Place, Savage, Maryland 20763.
Telephone: (410) 497-6700.
Cosmetic is primarily engaged in the retail sale of a wide range of brand
name cosmetics, fragrances, beauty aids and related items. As of December 31,
1996, Cosmetic operated 69 specialty retail stores in the greater metropolitan
areas of Washington, D.C.; Richmond, Virginia; Baltimore, Maryland; Chicago,
Illinois; Charlotte/Raleigh/Durham, North Carolina; and Philadelphia,
Pennsylvania.
Prestige Fragrance & Cosmetics, Inc., 2182 Route 35, Holmdel, New Jersey
07733-1199. Telephone: (908) 739-8822.
PFC operates a chain of retail stores that sell a wide range of first
quality, first quality excess, returned and refurbished and discontinued brand
name cosmetics, fragrances and personal care products at discounted prices. As
of December 31, 1996, PFC operated 198 stores located principally in outlet
malls in 41 states.
REASONS FOR THE MERGER
The Cosmetic Board believes that the combination of Cosmetic and PFC should
create an opportunity to achieve accelerated earnings growth through cost
savings, synergies and critical mass. The Cosmetic Board also believes that the
Cash Election should provide Cosmetic stockholders liquidity at a premium to the
market value of the Cosmetic Class A and Class B common stock prior to the
announcement of the signing of the letter of intent with respect to the Merger.
In evaluating the Merger, including the prospects for earnings growth, Cosmetic
stockholders should consider the fact that PFC has had net losses in each of its
fiscal years since the fiscal year ended December 31, 1992, and that Cosmetic
had a net loss for its fiscal year ended September 27, 1996.
RECOMMENDATION TO STOCKHOLDERS
The Cosmetic Board believes that the terms of the Merger are fair to and in
the best interests of Cosmetic and its stockholders. The Cosmetic Board
unanimously recommends that you vote FOR the proposal to (i) approve the Merger
Agreement and the Merger, including the amendment of Cosmetic's Certificate of
Incorporation to authorize Cosmetic to issue Cosmetic Class C common stock, the
conversion of Cosmetic Class A and Class B common stock into Cosmetic Class C
common stock and the appointment of nine directors, (ii) amend Cosmetic's
Certificate of Incorporation to repeal the classification of the Cosmetic Board,
(iii) elect two Class II directors (who will be replaced in connection with the
appointment of nine directors upon consummation of the Merger) and (iv) approve
the Cosmetic 1997 Stock Option Plan.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED AS ANNEX I TO THIS PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT BECAUSE IT
IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
COSMETIC FOLLOWING THE MERGER; EFFECT ON STOCKHOLDERS
Following the Merger, Cosmetic will be a subsidiary of Revlon, and
Cosmetic's current stockholders will hold a minority interest in Cosmetic. As a
result of the Merger, the liquidity of Cosmetic's common stock may be reduced
and may be subject to significant fluctuations in price.
Pursuant to the Merger, Revlon will receive 8,479,335 shares of Cosmetic
Class C common stock for its one share of PFC common stock, and, assuming the
Cash Election is made for all of the 4,299,884 outstanding shares of Cosmetic
Class A and Class B common stock and 205,200 outstanding options with an
exercise price of less than $7.63 per share, each Cosmetic stockholder, if he or
she does not make the Cash Election, will receive one share of Cosmetic Class C
common stock or, if he or she makes the Cash Election, 0.372 of a share of
Cosmetic Class C common stock and $4.79 in cash for each share of Cosmetic Class
A and Class B common stock, as described more fully herein. Based on the number
of shares of Cosmetic Class C common stock to be issued to Revlon and the
Principal Stockholders' agreement to make the Cash Election, Revlon will own at
least 74% of the Cosmetic Class C common stock outstanding immediately after the
Merger and will
3
<PAGE>
own approximately 84% of such shares if, in addition to the Principal
Stockholders' shares and options, the Cash Election is made in respect of all
other outstanding shares and options for shares with an exercise price of less
than $7.63 per share.
Revlon previously has stated publicly that the Merger is the first step in
its plan to withdraw from operating retail cosmetic stores so that Revlon's
management can focus on its core business of the manufacture and sale of
cosmetic products. Although Revlon has not yet determined the timing or form
that any such transaction might take, Revlon could, among other things, sell
some or all of the shares of Cosmetic Class C common stock that it receives in
the Merger in public or private transactions or cause the Combined Company to
conduct primary offerings of Cosmetic common stock, issue Cosmetic common stock
to acquire additional businesses or merge with another entity, any of which
transactions would have the effect of reducing the interest of Revlon as well as
other stockholders (and could have the effect of diluting the interests of
existing stockholders) in the Combined Company. In connection with any such
transaction, there can be no assurance as to the value that holders of Cosmetic
Class C common stock might receive, and such value could be lower than the
amount of cash offered in connection with the Cash Election available to
Cosmetic stockholders in the Merger. In addition, if any such transaction
resulted in a change of control of the Combined Company, as defined in certain
employment and consulting agreements to be entered into with Mark S. Weinstein,
Anita J. Weinstein and Susan K. Magenheim, the principal stockholders of
Cosmetic, such persons would be entitled to all amounts payable to them under
such agreements. Finally, there can be no assurance that Revlon will withdraw
from operating retail cosmetic stores.
WHAT COSMETIC STOCKHOLDERS WILL RECEIVE (SEE PAGE 54)
As a result of the Merger, Cosmetic stockholders will receive, for each
share of Cosmetic Class A or Class B common stock they own, one share of
Cosmetic Class C common stock or, at each stockholder's election and subject to
the limitation discussed below, $7.63 in cash. Following the Merger, the
Cosmetic Class C common stock will be the only class of Cosmetic stock
outstanding. Holders of options to purchase Cosmetic Class A or Class B common
stock with an exercise price of less than $7.63 per share may elect to receive
for each such option they hold an equivalent option to purchase Cosmetic Class C
common stock or, at each such optionholder's election and subject to the
limitation discussed below, cash equal to the difference between $7.63 and the
exercise price per share of such options. The right of stockholders and
optionholders to receive cash is limited to an aggregate of 2,829,065 shares and
options for shares, and to the extent that holders of more than 2,829,065 shares
and options for shares elect to receive cash, the Cash Election will be provided
to such holders pro rata. Holders of options to purchase Cosmetic Class A or
Class B common stock with an exercise price of more than $7.63 per share will
receive equivalent options to purchase Cosmetic Class C common stock.
Cosmetic stockholders who wish to make the Cash Election must deliver their
form of election to First Union National Bank of North Carolina (the "Exchange
Agent") at P.O. Box 217950, Charlotte, North Carolina, 28254-3555 by 5:00 p.m.
New York City time on the business day before the Meeting. Stockholders who are
not record holders and who wish to make the Cash Election must have the broker,
bank or other person that holds their shares make the Cash Election for them.
Stockholders who do not make the Cash Election or do not comply with the Cash
Election procedure will receive Cosmetic Class C common stock and will not
receive any cash in the Merger. Stockholders who make the Cash Election may
revoke the election by submitting written notice to the Exchange Agent prior to
5:00 p.m. New York City time on the business day before the Meeting.
ELECTION OF DIRECTORS; BOARD OF DIRECTORS AND MANAGEMENT OF COSMETIC
FOLLOWING THE MERGER (SEE PAGES 74 AND 75)
At the Meeting, the holders of the Cosmetic Class B common stock will vote
upon the election to the Cosmetic Board of Mark S. Weinstein and Donald R.
Rogers, the two members of the Cosmetic Board whose terms expire in 1997.
However, in connection with the Merger the Cosmetic Board will be enlarged to
nine members, and the nine persons named in the Merger Agreement will become the
directors of the Combined Company. In connection with the Merger, Cosmetic's
Certificate of Incorporation is proposed to be amended to repeal the
classification of the Cosmetic Board so that all of the directors will be
elected annually. See "The Merger -- Amendments to Cosmetic's Certificate of
Incorporation."
The members of the Board of Directors of the Combined Company (the
"Combined Company Board") will be Ronald O. Perelman, chairman of the executive
committee and a director of Revlon, Howard Gittis, a director of Revlon, Jerry
W. Levin, chairman, chief executive officer and a director of Revlon and a
director of PFC, Howard Diener, the president of PFC, William J. Fox, executive
vice president, chief financial officer and a director of Revlon and vice
president and a director of PFC, Wade H. Nichols, senior vice president and
general counsel of Revlon and vice president and a director of PFC, and Mark S.
Weinstein, chairman of the Cosmetic Board. It is also anticipated that David N.
Dinkins, a professor at Columbia University and the former Mayor of The City of
New York, and Harvey Rosenthal, the former president of Melville Corporation
(now known as CVS Corporation), will be the independent directors.
4
<PAGE>
Mr. Levin will be appointed chairman of the Combined Company Board, Mr.
Weinstein will be appointed vice chairman of the Combined Company Board and Mr.
Diener will be appointed president and chief executive officer of the Combined
Company.
The Principal Stockholders and Revlon have entered into a Stockholders
Agreement dated November 27, 1996 (the "Stockholders Agreement") pursuant to
which, among other things, for three years after the consummation of the Merger,
(i) the Principal Stockholders will vote all of their Cosmetic Class C common
stock in favor of Revlon's nominees for director so that Revlon will at all
times maintain representation on the Combined Company Board equal to Revlon's
percentage ownership of Cosmetic Class C common stock, but not less than seven
board seats, including two independent directors, and (ii) Revlon will vote its
shares in favor of the Principal Stockholders' nominees for director equal to
their aggregate percentage ownership of outstanding Cosmetic Class C common
stock, after giving effect to the Merger and the Cash Election, but not less
than one nor more than two board seats.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 35)
In considering the Cosmetic Board's recommendation that you vote in favor
of the Merger, you should be aware that several officers of Cosmetic, including
some officers who are directors, following the Merger will have employment or
consulting agreements that will provide them with interests in the Merger that
are different from, or in addition to, yours. These persons will receive
significant compensation following the Merger. In particular, Mr. Weinstein,
Cosmetic's chairman, and Anita J. Weinstein, an officer and director of
Cosmetic, will enter into four-year employment and non-competition agreements,
Susan K. Magenheim, an officer and director of Cosmetic, will enter into a
four-year consulting agreement and Ben S. Kovalsky, a director and Cosmetic's
chief executive officer, will enter into an amendment to his existing employment
agreement extending it through February 2000. Please refer to pages 35 and 36
for more information concerning employment and consulting agreements for these
officers and directors. In addition, the Principal Stockholders will enter into
the Stockholders Agreement and all options for Cosmetic Class A and Class B
common stock held by Cosmetic's directors, officers and employees will vest in
full upon the closing of the Merger.
CONDITIONS TO THE MERGER (SEE PAGE 55)
The completion of the Merger depends upon satisfaction of several
conditions, including the following:
(i) the approval of the Merger Agreement by the holders of a majority of
the outstanding Cosmetic Class B common stock;
(ii) Cosmetic shall have obtained financing of no less than $50 million to
make the cash payments required by the Cash Election, to refinance existing
indebtedness of Cosmetic and PFC, to pay fees and expenses and to provide future
working capital for the Combined Company following the Merger;
(iii) neither Cosmetic nor PFC shall have suffered a material adverse
change in its financial condition, business or results of operations;
(iv) the representations and warranties of Cosmetic, Revlon and PFC set
forth in the Merger Agreement shall be accurate unless such failure to be
accurate shall not have a material adverse effect;
(v) Cosmetic, Revlon and PFC shall have performed their obligations under
the Merger Agreement in all material respects; and
(vi) Cosmetic, Revlon and PFC shall have obtained all necessary material
governmental and third-party consents and approvals.
It is not a condition to completion of the Merger that the parties receive
an opinion of counsel with respect to the tax consequences of the Merger.
Cosmetic, however, has received an opinion of tax counsel with respect to the
federal income tax consequences of the Merger to the Cosmetic stockholders. See
page 26.
The Merger Agreement permits the party entitled to assert a condition to
waive that condition, except certain conditions which by law may not be waived,
such as the requirement of stockholder approval. Although each party reserves
the right to do so, none of the parties to the Merger Agreement currently
expects to waive any of the conditions to the Merger.
5
<PAGE>
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 57)
Cosmetic and Revlon can agree to terminate the Merger Agreement without
completing the Merger. In addition, either Cosmetic or Revlon can terminate the
Merger Agreement if any of the following occurs:
(i) if the Merger has not occurred before March 17, 1997, unless the
failure to consummate the Merger by this date is due to the action or failure to
act of the party seeking to terminate the Merger Agreement;
(ii) if the Merger Agreement is not approved by the holders of a majority
of the outstanding Cosmetic Class B common stock; or
(iii) if any governmental entity of competent jurisdiction enacts, enters
or enforces a statute, rule, regulation, order, decree or injunction which
restrains, enjoins or otherwise prohibits the consummation of the Merger.
In addition, Revlon may terminate the Merger Agreement if the Cosmetic
Board withdraws or modifies its recommendation that the Cosmetic stockholders
approve the Merger Agreement.
TERMINATION FEES AND EXPENSES (SEE PAGES 57 AND 58)
The Merger Agreement and the Stockholders Agreement generally require
Cosmetic and the Principal Stockholders to pay up to $1 million of Revlon's
expenses if the Merger Agreement is terminated under certain circumstances and,
if Cosmetic consummates an alternate transaction with another party within 90
days after the later of March 17, 1997 or termination of the Merger Agreement,
require Cosmetic and the Principal Stockholders to pay Revlon a termination fee
of $1 million, and require the Principal Stockholders to pay to Revlon a fee
equal to 25% of the difference between the consideration paid to the Principal
Stockholders and $7.63 per share times the number of shares held by the
Principal Stockholders. Cosmetic has no agreement, plan or understanding whereby
it would be required to reimburse the Principal Stockholders in the event that
they were required to pay any of the foregoing amounts or fees to Revlon.
The Merger Agreement also generally requires Revlon to pay up to $1 million
of Cosmetic's expenses if the Merger Agreement is terminated under certain
circumstances and requires Revlon to pay Cosmetic a termination fee of $1.25
million if PFC consummates an alternate transaction with another party within 90
days after the later of March 17, 1997 or termination of the Merger Agreement.
OPINION OF FINANCIAL ADVISOR (SEE PAGE 29)
In deciding to approve the Merger, the Cosmetic Board considered, among
other factors, an opinion from its financial advisor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), as to the fairness of the Merger consideration from
a financial point of view. This opinion is attached as Annex III to this Proxy
Statement/Prospectus. The holders of Cosmetic Class A and Class B common stock
should read this opinion.
In connection with delivering its opinion, Legg Mason performed a variety
of analyses. These analyses included (i) comparing the relevant historical and
projected financial and operating results and financial multiples of Cosmetic
and projected financial and operating results and financial multiples of the
Combined Company with the historical and projected operating results and
financial multiples of selected publicly traded companies, (ii) comparing some
possible acquisition premiums in the Merger to the percentage premiums paid by
acquirors in other transactions, (iii) comparing certain financial and operating
statistics of Cosmetic with certain financial and operating statistics of
selected retailers immediately prior to being acquired and (iv) calculating the
discount value of Cosmetic's forecasted cash flow. Legg Mason did not consider
the range of possible tax consequences facing individual Cosmetic stockholders,
and the valuations per share derived by Legg Mason were prior to any tax impact
on individual Cosmetic stockholders.
Legg Mason will receive a fee of $625,000 in connection with the Merger,
$600,000 of which is contingent upon the closing of the Merger. In addition,
Legg Mason received $50,000 in connection with providing its opinion.
REGULATORY APPROVALS (SEE PAGE 25)
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder, which provide that certain merger transactions may not be
consummated until required information and material have been furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and certain waiting periods have expired or been terminated. The required
information with respect to the Merger was filed on behalf of Cosmetic on
December 27, 1996 and on behalf of PFC on December 31, 1996 and the waiting
period was terminated on January 7, 1997.
6
<PAGE>
ACCOUNTING TREATMENT (SEE PAGE 26)
For accounting and financial reporting purposes, the Merger will be treated
as a reverse acquisition, which means that PFC will be considered to be the
acquiring company even though Cosmetic will be the surviving corporation. As a
result, PFC's historical financial statements will be the continuing historical
financial statements of the Combined Company and Cosmetic's assets, liabilities
and results of operations will be consolidated with the historical financial
statements of PFC subsequent to the consummation of the Merger. Fair value
adjustments will be made to Cosmetic's assets and liabilities to the extent of
Revlon's ownership interest in the Combined Company.
NO APPRAISAL RIGHTS (SEE PAGE 26)
Cosmetic stockholders have no right under the Delaware General Corporation
Law to an appraisal of the value of their shares in connection with the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 26)
The exchange of Cosmetic Class A or Class B common stock for Cosmetic Class
C common stock will be tax-free to Cosmetic stockholders for federal income tax
purposes. A Cosmetic stockholder who receives only cash in exchange for all of
his or her shares of Cosmetic Class A and Class B common stock (and is not
treated for federal income tax purposes as owning Cosmetic Class C common stock
owned by related persons or entities) will recognize a gain or loss for federal
income tax purposes. A Cosmetic stockholder who receives both cash and Cosmetic
Class C common stock will not recognize any loss for federal income tax purposes
but will recognize some or all of any gain. Cosmetic stockholders should consult
their own tax advisors with respect to their personal tax situation.
COSMETIC PER SHARE MARKET PRICE INFORMATION (SEE PAGE 38)
Cosmetic Class A and Class B common stock are listed on the Nasdaq National
Market. On September 30, 1996, the last full trading day prior to the public
announcement of the signing of a letter of intent with respect to the Merger,
the Cosmetic Class A common stock closed at $6.50 per share and the Cosmetic
Class B common stock closed at $7.25 per share. On February , 1997, the
Cosmetic Class A common stock closed at per share and the Cosmetic Class B
common stock closed at per share.
LISTING OF COSMETIC CLASS C COMMON STOCK (SEE PAGE 90)
Cosmetic has made application for the listing of the Cosmetic Class C
common stock on the Nasdaq National Market.
AMENDMENTS TO COSMETIC'S CERTIFICATE OF INCORPORATION (SEE PAGE 25)
The Merger Agreement provides that, as part of the Merger, Cosmetic will
amend its Certificate of Incorporation to authorize the issuance of up to
40,000,000 shares of Cosmetic Class C common stock (the "Class C Amendment"). A
vote by Cosmetic Class B stockholders in favor of the Merger is also a vote to
approve the Class C Amendment.
The Merger Agreement also requires Cosmetic to seek the approval of an
amendment to its Certificate of Incorporation to repeal the classification of
the Cosmetic Board, resulting in the annual election of all of Cosmetic's
directors (the "Board Amendment"). The Board Amendment, which requires the
affirmative vote of the holders of 80% of the outstanding Cosmetic Class B
common stock, is not a condition to the Merger.
The proposed forms of the amendments to Cosmetic's Certificate of
Incorporation are attached as Annex II to this Proxy Statement/Prospectus.
COSMETIC 1997 STOCK OPTION PLAN (SEE PAGE 84)
At the Meeting, Cosmetic Class B stockholders will also be asked to approve
the Cosmetic 1997 Stock Option Plan, which provides for the grant of stock
options to purchase up to 1,000,000 shares of Cosmetic Class C common stock to
the Combined Company's directors, officers and key employees following the
Merger. It is currently anticipated that initial grants of stock options to
purchase up to approximately 241,000 shares of Cosmetic Class C common stock
will be made by the Combined Company to certain of the Combined Company's
directors, officers and key employees following the Merger.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following summary historical and pro forma financial data of Cosmetic
and PFC have been derived from the financial statements and related notes
thereto of Cosmetic and PFC and the pro forma financial data and related notes
thereto included elsewhere herein. It is anticipated that upon consummation of
the Merger, Cosmetic will change its fiscal year to a 52 or 53 week year ending
on or about December 31. The pro forma consolidated financial data for the year
ended December 31, 1995 include the historical statement of operations of PFC
for its year ended December 31, 1995 and the historical statement of operations
of Cosmetic for its fiscal year ended September 29, 1995. The pro forma
consolidated financial data for the nine months ended September 30, 1996 are
derived from the unaudited historical statement of operations of PFC for its
nine months ended September 30, 1996 and the unaudited historical statement of
operations of Cosmetic for the nine months ended September 27, 1996. The pro
forma consolidated statement of operations data give effect to the Merger as if
it had been consummated on January 1, 1995. The pro forma balance sheet data as
of September 30, 1996 are derived from the historical balance sheet of Cosmetic
as of September 27, 1996 and the unaudited historical balance sheet of PFC as of
September 30, 1996. The pro forma balance sheet data give effect to the Merger
as if it had been consummated on September 30, 1996. The summary pro forma
consolidated financial data set forth below are not necessarily indicative of
results that would have occurred if the Merger had been consummated on such
dates or that may be achieved in the future. In the opinion of management, the
unaudited data reflect all adjustments (which include only normal, recurring
adjustments) necessary for a fair presentation of such data. The following
information should be read in conjunction with the financial statements of
Cosmetic and the financial statements of PFC (as indexed on page F-1) as well as
"Selected Financial Data of Cosmetic," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Cosmetic," "Selected Financial
Data of PFC", "Management's Discussion and Analysis of Financial Condition and
Results of Operations of PFC" and "Pro Forma Financial Information" included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, 1995 1996
---------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
COSMETIC PFC ADJUSTMENTS AS ADJUSTED COSMETIC PFC ADJUSTMENTS
-------- ------- ----------- ----------- ------- ------- -----------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $132,304 $72,717 $ -- $ 205,021 $92,215 $48,970 $ --
-------- ------- ----------- ----------- ------- ------- -----------
Gross margin.......................... 27,210 23,541 -- 50,751 18,874 16,736 --
Selling, general and administrative
expenses............................ 27,033 25,368 70 52,471 22,622 19,595 52
Restructuring charges -- -- -- -- 4,024 -- --
-------- ------- ----------- ----------- ------- ------- -----------
Operating income (loss)............... 177 (1,827) (70) (1,720) (7,772) (2,859) (52)
Other (income) expense................ (670) -- 250 (420) (66) -- 188
Interest expense...................... 725 2,137 1,673 4,535 714 699 1,255
-------- ------- ----------- ----------- ------- ------- -----------
Income (loss) from continuing
operations before income taxes...... 122 (3,964) (1,993) (5,835) (8,420) (3,558) (1,495)
Income taxes (benefit)................ (157) 50 -- (107) (2,930) 45 --
-------- ------- ----------- ----------- ------- ------- -----------
Income (loss) from continuing
operations.......................... 279 (4,014) (1,993) (5,728) (5,490) (3,603) (1,495)
Discontinued operations (a)
Loss from discontinued operations... -- (351) -- (351) -- -- --
Loss on disposal.................... -- (897) -- (897) -- -- --
-------- ------- ----------- ----------- ------- ------- -----------
Loss from discontinued operations..... -- (1,248) -- (1,248) -- -- --
-------- ------- ----------- ----------- ------- ------- -----------
Net income (loss)..................... $ 279 $(5,262) $(1,993) $ (6,976) $(5,490) $(3,603) $(1,495)
-------- ------- ----------- ----------- ------- ------- -----------
-------- ------- ----------- ----------- ------- ------- -----------
Income (loss) per common and common
equivalent shares................... $ 0.06 $ (0.69) $ (1.28)
-------- ----------- -------
-------- ----------- -------
<CAPTION>
AS ADJUSTED
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 141,185
-----------
Gross margin.......................... 35,610
Selling, general and administrative
expenses............................ 42,269
Restructuring charges 4,024
-----------
Operating income (loss)............... (10,683)
Other (income) expense................ 122
Interest expense...................... 2,668
-----------
Income (loss) from continuing
operations before income taxes...... (13,473)
Income taxes (benefit)................ (2,885)
-----------
Income (loss) from continuing
operations.......................... (10,588)
Discontinued operations (a)
Loss from discontinued operations... --
Loss on disposal.................... --
-----------
Loss from discontinued operations..... --
-----------
Net income (loss)..................... $ (10,588)
-----------
-----------
Income (loss) per common and common
equivalent shares................... $ (1.05)
-----------
-----------
</TABLE>
- ---------------
(a) On June 30, 1995, PFC adopted a plan to discontinue certain businesses whose
net assets, consisting principally of inventory and a payable to Revlon,
were subsequently transferred to Revlon. Such businesses have been reported
as discontinued operations.
8
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------
PRO FORMA
COSMETIC PFC ADJUSTMENTS AS ADJUSTED
------- ------- ----------- -----------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $42,815 $30,797 $ (10,400) $ 63,212
Inventory.................................................................... 56,479 32,686 -- 89,165
Total assets................................................................. 72,522 44,776 3,281 120,579
Long-term debt and Due to Revlon............................................. 12,329 18,746 22,511 53,586
Stockholders' equity......................................................... $37,181 $21,215 $ (29,630) $ 28,766
</TABLE>
SUMMARY HISTORICAL FINANCIAL DATA OF COSMETIC
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
SEPT. SEPT. SEPT. SEPT. SEPT.
25, 24, 30, 29, 27,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
STATEMENT OF OPERATIONS DATA:
Net sales........................................................ $101,175 $109,486 $123,551 $132,304 $133,795
-------- -------- -------- -------- --------
Gross margin..................................................... 20,852 22,972 26,977 27,210 28,034
Selling, general and administrative expenses..................... 16,251 17,115 19,929 27,033 30,268
Restructuring charges............................................ -- -- -- -- 4,024
-------- -------- -------- -------- --------
Operating income (loss).......................................... 4,601 5,857 7,048 177 (6,258)
Other income, net................................................ (49) (84) (110) (670) (95)
Interest expense................................................. 559 97 166 725 1,030
Income taxes (benefit)........................................... 1,657 2,267 2,804 (157) (2,433)
-------- -------- -------- -------- --------
Net income (loss)................................................ $ 2,434 $ 3,577 $ 4,188 $ 279 $ (4,760)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common and common equivalent shares............ $ 0.68 $ 0.82 $ 0.95 $ 0.06 $ (1.11)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------
SEPT. SEPT. SEPT. SEPT. SEPT.
25, 24, 30, 29, 27,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................. $ 29,918 $ 33,386 $ 36,039 $ 33,090 $ 42,815
Inventory........................................................ 41,217 45,002 50,422 61,891 56,479
Total assets..................................................... 49,914 54,765 62,134 77,967 72,522
Short-term debt.................................................. 195 222 5,297 12,276 311
Long-term debt, less current portion............................. 555 814 711 420 12,329(a)
Stockholders' equity............................................. $ 33,855 $ 37,436 $ 41,662 $ 41,941 $ 37,181
</TABLE>
SUMMARY HISTORICAL FINANCIAL DATA OF PFC
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $39,255 $44,033 $54,677 $62,674 $72,717 $45,790 $48,970
------- ------- ------- ------- ------- ------- -------
Gross margin........................... 15,958 13,877 18,829 21,256 23,541 14,016 16,736
Selling, general and administrative
expenses............................. 13,787 14,725 19,429 21,945 25,368 18,968 19,595
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................ 2,171 (848) (600) (689) (1,827) (4,952) (2,859)
Interest expense....................... 493 43 914 1,329 2,137 1,958 699
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes....... 1,678 (891) (1,514) (2,018) 3,964 (6,910) (3,558)
Income taxes........................... 12 16 17 25 50 45 45
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations........................... 1,666 (907) (1,531) (2,043) (4,014) (6,955) (3,603)
Discontinued operations (b)
Income (loss) from discontinued
operations........................... 92 627 1,174 842 (351) (351) --
Loss on disposal..................... -- -- -- -- (897) (897) --
------- ------- ------- ------- ------- ------- -------
Income (loss) from discontinued
operations........................... 92 627 1,174 842 (1,248) (1,248) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ 1,758 $ (280) $ (357) $(1,201) $(5,262) $(8,203) $(3,603)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -------------
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------------
<S> <C>
BALANCE SHEET DATA:
Working capital........................ $ 11,281 $ 20,123 $ 21,218 $ 25,782 $ 30,014 $ 30,797
Inventory.............................. 12,020 20,890 22,003 26,701 29,171 32,686
Total assets........................... 15,574 25,572 30,372 40,504 41,337 44,776
Due to Revlon (c)...................... -- 8,930 11,681 21,353 9,615 18,746
Stockholder's equity................... $ 13,540 $ 14,215 $ 15,405 $ 14,067 $ 28,298 $ 21,215
</TABLE>
- ---------------
(a) In October 1996, Cosmetic refinanced its existing short-term note payable
with borrowings under a new revolving credit facility that expires on
October 31, 1999 and, as a result, reclassified its short-term note payable
to long-term debt at September 27, 1996.
(b) On June 30, 1995, PFC adopted a plan to discontinue certain businesses whose
net assets, consisting principally of inventory and a payable to Revlon,
were subsequently transferred to Revlon. Such businesses have been reported
as discontinued operations.
(c) PFC's working capital and capital expenditure needs have been financed
through interest-bearing obligations that are payable by PFC to Revlon. PFC
has reflected this obligation on a long-term basis as the obligation has not
been repaid as a result of a capitalization of the amount due to Revlon in
September 1995. To the extent debt to Revlon was incurred subsequent to the
capital infusion, PFC anticipates that such balance will be payable, to the
extent of funds available, from operations, and, if and to the extent such
financing is secured and permits such repayment, from long-term third-party
financing.
COMPARABLE PER SHARE INFORMATION
Per share information for Cosmetic and the Combined Company on a historical
and pro forma basis, respectively, is summarized below. Per share data of PFC is
not presented because it has one stockholder, Revlon, and only one share
outstanding.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
COSMETIC COMPANY (A)
-------- -----------
<S> <C>
Book value per share as of September 30, 1996............................................ $ 8.66 $ 2.85
Net income (loss) per common and common equivalent shares - 1995 fiscal year............. $ 0.06(b) $ (0.69)(c)
Net loss per common and common equivalent shares - nine months ended September 30,
1996(d)................................................................................ $(1.11) $ (1.05)
Cash dividends........................................................................... $ -- $ --
</TABLE>
- ---------------
(a) The pro forma per share data give effect to the maximum Cash Election of
2,829,065 shares and options for shares. If the Cash Election is made for
only the 1,453,723 shares and options for shares that have an exercise price
of less than $7.63 per share held by the Principal Stockholders, the book
value per share for the Combined Company as of September 30, 1996 would have
been $2.49, and the net income (loss) for 1995 and the nine months ended
September 30, 1996 would have been $(0.53) and $(0.86), respectively.
(b) The net income (loss) per common and common equivalent shares - 1995 fiscal
year for Cosmetic has been derived from the historical statement of
operations of Cosmetic for its fiscal year ended September 29, 1995.
(c) The net income (loss) per common and common equivalent shares - 1995 fiscal
year for the Combined Company has been derived from the historical statement
of operations of Cosmetic for its fiscal year ended September 29, 1995 and
the historical statement of operations of PFC for its year ended December
31, 1995.
(d) The net loss per common and common equivalent shares - nine months ended
September 30, 1996 has been derived from the unaudited historical statement
of operations of Cosmetic for the nine months ended September 27, 1996 and
the historical statement of operations of PFC for the nine months ended
September 30, 1996.
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RISK FACTORS
THE FOLLOWING ARE CERTAIN RISK FACTORS OR INVESTMENT CONSIDERATIONS THAT
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE MERGER AND THE CASH ELECTION,
IN ADDITION TO THE RISKS AND OTHER INFORMATION DESCRIBED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
HISTORICAL NET LOSSES. Cosmetic had a net loss of $4.8 million for the
fiscal year ended September 27, 1996, and PFC had net losses of $5.3 million and
$1.2 million for the years ended December 31, 1995 and 1994, respectively, and a
net loss of $3.6 million for the nine-month period ended September 30, 1996. Had
the Merger occurred on January 1, 1995, the Combined Company (on a pro forma
basis) would have had net losses of $7.0 million and $10.6 million for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively. Cosmetic's net loss for the fiscal year ended September 27, 1996
included a restructuring charge of $4.0 million associated with the closing of
eight retail stores in Atlanta, Georgia. Although Cosmetic has no current plans
for similar closings, there can be no assurance that similar closings and
related restructuring charges would not occur in the future.
The ability of the Combined Company to generate operating income and net
income after the Merger will depend upon, among other things, its ability to
integrate successfully the operations of Cosmetic and PFC, the nature and extent
of any future business developments, the Combined Company's capital structure
and general economic conditions. There can be no assurance that the Combined
Company will be profitable and will not incur losses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Cosmetic," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of PFC" and "Pro Forma Financial Information."
UNCERTAINTIES REGARDING INTEGRATION OF COSMETIC AND PFC. The Combined
Company will attempt to use the Merger to effect cost savings, including a
reduction in operating expenses as a result of the elimination of duplicative
facilities, functions and other overhead expenses. Significant uncertainties,
however, accompany any business combination and its implementation with respect
to the ability of the combined companies to integrate functions and management
resources to achieve operating efficiencies. There can be no assurance that the
Combined Company will be able to realize cost savings as a result of the Merger,
that any such elimination of facilities, functions or overhead expenses will not
result in a decrease in revenue and profits, or that there will not be other
adverse effects from the integration. The inability to achieve the anticipated
cost savings would have a material adverse effect on the Combined Company's
operating results following the Merger. See "The Merger -- Operations After the
Merger."
REQUIREMENT FOR FINANCING TO CONSUMMATE THE MERGER; SIGNIFICANT BORROWINGS;
FUTURE FINANCING. Pursuant to the terms of the Merger Agreement, the
availability of satisfactory financing of at least $50 million by the effective
time of the Merger is a condition to the consummation of the Merger.
The Combined Company will incur substantial indebtedness to effect the
Merger, refinance existing Cosmetic and PFC indebtedness, pay fees and expenses
in connection with the Merger and the Financing (as defined herein) and provide
for future working capital needs. If the Merger had occurred on September 30,
1996, the Combined Company (on a pro forma basis) would have had long-term debt
and obligations under capital leases aggregating $49.8 million compared to
Cosmetic's historical long-term debt, less current portion, of $12.3 million as
of September 27, 1996 and PFC's debt to Revlon of $18.7 million as of September
30, 1996.
Upon consummation of the Merger and execution of a definitive credit
agreement (currently under negotiation with several lenders), the Combined
Company is expected to have a credit facility of up to $70 million, of which
approximately $49.7 million is expected to be borrowed upon the consummation of
the Merger ($20.9 million to fund the Cash Election, up to $27.2 million to
refinance existing Cosmetic and PFC indebtedness and $1.6 million for fees and
expenses related to the Merger) and up to $20.3 million is expected to be
available for future working capital requirements and for general corporate
purposes (the "Financing"). The Financing is expected to impose certain
limitations on the Combined Company that do not differ materially from those
imposed upon Cosmetic under its current credit facility, including, among other
things, limitations relating to (i) engaging in mergers, consolidations and
sales of assets, with certain exceptions, (ii) making distributions or paying
dividends or changing its capital structure, with certain exceptions, (iii)
entering into any transaction that materially and adversely affects the
collateral under the Financing or the Combined Company's ability to repay its
obligations, (iv) issuing any guarantees, with certain exceptions, (v) incurring
any debt in excess of specified amounts, with certain exceptions, (vi) prepaying
any debt before maturity, with certain exceptions, (vii) entering into certain
transactions with affiliates, with certain exceptions, (viii) engaging in other
lines of business, (ix) incurring any liens on its assets, with certain
exceptions, (x) entering into sale and leaseback transactions, with certain
exceptions, (xi) creating or acquiring any new subsidiaries, (xii) making
acquisitions or investments, with certain exceptions or (xiii) allowing any
subsidiary to have any
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<PAGE>
obligations to trade suppliers. In addition, the Financing is expected to
contain certain financial covenants, including covenants requiring the Combined
Company to maintain minimum adjusted tangible net worth and minimum interest
coverage.
The Combined Company's level of indebtedness could have important
consequences to the holders of Cosmetic Class C common stock, including the
following: (i) a substantial portion of the Combined Company's cash flow from
operations must be dedicated to the payment of the principal of and interest on
its indebtedness and will not be available for other purposes; (ii) the ability
of the Combined Company to obtain financing in the future for working capital
needs, capital expenditures, acquisitions, investments, general corporate
purposes or other purposes may be materially limited or impaired; and (iii) the
Combined Company's level of indebtedness may reduce its flexibility to respond
to changing business and economic conditions. However, Cosmetic believes that
this level of indebtedness will not materially impair the Combined Company's
ability to obtain capital for capital expenditures, acquisitions or investments
or materially reduce the Combined Company's flexibility to respond to business
or economic conditions. Subject to certain limitations contained in the
Financing, the Revlon Notes (as defined herein) and Revlon's credit agreement,
the Combined Company may incur additional indebtedness to finance working
capital or capital expenditures, investments or acquisitions or for other
purposes. See "Risk Factors -- Restrictions Imposed by the Terms of Revlon
Indebtedness."
RESTRICTIONS IMPOSED BY THE TERMS OF REVLON INDEBTEDNESS. The terms and
conditions of four series of Revlon's debt securities and the debt securities of
Revlon's indirect parent, Revlon Worldwide Corporation (the "Revlon Notes"),
impose restrictions on the ability of Revlon and its subsidiaries, which will
include the Combined Company after the effective time of the Merger, to incur
debt, make acquisitions or investments, sell assets, create liens and consent to
restrictions on their ability to pay dividends or make distributions in respect
of their capital stock. Although there can be no assurance, the Combined Company
does not believe that such restrictions will limit the ability of the Combined
Company to expand its business or to take advantage of business opportunities or
transactions. It is anticipated that all of the Cosmetic Class C common stock
held by Revlon will be pledged as collateral for Revlon's obligations under
Revlon's credit agreement and a credit agreement of a subsidiary of Revlon. See
"Risk Factors -- Requirement for Financing to Consummate the Merger; Significant
Borrowings; Future Financing."
DETERMINATION OF CONVERSION RATIO. Prior to the Merger, there was no public
market for the PFC common stock. The conversion ratio pursuant to which there
are to be issued 8,479,335 shares of Cosmetic Class C common stock for all of
the PFC common stock has been determined by negotiations among Cosmetic and
Revlon and may not be indicative of the value of PFC.
CHANGE OF CONTROL OF COSMETIC; CONTROL OF THE COMBINED COMPANY BY REVLON.
As a result of the Merger, assuming the Cash Election is made in respect of all
outstanding shares and options for shares with an exercise price of less than
$7.63 per share, Revlon will own approximately 84% of the Cosmetic Class C
common stock (the only class of Cosmetic stock to be outstanding following the
Merger). Revlon and the Principal Stockholders have entered into a Stockholders
Agreement which provides that for three years from the consummation of the
Merger, the Principal Stockholders will vote all of their Cosmetic Class C
common stock in favor of Revlon's nominees for director so that Revlon will at
all times maintain representation on the Combined Company Board equal to
Revlon's percentage ownership of Cosmetic Class C common stock, but not less
than seven board seats, including two independent directors, and Revlon will
vote its shares in favor of the Principal Stockholders' nominees for director
equal to their aggregate percentage ownership of Cosmetic Class C common stock,
after giving effect to the Merger and the Cash Election, but not less than one
nor more than two board seats. Accordingly, Revlon, the Combined Company's
principal vendor, will control the management and policies of the Combined
Company, including the terms of any agreements with Revlon as well as the vote
on all matters submitted to a vote of the Combined Company's stockholders,
including extraordinary transactions such as mergers and acquisitions, sales of
all or substantially all of the Combined Company's assets or "going private"
transactions. The maximum percentage of outstanding Cosmetic Class C common
stock that the Principal Stockholders would beneficially own in the aggregate
after consummation of the Merger is approximately 5%. See "Risk
Factors -- Reliance on Vendors and Sources of Supply," "The Stockholders
Agreement" and "Agreements with Revlon."
Revlon previously has stated publicly that the Merger is the first step in
its plan to withdraw from operating retail cosmetic stores so that Revlon's
management can focus on its core business of the manufacture and sale of
cosmetic products. Although Revlon has not yet determined the timing or form
that any such transaction might take, Revlon could, among other things, sell
some or all of the shares of Cosmetic Class C common stock that it receives in
the Merger in public or private transactions or cause the Combined Company to
conduct primary offerings of Cosmetic common stock, issue Cosmetic common stock
to acquire additional businesses or merge with another entity, any of which
transactions would have the effect of reducing the interest of Revlon as well as
other stockholders (and could have the effect of diluting the interests of
12
<PAGE>
existing stockholders) in the Combined Company. In connection with any such
transaction, there can be no assurance as to the value that holders of Cosmetic
Class C common stock might receive, and such value could be lower than the
amount of cash offered in connection with the Cash Election available to
Cosmetic stockholders in the Merger. In addition, if any such transaction
resulted in a change of control of the Combined Company, as defined in certain
employment and consulting agreements to be entered into with Mark S. Weinstein,
Anita J. Weinstein and Susan K. Magenheim, the principal stockholders of
Cosmetic, such persons would be entitled to all amounts payable to them under
such agreements. Finally, there can be no assurance that Revlon will withdraw
from operating retail cosmetic stores.
COMPETITION. The retail cosmetic product business is very competitive.
Cosmetic's and PFC's competitors include department stores, mass volume
retailers, chain drug stores, independent drug stores, discount stores and other
retail stores. Some of these competitors sell cosmetic products at discount
prices, and many are part of large national or regional chains and have
substantially greater resources and name recognition than Cosmetic and PFC.
Additionally, some of the Combined Company's principal competitors are principal
customers of Revlon. There can be no assurance that the Combined Company will
not be adversely affected by such competition. See "Risk Factors -- Change of
Control of Cosmetic; Control of the Combined Company by Revlon," "Business of
Cosmetic -- Competition" and "Business of PFC -- Competition."
RELIANCE ON VENDORS AND SOURCES OF SUPPLY. Cosmetic purchases products from
approximately 560 vendors, and its largest single vendor, Revlon, accounted for
approximately 10% of total purchases for the fiscal year ended September 27,
1996. Cosmetic currently has no long-term or exclusive contract with any vendor.
The loss of any of Cosmetic's largest vendors could have a material adverse
effect on Cosmetic.
PFC purchases products from approximately 75 vendors. PFC's largest vendor,
Revlon, and its indirect parent, Revlon Holdings Inc. ("Holdings"), accounted
for approximately 29% of PFC's total purchases for the nine months ended
September 30, 1996 and approximately 32% of PFC's total purchases for the year
ended December 31, 1995. PFC's second largest supplier, Elizabeth Arden, with
which PFC has a supply contract that expires in 1999, accounted for
approximately 15% of PFC's total purchases during 1995. In connection with the
Merger, the Combined Company and Revlon will enter into a supply contract with a
term of at least two and a maximum of four years. The loss of Revlon as a
supplier or a material change in the terms of the supply contract could have a
material adverse effect on the Combined Company's business following the Merger.
See "Agreements with Revlon."
Some of the products purchased by Cosmetic and PFC from their respective
vendors may include products that were originally sold to department stores and
other retailers. From time to time, certain manufacturers have taken actions to
prohibit or restrict the resale of such products by department stores and other
retailers. Some of the products purchased by Cosmetic and PFC from their
respective vendors also may include products that are subject to copyright,
trademark, trade dress and patent rights, either manufactured in foreign
countries or manufactured in the United States and sold to foreign distributors.
Periodically, litigation and administrative proceedings have been instituted and
federal legislation has been proposed seeking to halt or restrict the
importation of such merchandise. Any of the foregoing prohibitions or
restrictions could have a material adverse effect on the Combined Company if the
Combined Company could not obtain alternative sources for its products on terms
at least as favorable as are currently available. See "Business of
Cosmetic -- Purchasing" and "Business of PFC -- Purchasing."
Manufacturers of professional hair care products traditionally have allowed
their products to be sold only by retail hair salons. Historically, Cosmetic
purchased such products from secondary sources, and sales of these products
accounted for about 6% of Cosmetic sales volume in fiscal 1994. With the growth
of Cosmetic over the past three years, sufficient quantities of professional
hair care products have been increasingly difficult to purchase through
secondary sources. Cosmetic has added hair salons in its stores as an additional
service with the anticipation of developing direct relationships with
professional hair care products manufacturers, which required Cosmetic to
discontinue sales of such products obtained from secondary sources. In July
1995, Cosmetic 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 represented approximately
one-third of Cosmetic's historical professional hair care product sales volume.
The loss of the remaining professional hair care product sales has adversely
affected Cosmetic's retail sales. There can be no assurance that the hair salon
strategy will be successful or that the Combined Company will be able to secure
sufficient quantities of professional hair care products directly from
manufacturers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Cosmetic -- Hair Salon Strategy."
SEASONALITY. Both Cosmetic's and PFC's businesses are, and the Combined
Company's business will be, seasonal. Both Cosmetic's and PFC's highest sales
volumes occur during the October to December quarter. The seasonality of the
Combined Company's sales may cause a significant variation in its quarterly
operating results, and a significant decrease in the October
13
<PAGE>
to December quarter sales could have a material adverse effect on the Combined
Company's results of operations for the corresponding fiscal year.
SHARES ELIGIBLE FOR FUTURE SALE. Assuming the Cash Election is made in
respect of all outstanding shares and options for shares with an exercise price
of less than $7.63 per share, upon the consummation of the Merger, Revlon will
own approximately 84% of the outstanding Cosmetic Class C common stock, all of
which will be "restricted stock" as that term is defined in Rule 144 adopted
under the Securities Act of 1933, as amended (the "Securities Act"), and
initially will not be freely saleable in the public market without registration
under the Securities Act. It is anticipated that all of the shares of Cosmetic
Class C common stock owned by Revlon immediately after the effective time of the
Merger will be pledged by Revlon to secure its obligations under Revlon's credit
agreement and a credit agreement of a subsidiary of Revlon. Subject to
applicable law and the terms of Revlon's credit agreement and the subsidiary's
credit agreement, Revlon could sell any or all of the shares of Cosmetic Class C
common stock owned by it from time to time for any reason. Following the Merger,
Revlon will be entitled to demand on three occasions that Cosmetic file a
registration statement under the Securities Act for the sale of its Cosmetic
Class C common stock and will also be entitled to include its Cosmetic Class C
common stock in certain registration statements filed for the benefit of
Cosmetic. The Principal Stockholders will also be entitled to certain rights to
the registration of their Cosmetic Class C common stock. Although Cosmetic can
make no prediction as to the effect, if any, that sales of shares of Cosmetic
Class C common stock by Revlon, any pledgee of such shares or the Principal
Stockholders would have on the market price prevailing for the Cosmetic Class C
common stock from time to time, sales of substantial amounts of Cosmetic Class C
common stock or the availability of such shares for sale could adversely affect
prevailing market prices. See "Risk Factors -- Restrictions Imposed by the Terms
of Revlon Indebtedness," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of PFC -- Financial Condition, Liquidity and
Capital Resources," "Agreements with Revlon -- Registration Rights Agreement,"
"Interests of Directors and Officers in the Merger -- Stockholders Agreement
with Principal Stockholders," "The Stockholders Agreement" and "Description of
Cosmetic Capital Stock -- Federal Securities Laws Consequences."
DIVIDENDS UNLIKELY. Cosmetic has not paid any dividends on its common stock
to date, and it is unlikely that the Combined Company will pay any dividends in
the foreseeable future. The payment of dividends after the Merger will be
contingent upon the Combined Company's revenues and earnings, if any, capital
requirements and general financial condition, and will be subject to the
discretion of the Combined Company Board. See "Risk Factors -- Requirement for
Financing to Consummate the Merger; Significant Borrowings; Future Financing"
and "Description of Cosmetic Capital Stock -- Dividends."
REDUCED PUBLIC FLOAT; POSSIBLE VOLATILITY OF CLASS C COMMON STOCK PRICE.
There will be substantially fewer shares of Cosmetic Class C common stock held
by non-affiliated stockholders than Cosmetic Class A and Class B common stock
held by non-affiliated stockholders prior to the effective time of the Merger.
This reduced market capitalization could cause the market price of the Cosmetic
Class C common stock to be subject to significant fluctuations. In addition,
following the Merger, factors such as announcements by the Combined Company of
variations in its quarterly financial results, analysts' estimates of the
Combined Company's financial results, industry-wide results, changes in economic
conditions, competitive developments, sales of substantial blocks of the
securities of the Combined Company by the holders thereof, and the issuance of
stock in connection with future financings or corporate transactions among other
things, could cause dilution to existing stockholders and cause the market price
of the Combined Company's shares to fluctuate significantly. See "Risk
Factors -- Shares Eligible for Future Sale," "Risk Factors -- Authorization of
Additional Common Stock for Future Issuance" and "Market Prices of Cosmetic's
Securities."
AUTHORIZATIONS OF ADDITIONAL COMMON STOCK FOR FUTURE ISSUANCE. The
Principal Stockholders and their family members have advised the Cosmetic Board
that they intend to vote all of their shares in favor of the Merger Agreement,
which includes a provision to amend Cosmetic's Certificate of Incorporation so
as to authorize the issuance of 40,000,000 shares of Cosmetic Class C common
stock, and such vote is sufficient under the General Corporation Law of Delaware
and the Certificate of Incorporation for the approval of the Merger Agreement,
without the vote of any other stockholders. Upon effectiveness of the Merger,
the Combined Company Board will have the power, without further action of the
stockholders, to issue any or all of such shares for cash, securities, other
assets or businesses of third parties upon such terms as the Combined Company
Board may determine, any of which transactions could have the effect of diluting
the interests of existing stockholders of Cosmetic. See "The
Merger -- Amendments to Cosmetic's Certificate of Incorporation."
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FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes forward-looking statements that
are subject to risks and uncertainties. Forward-looking statements include (i)
expectations and estimates as to the Combined Company's future financial
performance, including growth and opportunities for growth in net sales and
earnings and earnings potential of the Combined Company; (ii) cash flows from
operations; (iii) the amount of required capital expenditures, including costs
associated with store openings and closings, and the availability of funds from
the Financing; (iv) the Pro Forma Financial Information (including assumptions
in the notes included therein); (v) the ability to integrate successfully the
operations of Cosmetic and PFC and the costs, timing, benefits and effectiveness
of such integration; (vi) the opportunities for earnings growth through cost
savings, synergies and critical mass; (vii) costs, timing, effectiveness and
benefits of management information system enhancements; (viii) cost savings as a
result of elimination of duplicative functions after the Merger; (ix) the
availability of product from Revlon after expiration or termination of the
Supply Agreement (as defined below); (x) the continued viability of Cosmetic's
salon business; and (xi) those other statements preceded by, followed by or that
include the words "believes," "expects," "anticipates" or similar expressions.
For these statements, Cosmetic claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The following important factors, in addition to those discussed
under "Risk Factors" and elsewhere in this Proxy Statement/Prospectus, could
affect the future results of the Combined Company and could cause those results
to differ materially from those expressed in the forward-looking statements: (i)
the inability to generate growth in net sales and earnings; (ii) the inability
to generate sufficient cash flows from operations to fund capital expenditures
and debt service on the Financing; (iii) unanticipated capital expenditures,
including costs associated with store openings and closings; (iv) the inability
to realize significant cost savings and decreases in operating expenses and
other benefits as a result of the integration of the operations of Cosmetic and
PFC or to realize increases in revenues or income as a result of such
integration; (v) the inability to successfully integrate or difficulties or
delays in integrating the operations of Cosmetic and PFC; (vi) unanticipated
costs, difficulties or delays in completing or realizing the intended benefits
of projects associated with information systems upgrades; (vii) actions by
competitors, including combinations within the retail industry and successful
new retail store concepts; (viii) the unavailability of product or the loss of
suppliers, including secondary source suppliers, the unavailability of products
from Revlon after the expiration of or termination of the Supply Agreement and
the inability to secure sufficient professional hair care products; (ix) the
lack of viability of Cosmetic's salon business; and (x) changes in consumer
preferences, including reduced consumer demand for cosmetics and other beauty
products.
THE MERGER
We are furnishing this Proxy Statement/Prospectus to the holders of the
Cosmetic Class A and Class B common stock in connection with the solicitation of
proxies by the Cosmetic Board for use at the Meeting and at any adjournments or
postponements thereof. At the Meeting, holders of Cosmetic Class B common stock
will be asked to vote upon a proposal to approve and adopt the Merger Agreement
and the related transactions, including the Merger, the Class C Amendment, the
conversion of Cosmetic Class A and Class B common stock into Cosmetic Class C
common stock and the appointment of nine directors (who will replace the
Cosmetic Board upon consummation of the Merger). A copy of the Merger Agreement
is attached hereto as Annex I.
The Merger Agreement provides, among other things, for the Merger of PFC
with and into Cosmetic, with Cosmetic surviving the Merger as a subsidiary of
Revlon. The one share of PFC common stock outstanding at the Effective Time will
be converted into 8,479,335 shares of Cosmetic Class C common stock as
consideration for the Merger. The conversion ratio has been determined by
negotiations between Cosmetic and Revlon and may not be indicative of the value
of PFC. The Merger will become effective on the date on which the Certificate of
Merger has been duly filed with the Delaware Secretary of State or such date and
time as is agreed upon by Cosmetic and Revlon and specified in the Certificate
of Merger (the "Effective Time"), which is currently expected to occur promptly
following the receipt of Cosmetic Class B stockholder approval at the Meeting.
In the Merger, each share of Cosmetic Class A and Class B common stock
outstanding immediately before the Effective Time shall be converted into the
right to receive one share of Cosmetic Class C common stock or, at the election
of each record stockholder and subject to the limitation discussed below, cash
in the amount of $7.63 per share.
The Merger Agreement also provides that each option to purchase Cosmetic
Class A or Class B common stock outstanding immediately prior to the Effective
Time will, after the Effective Time, be exercisable for the same number of
shares of Cosmetic Class C common stock, with the same exercise price and
expiration date as such option was exercisable immediately prior to the Merger;
PROVIDED, HOWEVER, that each holder of an option that has an exercise price of
less than $7.63 per
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<PAGE>
share can elect, subject to the limitation discussed below, to receive, in
return for cancellation of such option, cash in an amount equal to the
difference between $7.63 and the exercise price of such option.
The Cash Election is subject to the limitation that not more than 2,829,065
shares of Cosmetic Class A and Class B common stock and options that have an
exercise price of less than $7.63 per share will be exchangeable for cash
pursuant to the Cash Election (the "Limit"). To the extent that the aggregate
shares and options as to which a Cash Election has been made exceed the Limit,
each stockholder's and optionholder's Cash Election will be reduced pro rata.
The Principal Stockholders have agreed to make the Cash Election for all of
their 1,392,723 shares of Cosmetic Class A and Class B common stock and 61,000
options that have an exercise price of less than $7.63 per share. Accordingly,
if other persons holding more than 1,375,342 shares and options for shares with
an exercise price of less than $7.63 per share elect to receive cash, the Limit
will be exceeded and all holders who have made the Cash Election will be subject
to proration. As a result of the Principal Stockholders' agreement to make the
Cash Election, the shares of Cosmetic Class C common stock received by Revlon
will represent at least 74% of the Cosmetic Class C common stock outstanding
immediately after the Merger and will represent approximately 84% of such shares
if, in addition to the Principal Stockholders' shares and options, the Cash
Election is made in respect of all other outstanding shares and options for
shares with an exercise price of less than $7.63 per share.
BACKGROUND OF THE MERGER
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Cosmetic and Revlon. The following is a
brief discussion of the background of these negotiations, the Merger and the
related transactions.
On July 8, 1995, Louis Weinstein, founder and chairman of the Cosmetic
Board, died. As a result, Louis Weinstein's wife, Anita J. Weinstein, age 67,
became the sole owner of the 425,086 shares of Cosmetic Class A common stock and
605,995 shares of Cosmetic Class B common stock she had held as joint tenant
with her husband.
Since Louis Weinstein's death, Cosmetic and the Principal Stockholders have
received several proposals with respect to transactions which, if implemented,
would have resulted in extraordinary corporate transactions.
In August 1995, Perfumania, Inc., a publicly held company which owns a
chain of retail cosmetic stores, submitted a proposal to the Cosmetic Board to
acquire all of the outstanding Cosmetic common stock in a merger for $13 per
share in cash. After a preliminary review, the Principal Stockholders, based
upon the proposal's financing contingency and the Principal Stockholders' belief
that Perfumania could not raise the funds necessary to finance the proposal,
rejected the proposal. In December 1995, Perfumania submitted to Cosmetic a
draft letter of intent proposing a transaction in which Perfumania would acquire
Anita Weinstein's Cosmetic common stock for $7.00 per share in cash and would
acquire all other stockholders' Cosmetic common stock for $7.00 per share in
principal amount of Perfumania 9% senior subordinated notes. Cosmetic declined
to pursue this proposal based upon concerns with respect to the unequal
treatment of Cosmetic stockholders and the value of the proposed notes. In March
1996, Perfumania proposed to acquire all of the outstanding Cosmetic common
stock in a merger for $10.00 per share in cash. Cosmetic also declined to pursue
this proposal based upon the belief that Perfumania, especially in view of its
own financial condition at that time, could not raise the funds necessary to
finance the proposal.
In November 1995, Regis Corporation, a publicly held company which owns a
national chain of beauty salons, submitted a proposal to the Cosmetic Board to
acquire Cosmetic common stock from certain members of the Weinstein family for
$5 million in cash and to acquire all of the remaining outstanding Cosmetic
common stock in a merger in exchange for Regis common stock. The exchange ratio
was not specified but, based upon discussions, was proposed to value Regis
common stock at its market value and to value Cosmetic common stock at or near
its book value. After an initial due diligence investigation, Regis withdrew its
proposal and all discussions with respect to the proposed transaction were
terminated.
Between October 1995 and January 1996, Cosmetic received a series of
proposals from the chief executive officer of Phar-Mor, Inc., a publicly held
company which owns a national chain of drug stores. All of the proposals were
variations on a plan to acquire the Cosmetic common stock owned by members of
the Weinstein family for cash and notes and to acquire all of the remaining
outstanding Cosmetic common stock in a merger in exchange for Phar-Mor common
stock on a share for share basis. Cosmetic declined to pursue these proposals
based upon concerns with respect to their perceived inadequate value attributed
to Cosmetic common stock, their perceived inadequate amount of cash
consideration and their unequal treatment of Cosmetic stockholders.
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While Cosmetic and the Principal Stockholders considered several of these
proposals, neither Cosmetic nor the Principal Stockholders entered into any
letter of intent or definitive agreement regarding any such proposals.
In May 1996, Jerry W. Levin, chairman of the board and chief executive
officer of Revlon, contacted Mark S. Weinstein, chairman of the Cosmetic Board,
to inquire if he was interested in meeting to discuss a possible business
combination involving Cosmetic and PFC. (Mr. Levin had contacted Mr. Weinstein
after Mr. Weinstein had indicated to an acquaintance of Mr. Levin that Mr.
Weinstein would be interested in discussing with Revlon representatives a
possible business combination involving Cosmetic and PFC.) Shortly thereafter,
Mr. Weinstein met with Mr. Levin and other senior PFC officers and discussed a
possible business combination. Thereafter, Mr. Weinstein advised certain
Cosmetic Board members and officers, including Ben S. Kovalsky, Cosmetic's
president and chief executive officer, and Bruce E. Strohl, Cosmetic's chief
financial officer, of his meeting with Mr. Levin and PFC officers. On or about
May 13, 1996, Revlon and Cosmetic executed a confidentiality letter agreement
regarding a possible transaction involving Cosmetic and PFC. The confidentiality
letter provides that, subject to certain exceptions, (i) each party and its
representatives shall keep confidential certain non-public information provided
by the other party, (ii) neither party shall disclose that any such information
has been made available to it or that discussions are taking place or any of the
terms of the Merger, (iii) neither party shall hire any employee or solicit any
employee of the other party to terminate his or her employment and (iv) neither
party shall solicit any customer or supplier to terminate, suspend or alter
their business relations with the other party.
On or about June 5, 1996, Revlon submitted to Cosmetic a draft non-binding
discussion sheet regarding a proposed merger of PFC into Cosmetic, pursuant to
which, among other things, Cosmetic would, concurrently with such merger, offer
to purchase up to 2,000,000 shares of its common stock at a price of $7.00 per
share and, upon consummation of such transactions, Revlon would own
approximately 81% of Cosmetic's outstanding common stock. Following receipt of
the discussion sheet, a series of meetings and discussions occurred between PFC
representatives and Cosmetic representatives, including Messrs. Weinstein,
Kovalsky and Strohl.
On June 10, 1996, PFC's representatives met with the Cosmetic's
representatives, Cosmetic's legal counsel and a representative of Legg Mason.
The parties discussed the preliminary proposal, the opportunities in combining
PFC and Cosmetic for cost savings and synergies, an overview of PFC's operations
and preliminary unaudited historical and budgeted financial statements of PFC.
At the meeting, Cosmetic's representatives expressed a preference for an all
cash offer from Revlon.
On June 19, 1996, representatives of Legg Mason met with Cosmetic
representatives and Cosmetic's legal counsel to discuss Cosmetic's alternatives
for enhancing stockholder value. It was agreed that Legg Mason would propose to
Revlon that Revlon make an all cash offer for Cosmetic. On June 20, 1996, a
representative of Legg Mason discussed the proposal for a cash offer with
Revlon, and Revlon rejected such proposal.
On August 1, 1996, Mark Weinstein, Anita Weinstein and a Legg Mason
representative met with senior PFC representatives to discuss in greater detail
how the Combined Company might function and the opportunities for enhancing the
value of the Combined Company.
On August 7, 1996, a Revlon representative proposed to a representative of
Legg Mason a modification of the proposal under which Revlon and Cosmetic's
stockholders, immediately following the merger and without giving effect to the
proposed offer to purchase a portion of the shares for cash, would own 70% and
30%, respectively, of the Cosmetic common stock. Revlon also proposed that the
offer to purchase a portion of the shares for cash would be increased from $7.00
per share to $7.63 per share and the number of shares purchased would be
increased from 2,000,000 to a number of shares sufficient to permit Revlon to
own 80% of the Cosmetic's common stock after the cash purchase.
On August 8, 1996, representatives of Legg Mason continued negotiations
with Revlon's representatives. Revlon's representatives agreed that, upon
consummation of the merger and without giving effect to the cash offer, Revlon
and Cosmetic's stockholders would own 65% and 35%, respectively, of Cosmetic's
common stock, provided that the Principal Stockholders agreed to tender all of
their shares pursuant to the cash offer.
On or about August 9, 1996, Revlon submitted a revised draft non-binding
discussion sheet to Cosmetic regarding a proposed merger of PFC into Cosmetic,
pursuant to which, among other things, Cosmetic would, concurrently with the
merger, offer to purchase up to 2,336,000 shares of its common stock at a price
of $7.63 per share and, upon consummation of the transactions, Revlon would own
approximately 80% of Cosmetic's outstanding common stock (the "Proposal").
On August 20, 1996, a special meeting of the Cosmetic Board was held to
discuss the Proposal. At the Cosmetic Board meeting, a Legg Mason representative
provided the Cosmetic directors with a written presentation prepared by Legg
Mason regarding the Proposal, which included a summary of the proposed terms, a
preliminary valuation analysis of Cosmetic,
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certain financial data relating to PFC and a summary comparison of market
multiples for the fragrance distribution industry and for the women's retail
industry. The Legg Mason representative noted that the preliminary conclusions
were subject to the receipt of further information and projections to be
provided by Cosmetic and PFC as a result of their respective due diligence,
including projected operating performance and potential cost savings and
anticipated one time costs arising out of the proposed merger.
Also discussed at the August 20, 1996 Cosmetic Board meeting was the
background to the Proposal, including the several meetings between Cosmetic
representatives and Revlon and PFC representatives and the material differences
between the Proposal and the June 5th draft discussion sheet referred to above.
It was noted that, while under the June 5th draft discussion sheet, Revlon and
Cosmetic's existing stockholders would initially own, upon consummation of the
merger, without giving effect to the cash offer, 70% and 30%, respectively, of
Cosmetic's outstanding common stock and the cash offer would be for 2,000,000
shares at $7.00 per share, under the Proposal, upon consummation of the merger,
without giving effect to the cash offer, Revlon and the existing Cosmetic
stockholders would own 65% and 35%, respectively, of Cosmetic's outstanding
common stock and the cash offer would be for 2,336,000 shares at $7.63 per
share. It was also noted that Legg Mason had proposed to Revlon that Revlon
acquire Cosmetic on an "all cash" basis, and that Revlon had firmly rejected
this proposal. The Cosmetic Board determined, based upon Legg Mason's
presentation and its own analysis, including its analysis of the potential
synergies, that the Proposal's combination of cash and stock potentially
provided Cosmetic stockholders greater value than any all cash offer that
Cosmetic might reasonably expect to receive at that time.
At the August 20, 1996 meeting, the Cosmetic Board authorized Cosmetic to
engage Legg Mason as exclusive financial advisor to Cosmetic in connection with
Cosmetic's analysis of any investment in, merger with, acquisition of, or other
business combination with PFC, and if requested by the Cosmetic Board, to render
Legg Mason's opinion as to the fairness, from a financial point of view, of the
proposed merger consideration to be received by Cosmetic's stockholders.
From August 20, 1996 until October 1, 1996, numerous discussions and
negotiations occurred between Cosmetic representatives, including its legal
advisors and Legg Mason representatives, and Revlon and PFC representatives,
including their legal advisors, regarding the proposed merger, including a
related proposed letter of intent and exclusivity agreement between Cosmetic,
the Principal Stockholders, Revlon and PFC.
On October 1, 1996, a special meeting of the Cosmetic Board was held to
consider and act on (i) a proposed letter of intent among Revlon, PFC, Cosmetic
and the Principal Stockholders (the "Letter of Intent") and (ii) a related
exclusivity agreement to be executed by the same parties (the "Exclusivity
Agreement"), which collectively, provided for the negotiation of a merger
agreement pursuant to which, among other things, PFC would merge into Cosmetic
or a wholly owned subsidiary thereof. Copies of the Letter of Intent and
Exclusivity Agreement, both dated October 1, 1996, were distributed to the
Cosmetic directors at the meeting.
The terms of the proposed Letter of Intent and Exclusivity Agreement
included the following:
THE LETTER OF INTENT. The Letter of Intent provided that in connection with
the Merger, (a) Cosmetic's Certificate of Incorporation would be amended to
create Cosmetic Class C common stock, (b) Revlon would receive newly issued
Cosmetic Class C common stock such that, immediately following the Merger
(without giving effect to the Cash Election), Revlon would own at least 65% of
the outstanding Cosmetic Class C common stock (on a fully diluted basis taking
into account (x) all shares issuable upon the exercise of options then
outstanding with an exercise price of $7.70 or less, (y) 10,000 shares issuable
upon the exercise of options then outstanding with an exercise price of more
than $7.70 and (z) cancellation at or prior to the effective time of the Merger
of outstanding options exercisable for 20,000 shares that have an expiration
date of January 15, 1997), (c) each existing Cosmetic stockholder could elect to
receive, in exchange for each share of Cosmetic Class A or Class B common stock
held by such stockholder, either (i) one share of Cosmetic Class C common stock
or (ii) cash in the amount of $7.63 per share and (d) each stock option
outstanding immediately prior to the effective time of the Merger would, after
the effective time, be exercisable for the same number of shares of Cosmetic
Class C common stock and with the same exercise price and expiration date as
such option was exercisable immediately prior to the Merger; PROVIDED, HOWEVER,
that each holder of an option that has an exercise price of less than $7.63 per
share could elect, in lieu of retaining the stock option, to receive in
cancellation thereof cash in an amount equal to the difference between $7.63 and
the exercise price of such option. The Cash Election would be subject to the
limitation that not more than 2,829,065 shares of Cosmetic Class A and Class B
common stock, including outstanding Cosmetic Class A and Class B common stock
and shares subject to outstanding options, would be exchangeable for cash
pursuant to the Cash Election. To the extent that the aggregate shares and
options as to which a Cash Election was made exceeded the Limit, each
stockholder's and optionholder's Cash Election would be reduced pro rata. The
Principal Stockholders would agree to elect to make the
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Cash Election for all of their Cosmetic Class A and Class B common stock and
options that have an exercise price of less than $7.63 per share.
The Letter of Intent provided that Cosmetic's bylaw would be amended to
provide that the Cosmetic Board would consist of nine directors, of which there
would be two independent directors. For three years from the consummation of the
Merger, (i) the Principal Stockholders would agree to vote all of their Cosmetic
Class C common stock in favor of Revlon's nominees for director so that Revlon
would at all times maintain representation on the Combined Company Board equal
to Revlon's percentage ownership of Cosmetic Class C common stock, but not less
than five board seats, and (ii) Revlon would agree to vote its shares in favor
of the Principal Stockholders' nominees for director equal to their aggregate
percentage ownership of Cosmetic Class C common stock, after giving effect to
the Merger and the Cash Election, but not less than one nor more than two board
seats.
Jerry Levin, Revlon's chairman and chief executive officer, would be
appointed as a director and chairman of the Combined Company Board, Mark
Weinstein would be appointed as a vice chairman of the Combined Company Board
and Howard Diener, the president of PFC, would be appointed as president and
chief executive officer of the Combined Company.
Each of Mark Weinstein and Anita Weinstein would enter into an employment
and non-competition agreement with Cosmetic, and Susan Magenheim would enter
into a consulting and non-competition agreement with Cosmetic, each upon terms
and conditions acceptable to the parties.
PFC would enter into lease agreements with Revlon for five stores located
at Revlon's facilities, each upon terms and conditions acceptable to the
parties.
The Principal Stockholders would together be entitled to demand on one
occasion that Cosmetic file a registration statement under the Securities Act
for the sale of their Cosmetic Class C common stock and would also be entitled
to include their Cosmetic Class C common stock in certain registration
statements filed for Cosmetic's benefit. Revlon would be entitled to demand on
three occasions that Cosmetic file a registration statement under the Securities
Act for the sale of its Cosmetic Class C common stock and would also be entitled
to include its Cosmetic Class C common stock in certain registration statements
filed for Cosmetic's benefit. All such registration statements would be prepared
at Cosmetic's expense, except for fees and expenses of legal counsel of Revlon
or the Principal Stockholders, as the case may be, and underwriting discounts,
fees and expenses.
The Letter of Intent provided that the Merger would be subject to (i)
Cosmetic's and Revlon's satisfaction with complete financial, operations, tax,
legal, real estate, environmental, business and other due diligence, (ii) notice
to, filings with and approvals by government agencies (including the Federal
Trade Commission and/or The Department of Justice pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act and the Securities and Exchange
Commission ("SEC") pursuant to the federal securities laws), (iii) receipt of
material third party consents, (iv) the availability of financing for Cosmetic
to finance the Cash Election, refinance existing debt and provide working
capital on terms and conditions acceptable to both Cosmetic and Revlon and (v)
the negotiation, execution and delivery of a mutually acceptable definitive
merger agreement. In addition, Revlon's obligations would be subject to approval
of the transaction by Revlon's bank group and Revlon's board of directors.
Cosmetic's obligations would be subject to approval of the transaction by the
Cosmetic Board and the holders of Cosmetic's Class B common stock.
From and after October 1, 1996, the businesses of PFC and Cosmetic each
would be operated in the ordinary course and consistent with past practices
pending the Merger.
The Letter of Intent also provided that the merger agreement would include
certain exclusivity, expense reimbursement and termination fee provisions
substantially the same as those provided for in the Merger Agreement. See "The
Merger Agreement -- Certain Covenants," " -- Expenses" and " -- Termination Fee"
for a more detailed description of these provisions.
According to the Letter of Intent, the merger agreement would provide that
unless the merger agreement was terminated in accordance with its terms,
Cosmetic and the Principal Stockholders would be subject to exclusivity
obligations substantially the same as Cosmetic's exclusivity obligations under
the Exclusivity Agreement (briefly described below in the description of the
Exclusivity Agreement), and if Cosmetic or the Principal Stockholders were to
take certain actions or consummate certain transactions that were inconsistent
with the Merger during the 90-day period immediately following the later of (i)
the 110th day after the date the merger agreement was signed and (ii) certain
events of termination under the merger agreement, Cosmetic and the Principal
Stockholders would reimburse Revlon's expenses up to a maximum of $1 million.
The merger agreement would also provide that if Cosmetic should consummate such
a transaction prior to such date,
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Cosmetic would pay Revlon a termination fee of $1 million. The Letter of Intent
also provided that the Principal Stockholders would enter into a stockholders
agreement with Revlon that would provide, among other things, that (i) if
Cosmetic should consummate such a transaction prior to such date, the Principal
Stockholders would be obligated to pay a termination fee equal to 25% of the
excess of the amount of consideration received by the Principal Stockholders in
such transaction over $7.63 and (ii) if the Principal Stockholders voted against
the Merger, the Principal Stockholders also would be obligated to pay a fee of
$1 million (with a credit for any amount of the fee paid by the Principal
Stockholders pursuant to clause (i)).
The merger agreement would further provide that unless the merger agreement
was terminated in accordance with its terms, Revlon would be subject to
exclusivity obligations substantially the same as Revlon's exclusivity
obligations under the Exclusivity Agreement (briefly described below in the
description of the Exclusivity Agreement) and, if Revlon or PFC were to take
certain actions or consummate certain transactions that were inconsistent with
the Merger during the 90-day period immediately following the later of (i) the
110th day after the date the merger agreement was signed and (ii) certain events
of termination under the merger agreement, Revlon would reimburse Cosmetic's
expenses up to a maximum of $1 million. It also provided that if Revlon or PFC
should consummate such a transaction prior to such date, Revlon would pay
Cosmetic a termination fee of $1.25 million.
The Letter of Intent provided that it would terminate upon the earlier of
the execution of the merger agreement or November 30, 1996.
THE EXCLUSIVITY AGREEMENT. The Exclusivity Agreement contemplated that
Cosmetic and Revlon would conduct due diligence with respect to completing the
Merger and that the due diligence activities would require each party to incur
significant expenses. In view of these expenses, the Exclusivity Agreement
provided that until the earlier of (i) November 30, 1996 or (ii) termination of
the Letter of Intent (the "Exclusivity Period"), neither Cosmetic nor any of the
Principal Stockholders nor any of their representatives or agents would solicit,
engage in negotiations, provide information to or otherwise cooperate with any
person or entity that sought to acquire or expressed an interest in acquiring
all or a substantial part of the any class of the securities, business or assets
of Cosmetic nor would they grant any proxy, option or other similar right to any
third person or entity in connection with a transaction inconsistent with the
Merger. The Exclusivity Agreement further provided that nothing contained
therein would prohibit the Cosmetic Board from furnishing information to, or
entering into discussions or negotiations with, any person or entity that made
an unsolicited bona fide proposal in writing to acquire Cosmetic or
substantially all of its assets on terms which, in an exercise of their
fiduciary duty after the consideration of advice from Cosmetic's legal and
financial advisors, a majority of Cosmetic's directors determined was likely to
be more beneficial to Cosmetic's stockholders than the Merger. This proviso,
however, would not permit Cosmetic to terminate the Exclusivity Agreement or to
enter into an agreement with respect to (i) an alternate transaction prior to
the expiration of the Exclusivity Period or (ii) affect any other obligation
under the Exclusivity Agreement. In addition, the Principal Stockholders agreed
that during the Exclusivity Period they would not sell, pledge, agree to sell or
pledge or otherwise dispose of any of their Cosmetic common stock to any third
person, would vote against any alternate transaction and, if available, would
exercise appraisal rights with respect to any alternate transaction.
The Exclusivity Agreement also provided that, during the Exclusivity
Period, Revlon and its representatives and agents would not solicit, engage in
negotiations, provide information to or otherwise cooperate with any person or
entity that expressed an interest in acquiring all or a substantial part of any
class of the securities, business or assets of the PFC nor would Revlon grant
any proxy, option or other similar right to any third person or entity in
connection with a transaction inconsistent with the Merger.
The Exclusivity Agreement provided that, if Cosmetic or the Principal
Stockholders breached the Exclusivity Agreement or took certain other actions
inconsistent with the Merger during the Exclusivity Period and, in certain
circumstances, during the 120-day period immediately following the Exclusivity
Period, Cosmetic or the Principal Stockholders, as the case may be, would pay
Revlon an amount equal to its documented fees and expenses in connection with
the due diligence, preparation and negotiation of documents and preparation of
PFC financial statements related to the Merger, up to a maximum of $0.5 million.
It also provided that, if Revlon or PFC breached the Exclusivity Agreement or
took certain other actions inconsistent with the Merger during the Exclusivity
Period and, in certain circumstances, during the 120-day period immediately
following the Exclusivity Period, Revlon would pay Cosmetic an amount equal to
its documented fees and expenses in connection with the due diligence,
preparation and negotiation of documents and preparation of financial statements
related to the Merger, up to a maximum of $0.5 million.
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In addition to the foregoing expense reimbursement provisions, the
Exclusivity Agreement also provided that if Cosmetic consummated an alternate
transaction at any time during the Exclusivity Period or during the 120-day
period immediately following the Exclusivity Period, Cosmetic would pay to
Revlon on the date of consummation of such alternate transaction a break-up fee
of $1 million and the Principal Stockholders, jointly and severally, would pay
to Revlon on the date of consummation of such alternate transaction a break-up
fee equal to 25% of the difference between (a) the value of the consideration
paid to them in such alternate transaction with respect to all of their shares
minus (b) the product of (i) the number of shares held by the Principal
Stockholders multiplied by (ii) $7.63.
If Revlon or PFC consummated an alternate transaction at any time during
the Exclusivity Period or during the 120-day
period immediately following the Exclusivity Period, the Exclusivity Agreement
provided that Revlon would pay to Cosmetic on the date of consummation of such
alternate transaction a break-up fee of $1.25 million.
Also, at the October 1, 1996 Cosmetic Board meeting, the Legg Mason
representatives reviewed with the Cosmetic Board estimates of the potential
projected "stockholder value creation" which could result from the transaction
and the relative contribution made to such potential stockholder value creation
by each of Cosmetic and PFC. Legg Mason's representatives noted that in
developing their presentation, they relied upon historical and projected
financial information independently provided to Legg Mason by the managements of
PFC and Cosmetic. They also reviewed with the Cosmetic Board (i) a "line item"
discussion of Cosmetic and PFC managements' estimated cost synergies expected to
result from the combination of the two companies, including reductions in the
costs for merchandising, information systems and various personnel savings; (ii)
a summary of Cosmetic and PFC managements' estimates of "one-time" costs,
including costs for integrating information systems, consolidating distribution
operations, and specific transaction related expenses; (iii) the Combined
Company valuation analysis, which included the valuation methodology, a
comparison of current operating projections as compared to projections that had
previously been presented to the Cosmetic Board on August 20, 1996, income
statement information, balance sheet information and a preliminary valuation
analysis; and (iv) a summary of Cosmetic and PFC managements' estimates of
additional benefits not included in the analysis, including "payback" from
installation of point of sale scanning systems, reduction of payroll expense at
store level, other expense reductions, accelerated access to higher margin
professional products, and reductions in freight costs. Legg Mason also
presented a preliminary "stand alone" valuation analysis of Cosmetic, including
its historical stock price and trading volume, income statement and balance
sheet and a preliminary "stand alone" valuation analysis of PFC, including an
income statement and balance sheet analysis, and comparable company trading
multiples and transaction multiples for the drug store industry.
Legg Mason presented and the Cosmetic Board considered an analysis prepared
by the managements of Cosmetic and PFC of the operating synergies which could
result from combining PFC and Cosmetic. The synergy analysis included the
consolidation of overhead expenses, elimination of duplicative functions,
including those of distribution, information systems, human resources,
financing, management and merchandising, and the realization of other savings,
all of which are expected as a result of the anticipated consolidation of
certain warehouse, distribution and headquarters operations of Cosmetic and PFC
in Maryland. The synergies were estimated to be approximately $3.5 million per
annum. The one-time costs necessary to achieve these synergies were estimated to
be approximately $5.8 million (excluding legal and accounting costs for PFC and
Cosmetic related to the Merger and severance). The plan to operate the Cosmetic
stores and PFC stores as separate divisions was taken into account in these
estimates.
Mr. Weinstein discussed with the Cosmetic Board the above-referenced
previous contacts, discussions and negotiations in which he and the other
Cosmetic representatives and advisors had participated over the past two years
in respect of proposed business combinations involving Cosmetic or acquisitions
of Cosmetic's securities. Mr. Weinstein stated that none of these discussions
led to the execution of a letter of intent or definitive agreement and that he
knew of no current prospects for a proposal from a party other than Revlon. Legg
Mason's representative advised the Cosmetic Board that, while prior contacts,
discussions and negotiations by Cosmetic indicated that there was a limited
audience for other potential business combinations with Cosmetic, if the Letter
of Intent were executed and a definitive merger agreement was not reached,
Cosmetic could consummate an alternative transaction after the 180th day of the
execution date of the Letter of Intent, without paying a termination fee to
Revlon. Additionally, the Exclusivity Agreement would permit the Cosmetic Board
to provide information to and engage in negotiations with any entity making an
unsolicited proposal which they determined was likely to be more beneficial to
Cosmetic stockholders.
After discussion, the Cosmetic Board on October 1, 1996 created a committee
of the Cosmetic Board consisting of Ronald M. Hirschel and Donald R. Rogers to
monitor the negotiations of the merger agreement and related documents and to
keep the Cosmetic Board advised of the progress of such negotiations and of any
unsolicited offers received from third parties to acquire all or a substantial
portion of Cosmetic's business or equity before responding in any way to such
offers.
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Also, the Cosmetic Board determined that it was in the best interest of Cosmetic
and its stockholders for Cosmetic to enter into the Letter of Intent and
Exclusivity Agreement and, accordingly, authorized Cosmetic's execution and
delivery of the Letter of Intent and Exclusivity Agreement.
After the Cosmetic Board meeting on October 1, 1996, Cosmetic, the
Principal Stockholders, Revlon and PFC executed the Letter of Intent and the
Exclusivity Agreement, and Revlon and Cosmetic issued a press release announcing
the execution of such documents.
From October 1, 1996 until November 15, 1996, numerous discussions and
negotiations occurred between Cosmetic representatives, including Messrs.
Hirschel and Rogers, Cosmetic's legal counsel and Legg Mason representatives,
and Revlon and PFC representatives, including their legal counsel, regarding the
proposed merger and the definitive agreement and plan of merger and ancillary
documents thereto. Messrs. Hirschel and Rogers reviewed drafts of the proposed
merger agreement and certain ancillary agreements and participated in numerous
telephone conferences with Cosmetic's legal counsel and Revlon's legal counsel
on various terms and conditions of these agreements. In addition, Mr. Hirschel
reviewed and discussed the real estate leases proposed to be entered into with
Revlon for the Revlon stores.
On November 15, 1996, a special meeting of the Cosmetic Board was held to
consider and act on the proposed merger agreement by and among Cosmetic, Revlon
and PFC pursuant to which PFC would merge into Cosmetic or a wholly owned
subsidiary thereof. At the Cosmetic Board meeting, Legg Mason representatives
made a presentation to the Cosmetic Board regarding their opinion that, from a
financial point of view, the consideration to be paid to Cosmetic's stockholders
for their Cosmetic Class A and Class B common stock pursuant to the Merger
Agreement was fair. See "Opinion of Financial Advisor."
The Cosmetic Board noted at its November 15, 1996 meeting that at no time
since the initial public announcement of the proposed merger on October 1, 1996
had any person contacted Cosmetic, any Cosmetic Board member or any Principal
Stockholder about any proposal or offer to acquire Cosmetic or any alternative
transaction in respect of the Merger. The Cosmetic Board also noted that Messrs.
Hirschel and Rogers had substantially participated in negotiating the definitive
merger agreement, but that they had not formally met as a committee in view of
(i) such negotiations being conducted in a manner consistent with the detailed
Letter of Intent and Exclusivity Agreement and (ii) no alternate transactions
having been proposed since the initial public announcement of the proposed
merger. In consideration of their significant involvement in the process of
negotiating the Merger Agreement, the Cosmetic Board asked Messrs. Hirschel and
Rogers to make a proposal to the Cosmetic Board regarding their compensation for
serving as the committee members during the Merger Agreement negotiations and
the resulting extraordinary amount of time they were devoting to such
deliberations. The Cosmetic Board subsequently determined to pay them $10,000
each for their services on the committee.
The Cosmetic Board unanimously (i) approved Cosmetic's execution and
delivery of the Merger Agreement, the Principal Stockholders' execution and
delivery of the Stockholders Agreement and the agreements referred to therein or
contemplated thereby, (ii) determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are in the best
interests of Cosmetic's stockholders, (iii) approved the transactions
contemplated thereby for purposes of Section 203 of the General Corporation Law
of Delaware, and (iv) resolved to recommend that the holders of the Cosmetic
Class B common stock adopt the Merger Agreement and the transactions
contemplated therein, including the Merger.
On November 27, 1996, as authorized by the Cosmetic Board, Cosmetic
executed and delivered the Merger Agreement and the Principal Stockholders
executed and delivered the Stockholders Agreement. Thereafter, on November 27,
1996, Cosmetic and Revlon issued a press release announcing the execution and
delivery of such agreements.
REASONS FOR THE MERGER; RECOMMENDATION OF THE COSMETIC BOARD
The Cosmetic Board believes that the Merger is in the best interests of
Cosmetic and its stockholders and unanimously recommends to its stockholders
that they vote FOR approval and adoption of the Merger Agreement and the
transactions contemplated thereby. The Cosmetic Board believes that Cosmetic and
Cosmetic stockholders will benefit from the Merger.
As part of its review, the Cosmetic Board considered (i) information
concerning the financial performance, condition, business operations and
prospects of each of Cosmetic and PFC, including the fact that PFC has had net
losses since 1992, (ii) the proposed terms and structure of the Merger, (iii)
the terms of the Merger Agreement, including the parties' mutual
representations, warranties and covenants and the conditions to their respective
obligations, (iv) financial and other data with respect to other public
companies in the cosmetic products retail industry, (v) the Legg Mason Opinion
(as defined herein), (vi) the dilutive effect of the issuance of Cosmetic Class
C common stock in the Merger, and (vii) the business advantages expected to
result from the combination of Cosmetic and PFC. In considering the Legg Mason
Opinion, the Cosmetic Board
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took into account the fees payable to Legg Mason and the contingent nature of
those fees. See "Opinion of Financial Advisor."
The Cosmetic Board believes that the Merger is in the best interest of
Cosmetic's stockholders for the following reasons:
The Cosmetic Board believes that the Merger consideration is fair to the
Cosmetic stockholders. In this regard, the Cosmetic Board relied in part upon
the Legg Mason Opinion, including the financial analysis supporting the opinion
presented to the Cosmetic Board. In considering the Legg Mason Opinion, the
Cosmetic Board noted that certain valuation techniques yielded values for
Cosmetic common stock of greater than $7.63 per share. The Cosmetic Board
believed, however, that such values, for the reasons stated in the discussion
below of the Legg Mason Opinion, were not reliable. See "Opinion of Financial
Advisor."
The Cosmetic Board believes that the Combined Company can achieve
reductions in operating expenses as the overhead expenses of Cosmetic and PFC
are consolidated, duplicative functions are eliminated and other savings are
realized. Although the amount of reduction in operating expenses cannot be
quantified with certainty and there can be no assurances that such reductions
will be realized, Cosmetic believes that cost of sales and selling, general and
administrative expenses for the year ended December 31, 1995 and the nine months
ended September 30, 1996 would have been decreased by approximately $4.0 million
and $3.0 million, respectively, had the Merger been consummated on January 1,
1995. The Combined Company plans to consolidate certain warehouse, distribution
and headquarters operations of Cosmetic and PFC in Maryland, which consolidation
is expected to allow the Combined Company to achieve reduction of annual
operating expenses related to distribution, information systems, human
resources, financing, management, merchandising and other. Cosmetic believes
that the Combined Company will incur certain one-time costs and capital
expenditures to achieve these annual cost reductions, which will result in
higher interest expense and partially offset these benefits. See
"Forward-Looking Information," "Pro Forma Financial Information," "Risk
Factors -- Historical Net Losses" and " -- Uncertainties Regarding Integration
of Cosmetic and PFC."
The Cosmetic Board also believes that the Cash Election should provide
Cosmetic stockholders liquidity at a premium to the market value of the Cosmetic
Class A and Class B common stock prior to the announcement of the signing of the
Letter of Intent.
The Cosmetic Board considered that the Exclusivity Agreement provided and
the Merger Agreement provides that Cosmetic may not during a specified period of
time solicit any alternate transaction. The Exclusivity Agreement provided and
the Merger Agreement provides, however, that Cosmetic may furnish information to
and enter into discussions or negotiations with, any party that makes an
unsolicited bona fide written proposal to acquire Cosmetic or substantially all
of its assets on terms which, in an exercise of the Cosmetic Board's fiduciary
duty after the consideration of advice from Cosmetic's legal and financial
advisors, a majority of Cosmetic's directors determines is likely to be more
beneficial to Cosmetic's stockholders than the Merger. This provision, however,
does not permit Cosmetic to (i) terminate the Merger Agreement, (ii) enter into
an agreement with respect to an alternate transaction prior to the termination
of the Merger Agreement or (iii) affect any other obligation under the Merger
Agreement. The Cosmetic Board noted that the Merger Agreement provides for the
payment of up to $1 million of Revlon's expenses if the Merger Agreement is
terminated under certain circumstances and the payment to Revlon of a
termination fee of $1 million if Cosmetic enters into an alternate transaction
with another party within a specified period of time and was aware that Revlon
would not have agreed to enter into the Merger Agreement without those
provisions. The Cosmetic Board concluded that, while the existence of the
expense and termination fee provisions might reduce the likelihood that a third
party would propose an alternate transaction, the increased cost to a third
party would not be material and the benefits of the Merger to Cosmetic
outweighed the risks.
In considering the Merger, the Cosmetic Board acknowledged that there are
certain risks associated with the Merger, including (i) the possibility that the
potential benefits set forth above may not be realized, (ii) the lack of
profitability of PFC, (iii) the dilutive effect of the issuance of the Cosmetic
Class C common stock in the Merger, (iv) the possible reduced liquidity and
increased price fluctuations of Cosmetic's common stock and (v) the possibility
that the Merger might not be consummated, whether due to the failure to obtain
financing or otherwise, resulting in a potential adverse effect on the market
price of the Cosmetic Class A and Class B common stock. Notwithstanding the
risks, the Cosmetic Board concluded that the positive factors described above
outweighed the negative considerations. With respect to the risks associated
with realizing the benefits of the Merger and with PFC's losses, the Cosmetic
Board carefully evaluated the potential benefits associated with the Merger,
including potential cost savings, the steps required to be taken to realize such
benefits and the likelihood of realizing such benefits, and concluded that the
opportunity to realize the potential benefits and their potential value to
Cosmetic and its stockholders outweighed the risks associated with realizing
such benefits. With respect to the dilutive effect of the issuance of the
Cosmetic Class C common stock in the Merger and the potential for reduced
liquidity, the Cosmetic Board
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considered the possibility that Revlon might make a public offering of some or
all of its Cosmetic common stock in the future. The Cosmetic Board also
considered the potential for increasing the value of the Cosmetic common stock
with and without the Merger. Based upon these considerations, the Cosmetic Board
believes that the potential value of the Cosmetic common stock as a result of
the Merger exceeds the potential value of the Cosmetic common stock without the
Merger. Further, the Cosmetic Board considered the possibility that the Merger
might not be consummated and concluded that the expressed interest of Revlon in
completing the transaction and Revlon's ability to arrange the required
financing made it likely (although not certain) that the Merger would be
completed.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the Cosmetic Board did not find it practical
to, and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determinations.
THE COSMETIC BOARD UNANIMOUSLY RECOMMENDS THAT COSMETIC STOCKHOLDERS VOTE
"FOR" THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. SEE
"INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER."
FINANCING
The sources and application of funds required by Cosmetic to consummate the
Merger and provide working capital following the Merger are estimated as
follows:
<TABLE>
<CAPTION>
SOURCES OF FUNDS APPLICATION OF FUNDS
- -------------------------------------------------- --------------------------------------------------
<S> <C>
Financing $ 70.0 million Cash Election $ 20.9 million
Refinancing 27.2 million
Fees and expenses 1.6 million
Future working capital 20.3 million
-------------- --------------
Total $ 70.0 million Total $ 70.0 million
-------------- --------------
-------------- --------------
</TABLE>
To finance the Cash Election, refinance existing indebtedness of Cosmetic
and PFC, pay fees and expenses in connection with the Merger and the Financing
and provide financing for future working capital requirements and general
corporate purposes, including certain non-recurring costs incurred after the
Merger relating to the transaction and the consolidation of operations, Cosmetic
intends to enter into an agreement with one or more financial institutions
pursuant to which such financial institutions will lend up to $70 million to the
Combined Company. It is anticipated that the Financing will be secured by all of
the accounts receivable and inventory of the Combined Company and will contain
certain restrictive covenants applicable to the Combined Company that do not
differ materially from those imposed upon Cosmetic under its current credit
facility, including, among other things, limitations relating to (i) engaging in
mergers, consolidations and sales of assets, with certain exceptions, (ii)
making distributions or paying dividends or changing its capital structure, with
certain exceptions, (iii) entering into any transaction that materially and
adversely affects the collateral under the Financing or the Combined Company's
ability to repay its obligations, (iv) issuing any guarantees, with certain
exceptions, (v) incurring any debt in excess of specified amounts, with certain
exceptions, (vi) prepaying any debt before maturity, with certain exceptions,
(vii) entering into certain transactions with affiliates, with certain
exceptions, (viii) engaging in other lines of business, (ix) incurring any liens
on its assets, with certain exceptions, (x) entering into sale and leaseback
transactions, with certain exceptions, (xi) creating or acquiring any new
subsidiaries, (xii) making acquisitions or investments, with certain exceptions
or (xiii) allowing any subsidiary to have any obligations to trade suppliers. In
addition, the Financing is expected to contain certain financial covenants,
including covenants requiring the Combined Company to maintain minimum adjusted
tangible net worth and minimum interest coverage. See "Risk
Factors -- Requirement for Financing to Consummate the Merger; Significant
Borrowings; Future Financing." It is a condition to the consummation of the
Merger that the Combined Company shall have available to it proceeds of the
Financing of not less than $50 million on terms satisfactory to Cosmetic and
Revlon.
OPERATIONS AFTER THE MERGER
Following consummation of the Merger, the Combined Company will continue to
operate the Cosmetic stores and will also operate the PFC stores. It is
anticipated that the Cosmetic stores and the PFC stores will be operated as
separate divisions. It is also anticipated that certain warehouse, distribution
and headquarters operations of Cosmetic and PFC will be consolidated in
Maryland, and additional warehouse and distribution space will be secured. In
connection with the anticipated consolidation, the State of Maryland has
indicated that it is willing to consider providing the Combined Company with
incentives to be paid in 1997 and 1998 consisting of grants, loans and tax
credits aggregating up to approximately $1.2 million. Any incentive package
would be subject to a number of conditions, including, without limitation,
approval by the
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Legislative Policy Committee of the State of Maryland and other appropriate
authorities, and the Combined Company meeting specific job growth requirements.
There can be no assurance that these conditions will be met and that the
Combined Company will receive any such incentives. The Combined Company expects
to spend approximately $2.7 million as a result of the Merger to integrate and
enhance management information systems. See "Business of Cosmetic" and "Business
of PFC."
At the Effective Time, the Combined Company's bylaws will be amended to
provide that the Combined Company Board will consist of nine directors and the
persons named in the Merger Agreement will become the directors of the Combined
Company. Pursuant to the Stockholders Agreement, for three years after the
consummation of the Merger, (i) the Principal Stockholders have agreed to vote
all of their Cosmetic Class C common stock in favor of Revlon's nominees for
director so that Revlon will at all times maintain representation on the
Combined Company Board equal to Revlon's percentage ownership of Cosmetic Class
C common stock, but not less than seven board seats, including two independent
directors, and (ii) Revlon has agreed to vote its shares in favor of the
Principal Stockholders' nominees for director equal to their aggregate
percentage ownership of Cosmetic Class C common stock after giving effect to the
Merger and the Cash Election, but not less than one nor more than two board
seats. The members of the Combined Company Board immediately after the Merger
will be Ronald O. Perelman, chairman of the executive committee and a director
of Revlon, Howard Gittis, a director of Revlon, Jerry W. Levin, chairman, chief
executive officer and a director of Revlon and a director of PFC, Howard Diener,
the president of PFC, William J. Fox, executive vice president, chief financial
officer and a director of Revlon and vice president and a director of PFC, Wade
H. Nichols, senior vice president and general counsel of Revlon and vice
president and a director of PFC, and Mark S. Weinstein, chairman of the Cosmetic
Board. It is also anticipated that David M. Dinkins, a professor at Columbia
University and former Mayor of The City of New York, and Harvey Rosenthal, the
former president of Melville Corporation (now known as CVS Corporation), will be
the independent directors. Messrs. Levin, Weinstein and Diener will be appointed
chairman of the Combined Company Board, vice chairman of the Combined Company
Board and president and chief executive officer of the Combined Company,
respectively. See "Election of Directors; Management of Cosmetic Following the
Merger."
Cosmetic's Certificate of Incorporation provides for the Cosmetic Board to
be divided into three classes, with the members of each class serving staggered
terms of three years. This provision, however, is proposed to be repealed by the
Board Amendment. If the Board Amendment is adopted, after consummation of the
Merger the Combined Company Board would not be classified and all of the
directors would be elected annually.
AMENDMENTS TO COSMETIC'S CERTIFICATE OF INCORPORATION
The Merger Agreement provides that, as part of the Merger, Cosmetic's
Certificate of Incorporation will be amended to authorize the issuance of up to
40,000,000 shares of Cosmetic Class C common stock. A vote in favor of the
Merger by Cosmetic Class B stockholders is also a vote to approve the Class C
Amendment.
Up to approximately 10.1 million shares of Cosmetic Class C common stock
would be issued in connection with the Merger. The remaining 29.9 million shares
would be available for issuance in connection with Cosmetic stock option plans,
including the proposed Cosmetic 1997 Stock Option Plan, and also in connection
with future public or private financings, acquisitions, employee stock benefit
plans and other transactions. Other than the issuance in connection with the
Merger and the stock option plans, there are no current plans or proposals for
the issuance of Cosmetic Class C common stock.
The Merger Agreement also requires Cosmetic to seek the approval of an
amendment to its Certificate of Incorporation to repeal the classification of
the Cosmetic Board, which would result in the annual election of all of the
Combined Company's directors. Approval of the Board Amendment is not a condition
to the Merger. The Cosmetic Board recommends a vote FOR the approval of the
Board Amendment.
The proposed forms of the Class C Amendment and of the Board Amendment are
attached as Annex II to this Proxy Statement/Prospectus.
REGULATORY FILINGS AND APPROVALS
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder, which provide that certain merger transactions may not be
consummated until required information and material have been furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and certain waiting periods have expired or been terminated. The required
information with respect to the
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Merger was filed on behalf of Cosmetic on December 27, 1996 and on behalf of PFC
on December 31, 1996 and the waiting period was terminated January 7, 1997.
ACCOUNTING TREATMENT
Upon consummation of the Merger and assuming the Cash Election is made for
all outstanding shares and options for shares with an exercise price of less
than $7.63 per share, existing Cosmetic stockholders will hold securities with
approximately 16% of the voting power of Cosmetic and Revlon will hold
securities with approximately 84% of the voting power of the Combined Company.
Accordingly, the Merger will be accounted for as a reverse acquisition under
generally accepted accounting principles, pursuant to which PFC will be
considered the acquiror. Because PFC will be deemed to be the acquiring company
for accounting purposes, PFC's historical financial statements will be the
Combined Company's continuing historical financial statements and Cosmetic's
assets, liabilities and results of operations will be consolidated with PFC's
historical financial statements subsequent to the consummation of the Merger.
Fair value adjustments will be made to Cosmetic's assets and liabilities to the
extent of Revlon's ownership interest in Cosmetic. The amount recorded by PFC as
the cost of acquiring the net assets of Cosmetic will be the estimated aggregate
fair value of Revlon's ownership of the outstanding Cosmetic common stock. This
amount will also be recorded in the common stock and additional paid-in capital
equity accounts of the Combined Company as if the Combined Company had issued
such shares.
NO APPRAISAL RIGHTS
Holders of Cosmetic Class A and Class B common stock are not entitled to
appraisal rights under the Delaware General Corporation Law in connection with
the Merger because Cosmetic Class A and Class B common stock is listed on the
Nasdaq National Market, Cosmetic Class C common stock will be listed on the
Nasdaq National Market and no holder of Cosmetic Class A or Class B common stock
will be required to accept any consideration in cancellation of such shares
other than Cosmetic Class C common stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a discussion which summarizes the material federal
income tax consequences of the Merger to holders of Cosmetic Class A or Class B
common stock under the Internal Revenue Code of 1986, as amended (the "Code").
Based upon the information set forth in this Proxy Statement/Prospectus and
certain representations of the managements of Cosmetic and PFC, and assuming
that the Merger is effected pursuant to and on the terms set forth in the Merger
Agreement, Arent Fox Kintner Plotkin & Kahn, tax counsel to Cosmetic ("Tax
Counsel"), is of the opinion that the Merger will constitute a reorganization
within the meaning of Section 368(a)(1)(A) of the Code and that the discussion
set forth below accurately summarizes the material federal income tax
consequences of the Merger to the Cosmetic stockholders. Although such opinion
represents Tax Counsel's best judgment as to the matters discussed therein, such
opinion does not bind the Internal Revenue Service ("IRS") or any court. The
discussion does not deal with all of the tax considerations that may be relevant
to particular Cosmetic stockholders, such as stockholders who are dealers in
securities, foreign persons, tax-exempt entities or stockholders who received
their stock in Cosmetic in connection with the Cosmetic stock option plan. Also,
the discussion does not address any state, local or foreign tax considerations
or any federal estate, gift, employment, excise or other non-income tax
considerations. The following discussion is based upon provisions of the Code,
regulations, administrative rulings and judicial decisions currently in effect,
all of which are subject to change (possibly with retroactive effect) or to
different interpretations. No ruling from the IRS has been or will be sought
with respect to the tax consequences of the Merger.
ALL COSMETIC STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
WITH RESPECT TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES APPLICABLE TO
THEIR OWN PARTICULAR SITUATIONS.
COSMETIC STOCKHOLDERS WHO RECEIVE ONLY COSMETIC CLASS C COMMON STOCK. A
Cosmetic stockholder who receives only Cosmetic Class C common stock for his or
her Cosmetic Class A or Class B common stock will not recognize any gain or loss
for federal income tax purposes. Such a Cosmetic stockholder's tax basis for his
or her Cosmetic Class C common stock will be equal to his or her tax basis in
the Cosmetic Class A and/or Class B common stock owned by the Cosmetic
stockholder immediately before the transaction. Assuming the Cosmetic Class A
and/or Class B common stock exchanged by the Cosmetic stockholder was held as a
capital asset, his or her holding period for the Cosmetic Class C common stock
will include his or her holding period for the Cosmetic Class A and/or Class B
common stock exchanged for the Cosmetic Class C common stock.
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COSMETIC STOCKHOLDERS WHO RECEIVE ONLY CASH. A Cosmetic stockholder who
receives only cash for all of his or her Cosmetic Class A or Class B common
stock and is not treated as owning any Cosmetic Class C common stock by the
Code's attribution rules (see "Constructive Ownership of Stock," below) will
recognize a gain or loss equal to the difference between (i) the amount of cash
received and (ii) his or her tax basis for the Cosmetic Class A or Class B
common stock surrendered. If the Cosmetic Class A or Class B common stock
exchanged is a capital asset in the hands of such stockholder, the gain or loss
will be a capital gain or loss. The federal income tax consequences to a
Cosmetic stockholder who receives only cash for all of his or her Cosmetic
common stock but is (under the Code's attribution rules) treated as owning
Cosmetic Class C common stock immediately following the transaction will be
governed by the rules which apply to persons who receive both cash and Cosmetic
Class C common stock in the transaction.
COSMETIC STOCKHOLDERS WHO RECEIVE BOTH CLASS C COMMON STOCK AND CASH. A
Cosmetic stockholder will receive both cash and Cosmetic Class C common stock if
either (i) the Cosmetic stockholder makes the Cash Election as to some but not
all of his or her Cosmetic Class A or Class B common stock or (ii) the Cosmetic
stockholder makes the Cash Election as to some or all of his or her Cosmetic
Class A or Class B common stock and such Cash Election is pro rated as described
under "The Merger." Further, as noted above, the federal income tax consequences
to a Cosmetic stockholder who receives cash for all of his or her Cosmetic Class
A or Class B common stock but is treated (under the Code's attribution rules) as
owning Cosmetic Class C common stock after the transaction are determined under
the rules applicable to stockholders receiving both cash and Cosmetic Class C
common stock.
A Cosmetic stockholder who receives both cash and Cosmetic Class C common
stock in the Merger will not recognize any loss on the transaction for federal
income tax purposes. However, a Cosmetic stockholder who receives both cash and
Cosmetic Class C common stock in the transaction will be required to recognize a
gain equal to the lesser of (i) his or her realized gain (the value of cash and
Cosmetic Class C common stock received over his or her tax basis for the shares
surrendered) or (ii) the amount of cash received. Gain may be subject to tax as
ordinary income or capital gain depending upon an individual stockholder's facts
and circumstances.
A Cosmetic stockholder who receives Cosmetic Class C common stock and cash
will have a basis in his Cosmetic Class C common stock equal to the excess of
(A) the sum of (i) his or her basis in his or her Cosmetic Class A and Class B
common stock and (ii) the amount of gain, if any, recognized by the Cosmetic
stockholder over (B) the amount of cash received by the Cosmetic stockholder.
One effect of this basis rule is that any unrecognized loss will be reflected in
a Cosmetic stockholder's basis in his or her Cosmetic Class C common stock and
will increase the loss or reduce the gain on a subsequent sale of such shares.
Assuming such stockholder held his or her Cosmetic Class A and/or Class B common
stock as a capital asset, such stockholder's holding period for his or her
Cosmetic Class C common stock will include the period he or she held the
Cosmetic Class A and Class B common stock.
The determination as to whether a Cosmetic stockholder has a gain which
must be recognized or a loss which cannot be recognized must be made on a share
by share basis. Thus, a Cosmetic stockholder who makes the Cash Election as to
two different shares of stock, one of which was purchased at a price greater
than the Cash Election exchange price and the other of which was purchased for a
price which was less than the Cash Election exchange price, will (assuming the
Cash Election is oversubscribed so that the stockholder receives both Cosmetic
Class C common stock and cash) have a gain which must be recognized with respect
to the one share of stock and a loss which cannot be currently recognized with
respect to the other share of stock.
In the case of an individual taxpayer, ordinary income is subject to tax at
progressive rates, which can be as high as 39.6%, and capital gain income is
subject to tax at the lower of (i) the taxpayer's ordinary tax rate or (ii) 28%.
In general, corporate taxpayers are subject to the same tax rates on ordinary
income and capital gain; however, a corporate taxpayer is normally entitled to
exclude a portion of any dividend income from its taxable income. As described
below, the determination as to whether a Cosmetic stockholder who (i) receives
both cash and stock and (ii) recognizes a gain will have dividend income or
capital gain income is dependent on the Cosmetic stockholder's individual facts
and circumstances, including the particular stockholder's relative holdings of
Cosmetic Class A (non-voting) and Class B (voting) common stock. Accordingly,
Tax Counsel is not able to opine as to whether a gain recognized by a particular
stockholder who receives both cash and stock will constitute a capital gain or
dividend income, and therefore, each Cosmetic stockholder who is considering
making the Cash Election and expects to recognize a gain as the result of such
election should consult his or her personal tax advisor as to whether such a
gain will constitute a capital gain or dividend income in the stockholder's
particular situation.
Whether gain recognized by a Cosmetic stockholder who receives both cash
and Cosmetic Class C common stock in the transaction is treated (i) as dividend
income (i.e., ordinary income) to the extent of the recipient's pro rata share
of Cosmetic's earnings and profits (as determined for federal income tax
purposes) or (ii) solely as capital gain is determined under
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the principles of Section 302 of the Code. Under these principles, a Cosmetic
stockholder who recognizes gain as a result of receiving (or being treated by
attribution as receiving) a distribution of both cash and Cosmetic Class C
common stock in the transaction will not be entitled to capital gain treatment
unless his or her distribution either (i) results in a substantially
disproportionate reduction of the Cosmetic stockholder's interest in Cosmetic or
(ii) is not essentially equivalent to a dividend.
Insofar as relevant, a substantially disproportionate reduction in a
stockholder's interest requires that (i) a stockholder's voting power be reduced
to less than 80% of what it was prior to the distribution, (e.g., from 20% to
less than 16%) and (ii) a stockholder's percentage ownership of common stock be
reduced to less than 80% of what it was prior to the distribution.
A distribution is not essentially equivalent to a dividend if it results in
a "meaningful reduction" in the stockholder's ownership interest. For these
purposes, a stockholder's ownership interest includes rights to share in (i) the
corporation's voting power, (ii) the corporation's earning power (through future
dividends) and (iii) the corporation's assets upon liquidation. Whether
disproportionate reduction in one or more of such interests is a meaningful
reduction is generally a factual question based on the stockholder's particular
circumstances. However, based on court decisions and IRS rulings, a stockholder
with significant voting power can never have a meaningful reduction in ownership
interest unless there is a significant reduction in his or her voting power
(e.g., from over 50% to less than 50%, or a loss of the ability to join with one
other stockholder to control the corporation).
Further, the IRS has held in a published ruling that, under the particular
facts of that ruling, a very small reduction in the percentage stock ownership
of a stockholder constituted a "meaningful reduction" when the stockholder owned
an insignificant percentage of the corporation's stock (which was voting stock)
before and after a redemption and did not exercise any control over corporate
affairs and where the payments were not pro rata with respect to all outstanding
shares. There are no judicial or published administrative authorities addressing
the issue of whether a reduction in a minor stockholder's ownership interest in
dividends and assets can constitute a meaningful reduction if it also involves
an increase in the minor stockholder's voting power. Inasmuch as many of the IRS
rulings in this area give significant weight to voting power, it is likely that
the IRS would take the position that such a reduction is not meaningful.
As the foregoing discussion indicates, the determination as to whether a
cash distribution results in a capital gain or ordinary income requires a
comparison of the recipient's stock ownership after the event with his or her
ownership before the event. There is no judicial or published administrative
authority specifically addressing the issue. Based on published rulings in
analogous areas (e.g., transactions including a purchase of some of a
corporation's stock and the redemption of its stock as part of an integrated
plan), the comparison most likely should be between a Cosmetic stockholder's
initial ownership of Cosmetic Class A and Class B common stock and his or her
ownership of Cosmetic Class C common stock following the consummation of all of
the contemplated transactions (i.e., the Merger, the reclassification of
Cosmetic Class A and Class B common stock as Cosmetic Class C common stock and
the Cash Election). That is, the appropriate comparison would be between a
Cosmetic stockholder's ownership of Cosmetic Class C common stock after the
consummation of all the contemplated transactions with his or her ownership of
Cosmetic Class A and Class B common stock immediately before the contemplated
transactions.
Under this approach, each Cosmetic stockholder's ending percentage interest
in earning power and assets would be less than 80% of his or her percentage
interest in such items before the contemplated transactions, but whether such a
Cosmetic stockholder had a reduction in voting power would depend on the portion
of his or her pre-transaction Cosmetic common stock which was voting (Class B)
common stock and the portion of his or her Cosmetic common stock converted to
cash. Because the portion of a Cosmetic stockholder's shares of Cosmetic common
stock which will be converted to cash depends on the extent to which Cash
Elections are made with respect to more than 2,829,065 shares as well as on the
number of shares as to which such Cosmetic stockholder makes the Cash Election,
the percentage of voting power a Cosmetic stockholder will own after the
transaction cannot be predicted. However, if at least 7.5% of a Cosmetic
stockholder's shares were shares of Cosmetic Class B common stock and the
Cosmetic stockholder made the Cash Election as to all of his or her Cosmetic
Class A and Class B common stock, the percentage of Cosmetic's voting power
represented by his or her shares of Cosmetic Class C common stock would be less
than 80% of the percentage of the voting power represented by his or her
Cosmetic Class B common stock prior to the contemplated transactions, even if
all Cosmetic stockholders make Cash Elections as to all of their shares of
Cosmetic common stock. (Such a Cosmetic stockholder would have some reduction in
percentage voting power if at least 6.0% of his or her Cosmetic Class A and
Class B common stock had been shares of Cosmetic Class B common stock.)
As stated above, there is no published authority specifically addressing
how Section 302 principles should be applied to transactions identical to the
Merger. Accordingly, there can be no certainty as to the "correct" comparison,
and the IRS might
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assert that a different comparison should be used to determine whether a
Cosmetic stockholder has had a meaningful or substantially disproportionate
reduction in interest such as comparing his or her beginning or ending ownership
position with some hypothetical intermediate position (e.g., after the Merger
but before the reclassification of Cosmetic Class A and Class B common stock).
CONSTRUCTIVE OWNERSHIP OF STOCK. Under Section 318 of the Code, a taxpayer,
with certain exceptions, is deemed to constructively own stock actually owned
by, and in certain circumstances constructively owned by, certain family
members, corporations in which the stockholder has a major interest,
partnerships, trusts and estates in which the stockholder has an interest, or
which the taxpayer may acquire by exercise of an option or by conversion of a
security. In addition, a taxpayer which is a partnership, trust or estate is
deemed to constructively own shares owned by persons having an interest in the
taxpayer, and a taxpayer which is a corporation is deemed to constructively own
shares owned by major stockholders of the corporation.
An individual Cosmetic stockholder who receives solely cash for his or her
Cosmetic common stock but is treated as constructively owning stock owned by
members of his or her family, may be able to avoid being treated as the
constructive owner of such stock by filing an election under Section
302(c)(2)(A) of the Code. Similarly, a partnership, estate, trust or corporation
which receives solely cash for its shares of Cosmetic common stock but is
treated as constructively owning stock constructively owned by its owners or
beneficiaries may be able to eliminate such attribution by filing an election
under Section 302(c)(2)(A). The availability of and conditions to Section
302(c)(2)(A) depend upon the specific circumstances of the stockholder, and
accordingly, Tax Counsel is not able to opine as to the availability of an
election under Section 302(c)(2)(A) to any particular stockholder. A Cosmetic
stockholder who is considering such an election should discuss the matter with
his, her or its tax advisor to determine whether the election is available to
such stockholder and to assure that the filing and notice requirements
associated with such an election are satisfied.
CASH RECEIVED FOR OPTIONS. A holder of options on Cosmetic Class A or Class
B common stock who receives an equivalent option to purchase Cosmetic Class C
common stock will not recognize any income as a result of such exchange. A
holder of options on Cosmetic Class A or Class B common stock who makes a Cash
Election with respect to some or all of his or her options will recognize
ordinary income equal to the cash he or she receives as a result of such
election.
OPINION OF FINANCIAL ADVISOR
Cosmetic's financial advisor, Legg Mason, at the November 15, 1996 Cosmetic
Board meeting delivered its oral opinion to the Cosmetic Board, which opinion
was subsequently confirmed in writing (the "Legg Mason Opinion") that, as of
November 15, 1996, the consideration to be received by the holders of Cosmetic
Class A and Class B common stock in the Merger is fair from a financial point of
view to such holders. There is no current intention to update the Legg Mason
Opinion. The full text of the Legg Mason Opinion, which sets forth the
assumptions made, matters considered, scope and limitations of the review
undertaken and procedures followed by Legg Mason in rendering its opinion, is
attached to this Proxy Statement as Annex III and Legg Mason has consented to
its attachment hereto. Cosmetic stockholders are urged to read the opinion
carefully and in its entirety. The Legg Mason Opinion is directed only to the
fairness from a financial point of view to the Cosmetic stockholders of the
consideration to be received by them in the Merger and does not constitute a
recommendation to any Cosmetic stockholder as to how such stockholder should
vote at the Meeting or whether or to what extent any stockholder should or
should not make the Cash Election.
In arriving at its opinion, Legg Mason (i) reviewed the Merger Agreement,
the Stockholders Agreement and other related agreements; (ii) reviewed certain
publicly available audited and unaudited financial statements of Cosmetic and
certain other publicly available information of Cosmetic; (iii) reviewed certain
internal information, primarily financial in nature, concerning Cosmetic and
PFC, prepared by their respective managements; (iv) discussed the past and
current operations and financial condition and prospects of Cosmetic with the
senior management of Cosmetic; (v) discussed the past and current operations and
financial condition and prospects of PFC with the senior management of PFC; (vi)
reviewed forecast financial statements of Cosmetic prepared and furnished to
Legg Mason by the senior management of Cosmetic; (vii) reviewed forecast
financial statements of PFC prepared and furnished to Legg Mason by the senior
management of PFC; (viii) reviewed pro forma financial statements of the
Combined Company prepared jointly by the managements of Cosmetic and PFC; (ix)
held meetings and discussions with certain officers and employees of Cosmetic
and PFC, concerning the operations, financial condition and prospects of the
Combined Company; (x) reviewed recent stock market data relating to Cosmetic;
(xi) reviewed certain publicly available financial and stock market data
relating to selected public companies that Legg Mason considered relevant to its
inquiry; (xii) analyzed certain publicly available information concerning the
terms of selected merger and acquisition transactions that Legg Mason considered
relevant to its inquiry; (xiii) considered the pro
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forma financial effects of the Merger on Cosmetic; and (xiv) conducted such
other financial studies, analyses and investigations and considered such other
information as Legg Mason deemed necessary or appropriate.
In connection with its review, Legg Mason assumed and relied upon the
accuracy and completeness of all financial and other information supplied to it
by the managements of Cosmetic and PFC and all publicly available information,
and did not independently verify such information. Legg Mason also relied upon
the managements of Cosmetic and PFC, as to the reasonableness and achievability
of the financial projections (and the assumptions and bases therein) provided to
Legg Mason for Cosmetic, PFC and the Combined Company, respectively, and assumed
that such projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of management as to the future
operating performance of each respective entity, including, without limitation,
the tax benefits, cost savings and operating synergies to be enjoyed by the
Combined Company. Neither Cosmetic nor PFC publicly discloses internal
management projections of the type provided to Legg Mason in connection with
Legg Mason's review of the Merger. Such projections were not prepared with the
expectation of public disclosure. The projections were based on numerous
variables and assumptions that are inherently uncertain, including, without
limitation, factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such projections.
Legg Mason was not requested to make, and did not make, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
either Cosmetic or PFC and was not furnished with any such appraisal or
evaluation. Furthermore, Legg Mason did not consider the range of possible tax
consequences facing individual Cosmetic stockholders, and the valuations per
share derived by Legg Mason were prior to any tax impact on individual Cosmetic
stockholders.
The Legg Mason Opinion is necessarily based on stock prices and economic
and other conditions and circumstances as existed or were in effect on, and the
information made available to it as of, the date it delivered its oral opinion.
Legg Mason expressed no opinion as to what the value of Cosmetic Class C common
stock actually will be when issued to current holders of Cosmetic Class A and
Class B common stock pursuant to the Merger Agreement or as to the price or
trading range at which Cosmetic Class C common stock may trade following the
Merger.
In connection with rendering its opinion, Legg Mason performed a variety of
financial analyses. The summary of such analyses set forth below does not
purport to be a complete description of the analyses performed and factors
considered by Legg Mason in arriving at its opinion. Legg Mason believes that
its analysis must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create a misleading view of the processes underlying its
opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Legg Mason
was not authorized to solicit, and did not solicit, indications of interest from
any third party with respect to an acquisition of Cosmetic, its assets, or any
part thereof. In this regard, Legg Mason was advised by Cosmetic's senior
management that since the first public announcement of the Merger, no person
contacted Cosmetic's senior management, the Cosmetic Board or the Principal
Stockholders regarding any potential alternative transaction to the Merger. Legg
Mason assumed that the Merger and related transactions described elsewhere in
this Proxy Statement/Prospectus will be consummated according to the terms and
conditions described in the forms of the agreements reviewed by Legg Mason,
without any waiver of material terms or conditions by Cosmetic, PFC or Revlon,
and that obtaining any necessary regulatory approvals or satisfying any other
conditions for consummation of the Merger would not have an adverse effect on
the Combined Company.
The following is a summary of the principal financial and valuation
analyses performed by Legg Mason in connection with the preparation of the Legg
Mason Opinion. These analyses were presented to the Cosmetic Board at its
meeting on November 15, 1996 and were based on stock price information through
the close of the market on November 13, 1996.
THE OFFER
Legg Mason considered the fairness of the consideration to be received by
the holders of Cosmetic Class A and Class B common stock using three scenarios:
first, the fairness of the per share cash offer of $7.63 per share of Cosmetic
Class A and Class B common stock (the "Cash Offer"); second, the fairness
assuming an election to receive Cosmetic Class C common stock (the "Stock
Offer"); and third, the fairness of the pro rata combination of Cosmetic Class C
common stock and cash assuming all shareholders and all holders of options with
an exercise price of less than $7.63 per share make the Cash Election (the "Pro
Rata Offer"), according to which each stockholder would receive $4.79 in cash
and 0.372 shares of Cosmetic Class C common stock for each share of Cosmetic
Class A or Class B common stock. Legg Mason believes that these three scenarios
effectively capture the full range of potential allocations of cash and stock
contemplated by the Merger for any Cosmetic stockholder. Given the limited
spread between the historical prices of Cosmetic Class A and Class B common
stock, Legg Mason determined that no separate analysis for the Cosmetic Class A
and Class B common stock was necessary.
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COMPARABLE COMPANIES ANALYSIS
Legg Mason compared the relevant historical, current and projected
financial and operating results of both Cosmetic and the Combined Company with
the operating results of selected publicly traded companies that in Legg Mason's
judgment are and would be comparable to both Cosmetic and the Combined Company
(collectively, the "Comparable Companies"). The Comparable Companies were chosen
by Legg Mason based on general business, operating and financial characteristics
representative of companies in the industry in which both Cosmetic and the
Combined Company do and would operate. No company or business used in the
Comparable Companies analysis is identical to Cosmetic, PFC or the Combined
Company. Accordingly, an analysis of the results of the following is not
entirely mathematical; rather, it involved complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the public trading value of either the Comparable
Companies or the company to which they are being compared; therefore, the
resulting multiples relied upon for this analysis are subject to interpretation.
Legg Mason recognized that each of the Comparable Companies is and would be
distinguishable from both Cosmetic and the Combined Company in certain respects.
For the purposes of this analysis, the Comparable Companies selected by Legg
Mason were the following companies that retail cosmetics and similar products:
Arbor Drugs, Inc., Drug Emporium, Inc., Genovese Drug Stores, Inc., Longs Drug
Stores Corp., Perfumania, Inc., Revco D.S., Inc., Rite Aid Corp., and Walgreen
Co.
In performing its analysis, Legg Mason examined both the aggregate equity
value of the outstanding common equity (defined as the number of outstanding
shares times the current price per share as of November 13, 1996, hereafter the
"Equity Value") and the Equity Value plus preferred equity (if any) at
liquidation value, minority interests (if any) and total debt net of cash and
cash equivalents (the "Enterprise Value") of the Comparable Companies. Using
each Comparable Company's Enterprise Value, Legg Mason calculated multiples of,
among other things, each Comparable Company's latest 12 month's ("LTM") revenue
(the "Revenue Multiples"), LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA") (the "EBITDA Multiples") and LTM earnings before
interest and taxes ("EBIT") (the "EBIT Multiples") (collectively, the
"Enterprise Value Multiples").
Using each Comparable Company's Equity Value, and based on published
security analysts' estimates, Legg Mason also calculated multiples of, among
other things, each company's LTM earnings per share ("EPS") (the "LTM EPS
Multiples"), projected 1997 EPS (the "Projected 1997 EPS Multiples"), projected
1998 EPS (the "Projected 1998 EPS Multiples") and most recent book value (the
"Book Value Multiples") (collectively, the "Equity Value Multiples"). The
multiples that Legg Mason applied to Cosmetic and the Combined Company are
described in detail below.
Legg Mason noted that because Cosmetic's recent performance had been
significantly below average relative to the Comparable Companies, and both
Cosmetic and the pro forma Combined Company would have recorded net losses for
the LTM period, LTM multiples for both Cosmetic and the Combined Company were
generally of minimal informative value, and because of the losses, LTM EPS
results were not meaningful. Furthermore, because the Combined Company would not
enjoy the benefit of a full year of synergies until 1998, Legg Mason concluded
that the Projected 1998 EPS Multiples were most indicative of both the relative
and absolute values of Cosmetic and the Combined Company.
Using the foregoing information, Legg Mason derived a range of estimated
values per share based upon implied Enterprise Values and Equity Values derived
by applying the aforementioned mean and median Enterprise Value Multiples and
Equity Value Multiples of the Comparable Companies to the appropriate financial
statistics of Cosmetic and the Combined Company. In cases where Legg Mason's
analysis indicated that the multiple for a particular Comparable Company was not
meaningful (e.g. because of recently depressed financial and operating
performance), Legg Mason excluded that multiple and relied upon the mean and
median multiples of the other Comparable Companies. Legg Mason has advised that
such exclusions did not affect the reliability of its analysis.
COSMETIC STAND-ALONE. In using the Comparable Companies analysis to value
Cosmetic on a stand-alone basis, Legg Mason analyzed financial information which
included, among other things: (i) operating performance; (ii) growth rates;
(iii) capitalization ratios; (iv) ratios of common stock share prices to 1997
and 1998 estimated earnings per share and book value per share; and (v) ratios
of Enterprise Value to LTM revenues, EBITDA and EBIT.
Legg Mason noted that the mean and median multiples of Equity Value to 1997
and 1998 estimated earnings were 16.9x and 17.1x, and 14.7x and 14.9x,
respectively. Applying the mean multiples to Cosmetic's 1997 and 1998 estimated
earnings yielded implied per share values of Cosmetic common stock of $3.08 and
$5.10, respectively. Applying the median multiples to Cosmetic's 1997 and 1998
estimated earnings yielded implied per share values of Cosmetic common stock of
$3.13 and $5.17, respectively. Legg Mason noted that the mean and median
multiples of Enterprise Value to LTM revenues were 0.52x and 0.49x,
respectively, representing Cosmetic per share values of $12.67 and $12.05,
respectively; the mean and median
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multiples of Enterprise Value to LTM EBITDA were 8.6x and 7.9x, respectively,
representing Cosmetic per share values of $3.55 and $3.13, respectively; and the
mean and median multiples of Enterprise Value to LTM EBIT were 12.1x and 12.3x,
respectively, yielding negative implied equity value. Legg Mason noted that
because of Cosmetic's depressed LTM financial performance, none of the LTM
multiples and common stockholders' equity multiples, or the resulting implied
share values, were considered to be reliable measures of value for Cosmetic.
THE COMBINED COMPANY. In using the Comparable Companies analysis to value
the Combined Company, Legg Mason analyzed financial information which included,
among other things: (i) operating performance; (ii) growth rates; (iii)
capitalization ratios; (iv) ratios of common stock share prices to pro forma
1997 and 1998 estimated earnings per share; and (v) ratios of Enterprise Value
to LTM revenues, EBITDA and EBIT. To derive the value of the Combined Company,
Legg Mason applied the multiples resulting from the Comparable Companies
analysis to the projected financial performance of the Combined Company,
exclusive of the effects on earnings of both one-time charges arising from the
Merger and the tax benefits resulting from accumulated net operating losses (the
"NOLs") attributable to the Combined Company (collectively, the "Non-Operating
Items").
Legg Mason noted that the mean and multiples of Equity Value to 1997 and
1998 estimated earnings were 16.9x and 17.1x, and 14.7x and 14.9x, respectively.
These multiples, as applied to the forecast of the Combined Company's results
provided to Legg Mason by the managements of Cosmetic and PFC, yielded estimated
values for each share of Cosmetic Class C common stock of $4.10 and $4.16, and
$9.25 and $9.37, per share, respectively. Legg Mason noted that the mean and
median multiples of Enterprise Value to LTM revenues were 0.52x and 0.49x,
respectively, representing estimated values per share of Cosmetic Class C common
stock of $6.17 and $5.72, respectively; the mean and median multiples of
Enterprise Value to LTM EBITDA were 8.6x and 7.9x, respectively, representing
estimated values per share of Cosmetic Class C common stock of $4.71 and $4.00,
respectively; and that the mean and median multiples of Enterprise Value to LTM
EBIT were 12.1x and 12.3x, respectively, representing estimated values per share
of Cosmetic Class C common stock of $2.55 and $2.65, respectively.
The Non-Operating Items were evaluated separately from the operating
performance of the Combined Company, and then incorporated into the estimated
value calculations for both the Stock Offer and the Pro Rata Offer. The
estimated balance of $15 million of NOLs expected to be attributable to the
Combined Company, as provided to Legg Mason by the management of PFC, were
valued at $5.2 million, or $0.51 of additional value per share of the Combined
Company, based on the estimated cash flows attributable to their recognition
over an assumed four-year time period, discounted back at the Combined Company's
estimated medium-term after-tax cost of debt of approximately 6%. Legg Mason
also considered the cost of $4.2 million of one-time charges to be incurred as a
result of the Merger, which were valued at $2.5 million on an after-tax basis,
or $0.25 of additional charges per share of the Combined Company. In total, the
Non-Operating Items amounted to an additional $2.7 million of value, or $0.26 of
additional value per share of the Combined Company, accounting for $0.26 of
additional value in the Stock Offer scenario, and $0.10 of additional value in
the Pro Rata Offer scenario.
Applying the mean and median Projected 1998 EPS Multiples and incorporating
the additional value attributable to the Non-Operating Items, Legg Mason
developed mean and median estimated values per Cosmetic share attributable to
the Merger of the Cash Offer, the Stock Offer, and the Pro Rata Offer of $7.63
and $7.63, $9.51 and $9.64, and $8.34 and $8.39, respectively.
Legg Mason also noted that the Merger was projected to be accretive on an
EPS basis to Cosmetic for each of the LTM, 1997 and 1998 periods.
ACQUISITION PREMIUMS ANALYSIS
Legg Mason analyzed 1,286 transactions occurring since 1991 with regard to
the median percentage premium paid by acquirors. Legg Mason's analysis indicated
that the median percentage premium of offer prices to trading prices one month
prior to the announcement date for publicly announced transactions was 46% in
1991, 38% in 1992, 36% in 1993, 35% in 1994, 35% in 1995 and 29% through the
first three quarters of 1996. Legg Mason noted that the Cash Offer represented a
premium of 92%, the Stock Offer represented an estimated premium of 143% (based
on median Projected 1998 EPS Multiples) and the Pro Rata Offer represented an
estimated premium of 111% (based on median Projected 1998 EPS Multiples)
relative to the weighted average closing trading price for the Cosmetic Class A
and Class B common stock as of August 30, 1996 (the "Cosmetic Unaffected Stock
Price") of $3.97, the date one month prior to Cosmetic's public announcement of
the signing of the non-binding Letter of Intent.
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COMPARABLE TRANSACTIONS ANALYSIS
Legg Mason also performed an analysis of comparable merger and acquisition
transactions in reaching its opinion. Legg Mason compared certain financial and
operating statistics of Cosmetic with certain financial and operating statistics
of selected retailers immediately prior to their being acquired (the "Acquired
Companies"). While Legg Mason believed that the Acquired Companies were
comparable to Cosmetic, Legg Mason recognized that each of the Acquired
Companies was distinguishable from Cosmetic in certain respects and was not
acquired in circumstances directly comparable to the Merger. The 11 selected
acquisition transactions occurred between 1993 and the present and included
(acquiror/acquired company): American Stores/Clark Drugs, Drug Emporium
Inc./Eagleville Pharmacy, Eckerd Corp./Rite Aid Corp. (Florida), J.C. Penney
Co./Fay's Inc., J.C. Penney Co./Kerr Drug Stores, Inc., Pharmhouse Corp./FW
Woolworth (Rx Place), Revco D.S. Inc./Big B, Inc., Revco D.S., Inc./Hook-SupeRx,
Inc., Rite Aid Corp./Pathmark (Drug Stores), Rite Aid Corp./Perry Drugstores,
Inc., and Thrifty PayLess Holdings, Inc./PayLess Drug Stores Northwest, Inc.
In performing its analysis, Legg Mason examined both the amount paid for
each Acquired Company's common equity (the "Purchase Price of Equity") and the
Purchase Price of Equity plus the Acquired Company's total debt, preferred
equity (if any) and minority interests (if any) less cash and cash equivalents
(the "Transaction Value"). Using the Purchase Price of Equity for each Acquired
Company, Legg Mason calculated multiples of the Acquired Company's LTM, one year
forward and two years forward estimated EPS and then current common
stockholders' equity (the "Purchase Price of Equity Multiples") as of the
transaction date. Using the Transaction Value of each Acquired Company
transaction, Legg Mason calculated multiples of, among other things, the
Acquired Company's then LTM revenues, LTM EBITDA and LTM EBIT (collectively, the
"LTM Transaction Value Multiples"). Legg Mason also calculated the mean and
median premiums paid by acquirors, relative to each Acquired Company's
unaffected share price one month prior to the transaction date.
Legg Mason noted that the mean and median multiples of Purchase Price of
Equity to LTM net income and book value were 34.3x and 39.1x, and 2.79x and
2.76x, respectively. Applying the mean and median multiples to Cosmetic's LTM
net income yielded results which were not meaningful due to Cosmetic's LTM
losses. Applying mean and median multiples to Cosmetic's book value yielded
implied values of Cosmetic common stock of $22.32 and $22.15, respectively, per
share. Legg Mason noted that the mean and median multiples of Transaction Value
to LTM revenues were 0.39x and 0.39x, respectively, representing Cosmetic per
share values of $9.05 and $9.12, respectively; the mean and median multiples of
Transaction Value to LTM EBITDA were 9.1x and 8.9x, respectively, representing
Cosmetic per share values of $3.87 and $3.74, respectively; and the mean and
median multiples of Transaction Value to LTM EBIT of 15.9x and 14.8x,
respectively, which yielded per share values which were negative and therefore
not meaningful. Legg Mason noted that because of Cosmetic's depressed LTM
financial performance, none of the LTM Transaction Value Multiples and Purchase
Price of Equity Multiples, or the resulting implied share values, were
considered to be reliable measures of value for Cosmetic.
Applying the mean and median multiples of one year forward and two year
forward estimated EPS for the Acquired Companies of 12.9x and 11.0x, and 9.7x
and 8.9x, respectively, to Cosmetic's projected 1997 and 1998 EPS, Legg Mason
calculated imputed values for each Cosmetic share attributable to the Merger of
$2.36 and $2.01, and $3.37 and $3.09, respectively. Legg Mason also calculated
mean and median premiums to unaffected share prices for the Acquired Companies
of 62.1% and 63.0%, which suggested values for each Cosmetic share attributable
to the Merger of $6.44 and $6.47, respectively. The values per Cosmetic share
attributable to the Merger of the Cash Offer, the Stock Offer and the Pro Rata
Offer were compared to the Cosmetic per share values implied by the results of
the Comparable Transactions Analysis.
No company utilized in the Comparable Transactions Analysis was identical
to Cosmetic. Legg Mason advised the Cosmetic Board that an analysis of the
results of the foregoing was not purely mathematical; rather, it involved
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Acquired Companies and
other factors that could affect the acquisition value of such businesses and
Cosmetic.
DISCOUNTED CASH FLOW ANALYSIS
Legg Mason reviewed a discounted cash flow analysis of Cosmetic premised
upon the assumptions summarized below. The discounted cash flow analysis was
based upon the financial and operating information relating to the business,
operations and prospects of Cosmetic supplied by the management of Cosmetic and
covering the period from calendar year 1997 through the end of the calendar year
2001.
Using discount rates ranging from 11.4% to 19.4%, Legg Mason calculated the
present value of the projected stream of Net Unleveraged Cash Flow (as defined
below) for calendar years 1997 through 2001 and the present cash value of the
terminal value (the "Terminal Value") of Cosmetic at December 31, 2001. Legg
Mason applied discount rates derived from
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Cosmetic's implied weighted average cost of capital (using a pricing model known
as the Capital Asset Pricing Model and based on general and systemic risk
factors reflected by the Comparable Companies) and developed a range of rates
which reflected the additional risk implied by Cosmetic's recent and projected
operating performance. "Net Unleveraged Cash Flow," as used in the analysis, is
defined, for each period, as projected EBIT, less taxes at an estimated rate of
40.0%, plus projected depreciation and amortization, less projected capital
expenditures, plus or minus projected changes in non-cash working capital. The
Terminal Value was computed by multiplying Cosmetic's projected EBIT by terminal
multiples of 5.0x to 7.0x. Legg Mason adjusted the calculated present value of
the Net Unleveraged Cash Flow and Terminal Value by subtracting the debt on
Cosmetic's balance sheet, and adding cash and cash equivalents, to calculate a
range of equity values for Cosmetic. Legg Mason believes the ranges of discount
rates and terminal multiples were appropriate in view of Cosmetic's current
performance, projected performance and Legg Mason's estimate of Cosmetic's
weighted average cost of capital of 11%.
Based on the range of discount rates and terminal multiples referred to
above, Legg Mason calculated a range of equity values for Cosmetic of $2.4
million to $14.7 million, or $0.56 to $3.41 per share of Cosmetic Class A and
Class B common stock.
LEVERAGED BUYOUT ANALYSIS
Legg Mason also reviewed a leveraged buyout analysis of Cosmetic as a means
of establishing the value of Cosmetic assuming that Cosmetic were to be taken
private by a financial buyer. A leveraged buyout ("LBO") involves the
acquisition or recapitalization of a company financed primarily by incurring
debt that is serviced by the post-LBO operating cash flow of the company. Legg
Mason advised the Cosmetic Board that an LBO value tends to be lower than the
value derived by other valuation analyses because the debt servicing requirement
of a leveraged company limits the price which a financial buyer is able to pay.
Furthermore, Legg Mason noted that a financial buyer typically is unable to
realize strategic or synergistic benefits from an acquisition. In the course of
developing the LBO analyses, Legg Mason determined that the projected Net
Unleveraged Cash Flow to be generated by Cosmetic would be insufficient to
support an LBO.
ASSET LIQUIDATION ANALYSIS
Legg Mason also considered an asset liquidation analysis as a method of
valuing Cosmetic. An asset liquidation assumes that Cosmetic would be dissolved
and its assets sold for cash proceeds equal to estimated fair market values.
Legg Mason advised the Cosmetic Board that an asset liquidation tends to yield a
lower value than that derived from other analyses because a liquidation does not
attribute any value to the operation of the liquidated entity as a going
concern. In the course of considering this type of analysis, Legg Mason
determined that an asset liquidation analysis would not provide a reliable
measure of the value of Cosmetic, as the liquidation values of the assets of
retailers in general are, and that of Cosmetic in specific would be, less than
the book value of such assets, and typically represent only a small portion of
such entities' going concern value.
OTHER FACTORS
In rendering its opinion, Legg Mason considered certain other factors,
including a review of the business and operations of and the industries in which
Cosmetic and PFC operate, a review of Cosmetic's and PFC's historical operating
results and the financial and operating information with respect to the
business, operations and prospects of Cosmetic, PFC and the Combined Company, a
review of the current and historic stock price performance of Cosmetic and other
factors it deemed relevant.
Legg Mason is a nationally recognized investment banking firm which has
substantial experience in, among other things, the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Legg Mason acted as sole
manager in connection with an offering of Cosmetic Class A common stock in April
1992, for which it received customary compensation. In the ordinary course of
its business, Legg Mason may actively trade in the securities of Cosmetic for
its own account and the accounts of its customers, and accordingly, may at any
time hold a long or short position in such securities.
Pursuant to the terms of an engagement letter, Cosmetic agreed to pay Legg
Mason $625,000 for acting as financial advisor in connection with the Merger. Of
this amount $25,000 was paid upon the engagement of Legg Mason and $600,000 is
contingent upon the closing of the Merger. In addition, Cosmetic paid Legg Mason
a fee of $50,000 for rendering the Legg Mason Opinion. Cosmetic has agreed to
reimburse Legg Mason for its out-of-pocket expenses (including the reasonable
fees
34
<PAGE>
and expenses of its legal counsel), and to indemnify Legg Mason and certain
related parties against certain liabilities, including liabilities under the
federal securities laws, arising out of or in connection with the services
rendered by Legg Mason under its engagement letter.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER
In considering the Cosmetic Board's recommendation in favor of the Merger,
Cosmetic stockholders should be aware that certain Cosmetic officers, including
some officers who are also directors, have certain interests in the Merger that
are different from, or in addition to, the interests of Cosmetic's stockholders
generally. Four Cosmetic officers, Mark S. Weinstein, Anita J. Weinstein, Susan
K. Magenheim and Ben S. Kovalsky, are also members of the current six-person
Cosmetic Board.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS WITH MARK S. WEINSTEIN AND ANITA J.
WEINSTEIN
Mark Weinstein currently has an employment agreement with Cosmetic. See
"Election of Directors; Management of Cosmetic Following the
Merger -- Employment Agreements." At the Effective Time, Mark Weinstein and
Anita Weinstein will enter into employment and non-competition agreements with
the Combined Company. The employment and non-competition agreement with Mark
Weinstein provides that he will be employed as vice-chairman of the Cosmetic
Board and will receive bi-weekly payments totaling $315,000 and $150,000
annually in respect of salary and a non-competition covenant, respectively. The
employment and non-competition agreement with Anita Weinstein provides that she
will be employed as a vice-president of the Combined Company and will receive
bi-weekly payments totaling $50,000 and $50,000 annually in respect of salary
and a non-competition covenant, respectively. The agreements require that the
Combined Company continue to provide to Mark Weinstein and Anita Weinstein the
vehicles currently provided to them by Cosmetic, pay for operating expenses for
such vehicles during the term of the agreements and at their request during the
term of the agreements, and for thirty days thereafter, transfer such vehicles
to them. The agreements provide that each of Mark Weinstein and Anita Weinstein
will participate in certain of the Combined Company's benefit programs
(principally medical and disability insurance).
Each of the agreements has a four-year term, commencing at the Effective
Time. Each of the agreements provides that if the employee is terminated for
other than "good cause" (as defined therein), the Combined Company is obligated
to pay the employee the balance of the salary and non-competition payment due
over the remaining term of the agreement. If there is a "change in control" (as
defined therein) of the Combined Company, the employee may elect to treat such
change of control as a termination for other than "good cause," and the Combined
Company would be obligated to pay the employee the balance of the salary and
non-competition payments due in a single lump sum payment. Additionally, upon
death, expiration of the term of the agreement, change in control of the
Combined Company or termination for other than "good cause," the Combined
Company is obligated to purchase all of the employee's options (vested and
unvested). See "Principal Stockholders of Cosmetic." Payments would be based
upon the difference between the market price of Cosmetic Class C common stock on
the termination date and the exercise prices of the options.
Each agreement provides that, during the term of the agreement and for two
years thereafter, the employee will not, directly or indirectly, own, control,
manage or operate stores with products similar to those in stores operated by
the Combined Company in Maryland, Virginia, Illinois or the District of Columbia
or within a 50 mile radius of any other city where the Combined Company is
operating retail stores.
The agreement with Mark Weinstein requires that the Combined Company
continue in effect a life insurance policy in the face amount of $1 million.
Cosmetic currently pays the annual premium of approximately $8,800 on the
policy. Cosmetic is, and the Combined Company will be, the beneficiary of the
policy to the extent of the premiums paid by it and the balance of the benefits
are payable to the beneficiaries designated by Mark Weinstein. The agreement
with Anita Weinstein requires that the Combined Company continue in effect a
life insurance policy in the face amount of $4 million. Cosmetic currently pays
the annual premium of approximately $60,650 on the policy. Cosmetic is, and the
Combined Company will be, the beneficiary of the policy to the extent of the
premiums paid by it and the balance of the benefits are payable to the L&A
Weinstein Trust, a trust for the benefit of Mark Weinstein, Susan Magenheim and
their respective children. During the term of the agreements, each of Mark
Weinstein and Anita Weinstein have the right to purchase from the Combined
Company such life insurance policy for the amount of the premiums paid by
Cosmetic. In addition, the agreement with Mark Weinstein requires that the
Combined Company continue in effect a "key-man" life insurance policy in the
face amount of $1 million, which Mr. Weinstein will have the right to purchase
at the end of the term of his employment for the amount of the premiums paid by
Cosmetic and the Combined Company.
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<PAGE>
CONSULTING AND NON-COMPETITION AGREEMENT WITH SUSAN K. MAGENHEIM
At the Effective Time, Susan Magenheim will enter into a consulting
agreement with the Combined Company. The consulting and non-competition
agreement with Susan Magenheim calls for bi-weekly payments totaling $90,000 and
$45,000 annually in respect of the consulting fee and a non-competition
covenant, respectively. The agreement will commence at the Effective Time and
have a term of four years. The agreement provides that if Mrs. Magenheim is
terminated for other than "good cause" (as defined therein), the Combined
Company is obligated to pay Mrs. Magenheim the balance of the consulting fee and
non-competition payments due over the remaining term of the agreement. If there
is a "change of control" (as defined therein) of the Combined Company, Mrs.
Magenheim may elect to treat such change of control as a termination for other
than "good cause," and the Combined Company would be obligated to pay Mrs.
Magenheim the balance of the consulting fee and non-competition payments due in
a single lump sum payment. Also under the agreement, the Combined Company will
transfer to Mrs. Magenheim the vehicle currently provided to her by Cosmetic.
EMPLOYMENT AGREEMENT WITH BEN S. KOVALSKY
Ben Kovalsky, currently Cosmetic's president, chief executive officer and
chief operating officer, has an employment agreement with Cosmetic. See
"Election of Directors; Management of Cosmetic Following the
Merger -- Employment Agreements." At the Effective Time, Mr. Kovalsky will enter
into an amendment to his employment agreement with the Combined Company. The
agreement as amended will extend the term of the agreement through February 2000
and provide for an annual salary of $225,000 and payments for a non-competition
covenant of $100,000 per annum. The amended agreement provides that if Mr.
Kovalsky terminates the agreement after the six-month anniversary of the
Effective Time or if the Combined Company terminates at any time other than for
"good cause" (as defined therein), the Combined Company will be obligated to pay
in a lump sum the salary and non-competition payments through the end of the
term and will be obligated to purchase all of Mr. Kovalsky's options at the
difference between the market price (but not less than $7.63) and the exercise
price. See "Principal Stockholders of Cosmetic." The agreement also provides
that, upon expiration, termination by Mr. Kovalsky after the six-month
anniversary of the Effective Time or termination by the Combined Company other
than for "good cause" (as defined therein), the Combined Company is obligated to
transfer to Mr. Kovalsky the vehicle that he currently uses.
The amended agreement provides that, during the term of the agreement and
for two years thereafter, Mr. Kovalsky will not, directly or indirectly, own,
control, manage or operate stores with products similar to those in stores
operated by the Combined Company in Maryland, Virginia, Illinois or the District
of Columbia or within a 50 mile radius of any other city where Cosmetic is
operating retail stores.
The amended agreement requires that, upon termination of Mr. Kovalsky's
employment, the Combined Company will make certain deferred salary payments to
Mr. Kovalsky. Cosmetic has used the amounts deferred from Mr. Kovalsky's salary
to purchase a life insurance policy in the amount of $763,000 payable following
the death of Mr. Kovalsky and his spouse. Mr. Kovalsky may purchase this life
insurance policy for the amount of the premiums paid by Cosmetic and the
Combined Company.
STOCKHOLDERS AGREEMENT WITH PRINCIPAL STOCKHOLDERS
Concurrent with the execution of the Merger Agreement, the Principal
Stockholders entered into the Stockholders Agreement. At January 27, 1997, the
Principal Stockholders in the aggregate own approximately 23% of the outstanding
Cosmetic Class A common stock and approximately 48% of the outstanding Cosmetic
Class B common stock.
Pursuant to the Stockholders Agreement, the Principal Stockholders holding
at least 25% of the shares held by the Principal Stockholders will be entitled
to demand on one occasion that Cosmetic file a registration statement under the
Securities Act for the sale of their Cosmetic Class C common stock and will also
be entitled to include their Cosmetic Class C common stock in certain
registration statements filed for the benefit of Cosmetic. Cosmetic will bear
all expenses of such registration statements, except for fees and expenses of
counsel for the Principal Stockholders and underwriters' discounts, fees and
expenses.
The Stockholders Agreement provides that for three years after the
consummation of the Merger, (a) the Principal Stockholders will vote all of
their Cosmetic Class C common stock in favor of Revlon's nominees for director
so that Revlon will at all times maintain representation on the Combined Company
Board equal to Revlon's percentage ownership of Cosmetic Class C common stock,
but not less than seven board seats, including two independent directors, and
(b) Revlon will vote its shares of Cosmetic Class C common stock in favor of the
Principal Stockholders' nominees for director equal to their
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<PAGE>
aggregate percentage ownership of Cosmetic Class C common stock, after giving
effect to the Merger and the Cash Election, but not less than one nor more than
two board seats.
See "The Stockholders Agreement" for a complete description of the terms of
the Stockholders Agreement.
COSMETIC STOCK OPTIONS
The Merger Agreement provides that each option to purchase Cosmetic Class A
or Class B common stock outstanding immediately prior to the Effective Time
will, after the Effective Time, be exercisable for the same number of shares of
Cosmetic Class C common stock, with the same exercise price and expiration date
as such option was exercisable immediately prior to the Merger; PROVIDED,
HOWEVER, that each holder of an option that has an exercise price of less than
$7.63 per share can elect, in lieu of retaining the stock option, to receive in
cancellation thereof cash in an amount equal to the difference between $7.63 and
the exercise price of such option.
The Cash Election is subject to the limitation that not more than 2,829,065
shares of Cosmetic Class A and Class B common stock and options with an exercise
price of less than $7.63 per share will be exchangeable for cash pursuant to the
Cash Election. To the extent that the aggregate shares and options as to which a
Cash Election has been made exceed the Limit, each stockholder's and
optionholder's Cash Election will be reduced pro rata. Pursuant to the
Stockholders Agreement, the Principal Stockholders have agreed to elect to make
the Cash Election for all of their 1,392,723 shares of Cosmetic Class A and
Class B common stock and 61,000 options that have an exercise price of less than
$7.63 per share.
Upon the closing of the Merger, each option to purchase Cosmetic common
stock that is not exchanged pursuant to the Cash Election will become fully
vested. Subject to the results of the Cash Election, options for up to 3,375
shares held by Mr. Kovalsky, options for up to 3,750 shares held by Mr.
Weinstein, options for up to 1,875 shares held by Mr. Goldman, options for up to
1,875 shares held by Mr. Lewis and options for up to 1,875 shares held by Mr.
Strohl will fully vest upon the closing. See "Election of Directors; Management
of Cosmetic Following the Merger -- Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year End Option Values."
COMPENSATION OF COMMITTEE MEMBERS
In connection with negotiating the Merger Agreement, the Cosmetic Board
appointed a committee composed of two independent directors, Ronald M. Hirschel
and Donald R. Rogers. See "The Merger -- Background of the Merger." The Cosmetic
Board has determined to pay the committee members $10,000 each for their
services on the committee.
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<PAGE>
MARKET PRICES OF COSMETIC'S SECURITIES
Cosmetic's Class A and Class B common stock are each quoted on the Nasdaq
National Market under the symbols COSCA and COSCB, respectively. The following
table sets forth the high and low closing sale prices for the periods indicated.
Cosmetic has never paid cash dividends on the Cosmetic Class A or Class B common
stock.
MARKET PRICE
<TABLE>
<CAPTION>
FISCAL YEAR CLASS A CLASS B
ENDED ------------- -------------
SEPTEMBER QUARTER HIGH LOW HIGH LOW
- ----------- ------------------------ ---- --- ---- ---
<S> <C>
1995 First $ 19 $123/4 $ 183/4 $125/8
Second $ 14 $ 7 $ 14 $ 73/4
Third $ 91/4 $ 71/2 $ 11 $ 8
Fourth $ 10 $ 71/2 $ 10 $ 73/4
1996 First $ 77/8 $ 53/4 $ 83/8 $ 61/4
Second $ 73/4 $ 4 $ 71/2 $ 41/4
Third $ 57/8 $ 43/4 $ 63/4 $ 5
Fourth $ 53/4 $ 33/4 $ 61/8 $ 41/4
1997 First $ 61/2 $ 51/4 $ 71/4 $ 53/8
Second (through January
24, 1997) $ 6 $ 55/8 $ 6 $ 51/2
</TABLE>
As of January 22, 1997, there were 183 holders of record of the Cosmetic
Class A common stock and 128 holders of record of the Cosmetic Class B common
stock, excluding holders whose stock is held in nominee or street name.
On September 30, 1996, the last full trading day prior to the public
announcement of the signing of the Letter of Intent, the closing sale prices of
Cosmetic Class A and Class B common stock, as reported by the Nasdaq National
Market, were $6.50 and $7.25, respectively. On February , 1997, such closing
sale prices were $ and $ , respectively. Cosmetic stockholders are
urged to obtain current market quotations for Cosmetic Class A and Class B
common stock.
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<PAGE>
SELECTED FINANCIAL DATA OF COSMETIC
The following selected historical financial data of Cosmetic have been
derived from, and should be read in conjunction with, Cosmetic's audited
consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
SEPT. SEPT. SEPT. SEPT. SEPT.
25, 24, 30, 29, 27,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
STATEMENT OF OPERATIONS DATA:
Net sales........................................................ $101,175 $109,486 $123,551 $132,304 $133,795
-------- -------- -------- -------- --------
Gross margin..................................................... 20,852 22,972 26,977 27,210 28,034
Selling, general and administrative expenses..................... 16,251 17,115 19,929 27,033 30,268
Restructuring charges............................................ -- -- -- -- 4,024
-------- -------- -------- -------- --------
Operating income (loss).......................................... 4,601 5,857 7,048 177 (6,258)
Other income, net................................................ (49) (84) (110) (670) (95)
Interest expense................................................. 559 97 166 725 1,030
Income taxes (benefit)........................................... 1,657 2,267 2,804 (157) (2,433)
-------- -------- -------- -------- --------
Net income (loss)................................................ $ 2,434 $ 3,577 $ 4,188 $ 279 $ (4,760)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common and common equivalent shares............ $ 0.68 $ 0.82 $ 0.95 $ 0.06 $ (1.11)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------
SEPT. SEPT. SEPT. SEPT. SEPT.
25, 24, 30, 29, 27,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................. $ 29,918 $ 33,386 $ 36,039 $ 33,090 $ 42,815
Inventory........................................................ 41,217 45,002 50,422 61,891 56,479
Total assets..................................................... 49,914 54,765 62,134 77,967 72,522
Short-term debt.................................................. 195 222 5,297 12,276 311
Long-term debt, less current portion............................. 555 814 711 420 12,329(a)
Stockholders' equity............................................. $ 33,855 $ 37,436 $ 41,662 $ 41,941 $ 37,181
STORE DATA:
Stores opened.................................................... 5 8 14 12 5
Stores closed.................................................... -- -- -- -- 9
Stores in operation (at end of period)........................... 39 47 61 73 69
</TABLE>
- ---------------
(a) In October 1996, Cosmetic refinanced its existing short-term note payable
with borrowings under a new revolving credit facility that expires on
October 31, 1999 and, as a result, reclassified its short-term note payable
to long-term debt at September 27, 1996.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COSMETIC
GENERAL
Cosmetic was founded in 1957, with its initial operations consisting of the
sales of cosmetic products to wholesale customers. At September 27, 1996,
Cosmetic operated 69 stores under the name "The Cosmetic Center" 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. Cosmetic sells approximately 25,000
brand name prestige and mass-merchandised cosmetic products.
During the past three fiscal years Cosmetic 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 Cosmetic 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 Cosmetic 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 the absorption of
corporate overhead may be even longer.
Although the Philadelphia, Pa. and North Carolina market areas have
performed to Cosmetic's expectations, the Atlanta, Ga. marketplace was a
disappointment. During the 1996 fiscal year, the Atlanta marketplace suffered an
operating loss of $1.1 million. As a result, on August 4, 1996, Cosmetic 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 certain assets and a severance package for its Atlanta employees.
The expected future cash flow requirement of the restructuring provision at
September 27, 1996 is $2.1 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,
Cosmetic purchased professional hair care products from secondary sources, and
sales of these products generally accounted for 5% to 6% of Cosmetic's annual
retail sales. Cosmetic's purchases of these products and sale at value prices to
consumers was not looked upon favorably by these manufacturers. With the growth
of Cosmetic 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, Cosmetic 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, Cosmetic opened hair salons in 12 of its 13
new stores in the Pennsylvania, North Carolina and Georgia market areas. In
February 1995, Cosmetic began to retrofit existing stores in its Washington D.C.
and Chicago market areas. As of September 27, 1996, Cosmetic had built or
retrofitted 60 of its 69 stores to include hair salons.
In July 1995, Cosmetic 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. Cosmetic 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 Cosmetic.
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,
Cosmetic 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 Cosmetic to maintain in stock
sufficient quantities of professional hair care products of the manufacturer
with which Cosmetic has such relationship. See "Forward-Looking Statements."
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<PAGE>
RESULTS OF OPERATIONS
Cosmetic's fiscal year ends on the last Friday of September. Fiscal years
for the following discussion ended on September 27, 1996, September 29, 1995 and
September 30, 1994. Fiscal years 1996 and 1995 each consisted of 52 weeks and
fiscal year 1994 consisted of 53 weeks.
FISCAL YEAR ENDED SEPTEMBER 27, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29,
1995
Consolidated net sales for the year ended September 27, 1996 were $133.8
million, an increase of $1.5 million, or 1.1%, from the $132.3 million in
consolidated net sales for the year ended September 29, 1995.
Retail sales for the year ended September 27, 1996 were $132.1 million, an
increase of $2.4 million, or 1.9%, from the $129.7 million in retail sales for
the year ended September 29, 1995. The increase in retail sales was primarily
attributable to the five stores opened at various dates in fiscal year 1996, the
five stores opened in the second half of fiscal year 1995 which were in
operation for a full year in fiscal year 1996 and comparable store sales
increases in the second half of fiscal year 1996, partially offset by the loss
of sales from closed stores in the Atlanta area. Comparable store retail sales
for the 1996 fiscal year were $124.3 million as compared to $127.6 million for
the 1995 fiscal year, a decrease of $3.3 million. The decrease in comparable
store retail sales is primarily attributable to lost sales as a result of the
severe winter weather on the East Coast during the quarter ended March 29, 1996,
weak retail sales in men's and women's fragrances and the loss of professional
hair care product sales, the latter resulting from Cosmetic's change in methods
of purchasing professional hair care products. See "Hair Salon Strategy."
Cosmetic operated 69 stores at September 27, 1996 as compared to 73 stores at
September 29, 1995.
Wholesale sales for the year ended September 27, 1996 were $1.7 million, a
decrease of $0.9 million, or 34.6%, from the $2.6 million in wholesale sales for
the year ended September 29, 1995. Cosmetic 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
$105.8 million (79.1% of sales) for the year ended September 27, 1996, versus
$105.1 million (79.4% of sales) for the year ended September 29, 1995. The
dollar increase was primarily attributable to cost of sales and occupancy costs
associated with the five stores opened in fiscal year 1996, the five stores
opened in the second half of fiscal year 1995, which were in operation for a
full year in fiscal year 1996, additional buying and distribution expenses to
support the new stores and comparable store sales increases in the second half
of fiscal year 1996. Cost of sales, including buying, occupancy and distribution
expenses, as a percentage of sales were affected positively by gross margin
increases resulting from the direct purchase of professional hair care products.
This percentage gain was partially offset by new stores, whose sales volume has
not yet grown to the level experienced by mature stores, thus having a higher
cost of sales percentage because of occupancy costs.
Selling, general and administrative ("S G & A") expenses were $30.3 million
(22.6% of sales) for the year ended September 27, 1996, versus $27.0 million
(20.4% of sales) for the year ended September 29, 1995. S G & A expenses
increased $3.3 million for fiscal year 1996 versus fiscal year 1995. Of this
increase approximately $2.2 million is associated with stores not in operation
for the comparable time period and approximately $1.7 million is associated with
increased operating expenses of hair salons opened longer than one year. The
increase of new store and hair salon S G & A expenses was partially offset by
decreases of $0.6 million in S G & A expenses at comparable stores and corporate
overhead levels. The increase in S G & A expenses as a percentage of sales for
fiscal year 1996 versus fiscal year 1995 primarily reflects reduced comparable
stores sales volume and that new stores generally have a higher S G & A as a
percentage of sales because their sales volume has not matured.
Interest expense was $1.0 million (0.8% of sales) for the year ended
September 27, 1996, versus $0.7 million (0.5% of sales) for the year ended
September 29, 1995. The increase in interest expense was primarily attributable
to increased borrowings under the credit facility in effect at that time to
support fixed asset and working capital requirements associated with new stores
and the retrofit construction of hair salons in existing stores.
FISCAL YEAR ENDED SEPTEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1994
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
41
<PAGE>
the 12 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. Cosmetic 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. Cosmetic continues to emphasize
customer service and value as key elements in its efforts to stabilize wholesale
sales. Cosmetic 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 12 stores opened in fiscal year 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 by mature stores. The percentage was also adversely affected by the
decline in comparable store sales.
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
12 stores opened in fiscal year 1995 and the ten stores opened in the second
half of fiscal year 1994. These 22 stores, or 30% of all stores, generated
additional sales of $18.2 million, thus their S G & A expenses as a percentage
of sales were 27.5%, thus increasing S G & A as a percentage of sales. New
stores generally have higher S G & A as a percentage of sales until their sales
volume matures.
S G & A expenses for fiscal year 1995 also included some one-time expenses.
Cosmetic absorbed an $0.8 million payroll expense for salary continuation
benefits under the remaining term of the employment contract of Cosmetic'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, Cosmetic absorbed approximately $0.3
million of S G & A expenses, which included a $0.2 million 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 22 stores
discussed above and by the reduced comparable store sales volume for fiscal year
1995.
Interest expense was $0.7 million (0.5% of sales) for the year ended
September 29, 1995, versus $0.2 million (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 $0.2 million because the proceeds from the life insurance contract
are not taxable.
LIQUIDITY AND CAPITAL RESOURCES
Cosmetic's working capital was $42.8 million at September 27, 1996 compared
to $33.1 million at September 29, 1995. The ratio of current assets to current
liabilities was 3.1 at September 27, 1996 and 2.0 at September 29, 1995.
Net cash provided by operating activities amounted to $0.8 million for the
fiscal year ended September 27, 1996. The $5.4 million decrease in inventory and
$5.7 million in non-cash expenses, depreciation, amortization and the
restructuring provision were used to fund the loss from operations and other
elements of working capital.
42
<PAGE>
Net cash used by investing activities amounted to $1.0 million for the
fiscal year ended September 27, 1996. The investment is primarily attributable
to the opening of five new stores during the period and completion of the hair
salon retrofit construction.
Net cash used by financing activities amounted to $0.1 million for the
fiscal year ended September 27, 1996. Under Cosmetic's credit facility in effect
at that time, Cosmetic had net borrowings of $0.2 million to partially finance
fixed asset expenditures for new stores opened during the period. Cosmetic also
repaid capital lease obligations in the amount of $0.3 million.
Cosmetic 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. At
September 27, 1996, the Facility had an outstanding balance of $12.2 million at
interest rates ranging from 6.46% to 9.50%. The carrying value of Cosmetic's
debt approximates fair value.
In October 1996, Cosmetic 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,
Cosmetic 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 Cosmetic's assets except for fixed assets. Under the New Facility
Cosmetic may borrow at LIBOR plus 200 basis points or at the bank's prime rate
plus 50 basis points. Cosmetic also pays an unused line fee equal to one-quarter
of one percent per annum. Interest is payable on a monthly basis. If Cosmetic
terminates the New Facility, Cosmetic is obligated to pay a prepayment penalty
of $187,500 if the termination is made before the first anniversary date and
$62,500 after the first anniversary date. Unless the New Facility is terminated,
the consent of the lender will be required to consummate the Merger, and if such
consent is not obtained, Cosmetic will be required to pay the $187,500
prepayment penalty. As a result of Cosmetic'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 Cosmetic to be in compliance with a minimum tangible net worth
covenant.
Cosmetic's future cash needs without giving effect to the Merger primarily
result from its plan to open additional new stores. Cosmetic'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.
Cosmetic may open additional stores during the next fiscal year, however, this
would be dependent upon locating the properties and negotiating the economics of
the leases. Cosmetic believes that funds available from the New Facility and
internally generated funds would provide sufficient cash to meet Cosmetic's
needs for the next year.
If the Merger is consummated, the Combined Company's future cash needs
primarily result from the cash required in connection with the proposed Merger,
including funding the Cash Election, refinancing indebtedness of Cosmetic and
PFC, payment of costs and expenses of the Merger, costs to integrate the
operations of Cosmetic and PFC, costs to expand the operations of the Combined
Company and debt service on the Financing. The Combined Company believes that
funds available from the Financing and internally generated funds would provide
sufficient cash to meet the Combined Company's cash needs for the next year.
However, there can be no assurance that funds available from the Financing and
cash flows from operations will be sufficient to meet the Combined Company's
cash requirements. See "The Merger -- Financing" and "Forward-Looking
Statements."
SEASONALITY
Cosmetic's business is seasonal, with the highest volume of sales for both
the retail and wholesale divisions occurring during Cosmetic's first fiscal
quarter (October to December).
INFLATION
While inflation has not had, and Cosmetic does not expect it to have, a
material impact upon operating results, there can be no assurance that
Cosmetic's business will not be affected by inflation in the future.
43
<PAGE>
SELECTED FINANCIAL DATA OF PFC
The following selected historical financial data of PFC as of December 31,
1994 and 1995 and for each of the years in the three year period ended December
31, 1995 have been derived from, and should be read in conjunction with, PFC's
audited financial statements and the notes thereto. The selected historical
financial data as of December 31, 1991, 1992 and 1993 and September 30, 1996 and
for the years ended December 31, 1991 and 1992 and for the nine-month periods
ended September 30, 1995 and 1996 are derived from unaudited financial
statements. In the opinion of PFC's management, the unaudited data reflect all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation of such data. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of PFC."
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $39,255 $44,033 $54,677 $62,674 $72,717 $45,790 $48,970
------- ------- ------- ------- ------- ------- -------
Gross margin.................................... 15,958 13,877 18,829 21,256 23,541 14,016 16,736
Selling, general and administrative expenses.... 13,787 14,725 19,429 21,945 25,368 18,968 19,595
------- ------- ------- ------- ------- ------- -------
Operating income (loss)......................... 2,171 (848) (600) (689) (1,827) (4,952) (2,859)
Interest expense................................ 493 43 914 1,329 2,137 1,958 699
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations before
income taxes.................................. 1,678 (891) (1,514) (2,018) (3,964) (6,910) (3,558)
Income taxes.................................... 12 16 17 25 50 45 45
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations........ 1,666 (907) (1,531) (2,043) (4,014) (6,955) (3,603)
Discontinued operations: (a)
Income (loss) from discontinued operations.... 92 627 1,174 842 (351) (351) --
Loss on disposal.............................. -- -- -- -- (897) (897) --
------- ------- ------- ------- ------- ------- -------
Income (loss) from discontinued operations...... 92 627 1,174 842 (1,248) (1,248) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ 1,758 $ (280) $ (357) $(1,201) $(5,262) $(8,203) $(3,603)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
<S> <C>
BALANCE SHEET DATA:
Working capital................................. $11,281 $20,123 $21,218 $25,782 $30,014
Inventory....................................... 12,020 20,890 22,003 26,701 29,171
Total assets.................................... 15,574 25,572 30,372 40,504 41,337
Due to Revlon (b)............................... -- 8,930 11,681 21,353 9,615
Stockholder's equity............................ $13,540 $14,215 $15,405 $14,067 $28,298
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------------------- -------
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- ------- -------
<S> <C>
STORE DATA:
Stores opened................................... 9 13 28 42(c) 17 16
Stores closed................................... 4 5 1 7 8 8
Stores in operation (at end of period).......... 110 118 145 180 189 188
<CAPTION>
AS OF
SEPTEMBER 30,
-------------
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................. $30,797
Inventory....................................... 32,686
Total assets.................................... 44,776
Due to Revlon (b)............................... 18,746
Stockholder's equity............................ $21,215
1996
-----
<S> <C>
STORE DATA:
Stores opened................................... 12
Stores closed................................... 5
Stores in operation (at end of period).......... 196
</TABLE>
- ---------------
(a) On June 30, 1995, PFC adopted a plan to discontinue certain businesses whose
net assets, consisting principally of inventory and a payable to Revlon,
were subsequently transferred to Revlon. Such businesses have been reported
as discontinued operations.
(b) PFC's working capital and capital expenditure needs have been financed
through interest-bearing obligations that are payable by PFC to Revlon. PFC
has reflected this obligation on a long-term basis as the obligation has not
been repaid as a result of a capitalization of the amount due to Revlon in
September 1995. To the extent debt to Revlon was incurred subsequent to the
capital infusion, PFC anticipates that such balance will be payable, to the
extent of funds available, from operations, and, if and to the extent such
financing is secured and permits such repayment, from long-term third-party
financing.
(c) Includes 20 stores acquired in the acquisition of Colours & Scents.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PFC
OVERVIEW
PFC was incorporated on July 6, 1987 and operates a chain of retail stores
that sells a wide range of first quality, first quality excess, returned and
refurbished and discontinued brand name cosmetics, fragrances and personal care
products at discounted prices. As of December 31, 1996, PFC owned and operated
198 retail outlet stores located principally in outlet malls in 41 states. The
stores operate under the names "Prestige Fragrance & Cosmetics," "Colours &
Scents," "Visage" and "The Cosmetic Warehouse," with seven stores operated
principally for employees of Revlon. With its outlet mall focus, PFC has sought
to provide an outlet for major cosmetic manufacturers to sell their products
without competing directly with the retailers that purchase products from these
same manufacturers.
Revlon provides certain services to PFC for which PFC is charged for direct
and indirect expenses incurred by Revlon in providing such services. Such
services include insurance and risk management services, travel, legal services,
treasury and finance services, customer service, information systems and audit
services, among others. Additionally, Revlon provides the services of certain
employees at PFC's warehouse and distribution center for which PFC is charged.
PFC employees are eligible to participate in Revlon sponsored employee
pension benefit plans, including the Revlon Employees' Savings and Investment
Plan and Revlon Employees' Retirement Plan and Revlon sponsored employee welfare
benefit plans, including medical, dental, life and disability insurance
coverage.
PFC currently occupies its headquarters, warehouse and distribution center
in Holmdel, New Jersey and five employee stores located at Revlon facilities and
pays Revlon charges therefor. PFC purchases products from Revlon.
PFC's working capital and capital expenditure needs in the past have been
satisfied through interest-bearing obligations payable to Revlon. The weighted
average interest rate on such obligations was 10% for 1993, 1994 and 1995.
However, PFC expects that after consummation of the Merger borrowings under the
Financing will provide for the future working capital requirements of the
Combined Company.
As a wholly owned subsidiary of Revlon, PFC previously has not presented
its financial statements publicly. Upon consummation of the Merger and assuming
the Cash Election is made for all outstanding shares and options for shares with
an exercise price for less than $7.63 per share, Revlon will hold securities
with approximately 84% of the voting power of the Combined Company, and existing
Cosmetic stockholders will hold securities with approximately 16% of the voting
power of Cosmetic. Accordingly, for accounting and financial reporting purposes,
the Merger will be treated as a reverse acquisition, which means that PFC will
be considered to be the acquiring company even though Cosmetic will be the
surviving corporation. As a result, PFC's historical financial statements will
be the continuing historical financial statements of the Combined Company and
Cosmetic's assets, liabilities and results of operations will be consolidated
with the historical financial statements of PFC subsequent to the consummation
of the Merger. Fair value adjustments will be made to Cosmetic's assets and
liabilities to the extent of Revlon's ownership interest in the Combined
Company.
On June 30, 1995, PFC adopted a plan to discontinue certain businesses
whose net assets, consisting principally of inventory and a payable to Revlon,
were subsequently transferred to Revlon. Such businesses have been reported as
discontinued operations.
RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTH
PERIOD ENDED
SEPTEMBER 30, 1995
Net sales were $49.0 million and $45.8 million for the nine months ended
September 30, 1996 and 1995, respectively, an increase of $3.2 million or 6.9%,
primarily as a result of 12 new store openings and comparable store sales
growth, offset in part by sales lost due to five store closings in the ordinary
course of business. Comparable store sales (sales from stores in operation for
the full period in both fiscal periods) were $44.3 million and $43.7 million for
the nine month periods ended September 30, 1996 and 1995, respectively, an
increase of 1.4%.
As a percentage of net sales, cost of sales was 65.8% for the nine-month
period ended September 30, 1996 a decrease from 69.4% for the nine-month period
ended September 30, 1995. Cost of sales as a percentage of net sales decreased
in the 1996 period as a result of increased sales volume of higher margin
products and lower occupancy costs associated with the new stores opened in
1996.
As a percentage of net sales, SG&A expenses were 40.0% and 41.4% for the
nine-month periods ended September 30, 1996 and 1995, respectively. The decrease
was a result primarily of lower payroll and benefit expenses, offset in part by
higher general and administrative expenditures.
45
<PAGE>
Interest expense was $0.7 million for the nine-month period ended September
30, 1996 and $2.0 million for the nine month period ended September 30, 1995, a
decrease of $1.3 million. The decrease was primarily due to lower average
outstanding intercompany balances due Revlon during the 1996 period compared to
the 1995 period as a result of the capitalization of $24.7 million of
intercompany balances by Revlon in September 1995.
The provision for income taxes was $0.05 million for each of the nine-month
periods ended September 30, 1996 and 1995 and consists solely of state and local
franchise taxes.
Management has taken steps intended to reverse prior years' trends of
increased cost of sales, SG&A expenses and interest expense and to increase
operating margins.
PFC is attempting to reduce the cost of new store openings using various
means, including the implementation of a new store fixturing package. The lower
average outstanding intercompany balance, which resulted from the capitalization
of $24.7 million of intercompany balances by Revlon in September 1995, resulted
in reduced interest expenses. Interest expense for 1995 and 1996 was increased
as a result of the implementation of new computer technology, including adding
new registers and point of sale scanners along with office computers into every
PFC store. These installations resulted in one-time capital costs of $2.5
million or approximately 40% of PFC's capital expenditures for 1995 and 1996,
with corresponding increased interest expense for such periods.
PFC intends to reduce inventory and increase inventory turns with the
objective of reducing debt and interest expense and increasing cash flow through
the discontinuation of non-productive items as well as the reduction of on-hand
quantities.
PFC's business plan includes the objective of increasing gross margins by
altering the merchandise mix so as to increase the sale of higher gross margin
items.
FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994
Net sales were $72.7 million and $62.7 million for 1995 and 1994,
respectively, an increase of $10.0 million or 16.0%, primarily as a result of
the acquisition of substantially all of the assets and liabilities of Colours &
Scents, Inc. ("Colours & Scents") in July 1994, new fragrance bar promotions
which resulted in higher fragrance sales and 17 new store openings, offset in
part by sales lost due to eight store closings in the ordinary course of
business. Comparable store sales were $55.2 million and $52.5 million in 1995
and 1994, respectively, an increase of $2.7 million or 5.1%, primarily as a
result of higher fragrance sales due to the introduction of new fragrance bar
promotions.
As a percentage of net sales, cost of sales was 67.6% for 1995 and 66.1%
for 1994. Cost of sales as a percentage of net sales increased in 1995 as a
result of a higher volume of sales of lower margin products, such as fragrances,
increased sales volume of lower margin first quality products purchased from
manufacturers other than Revlon and increased rent and occupancy costs
associated with new stores opened in 1995 and 1994.
As a percentage of net sales, SG&A expenses were 34.9% for 1995 and 35.0%
for 1994. The increase of $3.4 million from 1994 to 1995 resulted primarily from
higher payroll expenses.
Interest expense was $2.1 million for 1995 and $1.3 million for 1994, an
increase of $0.8 million. The increase was primarily due to higher average
outstanding intercompany balances due Revlon during the first nine months of
1995. In September 1995, Revlon capitalized $24.7 million in intercompany
balances reducing interest expense in the fourth quarter of 1995.
The provision for income taxes was $0.05 million and $0.03 million for 1995
and 1994, respectively. The increase was attributable to higher state and local
franchise taxes in the 1995 period.
FOR THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31,
1993
Net sales were $62.7 million and $54.7 million for 1994 and 1993,
respectively, an increase of $8.0 million or 14.6%, primarily as a result of the
acquisition of Colours & Scents in July 1994 and 22 other new store openings,
offset in part by sales lost due to seven store closings in the ordinary course
of business. Comparable store sales were $45.1 million and $48.2 million in 1994
and 1993, respectively, a decrease of $3.1 million or 6.4%.
As a percentage of net sales, cost of sales was 66.1% for 1994 and 65.6%
for 1993. Cost of sales as a percentage of net sales increased in 1994 as a
result of a higher sales volume of lower margin first quality products purchased
from manufacturers other than Revlon, offset in part by an increase in the sales
volume of certain higher margin products. Products purchased from manufacturers
other than Revlon increased principally as a result of a new supply contract
that was acquired as a part of the acquisition of Colours & Scents.
As a percentage of net sales, SG&A expenses were 35.0% for 1994, an
improvement from 35.5% for 1993, as a result of slightly reduced payroll and
benefits and general and administrative expenses for 1994 compared with 1993.
46
<PAGE>
Interest expense was $1.3 million for 1994 and $0.9 million for 1993, an
increase of $0.4 million. The increase was due to higher average outstanding
intercompany balances due Revlon during 1994 compared to 1993.
The provision for income taxes was $0.03 million and $0.02 million for 1994
and 1993, respectively. The increase was attributable to higher state and local
franchise taxes in 1994.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $4.3 million and $11.3 million
for the nine month periods ended September 30, 1996 and 1995, respectively and
$4.7 million, $2.6 million and $0.9 million for 1995, 1994 and 1993,
respectively. The decrease in the net cash used for operating activities for the
nine months ended September 30, 1996 compared to the nine months ended September
30, 1995 resulted primarily from lower net losses and lower payments for
inventory purchases, offset in part by increased expenditures for payroll and
related benefits. The increase in the net cash used for operating activities for
1995 compared with 1994 and 1994 compared with 1993 resulted primarily from
higher net losses and increased payments for inventory purchases.
Net cash used for investing activities was $2.8 million and $2.3 million
for the nine month periods ended September 30, 1996 and 1995, respectively, and
$3.0 million, $2.0 million and $2.7 million for 1995, 1994 and 1993,
respectively. Net cash
used for investing activities for each of the periods included capital
expenditures for new store fixtures and leasehold improvements at new and
existing stores. Net cash used for investing activities for the nine month
period ended September 30, 1996, the nine month period ended September 30, 1995
and the full year 1995 included expenditures for new point-of-sale registers at
PFC's outlet stores and enhancements in PFC's information systems. Net cash used
for investing activities in 1993 also included capital expenditures for a
complete refurbishing of certain existing store locations.
Net cash provided by financing activities was $5.7 million and $11.8
million for the nine month periods ended September 30, 1996 and 1995,
respectively and $7.8 million, $6.4 million and $4.3 million for 1995, 1994 and
1993, respectively and consisted principally of financing provided by Revlon and
certain of its affiliates to PFC for inventory purchases, direct expenses
incurred by Revlon on behalf of PFC and allocated costs charged to PFC by Revlon
for services provided, partially offset by net distributions to Revlon recorded
by PFC in 1994 and 1995.
Without giving effect to the Merger, PFC's principal sources of funds are
expected to be cash flow generated from operations and borrowings from Revlon
and PFC's principal uses of funds are expected to be the payment of operating
expenses, including working capital, capital expenditure requirements and
payments of amounts due to Revlon. Without giving effect to the Merger, PFC
estimates that capital expenditures and leasehold improvements for 1996 will be
approximately $3.5 million primarily for costs associated with new store
openings and upgrades to PFC's management information systems and point-of-sale
registers, of which $2.8 million has been spent through September 30, 1996.
Based upon PFC's current level of operations and anticipated growth in net sales
and earnings as a result of its business strategy, PFC expects that cash flows
from operations and borrowings from Revlon would be sufficient to enable PFC to
meet its anticipated cash requirements for the foreseeable future without giving
effect to the Merger. See "Forward-Looking Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Cosmetic -- Liquidity and Capital Resources."
Pursuant to a Tax Sharing Agreement, each of the subsidiaries of Revlon,
including PFC, has agreed to pay to Revlon an amount equal to its liability for
federal, state and local income taxes (including estimated taxes), if any. Since
the payments to be made by subsidiaries of Revlon, including PFC, to Revlon
under the Tax Sharing Agreement will be determined by the amount of taxes that
such subsidiaries would otherwise have to pay if they were to file separate
federal, state or local income tax returns, the Tax Sharing Agreement will
benefit Revlon to the extent Revlon can offset the taxable income generated by
such subsidiaries, including PFC, against losses and tax credits generated by
Revlon and its other subsidiaries. PFC anticipates that, as a result of
anticipated operating losses, no significant federal tax payments or payments in
lieu of taxes pursuant to the Tax Sharing Agreement will be required by PFC for
1997. See "Agreement with Revlon -- Tax Sharing Agreement."
SEASONALITY
PFC's business is seasonal, with the highest sales volume for its outlet
stores occurring during the last quarter of the year (October to December).
INFLATION
In general, costs are affected by inflation and the effects of inflation
may be experienced by PFC in future periods. Management believes, however, that
such effects have not been material to PFC during the past three years.
47
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements give effect to the
Merger in a transaction which will be accounted for as a reverse acquisition.
See "The Merger -- Accounting Treatment." The unaudited pro forma condensed
consolidated balance sheet is based on the individual balance sheets of Cosmetic
and PFC appearing elsewhere in this Proxy Statement/Prospectus and has been
prepared to reflect the Merger as if it had occurred on September 30, 1996. The
unaudited pro forma condensed consolidated statements of operations are based on
the individual statements of operations of Cosmetic and PFC appearing elsewhere
in this Proxy Statement/Prospectus, and combine the results of operations of
Cosmetic for the year ended September 29, 1995 and for the nine-month period
ended September 27, 1996 with those of PFC for the year ended December 31, 1995
and for the nine-month period ended September 30, 1996, as if the Merger had
occurred on January 1, 1995. The unaudited pro forma financial statements should
be read in conjunction with the notes to the unaudited consolidated pro forma
financial information and the separate historical financial statements and notes
thereto of Cosmetic and PFC included elsewhere in this Proxy
Statement/Prospectus. The unaudited pro forma financial statements assume that
the Cash Election is made in respect of all outstanding shares and options for
shares with an exercise price of less than $7.63 per share. The other detailed
assumptions used to prepare the unaudited condensed pro forma financial
information are contained in the notes to unaudited pro forma financial
information. The pro forma combined financial data are intended for
informational purposes only and are not necessarily indicative of the financial
position or future results of operations of the Combined Company or of the
financial position or the results of operations of the Combined Company that
would have actually occurred had the Merger been in effect as of the date or for
the periods presented. Final adjustments may differ from the pro forma
adjustments presented herein. See "Forward-Looking Statements."
48
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO
COSMETIC PFC ADJUSTMENTS FORMA
------- ------- ----------- --------
<S> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 979 $ 1,940 $ $ 2,919
Accounts receivable, net.............................................. 1,860 1,860
Inventories........................................................... 56,479 32,686 89,165
Prepaid expenses and other............................................ 3,808 986 4,794
------- ------- ----------- --------
Total current assets............................................. 63,126 35,612 98,738
Property, plant and equipment, net...................................... 8,407 7,703 16,110
Other assets............................................................ 989 500(b) 1,489
Intangible asset........................................................ 1,461 2,781(a) 4,242
------- ------- ----------- --------
Total assets..................................................... $72,522 $44,776 $ 3,281 $120,579
------- ------- ----------- --------
------- ------- ----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $15,956 $ 2,831 $ $ 18,787
Accrued expenses and other............................................ 4,355 1,984 6,200(a) 16,739
4,200(d)
------- ------- ----------- --------
Total current liabilities........................................ 20,311 4,815 10,400 35,526
Due to Revlon........................................................... 18,746 (15,000)(b) 3,746
Long-term debt -- third parties......................................... 12,329 49,731(c) 49,840
(12,220)(b)
Other long-term liabilities............................................. 2,701 2,701
Stockholders' equity:
Class A common stock, $.01 par value; authorized 5,000,000 shares; 27 (27)(b)
issued and outstanding 2,713,354 shares............................
Class B common stock, $.01 par value; authorized 5,000,000 shares; 16 (16)(b)
issued and outstanding 1,582,780 shares............................
Class C common stock, $.01 par value; authorized 40,000,000 shares; 101(b) 101
issued and outstanding 10,073,390 shares...........................
Additional paid-in capital............................................ 21,386 25,056 (22,011)(b) 36,706
(21,386)(b)
15,752(b)
21,328(b)
12,851(a)
(37,181)(a)
20,911(a)
Retained earnings (Accumulated deficit)............................ 15,752 (3,841) (15,752)(b) (8,041)
(4,200)(d)
------- ------- ----------- --------
Total stockholders' equity (deficit)............................. 37,181 21,215 (29,630) 28,766
------- ------- ----------- --------
Total liabilities and stockholders' equity....................... $72,522 $44,776 $ 3,281 $120,579
------- ------- ----------- --------
------- ------- ----------- --------
</TABLE>
49
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
The following assumptions used in determining the pro forma adjustments to
the historical financial position give effect to the reverse purchase accounting
for the acquisition of Cosmetic by PFC, the issuance of Cosmetic Class C common
stock and the Financing as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
(a) Purchase accounting to reflect the fair value of Cosmetic:
Increase in Intangible assets due to the additional excess in cost over estimated fair value of the net
assets of Cosmetic..................................................................................... $ 2,781
Increase in Accrued expenses to reflect transaction costs related to severance for employees ($3,800) and
professional services ($2,400)......................................................................... (6,200)
Cost of Cosmetic (assumes a value of $7.63 per share to the extent of Revlon's ownership interest)....... (12,851)
Cosmetic book value...................................................................................... 37,181
Less treasury stock acquired in the Cash Election........................................................ (20,911)
----------
$ --
----------
----------
The allocations above are based upon a preliminary assessment that the recorded tangible assets and
liabilities of Cosmetic approximate their fair values and are subject to a more detailed review subsequent
to the Merger.
(b) Adjustment for the issuance of Cosmetic Class C common stock in exchange for PFC common stock
Elimination of Cosmetic Class A common stock in connection with the Merger............................... $ 27
Elimination of Cosmetic Class B common stock in connection with the Merger............................... 16
Issuance of Cosmetic Class C common stock in connection with the Merger.................................. (101)
Decrease in Cosmetic Additional paid-in capital to reflect its elimination in the Merger................. 21,386
Increase in Additional paid-in capital due to elimination of the Cosmetic's Retained earnings............ (15,752)
Increase in Additional paid-in capital due to issuance of Cosmetic Class C common stock in connection
with the Merger........................................................................................ (21,328)
Decrease in Cosmetic's Retained earnings to reflect its elimination in the Merger........................ 15,752
----------
$ --
----------
----------
(c) Adjustment to reflect additional borrowings to finance the Cash Election
Increase in Long-term debt -- third parties due to borrowings under the Financing to fund the Cash
Election, refinance existing Long-term debt -- third parties and payment of $15,000 Due to Revlon...... $(49,731)
Increase in other assets due to costs incurred to effect the Financing................................... 500
Repayment of PFC's Due to Revlon with proceeds from the Financing........................................ 15,000
Repayment of Cosmetic's note payable bank with proceeds from the Financing............................... 12,220
Decrease in Additional paid-in capital to reflect the cost of the Cash Election ($20,911) and other costs
of the Merger ($1,100)................................................................................. 22,011
----------
$ --
----------
----------
(d) Additional non-recurring expenses expected to be incurred after the Merger to consolidate overhead expenses
and eliminate duplicative functions:
PFC severance and relocation costs....................................................................... $ 1,530
Information system integration costs..................................................................... 1,600
Inventory relocation and integration costs............................................................... 1,070
----------
$ (4,200)
----------
----------
</TABLE>
50
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO
COSMETIC PFC ADJUSTMENTS FORMA
--------- ------- ----------- ----------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................................. $ 132,304 $72,717 $ -- $ 205,021
Cost of sales, including buying, occupancy and distribution............... 105,094 49,176 -- 154,270
--------- ------- ----------- ----------
Gross margin.............................................................. 27,210 23,541 -- 50,751
Selling, general and administrative expenses.............................. 27,033 25,368 70(a) 52,471
--------- ------- ----------- ----------
Operating income (loss)................................................... 177 (1,827) (70) (1,720)
Other (income) expense.................................................... (670) -- 250(b) (420)
Interest expense.......................................................... 725 2,137 1,673(c) 4,535
--------- ------- ----------- ----------
Income (loss) from continuing operations before income taxes.............. 122 (3,964) (1,993) (5,835)
(Benefit) provision for income taxes...................................... (157) 50 -- (107)
--------- ------- ----------- ----------
Income (loss) from continuing operations.................................. 279 (4,014) (1,993) (5,728)
Discontinued operations (e)...............................................
Loss from discontinued operations....................................... -- (351) -- (351)
Loss on disposal........................................................ -- (897) -- (897)
--------- ------- ----------- ----------
Loss from discontinued operations......................................... -- (1,248) -- (1,248)
--------- ------- ----------- ----------
Net income (loss)......................................................... $ 279 $(5,262) $(1,993) $ (6,976)
--------- ------- ----------- ----------
--------- ------- ----------- ----------
Income (loss) per common and common equivalent shares..................... $ 0.06 $ (0.69)
--------- ----------
--------- ----------
Weighted average shares outstanding....................................... 4,358,339 10,137,469(d)
--------- ----------
--------- ----------
</TABLE>
51
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO
COSMETIC PFC ADJUSTMENTS FORMA
--------- ------- ----------- ----------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................................. $ 92,215 $48,970 $ -- $ 141,185
Cost of sales including buying, occupancy and distribution................ 73,341 32,234 -- 105,575
--------- ------- ----------- ----------
Gross margin.............................................................. 18,874 16,736 -- 35,610
Selling, general and administrative expenses.............................. 22,622 19,595 52(a) 42,269
Restructuring charges..................................................... 4,024 -- 4,024
--------- ------- ----------- ----------
Operating loss............................................................ (7,772) (2,859) (52) (10,683)
Other (income) expense.................................................... (66) 188(b) 122
Interest expense.......................................................... 714 699 1,255(c) 2,668
--------- ------- ----------- ----------
Loss from operations before income taxes.................................. (8,420) (3,558) (1,495) (13,473)
(Benefit) provision for income taxes...................................... (2,930) 45 -- (2,885)
--------- ------- ----------- ----------
Net loss.................................................................. $ (5,490) $(3,603) $(1,495) $ (10,588)
--------- ------- ----------- ----------
--------- ------- ----------- ----------
Loss per common and common equivalent shares.............................. $ (1.28) $ (1.05)
--------- ----------
--------- ----------
Weighted average shares outstanding....................................... 4,295,062 10,074,192(d)
--------- ----------
--------- ----------
</TABLE>
52
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
The following assumptions used in determining the pro forma adjustments to
the historical financial position give effect to the reverse purchase accounting
for the acquisition of Cosmetic by PFC, the issuance of Cosmetic Class C common
stock and the Financing as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DEC. 31, NINE MONTHS ENDED
1995 SEPT. 30, 1996
----------- -----------------
<S> <C>
(DOLLARS IN THOUSANDS)
(a) Amortization of intangibles resulting from purchase costs incurred in the Merger
based upon a 40 year life............................................................ $ (70) $ (52)
----------- -----------------
----------- -----------------
(b) Amortization of costs incurred to effect the Financing............................... $ (250) $ (188)
----------- -----------------
----------- -----------------
(c) The adjustment to interest expense resulting from debt incurred to complete the Cash
Election and the Merger based upon borrowings of $20,911 bearing interest at 8%
per annum......................................................................... $ (1,673) $ (1,255)
----------- -----------------
----------- -----------------
(d) The adjustment to common shares outstanding resulting from the following transactions
both as if they had taken place as of the beginning of the period:
Shares acquired in the Cash Election.............................................. (2,700,205) (2,700,205)
Shares issued in the Merger....................................................... 8,479,335 8,479,335
----------- -----------------
5,779,130 5,779,130
----------- -----------------
----------- -----------------
</TABLE>
(e) On June 30, 1995, PFC adopted a plan to discontinue certain businesses whose
net assets, consisting principally of inventory and a payable to Revlon,
were subsequently transferred to Revlon. Such businesses have been reported
as discontinued operations.
In addition to the above pro forma adjustments, the Cosmetic Board believes
that the Combined Company can achieve reductions in operating expenses as the
overhead expenses of Cosmetic and PFC are consolidated, duplicative functions,
including those of distribution, information systems, human resources,
financing, management, merchandising and other, are eliminated, and other
savings are realized as a result of the anticipated consolidation of certain
warehouse, distribution and headquarters operations of Cosmetic and PFC in
Maryland. Although the amount of the reductions in operating expenses cannot be
quantified with certainty, and there can be no assurances that such reductions
will be realized, Cosmetic believes that cost of sales and selling, general and
administrative expenses for the year ended December 31, 1995 and the nine months
ended September 30, 1996 on a pro forma basis would have been decreased by
approximately $4.0 million and $3.0 million, respectively, had the Merger been
consumated on January 1, 1995. See "Forward-Looking Information," "Risk
Factors -- Historical Net Losses" and " -- Uncertainties Regarding Integration
of Cosmetic and PFC."
53
<PAGE>
THE MERGER AGREEMENT
GENERAL
The Merger Agreement provides, among other things, for the Merger of PFC
with and into Cosmetic, with Cosmetic remaining as the surviving company. The
Merger will become effective at the Effective Time, which is currently expected
to occur promptly following the receipt of stockholder approval at the Meeting.
The following description of the Merger Agreement is qualified by reference to
the complete text of the Merger Agreement, which is incorporated by reference
herein and attached hereto as Annex I.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, each share of Cosmetic Class A and Class B common
stock outstanding immediately before the Effective Time shall be converted into
the right to receive one share of Cosmetic Class C common stock or, at the
election of each record stockholder and subject to the limitation discussed
below, cash in the amount of $7.63 per share.
The Merger Agreement also provides that each option to purchase Cosmetic
Class A or Class B common stock outstanding immediately prior to the Effective
Time will, after the Effective Time, be exercisable for the same number of
shares of Cosmetic Class C common stock, with the same exercise price and
expiration date as such option was exercisable immediately prior to the
Effective Time; PROVIDED, HOWEVER, that each holder of an option that has an
exercise price of less than $7.63 per share can elect, subject to the limitation
discussed below, to receive, in return for cancellation of such option, cash in
an amount equal to the difference between $7.63 and the exercise price of such
option.
The Cash Election is subject to the limitation that not more than 2,829,065
shares of outstanding Cosmetic Class A and Class B common stock and shares
subject to outstanding options, will be exchangeable for cash pursuant to the
Cash Election. To the extent that the aggregate shares and options as to which a
Cash Election has been made exceed the Limit, each stockholder's and
optionholder's Cash Election will be reduced pro rata. The Principal
Stockholders have agreed to elect to make the Cash Election for all of their
1,392,723 shares of Cosmetic Class A and Class B common stock and 61,000 options
that have an exercise price of less than $7.63 per share.
The sole share of PFC common stock outstanding at the Effective Time will
be converted into 8,479,335 shares of Cosmetic Class C common stock. The
conversion ratio has been determined by negotiations among Cosmetic and Revlon
and may not be indicative of the value of PFC. As a result of the Principal
Stockholders' agreement to make the Cash Election, such shares will represent at
least 74% of the Cosmetic Class C common stock outstanding immediately after the
Merger and will represent approximately 84% of such shares if, in addition to
the Principal Stockholders' shares and options, the Cash Election is made in
respect of all other outstanding shares and options for shares with an exercise
price of less than $7.63 per share. Accordingly, if other persons holding more
than 1,375,342 shares and options for shares that have a price of less than
$7.63 per share elect to receive cash, all holders who have made the Cash
Election will be subject to proration.
CASH ELECTION
Cosmetic record stockholders who wish to make the Cash Election must
complete, sign and return the enclosed form of election to the Exchange Agent
prior to 5:00 p.m., New York City time, on the business day immediately
preceding the Meeting. Stockholders who are not holders of record and who wish
to make the Cash Election must have the broker, bank or other person that holds
their shares make the Cash Election for them. Stockholders who do not make the
Cash Election or do not comply with the Cash Election procedure will receive
Cosmetic Class C common stock and will not receive any cash in the Merger.
Stockholders of record who make the Cash Election may revoke the election by
submitting written notice to the Exchange Agent prior to 5:00 p.m., New York
City time, on the business day immediately preceding the Meeting.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, each certificate formerly representing Cosmetic
Class A or Class B common stock ("Cosmetic Certificates") shall be deemed for
all purposes to evidence ownership of the right to receive Cosmetic Class C
common stock and/or cash as provided in the Merger Agreement until surrendered
to the Exchange Agent.
As soon as practicable after the Effective Time, a form of letter of
transmittal and instructions will be mailed to the holders of record of Cosmetic
Certificates to be used by such holders in forwarding Cosmetic Certificates to
the Exchange Agent. Each stockholder will be required to return a properly
completed transmittal letter, together with any Cosmetic Certificates listed on
the transmittal letter, to the Exchange Agent to receive shares of Cosmetic
Class C common stock and, if
54
<PAGE>
applicable, cash as provided herein. STOCKHOLDERS SHOULD NOT SEND COSMETIC
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY RECEIVE A TRANSMITTAL LETTER.
On and after the Effective Time, upon surrender of a Cosmetic Certificate
for cancellation to the Exchange Agent, subject to the effect of applicable
laws, there shall be delivered to the holder of such Cosmetic Certificate a
certificate for such holder's Cosmetic Class C common stock and, if applicable,
cash as provided herein. From and after the Effective Time, the holders of
Cosmetic Certificates shall cease to have any rights with respect to such stock,
and their sole rights shall be to receive Cosmetic Class C common stock and, if
applicable, cash as provided herein. No interest will be paid or will accrue on
any cash payable under the Merger Agreement.
No fractional shares of Cosmetic Class C common stock will be issued as a
result of the Merger and the Cash Election. Each holder of a fractional interest
in Cosmetic Class C common stock will be entitled to receive a cash payment in
lieu of such fractional amount equal to the fraction of $7.63 the fractional
share represents. As soon as practicable after the determination of the amount
of cash, if any, to be paid to the Cosmetic stockholders with respect to any
fractional share interests and upon surrender of the Cosmetic Certificates, the
Exchange Agent shall distribute in cash the amount payable to such fractional
holder.
CONDITIONS TO THE MERGER
The Merger is subject to certain customary conditions, some of which may be
waived by Cosmetic and/or Revlon to the extent the Merger Agreement provides
that such condition is for their or its benefit.
The obligations of Cosmetic, Revlon and PFC are subject to the conditions,
among others, that (i) the Merger Agreement shall have been approved by the
holders of a majority of the Cosmetic Class B common stock, (ii) no statute,
rule, regulation, order, decree or injunction shall have been enacted or entered
which restrains, enjoins or otherwise prohibits the consummation of the Merger,
(iii) the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act shall have been terminated or expired (the period was
terminated on January 7, 1997), (iv) the registration statement of which this
Proxy Statement/Prospectus is part shall not be the subject of a stop order or
proceeding seeking a stop order and any material "blue sky" or other state
securities laws shall have been complied with, (v) Legg Mason shall not have
modified or withdrawn its opinion in a manner unfavorable to the adoption of the
Merger Agreement or the consummation of the Merger and (vi) the Combined Company
shall have available to it proceeds of the Financing on terms satisfactory to
Cosmetic and Revlon of not less than $50 million. See "The Merger -- Financing."
The obligations of Cosmetic are subject to the conditions, among others,
that (i) the representations and warranties of Revlon and PFC set forth in the
Merger Agreement are accurate, unless such failure shall not have a material
adverse effect (as defined in the Merger Agreement), (ii) Revlon and PFC shall
have performed their obligations under the Merger Agreement in all material
respects, (iii) PFC shall not have suffered a material adverse change in its
financial condition, business or results of operations, (iv) Revlon and PFC
shall have obtained all necessary material governmental and third-party consents
and approvals, the failure to obtain which would have a material adverse effect,
(v) Revlon shall have entered into the Holmdel Lease (as defined herein) and PFC
Employee Store Leases (as defined herein), (vi) Revlon shall have entered into
the Services Agreement (as defined herein) and the Supply Agreement (as defined
herein) and (vii) Cosmetic shall have received certain legal opinions from
counsel to Revlon and PFC.
The obligations of Revlon and PFC are subject to the conditions, among
others, that (i) the representations and warranties of Cosmetic set forth in the
Merger Agreement are accurate, unless such failure shall not have a material
adverse effect (as defined in the Merger Agreement), (ii) Cosmetic shall have
performed its obligations under the Merger Agreement in all material respects,
(iii) Cosmetic shall not have suffered a material adverse change in its
financial condition, business or results of operations, (iv) Cosmetic shall have
obtained all necessary material governmental and third-party consents and
approvals, the failure to obtain which would have a material adverse effect, (v)
Cosmetic shall have entered into the Registration Rights Agreement (as defined
herein), (vi) Cosmetic shall have entered into the Holmdel Lease and PFC
Employee Store Leases, (vii) Cosmetic shall have entered into the Services
Agreement and the Supply Agreement, (viii) Cosmetic shall have entered into the
Employment and Non-Competition Agreements with Mark S. Weinstein and Anita J.
Weinstein, the Consulting and Non-Competition Agreement with Susan K. Magenheim
and the amendment to the Employment Agreement with Ben Kovalsky, (ix) Revlon and
PFC shall have received certain legal opinions from counsel to Cosmetic, (x) the
Principal Stockholders shall not have defaulted in the performance of their
obligations under the Stockholders Agreement, (xi) certain Cosmetic directors
and officers shall have resigned, (xii) certain amendments to the 1991 Option
Plan (as defined herein) and option agreements shall have been adopted and
(xiii) the Cosmetic 1997 Stock Option Plan shall have been adopted and approved
by the holders of the Cosmetic Class B common stock.
55
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties by Cosmetic,
PFC and Revlon relating to, among other things, (i) due incorporation and good
standing and similar corporate matters; (ii) the respective capital structures
of Cosmetic and PFC; (iii) the authorization, validity and enforceability of the
Merger Agreement; (iv) governmental authorizations required to effect the Merger
and absence of conflicting agreements and documents; (v) the absence of material
changes; (vi) the absence of undisclosed liabilities; (vii) the absence of
certain defaults and compliance with applicable laws; (viii) the absence of
claims and litigation; (ix) title to assets; (x) properties and other assets;
(xi) contracts; (xii) intellectual property; (xiii) employment agreements; (xiv)
employee benefit plans; (xv) labor relations; (xvi) taxes; (xvii) insurance
coverage; (xviii) environmental matters; (xix) related party transactions; (xx)
the absence of false or misleading statements in the Proxy Statement/Prospectus;
(xxi) broker's fees; and (xxii) the absence of false or misleading statements in
the Merger Agreement and related schedules. The Merger Agreement contains
further representations and warranties by Cosmetic concerning (i) the accuracy
of documents it has filed with the SEC; (ii) the compliance of the Proxy
Statement/Prospectus with applicable provisions of the securities laws; (iii)
the vote required to approve the Merger; (iv) the absence of appraisal rights;
(v) compliance with state takeover statutes; (vi) the receipt of the Legg Mason
Opinion; and (vii) the recommendation of the Cosmetic Board. The Merger
Agreement contains further representations and warranties by PFC and Revlon
concerning the accuracy of PFC's financial statements. Certain of the
representations and warranties are subject to exceptions and limitations.
Cosmetic stockholders are urged to read the Merger Agreement in its entirety.
The representations and warranties contained in the Merger Agreement will
not survive beyond the Effective Time.
CONDUCT OF BUSINESS PRIOR TO MERGER
Pursuant to the Merger Agreement, Cosmetic and PFC have each agreed that,
prior to the Merger, each of them will conduct its respective operations only in
the ordinary course of business, consistent with past practices and will use its
best efforts to preserve its respective businesses and its respective
relationships with its officers, employees and other persons having business
relationships with it. Each has agreed that, without the consent of the other,
it will not, among other things, (i) amend its Certificate of Incorporation or
bylaws; (ii) issue securities (except, in the case of Cosmetic, pursuant to
outstanding stock options and except for the grant of 1,000 options to purchase
Cosmetic Class A common stock at an exercise price of 100% of fair market value
(as defined in the 1991 Option Plan) of the Cosmetic Class A common stock on the
date of issuance of the options, and the grant of 20,000 options to purchase
Cosmetic Class A common stock at an exercise price of not less than 110% of fair
market value of the Cosmetic Class A common stock on the date of the options);
(iii) pay any dividend or acquire its securities; (iv) incur debt (except under
certain existing arrangements), make loans or mortgage assets; (v) enter into
new or alter existing employee compensation or benefit agreements or
arrangements; (vi) pay any claims or liabilities (other than in the ordinary
course of business); (vii) make capital expenditures (except pursuant to
existing capital expenditure plans) or acquire or dispose of material assets
(except in the ordinary course of business); (viii) make tax elections or
compromise tax liabilities; (ix) change accounting practices; or (x) enter into,
amend or terminate contracts (unless immaterial or in the ordinary course of
business). Certain of these provisions are subject to exceptions and
limitations. Cosmetic stockholders are urged to read the Merger Agreement in its
entirety.
CERTAIN COVENANTS
In the Merger Agreement, Cosmetic has agreed that it will, among other
things, (i) prepare and file this Proxy Statement/Prospectus with the SEC; (ii)
cause a meeting of the holders of the Cosmetic Class B common stock to be duly
called and held; (iii) use its best efforts to cause the Cosmetic Class C common
stock to be listed on the Nasdaq National Market; and (iv) maintain in effect
all of its present insurance policies.
Cosmetic and PFC have agreed to provide each other, upon reasonable notice,
access to the other's facilities, books, records, employees and other
representatives and to keep such information confidential. Cosmetic, PFC and
Revlon have agreed to use commercially reasonable efforts to take all actions
necessary, proper or advisable to consummate the transactions contemplated by
the Merger Agreement as soon as practicable, including obtaining all required
consents and approvals and making all required filings and applications with
governmental agencies, and not to take any action or fail to take any action
that is reasonably likely to make any representation or warranty in the Merger
Agreement untrue or incorrect as of the date when made or as of any future date
or that could prevent the satisfaction of any condition to closing set forth in
the Merger Agreement. Cosmetic and Revlon have agreed to promptly inform the
other party of material changes in the business of Cosmetic or PFC,
respectively, and of the happening of any event that would cause any
representation or warranty of Cosmetic, Revlon or PFC set forth in the Merger
Agreement to be untrue.
56
<PAGE>
Revlon has agreed to use commercially reasonable efforts, subject to normal
conditions, to arrange the Financing, and Cosmetic has agreed to provide all
necessary cooperation in connection with the arrangement of the Financing.
Cosmetic has agreed that Cosmetic, its subsidiaries and its affiliates,
officers, directors, employees, representatives and agents will not solicit,
engage in negotiations, provide information to or otherwise cooperate with any
person or entity that expresses an interest in acquiring all or a substantial
part of any class of the securities, business or assets of Cosmetic nor will
they grant any proxy, option or other similar right to any third person or
entity in connection with a transaction inconsistent with the Merger. The Merger
Agreement further provides that nothing contained therein shall prohibit the
Cosmetic Board from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal in writing to acquire Cosmetic or substantially all of its assets on
terms which, in an exercise of their fiduciary duty after the consideration of
advice from Cosmetic's legal and financial advisors, a majority of Cosmetic's
directors determines is likely to be more beneficial to the holders of Cosmetic
common stock than the Merger. This proviso, however, does not permit Cosmetic to
(i) terminate the Merger Agreement, (ii) enter into an agreement with respect to
a Cosmetic Center Alternate Transaction (as defined below, see " -- Expenses")
prior to the termination of the Merger Agreement or (iii) affect any other
obligation under the Merger Agreement.
Revlon and PFC have agreed that Revlon, PFC and Revlon's affiliates,
officers, directors, employees, representatives and agents will not solicit,
engage in negotiations, provide information to or otherwise cooperate with any
person or entity that expresses an interest in acquiring all or a substantial
part of any class of the securities, business or assets of PFC nor will Revlon
or PFC grant any proxy, option or other similar right to any third person or
entity in connection with a transaction inconsistent with the Merger.
TERMINATION; AMENDMENT; WAIVER
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) by mutual agreement of Cosmetic and Revlon; (ii) by Cosmetic or Revlon
if the Merger has not occurred before March 17, 1997, unless the failure to
consummate the Merger by such date is due to the action or failure to act of the
party seeking to terminate the Merger Agreement; (iii) by Cosmetic or Revlon if
any governmental entity of competent jurisdiction shall have enacted, entered or
enforced a statute, rule, regulation, order, decree or injunction which
restrains, enjoins or otherwise prohibits the consummation of the Merger; (iv)
by Revlon if the Cosmetic Board withdraws or modifies its recommendation that
the Cosmetic stockholders approve the Merger Agreement in a manner not favorable
to the adoption of the Merger Agreement or the consummation of the Merger; or
(v) by Cosmetic or Revlon if the Merger Agreement is not approved by the holders
of a majority of the outstanding Cosmetic Class B common stock.
The Merger Agreement may be amended by written agreement of each of the
parties, PROVIDED that, in accordance with the General Corporation Law of
Delaware, after the approval of the Cosmetic stockholders no amendment may be
made which changes the form or decreases the consideration per share to be paid
in the Merger or which changes any of the terms or conditions of the Merger
Agreement if such change would adversely affect the rights of such stockholders
without the further approval of such stockholders. In addition, each party may
at any time waive the other party's compliance with certain terms and conditions
of the Merger Agreement.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses, except as provided
below and except that the filing fee under the Hart-Scott-Rodino Antitrust
Improvements Act was paid 20% by Cosmetic and 80% by PFC.
If (a)(i) Cosmetic shall enter into, or publicly announce its intent to
enter into an agreement in principle, letter of intent or definitive agreement
with anyone other than Revlon and its affiliates with respect to any sale,
merger or other similar transaction involving Cosmetic, any class of its equity
securities or all or substantially all of its assets, (ii) the Cosmetic Board
(A) recommends or approves that Cosmetic's stockholders sell shares of any class
of Cosmetic's equity securities or all or substantially all of Cosmetic's assets
to another person or group, (B) recommends or approves any transaction described
in clause (a)(i) above to another person or group or (C) withdraws or modifies
in a manner adverse to Revlon its support for the Merger (other than due to
circumstances regarding PFC which could reasonably be expected to have a
material adverse affect on PFC) or (iii) Cosmetic breaches in any material
respect any of its obligations under the Merger Agreement, or (b) any Cosmetic
Center Alternate Transaction is consummated during the 90-day period following
the later of March 17, 1997 or the termination of the Merger Agreement in
accordance with its terms, unless the Merger Agreement is
57
<PAGE>
terminated by Revlon (other than due to a material breach by Cosmetic of its
obligations under the Merger Agreement or a material breach by the Principal
Stockholders of their obligations under the Stockholders Agreement) or as a
result of the failure of a condition to either party's obligation to close under
the Merger Agreement (other than due to a material breach by Cosmetic of its
obligations under the Merger Agreement or a material breach by the Principal
Stockholders of their obligations under the Stockholders Agreement) (the later
of such dates being the "Cosmetic Center Termination Date"), Cosmetic shall pay
to Revlon within two business days after such event, an amount equal to its
documented fees and expenses in connection with the due diligence, preparation
and negotiation of documents and preparation of PFC financial statements related
to the Merger, up to a maximum of $1 million (the "Revlon Expense Reimbursement
Fee"). The events described in (a)(i), (a)(ii) and (a)(iii) are referred to as
"Cosmetic Center Triggering Events," and the events described in (a)(i),
(a)(ii)(A) and (a)(ii)(B) are referred to as a "Cosmetic Center Alternate
Transaction."
If (a)(i) Revlon or PFC shall enter into, or publicly announce its intent
to enter into an agreement in principle or definitive agreement with anyone
other than Cosmetic and its affiliates with respect to any sale, merger or other
similar transaction involving PFC, any of its equity securities or all or
substantially all of its assets, (ii) Revlon's or PFC's board of directors (A)
recommends or approves that PFC's stockholder sell shares of PFC's equity
securities or all or substantially all of PFC's assets to another person or
group, (B) recommends or approves any transaction described in clauses (a)(i) or
(a)(iii) of this paragraph or (C) withdraws or modifies in a manner adverse to
Cosmetic its support of Cosmetic's proposal (other than due to circumstances
regarding Cosmetic which could reasonably be expected to have a material adverse
affect on Cosmetic), (iii) Revlon or PFC sells or agrees to sell any shares of
PFC's equity securities to any group other than Cosmetic, or (iv) Revlon or PFC
breaches in any material respect any of their respective obligations under the
Merger Agreement, or (b) any PFC Alternate Transaction is consummated during the
90-day period following the later of March 17, 1997 or the termination of the
Merger Agreement in accordance with its terms, unless the Merger Agreement is
terminated by Cosmetic (other than due to a material breach by Revlon or PFC) or
as a result of the failure of a condition to either party's obligation to close
under the Merger Agreement (other than due to a material breach by Revlon or
PFC) (the later of such dates being the "Revlon Termination Date"), Revlon shall
pay Cosmetic within two business days after such event an amount equal to its
documented fees and expenses in connection with the due diligence, preparation
and negotiation of documents and preparation of Cosmetic financial statements
related to the Merger, up to a maximum of $1 million. The events described in
(a)(i), (a)(ii), (a)(iii) and (a)(iv) are referred to as "Revlon Triggering
Events," and the events described in (a)(i), (a)(ii)(A), (a)(ii)(B) and (a)(iii)
are referred to as a "PFC Alternate Transaction."
TERMINATION FEE
In addition to the foregoing expense reimbursement provisions, the Merger
Agreement also provides that if Cosmetic shall consummate any Cosmetic Center
Alternate Transaction at any time prior to the Cosmetic Center Termination Date
or during the 90-day period immediately following the Cosmetic Center
Termination Date, Cosmetic shall pay to Revlon on the date of consummation of
such Cosmetic Center Alternate Transaction a break-up fee of $1 million (the
"Cosmetic Center Break-up Fee").
If Revlon or PFC shall consummate any PFC Alternate Transaction at any time
prior to the Revlon Termination Date or during the 90-day period immediately
following the Revlon Termination Date, Revlon shall pay to Cosmetic on the date
of consummation of such PFC Alternate Transaction a break-up fee of $1.25
million (the "Revlon Break-up Fee").
THE STOCKHOLDERS AGREEMENT
Concurrent with the execution of the Merger Agreement, the Principal
Stockholders and Revlon entered into the Stockholders Agreement. At January 27,
1997, the Principal Stockholders in the aggregate own approximately 23% of the
outstanding Cosmetic Class A common stock and approximately 48% of the
outstanding Cosmetic Class B common stock.
Pursuant to the Stockholders Agreement, the Principal Stockholders have
agreed to elect to make the Stockholder Cash Election for all of their Cosmetic
Class A and Class B common stock and to make the Option Cash Election with
respect to each stock option held by each Principal Stockholder that has an
exercise price of less than $7.63 per share.
The Principal Stockholders have agreed that neither they nor their
representatives or agents shall solicit, engage in negotiations, provide
information to or otherwise cooperate with any person or entity that expresses
an interest in acquiring all or a substantial part of any class of the
securities, business or assets of Cosmetic nor will they grant any proxy, option
or other similar right to any third person or entity in connection with a
transaction inconsistent with the Merger. In addition, the Principal
Stockholders agreed that they will not sell, pledge, agree to sell or pledge or
otherwise dispose of any of their shares
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of any class of Cosmetic's securities to any third person, and with respect to
any Stockholder Alternate Transaction (as defined below) or Cosmetic Center
Alternate Transaction, each of the Principal Stockholders will vote against any
such Stockholder Alternate Transaction or Cosmetic Center Alternate Transaction
and, if available, will exercise appraisal rights with respect to their shares.
A "Stockholder Alternate Transaction" is defined as a sale or agreement to sell
by any one of the Principal Stockholders any shares of any class of the
outstanding equity securities or securities convertible into equity securities
of Cosmetic to any person or group other than Revlon or its affiliates.
If (a) any Stockholder Triggering Event or Cosmetic Center Triggering Event
occurs prior to the termination of the Merger Agreement in accordance with its
terms or (b) any Stockholder Alternate Transaction or Cosmetic Center Alternate
Transaction is consummated prior to the Cosmetic Center Termination Date, each
Principal Stockholder agrees, jointly and severally, to pay Revlon within two
business days after such event the Revlon Expense Reimbursement Fee (without
duplication of any amounts in respect of expense reimbursement paid to Revlon by
Cosmetic pursuant to the Merger Agreement). A "Stockholder Triggering Event"
shall have occurred if any of the Principal Stockholders breach any of its
obligations under the Stockholders Agreement in any material respect or Cosmetic
breaches any of its obligations under the Merger Agreement in any material
respect.
If Cosmetic should consummate any Cosmetic Center Alternate Transaction or
any Principal Stockholder shall consummate a Stockholder Alternate Transaction
prior to the Cosmetic Center Termination Date or during the 90-day period
immediately following the Cosmetic Center Termination Date, the Principal
Stockholders agree to pay to Revlon a break-up fee equal to 25% of the
difference between (i) the value of the consideration paid to the Principal
Stockholders in such Cosmetic Center Alternate Transaction or such Stockholder
Alternate Transaction, as the case may be, with respect to all of their shares
minus (ii) the product of (A) the number of shares held by the Principal
Stockholders multiplied by (B) $7.63 (the "Principal Stockholders Break-Up
Fee").
If (i) at any meeting of Cosmetic stockholders held for the purpose of
voting on the Merger, the Principal Stockholders do not vote in favor of the
Merger or (ii) the Principal Stockholders vote in favor of any Stockholder
Alternate Transaction or any Cosmetic Center Alternate Transaction prior to the
Cosmetic Center Termination Date, the Principal Stockholders agree to pay Revlon
a fee of $1 million, provided that if the Principal Stockholders Break-Up Fee is
payable subsequently, the $1 million payable would be credited against such
Principal Stockholders Break-Up Fee.
Cosmetic has no agreement, arrangement or understanding pursuant to which
it would be required to reimburse the Principal Stockholders in the event that
they were required to pay any of the Revlon Expense Reimbursement Fee or the
Principal Stockholders Break-Up Fee.
Pursuant to the Stockholders Agreement, Principal Stockholders holding at
least 25% of all Cosmetic Class C common stock held by the Principal
Stockholders will be entitled to demand on one occasion that Cosmetic file a
registration statement under the Securities Act for the sale of their Cosmetic
Class C common stock. The Principal Stockholders will also be entitled to
include their Cosmetic Class C common stock in certain registration statements
filed for the benefit of Cosmetic. Cosmetic will bear all expenses of such
registration statements, except for fees and expenses of counsel for the
Principal Stockholders and underwriters' discounts, fees and expenses.
The Stockholders Agreement provides that for three years from the
consummation of the Merger, the Principal Stockholders will agree to vote all of
their Cosmetic Class C common stock in favor of Revlon's nominees for director
so that Revlon will at all times maintain representation on the Combined Company
Board equal to Revlon's percentage ownership of Cosmetic Class C common stock,
but not less than seven board seats, including two independent directors, and
Revlon will agree to vote its shares in favor of the Principal Stockholders'
nominees for director equal to their aggregate percentage ownership of Cosmetic
Class C common stock, after giving effect to the Merger and the Cash Election,
but not less than one nor more than two board seats.
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AGREEMENTS WITH REVLON
At the Effective Time, the Combined Company and Revlon (or with respect to
the employee stores located in Edison, New Jersey, Holdings) will enter into the
following agreements:
HOLMDEL LEASE
At the Effective Time, the Combined Company will enter into a lease with
Revlon for the retail store and office, warehouse and distribution facility that
PFC currently occupies in Holmdel, New Jersey for a period of up to five years
at a base rental of $395,250 per annum plus its proportionate share (17.2%) of
operating and tax expense escalations, which it is estimated will aggregate
approximately $342,000 for the full year in 1997 (the "Holmdel Lease"). The
Holmdel Lease can be terminated by the Combined Company upon 60 days' prior
notice for any reason and can be terminated by Revlon upon 180 days' prior
notice if (i) Revlon accepts an offer to sell or lease the facility to a third
party or ceases or substantially reduces operations at the facility; (ii) Revlon
or any of its affiliates no longer have the power to vote, directly or
indirectly, a majority of the voting power of outstanding shares of the Combined
Company; (iii) if all or substantially all of Combined Company's assets are sold
to any person other than an affiliate of Revlon or (iv) an agreement is entered
into by Revlon that would result in either (ii) or (iii).
PFC EMPLOYEE STORE LEASES
The Combined Company will continue to occupy the PFC employee stores
located in Edison (currently two employee stores that may be consolidated) and
Irvington, New Jersey; Oxford, North Carolina; and Phoenix, Arizona pursuant to
leases with terms of one year at an annual rent of $73,150, $20,064, $27,500 and
$18,200, respectively, for the first year, with the option to renew for nine
additional one-year periods with rent increases of 5% of the annual base rent
for each renewal year (the "PFC Employee Store Leases"). Operating costs are
included in the rent. During the first year of the terms, the PFC Employee Store
Leases would not be able to be terminated except that if at any time during the
term Revlon enters into an agreement with a non-affiliate for the sale or lease
of the facility in which a store is located, Revlon may terminate the relevant
lease upon notice effective the earlier to occur of five business days before
the closing of such sale or lease transaction, or 180 days following the giving
of such notice. In addition, at any time during the term either party may
terminate the applicable lease if Revlon ceases or substantially diminishes its
operations in the portion of a building in which a store is located (a
"Cessation of Operations"). If a Cessation of Operations occurs, Revlon may
terminate the lease upon 120 days' notice, except that if the termination date
would fall during the period between Thanksgiving and December 31, the
termination date automatically will become the first business day following
December 31. If a Cessation of Operations occurs, the Combined Company may
terminate upon at least 90 days' prior notice. After the first year of the
leases, the Combined Company may terminate at any time upon at least 90 days'
prior notice. Revlon may terminate at any time after the second anniversary of
the date of the leases if (i) Revlon or any of its affiliates no longer have the
power to vote, directly or indirectly, a majority of the voting power of
outstanding shares of the Combined Company; (ii) all or substantially all of the
Combined Company's assets are sold to any person other than an affiliate of
Revlon or (iii) an agreement is entered into by Revlon that would result in
either (i) or (ii). If Revlon exercises such termination right after the second
year of the leases but before the beginning of the fifth year, Revlon must give
at least one year's notice. Thereafter, Revlon may terminate in such event on
180 days' notice. Revlon is not obligated to terminate any or all of the leases
in such event, but may choose to retain the Combined Company as a tenant in one
or more locations. At the Effective Time, the Combined Company will also
sublease the New York employee store from Revlon at an annual rent of
approximately $99,000, which includes such store's share of operating and tax
escalations and which is subject to escalation each year. The sublease expires
in December 2004. If Revlon or one of its affiliates no longer owns 50% or more
of the voting stock of the Combined Company, the consent of Revlon's landlord to
the sublease must be sought to permit continuation of the sublease. The landlord
is not affiliated with Revlon and no assurance can be given that such consent
will be forthcoming. If Revlon terminates the Supply Agreement with the Combined
Company and does not agree to supply products for resale at the New York
employee store, the Combined Company may terminate the sublease on 90 days'
prior notice. The lease for the employee store located in Apex, North Carolina,
which is with a third party and provides for a fixed annual rent of $17,444,
including such store's share of operating and tax expense escalation, and which
expires April 2000, will be assigned by a subsidiary of Revlon to the Combined
Company at the Effective Time.
SERVICES AGREEMENT
Revlon and the Combined Company will enter into a services agreement at the
Effective Time pursuant to which Revlon will provide services, including
executive, treasury, legal, human resources, accounting, tax, real estate,
management information services, corporate information services, including
investor relations, risk management, participation in Revlon's insurance and
self-insurance programs and warehouse and distribution services (collectively,
the "Services"), as and to the
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extent requested by the Combined Company (the "Services Agreement"). The
Combined Company will pay Revlon the actual cost incurred by Revlon in providing
the Services. To the extent the Services are secured from third party providers
such as insurance carriers or outside advisors such as lawyers and accountants,
the Combined Company will pay to Revlon that portion of the amounts due to such
third party providers as is allocable to the Services purchased for and provided
to or for the benefit of the Combined Company. Such payments shall be made
within ten working days of the invoice therefor. Additionally, the Combined
Company will reimburse Revlon for all other reasonable out-of-pocket expenses
incurred by Revlon in providing the Services. Additionally, the Combined Company
will pay Revlon a one-time payment of $340,000 to cover all severance costs
expected to be incurred by Revlon with respect to the termination of certain
Revlon employees who provided Services to PFC prior to the Merger as a result of
the Combined Company's decision to consolidate certain warehouse, distribution
and headquarters operations in Maryland. The Services Agreement provides that
Revlon need not make available any Services to the Combined Company to the
extent doing so would cause an unreasonable burden to Revlon or to the extent
that Revlon discontinues such Services within its organization. Although there
is no specific limit on the amount payable to Revlon for the Services, the
charges are based upon Revlon's actual cost of providing such Services and
amounts due to third party providers with respect to the Services. If Revlon
were to provide the Combined Company with the same amount of Services in 1997
that had been provided to PFC in 1996, it is estimated that the total annual
amount payable to Revlon in connection with the provision of such Services would
not exceed $700,000 for 1997 (not including the one-time payment of $340,000 to
cover severance costs). The Services Agreement or any severable part thereof may
be terminated by either party on 180 days' notice. In addition, if at any time
Revlon together with its affiliates no longer have the power to vote, directly
or indirectly, a majority of the voting power of outstanding shares of the
Combined Company or if all or substantially all of the Combined Company's assets
are sold to any person other than an affiliate, Revlon may terminate the
Services Agreement upon 30 days' prior notice.
SUPPLY AGREEMENT
Revlon and the Combined Company will enter into a purchase and supply
agreement (the "Supply Agreement") at the Effective Time for a term of at least
two and a maximum of four years pursuant to which Revlon would agree to supply
to the Combined Company for resale in its retail stores, and not for wholesale
distribution, first quality Revlon products and first quality excess Revlon
products, and for resale only in the PFC division retail stores, and not for
wholesale distribution, discontinued and returned and refurbished Revlon
products (subject in all cases to the availability of product). Payments shall
be made within 30 days net of shipment. The Supply Agreement provides that
Revlon may terminate the agreement effective at any time after the second
anniversary of the Merger on one year's notice if Revlon together with its
affiliates no longer have the power to vote, directly or indirectly, a majority
of the voting power of outstanding shares of the Combined Company or if all or
substantially all of the Combined Company's assets are sold to any person other
than an affiliate.
TAX SHARING AGREEMENT
Revlon and PFC are, and after the Effective Time, Revlon and, assuming
Revlon owns more than 80% of the Cosmetic Class C common stock, the Combined
Company will be, for federal income tax purposes, included in the affiliated
group of which Mafco Holdings Inc. ("Mafco Holdings") is the common parent. As a
result, Revlon's and the Combined Company's federal taxable income and loss will
be included in such group's consolidated tax return filed by Mafco Holdings.
Revlon and the Combined Company also may be included in certain state and local
tax returns of Mafco Holdings or its subsidiaries.
In June 1992, Mafco Holdings, Holdings, Revlon, Inc. (Revlon's parent),
Revlon and certain of Revlon's subsidiaries, including PFC entered into a tax
sharing agreement (as amended by the second amendment, the "Tax Sharing
Agreement"), pursuant to which Mafco Holdings has agreed to indemnify Revlon,
Inc. and Revlon against federal, state or local income tax liabilities of the
consolidated or combined group of which Mafco Holdings (or a subsidiary of Mafco
Holdings other than Revlon, Inc. and Revlon or its subsidiaries) is the common
parent for taxable periods beginning on or after January 1, 1992 during which
Revlon, Inc., Revlon or a subsidiary of Revlon is a member of such group.
Revlon, Inc. has agreed to pay Revlon its share of any payment received by
Revlon, Inc. from Mafco Holdings under the Tax Sharing Agreement and Revlon has
agreed to pay to each of its subsidiaries, including PFC, its share of any
payment received by Revlon from Revlon, Inc. under the Tax Sharing Agreement.
Pursuant to the Tax Sharing Agreement, for all taxable periods beginning on or
after January 1, 1992, Revlon will pay to Revlon, Inc., which in turn will pay
to Mafco Holdings, amounts equal to the taxes that such corporation would
otherwise have to pay if it were to file separate federal, state or local income
tax returns (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Revlon), except that Revlon will not be entitled to carry back any losses to
taxable periods ending prior to January 1, 1992. No payments are required by
Revlon or Revlon, Inc. if and to the extent Revlon is prohibited under the
Revlon credit agreement from making cash tax sharing
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payments to Revlon, Inc. The Revlon credit agreement prohibits Revlon from
making cash tax sharing payments other than in respect of state and local income
taxes.
Pursuant to the Tax Sharing Agreement, each of the subsidiaries of Revlon,
including PFC, has agreed to pay to Revlon an amount equal to its liability for
federal, state and local income taxes (including estimated taxes), if any. Since
the payments to be made by subsidiaries of Revlon, including PFC, to Revlon
under the Tax Sharing Agreement will be determined by the amount of taxes that
such subsidiaries would otherwise have to pay if they were to file separate
federal, state or local income tax returns, the Tax Sharing Agreement will
benefit Revlon to the extent Revlon can offset the taxable income generated by
such subsidiaries, including PFC, against losses and tax credits generated by
Revlon and its other subsidiaries. PFC anticipates that, as a result of
anticipated operating losses, no significant federal tax payments or payments in
lieu of taxes pursuant to the Tax Sharing Agreement will be required by PFC for
1997. At the Effective Time, assuming Revlon owns 80% or more of the Combined
Company, the Combined Company will become a party to the Tax Sharing Agreement.
REGISTRATION RIGHTS AGREEMENT
The Combined Company will enter into a registration rights agreement with
Revlon pursuant to which Revlon will be entitled to demand on three occasions
that the Combined Company file a registration statement under the Securities Act
in connection with the sale of Revlon's Cosmetic Class C common stock and will
also be entitled to include such shares in certain registration statements filed
for the benefit of the Combined Company (the "Registration Rights Agreement").
The Combined Company will bear all expenses of such registration statements,
except for fees and expenses of counsel for Revlon and underwriters' discounts,
fees and expenses.
THE MEETING
This Proxy Statement/Prospectus is being furnished to holders of Cosmetic
Class A and Class B common stock in connection with the solicitation of proxies
by the Cosmetic Board from the holders of the Cosmetic Class B common stock for
use at the Meeting. This Proxy Statement/Prospectus and the accompanying form of
proxy are first being mailed to Cosmetic stockholders on or about February ,
1997. This Proxy Statement/Prospectus also constitutes Cosmetic's Annual Report
with respect to the fiscal year ended September 27, 1996.
COSMETIC'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SEC WILL BE
FURNISHED WITHOUT CHARGE TO COSMETIC STOCKHOLDERS UPON WRITTEN REQUEST TO MR.
BRUCE E. STROHL, THE COSMETIC CENTER, INC., 8839 GREENWOOD PLACE, SAVAGE,
MARYLAND 20763.
TIME AND PLACE; PURPOSES
The Meeting will be held at , Maryland, on February , 1997,
starting at 10:00 a.m., Eastern Standard Time. At the Meeting, holders of
Cosmetic Class B common stock will be asked to approve (i) the Merger Agreement,
including the Class C Amendment, the conversion of Cosmetic Class A and Class B
common stock into Cosmetic Class C common stock and the appointment of nine
directors at the Effective Time, (ii) the Board Amendment, (iii) the election of
two members of the Cosmetic Board (who will be replaced in connection with the
appointment of nine directors upon consummation of the Merger) and (iv) the
approval of the Cosmetic 1997 Stock Option Plan.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Cosmetic Board has fixed the close of business on January , 1997 as
the record date for the determination of Cosmetic Class B stockholders entitled
to notice of and to vote at the Meeting. Accordingly, only holders of record of
Cosmetic Class B common stock at the close of business on January , 1997 are
entitled to notice of and to vote at the Meeting. At the close of business on
January , 1997, there were shares of Cosmetic Class B common stock
outstanding. Holders of Cosmetic Class A common stock are not entitled to vote
at the Meeting.
The Cosmetic Class B common stock is the only class of securities entitled
to vote at the Meeting, and each share of Cosmetic Class B common stock is
entitled to one vote on each matter properly submitted to a vote at the Meeting.
The presence at the Meeting in person or by properly executed proxies of the
holders of a majority of the outstanding Cosmetic Class B common stock is
necessary to constitute a quorum for the transaction of business at the Meeting.
The affirmative vote of a majority of the outstanding Cosmetic Class B
common stock is required to approve the Merger Agreement. Approval of the Board
Amendment requires the affirmative vote of at least 80% of the outstanding
Cosmetic Class B common stock, and the election of the directors and the
approval of the Cosmetic 1997 Stock Option Plan requires the affirmative vote of
a majority of the Cosmetic Class B common stock present and voting at the
Meeting.
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The Principal Stockholders and their family members, who in the aggregate
beneficially own or control more than 51% of the outstanding Cosmetic Class B
common stock as of the record date, have advised Cosmetic that they intend to
vote their shares in favor of the Merger Agreement, the Board Amendment, the
election of the directors and the approval of the Cosmetic 1997 Stock Option
Plan. Accordingly, the approval of the Merger Agreement, the election of the
directors and the approval of the Cosmetic 1997 Stock Option Plan (but not the
Board Amendment) are assured without the vote of any other stockholder.
PROXIES
All shares of Cosmetic Class B common stock represented by properly
executed proxies received prior to or at the Meeting and not revoked will be
voted at the Meeting in accordance with the instructions indicated in such
proxies. If no instructions are indicated in a properly executed proxy, such
proxy will be voted FOR the approval of the Merger Agreement, the Board
Amendment, the election of directors and the Cosmetic 1997 Stock Option Plan. A
properly executed proxy marked "abstain," although counted for the purposes of
determining whether there is a quorum and for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote at
the Meeting, will not be voted. Accordingly, because the affirmative vote of a
majority of the outstanding Cosmetic Class B common stock is required for
approval of the Merger Agreement and the affirmative vote of 80% of the
outstanding Cosmetic Class B common stock is required for approval of the Board
Amendment, a proxy marked "abstain" will have the effect of a vote against such
proposals. Shares represented by "broker non-votes" (that is, shares held by
brokers or nominees which are represented at the Meeting but with respect to
which the broker or nominee is not authorized to vote on a particular proposal)
will be counted for purposes of determining whether there is a quorum at the
Meeting. Brokers and nominees are precluded from exercising their voting
discretion with respect to the approval of the Merger Agreement or the Board
Amendment and therefore, absent specific instructions from the beneficial owner
of such shares, are not authorized to vote such shares with respect to the
approval of the Merger Agreement or the Board Amendment. Because the affirmative
vote of a majority of the outstanding Cosmetic Class B common stock is required
for the approval of the Merger Agreement and the affirmative vote of 80% of the
outstanding Cosmetic Class B common stock is required for approval of the Board
Amendment, a "broker non-vote" will have the effect of a vote against the Merger
Agreement and the Board Amendment.
A stockholder who has executed and returned a proxy may revoke it at any
time before it is voted by delivering to Cosmetic's Secretary a signed notice of
revocation or a signed proxy bearing a later date or by attending the Meeting
and voting in person. Attendance at the Meeting will not in itself constitute
the revocation of a proxy.
The Cosmetic Board is not aware of any business to be acted upon at the
Meeting other than as described in this Proxy Statement/Prospectus. If, however,
other matters are properly brought before the Meeting, or any adjournment or
postponement thereof, the persons appointed as proxies will have discretion to
vote or to act thereon according to their best judgment. Such adjournments or
postponements may be for the purpose of soliciting additional proxies.
The cost of soliciting proxies will be paid by Cosmetic. In addition to
solicitation by mail, arrangements will be made with banks, brokerage houses and
other custodians, nominees and fiduciaries to send proxy materials to beneficial
owners, and Cosmetic will reimburse them for their reasonable expenses in so
doing. To the extent necessary to ensure sufficient participation at the
Meeting, Cosmetic's directors, officers and regular employees, without extra
compensation, may request by telephone or telegram the return of proxy cards.
STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES FOR COSMETIC CLASS A AND CLASS B COMMON STOCK WILL BE MAILED BY
COSMETIC TO COSMETIC STOCKHOLDERS OF RECORD ON FEBRUARY , 1997 AS SOON AS
PRACTICABLE AFTER THE CONSUMMATION OF THE MERGER.
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BUSINESS OF COSMETIC
GENERAL
Cosmetic is primarily engaged in the retail sale of a wide range of brand
name cosmetics, fragrances, beauty aids and related items (sometimes referred to
herein as "cosmetic products"). Cosmetic is a specialty retailer of cosmetic
products and believes that its stores offer a larger selection of cosmetic
products than other retailers in Cosmetic'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 prices. Traditional drug stores generally offer lower priced,
mass-merchandised items and a limited selection of prestige items, typically at
the manufacturers' suggested retail prices. Discount stores feature lower
prices, but generally only offer mass-merchandised cosmetic products. Cosmetic
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
Cosmetic's retail speciality stores sell cosmetic products. Cosmetic's
stores, which operate under the name "The Cosmetic Center(Register mark)", are
located in the metropolitan areas of Washington, D.C.; Richmond, Virginia;
Baltimore, Maryland; Chicago, Illinois; Charlotte/Raleigh/Durham, North
Carolina; and Philadelphia, Pennsylvania.
Cosmetic's retail division operated 69 specialty stores under the name "The
Cosmetic Center(Register mark)" as of December 31, 1996. 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 prices, with most items
priced from 10% to 20% below such prices. Cosmetic features advertised items
priced up to 70% below the manufacturers' suggested retail prices. 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.
Cosmetic's retail division operates hair salons in 60 of its 69 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 and permanent waving. Some stores also offer manicure
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 Salon
hours generally are shorter. 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 Cosmetic'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 Cosmetic.
Control over store operations is the responsibility of Cosmetic's vice
president of retail operations, one regional manager and six district managers.
It is company policy for the district managers to visit each store at least
weekly to ensure the quality of merchandise presentation, proper staffing and
adherence to company standards.
Approximately 61% of Cosmetic's sales are made for cash with the balance
under major credit card plans for which Cosmetic assumes no credit risk. The
stores accept the return of merchandise.
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ATLANTA, GEORGIA MARKETPLACE
Cosmetic closed its eight retail stores in the Atlanta, Georgia marketplace
effective August 4, 1996. As a result, in the fourth quarter of the fiscal year
ended September 27, 1996, Cosmetic recorded a restructuring provision of
approximately $4.0 million. The restructuring provision included the cost of
future lease obligations, a write off of certain assets and a severance package
for its Atlanta employees. The expected future cash requirement of the
restructuring provision at September 27, 1996 is approximately $2.1 million and
will be paid over the remaining one to four year terms of the Atlanta leases.
WHOLESALE DIVISION
Cosmetic's wholesale division, through Cosmetic's wholly owned subsidiary,
M. Steven Cosmetic Company, Inc., distributes cosmetic products to independent
drug stores and regional retail chains throughout the United States. 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.
DISTRIBUTION DIVISION
Cosmetic's distribution division, through Cosmetic'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(Register mark)" label. These products are sold in Cosmetic's
stores, by Cosmetic's wholesale division and to a small extent by independent
sales representatives.
RETAIL STORES
The following table summarizes the number of stores opened, net of closed
stores, by fiscal year by metropolitan market area as of September 27, 1996.
<TABLE>
<CAPTION>
WASHINGTON CHICAGO BALTIMORE RICHMOND NORTH PHILA.
FISCAL YEAR TOTAL D.C. IL MD VA CAROLINA PA
- --------------------------------------------- ----- ---------- ------- --------- -------- -------- ------
<S> <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 2
1995......................................... 12 4 1 2 3
1996......................................... (4) 1 1
-- -- -- -- -- --
-----
69 27 21 6 4 5 6
<CAPTION>
ATLANTA
FISCAL YEAR GA
- --------------------------------------------- -------
<S> <C>
1986 (and prior).............................
1987.........................................
1988.........................................
1989.........................................
1990.........................................
1991.........................................
1992.........................................
1993.........................................
1994......................................... 4
1995......................................... 2
1996......................................... (6)
--
0
</TABLE>
In fiscal year 1996, Cosmetic opened five stores, two in Georgia and one
each in Illinois, Pennsylvania and the Washington, D.C. metropolitan market
area, and closed nine stores, eight in Georgia and one in Illinois. Cosmetic may
open additional stores in fiscal year 1997, although no stores were opened or
closed during the first quarter of fiscal year 1997. Cosmetic'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
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, Cosmetic 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 Cosmetic's
purchases from various vendors change constantly. For the 1996 fiscal year,
Cosmetic estimates that approximately 82% of its cosmetic products were
purchased directly from manufacturers and their representatives (primary
sources) and approximately 18% 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. Cosmetic purchases
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merchandise from approximately 560 vendors. For the 1996 fiscal year, more than
$100,000 of purchases were made from each of approximately 155 different
vendors. The three largest primary source vendors accounted for approximately
10%, 8% and 4%, respectively, of total purchases. The largest secondary source
vendor accounted for approximately 2% of total purchases. For fiscal 1996 and
1995, Cosmetic's purchases from Revlon accounted for 10% and 8% of total
purchases, respectively, making Revlon the largest primary source vendor in each
year. As is customary in the cosmetic product industry, Cosmetic has no
long-term or exclusive contract with any vendor. The loss of any of Cosmetic's
largest vendors could have a material adverse effect on Cosmetic.
Some of the cosmetic products purchased by Cosmetic from its secondary
sources may include cosmetic products that were originally sold to department
stores and other retailers. From time to time, certain manufacturers have taken
actions to prohibit or restrict the resale of such products by department stores
and other retailers. Some of the cosmetic products purchased by Cosmetic from
its secondary sources also may include products subject to copyright, trademark,
trade dress and patent rights, either manufactured in foreign countries or
manufactured in the United States and sold to foreign distributors.
Periodically, litigation and administrative proceedings have been instituted,
and federal legislation has been proposed but seeking to halt or restrict the
importation of such merchandise. Any of the foregoing prohibitions or
restrictions could have a material adverse effect on the Combined Company if the
Combined Company could not obtain alternative sources for its products on terms
at least as favorable as are currently available. 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
Cosmetic's retail and wholesale divisions are served from a 103,000-square
foot distribution center located in Savage, Maryland. Cosmetic believes that the
distribution center, which opened in September 1990, has the capacity to service
approximately 100 specialty retail stores as well as Cosmetic's wholesale
operations. Cosmetic 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 Cosmetic's operations and is a key element in
Cosmetic'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 Cosmetic may respond rapidly to changes in sales
patterns. Cosmetic believes that the automated stock replenishment system
provides Cosmetic with a competitive advantage by reducing store personnel
expenses and enabling store personnel to focus on customer service.
Products delivered to Cosmetic's stores are generally marked with
Cosmetic'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.
Cosmetic currently uses an IBM Model AS400 Model F70, which was upgraded in
January 1994. In fiscal years 1993 and 1994, Cosmetic upgraded its point-of-sale
system in all of its stores to provide greater data processing and analysis
capacity.
ADVERTISING
Cosmetic's retail division traditionally uses newspaper print and insert
advertising in major metropolitan newspapers in Cosmetic's market areas.
Cosmetic may seasonally supplement its advertising program with radio and
television advertising. To increase store traffic and sales, Cosmetic features
advertised items priced up to 70% below the manufacturers' suggested retail
prices. The wholesale division relies primarily on telemarketing, catalogs and
flyers for sales promotion. Cosmetic has been able to obtain cooperative
advertising allowances from some of its vendors. Cosmetic groups its stores in
selected market areas, among other reasons, to obtain economies of scale on
advertising expenditures.
TRADE NAMES AND SERVICE MARKS
Cosmetic's stores use the trade name and service mark "The Cosmetic
Center(Register mark)." Cosmetic has registered "The Cosmetic
Center(Register mark)" 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 Cosmetic's rights to open new stores under
the name "The Cosmetic Center(Register mark)" may be limited in such states.
Cosmetic uses the slogan "A Beautiful Way to Save(Register mark)" in all of its
retail
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<PAGE>
advertising, for which it has obtained registration with the United States
Patent and Trademark Office. Cosmetic purchases cosmetic products produced by
manufacturers for sale under Cosmetic's "Courtney Brooke(Register mark)" and
"Biny (Bullet) Biny(Register mark)" labels. Cosmetic has obtained federal
registration for the "Courtney Brooke(Register mark)" mark and the "Biny
(Bullet) Biny(Register mark)" mark for substantially all of those classes of
goods sold under the "Courtney Brooke(Register mark)" mark and the "Biny
(Bullet) Biny(Register mark)" mark.
EMPLOYEES
At September 27, 1996, Cosmetic had approximately 1,630 employees, of whom
830 were full-time and 800 were part-time. Cosmetic 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 Cosmetic's employees are
covered by a collective bargaining agreement and no work stoppages have been
experienced. Cosmetic believes that its relationship with its employees is
satisfactory.
LEGAL PROCEEDINGS
From time to time, Cosmetic is involved in various routine legal
proceedings incident to the ordinary course of its business. Cosmetic believes
that the outcome of all pending legal proceedings in the aggregate is unlikely
to have a material effect on its business.
COMPETITION
The retail and wholesale cosmetic product business and professional salon
services business are very competitive. Cosmetic'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 Cosmetic. Cosmetic's stores compete on the basis of
selling price, merchandise selection and variety, customer service, store
location and ambiance. Cosmetic 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
Cosmetic.
Cosmetic's wholesale division competes directly with other cosmetic
wholesalers nationwide. Some of these wholesalers have substantially greater
resources than Cosmetic. Cosmetic's wholesale division competes on the basis of
merchandise selection and availability, selling price and rapid delivery.
STORE PROPERTIES
Cosmetic's stores range in size from approximately 5,000 to 10,000 square
feet, with the average store comprising 6,200 square feet. All of Cosmetic'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 $14.09 per square foot. Substantially all
of Cosmetic's leases provide for additional rents equal to a percentage of sales
above a certain minimum level. Sixteen of Cosmetic's leases terminate during
1997 or 1998. Cosmetic believes it will be able to negotiate new leases for
these properties or lease other space in the vicinity of the current locations.
Cosmetic leases a store in an industrial park from a partnership in which Anita
J. Weinstein, vice chairman, vice president, secretary and director of Cosmetic,
holds a 35.67% limited partnership interest. See "Business -- Retail Stores" for
information as to the number of stores and market areas.
DISTRIBUTION CENTER AND CORPORATE HEADQUARTERS
All of Cosmetic's stores are served by a 103,000-square foot distribution
center and corporate headquarters located in Savage, Maryland. This facility is
leased by Cosmetic 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 Cosmetic's stores. Cosmetic believes that this facility
currently can service approximately 100 specialty retail stores as well as
Cosmetic's wholesale operations, and that its store locations, distribution
center and inventory are adequately covered by insurance. It is anticipated that
certain warehouse, distribution and headquarters operations will be consolidated
in Maryland and additional warehouse and distribution space will be secured.
67
<PAGE>
BUSINESS OF PFC
GENERAL
PFC operates a chain of retail stores that sell a wide range of brand name
cosmetics, fragrances and health and beauty products at discounted prices. As of
December 31, 1996, PFC operated 198 stores located principally in outlet malls
in 41 states.
PFC's stores, which operate under the names Prestige Fragrance & Cosmetics,
Colours & Scents, Visage and The Cosmetic Warehouse, offer a broad selection of
brand name prestige and mass-merchandised cosmetic products, including face
makeup, lip makeup, nail enamel, eye makeup, skin care and treatment products,
bath and body products, shampoo, hair color, hair spray, soap, perfume, cologne,
after-shave and cosmetic accessories. PFC stores stock mass, specialty and
department store brands of certain major manufacturers, including Revlon. The
stores operating under the name Prestige Fragrance & Cosmetics, as well as ten
of the stores that operate under the name Colours & Scents (the "Prestige
Fragrance & Cosmetics stores"), sell first quality, first quality excess,
returned and refurbished and discontinued items in the outlet store environment
and provide an outlet for major cosmetic manufacturers to sell their products
without competing directly with the retailers that purchase products from these
same manufacturers. The other 23 stores operating under the name Colours &
Scents (the "Colours & Scents stores") principally carry first quality prestige
brand fragrances and cosmetics normally carried in department stores at
substantial discounts from department store prices. Colours & Scents stores also
operate in the outlet mall environment and as such provide an outlet for
prestige brand manufacturers to sell their excess and overstocked first quality
merchandise. A wholly owned subsidiary of Revlon, PFC was acquired by Revlon's
predecessor in 1987 as part of the acquisition of the Charles of the Ritz
business from Yves St. Laurent.
STORE LOCATIONS
As of December 31, 1996, of PFC's 198 stores, 166 were Prestige Fragrance &
Cosmetics stores, 23 were Colours & Scents stores, one was operated under the
name Visage, one was operated under the name The Cosmetic Warehouse and seven
were employee stores that sell principally to employees of Revlon and its
affiliates and are also open to the general public. The Prestige Fragrance &
Cosmetics stores are located in 41 states, with 16 located in California, 16
located in Florida and 13 located in Texas. PFC acquired 20 Colours & Scents
stores in 1994. The Colours & Scents stores are located throughout the United
States, with six stores in California. The employee stores are located in New
York, New Jersey, Arizona and North Carolina. The Visage and The Cosmetic
Warehouse stores are located in Florida.
68
<PAGE>
The table below indicates the states in which PFC operated stores as of
December 31, 1996:
<TABLE>
<CAPTION>
VISAGE AND THE
PRESTIGE FRAGRANCE COLOURS COSMETIC EMPLOYEE
LOCATION &COSMETICS & SCENTS WAREHOUSE STORES
- -------------------------------------------------------------------- ------------------ -------- -------------- --------
<S> <C>
Alabama............................................................. 2
Arizona............................................................. 3 1 1
California.......................................................... 16 6
Colorado............................................................ 3 2
Connecticut......................................................... 2
Delaware............................................................ 1
Florida............................................................. 16 2 2
Georgia............................................................. 8 1
Hawaii.............................................................. 1
Idaho............................................................... 2
Illinois............................................................ 4
Indiana............................................................. 5
Iowa................................................................ 2
Kansas.............................................................. 2
Kentucky............................................................ 5
Louisiana........................................................... 3
Maine............................................................... 1
Massachusetts....................................................... 1 1
Michigan............................................................ 3
Minnesota........................................................... 2
Mississippi......................................................... 2
Missouri............................................................ 5
Nebraska............................................................ 2
Nevada.............................................................. 3
New Hampshire....................................................... 2
New Jersey.......................................................... 2 3
New Mexico.......................................................... 2 1
New York............................................................ 6 1 1
North Carolina...................................................... 6 2
Ohio................................................................ 3 1
Oklahoma............................................................ 1
Oregon.............................................................. 4
Pennsylvania........................................................ 5 1
South Carolina...................................................... 6
Tennessee........................................................... 8 1
Texas............................................................... 13 2
Utah................................................................ 3
Vermont............................................................. 1
Virginia............................................................ 3 1
Washington.......................................................... 6 1
Wisconsin........................................................... 2
-- -- --
---
Totals.............................................................. 166 23 2 7
-- -- --
-- -- --
---
---
</TABLE>
STORE OPERATIONS AND MANAGEMENT
Each PFC retail store is open every day of the year (except Easter,
Thanksgiving, Christmas and New Year's Day) generally from 10:00 a.m. to 8:00
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 Prestige Fragrance & Cosmetics stores and the PFC
employee stores generally range in size from 900 square feet to 3,000 square
feet with an average store size of approximately 1,650 square feet. The Colours
& Scents stores generally range in size from 900 square feet to 2,600 square
feet with an average store size of approximately 1,300 square
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<PAGE>
feet. All Prestige Fragrance & Cosmetics stores are designed for both
full-service salesperson assisted and self-service shopping, while most of the
Colours & Scents stores are full-service only. Merchandise is generally
displayed by manufacturer within product lines. The stores have attractive
interiors, which generally include wall-to-wall carpeting or ceramic tile
flooring, color-coordinated custom designed displays and recessed and track
lighting.
Each store location is staffed with trained sales personnel who are
familiar with the merchandise and its features and benefits. Sales management
personnel are compensated on a salary plus incentive bonus basis. Each store on
average has five employees, including a manager, assistant manager and three
assistants. Stores are grouped into 15 geographic districts, which are in turn
grouped into four regions. District managers generally seek to visit stores
within their districts approximately twice monthly to review merchandise levels
and presentation, store appearance, personnel performance, expense control,
security and adherence to PFC standards and operating procedures. The district
managers report to four regional managers who in turn report to the vice
president of store operations.
Generally, approximately 65% of purchases at PFC's retail stores are made
by cash or check, with the balance made by major credit cards, for which PFC
assumes no credit risk. The stores generally accept the return of merchandise
within 14 days of purchase, if accompanied by a valid store receipt. If
merchandise is returned within 14 days without a receipt the customer can obtain
a store credit.
INFORMATION SYSTEMS
PFC is in the process of significantly upgrading its information system.
The majority of the costs of such upgrades have already been paid. When
implemented, these systems are designed to track buyers' orders, warehouse
receipts, shipment to stores, inventories, markdowns, store sales and individual
item performance. As part of this upgrade, perpetual inventory management
information systems have been installed in all PFC stores and are scheduled to
be implemented beginning in 1997. Point-of-sale information systems have been
installed and implemented in all PFC stores. These systems are designed to allow
PFC to merge data from the various phases of PFC's operations without manual
input. Although historically PFC employees at each store manually entered
product codes into registers to record sales, recently PFC stores have begun
using bar scanners to register sales, track inventories and conduct physical
inventories. The point-of-sale cash registers at PFC stores are designed to
record daily sales and allow PFC to capture unit and financial data from a
single entry. The new inventory and financial reporting systems, including
purchase, product allocation/distribution and sales, are designed to allow PFC
to monitor store and warehouse inventories efficiently and to provide for
automatic reordering, minimum and maximum stocking levels and optimum order
quantities based on actual sales. The systems are also designed to enable PFC to
analyze retail sales data by product group, SKU and manufacturer so that PFC can
adjust to changes in customer demand.
STORE EXPANSION AND CLOSINGS
Historically, PFC has reviewed additional store locations on an ongoing
basis, seeking to open new stores in outlet malls where it does not already have
a presence. The opening of new stores is subject to a number of factors,
including general economic and business conditions affecting consumer purchases,
the availability of suitable store sites, the ability to obtain leases on
favorable terms and the impact of competition from new stores on sales at
existing stores, among others.
PFC opened six new stores in November 1996 and in October and November 1996
opened 13 temporary stores for the Christmas season. All of the temporary stores
were located in malls that also house existing PFC stores, and the remaining
inventory of the temporary stores, which consisted primarily of cosmetic gift
sets and other gift items, was moved to such existing PFC stores when the
temporary stores were closed the week after Christmas. Nine new store openings
are expected for 1997, and leases for these stores have been negotiated and
executed. Eleven other store sites are under consideration, although whether any
such stores will be opened in 1997 depends upon the factors noted above and,
among other things, upon the completion of the development of the outlet malls
in question. PFC store openings may be delayed due to such factors as well as
others, some of which are beyond PFC's control, including the developer's
failure to complete an outlet mall as scheduled. PFC expects that the cost of
opening a new store in fiscal 1997 will be approximately $215,000, including
$80,000 for leasehold improvements and $135,000 for inventory. PFC expects that
the cost of closing a store in fiscal 1997 will be approximately $25,000.
PFC continuously monitors store performance and in the ordinary course of
business closes stores that do not perform well. Through the year ended December
31, 1996, PFC closed five stores and opened 14 new stores for a net increase of
nine stores. PFC closed eight stores and opened 17 new stores in 1995 for a net
increase of nine stores and closed seven stores and, exclusive of the
acquisition of the Colours & Scents stores in 1994, opened 22 new stores in 1994
for a net increase of 15 stores. PFC attempts to schedule store closings after
the Christmas holiday season and typically attempts to schedule
70
<PAGE>
openings before November 15 so that stores are in operation during the Christmas
holiday season. Management anticipates that store openings and closings will
continue to be a regular part of the Combined Company's operations.
DISTRIBUTION OPERATIONS
PFC's current executive and administrative offices and warehouse and
distribution facility are located at a facility owned by Revlon in Holmdel, New
Jersey and consists of approximately 15,000 square feet in office space and
approximately 78,000 square feet in warehouse and distribution space. Other than
inventory located at PFC stores, the remainder of PFC's inventory is stored in
the Holmdel warehouse until it is delivered to the stores. At the Holmdel
distribution center, delivered merchandise is inspected for damage and checked
against the applicable purchase order and, unless shipped immediately to a PFC
store to fill an existing order, is stored in the appropriate warehouse
location. See "The Merger -- Operations After the Merger."
Shipments are generally sent via United Parcel Service ("UPS") and are sent
directly from the warehouse to PFC's retail stores. Revlon has a shipment
contract with UPS that extends to its subsidiaries, including PFC. The prices
paid by PFC vary, depending upon shipment weight and distance. If UPS services
were not available, PFC believes it could use one or more other carriers without
materially impacting the delivery process, although the start-up time necessary
to familiarize a new carrier with PFC's operations could cause temporary
disruptions in distribution and PFC's delivery costs could increase. Although
there can be no assurance, PFC has no reason to believe that UPS services would
not be available after the Effective Time.
Deliveries of merchandise are generally made to PFC stores weekly, with
more frequent deliveries during the Christmas holiday season when demand
increases. Frequent deliveries permit the stores to minimize inventory storage
space, maximizing display and selling space.
PURCHASING
PFC purchases merchandise from a number of suppliers based on the most
favorable available terms, including price, quantity and merchandise selection
and, accordingly, the nature and extent of PFC's purchases vary in the ordinary
course. PFC currently purchases inventory from approximately 75 vendors. PFC's
largest vendor, Revlon, and its indirect parent, Holdings, accounted for
approximately 29%, 32% and 45% of total purchases during the nine months ended
September 30, 1996, and the years ended December 31, 1995 and 1994,
respectively, excluding approximately 3% and 5% in 1995 and 1994, respectively,
attributable to two brands that were divested by Revlon in 1995. In the past,
PFC has purchased some first quality products as well as returned, discontinued
and excess products from Revlon at discount prices. PFC's second largest
supplier, with whom PFC has a supply contract that expires in 1999, accounted
for approximately 15% of total purchases during 1995. Two other significant
suppliers accounted for approximately 5% and 2% of total purchases during 1995.
PFC does not believe that the loss of a single supplier, other than Revlon,
would have a material adverse effect on PFC's business because PFC believes that
alternative sources of supply would be available. See "Risk Factors -- Reliance
on Vendors and Sources of Supply" and "Agreements with Revlon."
PFC purchases from manufacturers as well as secondary source suppliers such
as distributors, wholesalers, importers and retailers. As a result of the
expansion of its merchandise mix, including the addition of fragrance products
to PFC stores, PFC expects that its reliance on secondary sources will decrease
slightly. During the nine months ended September 30, 1996 and December 31, 1995,
PFC purchased 80% of its products and 73% of its products, respectively,
directly from manufacturers with the balance purchased from secondary sources.
PFC's largest secondary source vendor accounted for approximately 1.5% of total
purchases in the nine months ended September 30, 1996 and 7% of total purchases
during 1995.
Merchandise purchased by PFC from secondary sources may include merchandise
that was originally sold by manufacturers and distributors to department stores
or other retailers. From time to time, certain manufacturers have taken actions
to attempt to prohibit or restrict the resale of such merchandise by department
stores and other retailers. Merchandise purchased by PFC from secondary sources
may also include products that are subject to copyright, trademark, trade dress
and patent rights, either manufactured in foreign countries or manufactured in
the United States and sold to foreign distributors. Periodically, the United
States trademark, trade dress, patent and copyright owners and their licensees
and trade associations have initiated litigation or administrative agency
proceedings seeking to halt the importation into the United States of such
foreign manufactured or previously exported products or restrict the sale of
such merchandise once in the United States. Federal legislation to support such
owners', licensees' and trade associations' positions has been proposed but to
date not adopted. PFC's secondary sources typically will not disclose the
identity of their suppliers, and accordingly, PFC cannot determine what, if any,
portion of its merchandise purchased from secondary sources could be affected by
any such attempt to prohibit
71
<PAGE>
or restrict resale or by judicial, legislative or administrative action
discussed above or by actions on other grounds. Although there can be no
assurance that future judicial, legislative or administrative agency action,
including possible import, export, tariff or other trade restrictions, will not
limit or eliminate some of the secondary sources used by PFC, PFC believes that
in the event of any such action or the limitation or elimination of any of its
secondary sources, PFC could obtain alternative sources for most, if not all, of
its products or substitute products from other suppliers. However, there can be
no assurance that PFC could obtain such alternative sources or that the terms on
which PFC could purchase these substitute products would be as favorable as the
terms it currently receives from secondary sources.
TRADE NAME AND SERVICE MARK
PFC's stores use the trade names and service marks "Prestige Fragrance &
Cosmetics," "Colours & Scents," "Visage" and "The Cosmetic Warehouse." PFC has
registered the Colours & Scents mark with the United States Patent and Trademark
Office.
COMPETITION
The retail cosmetic, fragrance and personal care product business is
subject to intense competition. PFC's principal competitors are other stores or
chains selling similar products at discounted prices, along with department
stores, independent drug stores, national and regional drug chains and other
retail stores. Some of PFC's competitors are part of large national or regional
chains and have substantially greater resources and name recognition than PFC
and some of these chains have stores that have been established for some time in
the same geographic areas as PFC stores. PFC believes that the principal areas
of competition with respect to its business are selling price, merchandise
selection and variety, customer service and store location. Some of PFC's
competitors derive revenue from sales of services or products other than
cosmetics, fragrances, personal care products and cosmetic accessories, such as
hair salons and professional beauty products.
MERCHANDISE AND MARKETING
Prestige Fragrance & Cosmetics stores sell mainly excess, discontinued and
returned products and some first quality products of major manufacturers.
Colours & Scents stores sell principally prestige brand first quality cosmetic
and fragrance products. Virtually all merchandising decisions affecting the
stores are made by the buyers in charge of PFC's three product categories, mass
cosmetics, prestige fragrances and beauty care and accessories, with approval by
the Director of Merchandising. Pricing and markdowns are determined centrally
but may be adjusted locally by regional managers in response to competitive
situations, subject to certain approvals. Approximately 90% of the merchandise
carried by Prestige Fragrance & Cosmetics stores is carried across all Prestige
Fragrance & Cosmetics stores; substantially all of the same merchandise is
carried consistently across all of Colours & Scents stores.
Value-oriented, in-store, point-of-purchase advertising is an important
part of PFC's overall marketing strategy. PFC advertises by means of flyers and
brochures distributed in the outlet malls and in-store promotions.
PROPERTIES
PFC's office, warehouse and distribution facility and retail store location
in Holmdel, New Jersey are owned by Revlon and consist of approximately 78,000
square feet of warehouse and distribution space and approximately 15,000 square
feet of office and retail store space. PFC currently occupies the facility
without any written lease and pays charges for allocated costs such as
maintenance, insurance, taxes, waste disposal and other charges to Revlon
aggregating approximately $570,000 per annum. At the Effective Time, the office,
warehouse and distribution facility will be leased from Revlon for a period of
up to five years, subject to early termination under certain conditions. See
"The Merger -- Operations After the Merger" and "Agreements with Revlon --
Holmdel Lease."
The employee stores located in New York, New York and Apex, North Carolina
are leased from unaffiliated third parties by Revlon and a subsidiary of Revlon,
respectively. The New York lease will be subleased to the Combined Company and
the Apex lease will be assigned to the Combined Company at the Effective Time.
The employee store properties located in Edison, New Jersey (two employee
stores, which may be consolidated into one prior to the Effective Time),
Irvington, New Jersey, Oxford, North Carolina, and Phoenix, Arizona currently
are owned by Revlon or its affiliates and are occupied by PFC without any
written lease with Revlon except that PFC pays charges to Revlon aggregating
approximately $139,000 per annum. At the Effective Time, Cosmetic will enter
into leases for these employee stores. See "Agreements with Revlon -- PFC
Employee Store Leases."
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PFC's retail outlet stores are typically subject to leases with initial
terms expiring at various dates through 2005 that provide for the payment of a
base rent plus additional occupancy charges. The average 1996 base rent cost is
$16.94 per square foot with additional estimated costs for taxes, insurance,
maintenance and similar charges of $8.68 per square foot. PFC leases also
provide for the payment of a percentage of sales, the average of which is 4.5%
of sales in excess of a negotiated minimum sales volume.
The average remaining initial term of all PFC retail store leases is
approximately four years, with 122 store leases containing renewal options for
an average of five years. Excluding four leases that are currently on a
month-to-month basis, 106 of the retail store leases will expire by December 31,
2000, with the remaining leases expiring between January 1, 2001 and November
30, 2005. Eight of the leases permit either PFC or the lessor to terminate if
specified minimum sales levels are not met. Certain of the leases contain
provisions pursuant to which PFC may terminate if the outlet mall in which the
store is located does not achieve a minimum occupancy rate. Leases for certain
PFC stores also contain provisions pursuant to which PFC is restricted from
opening new stores within certain distances from such PFC stores.
EMPLOYEES
As of December 31, 1996, PFC employed the equivalent of 850 full-time
employees, of whom 783 were employed in stores and 67 were employed in
executive, administration and other similar positions. Revlon provides the
services of approximately 60 union employees, and during the Christmas season a
number of temporary employees, all of whom perform warehouse, distribution and
related services at PFC's warehouse and distribution facility for which Revlon
charges PFC. See "Agreements with Revlon." PFC's full-time, salaried employees
are eligible to participate in employee pension benefit plans sponsored or
maintained by Revlon, including the Revlon Employees' Savings and Investment
Plan (a defined contribution 401(k) plan) and the Revlon Employees' Retirement
Plan (a defined benefit pension plan), and group medical, dental, life and
disability insurance coverages. Management believes that its employee relations
are satisfactory.
LEGAL PROCEEDINGS
From time to time, PFC is involved in various routine legal proceedings
incident to the ordinary course of its business. PFC believes that the outcome
of all pending legal proceedings in the aggregate is unlikely to have a material
effect on its business.
STOCKHOLDER MATTERS
There is no established public trading market for PFC's common stock. The
only outstanding PFC common stock is owned by Revlon, which has pledged such
stock as collateral to its bank group to support certain bank obligations of
Revlon and its subsidiaries, including Revlon's credit agreement and to support
a Yen-denominated credit facility of another subsidiary of Revlon. Immediately
after the Merger, assuming the Cash Election is made for all outstanding shares
and options for shares with an exercise price of less than $7.63 per share,
Revlon will receive approximately 84% of the Cosmetic Class C common stock. It
is anticipated that such stock would be pledged as collateral to replace the PFC
common stock previously pledged. See "The Merger."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As noted above, PFC has occupied the Holmdel office, warehouse and
distribution facility, the Holmdel retail store and five employee stores that
are owned by Revlon or its affiliates. Revlon and Holdings have sold product to
PFC in the past. Additionally, Revlon has provided various services to PFC and
has allocated charges to PFC to approximate the cost of such services. At the
Effective Time, Cosmetic and Revlon (or its affiliates, as the case may be) will
enter into agreements with respect to the Holmdel office, warehouse and
distribution facility and retail store, the employee stores, the supply of
product, the Services and tax sharing payments. See "Agreements with Revlon."
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<PAGE>
ELECTION OF DIRECTORS; MANAGEMENT OF COSMETIC
FOLLOWING THE MERGER
ELECTION OF DIRECTORS
The Cosmetic Board currently is classified, with two Class I directors, two
Class II directors and two Class III directors. The current terms of the
directors continue until the annual meeting of stockholders to be held in 1997,
1998 and 1999, respectively, and until their respective successors are elected
and qualified. At each annual meeting, directors are elected for a full term of
three years to succeed those directors whose terms expire at the annual meeting
date. As described elsewhere in this Proxy Statement/Prospectus, at the Meeting,
Cosmetic is seeking the approval of the holders of the Cosmetic Class B common
stock to an amendment to Cosmetic's Certificate of Incorporation to repeal the
classification of the Cosmetic Board and thereafter to elect all members of the
Combined Company Board annually. See "The Merger -- Amendments to Cosmetic's
Certificate of Incorporation."
The holders of the Cosmetic Class B common stock will vote upon the
election of the Class II directors, whose terms expire at the Meeting. If for
any reason the Merger is not completed, the term of the Class II directors
elected at the Meeting would expire in 2000.
Notwithstanding the election of the Class II directors at the Meeting, the
Merger Agreement provides that, at the Effective Time, the persons named in the
Merger Agreement would become the directors of the Combined Company. See
"Directors Following the Merger."
The persons named in the proxy will vote at the Meeting, unless the proxy
is marked otherwise, to elect as Class II directors, Mark S. Weinstein and
Donald R. Rogers. The proxy may not be voted for more than two directors. If a
nominee will be unable to serve, the person acting under the proxy may vote the
proxy for the election of a substitute. It is not currently contemplated that
any nominee will be unable to serve. The following information is furnished with
respect to the nominees listed above and to the other current directors of
Cosmetic. All references to Cosmetic in this section include Cosmetic's
predecessors.
Mark S. Weinstein, age 44, has been chairman of the Cosmetic Board since
July 1995. He was vice chairman of the Cosmetic Board and chief executive
officer of Cosmetic from April 1989 to July 1995 and has been a director of
Cosmetic since September 1982. From June 1985 to April 1989, he served as
Cosmetic's president. Mr. Weinstein is a Class II director.
Donald R. Rogers, age 50, has served as a director of Cosmetic 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. Rogers is a Class II
director.
Ronald M. Hirschel, age 46, 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. He has served as a director of Cosmetic since
December 1994. Mr. Hirschel is a Class I director.
Susan K. Magenheim, age 39, has served as a director of Cosmetic since
April 1989 and as vice president and assistant secretary of Cosmetic since April
1986. Ms. Magenheim also served as a director of Cosmetic from September 1982 to
July 1987. Mrs. Magenheim is a Class I director.
Ben S. Kovalsky, age 58, has served as chief executive officer of Cosmetic
since July 1995 and as a director, president and chief operating officer of
Cosmetic since April 1989. Mr. Kovalsky is a Class III director.
Anita J. Weinstein, age 67, has served as vice chairwoman of the Cosmetic
Board since July 1995, as a director and secretary of Cosmetic since September
1982 and as a vice president since April 1989. Mrs. Weinstein is a Class III
director.
Mark S. Weinstein and Susan K. Magenheim are the son and daughter of Anita
J. Weinstein.
The Cosmetic Board held five meetings during the fiscal year ended
September 27, 1996. Cosmetic does not have a nominating committee. During 1996,
each director attended at least 75% of the aggregate of the total number of
meetings of the Cosmetic Board (held during the period for which he or she was a
director) and the total number of meetings held by all Cosmetic Board committees
on which he or she served (during the periods that he or she served as a
member).
The Audit Committee, which during 1996 consisted of Messrs. Hirschel and
Rogers, is responsible for reviewing, with the independent certified public
accountants, the general scope of their audit services and the annual results of
their audit and making recommendations to the Cosmetic Board regarding the
selection and fees of the independent auditors. The Audit
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Committee met twice during the fiscal year. The Audit Committee also met in
December 1996 to discuss the results of the year end audit.
Based upon its review of Forms 3, 4 and 5 and any amendments thereto
furnished to Cosmetic pursuant to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), all of such forms were filed on a timely
basis by reporting persons during 1996.
DIRECTORS FOLLOWING THE MERGER
The following persons will become all of the directors of the Combined
Company immediately following the Merger (biographies are as of January 24,
1997):
Ronald O. Perelman, age 54, has been chairman of the executive committee of
the board of Revlon and of Revlon, Inc. since November 1995, and a director of
Revlon and of Revlon, Inc. since their respective formations in 1992. Mr.
Perelman has been chairman of the board and chief executive officer of
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings") and various of its
affiliates for more than the past five years. Mr. Perelman also is chairman of
the board of Andrews Group Incorporated ("Andrews Group"), Consolidated Cigar
Holdings Inc. ("Cigar Holdings"), Mafco Consolidated Group Inc. ("Mafco
Consolidated"), Meridian Sports Incorporated ("Meridian"), New World
Communications Group Incorporated ("New World Group"), Power Control
Technologies Inc. ("PCT"), Toy Biz, Inc. ("Toy Biz") and chairman of the
executive committee of the board of Marvel Entertainment Group, Inc. ("Marvel").
Mr. Perelman is a director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, California Federal Bank, a Federal
Savings Bank ("Cal Fed"), The Coleman Company, Inc. ("Coleman"), Coleman
Holdings Inc. ("Coleman Holdings"), Coleman Worldwide Corporation ("Coleman
Worldwide"), Cigar Holdings, Consolidated Cigar Corporation ("Consolidated
Cigar"), First Nationwide Holdings, Inc. ("FN Holdings"), First Nationwide
(Parent) Holdings Inc. ("First Nationwide Parent"), Mafco Consolidated, Pneumo
Abex Corporation ("Pneumo Abex"), Marvel, Marvel Holdings Inc., Marvel (Parent)
Holdings Inc., Marvel III Holdings Inc., Meridian, PCT, Revlon, Revlon, Inc.,
Revlon Worldwide Corporation ("Revlon Worldwide") and Toy Biz.
Howard Gittis, age 62, has been a director of Revlon and of Revlon, Inc.
since their respective formations in 1992. He has been vice chairman of
MacAndrews Holdings and various of its affiliates for more than five years. Mr.
Gittis is a director of the following corporations which file reports pursuant
to the Exchange Act: Andrews Group, Cal Fed, Cigar Holdings, Consolidated Cigar,
FN Holdings, First Nationwide Parent, Mafco Consolidated, Pneumo Abex, PCT,
Revlon, Revlon, Inc., Revlon Worldwide, Jones Apparel Group, Inc., Loral Space
and Communications, Ltd. and Rutherford-Moran Oil Corporation.
Howard Diener, age 54, has served as the president of PFC since September
1995. Prior to joining PFC, Mr. Diener was executive vice president of marketing
for McCrory's Stores from early 1993 until September 1995, executive vice
president of Rita Ann Distributors from 1991 until late 1992, executive vice
president of People's Drug Stores from 1988 until 1991, senior vice president of
merchandising at Rite-Aid from 1979 until 1988 and vice president of
merchandising for Dart Drug Corporation from 1968 until 1978.
William J. Fox, age 40, has been vice president and a director of PFC since
June 1992 and executive vice president and chief financial officer of Revlon,
Inc. and of Revlon since their respective formations in 1992. Mr. Fox was
elected as a director of Revlon, Inc. in November 1995 and of Revlon in
September 1994. He has been senior vice president of MacAndrews Holdings since
August 1990. He was vice president of MacAndrews Holdings from February 1987 to
August 1990 and was treasurer of MacAndrews Holdings from February 1987 to
September 1992. Prior to February 1987, he was vice president and assistant
treasurer of MacAndrews Holdings. Mr. Fox joined MacAndrews & Forbes Group,
Incorporated in 1983 as assistant controller, prior to which time he was a
certified public accountant at the international auditing firm of Coopers &
Lybrand. Mr. Fox is a director of The Hain Food Group, Inc.
Jerry W. Levin, age 52, has served as a director of PFC since October 1995,
has been chairman of the board of Revlon, Inc. and of Revlon since November
1995, and chief executive officer and a director of Revlon, Inc. and of Revlon
since their respective formations in 1992. Mr. Levin was president of Revlon,
Inc. and of Revlon from their respective formations in 1992 to November 1995.
Mr. Levin has been executive vice president of MacAndrews Holdings since March
1989. For 15 years prior to joining MacAndrews Holdings, he held various senior
executive positions with The Pillsbury Company. Mr. Levin is a director of the
following corporations that file reports pursuant to the Exchange Act: Coleman,
Coleman Holdings, Coleman Worldwide, Ecolab, Inc., First Bank System, Inc.,
Meridian, Revlon, Revlon, Inc. and Revlon Worldwide.
Wade H. Nichols, age 54, has been vice president and a director of PFC
since June 1992 and has been senior vice president and general counsel of
Revlon, Inc. and of Revlon since their respective formations in 1992. He was
elected senior
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vice president and general counsel of Holdings in March 1992. He was vice
president and secretary of Holdings from 1984 to 1992 and secretary from 1981 to
1984. He joined Holdings in 1978. Mr. Nichols has been vice president-law of
MacAndrews Holdings since 1988.
Mark S. Weinstein, age 44, has been chairman of the Cosmetic Board since
July 1995, vice chairman and chief executive officer of Cosmetic from April 1989
to July 1995 and a director since September 1982. From June 1985 to April 1989,
he served as Cosmetic's president.
David N. Dinkins, age 69, has been a professor at Columbia University
School of International and Public Affairs since January 1994. Mr. Dinkins was
Mayor of The City of New York from January 1990 through December 1993. Prior to
serving as Mayor of The City of New York, Mr. Dinkins served as Manhattan
Borough President from 1986 through 1989. Mr. Dinkins is a Director of the
following corporations which file reports pursuant to the Exchange Act: AMREP
Corporation, Carver Bancorp Inc., New World Group, and Transderm Laboratories
Corporation. He is also a trustee of WSIS Series Trust.
Harvey Rosenthal, age 54, was president and chief operating officer of
Melville Corporation, now known as CVS Corporation, from 1994 until October
1996. From 1984 to 1994, Mr. Rosenthal was president and chief executive officer
of the CVS division of Melville Corporation. Mr. Rosenthal joined the CVS
division of Melville Corporation in 1969 and held various executive positions in
merchandising, marketing and operations until 1984. Mr. Rosenthal is a director
of CVS, which files reports pursuant to the Exchange Act.
If the Merger is completed, but the Board Amendment is not approved, Mr.
Diener, Mr. Dinkins and Mr. Rosenthal will be elected for a term expiring at the
1998 annual stockholders meeting, Mr. Fox, Mrs. Gittis and Mr. Nichols will be
elected for a term expiring at the 1999 annual stockholders meeting and Mr.
Perelman, Mr. Levin and Mr. Weinstein will be elected for a term expiring at the
2000 annual stockholders meeting.
The Stockholders Agreement provides that for three years from the
consummation of the Merger, the Principal Stockholders agree to vote all of
their Class C common stock in favor of Revlon's nominees for director so that
Revlon will at all times maintain representation on the Combined Company Board
equal to Revlon's percentage ownership of Class C common stock, but not less
than seven board seats, including two independent directors, and Revlon agrees
to vote its shares in favor of the Principal Stockholders' nominees for director
equal to their aggregate percentage ownership of Class C common stock, after
giving effect to the Merger and the Cash Election, but not less than one nor
more than two board seats.
EXECUTIVE OFFICERS FOLLOWING THE MERGER
The Merger Agreement provides that, immediately following the consummation
of the Merger, the Combined Company Board will appoint Jerry W. Levin as
chairman of the Combined Company Board, Mark S. Weinstein as vice chairman of
the Combined Company Board and Howard Diener as the Combined Company's president
and chief executive officer. The following persons will be the other executive
officers of the Combined Company immediately following the Merger.
Ben S. Kovalsky, age 58, will serve as the president and chief operating
officer of the Cosmetic stores division of the Combined Company. Mr. Kovalsky
has served as chief executive officer of Cosmetic since July 1995 and as a
director, president and chief operating officer of Cosmetic since April 1989.
Bruce E. Strohl, age 46, will serve as the senior vice president and chief
financial officer of the Combined Company. Mr. Strohl has served as vice
president and chief financial officer of Cosmetic since April 1989. From 1988 to
April 1989, Mr. Strohl was vice president-finance and controller for Dart Drug
Stores, Inc.
Allan Goldman, age 42, will serve as senior vice president -- merchandising
of the Combined Company. Mr. Goldman has served as senior vice
president -- merchandising of Cosmetic since November 1995 and as senior vice
president -- marketing of Cosmetic from March 1995 to November 1995. From July
1988 to February 1995, Mr. Goldman was vice president -- merchandising for Rite
Aid Corporation.
Michael J. Lewis, age 57, will serve as vice president -- retail operations
of the Combined Company. Mr. Lewis has served as vice president -- retail
operations of Cosmetic since January 1990.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the fiscal years ended September 27,
1996, September 29, 1995 and September 30, 1994, the annual and long-term
compensation for services in all capacities for Cosmetic and its subsidiaries of
Cosmetic's chief executive officer and the four most highly compensated
executive officers at September 27, 1996 whose cash compensation from Cosmetic
exceeded $100,000:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- AWARDS
NAME AND SALARY ------------ ALL OTHER
PRINCIPAL POSITION YEAR $ BONUS $ OPTIONS # COMPENSATION
- --------------------------------- ---- ------- --------- ------------ ------------
<S> <C>
Ben S. Kovalsky 1996 314,644 -- 13,500 --
President, Chief Executive 1995 306,680 -- 13,500(1) --
Officer and Chief Operating 1994 299,943 32,500 4,500 --
Officer
Mark S. Weinstein 1996 241,416 -- 15,000 8,800(2)
Chairman of the Board 1995 232,045 -- 15,000(1) 8,800(2)
of Directors 1994 225,961 32,500 5,000 6,976(2)
Allan Goldman 1996 152,396 -- 7,500 --
Senior Vice President- 1995 81,237 -- -- --
Merchandising 1994 -- -- -- --
Michael J. Lewis 1996 159,233 -- 7,500 --
Vice President-Retail 1995 157,488 -- 6,700(1) --
Operations 1994 154,519 -- 2,500 --
Bruce E. Strohl 1996 120,075 -- 7,500 --
Vice President-Finance 1995 117,814 -- 8,000(1) --
Chief Financial Officer 1994 116,953 -- 2,500 --
</TABLE>
- ---------------
(1) In February 1995, the named executive officer received stock option grants
at the then fair market value of the Cosmetic Class A common stock upon
surrendering a like number of stock options.
(2) Includes insurance premiums paid in the amount of $8,800, $8,800 and $6,976
in 1996, 1995 and 1994, respectively, by Cosmetic with respect to
split-dollar life insurance polices for the benefit of Mark S. Weinstein.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of options
under the Cosmetic 1991 Stock Option Plan (the "1991 Option Plan") to each of
the executive officers named in the Summary Compensation Table during the fiscal
year ended September 27, 1996. All options issued under the 1991 Option Plan are
for Cosmetic Class A common stock.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM (3)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED #(1) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------ ------------ --------------- --------- ---------- ------- -------
<S> <C>
Ben S. Kovalsky 13,500(2) 14.5% $4.12 2/27/2006 $34,979 $88,644
Mark S. Weinstein 15,000(2) 16.1 4.53 2/27/2001 18,773 41,484
Allan Goldman 7,500(2) 8.1 4.12 2/27/2006 19,433 49,247
Michael J. Lewis 7,500(2) 8.1 4.12 2/27/2006 19,433 49,247
Bruce E. Strohl 7,500(2) 8.1 4.12 2/27/2006 19,433 49,247
</TABLE>
- ---------------
(1) All options issued during the 1996 fiscal year to the named executive
officers were granted as incentive stock options ("ISOs") under Section 422
of the Code. The option price with respect to ISOs may not be less than 100%
of the fair market value of the common shares on the date of grant of the
option. However, in the case of an ISO granted to a person owning over 10%
of the total combined voting power of all classes of stock of Cosmetic (a
"Ten Percent Stockholder"),
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the option price may not be less than 110% of such fair market value. Mark
S. Weinstein is a Ten Percent Stockholder. The aggregate fair market value
(determined as of the date or dates of grant) of the common shares subject
to ISOs granted to any one person which first become exercisable in any
calendar year may not exceed $100,000. ISOs are exercisable over a specified
period not to exceed ten years from the date of grant; provided, however,
that in the case of an ISO granted to a Ten Percent Stockholder, the
exercise period may not exceed five years from the date of grant. Subject to
the terms of the 1991 Option Plan and the option agreements, options will
terminate no later than thirty days after the termination of service as an
employee or director, except that options will terminate no later than nine
months after the termination of service due to death or disability. See
"1991 Option Plan."
(2) It is anticipated that all options will be vested upon the consummation of
the Merger. The options would have first become exercisable in each calendar
year as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C>
Ben S. Kovalsky.................................................. 6,750 3,375 3,375
Mark S. Weinstein................................................ 7,500 3,750 3,750
Allan Goldman.................................................... 3,750 1,875 1,875
Michael J. Lewis................................................. 3,750 1,875 1,875
Bruce E. Strohl.................................................. 3,750 1,875 1,875
</TABLE>
(3) The potential realizable value represents the estimated future gain in the
value of the options over their exercise price. The calculation assumes a 5%
and 10% appreciation rate, as dictated by the SEC, in the per share price of
the Cosmetic Class A common stock starting on the date of grant and further
assumes that the options will be exercised on the expiration date. These
return values are not intended to be a forecast of the Cosmetic Class A
common stock price and are not necessarily indicative of the actual values
which may be realized by the named executive officer. See "Interests of
Directors and Officers in the Merger -- Cosmetic Stock Options."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information for each of the executive
officers named in the Summary Compensation Table with respect to the options
exercised during the fiscal year ended September 27, 1996 and the value of
outstanding and unexercised options held as of September 27, 1996.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-
MONEY
NUMBER OF OPTIONS AT
SHARES NUMBER OF UNEXERCISED OPTIONS FISCAL YEAR
ACQUIRED AT FISCAL YEAR END ENDED(1)
CLASS OF ON VALUE ----------------------------- -----------
NAME STOCK EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
- ------------------ --------- ---------- ------------- ------------ ----------------- ----------- ----------------
<S> <C>
Ben S. Kovalsky A -- -- 47,750 6,750 $45,525 $ 10,125
B -- -- 27,500 -- 32,400 --
Mark S. Weinstein A -- -- 22,500 7,500 8,175 8,175
B -- -- -- -- -- --
Allan Goldman A -- -- 3,750 3,750 5,625 5,625
B -- -- -- -- -- --
Michael J. Lewis A -- -- 10,450 3,750 5,625 5,625
B -- -- -- -- -- --
Bruce E. Strohl A -- -- 13,500 3,750 8,055 5,625
B -- -- 1,750 -- 2,430 --
</TABLE>
- ---------------
(1) At September 27, 1996 the closing market price of the Cosmetic Class A
common stock was $5.63 per share and the closing market price of the
Cosmetic Class B common stock was $5.63 per share.
(2) It is anticipated that all options will be vested upon the consummation of
the Merger.
EMPLOYMENT AGREEMENTS
Cosmetic has employment agreements with Mr. Weinstein and Mr. Kovalsky that
provide for annual salaries of $227,625 and $298,721, respectively, subject to
annual increases. The agreements require that Cosmetic provide to the respective
employee a vehicle or vehicle allowance, as well as the right to participate in
certain of Cosmetic's benefit programs.
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<PAGE>
Each of the agreements has a four-year term, commencing March 1, 1991, and
is automatically extended for successive additional 12-month periods unless a
notice to terminate such contract is given by Cosmetic at least 24 months prior
to the expiration of the term of such agreement (including any extension
thereof). The agreements provide that if the respective employee is terminated
by Cosmetic other than for "good cause," or if there is a "change in control" of
Cosmetic (as defined in the agreements), Cosmetic is obligated to pay the
employee the balance of the salary due over the remaining term of the agreement.
Additionally, upon death, expiration of term, change in control of Cosmetic, or
termination other than for "good cause," Cosmetic is obligated to purchase all
of the employees' options (vested or unvested), which totaled 112,000 options at
December 8, 1996. Payments would be based upon the difference between the market
value of the Cosmetic Class A or Class B common stock, as the case may be, on
the termination date and the exercise prices of the options.
Each agreement provides that, during the term of the agreement and for two
years thereafter, the employee will not, directly or indirectly, own, control,
manage, or operate stores similar to those operated by Cosmetic in Maryland,
Virginia, Illinois, or the District of Columbia or within a 50 mile radius of
any other city where Cosmetic is operating retail stores.
The agreement with Mr. Weinstein requires that Cosmetic continue in effect
a life insurance policy in the face amount of $1,000,000. Cosmetic pays the
annual premium of $8,800 on the policy. Cosmetic is the beneficiary of the
policy to the extent of the premiums paid by it and the balance of the benefits
are payable to beneficiaries designated by Mr. Weinstein. The agreement with Mr.
Kovalsky requires that Cosmetic reimburse him, up to a maximum amount of $4,000,
for the annual premium cost of various personal insurance policies owned by him.
Cosmetic has employment agreements with Allan Goldman, Michael Lewis and
Bruce Strohl that currently provide for annual salaries of $150,000, $150,380,
and $140,000, respectively, subject to annual increases. Mr. Goldman's agreement
commenced on October 1, 1996. Mr. Lewis's and Mr. Strohl's agreements commenced
on August 1, 1995. The agreements have a one-year term and are automatically
extended for successive additional 12-month periods unless a notice to terminate
the agreement is given by Cosmetic at least 90 days prior to the expiration of
the term of the agreement (including any extension thereof). The agreements
provide that if Messrs. Goldman, Lewis or Strohl are terminated by Cosmetic
without cause or after the expiration of the term, Cosmetic is obligated to pay
the employee an amount equal to one year's salary. Upon the death of the
employee, the agreement is terminated and the Cosmetic's only obligation is the
payment of the unpaid portion of accrued compensation up to the date of death.
In connection with the Merger, Mr. Weinstein will enter into a new
agreement and Mr. Kovalsky's agreement will be amended. See "Interests of
Directors and Officers in the Merger -- Employment and Non-Competition
Agreements with Mark S. Weinstein and Anita J. Weinstein," " -- Consulting
Agreement and Non-Competition with Susan K. Magenheim"
and " -- Employment Agreement with Ben S. Kovalsky."
DIRECTOR COMPENSATION
Cosmetic pays each director who is not an officer or employee of Cosmetic
or any affiliate $2,000 as director fees for each Cosmetic Board meeting and
$1,000 for each audit committee meeting attended. Directors who are officers or
employees of Cosmetic or any affiliate receive no additional cash compensation
for service as directors. For the fiscal year ended September 27, 1996, Cosmetic
paid directors fees of $10,000 to each of Mr. Rogers and Mr. Hirschel and audit
committee fees of $2,000 to each of Mr. Rogers and Mr. Hirschel.
Anita J. Weinstein and Mr. Rogers are members of the stock option
committee. In that capacity, pursuant to the terms of the 1991 Option Plan, they
receive annually on January 15th non-discretionary, fully vested grants of
non-qualified options for 20,000 and 1,000 shares of Cosmetic Class A common
stock, respectively. Mrs. Weinstein's options are issued at 110% of fair market
value at the date of grant and terminate five years thereafter. Mr. Rogers'
options are issued at fair market value at the date of grant and terminate ten
years thereafter. This provision will be repealed in connection with the Merger,
and the Cosmetic 1997 Stock Option Plan does not make any provision for
non-discretionary grants.
1991 OPTION PLAN
An aggregate of 596,408 shares of Cosmetic Class A common stock and 43,750
shares of Cosmetic Class B common stock are reserved for issuance pursuant to
the 1991 Option Plan. Options under the 1991 Option Plan have been designated
ISOs, which are intended to qualify under Section 422 of the Code, or
non-qualified options ("Non-Qualified Options") which are not subject to the
provisions of Section 422. An employee exercising an ISO will recognize no
income at the time of exercise, and Cosmetic will have no deduction for purposes
of federal income taxation at the time of exercise. The 1991 Option Plan will
terminate on December 31, 2000, or on such earlier date as the Cosmetic Board
may determine.
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<PAGE>
The 1991 Option Plan is administered by a committee of the Cosmetic Board,
consisting of Anita Weinstein and Mr. Rogers (the "Stock Option Committee"). The
Stock Option Committee has the authority to determine who among the eligible
participants will be granted options, whether an option will be designated as an
ISO or a Non-Qualified Option, the number of shares of Cosmetic Class A common
stock covered by each option, the time or times at which options may be granted
or exercised, and any other terms and conditions of the options which are not
otherwise stated in the 1991 Option Plan, except for the non-discretionary
option grants described below, the recipients and terms of which are specified
in the 1991 Option Plan.
Directors, officers and key employees of Cosmetic are eligible to
participate in the 1991 Option Plan. Directors who are not employees may only
receive Non-Qualified Options, and the Stock Option Committee members may only
receive non-discretionary option grants as described below.
The option price with respect to ISOs will not be less than 100% of the
fair market value of the Cosmetic Class A common stock on the date of grant of
the option. However, in the case of an ISO granted to a Ten Percent Stockholder,
the option price will not be less than 110% of such fair market value. The
option price of Non-Qualified Options will not be less than 50% of the fair
market value of the Cosmetic Class A common stock on the date of grant. The
aggregate fair market value of the Cosmetic Class A common stock subject to ISOs
(determined as of the date or dates of grant) granted to any one person which
first become exercisable in any calendar year may not exceed $100,000.
Except for non-discretionary grants, ISOs are exercisable over the exercise
period specified by the Stock Option Committee in the option agreement, but in
no event will such period exceed ten years from the date of grant; provided,
however, that in the case of an ISO granted to a Ten Percent Stockholder, the
exercise period will not exceed five years from the date of grant. Non-Qualified
Options are exercisable over a period of 11 years from the date of grant.
Options will terminate no later than thirty days after the termination of
service as an employee or director, except that options will terminate no later
than nine months after the termination of service due to death or disability.
The option price shall be paid in full at the time of exercise in cash.
Alternatively, the Stock Option Committee may approve, except for options
granted pursuant to the non-discretionary provisions, payment in Cosmetic Class
A common stock having an aggregate fair market value equal to the aggregate
option price of the options exercised or in such a combination of cash and
Cosmetic Class A common stock.
Provided Cosmetic Class A common stock is available under the 1991 Option
Plan, the Stock Option Committee annually is required to grant to any director
serving on the Stock Option Committee who is not an employee of Cosmetic a Non-
Qualified Option for 1,000 shares of Cosmetic Class A common stock on January 15
or the closest business day if January 15 is not a business day (the
"Non-Discretionary Grant"). The option price is required to be 100% of the fair
market value of the Cosmetic Class A common stock on the date of grant of the
option. The option is required to be fully vested upon grant and exercisable for
a period of ten years. Similarly, the Stock Option Committee is required to
grant to any director serving on the Stock Option Committee who is an employee
of Cosmetic an ISO on January 15 or the closest business day if January 15 is
not a business day. Each such grant is for 20,000 shares of Cosmetic Class A
common stock, provided, however, that if Cosmetic's consolidated net income as
reflected in its audited financial statements for the fiscal year immediately
preceding the date of grant (the "Subject Year") reflects an increase over the
last prior fiscal year (the "Prior Year") of 100% or more, such grant will be
for 30,000 shares of Cosmetic Class A common stock (the "Bonus Increase"). No
Bonus Increase will be granted with respect to a Subject Year when the
consolidated net income for the Prior Year is less than the consolidated net
income for the fiscal year preceding the Prior Year. The option price will be
100% of the fair market value of the Cosmetic Class A common stock on the date
of grant of the option and will be exercisable for a period of ten years from
the date of grant; provided, however, that in the case of an ISO granted to a
Ten Percent Shareholder, the option price will be 110% of such fair market value
on the date of grant and will be exercisable for a period of five years from the
date of grant. Each optionee's options granted under this provision shall vest
at a rate such that the aggregate fair market value (determined at the time an
option is granted) of Cosmetic Class A common stock subject to ISOs which become
exercisable for the first time in any one year will not exceed $100,000.
All outstanding but unexercised options to the extent that they are not
fully vested become exercisable in full on the date that (a) Cosmetic executes
an agreement to merge with or into another corporation or to sell substantially
all its assets (except a merger in which Cosmetic is the surviving corporation
and no Cosmetic Class A common stock is converted or exchanged in the merger),
(b) more than 50% of the Cosmetic Class A common stock is acquired by any person
or group (other than any group composed of members of the Weinstein family) or
(c) members of the then existing Cosmetic Board cease to constitute at least a
majority of the Cosmetic Board other than as the result of nominations or
elections approved by a vote of at least two-thirds of the existing directors.
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<PAGE>
During the fiscal year ended September 27, 1996, options for 13,500 shares
of Cosmetic Class A common stock were granted to Ben S. Kovalsky at an average
exercise price of $4.12; options for 15,000 shares of Cosmetic Class A common
stock were granted to Mark S. Weinstein at an average exercise price of $4.53;
options for 7,500 shares of Cosmetic Class A common stock were granted to Alan
Goldman at an average exercise price of $4.12; options for 7,500 shares of
Cosmetic Class A common stock were granted to Michael J. Lewis at an average
exercise price of $4.12; options for 7,500 shares of Cosmetic Class A common
stock were granted to Bruce E. Strohl at an average exercise price of $4.12;
options for 92,000 shares of Cosmetic Class A common stock (including the
foregoing individual option grants) were granted to all current executive
officers as a group at an average exercise price of $4.75; and options for 1,000
shares of Cosmetic Class A common stock were granted to all directors (other
than directors who are executive officers) as a group at an average exercise
price of $6.00. All of the foregoing option grants were made under the 1991
Option Plan.
In connection with the Merger, the Cosmetic Board will amend the 1991
Option Plan to delete the Non-Discretionary Grant provision and to provide that
no further options are to be granted under the 1991 Option Plan. See "The
Merger" and "Interests of Directors and Officers in the Merger -- Cosmetic Stock
Options."
REPORT TO STOCKHOLDERS ON COMPENSATION
Cosmetic's executive compensation policies are formulated, administered and
reviewed by the Cosmetic Board. The Cosmetic Board's general goal with respect
to executive officer compensation is to design a compensation package which
enables Cosmetic to attract, motivate and retain key qualified executives and to
establish and maintain incentives for performance. The executive officer
compensation program consists of: (a) salary, (b) bonus and (c) long-term stock
based incentives.
The base salaries of the executive officers are intended to be set at
competitive levels within the retail industry consistent with the executive
officer's position and experience. The Cosmetic Board does not employ pay
scales, formulas, target levels or other quantitative techniques in setting
executive officers' salaries but instead makes an individual judgment in its
discretion with respect to each executive officer, based upon the directors'
general knowledge with respect to compensation practices in other companies,
including companies the directors believe are engaged in similar businesses, and
the directors' judgment with respect to an appropriate salary based upon the
individual officer's position, experience and personal performance. The base
salaries for Messrs. Kovalsky, Weinstein, Goldman, Lewis and Strohl were fixed
in connection with entering into the employment agreements described above under
"Employment Agreements." The agreements for Messrs. Kovalsky and Weinstein
provide for annual increases equal to the greater of the Consumer Price Index
for all Urban Consumers or the budgeted percentage compensation increase for all
officers, exclusive of the chairman of the Cosmetic Board and the president of
Cosmetic.
The Cosmetic Board similarly does not employ scales, formulas, target
levels or other quantitative techniques in setting executive officer bonuses but
instead makes an individual judgment based upon the overall performance of
Cosmetic on a year to year basis and an evaluation, in its discretion, of the
personal performance of each executive officer.
Long-term incentive compensation, in the form of stock options, may be
awarded to any of the executive officers under the 1991 Option Plan. Awards
under the plan are made by the Stock Option Committee (composed of Mrs.
Weinstein and Mr. Rogers). The Stock Option Committee does not employ formulas
or other quantitative techniques in setting the amount of option grants, but
exercises its discretion in determining grants based upon its evaluation of the
executive officer's position, experience and personal performance. The exercise
price of options granted under the plan are fixed by the plan at fair market
value of the shares subject to the grant on the date of the grant (110% of the
fair market value in the case of ISO grants to 10% stockholders). Compensation
under the plan therefore will be realized only to the extent that the stock
price appreciates, thereby aligning the financial interest of Cosmetic's
executive officers with those of Cosmetic's stockholders.
Mr. Kovalsky has served as Cosmetic's chief executive officer since July
1995 and is compensated pursuant to his employment agreement entered into as of
March 1, 1991. The terms of the agreement are described above under "Employment
Agreements." Mr. Kovalsky's base salary is set in the agreement and an annual
increase is determined by calculating the greater of the Consumer Price Index
for all Urban Consumers or the budgeted percentage compensation increase for all
officers, exclusive of the chairman of the Cosmetic Board and the president of
Cosmetic. Mr. Kovalsky's base salary was increased by $5,716 from 1995 to 1996.
No bonus was awarded in 1996. In February 1996 the Stock Option Committee
awarded 13,500 options to Mr. Kovalsky at the fair market value. The options,
when awarded.; were exercisable over a three year period, but in accordance with
the terms of the plan were accelerated upon the signing of the Merger Agreement.
The 2% salary increase was determined by the Cosmetic Board, and the option
grants were determined by the Stock Option Committee, based upon their
individual evaluations of Mr. Kovalsky's personal performance and cost of living
increases.
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The Cosmetic Board believes that Mr. Kovalsky's compensation for the fiscal
year ended September 27, 1996 was determined in a manner consistent with the
policies described above. Mr. Kovalsky did not participate in the Cosmetic
Board's deliberations with respect to the determination of his compensation.
<TABLE>
<CAPTION>
BOARD OF DIRECTORS STOCK OPTION COMMITTEE
- ------------------------------------ ------------------------------------
<S> <C>
Mark S. Weinstein Anita J. Weinstein
Anita J. Weinstein Donald R. Rogers
Ben S. Kovalsky
Susan K. Magenheim
Donald R. Rogers
Ronald M. Hirschel
</TABLE>
82
<PAGE>
PERFORMANCE GRAPH
The following graph illustrates from September 30, 1991 through September
30, 1996 the cumulative total stockholder return, including the reinvestment of
dividends, of $100 invested in Cosmetic Class B common stock, the Total Return
Index for the Nasdaq National Market (US Companies) and the Total Return
Industry Index for the Nasdaq Retail Stocks.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG THE COSMETIC CENTER, INC., THE NASDAQ STOCK MARKET-US INDEX
AND THE NASDAQ RETAIL TRADE INDEX
9/91 9/92 9/93 9/94 9/95 9/96
THE COSMETIC CENTER, INC. 100 126 147 180 77 63
NASDAQ STOCK MARKET-US 100 112 146 148 204 243
NASDAQ RETAIL TRADE 100 101 115 112 124 148
* $100 INVESTED ON 9/30/91 IN STOCK OR INDEX INCLUDING REINVESTMENT OF
DIVIDENDS. fISCAL YEAR ENDNG SEPTEMBER 30.
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<PAGE>
COSMETIC 1997 STOCK OPTION PLAN
The Cosmetic Board has approved the Cosmetic 1997 Stock Option Plan to
assist the Combined Company in attracting, maintaining and developing strong
management following the Merger by, among other things, encouraging ownership of
shares by employee and aligning grantee interests with the interests of
stockholders of the Combined Company. An aggregate of one million shares of
Cosmetic Class C common stock have been reserved for issuance pursuant to the
Cosmetic 1997 Stock Option Plan. Options under the Cosmetic 1997 Stock Option
Plan may be designated ISOs or Non-Qualified Options. An employee exercising an
ISO will not recognize income at the time of exercise, and the Combined Company
will not have a deduction for purposes of federal income taxation at the time of
exercise. The Cosmetic 1997 Stock Option Plan will terminate on December 31,
2006, or on such earlier date as the Combined Company Board may determine.
The Cosmetic 1997 Stock Option Plan may be administered by the Combined
Company Board or by a committee of the Combined Company Board. The Combined
Company Board or the committee will have the authority to determine who among
the eligible participants will be granted options, whether an option will be
designated as an ISO or a Non-Qualified Option, the number of shares covered by
each option, the time or times at which options may be granted or exercised, and
any other terms and conditions of the options which are not otherwise stated in
the Cosmetic 1997 Stock Option Plan.
The Combined Company Board or the committee may amend, suspend, terminate
or modify the Cosmetic 1997 Stock Option Plan at any time except that no
amendment or modifications may be made without approval of a majority of the
issued and outstanding shares of common stock entitled to vote to the extent
that such approval is required under any applicable legal, tax or regulatory
requirement, including, without limitation, Section 162(m) of the Code.
Directors, officers and key employees of the Combined Company will be
eligible to participate in the Cosmetic 1997 Stock Option Plan. Directors who
are not employees may only receive Non-Qualified Options. Approximately 35
persons initially will be eligible to receive options under the Cosmetic 1997
Stock Option Plan. It is currently anticipated that the Combined Company Board
will make initial grants under the Cosmetic 1997 Stock Option Plan of
nonqualified options having a term of 10 years to purchase shares of Cosmetic
Class C common Stock at an exercise price equal to the fair market value on the
date of grant, of which options to purchase 100,000, 10,000 and 5,000 would be
granted to Messrs. Diener, Strohl and Goldman, 115,000 to all executive officers
as a group, 50,000 for Mr. Levin, 25,000 for Mr. Fox and 10,000 for Mr. Nichols
and 41,000 to all employees other than executive officers. All grants will vest
25% each year beginning on the first anniversary of the date of grant and will
become 100% vested on the fourth anniversary of the date of grant.
The option price with respect to ISOs and Non-Qualified Options will not be
less than 100% of the fair market value of the Cosmetic Class C common stock on
the date of grant of the option. However, in the case of an ISO granted to a Ten
Percent Stockholder, the option price will not be less than 110% of such fair
market value. The aggregate fair market value of the Cosmetic Class C common
shares subject to ISOs (determined as of the date or dates of grant) granted to
any one person which first become exercisable in any calendar year may not
exceed $100,000.
ISOs will be exercisable over the exercise period specified by the Combined
Company Board or the committee in the option agreement, but in no event will
such period exceed ten years from the date of grant; PROVIDED, HOWEVER, that in
the case of an ISO granted to a Ten Percent Stockholder, the exercise period
will not exceed five years from the date of grant. Non-Qualified Options
generally will be exercisable over a period of up to ten years from the date of
grant. Options will terminate 30 days after the termination of service (other
than for cause) as an employee or director, except that options will vest and
may be exercised for nine months after the termination of service due to death
or disability. Options will terminate immediately upon termination for cause.
The option price shall be paid in full at the time of exercise in cash or
by delivery of shares of Cosmetic Class C common stock owned for at least six
months (or such other period as the Combined Company Board may in its discretion
determine) having an aggregate fair market value equal to the aggregate option
price of the options exercised or in such a combination of cash and such shares
of Cosmetic Class C common stock. Shares acquired upon exercise of an option
shall not be accepted as payment unless such option exercise occurred at least
six months prior to the exercise of the option the option price of which is
proposed to be paid in part or in full by the tender of such shares. The
Combined Company Board or committee may require, as a condition of accepting any
such delivery of shares, that the optionee furnish the Combined Company Board or
the committee with a Compliance Opinion (as defined in the Cosmetic 1997 Stock
Option Plan).
In the event that the Combined Company is to be merged or consolidated with
another corporation or reorganized or liquidated, then the Combined Company
Board or the committee may, in its discretion, provide that awards granted to an
optionee will terminate unless exercised within the period determined by the
Combined Company Board or the committee
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<PAGE>
(not less than 30 days) in which case the Combined Company Board or the
committee must accelerate the exercisability and vesting of such awards.
The Combined Company Board or the committee may provide that options are
transferable under limited circumstances to optionees' immediate family members
or partnerships or trusts for their benefit.
The following sets forth a summary of federal income tax consequences of
participation in the Cosmetic 1997 Stock Option Plan based on current federal
income tax laws. This summary is not intended to be exhaustive and does not
describe state, local or foreign tax consequences.
A holder of an ISO will generally realize taxable income only upon
disposition of shares acquired upon exercise of the ISO rather than upon the
grant or timely exercise of the ISO. Tax consequences of an untimely exercise of
an ISO are determined in accordance with the rules applicable to Non-Qualified
Options. The amount by which the fair market value of the Cosmetic Class C
common stock on the exercise date of an ISO exceeds the exercise price generally
will increase the option holder's "alternative minimum taxable income."
A holder of a Non-Qualified Option generally will not be subject to tax at
the time of the grant of the Non-Qualified Option; the optionee generally will
include in ordinary income the excess, if any, of the fair market value of the
Cosmetic Class C common stock purchased over the exercise price. The Combined
Company generally will be entitled to a deduction at the time and in the amount
that the holder recognizes ordinary income.
The affirmative vote of holders of a majority of the Cosmetic Class B
common stock voting at the Meeting is required for approval of the Cosmetic 1997
Stock Option Plan. The Principal Stockholders and their family members, who in
the aggregate beneficially own or control more than 51% of the outstanding
Cosmetic Class B common stock as of the record date, have advised the Cosmetic
Board that they intend to vote their shares in favor of the Cosmetic 1997 Stock
Option Plan. Accordingly, approval of the Cosmetic 1997 Stock Option Plan is
assured without the vote of any other stockholder.
The Cosmetic Board recommends a vote FOR the approval of the Cosmetic 1997
Stock Option Plan.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF COSMETIC
The following table sets forth certain information regarding the beneficial
ownership of Cosmetic common stock as of January 27, 1997, (i) by each such
person who is known by Cosmetic to own beneficially more than five percent (5%)
of the Cosmetic Class A or Class B common stock, (ii) by each director and
officer of Cosmetic and (iii) by all directors and officers of Cosmetic as a
group. Except as indicated, each stockholder has sole voting and investment
power with respect to all shares shown as beneficially owned by such
stockholder, in each case including shares obtainable upon exercise of options
exercisable on or before March 27, 1997, of which 18,748 become exercisable as a
result of the Merger.
<TABLE>
<CAPTION>
COSMETIC CLASS A COMMON COSMETIC CLASS B COMMON
STOCK STOCK
-------------------------- --------------------------
AMOUNT AND PERCENT OF AMOUNT AND PERCENT OF
NAME NATURE CLASS (1) NATURE CLASS (2)
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C>
Anita J. Weinstein............................................. 149,544(3) 5.3 605,995 38.3
Mark S. Weinstein.............................................. 146,519(4) 5.3 120,512(5) 7.6
Susan K. Magenheim............................................. 78,850(6) 2.7 86,843(7) 5.5
Weinstein Family Limited Partnership........................... 473,728(8) 17.4 -0- *
Ben S. Kovalsky................................................ 59,500(9) 2.1 32,500(10) 2.0
Donald R. Rogers............................................... 8,500(11) * 4,500(12) *
Ronald M. Hirschel............................................. 1,810(13) * 605(14) *
Allan Goldman.................................................. 8,500(15) * -0- *
Michael J. Lewis............................................... 14,200(16) * -0- *
Bruce E. Strohl................................................ 21,250(17) * 2,750(18) *
Brown Capital Management, Inc.................................. -0- * 210,200(19) 13.3
All directors and officers as a group (12 persons)............. 972,401(20) 32.7 854,205(21) 52.9
</TABLE>
- ---------------
* Less than 1% of the outstanding shares.
(1) Based on 2,717,104 shares of Cosmetic Class A common stock outstanding plus
256,850 options that are exercisable on or before March 27, 1997 for the
individual officers.
(2) Based on 1,582,780 shares of Cosmetic Class B common stock outstanding plus
30,750 options that are exercisable on or before March 27, 1997 for the
individual officers.
(3) Includes 100,000 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
Excludes shares held by the Weinstein Family Limited Partnership. See Note
8.
(4) Includes 30,000 shares of Cosmetic Class A common stock issuable upon
exercise of currently exercisable options, 2,036 shares of Cosmetic Class A
common stock owned by his wife and 26,260 shares of Cosmetic Class A common
stock held by him in trust for his nephews and niece, over which shares he
disclaims any beneficial interest. Excludes shares held by the Weinstein
Family Limited Partnership. See Note 8.
(5) Includes 6,888 shares of Cosmetic Class B common stock owned by his wife
and 17,722 shares of Cosmetic Class B common stock held by him in trust for
his nephews and niece, over which shares he disclaims any beneficial
interest.
(6) Includes 12,400 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997, 2,424
shares of Cosmetic Class A common stock owned by her husband and, 37,453
shares of Cosmetic Class A common stock held by her in trust for her nephew
and niece, over which shares she disclaims any beneficial interest.
Excludes shares held by the Weinstein Family Limited Partnership. See Note
8.
(7) Includes 29,085 shares of Cosmetic Class B common stock held by her in
trust for her nephew and niece, over which shares she disclaims any
beneficial interest.
(8) Anita J. Weinstein, Mark S. Weinstein, and Susan K. Magenheim hold a
38.50%, 30.75% and 30.75% partnership interest, respectively, in the
Weinstein Family Limited Partnership.
(9) Includes 54,500 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
(10) Includes 27,500 shares of Cosmetic Class B common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
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<PAGE>
(11) Includes 6,000 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997 and
2,000 shares of Cosmetic Class A common stock owned by his wife, over which
shares he disclaims any beneficial interest.
(12) Includes 1,000 shares of Cosmetic Class B common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997 and
2,000 shares of Cosmetic Class B common stock owned by his wife, over which
shares he disclaims any beneficial interest.
(13) Includes 80 shares of Cosmetic Class A common stock owned by his wife and
1,170 shares of Cosmetic Class A common stock held by him in trust for his
children, over which shares he disclaims any beneficial interest.
(14) Includes 55 shares of Cosmetic Class B common stock owned by his wife.
(15) Includes 7,500 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
(16) Includes 14,200 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
(17) Includes 17,250 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
(18) Includes 1,750 shares of Cosmetic Class B common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997.
(19) Based upon Schedule 13G filed with the SEC on April 15, 1996, Brown Capital
Management, Inc., 809 Cathedral Street, Baltimore, Maryland 21201, has sole
voting power with respect to 168,000 of these shares.
(20) Includes 256,850 shares of Cosmetic Class A common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997,
63,713 shares of Cosmetic Class A common stock held by Mark S. Weinstein or
Susan K. Magenheim in trust for their respective nephews and nieces and
1,170 shares of Cosmetic Class A common stock held by Ronald M. Hirschel in
trust for his children.
(21) Includes 30,750 shares of Cosmetic Class B common stock issuable upon
exercise of options that are exercisable on or before March 27, 1997 and
46,807 shares of Cosmetic Class B common stock held by Mark S. Weinstein or
Susan K. Magenheim in trust for their respective nephews and nieces.
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DESCRIPTION OF COSMETIC CAPITAL STOCK
Before giving effect to the Class C Amendment, Cosmetic is authorized to
issue 5,000,000 shares of Class A common stock, par value $.01 per share, and
5,000,000 shares of Class B common stock, par value $.01 per share. As of
January 22, 1997, there were outstanding 2,717,104 shares of Cosmetic Class A
common stock and 1,582,780 shares of Cosmetic Class B common stock, held of
record by approximately 183 stockholders and approximately 128 stockholders,
respectively, excluding holders whose stock is held in nominee or street name.
Pursuant to the Class C Amendment, Cosmetic's Certificate of Incorporation
is proposed to be amended to authorize 40,000,000 shares of Class C common
stock, par value $.01 per share. Pursuant to the Merger, all of the outstanding
Cosmetic common stock will be exchanged for Cosmetic Class C common stock.
Although following the Merger, the Certificate of Incorporation will continue to
authorize Cosmetic Class A and Class B common stock, Cosmetic has no current
intention to issue any more Cosmetic Class A or Class B common stock.
COSMETIC CLASS A COMMON STOCK
VOTING RIGHTS. The holders of Cosmetic Class A common stock have no voting
rights except as described below and as otherwise required by Delaware law. In
exercising any such vote, each outstanding share of Cosmetic Class A common
stock would be entitled to one vote. The Certificate of Incorporation provides
that the affirmative vote of holders of at least a majority of the then
outstanding Cosmetic Class A common stock, voting together as a single class, is
required to amend the Certificate of Incorporation if such amendment would alter
or change the powers, preferences or special rights of the Cosmetic Class A
common stock.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each share of Cosmetic Class A and Class
B common stock is equal in respect to dividends and other distributions in cash,
stock or property, except that (i) a dividend or distribution in cash or
property on Cosmetic Class A common stock may be greater than any dividend or
distribution in cash or property on Cosmetic Class B common stock, (ii) a
dividend or distribution in Cosmetic shares on Cosmetic Class A common stock may
be paid or made only in Cosmetic Class A common stock and (iii) a dividend or
distribution in Cosmetic shares on Cosmetic Class B common stock may be paid or
made either in Cosmetic Class A or Class B common stock.
MERGERS AND CONSOLIDATIONS. In the event of a merger, consolidation or
combination of Cosmetic with another entity (whether or not Cosmetic is the
surviving entity) or in the event of dissolution of Cosmetic, the holders of
Cosmetic Class A common stock are entitled to receive the same per share
consideration as the per share consideration, if any, received by holders of
Cosmetic Class B common stock in that transaction.
CONVERTIBILITY. The Cosmetic Class A common stock is convertible into
Cosmetic Class B common stock if at any time the number of outstanding shares of
Cosmetic Class B common stock falls below 10% of the aggregate number of
outstanding shares of Cosmetic Class A and Class B common stock. In that event,
immediately upon the occurrence thereof, all of the outstanding Cosmetic Class A
common stock would be converted automatically into Cosmetic Class B common stock
on a share-for-share basis. For purposes of this provision, Cosmetic Class A or
Class B common stock repurchased by Cosmetic would not be considered to be
"outstanding" from and after the date of repurchase. In the event of any such
conversion of the Cosmetic Class A common stock, certificates which formerly
represented outstanding Cosmetic Class A common stock thereafter would be deemed
to represent a like number of shares of Cosmetic Class B common stock, and all
common stock then authorized by the Certificate of Incorporation would be deemed
to be Cosmetic Class B common stock.
PREEMPTIVE RIGHTS. The holders of Cosmetic Class A common stock do not have
any preemptive rights enabling them to subscribe for or receive shares of
Cosmetic of any class or any other securities convertible into any class of
Cosmetic's shares.
COSMETIC CLASS B COMMON STOCK
VOTING RIGHTS. The holders of Cosmetic Class B common stock are entitled to
vote on all matters voted on by stockholders, including the election of
directors, and, except as noted above and as otherwise required by law with
respect to the Cosmetic Class A common stock, the holders of such shares
exclusively possess all voting power. In exercising any such vote, each
outstanding share of Cosmetic Class B common stock is entitled to one vote. The
ability of the holders of Cosmetic Class B common stock to exercise their voting
power may be affected by the Class A protection provisions discussed below.
88
<PAGE>
CLASS A PROTECTION. The Certificate of Incorporation provides that any
person who, after March 13, 1992, acquires and continues to hold more than 15%
of the outstanding Cosmetic Class B common stock would only be allowed to vote
those shares to the extent that such shares are not "excess Class B Common
Shares." The number of shares of Cosmetic Class B common stock on any date
deemed to be excess Class B Common Shares would be equal to: (i) the percentage
which the number of shares of Cosmetic Class B common stock acquired since March
13, 1992 and then held by that person bears to the aggregate number of
outstanding shares of Cosmetic Class B common stock; (ii) minus the percentage
which the number of shares of Cosmetic Class A common stock acquired since March
13, 1992 at an equitable price and then held by that person bears to the
aggregate number of outstanding shares of Cosmetic Class A common stock; (iii)
times the aggregate number of outstanding shares of Cosmetic Class B common
stock. For purposes of the Cosmetic Class A protection provision, Cosmetic Class
B common stock held by a person on March 13, 1992 would not be included in
determining whether a person has acquired excess Class B Common Shares.
The Certificate of Incorporation provides that an equitable price has been
paid for Cosmetic Class A common stock only when it has been acquired at a price
at least equal to the greater of (i) the highest per share price paid by the
acquiring person, in cash or in non-cash consideration, for any shares of
Cosmetic Class B common stock acquired within the 60-day periods preceding and
following the acquisition of the Cosmetic Class A common stock or (ii) the
highest closing market sale price of a share of Cosmetic Class B common stock
during the 30-day periods preceding and following the acquisition of the
Cosmetic Class A common stock. The value of any noncash consideration will be
determined by the Cosmetic Board acting in good faith. The highest closing
market sale price of a share of Cosmetic Class B common stock will be the
highest closing sale price on the Nasdaq National Market or such other
securities exchange or quotation system then constituting the principal trading
market for the Cosmetic Class B common stock. If no quotations are available,
the highest closing market sale price will be the fair market value during the
30-day periods of a share of Cosmetic Class B common stock as determined by the
Cosmetic Board acting in good faith.
Under the Class A protection provisions, an acquisition of Cosmetic Class B
common stock is deemed to include any shares that a person acquires directly or
indirectly, in one transaction or a series of transactions, or with respect to
which that person acts or agrees to act in concert with any other person. Unless
there are affirmative attributes of concerted action, however, "acting or
agreeing to act in concert with any other person" will not include actions taken
or agreed to be taken by persons acting in their official capacities as
directors or officers of Cosmetic or actions by persons merely because they are
related by blood or marriage. Also, an acquisition of Cosmetic Class B common
stock will not be deemed to include acquisitions made pursuant to contracts
existing prior to March 13, 1992 or acquisitions by bequest or inheritance, by
operation of law upon the death of any individual, or by any other transfer
without valuable consideration, including a gift that is made in good faith and
not for purposes of circumventing the Class A protection provisions.
For purposes of the Class A protection provisions, (i) any Cosmetic Class A
or Class B common stock issued by Cosmetic since the last date on which a person
acquired any Cosmetic Class B common stock is considered to be not outstanding
and (ii) any Cosmetic Class A or Class B common stock repurchased by Cosmetic
since the last date on which a person acquired any Cosmetic Class A or Class B
common stock (whether in treasury or retired) is deemed still to be outstanding.
The Class A protection provisions also provide that, if the voting power of any
Cosmetic Class B common stock cannot be exercised pursuant to the provision,
that share nevertheless will be included in the determination of the voting
power of Cosmetic for any purposes under the Certificate of Incorporation or
under the Delaware General Corporation Law, unless otherwise specified in the
Bylaws.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each share of Cosmetic Class A and Class
B common stock is equal in respect to dividends and other distributions in cash,
stock or property, except that (i) a dividend or distribution in cash or
property on Cosmetic Class A common stock may be greater than any dividend or
distribution in cash or property on Cosmetic Class B common stock, (ii) a
dividend or distribution in Cosmetic shares on Cosmetic Class A common stock may
be paid or made only in Cosmetic Class A common stock and (iii) a dividend or
distribution in Cosmetic shares on Cosmetic Class B common stock may be paid or
made either in Cosmetic Class A or Class B common stock.
NO CONVERTIBILITY. The Cosmetic Class B common stock is not at any time
convertible into Cosmetic Class A common stock.
PREEMPTIVE RIGHTS. The holders of Cosmetic Class B common stock do not have
any preemptive rights enabling them to subscribe for or receive shares of
Cosmetic of any class or any other securities convertible into any class of
Cosmetic's shares.
89
<PAGE>
COSMETIC CLASS C COMMON STOCK
Upon the exchange of the outstanding Cosmetic Class A and Class B common
stock for Cosmetic Class C common stock pursuant to the terms of the Merger, the
Cosmetic Class C common stock will have all the rights of common stock as
provided in the Delaware General Corporation Law.
VOTING RIGHTS. The holders of Cosmetic Class C common stock will be
entitled to vote on all matters voted on by stockholders, including the election
of directors. In exercising any such vote, each outstanding share of Cosmetic
Class C common stock will be entitled to one vote.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each share of Cosmetic Class C common
stock will be equal in respect to dividends and other distributions in cash,
stock or property.
NO CONVERTIBILITY. The Cosmetic Class C common stock will not be at any
time convertible into Cosmetic Class A or Class B common stock.
PREEMPTIVE RIGHTS. The holders of Cosmetic Class C common stock will not
have any preemptive rights enabling them to subscribe for or receive Cosmetic
shares of any class or any other securities convertible into any class of
Cosmetic's shares.
DIVIDENDS
Cosmetic has not paid any dividends on the Cosmetic Class A or Class B
common stock to date. The payment of any dividends subsequent to the Merger will
be within the discretion of the Combined Company Board.
TRANSFER AGENT
The transfer agent and registrar for the Cosmetic common stock is First
Union National Bank of North Carolina.
NASDAQ NATIONAL MARKET LISTING
Cosmetic has made application for the listing of the Cosmetic Class C
common stock on the Nasdaq National Market.
FEDERAL SECURITIES LAWS CONSEQUENCES
This Proxy Statement/Prospectus does not cover any resales of the Cosmetic
Class C common stock to be issued upon consummation of the Merger, and no person
is authorized to make any use of this Proxy Statement/Prospectus in connection
with any such resale.
The Cosmetic Class C common stock issued pursuant to this Proxy
Statement/Prospectus will be freely transferable under the Securities Act except
for shares issued to any stockholder who may be deemed to be an "affiliate" of
Cosmetic for purposes of Rule 145 under the Securities Act as of the date of the
Meeting. Affiliates are persons that directly or indirectly control, are
controlled by, or are under common control with, Cosmetic. Under federal
securities laws, control is considered to be a question of fact determined on a
case by case basis. Generally, whether a person is in control of a corporation
is determined by that person's power to effect the policies of the corporation
through stock ownership or managerial position.
Affiliates may offer and sell Cosmetic Class C common stock received in the
Merger as long as the following conditions are met: (i) Cosmetic has filed with
the SEC all reports required to be filed pursuant to Section 13 of the Exchange
Act during the 12 months preceding the sale arising from the Merger; (ii)7the
number of shares of Cosmetic Class C common stock sold by each affiliate does
not exceed the greater of (a) 1% of the outstanding Cosmetic Class C common
stock, (b) the average weekly reported volume of trading in Cosmetic Class C
common stock on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the filing of the notice required by Rule 144(h)
under the Securities Act, or if no such notice is required, the date of
execution of the transaction directly with a market maker, or (c) the average
weekly volume of trading in such securities reported through the consolidated
transaction reporting system contemplated by Rule 11Aa3-1 under the Exchange Act
during the four-week period specified above; (iii) all shares of Cosmetic Class
C common stock are sold in brokerage transactions and no orders are solicited in
connection with the sale; and (iv) the broker does not receive more than the
usual and customary broker's commission in connection with the sale.
As described in "The Stockholders Agreement," both Revlon and the Principal
Stockholders will receive certain rights to registration of their Cosmetic Class
C common stock under the Securities Act. Pursuant to any such registration
statement, the selling securityholders would be entitled to sell shares without
regard to the foregoing limitations. See "Risk Factors -- Shares Eligible for
Future Sale."
90
<PAGE>
LEGAL MATTERS
Arent Fox Kintner Plotkin & Kahn, Washington, D.C., will render an opinion
with respect to certain matters on behalf of Cosmetic.
EXPERTS
Cosmetic's financial statements as of September 27, 1996 and for each of
the three years then ended included in this Proxy Statement/Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein and in the Registration Statement in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
PFC's financial statements as of December 31, 1994 and 1995, and for each
of the years in the three-year period ended December 31, 1995, included in this
Proxy Statement/Prospectus and elsewhere in the Registration Statement have been
included in this Proxy Statement/Prospectus and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere in this Proxy Statement/Prospectus, and upon
the authority of said firm as experts in accounting and auditing.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, were Cosmetic's
auditors for the fiscal year ended September 27, 1996 and have been employed in
that capacity since May 1987. The Cosmetic Board has not made a determination as
to Cosmetic's auditors for Cosmetic's current fiscal year, which determination
is expected to be made after the completion of the Merger.
A representative of Arthur Andersen LLP is expected to attend the Meeting.
At that time, the representative will have the opportunity to make a statement
if he or she desires and will be available to respond to appropriate questions
regarding the most recent audit of Cosmetic's financial statements.
FUTURE STOCKHOLDER PROPOSALS
Any Cosmetic stockholder who intends to submit a proposal for inclusion in
the proxy materials for the 1998 annual meeting of Cosmetic must submit such
proposal to the Secretary of Cosmetic by 1997.
WHERE YOU CAN FIND MORE INFORMATION
Cosmetic files annual, quarterly and special reports, proxy statements and
other information with the SEC. Cosmetic has filed a Registration Statement on
Form S-4 to register with the SEC the Cosmetic Class C common stock to be issued
in the Merger. This Proxy Statement/Prospectus is a part of that Registration
Statement and constitutes a prospectus of Cosmetic in addition to being a proxy
statement of Cosmetic for the Meeting. As allowed by SEC rules, this Proxy
Statement/Prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to the Registration Statement. The
Registration Statement on Form S-4, including all exhibits and schedules
thereto, as well as Cosmetic's other SEC filings, may be inspected without
charge at the principal office of the Commission, at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the Midwest Regional
Office of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and at the Northeast Regional office of
the Commission at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
upon the payment of prescribed fees. Such material may also be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
Cosmetic has supplied all information contained in this Proxy
Statement/Prospectus relating to Cosmetic and PFC has supplied all such
information relating to PFC and Revlon.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS DATED FEBRUARY
, 1997. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THIS PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE
ISSUANCE OF THE COSMETIC CLASS C COMMON STOCK IN THE MERGER SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
91
<PAGE>
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------- -----------
<S> <C>
1991 Option Plan........................................................................ 77
Acquired Companies...................................................................... 33
Andrews Group........................................................................... 75
Board Amendment......................................................................... 7
Bonus Increase.......................................................................... 80
Book Value Multiples.................................................................... 31
Cal Fed................................................................................. 75
Cash Election........................................................................... Cover page
Cash Offer.............................................................................. 30
Cessation of Operations................................................................. 60
Cigar Holdings.......................................................................... 75
Class C Amendment....................................................................... 7
Code.................................................................................... 26
Coleman................................................................................. 75
Coleman Holdings........................................................................ 75
Coleman Worldwide....................................................................... 75
Colours & Scents........................................................................ 46
Colours & Scents stores................................................................. 68
Combined Company........................................................................ Cover page
Combined Company Board.................................................................. 4
Comparable Companies.................................................................... 31
Consolidated Cigar...................................................................... 75
Cosmetic................................................................................ Cover page
Cosmetic Board.......................................................................... 1
Cosmetic Center Alternate Transaction................................................... 58
Cosmetic Center Break-up Fee............................................................ 58
Cosmetic Center Termination Date........................................................ 58
Cosmetic Center Triggering Events....................................................... 58
Cosmetic Certificates................................................................... 54
Cosmetic Unaffected Stock Price......................................................... 32
EBIT.................................................................................... 31
EBIT Multiples.......................................................................... 31
EBITDA.................................................................................. 31
EBITDA Multiples........................................................................ 31
Effective Time.......................................................................... 15
Enterprise Value........................................................................ 31
Enterprise Value Multiples.............................................................. 31
EPS..................................................................................... 31
Equity Value............................................................................ 31
Equity Value Multiples.................................................................. 31
Exchange Act............................................................................ 75
Exchange Agent.......................................................................... 4
Exclusivity Agreement................................................................... 18
Exclusivity Period...................................................................... 20
Facility................................................................................ 43
Financing............................................................................... 11
First Nationwide Parent................................................................. 75
FN Holdings............................................................................. 75
Holdings................................................................................ 13
Holmdel Lease........................................................................... 60
IRS..................................................................................... 26
ISOs.................................................................................... 78
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------- -----------
<S> <C>
LBO..................................................................................... 34
Legg Mason.............................................................................. 6
Legg Mason Opinion...................................................................... 29
Letter of Intent........................................................................ 18
Limit................................................................................... 16
LTM..................................................................................... 31
LTM EPS Multiples....................................................................... 31
LTM Transaction Value Multiples......................................................... 33
MacAndrews Holdings..................................................................... 75
Mafco Consolidated...................................................................... 75
Mafco Holdings.......................................................................... 61
Marvel.................................................................................. 75
Meeting................................................................................. Cover page
Merger.................................................................................. Cover page
Merger Agreement........................................................................ Cover page
Meridian................................................................................ 75
Net Unleveraged Cash Flow............................................................... 34
New Facility............................................................................ 43
NOLs.................................................................................... 32
Non-Discretionary Grant................................................................. 80
Non-Operating Items..................................................................... 32
Non-Qualified Options................................................................... 80
PCT..................................................................................... 75
PFC..................................................................................... Cover page
PFC Alternate Transaction............................................................... 58
PFC Employee Store Leases............................................................... 60
Pneumo Abex............................................................................. 75
Prestige Fragrance & Cosmetics stores................................................... 68
Principal Stockholders Break-Up Fee..................................................... 59
Principal Stockholders.................................................................. 1
Prior Year.............................................................................. 80
Pro Rata Offer.......................................................................... 30
Projected 1997 EPS Multiples............................................................ 31
Projected 1998 EPS Multiples............................................................ 31
Proposal................................................................................ 17
Purchase Price of Equity................................................................ 33
Purchase Price of Equity Multiples...................................................... 33
Registration Rights Agreement........................................................... 62
Revenue Multiples....................................................................... 31
Revlon.................................................................................. Cover page
Revlon Break-up Fee..................................................................... 58
Revlon Expense Reimbursement Fee........................................................ 58
Revlon Notes............................................................................ 12
Revlon Termination Date................................................................. 58
Revlon Triggering Events................................................................ 58
Revlon Worldwide........................................................................ 75
SEC..................................................................................... 19
S G & A................................................................................. 41
Securities Act.......................................................................... 14
Services................................................................................ 60
Services Agreement...................................................................... 61
Stock Offer............................................................................. 30
Stock Option Committee.................................................................. 80
Stockholders Agreement.................................................................. 5
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------- -----------
<S> <C>
Stockholder Alternate Transaction....................................................... 59
Stockholder Triggering Event............................................................ 59
Subject Year............................................................................ 80
Supply Agreement........................................................................ 61
Tax Counsel............................................................................. 26
Tax Sharing Agreement................................................................... 61
Ten Percent Stockholder................................................................. 78
Terminal Value.......................................................................... 33
The Salon............................................................................... 64
Toy Biz................................................................................. 75
Transaction Value....................................................................... 33
UPS..................................................................................... 71
</TABLE>
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................................................... F-2
Consolidated Balance Sheets as of September 29, 1995 and September 27, 1996............................................ F-3
Consolidated Statements of Operations.................................................................................. F-4
Fifty-three weeks ended September 30, 1994
Fifty-two weeks ended September 29, 1995
Fifty-two weeks ended September 27, 1996
Consolidated Statements of Shareholders' Equity........................................................................ F-5
Fifty-three weeks ended September 30, 1994
Fifty-two weeks ended September 29, 1995
Fifty-two weeks ended September 27, 1996
Consolidated Statements of Cash Flows.................................................................................. F-6
Fifty-three weeks ended September 30, 1994
Fifty-two weeks ended September 29, 1995
Fifty-two weeks ended September 27, 1996
Notes to Consolidated Financial Statements............................................................................. F-7
PRESTIGE FRAGRANCE & COSMETICS, INC.
Independent Auditors' Report........................................................................................... F-15
Balance Sheets as of December 31, 1994 and 1995...................................................................... F-16
Statements of Operations for each of the years in the three-year period ended December 31, 1995...................... F-17
Statements of Stockholder's Equity for each of the years in the three-year period ended December 31, 1995............ F-18
Statements of Cash Flows for each of the years in the three-year period ended December 31, 1995...................... F-19
Notes to Financial Statements........................................................................................ F-20
Condensed Balance Sheets as of December 31, 1995 and September 30, 1996................................................ F-28
Condensed Statements of Operations for the nine months ended September 30, 1995 and 1996............................... F-29
Condensed Statement of Stockholder's Equity for the nine months ended September 30, 1996............................... F-30
Condensed Statements of Cash Flows for the nine months ended September 30, 1995 and 1996............................... F-31
Notes to Unaudited Condensed Financial Statements...................................................................... F-32
</TABLE>
F-1
<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
27, 1996, and September 29, 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three fiscal
years in the period ended September 27, 1996. 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 27, 1996, and September 29, 1995, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended September 27, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.,
November 27, 1996
F-2
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C>
(DOLLARS IN
THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 1,320 $ 979
Accounts receivable............................................................................. 881 1,860
Inventories..................................................................................... 61,891 56,479
Prepaid expenses................................................................................ 529 442
Prepaid income taxes............................................................................ 1,142 1,735
Deferred income tax benefit..................................................................... 970 1,631
------- -------
Total current assets......................................................................... 66,733 63,126
------- -------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment............................................................... 11,410 10,989
Leasehold improvements.......................................................................... 4,932 5,022
Leased property -- capitalized.................................................................. 1,670 1,652
------- -------
18,012 17,663
Accumulated depreciation and amortization....................................................... 7,211 9,256
------- -------
10,801 8,407
------- -------
DEPOSITS AND OTHER ASSETS......................................................................... 307 378
------- -------
DEFERRED INCOME TAX BENEFIT....................................................................... 126 611
------- -------
TOTAL ASSETS................................................................................. $77,967 $72,522
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................................ $17,309 $15,956
Note payable -- bank (Note 2)................................................................... 11,985 --
Accrued expenses................................................................................ 4,058 4,044
Current portion of obligation under capital leases.............................................. 291 311
------- -------
TOTAL CURRENT LIABILITIES.................................................................... 33,643 20,311
NOTE PAYABLE -- BANK (NOTE 2)..................................................................... -- 12,220
OBLIGATION UNDER CAPITAL LEASES................................................................... 420 109
DEFERRED RENT..................................................................................... 1,339 1,305
OTHER LIABILITIES................................................................................. 624 1,396
------- -------
TOTAL LIABILITIES............................................................................ 36,026 35,341
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY: (NOTE 4)
Class A common stock, $.01 par value; authorized 5,000,000 shares; issued 2,721,472 shares in
1995 and 2,713,354 shares in 1996............................................................ 27 27
Class B common stock, $.01 par value; authorized 5,000,000 shares; issued 1,594,924 shares in
1995 and 1,582,780 shares in 1996............................................................ 16 16
Additional paid-in capital...................................................................... 21,740 21,386
Retained earnings............................................................................... 20,512 15,752
Treasury stock-Class B common stock, 32,144 shares in 1995 and no shares in 1996, at cost....... (354) --
------- -------
TOTAL SHAREHOLDERS' EQUITY........................................................................ 41,941 37,181
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................................ $77,967 $72,522
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net sales.................................................................. $ 123,551 $ 132,304 $ 133,795
---------- ---------- ----------
Cost of sales including buying, occupancy and distribution................. 96,574 105,094 105,761
Selling, general and administrative expenses............................... 19,929 27,033 30,268
Restructuring provision (Note 10).......................................... -- -- 4,024
---------- ---------- ----------
Total operating expenses................................................... 116,503 132,127 140,053
---------- ---------- ----------
Income (loss) from operations.............................................. 7,048 177 (6,258)
Other income, net.......................................................... 110 670 95
Interest expense........................................................... (166) (725) (1,030)
---------- ---------- ----------
Earnings (loss) before income taxes........................................ 6,992 122 (7,193)
Income tax provision (benefit)............................................. 2,804 (157) (2,433)
---------- ---------- ----------
Net earnings (loss)........................................................ $ 4,188 $ 279 $ (4,760)
---------- ---------- ----------
---------- ---------- ----------
Net earnings (loss) per common share
Primary.................................................................... $ 0.95 $ 0.06 $ (1.11)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding
Primary.................................................................... 4,414,462 4,358,339 4,293,457
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID-IN RETAINED ------------------
CLASS A CLASS B CAPITAL EARNINGS CLASS A CLASS B
------- ------- ---------- -------- ------- -------
<S> <C>
(DOLLARS IN THOUSANDS)
Balances at September 24, 1993.................... $27 $15 $ 21,349 $ 16,045 $ -- $ --
Exercise of stock options, 6,050 shares........... -- -- 38 -- -- --
Net earnings...................................... -- -- -- 4,188 -- --
------- ------- ---------- -------- ------- -------
Balances at September 30, 1994.................... 27 15 21,387 20,233 -- --
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 -- --
------- ------- ---------- -------- ------- -------
Balances at September 29, 1995.................... 27 16 21,740 20,512 -- (354)
Exercise of stock options, 28,118 Class A common
shares tendered for 20,000 Class A common shares
and 20,000 Class B common shares................ -- -- 214 -- (214) --
Retired treasury stock, 28,118 Class A common
shares and 32,144 Class B common shares......... -- -- (568) -- 214 354
Net loss.......................................... -- -- -- (4,760) -- --
------- ------- ---------- -------- ------- -------
Balances at September 27, 1996.................... $27 $16 $ 21,386 $ 15,752 $ -- $ --
------- ------- ---------- -------- ------- -------
------- ------- ---------- -------- ------- -------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balances at September 24, 1993.................... $37,436
Exercise of stock options, 6,050 shares........... 38
Net earnings...................................... 4,188
-------------
Balances at September 30, 1994.................... 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................ --
Net earnings...................................... 279
-------------
Balances at September 29, 1995.................... 41,941
Exercise of stock options, 28,118 Class A common
shares tendered for 20,000 Class A common shares
and 20,000 Class B common shares................ --
Retired treasury stock, 28,118 Class A common
shares and 32,144 Class B common shares......... --
Net loss.......................................... (4,760)
-------------
Balances at September 27, 1996.................... $37,181
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- -------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)............................................................... $ 4,188 $ 279 $(4,760)
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization.................................................. 1,580 2,341 2,719
Restructuring provision (Note 10).............................................. -- -- 4,024
Change in assets and liabilities:
Accounts receivable.......................................................... (484) 676 (979)
Inventories.................................................................. (5,420) (11,469) 5,412
Prepaid expenses............................................................. (341) (406) (86)
Prepaid income taxes......................................................... (103) (983) (593)
Deposits and other assets.................................................... (140) (53) (71)
Accounts payable............................................................. (2,895) 7,387 (1,353)
Accrued expenses............................................................. 903 723 (1,034)
Restructuring provision (Note 10)............................................ -- -- (1,022)
Deferred rent................................................................ 163 132 (34)
Other liabilities............................................................ -- 624 (316)
Deferred income tax benefit.................................................. 207 (403) (1,146)
------- -------- -------
Net cash (used in) provided by operating activities.......................... (2,342) (1,152) 761
------- -------- -------
Cash flows from investing activities:
Capital expenditures, net......................................................... (2,861) (5,633) (1,055)
Proceeds from sale of equipment................................................... -- 35 9
------- -------- -------
Net cash used in investing activities.......................................... (2,861) (5,598) (1,046)
------- -------- -------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement..................................... 5,025 6,960 235
Repayments of capital lease obligations........................................... (245) (272) (291)
Exercise of stock options......................................................... 38 -- --
------- -------- -------
Net cash provided by (used in) financing activities............................ 4,818 6,688 (56)
------- -------- -------
Net decrease in cash and cash equivalents........................................... (385) (62) (341)
Cash and cash equivalents at beginning of year...................................... 1,767 1,382 1,320
------- -------- -------
Cash and cash equivalents at end of year............................................ $ 1,382 $ 1,320 $ 979
------- -------- -------
------- -------- -------
Supplemental disclosures of cash flow information
and non cash activities:
Cash payments for interest........................................................ $ 146 $ 696 $ 1,059
Cash payments for income taxes.................................................... 2,700 837 339
Capital lease obligations incurred................................................ 192 -- --
Treasury stock (Note 4)........................................................... -- 354 214
</TABLE>
See notes to consolidated financial statements.
F-6
<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 cosmetics, fragrances, beauty aids and related items on a retail basis
under the name "The Cosmetic Center(Register mark)" in 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 Dumond Distribution, 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 at the point of shipment on its wholesale business.
FISCAL YEAR
The Company's fiscal year ends on the last Friday of September. The
Company's fiscal years ended on September 30, 1994, September 29, 1995, and
September 27, 1996. Fiscal year 1994 consisted of 53 weeks and fiscal years 1995
and 1996 each consisted of 52 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 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, income tax refunds 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.
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 $2,486,000 at September 29,
1995, and September 27, 1996, respectively.
F-7
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 1 -- Summary of Significant Accounting Policies -- Continued
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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
DEFERRED INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS
109, deferred tax assets and 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.
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 1994 and 1995 includes the exercise of all stock
options having exercise prices less than the average market price of the common
stock using the treasury stock method. Stock options were not considered for
1996 as their impact is antidilutive. Fully diluted earnings per share is not
presented as the difference between these amounts and the amounts presented is
not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF CURRENT ASSETS AND CURRENT LIABILITIES
At September 27, 1996, the carrying amount of current assets and current
liabilities approximates fair value due to the short maturity of those
instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than its fiscal year ending September 26, 1997. The Company anticipates
that the adoption of the standard will not have a material effect on its
consolidated financial position or results of operations.
The Company is also required to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation," no later than its fiscal year ending September 26,
1997. This statement encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity instruments. Entities
which elect not to adopt the fair value method of accounting are required to
make pro forma disclosures of earnings and per share data as if the fair value
method was adopted. Management does not intend to adopt the fair value method of
accounting. Accordingly, adoption of the statement will only impact the
Company's disclosures.
Note 2 -- Note Payable -- Bank
The Company had an unsecured credit facility (the "Facility") with a bank
for a maximum borrowing of $15,000,000. 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. At
September 29, 1995, the Facility had an outstanding balance of $11,985,000 at
interest rates ranging from 7.03% to 8.00%. At
F-8
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 2 -- Note Payable -- Bank -- Continued
September 27, 1996, the Facility had an outstanding balance of $12,220,000 at
interest rates ranging from 6.46% to 9.50%. The weighted average interest rate
on borrowings was 7.90% in 1995 and 7.47% in 1996. The carrying value of the
Company's debt approximates fair value.
In October 1996, the Company paid the outstanding balance of $14,200,000 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 $25,000,000 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 monthly. 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. 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.
Future annual maturities of long-term debt under the terms of the New
Facility are as follows for the fiscal year:
1997 -- $0, 1998 -- $0, 1999 -- $0, 2000 -- $12,220,000 and 2001 -- $0.
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 expired in
August 1996. The agreement entitled the Company to receive payments from the
counterparties in any period during which the floating rate on its credit
facility exceeded 8%. The premium paid was amortized over the cap period.
In 1995 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 counterparty (major financial
institution) will be able to fully satisfy its obligations under the contract.
Note 3 -- Accrued Expenses
At September 29, 1995 and September 27, 1996, accrued expenses consisted of
the following:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C>
(DOLLARS IN
THOUSANDS)
Payroll and payroll taxes................................................................ $ 1,423 $ 1,419
Restructuring provision (Note 10)........................................................ -- 1,020
Other operating expenses................................................................. 911 794
Sales and other taxes.................................................................... 775 467
Group medical............................................................................ 23 160
Advertising expenses..................................................................... 511 143
Fixed assets............................................................................. 415 41
------- -------
$ 4,058 $ 4,044
------- -------
------- -------
</TABLE>
F-9
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 4 -- Shareholders' Equity
The Class A common stock (nonvoting) and Class B common stock (voting) are
similar in characteristics except that the voting power for the election of
directors and all other purposes is vested exclusively in the holders of Class B
common stock, except as otherwise required by law or the Certificate of
Incorporation.
Under the 1991 Stock Option Plan (Note 7), 596,408 shares of Class A common
stock and 43,750 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, was recorded as treasury stock in the accompanying financial
statements.
In fiscal 1996, certain officers exercised options for 20,000 shares of
each of the Class A and Class B common stock. The exercise price of
approximately $214,000 was paid with 28,114 shares of Class A common stock and
as a result was recorded as treasury stock in the accompanying financial
statements.
In August 1996, the Board of Directors retired the 28,114 shares of Class A
and 32,144 shares of Class B treasury stock. As a result the original cost of
the treasury stock was recorded against additional paid-in capital.
Note 5 -- Income Taxes
The Company accounts for income taxes under SFAS 109. 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 a valuation allowance against its net deferred tax assets.
At September 29, 1995 and September 27, 1996, the components of the net
deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C>
(DOLLARS IN
THOUSANDS)
Deferred tax assets (liabilities):
UNICAP................................................................................. $ 565 $ 556
Deferred rent.......................................................................... 623 549
Depreciation and amortization.......................................................... (570) (369)
Preopening costs....................................................................... (40) (9)
Restructuring costs.................................................................... -- 843
Alternative minimum tax credit......................................................... -- 252
Accrued vacation....................................................................... 159 158
Accrued group medical.................................................................. 2 40
Employment contract.................................................................... 269 129
Deferred legal......................................................................... 40 31
Deferred compensation.................................................................. 48 62
------ ------
Net deferred tax asset................................................................... $1,096 $2,242
------ ------
------ ------
</TABLE>
F-10
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 5 -- Income Taxes -- Continued
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1994 1995 1996
------- ----- -------
<S> <C>
(DOLLARS IN THOUSANDS)
Current:
Federal...................................................................... $ 2,126 $202 $(1,482)
State........................................................................ 471 44 195
------- ----- -------
2,597 246 (1,287)
------- ----- -------
Deferred:
Federal...................................................................... 181 (330) (974)
State........................................................................ 26 (73) (172)
------- ----- -------
207 (403) (1,146)
------- ----- -------
$ 2,804 $(157) $(2,433)
------- ----- -------
------- ----- -------
</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>
1994 1995 1996
-------------- ---------------- ----------------
<S> <C>
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ------ ------- -----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Expense at statutory federal rate................................ $2,377 34.0% $ 42 34.0% $(2,446) (34.0)%
Increase in income taxes resulting from:
State income taxes, net of
Federal income tax benefit.................................. 325 4.6 6 4.6 129 1.8
Life insurance proceeds........................................ -- -- (216 ) (176.3) -- --
Other, net..................................................... 102 1.5 11 9.0 (116) (1.6)
------ ---- ------ ------ ------- -----
$2,804 40.1% $(157 ) (128.7)% $(2,433) (33.8)%
------ ---- ------ ------ ------- -----
------ ---- ------ ------ ------- -----
</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 $114,000
and $38,000 for fiscal years 1994 and 1995, respectively. There was no
contribution in 1996. 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 422 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.
F-11
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 of Class A common stock, 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 of Class A
common stock, 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>
1994 1995 1996
------------------- -------------------- -------------------
<S> <C>
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- -------- -------- -------- -------- -------
Available for grant:
Beginning............................. 135,776 -- 70,776 -- 329,776 --
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Under option:
Beginning............................. 224,612 134,612 285,812 132,362 286,632 92,180
Granted ($15.75-21.17/share).......... 65,000 -- -- -- -- --
Granted ($7.00-9.62/share)............ -- -- 113,000 -- -- --
Granted ($ 4.12-6.60/share)........... -- -- -- -- 93,000 --
Exercised ($4.00-11.37/share)......... (3,800) (2,250) -- -- -- --
Exercised ($4.40/share)............... -- -- (40,180) (40,182) -- --
Exercised ($5.36/share)............... -- -- -- -- (20,000) (20,000)
Cancelled ($11.37-17.32/share)........ -- -- (72,000) -- -- --
Cancelled ($6.50-21.17/share)......... -- -- -- -- (96,082) (28,430)
-------- -------- -------- -------- -------- -------
Under option -- end..................... 285,812 132,362 286,632 92,180 263,550 43,750
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Authorized increase..................... -- -- 300,000 -- -- --
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Options exercisable..................... 227,885 130,106 252,921 92,180 218,314 43,750
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Available for grant -- end.............. 70,776 -- 329,776 -- 332,858 --
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
</TABLE>
During 1995 the Company reduced the exercise price of 72,000 options to the
then current fair market value of $7.00 per share.
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 year 1994, 1995 and 1996 were approximately
$59,000, $59,000 and $52,000 respectively.
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:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C>
Computer equipment............................................. $ 1,670,000 $ 1,652,000
Accumulated amortization....................................... (1,030,000) (1,288,000)
----------- -----------
$ 640,000 $ 364,000
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 9 -- Commitments and Contingencies -- Continued
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. Rental abatements are recognized on a
straight line basis over the life of the lease. Total rent expense for fiscal
years 1994, 1995 and 1996, was approximately $5,448,000, $7,091,000 and
$7,481,000, respectively. Total rent expense includes additional rentals, based
upon sales, of approximately $106,000, $78,000 and $55,000, respectively.
Future minimum lease payments under noncancellable leases and the present
value of future minimum capital lease payments as of September 27, 1996, are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C>
Year ending September:
1997............................................................................. $ 331,000 $ 7,652,000
1998............................................................................. 98,000 6,923,000
1999............................................................................. 15,000 5,993,000
2000............................................................................. -- 4,969,000
2001............................................................................. -- 3,580,000
2002 and future years............................................................ -- 7,013,000
--------- -----------
Total minimum lease payments.................................................. $ 444,000 $36,130,000
-----------
-----------
Less amount representing interest.................................................. (24,000)
---------
Present value of future minimum capital lease payments............................. 420,000
Less current maturities of obligation under capital leases......................... (311,000)
---------
Obligation under capital leases, excluding current maturities...................... $ 109,000
---------
---------
</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 Company's financial position or results of operations.
The Company has employment agreements with certain employees that call for
minimum annual salaries totaling approximately $1.1 million. 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 112,000 options at September 27,
1996. 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, $503,000 of which is outstanding as of
September 27, 1996. This liability was partially funded by life insurance
proceeds of $550,000 which is included in other income for the fiscal year 1995.
There was no required payment under the stock option buy back provision, as the
Chairman's beneficiary elected not to exercise this provision.
Note 10 -- Restructuring Provision
During the fourth quarter of 1996, the Company recorded a restructuring
provision of $4,024,000 related to the August 1996 closing of the Company's
eight retail stores in the Atlanta, Ga. marketplace. The restructuring provision
included the cost of future lease obligations, a write off of certain assets and
a severance package for its Atlanta employees. The unpaid balance of the
restructuring provision as of September 27, 1996 was approximately $2,108,000,
principally related to lease liabilities. Of this amount $1,020,000 is expected
to be paid in fiscal year 1997 and as a result is classified as a current
liability.
F-13
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Note 11 -- Subsequent Event
On November 27, 1996, the Company entered into a merger agreement (the
"Merger") with Revlon Consumer Products Corporation ("RCPC") and Prestige
Fragrance & Cosmetic, Inc. ("PFC") a wholly owned subsidiary of RCPC. Under the
Merger, the Company will merge with PFC and the Company will remain as the
surviving corporation. In connection with the Merger, a new class of the Company
voting common stock ("Class C common stock") will be created. RCPC will receive
newly issued Class C common stock such that immediately following the Merger,
RCPC will own 65% of the issued and outstanding Class C common stock of the
Company. Also as a part of the Merger, 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 price of less than $7.63 per share can elect to receive cash of
$7.63 less the exercise price with a limit of 2,829,065 shares and options as to
which the cash elections will be accepted (the "Cash Election"). Giving effect
to the Cash Election, RCPC can own at least 74% and up to 84% of the Company's
outstanding common stock. Since, as a result of the Merger and Cash Election,
RCPC will own a majority of voting interest in the Company, the Merger will be
accounted for as a reverse acquisition, whereby the PFC's financial statements
will represent the continuing historical financial statements of the Company.
The completion of the Merger is subject to, among other things, the approval of
the stockholders of the Company, regulatory approval and financing for the
surviving corporation. No assurance can be given that the Merger can be
completed.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Prestige Fragrance & Cosmetics, Inc.:
We have audited the accompanying balance sheets of Prestige Fragrance &
Cosmetics, Inc. (a wholly owned subsidiary of Revlon Consumer Products
Corporation) as of December 31, 1994 and 1995, and the related statements of
operations, cash flows and stockholder's equity for each of the years in the
three-year period ended December 31, 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Fragrance &
Cosmetics, Inc. as of December 31, 1994 and 1995 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
October 18, 1996
New York, New York
F-15
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C>
1994 1995
-------- -------
ASSETS
Current assets:
Cash............................................................................................ $ 3,370 $ 3,421
Inventories, net................................................................................ 26,701 29,171
Prepaid expenses and other...................................................................... 795 846
-------- -------
Total current assets......................................................................... 30,866 33,438
-------- -------
Property and equipment, net....................................................................... 5,375 6,409
Net assets from discontinued operations........................................................... 2,735 --
Intangible asset.................................................................................. 1,528 1,490
-------- -------
Total assets................................................................................. $ 40,504 $41,337
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................................ $ 2,815 $ 876
Accrued expenses and other...................................................................... 2,269 2,548
-------- -------
Total current liabilities.................................................................... 5,084 3,424
-------- -------
Due to Parent..................................................................................... 21,353 9,615
Stockholder's equity:
Common stock, par value $1.00 per share, 1,000 shares authorized, 1 share issued and
outstanding.................................................................................. -- --
Additional paid-in capital...................................................................... 9,043 28,536
Retained earnings (Accumulated deficit)......................................................... 5,024 (238)
-------- -------
Total stockholder's equity................................................................... 14,067 28,298
-------- -------
Total liabilities and stockholder's equity.............................................. $ 40,504 $41,337
-------- -------
-------- -------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C>
1993 1994 1995
------- ------- -------
Net sales......................................................................... $54,677 $62,674 $72,717
Cost of sales, including buying, occupancy and distribution....................... 35,848 41,418 49,176
------- ------- -------
Gross margin................................................................... 18,829 21,256 23,541
Selling, general and administrative expenses...................................... 19,429 21,945 25,368
------- ------- -------
Operating loss................................................................. (600) (689) (1,827)
Intercompany interest............................................................. 914 1,329 2,137
------- ------- -------
Loss from continuing operations before income taxes............................... (1,514) (2,018) (3,964)
Provision for income taxes........................................................ 17 25 50
------- ------- -------
Loss from continuing operations................................................... (1,531) (2,043) (4,014)
Discontinued operations:
Income (loss) from discontinued operations..................................... 1,174 842 (351)
Loss on disposal............................................................... -- -- (897)
------- ------- -------
Income (loss) from discontinued operations........................................ 1,174 842 (1,248)
------- ------- -------
Net loss.......................................................................... $ (357) $(1,201) $(5,262)
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT) EQUITY
-------- ---------- ------------ -------------
<S> <C>
Balance at January 1, 1993................................................ $ -- $ 7,496 $ 6,719 $14,215
Net loss.................................................................. -- -- (357) (357)
Net contributions from Parent............................................. -- 1,547 -- 1,547
-------- ---------- ------------ -------------
Balance at December 31, 1993.............................................. -- 9,043 6,362 15,405
Net loss.................................................................. -- -- (1,201) (1,201)
Net distributions to Parent............................................... -- -- (137) (137)
-------- ---------- ------------ -------------
Balance at December 31, 1994.............................................. -- 9,043 5,024 14,067
Net loss.................................................................. -- -- (5,262) (5,262)
Net distributions to Parent............................................... -- (5,194) -- (5,194)
Capitalization of indebtedness by Parent.................................. -- 24,687 -- 24,687
-------- ---------- ------------ -------------
Balance at December 31, 1995.............................................. $ -- $ 28,536 $ (238) $28,298
-------- ---------- ------------ -------------
-------- ---------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C>
1993 1994 1995
------- ------- -------
Cash flows from operating activities:
Net loss........................................................................... $ (357) $(1,201) $(5,262)
Depreciation and amortization...................................................... 1,071 1,388 1,996
Change in assets and liabilities, net of the effect of acquisition:
Increase in inventories......................................................... (1,113) (3,243) (2,470)
(Increase) decrease in prepaid expenses and other............................... (177) 255 (51)
(Increase) decrease in net assets from discontinued operations.................. (1,174) (842) 2,735
Increase (decrease) in accounts payable......................................... 1,016 1,358 (1,939)
(Decrease) increase in accrued expenses and other............................... (157) (348) 279
------- ------- -------
Net cash used for operating activities........................................ (891) (2,633) (4,712)
------- ------- -------
Cash flows from investing activities:
Capital expenditures............................................................... (2,743) (1,962) (2,992)
------- ------- -------
Net cash used for investing activities........................................ (2,743) (1,962) (2,992)
------- ------- -------
Cash flows from financing activities:
Increase in Due to Parent.......................................................... 2,751 6,578 12,949
Net contributions from (distributions to) Parent................................... 1,547 (137) (5,194)
------- ------- -------
Net cash provided by financing activities..................................... 4,298 6,441 7,755
------- ------- -------
Net increase in cash................................................................. 664 1,846 51
Cash at the beginning of the period.................................................. 860 1,524 3,370
------- ------- -------
Cash at the end of the period........................................................ $ 1,524 $ 3,370 $ 3,421
------- ------- -------
------- ------- -------
Supplemental schedule of non cash investing activities:
In connection with the business acquisition, liabilities were assumed as follows:
Fair value of assets acquired...................................................... $ 3,882
Cash paid.......................................................................... --
-------
Liabilities assumed................................................................ $ 3,882
-------
-------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. Nature of Business
Prestige Fragrance & Cosmetics, Inc. ("PFC" or the "Company") was
incorporated on July 6, 1987. PFC's business consists of two groups, its retail
outlets and the employee stores. As of December 31, 1995, the Company owned and
operated 186 retail outlet stores, operating under the names "Colours & Scents,"
"Prestige Fragrance & Cosmetics," "Visage" and "The Cosmetic Warehouse"
throughout the United States, and seven stores in the United States principally
for employees of Revlon Consumer Products Corporation ("RCPC" or the "Parent")
and its affiliates. The retail outlet stores are located in regional and
manufacturers' outlet malls. The employee stores are located primarily at RCPC
offices and manufacturing facilities throughout the country. The Company offers
a broad selection of brand name prestige and mass-merchandised cosmetic
products, consisting of makeup, lipstick, nail enamel, fragrances and personal
care and skin care products. The Prestige Fragrance & Cosmetics stores sell
first quality, first quality excess, returned and refurbished and discontinued
items in the outlet store environment and provide an outlet for mass cosmetic
manufacturers to sell their products without competing directly with the
retailers that purchase products from these same manufacturers. Colours & Scents
stores generally carry first quality prestige brand fragrances and cosmetics
normally carried in department stores at substantial discounts from department
store prices. Colours & Scents stores also operate in the outlet mall
environment and as such provide an outlet for prestige brand manufacturers to
sell their excess and overstocked first quality merchandise.
2. Significant Accounting Policies
BASIS OF PRESENTATION:
The Company is a wholly owned subsidiary of RCPC, which is a wholly owned
subsidiary of Revlon, Inc. ("Revlon"), which in turn is an indirect majority
owned subsidiary of Revlon Holdings Inc. ("Holdings"). Holdings is an indirect
subsidiary of Mafco Holdings Inc. ("Mafco Holdings").
Assets, liabilities and results of operations specifically identifiable to
certain small businesses that historically were included in the financial
statements of the Company have been excluded from these financial statements as
those businesses were transferred to and are currently managed and operated by
RCPC.
CASH:
The Company maintains minimal cash balances on hand at the stores and in
local bank branches. The cash is regularly transferred to an account maintained
by RCPC and at such time reduces the amount due to Parent.
INVENTORIES:
Inventories, consisting of finished goods, are stated at the lower of cost
or market value. Cost is determined using the average cost method.
PROPERTY, PLANT AND EQUIPMENT:
Machinery, office furniture and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of such
assets, which is generally five years. Leasehold improvements are amortized over
the terms of the lease or the estimated useful lives of the improvements,
whichever is shorter. The estimated useful lives for leasehold improvements is
generally five years. Repairs and maintenance are charged to operations as
incurred, and expenditures for additions and improvements are capitalized.
INTANGIBLE ASSET:
The intangible asset relates to the acquisition in 1994 of the assets and
liabilities assumed of Colours & Scents, Inc. ("Colours & Scents") and consists
of goodwill, which is being amortized on a straight-line basis over 40 years.
The Company evaluates, when circumstances warrant, the recoverability of its
intangible asset on the basis of undiscounted cash flow projections and through
the use of various other measures, which include, among other things, a review
of its business plans. Accumulated amortization aggregated $10 and $48 at
December 31, 1994 and 1995, respectively.
F-20
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. Significant Accounting Policies -- Continued
REVENUE RECOGNITION:
The Company recognizes revenue upon the sale of products at its stores.
INCOME TAXES:
Income taxes are calculated using the liability method in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
The Company is included in the affiliated group of which Mafco Holdings is
the common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax returns filed by Mafco Holdings. The
Company also may be included in certain state and local tax returns of Mafco
Holdings or its subsidiaries. For all periods presented, federal, state and
local income taxes are provided as if the Company filed its own tax returns. In
June 1992, RCPC and certain of its subsidiaries, including the Company, and
Mafco Holdings entered into a tax sharing agreement, subsequently amended, which
is described in Note 11.
PENSION, HEALTH AND WELFARE AND POSTEMPLOYMENT BENEFITS:
Employees of the Company are eligible to participate in RCPC sponsored
employee pension benefit plans, including the Revlon Employees' Savings and
Investment Plan, a defined contribution 401 (k) plan (the "Revlon Savings Plan")
and the Revlon Employees' Retirement Plan, a defined benefit pension plan (the
"Revlon Pension Plan") and RCPC sponsored employee welfare benefit plans,
including medical, dental, life and disability insurance coverage. The minimum
amount required pursuant to the Employee Retirement Income Security Act, as
amended, is contributed annually by RCPC on behalf of all participants in the
plans, including PFC employees who participate in the RCPC sponsored plans. PFC
records pension expense for its share of the pension liability for the employees
of the Company as a component of the allocation made by RCPC to PFC. Certain
union employees of RCPC that provide services to PFC are covered by the
Revlon/UAW Pension Plan and the UAW Group Welfare Plan. Wages, benefit costs and
pension and welfare expenses of RCPC union employees that provide services to
PFC are charged directly to PFC and are recorded as charges to selling, general
and administrative expenses (see Note 12).
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires the Company to
accrue for benefits such as severance, disability and health insurance provided
to former eligible employees, principally management personnel, prior to their
retirement, if estimable. Such benefits generally are vested and accumulate over
eligible employees' service periods. Effective January 1, 1994, the Company
accounts for such benefits on a terminal basis in accordance with the provisions
of SFAS No. 5, "Accounting for Contingencies," as amended by SFAS No. 112, which
requires companies to accrue for postemployment benefits when it is probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated, which is generally when an employee is terminated. The
Company does not believe such liabilities can be reasonably estimated prior to
termination. The adoption of SFAS No. 112 did not have a material impact on the
1994 Statement of Operations.
CONCENTRATION OF RISK:
The Company's only financial instrument that is exposed to concentration of
credit risk consists of cash. The Company's cash is deposited with major banks
and financial institutions and is transferred to an account maintained by RCPC
on a regular basis. RCPC routinely assesses the financial strength of its
financial institutions, including those of its subsidiaries. As a consequence,
RCPC and PFC have concluded that the Company's exposure resulting from
concentration of credit risk is limited.
The Company purchased fragrances, personal care and cosmetics and skin care
products from RCPC for first quality products at prices equal to cost plus a
mark-up of approximately 6.1%, 6.1% and 5.5% for 1993, 1994 and 1995,
respectively, and for returned and refurbished products at prices equal to cost
plus a mark-up of approximately 3.3% for 1993, 1994 and 1995. The amounts
purchased, including the mark-up, amounted to $17,680, $19,047 and $13,468 for
1993, 1994 and 1995, respectively. The loss of RCPC as a supplier could have a
material adverse effect on the Company's business if PFC were unable to secure
alternative sources of similar products.
F-21
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. Significant Accounting Policies -- Continued
PFC's second largest supplier, with which PFC has a supply contract that
expires in 1999, accounted for approximately 12.4% and 15.3% of total purchases
during 1994 and 1995, respectively. The Company does not believe that the loss
of this supplier or any other single supplier other than RCPC would have a
material adverse effect on PFC's business because the Company believes that
alternative sources of supply are available.
NEW STORE OPENING EXPENSES:
Personnel recruitment, training, supplies, payroll and related costs
incurred in connection with opening new stores are expensed as incurred.
MANAGEMENT ESTIMATES:
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and accounts payable approximate their fair
values as of December 31, 1995, due to the short maturities of such instruments.
3. Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. SFAS
No. 121 will be effective beginning January 1, 1996. The Company does not
believe that the adoption of SFAS No. 121 will have a material adverse impact on
its results of operations or financial condition.
4. Acquisition of Colours & Scents
On July 6, 1994, the Company acquired substantially all of the assets and
assumed certain liabilities of Colours & Scents for cash of $2,734, which was
paid by RCPC on behalf of the Company, and recorded the purchase price as an
increase in Due to Parent. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased and liabilities assumed based upon their
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired and liabilities assumed
was $1,538 and has been recorded as an intangible asset, which is being
amortized on a straight-line basis over 40 years. The results of operations of
Colours & Scents have been included in the accompanying Statements of Operations
from the date of acquisition.
F-22
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. Acquisition of Colours & Scents -- Continued
The following unaudited pro forma summary combines the results of
operations of the Company and Colours & Scents as if the acquisition had
occurred at the beginning of 1993 after giving effect to certain pro forma
adjustments, including, among others, adjustments to reflect the amortization of
cost in excess of net assets of the business acquired and increased interest
expense associated with acquisition funding. This pro forma financial
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been if the
acquisition had occurred at the beginning of 1993, nor is it necessarily
indicative of the results of operations which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
<S> <C>
1993 1994
------- -------
Net sales............................................................................. $60,215 $66,085
Operating loss........................................................................ (427) (789)
Net loss from continuing operations................................................... (1,631) (2,280)
Net loss.............................................................................. $ (457) $(1,438)
------- -------
------- -------
</TABLE>
5. Additional Paid-in Capital
During 1995, the Parent capitalized intercompany receivables from the
Company in the amount of $24,687. The Company recorded the capital infusion as
Additional paid-in capital and reduced the Due to Parent correspondingly.
6. Due to Parent
As of December 31, 1994 and 1995, the Company had an outstanding obligation
due to its Parent and certain of its Parent's subsidiaries of $21,353 and
$9,615, respectively. The Company's working capital and capital expenditure
needs are satisfied through interest-bearing obligations that are payable by the
Company to its Parent. The weighted average interest rate on the outstanding
balances due to the Parent for the years ended December 31, 1993, 1994 and 1995
was 10%, respectively. The Company has reflected this obligation on a long-term
basis as the obligation has not been repaid as a result of the capitalization
(see Note 5) and to the extent debt was incurred subsequent to the capital
infusion, the Company anticipates that such balance will be payable to the
extent of funds available from operations and, if and to the extent such
financing is secured and permits such repayment, from long-term third party
financing.
7. Discontinued Operations
On June 30, 1995, PFC adopted a plan to discontinue the wig kiosk and
warehouse sales businesses. The net assets of the warehouse sales business were
transferred to RCPC on December 31, 1995. A substantial portion of the wig kiosk
business was shut down and the net liability was transferred to another
subsidiary of RCPC on December 31, 1995. The transfer of the businesses resulted
in an estimated loss of $897 on the disposal of certain assets of the wig kiosk
business and estimated losses from operations for the six months through the
date of transfer. Accordingly, the wig kiosk and warehouse sales businesses have
been reported as discontinued operations in accordance with Accounting
Principles Board No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." Net assets of the discontinued
operations consisted primarily of inventory and a payable to RCPC.
8. Prepaid Expenses and Other
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1994 1995
---- ----
Prepaid expenses............................................................................ $640 $656
Other....................................................................................... 155 190
---- ----
$795 $846
---- ----
---- ----
</TABLE>
F-23
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. Property and Equipment, Net
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
<S> <C>
1994 1995
------- -------
Machinery and equipment............................................................... $ 1,756 $ 1,779
Office furniture and fixtures......................................................... 5,490 6,221
Leasehold improvements................................................................ 3,697 3,978
Construction-in-progress.............................................................. 7 1,202
------- -------
10,950 13,180
Accumulated depreciation.............................................................. (5,575) (6,771)
------- -------
$ 5,375 $ 6,409
------- -------
------- -------
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1993, 1994 and 1995 was $1,071, $1,378 and $1,958,
respectively.
10. Accrued Expenses and Other
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
<S> <C>
1994 1995
------- -------
Taxes, other than federal income taxes................................................... $ 903 $ 986
Rent..................................................................................... 151 406
Compensation and related benefits........................................................ 430 349
Other.................................................................................... 785 807
------- -------
$ 2,269 $ 2,548
------- -------
------- -------
</TABLE>
11. Income Taxes
In June 1992, Holdings, Revlon, RCPC and certain of its subsidiaries,
including the Company, and Mafco Holdings entered into a tax sharing agreement
(as amended, the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has
agreed to indemnify Revlon and RCPC against federal, state or local income tax
liabilities of the consolidated or combined group of which Mafco Holdings (or a
subsidiary of Mafco Holdings other than Revlon and RCPC or its subsidiaries) is
the common parent for taxable periods beginning on or after January 1, 1992
during which Revlon and RCPC or a subsidiary of RCPC is a member of such group.
Pursuant to the Tax Sharing Agreement, for all taxable periods beginning on or
after January 1, 1992, RCPC will pay to Revlon, which in turn will pay to
Holdings amounts equal to the taxes that RCPC and its subsidiaries would
otherwise have to pay if they were to file separate consolidated federal, state
or local income tax returns (including any amounts determined to be due as a
result of a redetermination arising from an audit or otherwise of the
consolidated or combined tax liability relating to any such period which is
attributable to RCPC or its subsidiaries), except that RCPC and its subsidiaries
will not be entitled to carry back any losses to taxable periods ending prior to
January 1, 1992. Pursuant to the Tax Sharing Agreement, the Company is
responsible to pay to RCPC, to the extent a tax obligation exists for RCPC and
its subsidiaries under the Tax Sharing Agreement, amounts equal to the taxes
that the Company would have to pay if it were to file separate federal, state or
local income tax returns applying the same principles used in determining RCPC's
tax sharing payments to Revlon. No payments are required by RCPC or any of its
subsidiaries, including the Company, if and to the extent RCPC is prohibited
under its credit agreement from making tax sharing payments. The RCPC credit
agreement currently in effect (the "RCPC Credit Agreement") prohibits RCPC from
making cash tax sharing payments other than in respect of state and local income
taxes. Since the payments to be made by RCPC and its subsidiaries under the Tax
Sharing Agreement will be determined by the amount of taxes that RCPC and its
subsidiaries would otherwise have to pay if it were to file separate federal,
state or local income tax returns, the Tax Sharing Agreement will benefit Mafco
Holdings to the extent Mafco Holdings can offset the taxable income generated by
RCPC and its subsidiaries against losses and tax credits generated by Mafco
Holdings and its other subsidiaries. As a result of net operating tax losses and
prohibitions under the RCPC Credit Agreement, no federal tax payments or
payments in lieu of taxes pursuant to the Tax Sharing Agreement were required by
the Company in 1993, 1994 or 1995.
F-24
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
11. Income Taxes -- Continued
The Company's provision for income taxes reflects only the current
provision for state and local taxes as the Company does not have a provision for
federal income tax as a result of its losses before income taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 and 1995 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
<S> <C>
1994 1995
------- -------
Deferred tax assets:
Inventories.......................................................................... $ 678 $ 631
Net operating loss carryforwards..................................................... 4,892 8,511
Employee benefits.................................................................... 18 7
Other................................................................................ 479 851
------- -------
Total gross deferred tax assets................................................... 6,067 10,000
Less valuation allowance.......................................................... (6,015) (9,902)
------- -------
Net deferred tax assets........................................................... 52 98
Deferred tax liabilities:
Other................................................................................ (52) (98)
------- -------
Total gross deferred tax liabilities.............................................. (52) (98)
------- -------
Net deferred tax liability............................................................. $ -- $ --
------- -------
------- -------
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1994 was
$3,381. The valuation allowance increased by $2,634 during the year ended
December 31, 1994 and increased by $3,887 during the year ended December 31,
1995.
12. Related Party Transactions
SERVICES:
RCPC provides certain services to the Company for which the Company is
charged for direct and indirect expenses incurred by RCPC in providing such
services. Such services include insurance and risk management services, travel,
legal services, treasury and finance services, customer service, information
systems and audit services. Additionally, RCPC provides the services of certain
union employees at the Company's warehouse and distribution center. The amounts
charged by RCPC to the Company for such allocated expenses and for the services
of the union employees amounted to approximately $2,022, $1,968 and $2,037 for
1993, 1994 and 1995, respectively. These expenses are included within cost of
sales and selling, general and administrative expenses in the accompanying
Statements of Operations.
EMPLOYEE BENEFITS:
Company employees are eligible to participate in RCPC sponsored employee
pension benefit plans, including the Revlon Savings Plan and the Revlon Pension
Plan and RCPC sponsored employee welfare benefit plans, including medical,
dental, life and disability insurance coverage. The minimum amount required
pursuant to the Employee Retirement Income Security Act, as amended, is
contributed annually by RCPC on behalf of PFC employees who participate in the
RCPC sponsored plans. PFC recorded $1,818, $2,221 and $2,754 in 1993, 1994 and
1995, respectively, in benefit expenses for its share of the pension and welfare
benefit plans liability for the Company's employees. Such amounts are recorded
as a charge to cost of sales and selling, general and administrative expenses in
the accompanying Statements of Operations. RCPC union employees who provide
services to the Company are covered by the Revlon/UAW Pension Plan and the UAW
Group Welfare Plan. Pension and welfare expenses for the RCPC union employees
are charged directly to the Company and have been included within amounts
reflected in the "Services" paragraph.
F-25
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. Related Party Transactions -- Continued
RENT:
The Company currently occupies its headquarters office, warehouse and
distribution center in Holmdel, New Jersey without any written arrangement with
RCPC. The amount charged to the Company by RCPC for the Holmdel facility
amounted to approximately $563, $546 and $557 for 1993, 1994 and 1995,
respectively. The employee stores located in New York City and Apex, NC are
leased from unaffiliated third parties by RCPC and a subsidiary of RCPC,
respectively. The five remaining employee stores are occupied by the Company
without any written arrangement with RCPC. The Company paid to RCPC rental and
other allocated charges for the employee stores that amounted to $57, $25 and
$52 in the aggregate in 1993, 1994 and 1995, respectively. All rental and other
expenses related to such occupancies have been recorded by the Company in cost
of sales in the accompanying Statements of Operations.
SALE OF PRODUCT MANUFACTURED BY RCPC:
Sales by PFC of products that were purchased from RCPC and Holdings
amounted to approximately 88.2%, 68.0% and 48.0% of total net sales for 1993,
1994 and 1995, respectively.
TAX SHARING AGREEMENT:
Holdings, RCPC and certain of its subsidiaries, including the Company, and
Mafco Holdings are parties to the Tax Sharing Agreement which is described in
Note 11.
13. Commitments and Contingencies
LEASES:
The Company currently leases retail space at various locations under
operating lease agreements. Certain leases provide for contingent rents based
upon store sales exceeding specified amounts. Additionally, some store leases
have specified annual rental increases or rent abatements. Total rent expense to
third parties for 1993, 1994 and 1995, was approximately $4,764, $6,326 and
$7,743, respectively, of which $554, $278 and $358 was recorded for contingent
rent in 1993, 1994 and 1995, respectively. Certain of the leases contain
provisions pursuant to which the Company may terminate if the outlet mall in
which the store is located does not achieve at least a specified occupancy rate.
Certain of the leases permit either the Company or the lessor to terminate the
lease if specified minimum sales levels are not met. In addition, one hundred
and twenty-one of the leases permit the Company to renew its leases for
specified terms.
Future minimum lease commitments under operating leases with initial or
remaining lease terms in excess of one year from December 31, 1995 aggregated
$24,114; such commitments for each of the five years subsequent to December 31,
1995 are $4,833, $4,618, $4,034, $3,166 and $2,611, respectively.
OTHER:
The Company is involved as a defendant in certain litigation and
proceedings arising in the normal conduct of its business. In the opinion of the
Company's management, based upon advice of its counsel handling such litigation
and proceedings, an adverse outcome, if any, will not have a material effect on
the Company's financial condition or results of operations.
Certain of the Company's assets and its one share of issued and outstanding
common stock have been pledged as collateral to support certain bank obligations
of RCPC and its subsidiaries, including the RCPC Credit Agreement, and the stock
has been pledged as collateral under a yen-denominated credit agreement of
another subsidiary of RCPC.
14. Subsequent Event
PROPOSED MERGER:
On October 1, 1996, RCPC entered into a non-binding letter of intent with
respect to the proposed merger (the "Proposed Merger") of the Company with and
into The Cosmetic Center, Inc. ("Cosmetic Center") with Cosmetic Center as the
F-26
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
14. Subsequent Event -- Continued
surviving corporation. In connection with the Proposed Merger, a new class of
Cosmetic Center voting common stock ("Class C Common Stock") would be created.
RCPC would receive newly issued Class C Common Stock such that immediately
following the Proposed Merger RCPC would own 65% of the issued and outstanding
Class C Common Stock of Cosmetic Center. Also as a part of the Proposed Merger,
holders of Cosmetic Center's Class A and Class B common stock could elect to
receive cash at $7.63 per share and holders of options that have an exercise
price of less than $7.63 per share could elect to receive cash of $7.63 less the
exercise price with a limit of 2,829,065 shares and options as to which the cash
elections would be accepted (the "Cash Election"). Giving effect to the Cash
Election, RCPC could own at least 74% and up to 84% of Cosmetic Center's
outstanding common stock. Since, as a result of the Proposed Merger and Cash
Election, RCPC will own a majority of voting interest in Cosmetic Center, the
Proposed Merger will be accounted for as a reverse acquisition, whereby the
Company's financial statements would represent the continuing historical
financial statements of Cosmetic Center. The completion of the Proposed Merger
is subject to, among other things, the approval of stockholders and boards of
directors of the Company and Cosmetic Center, regulatory approval and financing
for the surviving corporation. If such conditions are satisfied it is
anticipated that the Proposed Merger would be completed in early 1997. No
assurance can be given that such Proposed Merger can be completed.
As a part of the Proposed Merger, the Company expects that a credit
facility with a third party lending institution would be established, that would
provide financing for the Cash Election, refinancing of Cosmetic Center's
existing bank debt, post Proposed Merger working capital and repayment of the
outstanding balance due to Parent.
F-27
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash.................................................................................... $ 3,421 $ 1,940
Inventories, net........................................................................ 29,171 32,686
Prepaid expenses and other.............................................................. 846 986
------------ -------------
Total current assets................................................................. 33,438 35,612
------------ -------------
Property and equipment, net............................................................... 6,409 7,703
Intangible asset.......................................................................... 1,490 1,461
------------ -------------
Total assets......................................................................... $ 41,337 $44,776
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................................................ $ 876 $ 2,831
Accrued expenses and other.............................................................. 2,548 1,984
------------ -------------
Total current liabilities............................................................ 3,424 4,815
------------ -------------
Due to Parent............................................................................. 9,615 18,746
Stockholder's equity:
Common stock, par value $1.00 per share, 1,000 shares authorized, 1 share issued and
outstanding.......................................................................... -- --
Additional paid-in capital.............................................................. 28,536 25,056
Accumulated deficit..................................................................... (238) (3,841)
------------ -------------
Total stockholder's equity........................................................... 28,298 21,215
------------ -------------
Total liabilities and stockholder's equity......................................... $ 41,337 $44,776
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to Unaudited Condensed Financial Statements.
F-28
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C>
1995 1996
------- -------
Net sales......................................................................................... $45,790 $48,970
Cost of sales, including buying, occupancy and distribution....................................... 31,774 32,234
------- -------
Gross margin.................................................................................... 14,016 16,736
Selling, general and administrative expenses...................................................... 18,968 19,595
------- -------
Operating loss.................................................................................. (4,952) (2,859)
Intercompany interest............................................................................. 1,958 699
------- -------
Loss from continuing operations before income taxes............................................... (6,910) (3,558)
Provision for income taxes........................................................................ 45 45
------- -------
Loss from continuing operations................................................................... (6,955) (3,603)
Discontinued operations:
Loss from discontinued operations............................................................... (351) --
Loss on disposal................................................................................ (897) --
------- -------
Loss from discontinued operations................................................................. (1,248) --
------- -------
Net loss.......................................................................................... $(8,203) $(3,603)
------- -------
------- -------
</TABLE>
See accompanying notes to Unaudited Condensed Financial Statements.
F-29
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
CONDENSED STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ------------ -------------
<S> <C>
Balance at January 1, 1996................................................ $ -- $ 28,536 $ (238) $28,298
Net loss.................................................................. -- -- (3,603) (3,603)
Net distributions to Parent............................................... -- (3,480) -- (3,480)
------ ---------- ------------ -------------
Balance at September 30, 1996............................................. $ -- $ 25,056 $ (3,841) $21,215
------ ---------- ------------ -------------
------ ---------- ------------ -------------
</TABLE>
See accompanying notes to Unaudited Condensed Financial Statements.
F-30
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
-------- --------
<S> <C>
Cash flows from operating activities:
Net loss............................................................................................. $ (8,203) $ (3,603)
Depreciation and amortization........................................................................ 1,400 1,543
Change in assets and liabilities, net of the effect of acquisition:
Increase in inventories........................................................................... (5,860) (3,515)
Increase in prepaid expenses and other............................................................ (92) (140)
Decrease in net assets from discontinued operations............................................... 1,248 --
(Decrease) increase in accounts payable........................................................... (573) 1,955
Increase (decrease) in accrued expenses and other................................................. 731 (564)
-------- --------
Net cash used for operating activities.......................................................... (11,349) (4,324)
-------- --------
Cash flows from investing activities:
Capital expenditures................................................................................. (2,317) (2,808)
-------- --------
Net cash used for investing activities.......................................................... (2,317) (2,808)
-------- --------
Cash flows from financing activities:
Increase in Due to Parent............................................................................ 13,302 9,131
Net distributions to Parent.......................................................................... (1,456) (3,480)
-------- --------
Net cash provided by financing activities....................................................... 11,846 5,651
-------- --------
Net decrease in cash................................................................................... (1,820) (1,481)
Cash at the beginning of the period.................................................................... 3,370 3,421
-------- --------
Cash at the end of the period.......................................................................... $ 1,550 $ 1,940
-------- --------
-------- --------
</TABLE>
See accompanying notes to Unaudited Condensed Financial Statements.
F-31
<PAGE>
PRESTIGE FRAGRANCE & COSMETICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. Basis of Presentation
Prestige Fragrance & Cosmetics, Inc. (the "Company") is a wholly owned
subsidiary of Revlon Consumer Products Corporation ("RCPC"), which is an
indirect subsidiary of Mafco Holdings Inc. ("Mafco Holdings").
The accompanying Condensed Financial Statements are unaudited. In
management's opinion, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been made.
Assets, liabilities and results of operations specifically identifiable to
certain small businesses that historically were included in the financial
statements of the Company have been excluded from these financial statements as
those businesses were transferred to and are currently managed and operated by
RCPC.
The results of operations and financial position, including working
capital, for interim periods are not necessarily indicative of those to be
expected for a full year, due, in part, to seasonal fluctuations, which are
normal for the Company's business.
The Company has made a number of estimates and assumptions relating to the
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.
2. Effect of New Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. SFAS No. 121 became effective beginning
January 1, 1996. The adoption of SFAS No. 121 did not have a material impact on
the results of operations or financial condition of the Company.
F-32
<PAGE>
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
------------------------
THE COSMETIC CENTER, INC.,
------------------------
REVLON CONSUMER PRODUCTS CORPORATION
------------------------
AND
------------------------
PRESTIGE FRAGRANCE & COSMETICS, INC.
------------------------
DATED AS OF NOVEMBER 27, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 27, 1996 by and among The
Cosmetic Center, Inc., a Delaware corporation (the "Company"), Revlon Consumer
Products Corporation, a Delaware corporation ("Parent"), and Prestige Fragrance
& Cosmetics, Inc., a Delaware corporation and a wholly owned subsidiary of
Parent ("PFC").
WHEREAS, the Board of Directors of each of Parent, PFC and the Company has
approved, and deems it advisable and in the best interests of its respective
stockholders to consummate, the merger of PFC with and into the Company upon the
terms and subject to the conditions set forth herein; and
WHEREAS, Parent is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Anita J.
Weinstein, Mark S. Weinstein, Susan K. Magenheim and Weinstein Family Limited
Partnership, a Maryland limited partnership (collectively, the "Principal
Stockholders"), enter into an agreement (the "Stockholders Agreement") providing
for certain actions relating to the transactions contemplated by this Agreement,
and to induce Parent to enter into this Agreement, the Company has approved the
entering into by the Principal Stockholders of the Stockholders Agreement with
Parent;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
MERGER
SECTION 1.01 MERGER. Subject to the terms and conditions hereof, at the
Effective Time (as defined in Section 1.02), PFC shall be merged (the "Merger")
with and into the Company in accordance with the General Corporation Law of the
State of Delaware (the "GCL"). Following the Merger, the Company shall continue
as the surviving corporation (the "Surviving Corporation") under the name "The
Cosmetic Center, Inc." and the separate corporate existence of PFC shall cease.
The Merger shall have the effects set forth in the GCL.
SECTION 1.02 EFFECTIVE TIME. Parent, PFC and the Company will cause a
Certificate of Merger to be executed and filed on the Closing Date (as defined
in Section 1.03) (or on such other date as Parent and the Company may agree)
with the Secretary of State of the State of Delaware in accordance with the GCL
(the "Certificate of Merger"). The Merger shall become effective on the date on
which the Certificate of Merger has been duly filed with the Secretary of State
of the State of Delaware or such date and time as is agreed upon by the parties
and specified in the Certificate of Merger. The date and time the Merger becomes
effective is hereinafter referred to as "Effective Time."
SECTION 1.03 CLOSING. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m. on a date specified by the parties, which shall be no later
than the second business day after satisfaction or waiver of all of the
conditions set forth in Article VI (the "Closing Date"), at the offices of
Latham & Watkins, 885 Third Avenue, New York, New York 10022, unless another
date or place is agreed to in writing by the parties hereto.
SECTION 1.04 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation of the Company, as in effect immediately prior to the Effective
Time, shall be amended at the Effective Time by virtue of and in the Merger so
as to read in its entirety in the form set forth as Exhibit A, and, as so
amended, until thereafter further amended as provided therein and under the GCL,
it shall be the Certificate of Incorporation of the Surviving Corporation
following the Merger. The Bylaws of the Surviving Corporation shall be as set
forth on Exhibit B.
SECTION 1.05 DIRECTORS. The individuals listed on Annex A shall, from and
after the Effective Time, be the initial directors of the Surviving Corporation
until their successors shall have been duly elected and qualified or until their
earlier death, resignation or removal in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
SECTION 1.06 OFFICERS AND KEY EMPLOYEES. The individuals listed on Annex B
shall, from and after the Effective Time, be the initial officers of the
Surviving Corporation until their successors shall have been duly appointed or
qualified or until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and Bylaws of the Surviving Corporation.
To ensure continuity of management for the Surviving Corporation, on the Closing
Date, the Surviving Corporation shall enter into Employment Agreements,
substantially in the form of Exhibit C-1 and C-2, with each of Mark Weinstein
and Anita Weinstein, respectively (the "Weinstein Employment Agreements"), an
Amendment to Employment Agreement, substantially in the form of Exhibit C-3,
with Ben S. Kovalsky (the "Kovalsky Amendment" and, together with the Weinstein
Employment Agreements, the "Employment Agreements") and a Consulting Agreement,
substantially in the form of Exhibit D, with Susan Magenheim (the "Consulting
Agreement").
<PAGE>
ARTICLE II
EXCHANGE OF SHARES
SECTION 2.01 CONVERSION OF SHARES.
(a) Each share of Class A common stock, par value $.01 per share (a "Class
A Share"), and each share of Class B common stock, par value $.01 per share (a
"Class B Share"; the Class B Shares and the Class A Shares are collectively
referred to herein as the "Shares") of the Company issued and outstanding
immediately prior to the Effective Time shall, at the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the following (the "Merger Consideration"):
(i) for each such Share other than Electing Shares (as defined in
Section 2.01(a)(ii)), one validly issued, fully paid and non-assessable
share of Class C common stock, par value $.01 per share, of the Surviving
Corporation (each, a "New Share"); and
(ii) to the extent not converted into New Shares in accordance with
Section 2.01(a)(i), and only for each such Share with respect to which an
election to receive cash has been effectively made and not revoked or lost
pursuant to Section 2.02 ("Electing Shares"), the right to receive the
consideration set forth in Section 2.03.
(b) Each Share held by the Company as a treasury share immediately prior to
the Effective Time shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the Company, be canceled and retired and cease
to exist without any conversion thereof and no payment shall be made with
respect thereto.
SECTION 2.02 CASH ELECTIONS.
(a) Each person who, on or prior to the Election Date (as defined in
Section 2.02(c)), is a record holder of Shares will be entitled, with respect to
all or any portion of his Shares, to make an unconditional election (a "Cash
Election"), subject to the terms hereof, on or prior to the Election Date to
receive the consideration set forth in Section 2.03 on the basis hereinafter set
forth.
(b) Prior to the mailing of the Proxy Statement (as defined in Section
5.03(a)), Parent shall appoint a bank or trust company to act as exchange agent
(the "Exchange Agent") for payment of the Merger Consideration.
(c) The Company shall prepare and mail a form of election, which form shall
be subject to the reasonable approval of Parent (the "Form of Election"), with
the Proxy Statement to the record holders of Shares as of the record date for
the Stockholders Meeting (as defined in Section 5.03(c)), which Form of Election
shall be used by each record holder of Shares who wishes to elect to receive the
consideration set forth in Section 2.03. Any such holder's election to receive
the Cash Election Price shall have been made properly if and only if the
Exchange Agent shall have received at its designated office, by 5:00 p.m., New
York City time, on the business day (the "Election Date") immediately preceding
the date of the Stockholders Meeting, a Form of Election properly completed and
signed by such holder.
(d) Any Form of Election may be revoked by the stockholder submitting it to
the Exchange Agent only by written notice received by the Exchange Agent (i)
prior to 5:00 p.m., New York City time, on the Election Date or (ii) after the
Election Date, if (and only to the extent that) the Exchange Agent is required
to permit revocations and the Effective Time shall not have occurred prior to
such date. In addition, all Forms of Election shall automatically be revoked if
the Exchange Agent is notified in writing by Parent and the Company that the
Merger has been abandoned.
(e) The determination of the Exchange Agent shall be binding as to whether
or not elections to receive the Cash Election Price have been properly made or
revoked pursuant to this Section 2.02, including whether or not elections and
revocations were made on a timely basis. If the Exchange Agent determines that
any election to receive the Cash Election Price was not properly made or was
properly revoked with respect to Shares, such Shares shall be treated by the
Exchange Agent as Shares which were not Electing Shares, and such Shares shall
be converted in the Merger into New Shares pursuant to Section 2.01(a)(ii). The
Exchange Agent shall also make all computations contemplated by Sections 2.03
and 2.06, and all such computations shall be conclusive and binding on the
holders of the Shares absent manifest error. The Exchange Agent may, with the
mutual agreement of Parent and the Company, make such rules as are consistent
with this Section 2.02 for the implementation of the elections provided for
herein as shall be necessary or desirable fully to effect such elections.
2
<PAGE>
SECTION 2.03 MAXIMUM ELECTION NUMBER.
(a) If the aggregate number of Electing Shares and Electing Option Shares
(as defined in Section 2.06) (the "Cash Election Number") does not exceed
2,829,065 (the "Maximum Election Number"), then each Electing Share shall, at
the Effective Time, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive in cash from the
Company following the Merger an amount equal to $7.63 (the "Cash Election
Price").
(b) If the Cash Election Number exceeds the Maximum Election Number, then
each Electing Share shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive (i) cash from the Company following the Merger in an amount
equal to (x) the Cash Election Price multiplied by (y) a fraction (the "Cash
Proration Factor"), the numerator of which shall be the Maximum Election Number
and the denominator of which shall be the Cash Election Number, and (ii) subject
to Section 2.05(e), a fractional New Share equal to (x) one New Share,
multiplied by (y) one minus the Cash Proration Factor.
SECTION 2.04 CONVERSION OF PFC'S COMMON STOCK; REGISTRATION RIGHTS
AGREEMENT. The sole share of common stock of PFC issued and outstanding
immediately prior to the Effective Time shall, at the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into and become 8,479,335 validly issued, fully paid and
non-assessable New Shares. On the Closing Date, the Company and Parent shall
enter into a Registration Rights Agreement (the "Parent Registration Rights
Agreement") substantially in the form of Exhibit E.
SECTION 2.05 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As soon as reasonably practicable as of or after the
Effective Time, the Company shall deposit with the Exchange Agent, for the
benefit of the holders of Company Common Stock, for exchange in accordance with
this Article II, the cash portion of Merger Consideration.
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
each holder of an outstanding certificate or certificates which prior thereto
represented Shares shall, upon surrender to the Exchange Agent of such
certificate or certificates and acceptance thereof by the Exchange Agent, be
entitled to a certificate or certificates representing the number of full New
Shares, if any, to be received by the holder thereof pursuant to this Agreement
and the amount of cash, if any, into which the number of Shares previously
represented by such certificate or certificates surrendered shall have been
converted pursuant to this Agreement. The Exchange Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. After the Effective Time, there shall be no
further transfer on the records of the Company or its transfer agent of
certificates representing Shares, and if such certificates are presented to the
Company for transfer, they shall be canceled against delivery of the Merger
Consideration to which the holder of such Shares is entitled. If any certificate
for such New Shares is to be issued in, or if cash is to be remitted to, a name
other than that in which the certificate for the Shares surrendered for exchange
is registered, it shall be a condition of such exchange that the certificate so
surrendered shall be properly endorsed, with signature guaranteed, or otherwise
in proper form for transfer and that the person requesting such exchange shall
pay to the Company or its transfer agent any transfer or other taxes required by
reason of the issuance of certificates for such New Shares in a name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of the Company or its transfer agent that such tax has been
paid or is not applicable. Until surrendered as contemplated by this Section
2.05(b), each certificate for Shares shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration as contemplated by Section 2.01. No interest will be paid
or will accrue on any cash payable as Merger Consideration or in lieu of any
fractional New Shares exchanged.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No (i) dividends or
other distributions declared by the Company with a record date after the
Effective Time, (ii) Merger Consideration or (iii) cash payment in lieu of
fractional New Shares pursuant to Section 2.05(e) shall be paid to the holder of
any unsurrendered certificate for Shares until the surrender of such certificate
in accordance with this Article II. Subject to the effect of applicable laws,
following surrender of any such certificate, there shall be paid to the holder
of the certificate representing whole New Shares issued in connection therewith,
without interest, (A) at the time of such surrender, the Merger Consideration
and the amount of any cash payable in lieu of a fractional New Share to which
such holder is entitled pursuant to Article II and the proportionate amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole New Shares, and (B) at the
appropriate payment date, the proportionate amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole New Shares.
3
<PAGE>
(d) NO FURTHER OWNERSHIP RIGHTS IN SHARES EXCHANGED FOR CASH. All cash paid
upon the surrender for exchange of certificates representing any Shares in
accordance with the terms of this Article II (including any cash paid pursuant
to Section 2.05(e)) shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the Shares exchanged for cash
theretofore represented by such certificates.
(e) NO FRACTIONAL SHARES. No certificates or scrip representing fractional
New Shares shall be issued in connection with the Merger, and such fractional
share interests shall not entitle the owner thereof to vote or to any rights of
a stockholder of the Company after the Merger. Notwithstanding any other
provision of this Agreement, each holder of Shares exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a New
Share (after taking into account all Shares delivered by such holder and after
aggregating all fractional shares to which each holder shall be entitled) shall
receive, in lieu thereof, a cash payment (without interest) equal to the Cash
Election Price multiplied by the fraction of a New Share to which such holder
would otherwise be entitled but for this Section 2.05(e).
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Merger Consideration
deposited with the Exchange Agent pursuant to this Section 2.05 (the "Exchange
Fund") which remains undistributed to the holders of the certificates
representing Shares for 180 days after the Effective Time shall be delivered to
the Company, upon demand, and any holders of Shares prior to the Merger who have
not theretofore complied with this Article II shall thereafter look only to the
Company and only as general creditors thereof for payment of their claim for
cash, New Shares, cash in lieu of fractional New Shares and dividends or
distributions with respect to New Shares, if any, to which such holders may be
entitled.
(g) NO LIABILITY. None of Parent or the Company or the Exchange Agent shall
be liable to any person in respect of any New Shares (or dividends or
distributions with respect thereto) or cash from the Exchange Fund delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law. If any certificates representing Shares shall not have been
surrendered prior to one year after the Effective Time (or immediately prior to
such earlier date on which any cash, cash in lieu of fractional New Shares or
dividends or distributions with respect to New Shares, if any, in respect of
such certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.04), any such cash, dividends or
distributions in respect of such certificate shall, to the extent permitted by
applicable law, become the property of the Company, free and clear of all claims
or interest of any person previously entitled thereto.
(h) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by the Company, on a daily basis. Any
interest and other income resulting from such investments shall be paid to the
Company.
SECTION 2.06 STOCK OPTIONS.
(a) As soon as practicable following the date of this Agreement, the Board
of Directors of the Company (or, if appropriate, any committee thereof
administering the Company's 1991 Stock Option Plan (the "Stock Plan")) shall
adopt such resolutions or take such other actions as may be required (including,
if necessary, the preparation and filing of a Registration Statement on Form
S-8, or an amendment thereto) to effect the following:
(i) cause written notification of the Merger to be given by the Board
of Directors to each holder of an outstanding option to purchase Shares
("Company Stock Options") granted under the Stock Plan to the effect that
each such Company Stock Option has become fully exercisable and fully
vested as provided in the Stock Plan; and
(ii) amend the terms of all outstanding Company Stock Options to
provide that, (A) at the Effective Time, each outstanding Company Stock
Option shall be exercisable for the same number of New Shares and with the
same exercise price and expiration date as such option was exercisable for
Shares immediately prior to Effective Time ("New Options"); provided,
however, that each existing holder of a Company Stock Option that has an
exercise price of less than the Cash Election Price may elect (which
election (the "Option Cash Election") shall be delivered to the Company at
least three business days prior to the Effective Time) to receive in
cancellation for such Company Stock Option (subject to any applicable
withholding taxes) the consideration set forth in Section 2.06(c) and (B)
from and after the Effective Time, there shall be no further grants of
Company Stock Options (including New Options) under the Stock Plan.
(b) The Company Stock Options with respect to which an Option Cash Election
has been effectively made pursuant to Section 2.06(a)(ii) and not revoked or
lost shall be referred to as "Electing Options" and the number of Shares subject
to Company Stock Options with respect to which an Option Cash Election has been
effectively made pursuant to Section 2.06(a)(ii) and not revoked or lost shall
be referred to as "Electing Option Shares."
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(c) If the Cash Election Number does not exceed the Maximum Election
Number, then each Electing Option shall, at the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive an amount of cash from the Company following the
Merger equal to the product of (i) the total number of Electing Option Shares
subject to such Electing Option, multiplied by (ii) the excess of the Cash
Election Price over the exercise price per share of the Electing Option Shares
subject to such Electing Option. If the Cash Election Number exceeds the Maximum
Election Number, then each Electing Option shall, at the Effective Time, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive (i) cash from the Company following the
Merger in an amount equal to the product of (A) the total number of Electing
Option Shares subject to such Electing Option, multiplied by (B) the excess of
the Cash Election Price over the exercise price per share of the Shares subject
to such Electing Option, multiplied by (C) the Cash Proration Factor, and (ii)
New Options exercisable for a number of New Shares, rounded to the nearest whole
number of New Shares, equal to the product of (A) the total number of Electing
Option Shares subject to such Electing Option, multiplied by (B) one minus the
Cash Proration Factor.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and PFC to enter into this Agreement, the
Company hereby makes, as of the date hereof, the following representations and
warranties to Parent and PFC, except as otherwise set forth in a written
disclosure schedule (the "Company Disclosure Schedule") delivered by the Company
to Parent and PFC prior to the date hereof, a copy of which is attached hereto,
which contains schedules numbered to correspond to sections of this Article III
and which sets forth in reasonable detail exceptions to the representations and
warranties contained in this Article III and certain other information as
required by this Agreement. Unless otherwise specified, (a) each reference in
this Article III to a numbered schedule is a reference to that numbered schedule
which is included in the Company Disclosure Schedule and (b) no disclosure made
in any particular numbered schedule of the Company Disclosure Schedule shall be
deemed to be made in any other numbered schedule of the Company Disclosure
Schedule unless expressly made therein (by cross reference or otherwise).
SECTION 3.01 ORGANIZATION.
(a) Each of the Company and its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as now being conducted, except where the
failure to have such power, authority or governmental approvals would not
individually or in the aggregate have a Material Adverse Effect (as defined in
this Section 3.01(a)) on the Company. Each of the Company and its subsidiaries
is duly qualified or licensed and in good standing to do business in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary,
except in such jurisdictions where the failure to be so duly qualified or
licensed and in good standing would not individually or in the aggregate have a
Material Adverse Effect on the Company. As used in this Agreement, (i) the term
"subsidiary" shall mean, with respect to any party, any corporation, partnership
or other business entity of which 50% or more of the equity or ordinary voting
power is held by, or which is controlled by, such party, and (ii) any reference
to any event, change or effect being "material" or having a "Material Adverse
Effect" means, with respect to any entity, such event, change or effect is
material or materially adverse (as the case may be) to the financial condition,
business or results of operations of such entity and its subsidiaries, if any,
taken as a whole, or impairs the ability of such entity to consummate the
transactions contemplated by this Agreement.
(b) The Company has heretofore delivered to Parent accurate and complete
copies of the Certificate of Incorporation, as amended to date, and Bylaws, as
currently in effect, of the Company and each of its subsidiaries.
(c) The Company does not own any equity interest in any corporation or
other entity other than its subsidiaries. Exhibit 22 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 29, 1995 sets forth a
complete list of the Company's subsidiaries. Neither the Company nor any of its
subsidiaries is party to any partnerships, joint ventures or similar business
organizations.
SECTION 3.02 CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists of 5,000,000 Class
A Shares and 5,000,000 Class B Shares. As of the date hereof, (i) 2,713,354
Class A Shares are issued and outstanding and no Class A Shares are issued and
held in the treasury of the Company, (ii) 1,582,780 Class B Shares are issued
and outstanding and no Class B Shares are held in the
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treasury of the Company and (iii) 263,550 Class A Shares and 43,750 Class B
Shares are reserved for issuance upon exercise of outstanding Company Stock
Options granted under the Stock Plan. Schedule 3.02 sets forth, with respect to
each outstanding Company Stock Option, the holder thereof, the number of Shares
issuable upon exercise thereof, the exercise price thereof and the expiration
date thereof. All outstanding shares of the Company's capital stock are, and all
Shares which may be issued pursuant to the exercise of outstanding Company Stock
Options will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid and non-assessable and not issued in
violation of statutory or contractual preemptive or similar rights. There are no
bonds, debentures, notes or other indebtedness of the Company or any of its
subsidiaries having general voting rights (or convertible into or exercisable or
exchangeable for securities having such rights) ("Voting Debt") issued and
outstanding. Except as set forth above and except for the transactions
contemplated by this Agreement, as of the date hereof, (i) there are no shares
of capital stock of the Company authorized, issued or outstanding, (ii) there
are no existing options, warrants, calls, preemptive rights, subscriptions or
other rights, agreements, arrangements or commitments of any character, relating
to the issued or unissued capital stock of the Company or any of its
subsidiaries, obligating the Company or any of its subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company or any
of its subsidiaries or securities convertible into or exercisable or
exchangeable for such shares or equity interests, or obligating the Company or
any of its subsidiaries to grant, extend or enter into any such option, warrant,
call, subscription or other right, agreement, arrangement or commitment and
(iii) there are no Company Contracts (as defined in Section 3.04) to repurchase,
redeem or otherwise acquire or retire any Shares or other capital stock of the
Company or the capital stock of any subsidiary or affiliate of the Company, or
to provide funds to make any investment (in the form of a loan, capital
contribution or otherwise) in any other entity (other than a wholly owned
subsidiary of the Company).
(b) All of the outstanding shares of capital stock of each of the
subsidiaries of the Company are owned of record and beneficially by the Company,
directly or indirectly, and all such shares have been duly authorized and
validly issued and are fully paid and nonassessable and were not issued in
violation of any statutory or contractual preemptive rights; and all such shares
are owned by the Company or its subsidiaries free and clear of all liens,
pledges, charges, mortgages, claims, security interests or other encumbrances,
rights or interests of any kind (collectively, "Liens").
(c) There are no voting trusts, proxies or other agreements, understandings
or restrictions to which the Company or any of its subsidiaries is a party or
subject with respect to the voting of the capital stock of the Company or any of
the subsidiaries. Except as contemplated by this Agreement and the Stockholders
Agreement, there are no Company Contracts pursuant to which the Company is or
could be required to register Shares or other securities under the Securities
Act of 1933, as amended (the "Securities Act"), or any such agreement or other
agreements or arrangements with or among any securityholders of the Company with
respect to securities of the Company.
(d) Except as provided in Article II, none of the Company or its
subsidiaries is required to redeem, repurchase or otherwise acquire shares of
capital stock of the Company or any of its subsidiaries as a result of the
consummation of the transactions contemplated by this Agreement.
(e) The only indebtedness for borrowed money of the Company and its
subsidiaries is (i) under the Loan and Security Agreement dated as of October
31, 1996 among BankAmerica Business Credit, Inc., as lender, and the Company, as
borrower, and certain agreements executed in connection therewith (collectively,
the "Company Credit Facility"), and (ii) $495,000 of capitalized leases as of
June 28, 1996 identified in Schedule 3.02(e). Other than the Company Credit
Facility, no indebtedness for borrowed money by the Company or any of its
subsidiaries contains any restrictions upon the incurrence of indebtedness for
borrowed money by the Company or its subsidiaries or restricts the ability of
the Company or any of its subsidiaries to grant any Liens on its properties or
assets.
SECTION 3.03 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. The
Company has full corporate power and authority to execute and deliver each of
this Agreement and the agreements referred to herein or contemplated hereby and
to consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance by the Company of this Agreement and the agreements
referred to herein or contemplated hereby, and the consummation by the Company
of the transactions contemplated hereby and thereby, have been duly authorized
by the Board of Directors of the Company and, except for obtaining the approval
of its stockholders as contemplated by Section 5.03(c), no other corporate
action on the part of the Company is necessary to authorize the execution and
delivery by the Company of this Agreement and the agreements referred to herein
or contemplated hereby and the consummation by the Company of the transactions
contemplated hereby and thereby. This Agreement has been, and, on the Closing
Date, each of the other agreements referred to herein or contemplated hereby to
which the Company is a party will be, duly executed and delivered by the Company
and, assuming due and
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valid authorization, execution and delivery hereof and thereof by the other
parties hereto and thereto, is or will be, as the case may be, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.
SECTION 3.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), state securities or blue sky laws, and the
GCL, neither the execution, delivery or performance of this Agreement and the
agreements referred to herein or contemplated hereby by the Company, nor the
consummation by the Company of the transactions contemplated hereby or thereby,
nor compliance by the Company with any of the provisions hereof or thereof, will
(i) conflict with or result in any breach of any provision of the Certificate of
Incorporation or the Bylaws of the Company or of any of its subsidiaries, (ii)
require any filing, notice, declaration or registration to or with, or any
permit, authorization, consent or approval of, any federal, state, local or
foreign court, arbitral tribunal, administrative agency or commission or other
governmental or other regulatory authority, body or agency (a "Governmental
Entity"), (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument, obligation or commitment to
which the Company or any of its subsidiaries is a party or by which any of them
or any of their respective properties or assets may be bound (the "Company
Contracts") or (iv) violate any order, writ, injunction, judgment, decree,
settlement, law, statute, rule, regulation or requirement or other governmental
approval or authorization (whether federal, state, local or foreign) applicable
to the Company, any of its subsidiaries or any of their respective businesses,
properties or assets, excluding from the foregoing clauses (ii), (iii) and (iv)
such violations, breaches or defaults which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. Schedule 3.04 sets
forth a list of all notices and consents required to be given or obtained
pursuant to the Company Contracts prior to or as a result of the consummation of
the transactions contemplated by this Agreement and the agreements referred to
herein or contemplated hereby.
SECTION 3.05 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed
with the Securities and Exchange Commission (the "SEC"), and has heretofore made
available to Parent, true and complete copies of, all forms, reports, schedules,
statements and other documents required to be filed by it under the Exchange Act
or the Securities Act (as such documents have been amended since the time of
their filing, collectively, the "Company SEC Documents"). As of their respective
dates or, if amended, as of the date of the last such amendment, the Company SEC
Documents, including all financial statements and schedules included therein (a)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and (b) complied in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder. None of
the subsidiaries of the Company is required to file any forms, reports,
schedules, statements or other documents with the SEC. The financial statements
of the Company included in the Company SEC Documents as of and for each of the
fiscal years of the Company in the three-year period ended September 29, 1995,
and the financial statements of the Company included in the Company SEC
Documents filed since September 29, 1995, have been prepared from, and are in
accordance with, the books and records of the Company and its consolidated
subsidiaries, comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position and consolidated results of
operations and cash flows (and consolidated changes in financial position, if
any) of the Company and its subsidiaries for the respective periods or as of the
respective dates set forth therein.
SECTION 3.06 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Company
SEC Documents, since September 29, 1995, (a) the Company and its subsidiaries
have conducted their respective businesses only in the ordinary and usual
course, consistent with past practice, and (b) no change has occurred or, to the
knowledge of the Company, is threatened that is reasonably likely to have a
Material Adverse Effect on the Company. Without limiting the generality of the
foregoing, since September 29, 1995, neither the Company nor any of its
subsidiaries has:
(i) amended its Certificate of Incorporation or Bylaws;
(ii) authorized for issuance, issued, sold, delivered or agreed or
committed to issue, sell or deliver (whether through the issuance or granting of
options, warrants, convertible, exercisable or exchangeable securities,
subscriptions, calls, rights, or other agreements or commitments) any stock of
any class or any other securities of the Company or any of its subsidiaries,
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except for the issuance of Shares pursuant to the exercise of Company Stock
Options in accordance with the terms of such options;
(iii) other than the cancellation of treasury shares, split, combined or
reclassified any shares of its capital stock, declared, set aside or paid any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeemed, repurchased
or otherwise acquired or retired any of its securities or any securities of its
subsidiaries;
(iv) other than under the Company Credit Facility (and any predecessor
thereof), incurred or assumed any indebtedness for borrowed money or issued any
debt securities or warrants or rights to acquire debt securities of the Company
or any of its subsidiaries, or assumed, guaranteed, endorsed or otherwise became
liable (whether directly, contingently or otherwise) for the obligations of any
other person, or made any loans, advances or capital contributions to, or
investments in, any other person (other than investments in any of the Company's
subsidiaries), or mortgaged, pledged or otherwise encumbered any assets or
otherwise created or suffered a lien thereon;
(v) entered into, adopted, terminated or amended any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreements, trusts, plans, funds
or other arrangements for the benefit or welfare of any director, officer or
employee, other than in connection with the hiring and termination of
non-officer employees in the ordinary course of business consistent with past
practices, or materially increased the compensation or fringe benefits of any
director, officer or employee (other than any such increase in the compensation
or fringe benefits of any non-officer employee in the ordinary course of
business consistent with past practices) or paid any benefit not required by any
existing plan and arrangement (including the granting of stock options, stock
appreciation rights, shares of restricted stock or performance units) or entered
into any contract, agreement, commitment or arrangement to do any of the
foregoing;
(vi) paid, discharged or satisfied any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of liabilities or obligations in the
ordinary course of business consistent with past practice;
(vii) made any capital expenditure or commitment to make any capital
expenditure, except in accordance with the Company's capital expenditure plan
for the year ended September 27, 1996 (the "Company Capital Expenditure Plan"),
a true, correct and complete copy of which has been delivered to Parent and PFC,
or acquired, sold, leased, encumbered, transferred or disposed of any real
property or any other material assets, except for the purchase and sale of
inventory and the leasing, closing and renovation of retail stores, in each case
in the ordinary course of business consistent with past practice;
(viii) made any tax elections or settled or compromised any income tax
liability;
(ix) changed any accounting policies, procedures or practices, other than
as set forth in the Company SEC Documents; or
(x)(A) entered into, amended or terminated any Company Contract, except for
any such contract, other than a Material Company Contract, that (1) does or did
not involve an unpaid amount greater than $200,000, in the case of purchase
orders, and $50,000 in the case of any other Company Contract, and (2) was
entered into, amended or terminated in the ordinary course of business
consistent with past practice, or (B) taken any action or failed to take any
action that, with or without notice or lapse of time, would constitute a default
under any Material Company Contract (as defined in Section 3.12).
SECTION 3.07 NO UNDISCLOSED LIABILITIES. Since September 29, 1995, neither
the Company nor any of its subsidiaries has incurred any liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
(a) individually or in the aggregate would be reasonably likely to have a
Material Adverse Effect on the Company or (b) would be required by GAAP to be
reflected on a consolidated balance sheet of the Company and its subsidiaries
(including the notes thereto), except, in the case of clause (b), for this
Agreement and the other agreements referred to herein or contemplated hereby,
and for such liabilities and obligations (i) disclosed in the Company SEC
Documents or (ii) incurred subsequent to September 27, 1996 in the ordinary
course of business consistent with past practices that have not arisen as a
result of a breach by the Company or any of its subsidiaries of any Company
Contract.
SECTION 3.08 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS.
(a) Neither the Company nor any of its subsidiaries is in default or
violation of any term, condition or provision of (i) its respective Certificate
of Incorporation or Bylaws or (ii) any order, writ, injunction, judgment,
decree, settlement, law, statute, rule, regulation or requirement or other
governmental approval or authorization (whether federal, state, local or
foreign)
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applicable to the Company, any of its subsidiaries or any of their respective
businesses, properties or assets, excluding from the foregoing clause (ii)
defaults or violations which would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
(b) The Company and its subsidiaries hold, and are in compliance with the
terms of, all permits, licenses, variances, orders, approvals and authorizations
of all Governmental Entities required for the lawful conduct of the business of
the Company and its subsidiaries (the "Company Permits"), except where the
failure to hold or be in compliance with any such Company Permit would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
SECTION 3.09 LITIGATION. There is no suit, action, claim, proceeding,
investigation or review (each, a "Proceeding") by any Governmental Entity or
other person or entity with respect to the Company or any of its subsidiaries or
any of their respective assets pending or, to the best knowledge of the Company
and its subsidiaries, threatened, nor has any Governmental Entity or other
person or entity indicated an intention to conduct or prosecute any such
Proceeding, nor does the Company or any of its subsidiaries have knowledge of
any facts that could reasonably be expected to form the basis of any such
Proceeding, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen after due inquiry, would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. Neither the Company
nor any of its subsidiaries is subject to any outstanding order, writ,
injunction, settlement or decree which, insofar as can be reasonably foreseen
after due inquiry, would have, individually or in the aggregate, a Material
Adverse Effect on the Company. The Company has provided to Parent true, complete
and correct copies of all complaints, motions, responses and other documentation
and correspondence relating to any pending or threatened Proceeding.
SECTION 3.10 TITLE TO ASSETS. The Company and its subsidiaries have good
and marketable title to, or a valid leasehold interest in, all of their
respective properties and assets (real, personal and mixed, tangible and
intangible) free and clear of all Liens of any kind or character, except: (a)
Liens granted under the Company Credit Facility and capital leases disclosed in
the Company SEC Documents, (b) Liens for current Taxes (as defined in Section
3.17(c)) not yet due and payable; (c) Liens, imperfections of title or easements
which do not, in the aggregate, materially detract from the value of, or
interfere with the present or proposed use of, the properties subject thereto or
affected thereby, or otherwise materially impair the operations of the entity
which owns or leases such property or assets or materially impair the use of
such property or assets or which otherwise would not, in the aggregate, have a
Material Adverse Effect on the Company; and (d) mechanics', carriers', workers,
landlords', and other similar Liens arising or incurred in the ordinary course
of business consistent with past practice.
SECTION 3.11 PROPERTIES.
(a) OWNED REAL PROPERTY. Neither the Company nor any of its subsidiaries
owns any real property.
(b) LEASED REAL PROPERTY. Schedule 3.11(b) sets forth, by address, owner,
usage and term, a true and complete list of all real property agreements
(including all amendments thereto) pursuant to which the Company or any of its
subsidiaries leases, subleases or otherwise occupies any real property (the
"Real Property Leases"). Pursuant to the Real Property Leases, the Company and
its subsidiaries have validly existing and enforceable leasehold, subleasehold
or occupancy interests in the property leased thereunder ("Leased Real
Property"), in each case free from defaults (including any violation of any use
provisions thereunder) and events which with the giving of notice or the passage
of time would constitute a default. There are (i) no outstanding contracts for
any improvements to the Leased Real Property which have not been fully paid and
performed that involve the payment of more than $50,000 individually or $100,000
in the aggregate, (ii) no expenses of any kind (including brokerage and leasing
commissions and lease administration fees) in excess of an aggregate of $10,000
pertaining to the Leased Real Property which are due and payable and have not
been fully paid and (iii) no deposits held by any third party with respect to
any of the Leased Real Property.
(c) THIRD PARTY LEASES. Schedule 3.11(c) sets forth, by address, owner and
usage, a true and complete list of all real property agreements (including all
amendments thereto) pursuant to which the Company or any of its subsidiaries
leases, subleases or otherwise permits any third party to occupy any Leased Real
Property (collectively the "Third Party Leases"). Each of the Third Party Leases
is in full force and effect and free from defaults (including any violation of
any use provisions thereunder) and events which with the giving of notice or
passage of time would constitute a default (by landlord or tenant thereunder),
except for defaults which, individually or in the aggregate, would not have an
Material Adverse Effect on the Company. None of the Third Party Leases grants
any options or other rights to the tenant thereunder to purchase any of the
Leased Real Property.
(d) DEVELOPMENT AGREEMENTS. Schedule 3.11(d) sets forth a true and complete
list of all agreements (including all amendments thereto) pursuant to which (i)
any third party has been given the right (exclusive or otherwise) to develop any
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real property for the Company or any of its subsidiaries or (ii) the Company or
any of its subsidiaries has agreed to develop, construct or occupy in the future
(whether by lease or other occupancy agreement) any real property (the
"Development Agreements"). Each of the Development Agreements is in full force
and effect, in each case free from defaults and events which with the giving of
notice or the passage of time would constitute a default thereunder.
(e) VIOLATIONS/CONDEMNATION. Neither the Company nor any of its
subsidiaries has received, with respect to any Leased Real Property, any written
notice of default or any written notice of noncompliance with respect to any
applicable state, federal or local law, statute, rule, regulation or requirement
relating to zoning, building, fire, use restriction or safety or health codes
which have not been remedied in all respects which would be reasonably likely to
have a Material Adverse Effect on the Company. There is no pending, or to the
knowledge of the Company and its subsidiaries, threatened condemnation or other
governmental taking of any of the Leased Real Property.
SECTION 3.12 CONTRACTS.
(a) Schedule 3.12(a) sets forth a complete and accurate list of each
Company Contract (whether written or oral) (i) which relates to the borrowing of
money or a guaranty of any obligation for the borrowing of money, (ii) which
prohibits or limits the ability of the Company or any of its subsidiaries to
engage in any business or compete with any person, (iii) for the licensing or
use of any Company Intellectual Property (as defined in Section 3.13), (iv) for
the sale, lease or sublease of real property, (v) for the sale, lease or
sublease of personal property or other assets with a fair market value or for
total consideration exceeding $25,000, (vi) (other than this Agreement) for the
acquisition of the Company or any of its subsidiaries or the business of the
Company or any of its subsidiaries, (vii) for the supply of products and
inventory involving after the date hereof more than $50,000, (viii) which
relates to computer hardware, software and systems involving after the date
hereof more than $50,000, (ix) to which the Company or any of its subsidiaries,
and any affiliate, director or officer of the Company or any of its
subsidiaries, is a party, (x) not entered into in the ordinary course of
business consistent with past practice which involves after the date hereof the
receipt or payment of more than $25,000 in any one year, or (xi) the
consequences of a default or termination under which would be reasonably likely
to have a Material Adverse Effect on the Company (collectively, "Material
Company Contracts").
(b) True, complete and correct copies of all written Material Company
Contracts, including all amendments, modifications or extensions thereof, have
been previously made available to Parent.
(c) Each Material Company Contract is valid and binding and in full force
and effect and neither the Company nor any of its subsidiaries, or, to the best
knowledge of the Company and its subsidiaries, any other party thereto, is in
default or violation (and no event has occurred which with the giving of notice
or the lapse of time or both would constitute a default or violation) of any
term, condition or provisions of any Material Company Contract, except in either
instance for defaults or violations which, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect on the Company.
(d) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not alter or impair any rights of the
Company or its subsidiaries under any of the Material Company Contracts; and the
Company Contracts that will be held by the Surviving Corporation and its
subsidiaries at the Effective Time will include all Company Contracts necessary
to permit the Surviving Corporation and its subsidiaries to conduct the business
conducted by the Company and its subsidiaries as conducted on the date hereof.
SECTION 3.13 LICENSES; INTELLECTUAL PROPERTY. Schedule 3.13 sets forth a
list of all material federal, state, local and foreign registrations of patents,
trademarks, trade names or other trade rights and copyrights and all pending
applications for any such registrations that are owned by the Company or any of
its subsidiaries or in which the Company or any of its subsidiaries has any
interest, or that are being used in connection with, or relate to, the business
of the Company and its subsidiaries (collectively, the "Company Intellectual
Property"). The Company has delivered to Parent and PFC true, correct and
complete copies of each registration, application and other document relating to
the Company Intellectual Property. The Company and its subsidiaries own, or
possess adequate and enforceable licenses or other rights to use, all Company
Intellectual Property and all other patents, trademarks, trade names and other
trade rights and copyrights used in or necessary for their businesses as
currently conducted, except where the failure to own or possess such licenses or
other rights would not, individually or in the aggregate, have a Material
Adverse Effect on the Company; such ownership and licenses will not cease to be
valid and in full force and effect by reason of the execution, delivery and
performance of this Agreement and the agreements referred to herein or
contemplated hereby or the consummation of the transactions contemplated hereby
and thereby. No other entity or person (a) has notified the Company or any of
its subsidiaries that it is claiming any ownership of or right to use such
Company Intellectual Property or (b) to the best knowledge of the Company and
its subsidiaries, has
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interfered with, infringed upon or otherwise come into conflict with any such
Company Intellectual Property. The conduct of the business of the Company and
its subsidiaries has not in the preceding three years, and as currently
conducted does not, conflict with, interfere with, infringe upon or otherwise
violate the rights of any third party in or to patents, trademarks, trade names
or copyrights, and neither the Company nor any of its subsidiaries has received
any written notice of any such conflict, infringement or violation.
SECTION 3.14 EMPLOYMENT AND CONSULTING AGREEMENTS.
(a) Schedule 3.14 sets forth a complete and correct list of all employment,
compensation, severance, consulting or indemnification contracts ("Employment
Agreements") between the Company or any of its subsidiaries and its present or
former employees, officers, directors and consultants pursuant to which the
Company or any of its subsidiaries has any continuing obligations thereunder
(including any severance payments). The Company has made available to Parent
true, complete and correct copies of all such agreements.
(b) Neither the Company nor any of its subsidiaries is a party to any
Employment Agreement or any agreement relating to Company Stock Options which
contains a "change in control," "potential change in control" or similar
provision. Except as set forth in this Agreement, the execution, delivery and
performance of this Agreement and the agreements referred to herein or
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, will not (either alone or upon the occurrence of any
additional acts or events) result in any payment (severance pay or otherwise)
becoming due from the Company or any of its subsidiaries to any of its present
or former employees, officers, directors or consultants or accelerate the time
of payment or vesting, or increase the amount of compensation or Company Stock
Options due, any such person.
SECTION 3.15 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Schedule 3.15 sets forth a list of all material employee benefit plans,
arrangements, contracts or agreements (including Employment Agreements and
severance agreements) of any type (including all plans described in sections
3(1) and 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), maintained at any time during the past five years by the Company,
any of its subsidiaries or any trade or business, whether or not incorporated (a
"Company ERISA Affiliate"), which together with the Company would be deemed a
"single employer" within the meaning of section 4001(b)(15) of ERISA ("Company
Benefit Plans"). Neither the Company nor any Company ERISA Affiliate has any
formal plan or commitment, whether legally binding or not, to create any
additional Company Benefit Plan or modify or change any existing Company Benefit
Plan that would affect any employee or terminated employee of the Company or any
Subsidiary.
(b) With respect to each Company Benefit Plan, (i) if intended to qualify
under section 401(a), 401(k) or 403(a) of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "Code"), such
plan so qualifies, and its trust is exempt from taxation under section 501(a) of
the Code, (ii) such plan has been administered in all material respects in
accordance with its terms and applicable law, (iii) no breaches of fiduciary
duty have occurred which might reasonably be expected to give rise to material
liability on the part of the Company, (iv) no disputes are pending or, to the
knowledge of the Company and its subsidiaries, threatened that are reasonably
likely to give rise to material liability on the part of the Company or result
in a Material Adverse Effect on the Company, (v) no prohibited transaction
(within the meaning of Section 406 of ERISA) has occurred that are reasonably
likely to give rise to material liability on the part of the Company or result
in a Material Adverse Effect on the Company, (vi) all contributions and premiums
due as of the date hereof (without taking into account any extensions for such
contributions and premiums) have been made in full and (vii) all filings and
reports have been made in accordance with Sections 101, 104 and 400 of ERISA and
Sections 6057, 6058 and 6059 of the Code.
(c) Neither the Company nor any Company ERISA Affiliate (i) has incurred an
accumulated funding deficiency, as defined in the Code and ERISA, or (ii) has
any material liability under Title IV of ERISA with respect to any employee
benefit plan that is subject to Title IV of ERISA.
(d) With respect to each Company Benefit Plan that is a "welfare plan" (as
defined in section 3(1) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of the Company or any of
its subsidiaries beyond their termination of employment, other than on an
employee-pay-all basis.
(e) The execution, delivery and performance of this Agreement and the
agreements referred to herein or contemplated hereby, and consummation of the
transactions contemplated hereby and thereby, will not (i) entitle any
individual to severance pay from the Company or accelerate the time of payment
or vesting, or increase the amount, of compensation or benefits due to any
individual from the Company, (ii) constitute or result in a prohibited
transaction under section 4975 of the Code or
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section 406 or 407 of ERISA or (iii) subject the Company, any of its
subsidiaries, any Company ERISA Affiliate, any of the Company Benefit Plans, any
related trust, any trustee or administrator of any thereof, or any party dealing
with the Company Benefit Plans or any such trust to either a civil penalty
assessed pursuant to section 409 or 502 (i) of ERISA, a criminal penalty
assessed pursuant to section 501 of ERISA or a tax imposed pursuant to section
4975, 4976, 4977, 4980B or 6652 of the Code.
(f) There is no Company Benefit Plan that is a "multiemployer plan," as
such term is defined in section 3(37) of ERISA.
(g) With respect to each Company Benefit Plan, the Company has made
available to Parent or its representatives (i) accurate and complete copies of
all plan texts, summary plan descriptions, summary of material modifications,
trust agreements and other related agreements, including all amendments to the
foregoing, and (ii) the most recent annual report, the most recent annual and
periodic accounting of plan assets, the most recent determination letter
received from the United States Internal Revenue Service (the "Service") and the
most recent actuarial valuation, to the extent any of the foregoing may be
applicable to a particular Company Benefit Plan.
SECTION 3.16 LABOR RELATIONS.
(a) The Company and its subsidiaries do not have and for the past three
years have not had (i) any unfair labor practice charge or complaint or other
proceeding pending or, to the Company's best knowledge, threatened against the
Company or any of its subsidiaries before the National Labor Relations Board,
(ii) any labor strike, work slowdown or stoppage pending or, to the Company's
best knowledge, threatened against or affecting the Company or any of its
subsidiaries, (iii) any pending collective bargaining negotiations relating to
the employees of the Company or any of its subsidiaries, (iv) any pending
petitions for recognition of a labor union or association as the exclusive
bargaining agent for any or all of the employees of the Company or any of its
subsidiaries, (v) to the Company's best knowledge, any general solicitation of
representation cards by any union seeking to represent the employees of the
Company or any of its subsidiaries as their exclusive bargaining agent, (vi) any
collective bargaining agreements or (vii) any arbitrations, grievances, suits or
administrative proceedings before any Government Entity relating to labor or
employment matters involving any employees of the Company or any of its
subsidiaries.
(b) The Company and its subsidiaries are and have been in compliance for
the past three years with all applicable laws relating to employment and
employment practices, terms and conditions of employment, wages and hours,
occupational safety and health and notice and the requirements of the Worker
Adjustment Retraining Act of 1988, Title VII of the Civil Rights Act of 1964,
the Family and Medical Leave Act of 1993 or similar state or local law,
excluding defaults or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
SECTION 3.17 TAXES.
(a) The Company and its subsidiaries have (i) duly filed and timely (or
there have been filed on their behalf) with the appropriate governmental
authorities all Tax Returns (as defined in Section 3.17(n)) required to be filed
by them on or prior to the date hereof, other than any filings which the failure
to make in a timely manner would not have a Material Adverse Effect on the
Company, it being understood that the failure to file a federal or state income
Tax Return would have a Material Adverse Effect on the Company, and all such Tax
Returns are true, correct and complete in all material respects, and (ii) duly
paid in full or made provision in accordance with GAAP (or there has been paid
or provision has been made on their behalf) for the payment of all Taxes (as
defined in Section 3.17(n)) for all periods ending on or before the date hereof.
(b) There are no Liens for Taxes upon any property or assets of the Company
or any of its subsidiaries, except for liens for Taxes not yet due.
(c) Neither the Company nor any of its subsidiaries has made any change in
accounting methods or received a ruling or a proposed ruling from any taxing
authority that is reasonably likely to have a Material Adverse Effect on the
Company.
(d) The Company and its subsidiaries have complied in all material respects
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes (including withholding of Taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign laws) and have,
within the time and the manner prescribed by law, withheld from employee wages
and paid over to the proper governmental authorities all amounts required to be
so withheld and paid over under applicable laws.
(e) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending or, to the best knowledge
of the Company, threatened with regard to any Taxes or Tax Returns of the
Company or
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any of its subsidiaries, and neither the Company nor any of its subsidiaries has
received a written notice of any pending audits or proceedings.
(f) The Tax Returns of the Company and its subsidiaries have been examined
by the Service or other applicable agency (or the applicable statutes of
limitation for the assessment of federal income Taxes for such periods have
expired) for all periods through and including September 30, 1994, and no
material deficiencies were asserted as a result of such examinations which have
not been resolved and fully paid.
(g) There are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against the Company or any of its subsidiaries, and no
power of attorney granted by either the Company or any of its subsidiaries with
respect to any Taxes is currently in force.
(h) Neither the Company nor any of its subsidiaries is a party to any
agreement providing for the allocation or sharing of Taxes.
(i) Neither the Company nor any of its subsidiaries is a party to any
agreement, contract or arrangement that could result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code.
(j) Neither the Company nor any of its subsidiaries has, with regard to any
assets or property held, acquired or to be acquired by any of them, filed a
consent to the application of Section 341(f) of the Code, or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the Company
or any of its subsidiaries.
(k) The deductibility of compensation paid by the Company or its
subsidiaries has not been and will not be limited by Section 162(m) of the Code.
(l) All transactions that could give rise to an understatement of the
federal income tax liability of the Company or any of its subsidiaries within
the meaning of Section 6662(d) of the Code are adequately disclosed on Tax
Returns in accordance with Section 6662(d)(2)(B) of the Code if there is or was
no substantial authority for the treatment giving rise to such understatement.
(m) The Company does not have any liability for Taxes of any person other
than the Company and its subsidiaries.
(n) The Company has made all required estimated Tax Payments sufficient to
avoid any material underpayment penalties.
(o) No closing agreement that could affect the Taxes of the Company for
periods ending after the Effective Time has been entered into by or with respect
to the Company pursuant to section 7121 of the Code or any similar provision of
any state, local or foreign law.
(p) Schedule 3.17 sets forth all elections that have been made or filed by
or with respect to the Company.
(q) None of the assets of the Company constitute tax-exempt use property
within the meaning of section 168(h) of the Code or property that is or will be
required to be treated as owned by any person other than the Company pursuant to
the provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as in
effect immediately prior to the enactment of the Tax Reform Act of 1986.
(r) "Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments (including income, gross receipts, excise, real or personal
property, sales, withholding, social security, occupation, use, service,
license, net worth, payroll, franchise, transfer and recording taxes, fees and
charges) imposed by the Service or any taxing authority (whether domestic or
foreign including any state, county, local or foreign government or any
subdivision or taxing agency thereof (including a United States possession)),
whether computed on a separate, consolidated, unitary, combined or any other
basis; and such term shall include any interest whether paid or received, fines,
penalties or additional amounts attributable to, or imposed upon, or with
respect to, any such taxes, charges, fees, levies or other assessments. "Tax
Return" shall mean any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including information
returns, any documents with respect to or accompanying payments of estimated
Taxes, or with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.
SECTION 3.18 INSURANCE. The Company and each of its subsidiaries are, and
for the last three years continuously have been, insured by insurers, reasonably
believed by the Company to be of recognized financial responsibility and
solvency
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against, or self-insured with revenues sufficient to protect against, such
losses and risks and in such amounts as are customary in the businesses in which
they are engaged. All material policies of insurance and fidelity or surety
bonds insuring the Company or any of its subsidiaries or their respective
businesses, assets, employees, officers and directors are in full force and
effect. All premiums due thereon have been paid, and the Company has complied in
all material respects with the provisions of such policies. No Proceeding is
pending or, to the Company's best knowledge, threatened to revoke, cancel or
limit such policies and no notice of cancellation of any of such material
policies have been received by the Company. The Company has complied with all
material recommendations for the prevention of loss made by all of the Company's
insurance carriers. Schedule 3.18 lists all insurance policies (with a
description of coverage, periods of coverage, limits of coverage, self-insured
retentions or deductibles) and describes all self-insurance arrangements
affecting the Company or any of its subsidiaries and the aggregate amount of all
claims made under such policies or arrangements since January 1, 1994. There are
no material claims by the Company or any of its subsidiaries under any such
policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause. All necessary notifications of
claims have been made to insurance carriers other than those which will not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
True, complete and correct copies of all of policies of insurance and fidelity
or surety bonds insuring the Company or any of its subsidiaries or their
respective businesses, assets, employees, officers and directors have been
provided to Parent.
SECTION 3.19 ENVIRONMENTAL MATTERS.
(a) The Company and each of its subsidiaries is in compliance in all
material respects with the Requirements of Environmental Laws (as defined in
Section 3.19(d)) and neither the Company nor any of its subsidiaries has
received any communication within the past three years from a person that
alleges that the Company or any of its subsidiaries is not in such compliance.
(b) There is no Environmental Claim (as defined in Section 3.19(d)) pending
or, to the Company's best knowledge, threatened against the Company or any of
its subsidiaries or, to the Company's best knowledge after due inquiry, against
any person or entity whose liability for any Environmental Claim the Company or
any of its subsidiaries has retained or assumed either contractually or by
operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the release, emission, discharge or
disposal of any Materials of Environmental Concern (as defined in Section
3.19(d)) that could be expected to result in any Environmental Claim against the
Company, any of its subsidiaries or any person or entity whose liability for any
Environmental Claim the Company or any of its subsidiaries has retained or
assumed either contractually or by operation of law.
(d) "Environmental Claim" means, with respect to any person, any claim,
demand, action, cause of action, suit, loss, cost, damage, fine, penalty, lien,
expense, liability, judgment, proceeding, whether threatened, sought, brought,
or imposed (referred to in this subsection as a "Claim"), against such person or
any subsidiary thereof by any other person or any public or private entity that
seeks to impose costs or liabilities for (i) pollution or contamination of the
air, surface water, ground water, soil, or subsurface present or existing at the
Properties (as hereinafter defined), or at properties owned by persons other
than such person or any of its subsidiaries, whether known now or discovered at
some future date, (ii) solid, gaseous, or liquid waste generation, handling,
treatment, storage, disposal, or transportation by any person at or from any of
the Properties which activities were conducted on or at any time prior to the
date hereof, (iii) exposure to Materials of Environmental Concern which were
present on, in, under, or upon any of the Properties as of or at any time prior
to the date hereof or which migrated to or from any of the Properties as of or
at any time prior to the date hereof, (iv) the manufacture, processing,
distribution in commerce, use, or storage of Materials of Environmental Concern
by any person at or from any of the Properties, which activities occurred on or
at any time prior to the date hereof, (v) injury to or death of any person or
persons related to the presence of Materials of Environmental Concern on, in,
under or upon any of the Properties as of at any time prior to the date hereof,
or related to Materials of Environmental Concern migrating to or from any of the
Properties as of or at any time prior to the date hereof, (vi) destruction,
damage or contamination of any property directly or indirectly related to the
presence of Materials of Environmental Concern on, in, under or upon any of the
Properties as of or at any time prior to the date hereof, or related to
Materials of Environmental Concern migrating to or from any of the Properties as
of or at any time prior to the date hereof (vii) any claim for a past or present
violation of Requirements of Environmental Law and (viii) any and all penalties
due to the presence of Materials of Environmental Concern on, in, under or upon
any of the Properties as of or at any time prior to the date hereof, or due to
Materials of Environmental concern migrating to or from any of the Properties as
of or at any time prior to the date hereof, in each case described in this item
(viii), which presence of Materials of Environmental Concern are in violation of
the Requirements of Environmental Law. The term "Environmental Claim" also
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shall mean (i) the costs of removal pursuant to the Requirements of
Environmental Law of any and all Materials of Environmental Concern from all or
any portion of any of the Properties, which Materials of Environmental Concern
were disposed, spilled, or released as of or at any time prior to the date
hereof, (ii) costs required pursuant to the Requirements of Environmental Law to
take necessary precautions to protect against the release after the date hereof
of Materials of Environmental Concern on, in, under, upon or from any of the
Properties, or in or into the air, soil, surface water, ground water or
subsurface, any public domain or natural resource, or any surrounding areas,
which Materials of Environmental Concern were disposed, spilled, or released as
of or at any time prior to the date hereof, and (iii) costs incurred to comply,
in connection with all or any portion of any of the Properties, with all
Requirements of Environmental Law due to the presence of Materials of
Environmental Concern on in, under or upon any of the Properties as of or at any
time prior to the date hereof, or due to Materials of Environmental Concern
migrating to or from any of the Properties as of or at time prior to the date
hereof. "Environmental Claim" also shall mean any event, occurrence, or
condition as a consequence of which, pursuant to any Requirements of
Environmental Law, (i) such person, any of its subsidiaries, or any owner,
occupant, or other person having any interest in the Properties shall be liable
or incur any costs due to the presence of Materials of Environmental Concern on,
in, under or upon any of the Properties, which Materials of Environmental
Concern were present at the Properties as of or at any time prior to the date
hereof, or migrated to or from any of the Properties as of or at any time prior
to the date hereof, or (ii) any of the Properties shall be subject to any
material restriction on use, ownership, or transferability due to the presence
of Materials of Environmental Concern on, in, under or upon any of the
Properties, which Materials of Environmental Concern were present at the
Properties as of or at any time prior to the date hereof, or migrated to or from
any of the Properties as of or at any time prior to the date hereof or (iii) any
Remedial Work is required on, in, under or upon any of the Properties.
"Costs" means, with respect to any person, all liabilities, losses, costs,
damages (including consequential damages), expenses, claims, attorneys' fees,
experts' fees, consultants' fees and disbursements of any kind or of any nature
whatsoever imposed upon such person or any of its subsidiaries as a result of an
Environmental Claim by any other person or a public or private entity. For the
purposes of this definition, such losses, costs and damages shall include
remedial, removal, response, abatement, cleanup, legal, investigative and
monitoring costs and related costs, expenses, losses, damages, penalties, fines,
obligations, defenses, judgments, suits, proceedings and disbursements.
"Requirements of Environmental Law" means all federal, state, local and
foreign environmental, ecological, or natural resources laws, regulations,
rules, orders, policies or guidelines, as such may now exist, be enacted,
adopted, promulgated, or issued hereafter or be modified hereafter, as any of
the foregoing are imposed or enforced by any federal, state, or local or foreign
executive, legislative, judicial, regulatory, or administrative agency, board,
or authority.
"Properties" or "Property" means, with respect to any person, all or any
portion of the real property and all buildings and improvements thereon
currently or formerly owned, leased, or otherwise utilized by such person or any
of its subsidiaries or any predecessor in interest for manufacturing,
distribution, storage, treatment, or disposal of Materials of Environmental
Concern.
The term "Materials of Environmental Concern" shall include:
(i) those substances now or hereafter included within the definitions of
"hazardous substances," "hazardous materials," "toxic substances," "pollutant,"
"contaminant" or "solid waste" in the Comprehensive Environmental Response
Compensation and Liability Act (42 U.S.C. (section mark) 9601 et seq.)
("CERCLA"), the Resource Conservation and Recovery Act of 1976 (42 U.S.C.
(section mark) 6901 et seq.) ("RCRA"), and the Hazardous Materials
Transportation Act, 49 U.S.C. (section mark) 1801 et seq., and in the
regulations promulgated pursuant to said laws, all as amended from time-to-time;
(ii) those substances now or hereafter listed in the United States
Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by
the Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto);
(iii) any material, waste or substance which is (A) petroleum, (B)
asbestos, (C) polychlorinated biphenyl, (D) designated as a "hazardous
substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C.
(section mark) 1251 et seq. (33 U.S.C. (section mark) 1321) or listed pursuant
to Section 307 of the Clean Water Act (33 U.S.C. (section mark) 1317), (E)
flammable explosives, (F) radioactive materials or (G) listed or designated, now
or hereafter, as a "hazardous" or "toxic" air pollutant under the Clean Air Act
(42 U.S.C. (section mark) 7401), as amended;
(iv) those substances defined as "hazardous chemicals" by the Occupational
Safety and Health Administration (29 CFR 1910.1200 and amendments thereto); and
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(v) such other substances, scraps, materials and wastes which are or become
regulated as pollutants, contaminants, hazardous or toxic under applicable
local, state or federal law, or by the United States government, or which are
classified as hazardous or toxic under federal, state, or local laws or
regulations.
"Remedial Work" means, with respect to any person, any investigation,
evaluation, assessment or monitoring of site conditions, including surface and
subsurface, and any clean-up, containment, restoration, removal or other
response work of any kind or nature required of or imposed upon such person or
any of its subsidiaries by any other person or entity under Requirements of
Environmental Law.
SECTION 3.20 RELATED PARTY TRANSACTIONS. Except as set forth in the Company
SEC Reports, no director, officer, partner, employee, affiliate or associate of
the Company or any of its subsidiaries (a) has borrowed money from or has
outstanding any indebtedness or other similar obligations to the Company or any
of its subsidiaries, (b) to the best knowledge of the Company, owns any direct
or indirect interest of any kind in, or is a director, officer, employee, party,
affiliate or associate of, or consultant or lender to, or borrower from, or has
the right to participate in the management, operations or profits of, any person
or entity which is (i) a competitor, supplier, customer, distributor, lessor,
tenant, creditor or debtor of the Company or any of its subsidiaries, (ii)
engaged in a business related to the business of the Company or any of its
subsidiaries or (iii) participating in any transaction to which the Company or
any of its subsidiaries is a party, (c) is otherwise a party to any contract,
arrangement or understanding with the Company or any of its subsidiaries or (d)
has any claim adverse to, or is a party in a proceeding adverse to, the Company
or any of its subsidiaries.
SECTION 3.21 INFORMATION IN PROXY STATEMENT. The Form S-4 (as defined in
Section 5.03(a)) will not, from and after the time it becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading, and the Proxy Statement (as defined in Section
5.03(a)) will not, at the date it is first mailed to Company stockholders and at
the time of the meeting of Company stockholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading, except that no representation is made by the Company with
respect to statements made therein based on information with respect to Parent
or PFC supplied in writing by Parent or PFC specifically for inclusion in the
Form S-4 or the Proxy Statement. The Form S-4 will, at the time it becomes
effective under the Securities Act, comply in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder. The
Proxy Statement will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
SECTION 3.22 VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding Class B Shares are the only votes of the holders of
any class or series of the Company's capital stock necessary to approve this
Agreement and the transactions contemplated hereby.
SECTION 3.23 NO APPRAISAL RIGHTS. In respect of the Company's capital
stock, no appraisal rights statute or similar statute or regulation of the State
of Delaware (and, to the knowledge of the Company after due inquiry, of any
other state or jurisdiction) applies or purports to apply to this Agreement, the
Merger or any of the other transactions contemplated hereby.
SECTION 3.24 STATE TAKEOVER STATUTES. No state takeover statute or similar
statue, rule or regulation of the State of Delaware (including the restrictions
on "business combinations" imposed by Section 203 of the GCL), and, to the
knowledge of the Company after due inquiry, of any other state or jurisdiction,
applies or purports to apply to this Agreement, the Merger or any of the other
transactions contemplated hereby. No provision of the Certificate of
Incorporation, Bylaws or other governing instruments of the Company or any of
its subsidiaries would, directly or indirectly, restrict or impair the ability
of Parent or its affiliates to vote, or otherwise to exercise the rights of a
stockholder with respect to, securities of the Company and its subsidiaries that
may be acquired or controlled by Parent or its affiliates pursuant to this
Agreement, the Merger or any of the transactions contemplated hereby or
otherwise or permit any stockholder to acquire securities of the Company on a
basis not available to Parent if Parent were to so acquire securities of the
Company, and neither the Company nor any of its subsidiaries has any rights
plan, preferred stock or similar arrangement which have any of the
aforementioned consequences.
SECTION 3.25 BROKERS OR FINDERS. Schedule 3.25 sets forth all agents',
brokers', investment bankers', financial advisors' and finders' fees and other
similar commissions and fees payable by the Company or any of its subsidiaries
in connection with this Agreement and the transactions contemplated hereby. The
fees and expenses of any such agent, broker, investment banker, financial
advisor or other firm or person will be paid by the Company in accordance with
the Company's or any
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subsidiary's agreement with such agent, broker, investment banker, financial
advisor or other firm or person. A true and complete copy of all such agreements
have been delivered to Parent.
SECTION 3.26 OPINION OF FINANCIAL ADVISOR. The Company has received an
opinion from Legg Mason Wood Walker, Inc. ("Legg Mason"), dated the date hereof,
to the effect that, as of such date, the transactions contemplated hereby are
fair to the stockholders of the Company from a financial point of view.
SECTION 3.27 BOARD RECOMMENDATION. The Board of Directors of the Company,
at a meeting duly called and held, has by unanimous vote of those directors
present (who constituted 100% of the directors then in office), (i) approved the
execution of this Agreement, the Stockholders Agreement and the agreements
referred to herein and therein or contemplated hereby or thereby, (ii)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are in the best interests of the stockholders of the
Company, (iii) has duly and validly approved the transactions contemplated
hereby for purposes of Section 203 of the GCL and taken all appropriate and
necessary action such that the provisions of Section 203 of GCL will not apply
to the transactions contemplated hereby and (iv) resolved to recommend that the
holders of the Shares adopt this Agreement and the transactions contemplated
herein, including the Merger.
SECTION 3.28 STATEMENTS TRUE AND CORRECT. No statement made by the Company
in this Agreement, the Company Disclosure Schedule or any certificate furnished
or to be furnished by the Company, any of its subsidiaries, or any director or
officer of the Company or any subsidiary, contains or will contain any untrue
statement of material fact or omits or will omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND PFC
As an inducement to the Company to enter into this Agreement, Parent and
PFC hereby make, as of the date hereof, the following representations and
warranties to the Company, except as otherwise set forth in a written disclosure
schedule (the "PFC Disclosure Schedule ") delivered by Parent and PFC to the
Company prior to the date hereof, a copy of which is attached hereto, which
contains schedules numbered to correspond to sections of this Article IV and
which sets forth in reasonable detail exceptions to the representations and
warranties contained in this Article IV and certain other information as
required by this Agreement. Unless otherwise specified, (a) each reference in
this Article IV to a numbered schedule is a reference to that numbered schedule
which is included in the PFC Disclosure Schedule and (b) no disclosure made in
any particular numbered schedule of the PFC Disclosure Schedule shall be deemed
to be made in any other numbered schedule of the PFC Disclosure Schedule unless
expressly made therein (by cross reference or otherwise).
SECTION 4.01 ORGANIZATION.
(a) Each of Parent and PFC is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted, except where
the failure to have such power or authority would not individually or in the
aggregate have a Material Adverse Effect on Parent or PFC. PFC is duly qualified
or licensed and in good standing to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed and in good
standing would not individually or in the aggregate have a Material Adverse
Effect on PFC.
(b) Parent has heretofore made available to the Company accurate and
complete copies of the Certificate of Incorporation, as amended to date, and
Bylaws, as currently in effect, of PFC.
(c) PFC does not own any equity interest in any corporation or other
entity. PFC is not a party to any partnerships, joint ventures or similar
business organizations.
SECTION 4.02 CAPITALIZATION.
(a) The authorized capital stock of PFC consists of 1,000 shares of common
stock, par value $1.00 per share ("PFC Shares"), of which, as of the date
hereof, one share is issued and outstanding. The outstanding PFC Share is duly
authorized, validly issued, fully paid and non-assessable and not issued in
violation of statutory or contractual preemptive or similar rights. There is no
Voting Debt of PFC issued and outstanding. Except as set forth above and except
for the transactions contemplated by this Agreement, as of the date hereof, (i)
there are no shares of capital stock of PFC authorized, issued or
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outstanding, (ii) there are no existing options, warrants, calls, preemptive
rights, subscriptions or other rights, agreements, arrangements or commitments
of any character, relating to the issued or unissued capital stock of PFC,
obligating PFC to issue, transfer or sell or cause to be issued, transferred or
sold any shares of capital stock or Voting Debt of, or other equity interest in,
PFC or securities convertible into or exercisable or exchangeable for such
shares or equity interests, or obligating PFC to grant, extend or enter into any
such option, warrant, call, subscription or other right, agreement, arrangement
or commitment and (iii) there are no PFC Contracts (as defined in Section 4.04)
to repurchase, redeem or otherwise acquire or retire any PFC Shares or other
capital stock of PFC, or to provide funds to make any investment in any other
entity.
(b) There are no voting trusts, proxies or other agreements, understandings
or restrictions to which PFC is a party or subject with respect to the voting of
the capital stock of PFC.
(c) PFC is not required to redeem, repurchase or otherwise acquire shares
of capital stock of PFC as a result of the consummation of the transactions
contemplated by this Agreement.
(d) The only indebtedness for borrowed money of PFC is $18.746 million
payable to Parent, $15.0 million of which will be reflected in a promissory note
prior to the Effective Time.
SECTION 4.03 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. Each
of Parent and PFC has full corporate power and authority to execute and deliver
each of this Agreement and the agreements referred to herein or contemplated
hereby and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the agreements referred to herein
or contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by the Boards of Directors (or any
authorized committee thereof) of Parent and PFC, and by Parent as the sole
stockholder of PFC, and no other corporate proceedings on the part of Parent or
PFC are necessary to authorize this Agreement and the agreements referred to
herein or contemplated hereby or to consummate the transactions contemplated
hereby and thereby. This Agreement has been, and, on the Closing Date, each of
the other agreements referred to herein or contemplated hereby to which Parent
or PFC is a party will be, duly executed and delivered by each of Parent and
PFC, as applicable, and, assuming due and valid authorization, execution and
delivery hereof and thereof by the other parties hereto and thereto, is or will
be, as the case may be, a valid and binding obligation of each of Parent and
PFC, as applicable, enforceable against it in accordance with its terms.
SECTION 4.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the HSR Act, state
securities or blue sky laws, and the GCL, neither the execution, delivery or
performance of this Agreement and the agreements referred to herein or
contemplated hereby by Parent or PFC, nor the consummation by Parent or PFC of
the transactions contemplated hereby or thereby, nor compliance by Parent or PFC
with any of the provisions hereof or thereof, will (i) conflict with or result
in any breach of any provision of the Certificate of Incorporation or the Bylaws
of Parent or PFC, (ii) require any filing, notice, declaration or registration
to or with, or any permit, authorization, consent or approval of, any
Governmental Entity, (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument, obligation or
commitment to which Parent or PFC is a party or by which any of them or any of
their respective properties or assets may be bound (with respect to PFC only,
the "PFC Contracts ") or (iv) violate any order, writ, injunction, judgment,
decree, settlement, law, statute, rule, regulation or requirement or other
governmental approval or authorization (whether federal, state, local or
foreign) applicable to Parent, PFC or any of their respective businesses,
properties or assets, excluding from the foregoing clauses (ii), (iii) and (iv)
such violations, breaches or defaults which would not, individually or in the
aggregate, have a Material Adverse Effect on Parent or PFC. Schedule 4.04 sets
forth a list of all notices and consents required to be given or obtained
pursuant to the PFC Contracts prior to or as a result of the consummation of the
transactions contemplated by this Agreement and the agreements referred to
herein or contemplated hereby.
SECTION 4.05 FINANCIAL STATEMENTS. The financial statements of PFC as of
and for each of the fiscal years of PFC in the two-year period ended December
31, 1995 and for the nine months ended September 30, 1996 (the "PFC Financial
Statements"), copies of which were previously delivered to the Company, have
been prepared from, and are in accordance with, the books and records of PFC,
have been prepared in accordance with GAAP applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto) and
fairly present the financial position and results of operations and cash flows
(and changes in financial position, if any) of PFC for the respective periods or
as of the respective dates set forth therein.
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SECTION 4.06 ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, (a) PFC
has conducted its business only in the ordinary and usual course, consistent
with past practice, and (b) no change has occurred or, to the knowledge of PFC,
is threatened that is reasonably likely to have a Material Adverse Effect on
PFC. Without limiting the generality of the foregoing, since December 31, 1995,
PFC has not:
(i) amended its Certificate of Incorporation or Bylaws;
(ii) authorized for issuance, issued, sold, delivered or agreed or
committed to issue, sell or deliver (whether through the issuance or granting of
options, warrants, convertible, exercisable or exchangeable securities,
subscriptions, calls, rights, or other agreements or commitments) any stock of
any class or any other securities of PFC;
(iii) other than the cancellation of treasury shares, split, combined or
reclassified any shares of its capital stock, declared, set aside or paid any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeemed, repurchased
or otherwise acquired or retired any of its securities;
(iv) incurred or assumed any indebtedness for borrowed money or issued any
debt securities or warrants or rights to acquire debt securities of PFC, or
assumed, guaranteed, endorsed or otherwise became liable (whether directly,
contingently or otherwise) for the obligations of any other person, or made any
loans, advances or capital contributions to, or investments in, any other
person, or mortgaged, pledged or otherwise encumbered any assets or otherwise
created or suffered a lien thereon;
(v) entered into, adopted, terminated or amended any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreements, trusts, plans, funds
or other arrangements for the benefit or welfare of any director, officer or
employee, other than in connection with the hiring and termination of
non-officer employees in the ordinary course of business consistent with past
practices, or materially increased the compensation or fringe benefits of any
director, officer or employee (other than any such increase in the compensation
or fringe benefits of any non-officer employee in the ordinary course of
business consistent with past practices) or paid any benefit not required by any
existing plan and arrangement (including the granting of stock options, stock
appreciation rights, shares of restricted stock or performance units) or entered
into any contract, agreement, commitment or arrangement to do any of the
foregoing;
(vi) paid, discharged or satisfied any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of liabilities or obligations in the
ordinary course of business consistent with past practice and in accordance with
their terms;
(vii) made any capital expenditure or commitment to make any capital
expenditure, except in accordance with PFC's capital expenditure plan for the
year ending December 31, 1996 (the "PFC Capital Expenditure Plan"), a true,
correct and complete copy of which has been made available to the Company, or
acquired, sold, leased, encumbered, transferred or disposed of any real property
or any other material assets, except for the purchase and sale of inventory and
the leasing, closing and renovating of retail stores, in each case in the
ordinary course of business consistent with past practice;
(viii) made any tax elections or settled or compromised any income tax
liability;
(ix) changed any accounting policies, procedures or practices from those
set forth in the PFC Financial Statements; or
(x)(A) entered into, amended or terminated any PFC Contract, except for any
such contract, other than Material PFC Contracts, that (1) does or did not
involve an unpaid amount greater than $200,000, in the case of purchase orders,
and $50,000 in the case of any other PFC Contract, and (2) was entered into,
amended or terminated in the ordinary course of business consistent with past
practice, or (B) taken any action or failed to take any action that, with or
without notice or lapse of time, would constitute a default under any Material
PFC Contract (as defined in Section 4.12).
SECTION 4.07 NO UNDISCLOSED LIABILITIES. Since December 31, 1995, PFC has
not incurred any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, that (a) individually or in the aggregate
would be reasonably likely to have a Material Adverse Effect on PFC or (b) would
be required by GAAP to be reflected on a consolidated balance sheet of PFC
(including the notes thereto), except, in the case of clause (b), for this
Agreement and the other agreements referred to herein or contemplated hereby,
and for such liabilities and obligations incurred in the ordinary course of
business consistent with past practices that have not arisen as a result of a
breach by PFC of a PFC Contract.
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SECTION 4.08 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS.
(a) PFC is not in default or violation of any term, condition or provision
of (i) its Certificate of Incorporation or Bylaws or (ii) any order, writ,
injunction, judgment, decree, settlement, law, statute, rule, regulation or
requirement or other governmental approval or authorization (whether federal,
state, local or foreign) applicable to PFC or its business, properties or
assets, excluding from the foregoing clause (ii) defaults or violations which
would not, individually or in the aggregate, have a Material Adverse Effect on
PFC.
(b) PFC holds, and is in compliance with the terms of, all permits,
licenses, variances, orders, approvals and authorizations of all Governmental
Entities required for the lawful conduct of the business of PFC (the "PFC
Permits"), except where the failure to hold or be in compliance with any such
PFC Permits would not, individually or in the aggregate, have a Material Adverse
Effect on PFC.
SECTION 4.09 LITIGATION. There is no Proceeding by any Governmental Entity
or other person or entity with respect to PFC or any of its assets pending or,
to the best knowledge of PFC, threatened, nor has any Governmental Entity or
other person or entity indicated an intention to conduct or prosecute any such
Proceeding, nor does PFC have knowledge of any facts that could reasonably be
expected to form the basis of any such Proceeding, other than, in each case,
those the outcome of which, as far as reasonably can be foreseen after due
inquiry, would not, individually or in the aggregate, have a Material Adverse
Effect on PFC. PFC is not subject to any outstanding order, writ, injunction,
settlement or decree which, insofar as can be reasonably foreseen after due
inquiry, would have, individually or in the aggregate, a Material Adverse Effect
on PFC. PFC has made available to the Company true, complete and correct copies
of all complaints, motions, responses and other documentation and correspondence
relating to any pending or threatened Proceeding.
SECTION 4.10 TITLE TO ASSETS. PFC has good and marketable title to, or a
valid leasehold interest in, all of its business, properties and assets (real,
personal and mixed, tangible and intangible) free and clear of all Liens of any
kind or character, except: (a) Liens for current Taxes not yet due and payable;
(b) Liens, imperfections of title or easements which do not, in the aggregate,
materially detract from the value of, or interfere with the present or proposed
use of, the properties subject thereto or affected thereby, or otherwise
materially impair the operations of the entity which owns or leases such
property or assets or materially impair the use of such property or which
otherwise would not, in the aggregate, have a Material Adverse Effect on PFC;
(c) Liens securing indebtedness, which indebtedness is reflected on the
consolidated balance sheet of PFC in the PFC Financial Statements; and (d)
mechanics', carriers', workers, landlords', and other similar Liens arising or
incurred in the ordinary course of business consistent with past practice.
SECTION 4.11 PROPERTIES.
(a) OWNED REAL PROPERTY. PFC does not own any real property.
(b) LEASED REAL PROPERTY. Schedule 4.11(b) sets forth, by address, owner,
usage and term, a true and complete list of all real property agreements
(including all amendments thereto) pursuant to which PFC leases, subleases or
otherwise occupies any real property (the "PFC Real Property Leases"). Pursuant
to the PFC Real Property Leases, PFC has validly existing and enforceable
leasehold, subleasehold or occupancy interests in the property leased thereunder
("PFC Leased Real Property"), in each case free from defaults (including any
violation of any use provisions thereunder) and events which with the giving of
notice or the passage of time would constitute a default. There are (i) no
outstanding contracts for any improvements to the PFC Leased Real Property which
have not been fully paid and performed that involve the payment of more than
$50,000 individually or $100,000 in the aggregate, (ii) no expenses of any kind
(including brokerage and leasing commissions and lease administration fees) in
excess of an aggregate of $10,000 pertaining to the PFC Leased Real Property
which are due and payable and have not been fully paid and (iii) no deposits
held by any third party with respect to any of the PFC Leased Real Property.
(c) THIRD PARTY LEASES. Schedule 4.11(c) sets forth, by address, owner and
usage, a true and complete list of all real property agreements (including all
amendments thereto) pursuant to which PFC leases, subleases or otherwise permits
any third party to occupy any PFC Leased Real Property (collectively the "PFC
Third Party Leases"). Each of the PFC Third Party Leases is in full force and
effect and in each case free from defaults (including any violation of any use
provisions thereunder) and events which with the giving of notice or passage of
time would constitute a default (by landlord or tenant thereunder) except in
either instance for defaults which individually or in the aggregate, would not
have an Material Adverse Effect on PFC. None of the PFC Third Party Leases
grants any options or other rights to the tenant thereunder to purchase any of
the PFC Leased Real Property.
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(d) DEVELOPMENT AGREEMENTS. Schedule 4.11(d) sets forth a true and complete
list of all agreements (including all amendments thereto) pursuant to which (i)
any third party has been given the right (exclusive or otherwise) to develop any
real property for PFC or (ii) PFC has agreed to develop, construct or occupy in
the future (whether by lease or other occupancy agreement) any real property
(the "PFC Development Agreements"). Each of the PFC Development Agreements is in
full force and effect in each case free from defaults and events which with the
giving of notice or the passage of time would constitute a default thereunder.
(e) VIOLATIONS/CONDEMNATION. PFC has not received, with respect to any PFC
Leased Real Property, any written notice of default or any written notice of
noncompliance with respect to any applicable state, federal or local law,
statute, rule, regulation or requirement relating to zoning, building, fire, use
restriction or safety or health codes which have not been remedied in all
respects which would be reasonably likely to have a Material Adverse Effect on
PFC. There is no pending, or to the knowledge of PFC, threatened condemnation or
other governmental taking of any of the PFC Leased Real Property.
SECTION 4.12 CONTRACTS.
(a) Schedule 4.12(a) sets forth a complete and accurate list of each PFC
Contract (whether written or oral) (i) which relates to the borrowing of money
or a guaranty of any obligation for the borrowing of money, (ii) which prohibits
or limits the ability of PFC to engage in any business or compete with any
person, (iii) for the licensing or use of any PFC Intellectual Property (as
defined in Section 4.13), (iv) for the sale, lease or sublease of real property,
(v) for the sale, lease or sublease of personal property or other assets with a
fair market value or for total consideration exceeding $25,000, (vi) (other than
this Agreement) for the acquisition of PFC or its business, (vii) for the supply
of products and inventory involving after the date hereof more than $50,000,
(viii) which relates to computer hardware, software and systems involving after
the date hereof more than $50,000, (ix) to which PFC, and any affiliate,
director or officer of PFC, is a party, (x) not entered into in the ordinary
course of business consistent with past practice which involves after the date
hereof the receipt or payment of more than $25,000 in any one year, or (xi) the
consequences of a default or termination under which would be reasonably likely
to have a Material Adverse Effect on PFC (collectively, "Material PFC
Contracts").
(b) True, complete and correct copies of all written Material PFC
Contracts, including all amendments, modifications or extensions thereof, have
been previously made available to the Company.
(c) Each Material PFC Contract is valid and binding and in full force and
effect and neither PFC, or, to the best knowledge of PFC, any other parties
thereto, is in default or violation (and no event has occurred which with the
giving of notice or the lapse of time or both would constitute a default or
violation) of any term, condition or provisions of any Material PFC Contract,
except in either instance for defaults or violations, which individually or in
the aggregate, would not be reasonably likely to have a Material Adverse Effect
on PFC.
(d) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not alter or impair any rights of PFC
under any of the Material PFC Contracts; and the PFC Contracts that will be held
by the Surviving Corporation and its subsidiaries at the Effective Time will
include all PFC Contracts necessary to permit the Surviving Corporation and its
subsidiaries to conduct the business conducted by PFC as conducted on the date
hereof.
SECTION 4.13 LICENSES; INTELLECTUAL PROPERTY. Schedule 4.13 sets forth a
list of all federal, state, local and foreign registrations of patents,
trademarks, trade names or other trade rights and copyrights and all pending
applications for any such registrations that are owned by PFC or in which PFC
has any interest, or that are being used in connection with, or relate to, the
business of PFC (collectively, the "PFC Intellectual Property"). PFC has made
available to the Company true, correct and complete copies of each registration,
application and other document relating to the PFC Intellectual Property. PFC
owns, or possesses adequate and enforceable licenses or other rights to use, all
PFC Intellectual Property and all other patents, trademarks, trade names and
other trade rights and copyrights used in or necessary for its business as
currently conducted, except where the failure to own or possess such licenses or
other rights would not, individually or in the aggregate, have a Material
Adverse Effect on PFC; such ownership and licenses will not cease to be valid
and in full force and effect by reason of the execution, delivery and
performance of this Agreement and the agreements referred to herein or
contemplated hereby or the consummation of the transactions contemplated hereby
and thereby. No other entity or person (a) has notified PFC that it is claiming
any ownership of or right to use such PFC Intellectual Property or (b) to the
best knowledge of PFC, has interfered with, infringed upon or otherwise come
into conflict with any such PFC Intellectual Property. The conduct of the
business of PFC has not in the preceding three years, and as currently conducted
does not, conflict with, interfere with, infringe upon or otherwise violate the
rights of any third party in or to patents, trademarks, trade names or
copyrights, and PFC has not received any written notice of any such conflict,
infringement or violation.
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SECTION 4.14 EMPLOYMENT AND CONSULTING AGREEMENTS.
(a) Schedule 4.14 sets forth a complete and correct list of all Employment
Agreements between PFC and its present or former employees, officers, directors
and consultants pursuant to which PFC has any continuing obligations thereunder
(including any severance payments). PFC has made available to the Company true,
complete and correct copies of all such agreements.
(b) PFC is not a party to any Employment Agreement or any agreement
relating to stock options which contains a "change in control," "potential
change in control" or similar provision. Except as set forth in this Agreement,
the execution, delivery and performance of this Agreement and the agreements
referred to herein or contemplated hereby, and the consummation of the
transactions contemplated hereby and thereby, will not (either alone or upon the
occurrence of any additional acts or events) result in any payment (severance
pay or otherwise) becoming due from PFC to any of its present or former
employees, officers, directors or consultants or accelerate the time of payment
or vesting, or increase the amount of compensation or stock options due, any
such person.
SECTION 4.15 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Schedule 4.15 sets forth a list of all material employee benefit plans,
arrangements, contracts or agreements (including Employment Agreements and
severance agreements) of any type in which PFC employees participate or are
eligible to participate (including but not limited to all plans described in
sections 3(1) and 3(2) of ERISA), maintained during the past five years by PFC,
any of its subsidiaries or any trade or business, whether or not incorporated (a
"PFC ERISA Affiliate"), which together with PFC would be deemed a "single
employer" within the meaning of section 4001(b)(15) of ERISA ("PFC Benefit
Plans"). Neither PFC nor any PFC ERISA Affiliate has any formal plan or
commitment, whether legally binding or not, to create any additional PFC Benefit
Plan or modify or change any existing PFC Benefit Plan that would affect any
employee or terminated employee of PFC.
(b) With respect to each PFC Benefit Plan, (i) if intended to qualify under
section 401(a), 401(k) or 403(a) of the Code, such plan so qualifies, and its
trust is exempt from taxation under section 501(a) of the Code, (ii) such plan
has been administered in all material respects in accordance with its terms and
applicable law, (iii) no breaches of fiduciary duty have occurred which might
reasonably be expected to give rise to material liability on the part of PFC,
(iv) no disputes are pending or, to the knowledge of PFC, threatened that are
reasonably likely to give rise to material liability on the part of PFC or
result in a Material Adverse Effect on PFC, (v) no prohibited transaction
(within the meaning of Section 406 of ERISA) has occurred that are reasonably
likely to give rise to material liability on the part of PFC or result in a
Material Adverse Effect on PFC, (vi) all contributions and premiums due as of
the date hereof (without taking into account any extensions for such
contributions and premiums) have been made in full and (vii) all filings and
reports have been made in accordance with sections 101, 104 and 400 of ERISA and
sections 6057, 6058 and 6059 of the Code.
(c) Neither PFC nor any PFC ERISA Affiliate (i) has incurred an accumulated
funding deficiency, as defined in the Code and ERISA, or (ii) has any material
liability under Title IV of ERISA with respect to any employee benefit plan that
is subject to Title IV of ERISA.
(d) With respect to each PFC Benefit Plan that is a "welfare plan" (as
defined in section 3(1) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of PFC beyond their
termination of employment, other than on an employee-pay-all basis.
(e) The execution, delivery and performance of this Agreement and the
agreements referred to herein or contemplated hereby, and the consummation of
the transactions contemplated hereby and thereby, will not (i) entitle any PFC
employee to severance pay or accelerate the time of payment or vesting, or
increase the amount, of compensation or benefits due to any PFC employee, (ii)
constitute or result in a prohibited transaction under section 4975 of the Code
or section 406 or 407 of ERISA under any PFC Benefit Plan or (iii) subject PFC,
any of its subsidiaries, any PFC ERISA Affiliate, any of PFC Benefit Plans, any
related trust, any trustee or administrator of any thereof, or any party dealing
with PFC Benefit Plans or any such trust to either a civil penalty assessed
pursuant to section 409 or 502 (i) of ERISA, a criminal penalty assessed
pursuant to section 501 of ERISA or a tax imposed pursuant to section 4975,
4976, 4977, 4980B or 6652 of the Code.
(f) There is no PFC Benefit Plan that is a "multiemployer plan," as such
term is defined in section 3(37) of ERISA.
(g) With respect to each PFC Benefit Plan, PFC has made available to the
Company or its representatives (i) accurate and complete copies of all plan
texts, summary plan descriptions, summary of material modifications, trust
agreements and other related agreements including all amendments to the
foregoing, and (ii) the most recent annual report, the most recent
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annual and periodic accounting of plan assets, the most recent determination
letter received from the Service and the most recent actuarial valuation, to the
extent any of the foregoing may be applicable to a particular PFC Benefit Plan.
SECTION 4.16 LABOR RELATIONS.
(a) PFC does not have and for the past three years has not had (i) any
unfair labor practice charge or complaint or other proceeding pending or, to
PFC's best knowledge, threatened against PFC before the National Labor Relations
Board, (ii) any labor strike, work slowdown or stoppage pending or, to PFC's
best knowledge, threatened against or affecting PFC, (iii) any pending
collective bargaining negotiations relating to the employees of PFC, (iv) any
pending petitions for recognition of a labor union or association as the
exclusive bargaining agent for any or all of the employees of PFC, (v) to PFC's
knowledge, any general solicitation of representation cards by any union seeking
to represent the employees of PFC as their exclusive bargaining agent, (vi) any
collective bargaining agreements or (vii) any arbitrations, grievances, suits or
administrative proceedings before any Government Entity relating to labor or
employment matters involving any employees of PFC.
(b) PFC is and has been in compliance for the past three years with all
applicable laws relating to employment and employment practices, terms and
conditions of employment, wages and hours, occupational safety and health and
notice and the requirements of the Worker Adjustment Retraining Act of 1988,
Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act of
1993 or similar state or local law, excluding defaults or violations which would
not, individually or in the aggregate, have a Material Adverse Effect on PFC.
SECTION 4.17 TAXES.
(a) Parent or an affiliate of Parent has (i) duly and timely filed (or
there has been filed on its behalf) with the appropriate governmental
authorities all Tax Returns required to be filed by it with respect to PFC on or
prior to the date hereof, other than any filings which the failure to make in a
timely manner would not have a Material Adverse Effect on PFC, it being
understood that the failure to file a federal or state income Tax Return would
have a Material Adverse Effect on PFC, and all such Tax Returns are true,
correct and complete in all material respects, and (ii) duly paid in full or
made provision in accordance with GAAP (or there has been paid or provision has
been made on their behalf) for the payment of all Taxes for all periods ending
on or before the date hereof.
(b) There are no Liens for Taxes upon any property or assets of PFC, except
for liens for Taxes not yet due.
(c) PFC has not made any change in accounting methods or received a ruling
or a proposed ruling from any taxing authority that is reasonably likely to have
a Material Adverse Effect on PFC.
(d) PFC has complied in all material respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including withholding of Taxes pursuant to Sections 1441 and 1442 of the Code
or similar provisions under any foreign laws) and has, within the time and the
manner prescribed by law, withheld from employee wages and paid over to the
proper governmental authorities all amounts required to be so withheld and paid
over under applicable laws.
(e) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending or, to the best
knowledge, of Parent and PFC, threatened with regard to any Taxes or Tax Returns
of PFC, and neither Parent nor PFC has received a written notice of any pending
audits or proceedings.
(f) There are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against PFC, and no power of attorney granted by PFC with
respect to any Taxes is currently in force.
(g) PFC is not a party to any agreement, contract or arrangement that could
result, separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(h) PFC has not, with regard to any assets or property held, acquired or to
be acquired by it, filed a consent to the application of Section 341(f) of the
Code, or agreed to have Section 341(f)(2) of the Code apply to any disposition
of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by PFC.
(i) The deductibility of compensation paid by PFC has not been and will not
be limited by Section 162(m) of the Code.
(j) All transactions that could give rise to an understatement of the
federal income tax liability of PFC within the meaning of Section 6662(d) of the
Code are adequately disclosed on Tax Returns in accordance with Section
6662(d)(2)(B) of the Code if there is or was no substantial authority for the
treatment giving rise to such understatement.
(k) PFC has made all required estimated Tax Payments sufficient to avoid
any material underpayment penalties.
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(l) No closing agreement that could affect the Taxes of PFC for periods
ending after the Effective Time has been entered into by or with respect to PFC
pursuant to section 7121 of the Code or any similar provision of any state,
local or foreign law.
(m) Schedule 4.17 sets forth all elections that have been made or filed by
or with respect to PFC.
(n) None of the assets of PFC constitute tax-exempt use property within the
meaning of section 168(h) of the Code or property that is or will be required to
be treated as owned by any person other than PFC pursuant to the provisions of
section 168(f)(8) of the Internal Revenue Code of 1954, as in effect immediately
prior to the enactment of the Tax Reform Act of 1986.
(o) Based on the Tax Sharing Agreement, dated as of June 24, 1992 (as
amended), and continued participation by PFC in the consolidated federal tax
return of the consolidated group of which it is currently a member, as of the
date of this Agreement there is not less than $15 million of net operating
losses that can be utilized by PFC.
SECTION 4.18 INSURANCE. PFC is, and for the last three years continuously
has been, insured through group policies with Parent and certain affiliates by
insurers, reasonably believed by Parent to be of recognized financial
responsibility and solvency against, or self-insured with reserves sufficient to
protect against, such losses and risks and in such amounts as are customary in
the businesses in which they are engaged. All material policies of insurance and
fidelity or surety bonds insuring PFC or its business, assets, employees,
officers and directors are in full force and effect. All premiums due thereon
have been paid, and Parent and PFC have complied in all material respects with
the provisions of such policies. No Proceeding is pending or, to Parent's or
PFC's best knowledge, threatened, to revoke, cancel or limit such policies and
no notice of cancellation of any of such material policies have been received by
PFC. Parent and PFC have complied with all material recommendations for the
prevention of loss made by all such insurance carriers. Schedule 4.18 lists all
insurance policies (with a description of coverage, periods of coverage, limits
of coverage, self-insured retentions or deductibles) and describes all self-
insurance arrangements affecting PFC and the aggregate amount of all claims made
under such policies or arrangements with respect to PFC since January 1, 1994.
There are no material claims by or on behalf of PFC under any such policy or
instrument as to which any insurance company is denying liability or defending
under a reservation of rights clause. All necessary notifications of claims have
been made to insurance carriers other than those which will not, individually or
in the aggregate, have a Material Adverse Effect on PFC. True, complete and
correct copies of all of policies of insurance and fidelity or surety bonds
insuring PFC or its business, assets, employees, officers and directors have
been provided to the Company.
SECTION 4.19 ENVIRONMENTAL MATTERS.
(a) PFC is in compliance in all material respects with the Requirements of
Environmental Laws and PFC has not received any communication within the past
three years from a person that alleges that PFC is not in such compliance.
(b) There is no Environmental Claim pending or, to PFC's best knowledge,
threatened against PFC or, to PFC's best knowledge after due inquiry, against
any person or entity whose liability for any Environmental Claim PFC has
retained or assumed either contractually or by operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the release, emission, discharge or
disposal of any Materials of Environmental Concern, that could be expected to
result in any Environmental Claim against PFC or any person or entity whose
liability for any Environmental Claim PFC has retained or assumed either
contractually or by operation of law.
SECTION 4.20 RELATED PARTY TRANSACTIONS. Except for Parent, no director,
officer, partner, employee, affiliate or associate of PFC (a) has borrowed money
from or has outstanding any indebtedness or other similar obligations to PFC,
(b) to the best knowledge of PFC, owns any direct or indirect interest of any
kind in, or is a director, officer, employee, party, affiliate or associate of,
or consultant or lender to, or borrower from, or has the right to participate in
the management, operations or profits of, any person or entity which is (i) a
competitor, supplier, customer, distributor, lessor, tenant, creditor or debtor
of PFC, (ii) engaged in a business related to the business of PFC or (iii)
participating in any transaction to which PFC is a party, (c) is otherwise a
party to any contract, arrangement or understanding with PFC or (d) has any
claim adverse to, or is a party in a proceeding adverse to, PFC.
SECTION 4.21 PROXY STATEMENT. None of the information regarding Parent or
PFC supplied in writing by Parent or PFC for inclusion in the Form S-4 or the
Proxy Statement will contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading.
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SECTION 4.22 BROKERS OR FINDERS. Schedule 4.22 sets forth all agents',
brokers', investment bankers', financial advisors' and finders' fees and other
similar commissions and fees payable by Parent or PFC in connection with this
Agreement and the transactions contemplated hereby.
SECTION 4.23 STATEMENTS TRUE AND CORRECT. No statement made by PFC in this
Agreement, the PFC Disclosure Schedule or any certificate furnished or to be
furnished by PFC, any of its subsidiaries, or any director or officer of PFC or
any subsidiary, contains or will contain any untrue statement of material fact
or omits or will omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
ARTICLE V
COVENANTS
SECTION 5.01 CONDUCT OF BUSINESS OF THE COMPANY. Parent and PFC acknowledge
that upon the execution of this Agreement, customers, suppliers, dealers,
employees and others having a relationship with the Company will become aware of
the fact that the Company is a party to this Agreement and that some disruptions
in the business of the Company and in these relationships is inevitable as part
of this process. However, except as provided in this Agreement, during the
period from the date of this Agreement to the Effective Time, the Company shall,
and shall cause each of its subsidiaries to, conduct its operations according to
its ordinary and usual course of business, consistent with past practice, and
use its best efforts, consistent with prudent business judgment, to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with lessors,
licensors, licensees, suppliers, contractors, distributors, customers and others
having business relationships with it. Without limiting the generality of the
foregoing, and except as otherwise provided in this Agreement, the Company shall
not, and shall not permit any of its subsidiaries to, without the prior written
consent of Parent:
(a) amend its Certificate of Incorporation or Bylaws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, convertible securities, subscriptions, calls, rights, phantom stock,
stock appreciation rights and any other similar rights or other agreements or
commitments) any capital stock of any class or any other securities, except for
(i) the grant after the date hereof of Company Stock Options to purchase up to
1,000 Class A Shares at an exercise price of 100% of the Fair Market Value (as
defined in the Stock Plan) of the Class A Shares on the date of issuance of such
Company Stock Options pursuant to Section 4 of the Stock Plan, (ii) the grant
after the date hereof of Company Stock Options to purchase up to 20,000 Class A
Shares at an exercise price of not less than 110% of the Fair Market Value (as
defined in the Stock Plan) of the Class A Shares on the date of issuance of such
Company Stock Options and (iii) the issuance of Shares pursuant to the exercise
of Company Stock Options outstanding on the date hereof or issued pursuant to
clause (i) or (ii) of this Section 5.01(b) in accordance with the terms of such
Company Stock Options, or amend any of the terms of any such rights or
securities outstanding, or agreements in effect, on the date hereof (including
any amendment or repricing of any Company Stock Options), other than as
contemplated by Section 2.06 or Section 6.03(m);
(c) other than the cancellation of treasury shares, split, combine or
reclassify any shares of its capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase or
otherwise acquire any of its securities or any securities of its subsidiaries;
(d)(i) other than under the Company Credit Facility, incur or assume any
indebtedness for borrowed money or issue any debt securities or warrants or
rights to acquire debt securities of the Company or any of its subsidiaries,
(ii) assume, guarantee, endorse or otherwise become liable (whether directly,
contingently or otherwise) for the obligations of any other person (other than
any subsidiary of the Company), (iii) make any loans, advances or capital
contributions to, or investments in, any other person (other than any subsidiary
of the Company) or (iv) mortgage, pledge or otherwise encumber any material
assets or otherwise create or suffer a Lien thereon;
(e) enter into, adopt, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee welfare or pension benefit agreements,
trusts, plans, funds or other arrangements for the benefit or welfare of any
director, officer or employee, other than in connection with the hiring and
termination of non-officer employees in the ordinary course of business
consistent with past practices, or increase in any manner the compensation or
fringe benefits of any director, officer or employee (other than any increase in
the compensation or fringe benefits of any non-officer employee in the ordinary
course of business consistent with past practices) or pay any benefit not
required by any
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existing plan and arrangement (including the granting of stock options, stock
appreciation rights, shares of restricted stock or performance units) or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing;
(f) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of liabilities or obligations in the
ordinary course of business consistent with past practice and in accordance with
their terms;
(g) authorize or make any capital expenditures, except in accordance with
the Company Capital Expenditure Plan, and, except for the acquisition and sale
of inventory and the leasing, closing and renovation of retail stores, in each
case in the ordinary course of business consistent with past practice, acquire,
sell, lease, encumber, transfer or dispose of any material assets;
(h) make any tax elections or settle or compromise any income tax
liability;
(i) change any accounting policies, procedures or practices, other than as
set forth in the Company SEC Documents;
(j)(i) enter into, amend or terminate any Company Contract, except for any
such contract that (A) does not involve an amount greater than $200,000, in the
case of purchase orders, and $50,000, in the case of other Company Contracts,
and (B) is entered into, amended or terminated in the ordinary course of
business consistent with past practice, or (ii) take any action or fail to take
any action that, with or without notice or lapse of time, would constitute a
default under any Material Company Contract; or
(k) take, or agree in writing or otherwise to take, any of the foregoing
actions.
SECTION 5.02 CONDUCT OF BUSINESS OF PFC. The Company acknowledges that upon
the execution of this Agreement, customers, suppliers, dealers, employees and
others having a relationship with PFC will become aware of the fact that PFC is
a party to this Agreement and that some disruptions in the business of PFC and
in these relationships is inevitable as part of this process. However, except as
provided in this Agreement, during the period from the date of this Agreement to
the Effective Time, PFC shall conduct its operations according to its ordinary
and usual course of business, consistent with past practice, and use its best
efforts, consistent with prudent business judgment, to preserve intact its
business organization, to keep available the services of its officers and
employees and to maintain satisfactory relationships with licensors, licensees,
suppliers, contractors, distributors, customers and others having business
relationships with it. Without limiting the generality of the foregoing, and
except as otherwise provided in this Agreement, PFC shall not, without the prior
written consent of the Company:
(a) amend its Certificate of Incorporation or Bylaws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, convertible securities, subscriptions, calls, rights, or other
agreements or commitments) any capital stock of any class or any other
securities;
(c) other than the cancellation of treasury shares, split, combine or
reclassify any shares of its capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase or
otherwise acquire any of its securities or any securities of its subsidiaries;
(d)(i) incur or assume any indebtedness for borrowed money or issue any
debt securities or warrants or rights to acquire debt securities of the Company
or any of its subsidiaries, except for the issuance of a promissory note in a
principal amount not to exceed $15 million, (ii) assume, guarantee, endorse or
otherwise become liable (whether directly, contingently or otherwise) for the
obligations of any other person, except to the extent required under Parent's
credit facilities in effect from time to time, (iii) make any loans, advances or
capital contributions to, or investments in, any other person or (iv) mortgage,
pledge or otherwise encumber any material assets or otherwise create or suffer a
lien thereon, except to the extent required under Parent's credit facilities in
effect from time to time;
(e) enter into, adopt, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreements, trusts, plans, funds
or other arrangements for the benefit or welfare of any director, officer or
employee, other than in connection with the hiring and termination of
non-officer employees in the ordinary course of business consistent with past
practices, or increase in any manner the compensation or fringe benefits of any
director, officer or employee (other than any increase in the compensation or
fringe benefits of any non-officer employee in the ordinary course of business
consistent with past practices) or pay any benefit not required by any existing
plan and
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arrangement (including the granting of stock options, stock appreciation rights,
shares of restricted stock or performance units) or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing;
(f) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of liabilities or obligations in the
ordinary course of business consistent with past practice and in accordance with
their terms;
(g) authorize or make any capital expenditures, except in accordance with
the PFC Capital Expenditure Plan, and except for the acquisition and sale of
inventory and the leasing, closing and renovation of retail stores, in each case
in the ordinary course of business consistent with past practice, acquire, sell,
lease, encumber, transfer or dispose of any material assets;
(h) make any tax elections or settle or compromise any income tax
liability;
(i) change any accounting policies, procedures or practices other than
those set forth in the PFC Financial Statements;
(j)(i) enter into, amend or terminate any PFC Contract, except for any such
contract that (A) does not involve an amount greater than $200,000, in the case
of purchase orders, and $50,000 in the case of other PFC Contracts, and (B) is
entered into, amended or terminated in the ordinary course of business
consistent with past practice, or (ii) take any action or fail to take any
action that, with or without notice or lapse of time, would constitute a default
under any Material PFC Contract; or
(k) take, or agree in writing or otherwise to take, any of the foregoing
actions.
SECTION 5.03 PREPARATION OF FORM S-4 AND PROXY STATEMENT; STOCKHOLDER
MEETING.
(a) Promptly following the date of this Agreement, the Company shall
prepare and file with the SEC, and Parent and PFC shall reasonably cooperate
with the Company in preparing and filing with the SEC, (i) a proxy statement
with respect to the Company's annual meeting of stockholders, the Merger and the
transactions contemplated hereby (the "Proxy Statement") and (ii) a Registration
Statement on Form S-4 (the "Form S-4"), in which the Proxy Statement will be
included. The Company shall use its best efforts to have the Form S-4 and any
Registration Statement on Form S-8, or any amendment thereto, contemplated by
Sections 2.06 and 5.11 declared effective under the Securities Act as promptly
as practicable after such filing. The Company shall cause the Proxy Statement to
be mailed to the Company's stockholders as promptly as practicable after the
Form S-4 is declared effective under the Securities Act. The Company shall also
take any action required to be taken under any applicable state securities laws
in connection with the registration and qualification in connection with Merger
of Common Stock of the Company following the Merger. The Company and Parent each
agree to correct any information provided by it for use in the Form S-4 and any
Registration Statement on Form S-8, or any amendment thereto, contemplated by
Sections 2.06 and 5.11 which shall have become false or misleading.
(b) The Company shall promptly notify Parent of (i) the effectiveness of
the Form S-4 and any Registration Statement on Form S-8, or any amendment
thereto, contemplated by Sections 2.06 and 5.11 or (ii) any request by the SEC
for any amendment to the Form S-4 and any Registration Statement on Form S-8, or
any amendment thereto, contemplated by Sections 2.06 and 5.11 or for additional
information. All filings with the SEC, including the Form S-4 and any amendment
thereto and any Registration Statement on Form S-8, or any amendment thereto,
contemplated by Sections 2.06 and 5.11, and all mailings to the Company'
stockholders in connection with the Merger, including the Proxy Statement, shall
be subject to the prior review and comment of Parent, and no such filing or
mailing shall be made without the prior consent of Parent, which shall not
unreasonably be withheld, unless the Company reasonably concludes, upon the
advice of counsel, that such filing or mailing is required by applicable law.
(c) The Company shall, as promptly as practicable following the
effectiveness of the Form S-4 and any Registration Statement on Form S-8, or any
amendment thereto, contemplated by Sections 2.06 and 5.11, and in consultation
with Parent, duly call, give notice of, convene and hold a meeting of its
stockholders (the "Stockholders Meeting") for the purpose of approving this
Agreement and the transactions contemplated by this Agreement to the extent
required by Delaware law. Subject to the provisions of Section 5.04, (i) the
Company shall, through its Board of Directors, recommend to its stockholders
approval of the foregoing matters, as set forth in Section 3.27; (ii) such
recommendation, together with a copy of the opinion referred to in Section
6.01(e), shall be included in the Proxy Statement; and (iii) the Company shall
use its best efforts to hold such meeting as soon as practicable after the date
hereof.
(d) The Company shall cause its transfer agent to make stock transfer
records relating to the Company available to the extent reasonably necessary to
effectuate the intent of this Agreement.
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(e) The Company shall use its best efforts to cause the New Shares to be
listed, at the Effective Time, on the Nasdaq National Market.
(f) The Company shall use its best efforts to obtain the opinion referred
to in Section 6.01(e).
SECTION 5.04 NO SOLICITATION.
(a) Neither the Company nor any of its subsidiaries shall, and the Company
shall ensure that none of its affiliates, officers, directors, employees,
representatives or agents shall, after the date hereof, directly or indirectly,
solicit or engage in negotiations with, or provide any information to, or
otherwise cooperate with, any person or entity that seeks to acquire or
expresses an interest in acquiring all or any substantial part of any class of
the securities, business or assets of the Company or any subsidiary thereof, or
for the purpose of otherwise effecting any transaction or business combination
inconsistent with the Merger, and neither the Company nor any of its
subsidiaries shall, and the Company shall ensure that none of its affiliates,
officers, directors, employees, representatives or agents shall, enter into any
agreement with or grant any proxy, option or other similar right to any third
person or entity in connection with any transaction or business combination
inconsistent with the Merger; PROVIDED, HOWEVER, that (i) the filing of reports
and other information with the SEC and the distribution of reports and other
information to stockholders shall be deemed not to violate this Section 5.04(a)
and (ii) nothing contained in this Section 5.04(a) or elsewhere herein shall
prohibit the Board of Directors of the Company from furnishing information to,
or entering into discussions or negotiations with, any person or entity that
makes an unsolicited bona fide proposal in writing to acquire the Company,
whether by merger, consolidation, or stock acquisition, or acquisition of
substantially all of the assets of the Company, on terms which, in the exercise
of their fiduciary duty after the consideration of advice from the Company's
legal and financial advisors, a majority of the Company's directors determines
is likely to be more beneficial to each of the holders of the Shares than the
Merger, and PROVIDED, FURTHER, that the Company's legal and financial advisors
may engage in discussions regarding such written offer to clarify the terms of
such offer for the purpose of rendering the advice referred to above to the
Board of Directors of the Company, in each case, provided that, the Company and
its advisors, prior to furnishing such information to, or entering into
discussions or negotiations with, such a person or entity, shall provide written
notice to Parent to the effect that the Company is furnishing information to, or
entering into discussions with, such a person or entity, and shall keep Parent
informed of the status (including the identity of such person or entity and the
terms of any proposal) of such discussions or negotiations. Nothing in this
Section 5.04(a) shall (A) permit the Company to terminate this Agreement, (B)
permit the Company to enter into any agreement with respect to a Cosmetic Center
Alternate Transaction (as defined in Section 8.02(b)) prior to the termination
of this Agreement in accordance with its terms or (C) affect any other
obligation of any party under the Agreement.
(b) Neither Parent nor PFC shall, and Parent shall ensure that none of its
affiliates, officers, directors, employees, representatives or agents shall,
after the date hereof, directly or indirectly, solicit or engage in negotiations
with, or provide any information to, or otherwise cooperate with, any person or
entity that seeks to acquire or expresses an interest in acquiring all or any
substantial part of any class of the securities, business or assets of PFC, or
for the purpose of otherwise effecting any transaction or business combination
inconsistent with the Merger, and neither Parent nor PFC shall, and Parent shall
ensure that none of its affiliates, officers, directors, employees,
representatives or agents shall, enter into any agreement with or grant any
proxy, option or other similar right to any third person or entity in connection
with any transaction or business combination inconsistent with the Merger.
SECTION 5.05 ACCESS TO INFORMATION.
(a) Between the date of this Agreement and the Effective Time, the Company,
during normal business hours and upon reasonable notice, (i) shall give Parent
and its representatives full and complete access to all retail stores, offices,
warehouses and other facilities, to all books and records and to all employees
and representatives (including accountants and legal counsel) of the Company and
its subsidiaries, (ii) shall permit Parent and its representatives to make such
inspections and to conduct such interviews and inquiries as Parent or its
representatives may reasonably require and (iii) shall cause its officers and
those of its subsidiaries and representatives to furnish Parent and its
representatives with such financial and operating data and other information
with respect to the business and properties of the Company and its subsidiaries
as Parent may reasonably request from time to time.
(b) Between the date of this Agreement and the Effective Time, PFC, during
normal business hours and upon reasonable notice, (i) shall give the Company and
its representatives full and complete access to all retail stores, offices,
warehouses and other facilities, to all books and records and to all employees
and representatives of PFC, (ii) shall permit the Company and
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its representatives to make such inspections and to conduct such interviews and
inquiries as the Company or its representatives may reasonably require and (iii)
shall cause its officers to furnish the Company and its representatives with
such financial and operating data and other information with respect to the
business and properties of PFC as the Company may reasonably request from time
to time; PROVIDED, HOWEVER, that access to any federal and consolidated and
combined state tax records shall be limited to the PFC pro forma sections of
such records.
(c) Subject to Section 5.08 hereof, all information provided pursuant to
Sections 5.05(a) and (b) shall be kept confidential in accordance with the
Confidentiality Agreement, dated May 13, 1996 (the "Confidentiality Agreement"),
between the Company and Parent.
SECTION 5.06 SATISFACTION OF CLOSING CONDITIONS.
(a) Subject to the terms and conditions hereof, each of the parties hereto
agrees to use commercially reasonable efforts to take, or cause to be taken, all
other action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations or otherwise to consummate and
effect the transactions contemplated by this Agreement as promptly as
practicable, including obtaining all required consents and approvals, making all
required filings and applications and complying with or responding to any
requests by governmental agencies. In addition, no party hereto shall knowingly
take any action or fail to take any action which is reasonably likely to make
any representation or warranty of such party contained in this Agreement untrue
or incorrect as of the date when made or as of any future date or which could
prevent the satisfaction of any condition to closing set forth herein.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall take all such
necessary or desirable action. Each of the parties hereto will execute any
additional instruments necessary to consummate the transactions contemplated
hereby.
SECTION 5.07 FINANCINGS.
(a) The Company agrees to provide, and shall cause its subsidiaries and its
and their respective officers and employees to provide, all necessary
cooperation in connection with the arrangement of any commercially reasonable
financing to be consummated contemporaneous with or at or after the Closing in
respect of the transactions contemplated by this Agreement and the refinancing
of the indebtedness of the Surviving Corporation, including the execution and
delivery of any commercially reasonable commitment and fee letters, term sheets,
underwriting or placement agreements, pledge and security documents, other
commercially reasonable definitive financing documents, or other reasonably
requested certificates or documents, including a certificate of the chief
financial officer of the Company with respect to solvency matters, as may be
reasonably requested by Parent, subject in each case to customary conditions. In
addition, in conjunction with the obtaining of any such financing, the Company
agrees, at the request of Parent, to call for prepayment or redemption, or to
prepay, redeem and/or renegotiate, as the case may be, any then existing
indebtedness of the Company; provided that no such prepayment or redemption
shall themselves actually be made until contemporaneously with or after the
Effective Time.
(b)(i) Parent hereby agrees to use commercially reasonable efforts, subject
to normal conditions, to arrange the financing in respect of the transactions
contemplated by this Agreement described in Section 6.03(d), including, subject
to customary conditions, using commercially reasonable efforts to assist the
Company in the negotiation of definitive agreements with respect thereto,
including the execution and delivery of any reasonably requested certificates or
documents. Parent will keep the Company informed of the status of its efforts to
arrange such financing, including making reports with respect to significant
developments.
SECTION 5.08 PUBLIC ANNOUNCEMENTS. Parent and the Company will consult with
each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Merger or the other
transactions contemplated by this Agreement, and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or by obligations pursuant to any listing agreement with
any national securities exchange or The National Association of Securities
Dealers, Inc.
SECTION 5.09 OBLIGATION TO INFORM.
(a) The Company shall promptly inform Parent of any material change in the
business operations, financial or other condition or prospects of the Company
occurring subsequent to the date hereof and of the happening of any event that
would cause any representation or warranty of the Company set forth herein to be
untrue; PROVIDED, HOWEVER, that such disclosure shall not relieve the Company of
any liability with respect to the breach of such representation or warranty.
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(b) Parent shall promptly inform the Company of any material change in the
business operations, financial or other condition or prospects of PFC occurring
subsequent to the date hereof and of the happening of any event that would cause
any representation or warranty of PFC or Parent set forth herein to be untrue;
PROVIDED, HOWEVER, that such disclosure shall not relieve PFC or Parent of any
liability with respect to the breach of such representation or warranty.
SECTION 5.10 INSURANCE POLICIES.
(a) If any third party claim against the Company or any of its subsidiaries
is covered by self-insurance, deductibles or self-insured retentions of the
Company or any of its subsidiaries, or the Company or any of its subsidiaries is
uninsured for any such claim, the Company shall promptly notify Parent of any
such third party claim prior to making any determination to settle or not to
settle any such third party claim, and the Company shall afford Parent the
opportunity to review, comment and consent upon any such determination, such
consent not to be unreasonably withheld. The Company shall maintain in effect
and/or renew (as applicable) all present insurance policies and shall take all
necessary action to protect all past, present and future insurance policies of
the Company; PROVIDED, HOWEVER, that neither the Company nor any of its
subsidiaries shall take any such action that will materially increase the cost
of any insurance policy and shall not renew, replace or amend any such policies
without prior written notice to Parent. The Company shall not act or fail to act
in any manner that could give rise to an event of default thereunder.
(b) If any third party claim against PFC is covered by self-insurance,
deductibles or self-insured retentions of PFC, or PFC is uninsured for any such
claim, Parent shall promptly notify the Company of any such third party claim
prior to making any determination to settle or not to settle any such third
party claim, Parent shall afford the Company the opportunity to review, comment
and consent upon any such determination, such consent not to be unreasonably
withheld. PFC shall maintain in effect and/or renew (as applicable) all present
insurance policies and shall take all necessary action to protect all past,
present and future insurance policies of PFC; provided, however, that PFC shall
not take any such action that will materially increase the cost of any insurance
policy and shall not renew, replace or amend any such policies without prior
written notice to the Company. PFC shall not act or fail to act in any manner
that could give rise to an event of default thereunder.
SECTION 5.11 NEW STOCK OPTION PLAN. The Company shall take all action
necessary to adopt a new stock option plan (including the preparation and filing
of a Registration Statement on Form S-8), in form and substance reasonably
satisfactory to Parent and PFC (the "New Stock Plan").
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.01 CONDITIONS TO EACH PARTIES OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) This Agreement shall have been adopted by the affirmative vote of the
holders of a majority of the outstanding Class B Shares at a meeting duly called
and held for such purpose in accordance with applicable law (or by consents duly
executed in lieu thereof).
(b) No statute, rule, regulation, order, decree or injunction shall have
been enacted, entered, promulgated or enforced by any federal, state or foreign
court or Government Entity of competent jurisdiction which restrains, enjoins or
otherwise prohibits the consummation of the Merger.
(c) The applicable waiting period under the HSR Act shall have terminated
or expired.
(d) The Form S-4 and any Registration Statement on Form S-8, or any
amendment thereto, contemplated by Sections 2.06 and 5.11, shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order, and any material "blue sky" and other
state securities laws applicable to the registration and qualification of the
Common Stock of the Company following the Merger shall have been complied with.
(e) The Company shall have received an opinion from Legg Mason to the
effect that, as of the date of such opinion, the transactions contemplated
hereby are fair to the stockholders of the Company from a financial point of
view, and Legg Mason shall not have withdrawn or, in a manner not favorable to
the adoption of this Agreement or the consummation of the Merger, modified such
opinion.
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(f) The Company shall have financing availability, on terms satisfactory to
the Company and Parent, in an amount not less than $50 million to fund the
payment of the Cash Election, refinancing of existing indebtedness and the
working capital needs of the Surviving Corporation.
SECTION 6.02 CONDITIONS OF OBLIGATIONS OF THE COMPANY. The obligation of
the Company to effect the Merger are further subject to the satisfaction at or
prior to the Effective Time of the following conditions, unless waived by the
Company:
(a) The representations and warranties of Parent and PFC set forth in this
Agreement shall be true and correct as of the date of this Agreement and as of
the Effective Time, as if made as of such time, except where the untruth or
incorrectness of such representations and warranties (i) resulted solely from
actions specifically permitted pursuant to Section 5.02 or (ii) would not,
individually or in the aggregate, have a Material Adverse Effect on PFC. For
purposes of this Section 6.02(a), the representations and warranties of Parent
and PFC shall be deemed to have been made without any qualification as to
knowledge or materiality and, accordingly, all references in such
representations and warranties to "material," "Material Adverse Effect," "in all
material respects," "knowledge," "best knowledge" and similar terms and phrases,
and to specific dollar thresholds, shall be deemed to be deleted therefrom.
(b) Each of Parent and PFC shall have performed and complied, in all
material respects, with all obligations and covenants required to be performed
or complied with by it under this Agreement at or prior to the Effective Time.
(c) From the date of this Agreement through the Effective Time, PFC shall
not have suffered a Material Adverse Effect.
(d) The Company shall have received a certificate from the Chief Executive
Officer and the Chief Financial Officer of Parent, dated the date of the
Closing, to the effect that the conditions to closing set forth in Sections
6.02(a)-(c) have been satisfied.
(e) All permits, authorizations, consents or approvals of, or declarations
or filings with, or expirations or terminations of waiting periods imposed by,
any Government Entity, and all third party permits, authorizations, consents or
approvals (collectively, the "Authorizations"), required to be obtained, filed
or made by Parent or PFC in order to consummate the transactions contemplated
hereby shall have been obtained, filed or made, and all Authorizations required
to be filed or obtained by Parent or PFC, the failure to obtain which would have
a Material Adverse Effect on PFC or the Surviving Corporation, shall have been
filed or obtained.
(f) Parent shall have executed lease agreements substantially in the form
of Exhibit F with respect to the lease by the Company of PFC's employee stores
located at certain of Parent's facilities.
(g) Parent shall have executed supply and services agreements substantially
in the forms of Exhibits G and H.
(h) Wade H. Nichols, III, General Counsel of Parent, shall have delivered
an opinion in substantially the form attached hereto as Exhibit I.
SECTION 6.03 CONDITIONS OF OBLIGATIONS OF PARENT AND PFC. The obligation of
Parent and PFC to effect the Merger are further subject to the satisfaction at
or prior to the Effective Time of the following conditions, unless waived by
Parent or PFC:
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct as of the date of this Agreement and as of
the Effective Time, as if made as of such time, except where the untruth or
incorrectness of such representations and warranties (i) resulted solely from
actions specifically permitted pursuant to Section 5.01 or (ii) would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
For purposes of this Section 6.03(a), the representations and warranties of the
Company shall be deemed to have been made without any qualification as to
knowledge or materiality and, accordingly, all references in such
representations and warranties to "material," "Material Adverse Effect," "in all
material respects," "knowledge," "best knowledge" and similar terms and phrases,
and to specific dollar thresholds, shall be deemed to be deleted therefrom.
(b) The Company shall have performed and complied, in all material
respects, with all obligations and covenants required to be performed or
complied with by it under this Agreement at or prior to the Effective Time.
(c) From the date of this Agreement through the Effective Time, the Company
shall not have suffered a Material Adverse Effect.
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(d) Parent shall have received a certificate from the Chief Executive
Officer, the President and the Chief Financial Officer of the Company, dated the
date of the Closing, to the effect that the conditions to closing set forth in
Sections 6.01(a) and 6.03(a)-(d) have been satisfied.
(e) All Authorizations required to be obtained, filed or made by the
Company in order to consummate the transactions contemplated hereby shall have
been obtained, filed or made, and all Authorizations required to be filed or
obtained by the Company, the failure to obtain which would have a Material
Adverse Effect on the Company or the Surviving Corporation, shall have been
filed or obtained.
(f) The Company shall have executed the Parent Registration Rights
Agreement.
(g) The Company shall have executed lease agreements substantially in the
form of Exhibit F with respect to the lease by the Company of PFC's employee
stores located at certain of Parent's facilities.
(h) The Company shall have executed supply and services agreements
substantially in the forms of Exhibits G and H.
(i) The Company shall have executed the Employment Agreements and the
Consulting Agreement.
(j) Arent Fox Kintner Plotkin & Kahn, counsel to the Company, shall have
delivered an opinion in substantially the form attached hereto as Exhibit J.
(k) No Principal Stockholder shall have defaulted in the performance of any
of its material obligations under the Stockholders Agreement.
(l) Each individual who is a director of the Company, other than the
individuals listed on Annex A, shall have tendered his or her resignation,
effective no later than the Effective Time.
(m) The Company shall have amended the terms of the Stock Plan and each
Company Stock Option to be consistent with Section 2.06 and obtained the consent
of each holder of Company Stock Options to such amendment.
(n) The New Stock Plan shall have been adopted by the Company and approved
by the requisite vote of the stockholders of the Company.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
SECTION 7.01 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the stockholders of the Company, but prior to the Effective Time:
(a) By mutual written consent of Parent and the Company.
(b) By Parent or the Company if the Merger shall not have been consummated
before March 17, 1997 (the "Drop Dead Date"), unless the failure to consummate
the Merger by such date is due to the action or failure to act of the party
seeking to terminate in breach of its obligations under this Agreement.
(c) By Parent or the Company if any federal, state or foreign court or
Government Entity of competent jurisdiction shall have enacted, entered,
promulgated or enforced a statute, rule, regulation, order, decree or injunction
which restrains, enjoins or otherwise prohibits the consummation of the Merger.
(d) By Parent if the Board of Directors of the Company does not recommend
in the Proxy Statement or any amendments or supplements thereto that the
stockholders of the Company adopt this Agreement, or withdraws or, in a manner
not favorable to the adoption of this Agreement or the consummation of the
Merger, modifies such recommendation.
(e) By Parent or the Company if the holders of a majority of the
outstanding Class B Shares shall fail to adopt this Agreement at a meeting duly
called and held for such purpose in accordance with applicable law (or by
consents duly executed in lieu thereof).
SECTION 7.02 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.01 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers, agents or stockholders, other than
the provisions of this Section 7.02 and of Sections 5.05(c), 8.02 and 8.03,
which provisions shall survive any such termination. Nothing contained in this
Section 7.02 shall relieve any party from liability for any willful breach of
this Agreement.
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SECTION 7.03 AMENDMENT. This Agreement may be amended by action taken by
the Company, Parent and PFC at any time before or after approval of the Merger
by the stockholders of the Company but, after any such approval, no amendment
shall be made which alters or changes the form or decreases the amount of the
consideration per Share to be paid in the Merger or which alters or changes any
of the terms or conditions of this Agreement if such alteration or change would
adversely affect the rights of the Company's stockholders hereunder, without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of the parties.
SECTION 7.04 EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by or on behalf of
such party.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES. The
representations and warranties made herein shall not survive beyond the
Effective Time.
SECTION 8.02 EXPENSES.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses except as expressly
provided herein and except that the filing fee in connection with the filing in
accordance with the HSR Act shall be paid 20% by the Company and 80% by Parent.
(b) Notwithstanding Section 8.02(a), if (i) any of the events set forth in
clauses (1), (2) or (3) below (each of clauses (1), (2) and (3) being
hereinafter referred to as a "Cosmetic Center Triggering Event") occurs prior to
the termination of this Agreement in accordance with its terms or (ii) any
Cosmetic Center Alternate Transaction (as such term is defined in this Section
8.02(b)) is consummated during the 90-day period immediately following the later
of (A) the Drop Dead Date and (B) the termination of this Agreement in
accordance with its terms, unless this Agreement is terminated by Parent (other
than due to a material breach by the Company of its obligations hereunder or due
to a material breach by the Principal Stockholders of their obligations under
the Stockholders Agreement) or as a result of the failure of a condition to
either party's obligation to close under this Agreement (other than due to a
material breach by the Company of its obligations hereunder or due to a material
breach by the Principal Stockholders of their obligations under the Stockholders
Agreement) (the later of (A) and (B) being the "Cosmetic Center Termination Date
"), the Company shall pay to Parent within two business days after such event,
an amount in immediately available funds equal to the documented fees and
expenses (up to a maximum of $1,000,000) incurred since June 1, 1996 (including
after the date hereof) by Parent, PFC and their respective representatives and
agents in connection with the due diligence, preparation and negotiation of
legal documents, and preparation of financial statements of PFC related to the
Merger (including legal, tax and accounting fees (other than accounting fees to
the extent attributable to the audit of PFC's financial statements) and
disbursements). The Cosmetic Center Triggering Events are as follows:
(1) the Company shall have entered into, or shall have publicly
announced its intention to enter into, an agreement in principle, letter of
intent, definitive agreement or other similar arrangement, whether binding
or non-binding, with any person other than Parent and its affiliates with
respect to any sale, merger, consolidation or other similar transaction
involving the Company, any class of its equity securities or securities
convertible into equity securities or all or substantially all of its
assets;
(2) the Board of Directors of the Company shall (A) recommend or have
recommended that stockholders of the Company sell shares of any class of
equity securities or securities convertible into equity securities of the
Company to another person or group or recommend or approve any sale of all
or substantially all of the Company's assets to another person or group,
(B) recommend or have recommended to stockholders of the Company any
Cosmetic Center Alternate Transaction involving such person or group or (C)
in the absence of the Company learning of circumstances regarding PFC which
could reasonably be expected to have a Material Adverse Effect on PFC,
shall withdraw or have withdrawn or modify or have modified in a manner
adverse to Parent or PFC (including by no longer taking any position with
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respect to the Merger), its support for the Merger (the events described in
subparagraphs (b)(1), (b)(2)(A) and (b)(2)(B) being referred to herein as
"Cosmetic Center Alternate Transactions"); or
(3) the Company shall breach in any material respect any of its
obligations under this Agreement.
The Company shall advise Parent of the receipt of any proposal for a
Cosmetic Center Alternate Transaction and the details thereof within 48 hours of
the receipt thereof, and the Board of Directors of the Company shall not act
with respect to any such proposal for three business days after the delivery of
such notice to Parent. Nothing in Sections 8.02(b) or 8.03(a) shall be deemed to
limit in any way any claims Parent may have at law or equity with respect to any
breach by the Company of any of its obligations under this Agreement.
(c) Notwithstanding Section 8.02(a), if (i) any of the events set forth in
clauses (1), (2), (3) or (4) below (each of clauses (1), (2), (3) and (4) being
hereinafter referred to as a "Revlon Triggering Event") occurs prior to the
termination of this Agreement in accordance with its terms or (ii) any PFC
Alternate Transaction (as defined below) is consummated during the 90-day period
immediately following the later of (A) the Drop Dead Date and (B) the
termination of this Agreement in accordance with its terms, unless this
Agreement is terminated by the Company (other than due to a material breach by
Parent or PFC) or as a result of the failure of a condition to either party's
obligation to close under this Agreement (other than due to a material breach by
Parent or PFC) (the later of (A) and (B) being the "Revlon Termination Date"),
Parent shall pay to the Company within two business days after such event an
amount in immediately available funds equal to the documented fees and expenses
(up to a maximum of $1,000,000) incurred since June 1, 1996 (including after the
date hereof) by the Company and its representatives and agents in connection
with the due diligence, preparation and negotiation of legal documents, and
preparation of financial statements of the Company related to the Merger
(including legal, tax and accounting fees (other than accounting fees to the
extent attributable to the audit of the Company's financial statements) and
disbursements). The Revlon Triggering Events are as follows:
(1) Revlon or PFC shall have entered into, or shall have publicly
announced its intention to enter into, an agreement in principle, letter of
intent, definitive agreement or other similar arrangement, whether binding
or non-binding, with any person other than the Company and its affiliates
with respect to any sale, merger, consolidation or other similar
transaction involving PFC, any class of its equity securities or securities
convertible into equity securities or all or substantially all of its
assets (including a public offering of the equity securities of PFC);
(2) the Board of Directors of Parent or PFC shall (A) recommend or
have recommended that stockholders of PFC sell shares of any class of
equity securities or securities convertible into equity securities of PFC
to another person or group or recommend or approve any sale of all or
substantially all of PFC's assets to another person or group; (B) recommend
or have recommended to stockholders of Parent or PFC any PFC Alternate
Transaction involving such person or group; or (C) in the absence of PFC
learning of circumstances regarding the Company which could reasonably be
expected to have a Material Adverse Effect on the Company, shall withdraw
or have withdrawn or modify or have modified in a manner adverse to the
Company;
(3) Parent or PFC sells or agrees to sell any shares of the equity
securities or securities convertible into equity securities of PFC (other
than sales or transfers to any subsidiary or affiliate of Parent) to any
person or group other than the Company (the events described in
subparagraphs (c)(1), (c)(2)(A), (c)(2)(B) and (c)(3) being referred to
herein as "PFC Alternate Transactions"); or
(4) Revlon or PFC shall breach in any material respect any of their
respective obligations under this Agreement.
Parent shall advise the Company of the receipt of any proposal for a PFC
Alternate Transaction and the details thereof within 48 hours of the receipt
thereof, and neither Parent nor the Board of Directors of PFC shall not act with
respect to any such proposal for three business days after the delivery of such
notice to the Company. Nothing in Sections 8.02(c) or 8.03(b) shall be deemed to
limit in any way any claims the Company may have at law or equity with respect
to any breach by Parent or PFC of any of their obligations under this Agreement.
SECTION 8.03 BREAK-UP FEE.
(a) In addition to any amounts payable pursuant to SeCTION 8.02(B), if
Cosmetic Center shall consummate any Cosmetic Center Alternate Transaction at
any time prior to the Cosmetic Center Termination Date or during the 90-day
period immediately following the Cosmetic Center Termination Date, Cosmetic
Center shall pay to Revlon upon the date of consummation of such Cosmetic Center
Alternate Transaction a break-up fee equal to $1 million.
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(b) In addition to any amounts payable pursuant to Section 8.02(c), if
Parent or PFC shall consummate any PFC Alternate Transaction at any time prior
to the Revlon Termination Date or during the 90-day period immediately following
the Revlon Termination Date, Parent shall pay to the Company upon the date of
consummation of such PFC Alternate Transaction a break-up fee equal to $1.25
million.
SECTION 8.04 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) constitutes
the entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
between the parties or any of them with respect to the subject matter hereof,
other than the Confidentiality Agreement and the Stockholders Agreement, and (b)
shall not be assigned by operation of law or otherwise, provided that Parent may
cause PFC to assign its rights and obligations to Parent or any other wholly
owned subsidiary of Parent, PROVIDED, that no such assignment by PFC shall
relieve PFC of its obligations hereunder if such assignee does not perform such
obligations.
SECTION 8.05 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 8.06 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given upon receipt by the respective parties at the following addresses (or
such other address for a party as shall be specified by like notice):
if to Parent or PFC:
Revlon Consumer Products Corporation
625 Madison Avenue
New York, New York 10022
Attention: Vice President and Secretary
with a copy to:
Latham & Watkins
885 Third Avenue
New York, New York 10022
Attention: Steven Della Rocca
if to the Company:
The Cosmetic Center, Inc.
8839 Greenwood Place
Savage, Maryland 20763
Attention: Mark S. Weinstein
Chairman of the Board
with a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Carter Strong
SECTION 8.07 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.08 DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 8.09 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person or
persons any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 8.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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SECTION 8.11 INTERPRETATION.
(a) When used in this Agreement, the words "hereof," "herein" and
"hereunder" and words of similar import, unless otherwise specifically provided,
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement.
(b) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
(c) References to "Sections," "Exhibits" and "Schedules" are to Sections,
Exhibits and Schedules, respectively, of this Agreement unless otherwise
specifically provided.
(d) Unless the context clearly requires otherwise, the term "including" is
not limiting.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed as of the day and year first above written.
THE COSMETIC CENTER, INC.
By: /s/_MARK S. WEINSTEIN
Name: Mark S. Weinstein
Title:
REVLON CONSUMER PRODUCTS CORPORATION
By: /s/_JERRY W. LEVIN
Name: Jerry W. Levin
Title: Chief Executive Officer
PRESTIGE FRAGRANCE & COSMETICS, INC.
By: /s/_WADE H. NICHOLS
Name: Wade H. Nichols
Title: Vice President
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ANNEX II
FORM OF AMENDMENTS TO COSMETIC'S CERTIFICATE OF INCORPORATION
1. THE CLASS C AMENDMENT. Article Fourth of the Restated Certificate of
Incorporation of The Cosmetic Center, Inc., filed with the Delaware Secretary of
State on June 1, 1992 (the "Restated Certificate"), as part of the Merger is
proposed to be amended by deleting the present paragraph (a) in its entirety and
adding new paragraphs (a) and (g) to read as follows:
(a) The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is fifty million (50,000,000)
shares of common stock which shall be divided into classes, of which five
million (5,000,000) shares with a par value of one cent ($.01) per share
shall be Class A Common Stock ("Class A Common Shares"), five million
(5,000,000) shares with a par value of one cent ($.01) per share shall be
Class B Common Stock ("Class B Common Shares") and forty million
(40,000,000) shares with a par value of one cent ($.01) per share shall be
Class C Common Stock ("Class C Common Shares").
* * *
(g) Upon the exchange of the outstanding Class A Common Shares and
Class B Common Shares for Class C Common Shares pursuant to the terms of
the merger between the Corporation and Prestige Fragrance & Cosmetics,
Inc., the Class C Common Shares shall have all the rights of common stock
as provided in the Delaware General Corporation Law, including the right to
vote on the election of directors and all other matters submitted to a vote
of the holders of the Corporation's common stock. Each Class C Common Share
shall have one vote per share.
2. THE BOARD AMENDMENT. In addition, provided that the holders of at least
80 percent of the outstanding Cosmetic Class B common stock vote in favor of the
Board Amendment, Article Fifth of the Restated Certificate is proposed to be
amended by deleting the present Article Fifth in its entirety and substituting
therefor a new Article Fifth to read as follows:
Fifth: The number of directors of the Corporation shall be fixed from
time to time in the manner specified in the by-laws of the Corporation. The
previous classification of the Corporation's directors is hereby repealed.
To the extent permitted by the Delaware General Corporation Law, upon and
following the adoption of this amended Article Fifth, all of the
Corporation's directors shall be elected at each annual meeting of
stockholders of the Corporation.
<PAGE>
ANNEX III
December 17, 1996
The Board of Directors
The Cosmetic Center, Inc.
8839 Greenwood Place
Savage, MD 20763
Members of the Board:
The Cosmetic Center, Inc. ("Cosmetic"), Prestige Fragrance & Cosmetics,
Inc. ("PFC") (a subsidiary of Revlon Consumer Products Corporation ("Revlon")),
and Revlon have entered into an Agreement and Plan of Merger (the "Agreement")
dated November 27, 1996, which provides, among other things, for the merger of
PFC with and into Cosmetic (the "Merger"). This letter confirms the oral opinion
we provided to the Board of Directors of Cosmetic (the "Cosmetic Board") on
November 15, 1996.
Pursuant to the Agreement and as a result of the Merger: (a) the
Certificate of Incorporation of Cosmetic would be amended to create a new class
of voting Common Stock ("Class C Common Stock") of Cosmetic, (b) Revlon would
receive newly issued Class C Common Stock, and (c) at the time of the Merger,
each existing stockholder of Cosmetic could elect to receive, in exchange for
each share of Class A Common Stock or Class B Common Stock held by such
stockholder, either (i) one share of Class C Common Stock or (ii) cash in the
amount of $7.63 per share (the "Cash Election"). The Cash Election is subject to
the limitation that not more than 2,829,065 shares of Class A Common Stock and
Class B Common Stock and options on Class A and Class B Common Stock will be
exchangeable for cash pursuant to the Cash Election (the "Limit"). To the extent
that the aggregate shares and options as to which a Cash Election has been made
exceed the Limit, each stockholder's and optionholder's Cash Election will be
reduced pro rata. Mark S. Weinstein, Anita J. Weinstein, Susan K. Magenheim and
a partnership composed of Mr. Weinstein, Mrs. Weinstein and Mrs. Magenheim (the
"Principal Stockholders") have agreed to elect to make the Cash Election for all
of their Class A and Class B Common Stock and all options which have an exercise
price of less than $7.63. Based on the number of Class C Common shares to be
issued to Revlon, Revlon's ownership of Cosmetic after giving effect to the
Merger (the "Combined Company") would be at least 65%; after giving effect to
the Cash Election by the Principal Stockholders, Revlon's ownership would be
approximately 74%; and if the Limit is reached, then Revlon's ownership would be
increased to approximately 83%. The terms and conditions of the Merger are more
fully set forth in the Agreement.
We have acted as financial advisor to the Cosmetic Board in connection with
the Merger and will receive a fee for our services, a portion of which is
contingent upon the consummation of the transaction. In addition, we will
receive a separate fee for providing this opinion.
In arriving at our opinion set forth below, we have, among other things:
(i) reviewed the Merger Agreement; (ii) reviewed certain publicly available
audited and unaudited financial statements of Cosmetic and certain other
publicly available information of Cosmetic; (iii) reviewed certain internal
information, primarily financial in nature, concerning Cosmetic and PFC,
prepared by their respective managements; (iv) discussed the past and current
operations and financial condition and prospects of Cosmetic with the senior
management of Cosmetic; (v) discussed the past and current operations and
financial condition and prospects of PFC with the senior management of PFC; (vi)
reviewed forecast financial statements of Cosmetic prepared and furnished to us
by the senior management of Cosmetic; (vii) reviewed forecast financial
statements of PFC prepared and furnished to us by the senior management of PFC;
(viii) reviewed pro forma Combined Company financial statements prepared jointly
by the managements of Cosmetic and PFC; (ix) held meetings and discussions with
certain officers and employees of Cosmetic and PFC, concerning the operations,
financial condition and future prospects of the Combined Company; (x) reviewed
recent stock market data relating to Cosmetic; (xi) reviewed certain publicly
available financial and stock market data relating to selected public companies
that we considered relevant to our inquiry; (xii) analyzed certain publicly
available information concerning the terms of selected merger and acquisition
transactions that we considered relevant to our inquiry; (xiii) considered the
pro forma financial effects of the Merger on Cosmetic; and (xiv) conducted such
other financial studies, analyses and investigations and considered such other
information as we deemed necessary or appropriate.
We are not expressing an opinion as to what the value of Cosmetic Class C
Common Stock actually will be when issued to current holders of Cosmetic's Class
A and Class B Common Stock pursuant to the Merger Agreement, or as to the price
or trading range at which Cosmetic Class C Common Stock may trade following the
Merger.
In connection with our review, we have assumed and relied upon the accuracy
and completeness of all financial and other information supplied to us by
Cosmetic and PFC, and all publicly available information, and we have not
independently
<PAGE>
The Board of Directors December 17, 1996
The Cosmetic Center, Inc. Page 2
verified such information. We also have relied upon the managements of Cosmetic
and PFC, as to the reasonableness and achievability of the financial projections
(and the assumptions and bases therein) provided to us for Cosmetic, PFC and the
Combined Company, respectively, and we have assumed that such projections have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management as to the future operating performance of
each respective entity, including without limitation the tax benefits, cost
savings and operating synergies to be enjoyed by the Combined Company. Neither
of Cosmetic nor PFC publicly discloses internal management projections of the
type provided to Legg Mason in connection with Legg Mason's review of the
Merger. Such projections were not prepared with the expectation of public
disclosure. The projections were based on numerous variables and assumptions
that are inherently uncertain, including without limitation, factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such projections.
We have not been requested to make, and we have not made, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
either Cosmetic or PFC and we have not been furnished with any such appraisals
or evaluations. Estimates of values of companies and assets do not purport to be
appraisals or necessarily reflect the prices at which companies and assets may
actually be sold. Because such estimates are inherently subject to uncertainty,
Legg Mason assumes no responsibility for their accuracy. Furthermore, Legg Mason
did not consider the range of possible tax consequences facing individual
Cosmetic stockholders, and the valuations per share derived by Legg Mason are
prior to any tax impact on individual Cosmetic stockholders.
Our opinion is necessarily based on stock prices and economic and other
conditions and circumstances as in effect on, and the information made available
to us as of, November 15, 1996. In arriving at our opinion, we were not
authorized to solicit, and did not solicit, third party indications of interest
from any party with respect to an acquisition of Cosmetic, its assets, or any
part thereof. In this regard, we have been advised by Cosmetic's senior
management that since the first public announcement of the Merger, no person has
contacted Cosmetic's senior management, the Cosmetic Board or the Principal
Stockholders regarding any potential alternative transaction to the Merger. We
have assumed that the Merger and related transactions described above will be
consummated on the terms and conditions described in the forms of the agreements
reviewed by us, without any waiver of material terms or conditions by Cosmetic
or PFC, and that obtaining any necessary regulatory approvals or satisfying any
other conditions for consummation of the Merger will not have an adverse effect
on the Combined Company.
It is understood that this letter is directed to the Cosmetic Board. It
does not constitute a recommendation to any stockholder of Cosmetic as to how
such stockholder should vote on the Merger. This letter is not to be quoted or
referred to, in whole or in part, in any registration statement, prospectus or
proxy statement, or in any other document used in connection with the offering
or sale of securities, nor shall this letter be used for any other purposes,
without the prior written consent of Legg Mason Wood Walker, Incorporated,
provided that this opinion may be included in its entirety in any filing made by
Cosmetic with the Securities and Exchange Commission with respect to the Merger
and the transactions related thereto.
Based upon and subject to the foregoing, we are of the opinion that, as of
November 15, 1996, the consideration to be paid for the Class A Common Stock and
Class B Common Stock pursuant to the Agreement is fair to the stockholders of
Cosmetic, from a financial point of view.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
<PAGE>
ANNEX IV
THE COSMETIC CENTER, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
This Stock Option Plan (the "Plan") for The Cosmetic Center, Inc. (the
"Company") is intended to provide incentive to directors, officers and key
employees of the Company by providing those persons with opportunities to
purchase shares of the Company's Class C Common Stock under (a) incentive stock
options ("Incentive Stock Options") as such term is defined under Section 422 of
the Internal Revenue Code of 1986, as amended and (b) other stock options.
2. DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Affiliate" shall mean any person or entity that, at the time of
reference, directly or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" shall mean the Class C Common Stock of the Company.
(e) "Company" shall mean The Cosmetic Center, Inc., the employer which
has established this Plan.
(f) "Compliance Opinion" shall mean an opinion of counsel acceptable
to the Board to the effect that (i) delivery of shares of Common Stock as
payment of the exercise price of an Option or as payment of the withholding
taxes or other like taxes related to the delivery of shares of Common Stock
in connection with the exercise of an Option (a) would not result in the
Optionee incurring any liability under Section 16(b) of the Exchange Act
and (b) does not require (x) any listings, registrations or qualifications
in respect thereof upon any securities exchange or other self-regulatory
organization or under any federal, state, local or foreign law, rule or
regulation or (y) the expiration, elimination or satisfaction of any
prohibitions, restrictions or limitations under any federal, state, local
or foreign law, rule or regulation or the rules of any securities exchange
or other self-regulatory organization, and (ii) any and all written
agreements or representations by the Optionee with respect to the
disposition of shares, or with respect to any other matter that the Board
deems necessary or desirable to comply with the terms of any such listing,
registration or qualification or to obtain an exemption from the
requirement that any such listing, qualification or registration be made,
and any and all consents, clearances or approvals by any governmental or
other regulatory bodies or any parties to any loan agreements or other
contractual obligations of the Company or any Subsidiaries have been
obtained.
(g) "Disability" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" per share of Common Stock as of a particular
date shall mean (i) the closing sales price per share of Common Stock on
the principal national securities exchange, if any, on which the shares of
Common Stock shall then be listed for the last preceding date on which
there was a sale of Common Stock on such exchange, or (ii) if the shares of
Common Stock are not then listed on a national securities exchange, the
last sales price per share of Common Stock entered on a national
inter-dealer quotation system for the last preceding date on which there
was a sale of Common Stock on such national inter-dealer quotation system,
or (iii) if no closing or last sales price per share of Common Stock is
entered on a national inter-dealer quotation system, the average of the
closing bid and asked prices for the shares of Common Stock in the
over-the-counter market for the last preceding date on which there was a
quotation for Common Stock in such market, or (iv) if no price can be
determined under the preceding alternatives, then the price per share as
most recently determined by the Board, which shall make such determinations
of value at least once annually.
(j) "Immediate Family" means an Optionee's spouse, children or
grandchildren (including adopted and stepchildren and grandchildren).
<PAGE>
(k) "Incentive Stock Option" means one or more options to purchase
Common Stock which, at the time such options are granted under this Plan or
any other such plan of the Company, qualify as incentive stock options
under Section 422 of the Code.
(l) "Option Agreement" means a written instrument evidencing an
Option, in such form as the Board may from time to time approve.
(m) "Options" means Incentive Stock Options and other options granted
hereunder.
(n) "Optionee" shall mean any person to whom an Option is granted
under this Plan.
(o) "Permitted Transferee" shall have the meaning given in Section
7(h)(2) of this Plan.
(p) "Plan" shall mean this Stock Option Plan.
(q) "Subsidiary" of any person shall mean any corporation or other
entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or other ownership interests having
power only by reason of the happening of a contingency) to elect a majority
of the directors of such corporation, or other Persons performing similar
functions for such entity, are owned, directly or indirectly, by such
person.
(r) "Ten Percent Shareholder" shall mean an Optionee who, at the time
an Option is granted, owns directly or indirectly (within the meaning of
section 425(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company, its
parent or a Subsidiary.
3. GENERAL ADMINISTRATION.
(a) This Plan shall be administered by the Board or, if appointed by
the Board, a Stock Option Committee (the "Committee") composed solely of
two or more Non-Employee Directors, as that term is defined in Rule
16b-3(b)(3) of the Exchange Act. If the Board shall appoint the Committee,
all references in this Plan to the Board, except to the extent that the
context otherwise requires, shall be deemed to refer to the Committee.
(b) The Board, or if so appointed, the Committee, shall have the
authority (i) to exercise all of the powers granted to it under this Plan,
(ii) to construe, interpret and implement this Plan and any Option
Agreements executed pursuant to Section 7 below, (iii) to prescribe, amend
and rescind rules and regulations relating to this Plan, including rules
governing the Committee's own operations, (iv) to make all determinations
necessary or advisable in administering this Plan, (v) to correct any
defect, supply any omission and reconcile any inconsistency in this Plan,
and (vi) to amend this Plan to reflect changes in applicable law.
(c) The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to
the Committee, and may at any time remove one or more Committee members and
substitute others.
(d) No member of the Board or the Committee shall be liable for any
action taken or determination made in good faith with respect to the Plan
or any Option granted hereunder.
4. GRANTING OF OPTIONS
Options may be granted under the Plan at any time prior to December 31,
2006.
5. ELIGIBILITY
(a) Options may be granted to any director, officer or key employee of
the Company. In determining from time to time the directors, officers and
employees to whom Options shall be granted and the number of shares to be
covered by each Option, the Board shall take into account the duties of the
respective persons, their present and potential contributions to the
success of the Company and such other factors as the Board shall deem
relevant in connection with accomplishing the purposes of the Plan.
(b) At the time of the grant of each Option under the Plan, the Board
shall determine whether such Option is to be designated an Incentive Stock
Option. Unless the applicable Option Agreement explicitly states that an
Option is intended to be an Incentive Stock Option, such Option shall be a
nonqualified Option. Incentive Stock Options shall not be granted to a
director who is not an employee of the Company. The length of the exercise
period of Incentive Stock
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<PAGE>
Options shall be governed by Section 7(e)(1) of the Plan; the exercise
period of all other Options will be governed by Section 7(e)(2).
(c) If an Option is granted with the stated intent that it be an
Incentive Stock Option, and if for any reason such Option (or any portion
thereof) shall not qualify as an Incentive Stock Option, then, to the
extent of such nonqualification, such Option (or portion) shall be regarded
as a nonqualified Option appropriately granted under the Plan, PROVIDED
that such Option (or portion) otherwise satisfies the terms and conditions
of the Plan relating to nonqualified Options generally.
6. STOCK
(a) The stock subject to the Options shall be shares of Common Stock.
Such shares may, in whole or in part, be authorized but unissued shares
contributed directly by the Company or shares which shall have been or
which may be acquired by the Company. The aggregate number of shares of
Common Stock as to which Options may be granted from time to time under the
Plan shall be 1,000,000 shares and the maximum number of shares of Common
Stock as to which Options may be granted to any employee in any calendar
year shall be 100,000. The limitation established by the preceding sentence
shall be subject to adjustment as provided in Section 7 (i) hereof.
(b) If any outstanding Option under the Plan for any reason expires or
is terminated without having been exercised in full, the shares of Common
Stock allocable to the unexercised portion of such Option shall (unless the
Plan shall have been terminated) become available for subsequent grants of
Options under the Plan.
7. TERMS AND CONDITIONS OF OPTIONS
Each Option granted pursuant to the Plan shall be evidenced by an
Option Agreement. Options shall comply with and be subject to the following
terms and conditions:
(a) OPTION PRICE. Each Option shall state the Option Price, which
shall be not less than one hundred percent (100%) of the Fair Market Value
of the shares of Common Stock subject to the Option on the date of grant of
the Option; PROVIDED, HOWEVER, that in the case of an Incentive Stock
Option granted to a Ten Percent Shareholder, the Option Price shall not be
less than one hundred ten percent (110%) of such fair market value. The
Option Price shall be subject to adjustment as provided in Section 7(i)
hereof. The date on which the Board adopts a resolution expressly granting
an Option shall be considered the day on which such Option is granted.
(b) RESTRICTIONS. Any Common Stock issued under the Plan may contain
restrictions including, but not limited to, limitations on transferability
that may constitute substantial risks of forfeiture, as the Board may
determine.
(c) VALUE OF SHARES. Options may be granted to any eligible person for
shares of Common Stock of any value, PROVIDED that the aggregate Fair
Market Value (determined at the time the Option is granted) of the stock
with respect to which Incentive Stock Options are exercisable for the first
time by the Optionee during any calendar year (under all the plans of the
Company, its Parent and its Subsidiaries) shall not exceed $100,000.
(d) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in
full, at the time of exercise, in cash, in shares of Common Stock owned by
the Optionee free and clear of all liens and owned by the Optionee for at
least six months (or such shorter or longer period as the Board may in its
discretion determine that will not result in variable accounting treatment)
having a Fair Market Value in the aggregate equal to such Option Price, or
in a combination of cash and such shares. Shares acquired upon exercise of
an Option shall not be accepted as payment unless such Option exercise
occurred at least six months prior to the exercise of the Option the Option
Price of which is proposed to be paid in part or in full by the tender of
shares of Common Stock. The Board may require, as a condition of accepting
any such delivery of shares of Common Stock, that the Optionee furnish the
Board with a Compliance Opinion.
(e) TERM AND EXERCISE OF OPTIONS.
(1) Incentive Stock Options shall be exercisable over the exercise
period specified by the Board in the Option Agreement, but in no event
shall such period exceed ten (10) years from the date of the grant of
each such Incentive Stock Option; PROVIDED, HOWEVER, that in the case of
an Incentive Stock Option granted to a Ten Percent Shareholder, the
exercise period shall not exceed five (5) years from the date of grant
of such Option. The exercise period shall be subject to earlier
termination as provided in Section 7(f) and 7(g) hereof. An Option may
be exercised, as to any or all full shares of Common Stock as to which
the Option has become exercisable, by giving written notice of such
exercise to the Board, PROVIDED that an Option may not be exercised at
any one time as to less
3
<PAGE>
than 100 shares (or such number of shares as to which the Option is then
exercisable if such number of shares is less than 100).
(2) Options that have not been designated by the Board as Incentive
Stock Options shall be exercisable over the exercise period specified by
the Board in the Option Agreement, but in no event shall such period
exceed ten (10) years from the date of the grant of each such option.
(f) TERMINATION OF EMPLOYMENT. Except as provided in this Section 7(f)
and Section 7(g) hereof and by Permitted Transferees pursuant to Section
7(h), an Option may not be exercised unless the Optionee is then a director
or officer of or in the employ of the Company or any Affiliate of the
Company (or a corporation or an Affiliate of such corporation issuing or
assuming the Option in a transaction to which Section 425(a) of the Code
applies), and unless the Optionee has remained continuously a director or
officer or so employed since the date of grant of the Option. In the event
all association of an Optionee with the Company (as an employee, a director
or officer) shall terminate (other than by reason of death or Disability),
all Options or unexercised portions thereof granted to such Optionee which
are then exercisable may, unless earlier terminated in accordance with
their terms, be exercised within thirty (30) days after such termination;
PROVIDED, HOWEVER, that if the association of the Optionee with the Company
shall terminate for "cause" (as determined by the Board), all Options
theretofore granted to such Optionee (whether or not then vested or
exercisable) shall, to the extent not theretofore exercised, terminate
forthwith and the Optionee may not satisfy any condition or limitation that
is unsatisfied (and no additional portion shall otherwise become vested)
under any Options following the date of such termination. A bona fide leave
of absence shall not be considered a termination or break in continuity of
employment for any purpose of the Plan so long as the period of such leave
does not exceed ninety (90) days or such longer period during which the
Optionee's right to reemployment is guaranteed by statute or by contract.
Where the period of such leave exceeds ninety (90) days and the Optionee's
right to reemployment is not guaranteed, the Optionee's employment will be
deemed to have terminated on the ninety-first (91st) day of such leave.
Nothing in the Plan or in any Option granted pursuant hereto shall confer
upon an employee any right to continue in the employ of the Company or any
of its divisions or any Affiliates or interfere in any way with the right
of the Company or any such divisions or any Affiliates to terminate such
employment at any time.
(g) DEATH OR DISABILITY OF OPTIONEE. If an Optionee shall die while a
director or officer of or employed by the Company or any Affiliate, or if
the Optionee's employment shall terminate by reason of Disability, all
Options theretofore granted to such Optionee may, unless earlier terminated
in accordance with their terms, be exercised by the Optionee or by the
personal representative of the Optionee's estate or by a person who
acquired the right to exercise such Option by bequest or inheritance or
otherwise by reason of death of the Optionee, at any time within nine (9)
months after the date of death or Disability of the Optionee, but in no
event later than the date of expiration of the Option, PROVIDED that during
the lifetime of the Optionee any Option granted to him may be exercised
only by the Optionee or any Permitted Transferee pursuant to Section 7(h).
(h) TRANSFERABILITY OF OPTIONS.
(1) Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution.
(2) Notwithstanding Section 7(h)(1), the Board may in the
applicable Option Agreement or at any time thereafter provide that
Options granted hereunder which are not intended to qualify as Incentive
Stock Options under Code section 422 may be transferred without
consideration by the Optionee, subject to such rules as the Board may
adopt to preserve the purposes of the Plan to:
(i) the Optionee's Immediate Family;
(ii) a trust solely for the benefit of the Optionee and/or
members of his or her Immediate Family; or
(iii) a partnership or limited liability company whose only
partners or shareholders are the Optionee and/or members of his or her
Immediate Family.
(each transferee described in clauses (i), (ii) and (iii) above is
hereinafter referred to as a "Permitted Transferee"), PROVIDED that the
Optionee provides the Board with advance written notice describing the
terms and conditions of the proposed transfer and the Board notifies the
Optionee in writing that such a transfer would comply with the
requirements of the Plan and any applicable Option Agreement; and
PROVIDED FURTHER that with respect to Options granted to officers and
directors subject to the reporting requirements of Section 16 of the
Exchange Act no such Options may be transferred within six months of the
grant date to the extent such transfer would result in
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<PAGE>
the grant of the Option being deemed to constitute a non-exempt purchase
under Section 16 of the Exchange Act. The terms of any such transferred
Option shall apply to the Permitted Transferee, except that (a)
Permitted Transferees shall not be entitled to transfer any Options,
other than by will or the laws of descent and distribution; and (b)
Permitted Transferees shall not be entitled to exercise any transferred
Options unless there shall be in effect a registration statement on an
appropriate form under the Securities Act of 1933, as amended, covering
the shares to be acquired pursuant to the exercise of such Option if the
Board determines that such a registration statement is necessary or
appropriate. Upon notice from a Permitted Transferee of its intent to
exercise an Option, the Board shall advise such Permitted Transferee if
a registration statement is necessary and if so whether such
registration statement is in effect.
(i) EFFECT OF CERTAIN CHANGES.
(1) If and to the extent specified by the Board, there is any
change in the number of shares of Common Stock through the declaration
of stock dividends, recapitalization resulting in stock splits, or
combinations or exchanges of such shares, then the number of shares of
Common Stock available for Options, the number of such shares covered by
outstanding Options, and the price per share of such Options may be
appropriately adjusted (as the Board may determine) to reflect any
increase or decrease in the number of issued shares of Common Stock;
PROVIDED, HOWEVER, that any fractional shares resulting from such
adjustment shall be eliminated.
(2) If the Company or any successor is merged or consolidated with
another corporation and, whether or not the Company or such successor
shall be the surviving corporation, there shall be any change in the
shares of Common Stock as then constituted by reason of such merger or
consolidation, or in the event that all or substantially all of the
assets of the Company are acquired by another person, or in the event of
a reorganization or liquidation of the Company or any successor (each
such event being hereinafter referred to as a "Reorganization Event") or
in the event that the Board shall propose that the Company or any
successor enter into a Reorganization Event, then the Board may in its
discretion, by written notice to an Optionee, provide that such
Optionee's Options will be terminated unless such Optionee exercises or
takes such action within 30 days (or such longer period as the Board
shall determine in its sole discretion) after the date of such notice;
PROVIDED, HOWEVER, that if the Board takes such action the Board also
shall accelerate to an appropriate earlier date the dates upon which all
outstanding Options of such Optionee shall be exercisable. The Board
also may in its discretion, by written notice to an Optionee, provide
that conditions of Options shall be adjusted in the event of a
Reorganization Event upon such terms and conditions as the Board may
determine.
(3) Whenever deemed appropriate by the Board, the actions referred
to in paragraph (2) of this Section 7 (i) may be made conditional upon
the consummation of the applicable Reorganization Event.
(4) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board,
whose determination in that respect shall be final, binding and
conclusive.
(5) Except as hereinbefore expressly provided in this Section 7(i),
the Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of shares
of stock of any class or by reason of any dissolution, liquidation,
merger, or consolidation, and any issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of
any class, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or Option Price of shares of Common
Stock subject to an Option. The grant of an Option pursuant to the Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business
or assets.
(j) RIGHTS AS A SHAREHOLDER. An Optionee or a transferee of an Option
shall have no rights as a shareholder with respect to any shares covered by
his Option until the date of the issuance of a stock certificate to him for
such shares. No adjustments shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as provided in Section 7 (i)
hereof.
(k) OTHER PROVISIONS. The Option Agreements authorized under the Plan
shall contain such other provisions, including, without limitation, (i) the
imposition of restrictions upon the exercise of an Option and (ii) the
inclusion of any condition not inconsistent with such Option qualifying as
an Incentive Stock Option, as the Board shall deem advisable, including
provisions with respect to compliance with federal and applicable state
securities laws.
5
<PAGE>
8. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES
(a) No later than the date of exercise of any Option granted hereunder, the
Optionee will pay to the Company or make arrangements satisfactory to the Board
regarding payment of any federal, state or local taxes of any kind required by
law to be withheld upon the exercise of such Option, and
(b) The Company shall, to the extent permitted or required by law, have the
right to deduct from any payment of any kind otherwise due to the Optionee any
federal, state or local taxes of any kind required by law to be withheld upon
the exercise of such Option.
An Optionee may satisfy, in whole or in part, withholding requirements by
delivery of unrestricted shares of Common Stock owned by the Optionee for at
least six months (or such shorter or longer period as the Board may approve or
require that will not result in variable accounting treatment) having a fair
market value (determined as of the date of such delivery by the grantee) equal
to the amount otherwise payable. Without limiting the generality of the
foregoing: (i) the Board may require, as a condition of accepting any such
delivery of shares of Common Stock, that the Optionee furnish a Compliance
Opinion and (ii) such delivery may be made by withholding shares of Common Stock
from the shares otherwise issuable pursuant to the exercise of the Option giving
rise to the tax withholding obligation (in which event the date of delivery
shall be deemed the date the Option was exercised).
9. TERM OF PLAN
Options may be granted pursuant to the Plan from time to time prior to
December 31, 2006, PROVIDED that no Options granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders.
10. SAVINGS CLAUSE
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if the Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
11. AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time and from time to time suspend, terminate, modify
or amend the Plan, PROVIDED that no such suspension, termination, modification
or amendment shall be made without the approval of a majority of the issued and
outstanding shares of Common Stock to the extent such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement that is a prerequisite for exemptive relief under Section
162(m) of the Code (provided that the Company is subject to the requirements of
Section 162(m) of the Code as of the date of such action). Except as provided in
Section 7 hereof, no suspension, termination, modification or amendment of the
Plan may adversely affect any Option previously granted unless the written
consent of the Optionee is obtained.
12. CONDITIONS
If pursuant to Section 7(g) or Section 7(i)(2) the dates upon which Options
shall be exercisable are accelerated, it shall be on the condition that with
respect to Options granted to officers and directors subject to the reporting
requirements of Section 16 of the Exchange Act the shares of Common Stock
underlying such Options may not be sold by any such individual (or their estate
or Permitted Transferee) within six months after the grant of the Option to the
extent such sale would result in the grant of the Option being deemed to
constitute a non-exempt purchase under Section 16 of the Exchange Act.
6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 21. Exhibits
2.1 (A) Agreement and Plan of Merger among Cosmetic, Revlon
and PFC made as of November 27, 1996 (attached as
Annex I to the Proxy Statement/Prospectus)
*3 (C) Cosmetic's Certificate of Incorporation, as amended
3 (D) Proposed Amendments to Cosmetic's Certificate of
Incorporation (attached as Annex II to the Proxy
Statement/Prospectus)
*3 (E) Bylaws of Cosmetic, as amended
** 3 (F) Proposed Amended & Restated Bylaws of Cosmetic
Center, Inc.
*****5 Opinion of Arent Fox Kintner Plotkin & Kahn on
validity of Cosmetic Class C common stock
*****8 Opinion of Arent Fox Kintner Plotkin & Kahn on
tax matters
*10 (D) Cosmetic 1991 Stock Option Plan, as amended
***10 (E) Employment Agreement dated February 28, 1991 between
Cosmetic and Louis R. Weinstein
***10 (F) Employment Agreement dated February 28, 1991 between
Cosmetic and Mark S. Weinstein
***10 (G) Employment Agreement dated February 28, 1991 between
Cosmetic and Ben S. Kovalsky
<PAGE>
****10 (H) Employment Agreement dated August 1, 1995 between
Cosmetic and Michael J. Lewis
**10 (I) Employment Agreement dated August 1, 1995 between
Cosmetic and Bruce E. Strohl
**10 (J) Form of Employment and Non-Competition Agreement to
be entered into between Cosmetic and Mark S.
Weinstein
**10 (K) Form of Employment and Non-Competition Agreement to
be entered into between Cosmetic and Anita J.
Weinstein
**10 (L) Form of Consulting and Non-Competition Agreement to
be entered into between Cosmetic and Susan K.
Magenheim
**10 (M) Amendment to Employment Agreement dated as of to
October 15, 1996 between Cosmetic and Ben S. Kovalsky
**10 (N) Form of Supply Agreement to be entered into between
Revlon and Cosmetic
**10 (O) Form of Services Agreement to be entered into between
Revlon and Cosmetic
**10 (P) Form of Lease to be entered into between Revlon and
Cosmetic with respect to employee stores
**10 (Q) Form of Sublease to be entered into between Revlon
and Cosmetic with respect to New York City employee
store
**10 (R) Form of Lease to be entered into between Revlon and
Cosmetic with respect to Holmdel facility
**10 (S) Stockholders Agreement dated as of November 27, 1996
among Anita J. Weinstein, Mark S. Weinstein, Susan K.
Magenheim, Weinstein Family Limited Partnership and
Revlon
**10 (T) Form of Registration Rights Agreement to be entered
into between Revlon and Cosmetic
10 (U) Cosmetic 1997 Stock Option Plan (attached as
Annex IV to the Proxy Statement/ Prospectus).
**10 (V) Employment Agreement dated October 1, 1996 between
Cosmetic and Allan Goodman
<PAGE>
**21 Subsidiaries of Cosmetic
**23 (A) Consent of Arthur Andersen LLP
23 (B) Consent of KPMG Peat Marwick LLP (filed herewith)
23 (C) Consent of Arent Fox Kintner Plotkin & Kahn (to be
included in Exhibit 5 and Exhibit 8)
**23 (D) Consent of Ronald O. Perelman
**23 (E) Consent of Howard Gittis
**23 (F) Consent of Jerry W. Levin
**23 (G) Consent of Howard Diener
**23 (H) Consent of William J. Fox
**23 (I) Consent of Wade H. Nichols
**23 (J) Consent of David N. Dinkins
**23 (K) Consent of Harvey Rosenthal
**23 (L) Consent of Legg Mason Wood Walker, Incorporated
**24 Power of Attorney
**27 Financial Data Schedule
99 (A) Form of proxy (filed herewith)
99 (B) Form of Cash Election (filed herewith)
99 (C) Legg Mason Wood Walker Incorporated Summary of
Findings as Present to the Board of Directors of
The Cosmetic Center, Inc. dated November 15, 1996
(filed herewith)
* Incorporated by reference to Exhibits to Cosmetic's Registration
Statement on Form S-1 dated February 28, 1992, File No. 33-46094.
** Previously filed as part of this Registration Statement
*** Incorporated by reference to Cosmetic's Form 10-K for the year ended
September 27, 1991.
**** Incorporated by reference to Cosmetic's Form 10-K for the year ended
September 29, 1995
***** To be filed by amendment
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be in the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed in include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements
and information are contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the Form
F-3.
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act
<PAGE>
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Washington,
District of Columbia, on January 30, 1997.
THE COSMETIC CENTER, INC.
By: /s/ Mark S. Weinstein
----------------------------------
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date
<S> <C>
/s/ Mark S. Weinstein Chairman of the Board of Directors January 30, 1997
- ------------------------------
Mark S. Weinstein
/s/ Anita J. Weinstein* Vice Chairman, Vice President, January 30, 1997
- ------------------------------ Secretary, and Director
Anita J. Weinstein
/s/ Ben S. Kovalsky* President, Chief Executive Officer, January 30, 1997
- ------------------------------ Chief Operating Officer and Director
Ben S. Kovalsky
<PAGE>
/s/ Susan K. Magenheim* Vice President, Assistant Secretary January 30, 1997
- ------------------------------ and Director
Susan K. Magenheim
/s/ Donald R. Rogers* Director January 30, 1997
- ------------------------------
Donald R. Rogers
/s/ Ronald M. Hirschel* Director January 30, 1997
- ------------------------------
Ronald M. Hirschel
/s/ Bruce E. Strohl Vice President - Finance January 30, 1997
- ------------------------------ and Chief Financial Officer
Bruce E. Strohl
/s/ Arlene H. Wright Controller and Chief Accounting January 30, 1997
- ------------------------------ Officer
Arlene H. Wright
</TABLE>
- ------------
* Signed by Mark S. Weinstein pursuant to power of attorney previously filed.
EXHIBIT 23(B)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder Prestige Fragrance & Cosmetics, Inc.:
We consent to the use of our report included herein and to the
reference to our firm under the heading "Experts" in the Proxy
Statement/Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
January 29, 1997
EXHIBIT 99(A)
PROXY
THE COSMETIC CENTER, INC.
Special Meeting of Stockholders to be held February , 1997
The undersigned, a Class B stockholder of The Cosmetic Center, Inc., a Delaware
corporation (the "Company"), hereby appoints Mark S. Weinstein and Bruce E.
Strohl or either of them, attorneys and proxies of the undersigned, with full
power of substitution to vote and act for the undersigned at the Company's
Special Meeting of Stockholders in lieu of the Annual Meeting to be held at
on , February , 1997 at
a.m., and at any postponement or adjournment thereof, in respect of all
shares of the Class B common stock registered in the name of the undersigned as
fully as the undersigned could vote and act if personally present, on the
following matters:
1. To adopt the Agreement and Plan of Merger dated November 27, 1996 by
and among the Company, Prestige Fragrance & Cosmetics, Inc. and Revlon
Consumer Products Corporation, including (a) the Merger, (b) the
amendment to the Company's certificate of incorporation regarding the
authorization of Class C common stock, (c) the conversion of Class A
and Class B common stock into Class C common stock and (d) the
appointment of nine nominees to the board of directors.
FOR __ AGAINST __ ABSTAIN __
2. To elect two Class II directors.
Nominees: Mark S. Weinstein and Donald R. Rogers. (Instructions: To
withhold authority to vote for any individual nominee, strike out that
nominee's name.)
FOR __ (except as WITHHELD __
Indicated above)
3. To approve the amendment to the Company's certificate of incorporation
to repeal the classification of the board of directors.
FOR __ AGAINST __ ABSTAIN __
4. To approve the Company's 1997 Stock Option Plan.
FOR __ AGAINST __ ABSTAIN __
5. In their discretion, on any other matter which may properly come before
the meeting or any postponement or adjournment thereof.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
This proxy, when properly executed, will be voted as directed herein by the
undersigned. However, if no direction is given, this proxy will be voted FOR
proposals 1, 2, 3 and 4.
Please date this proxy and sign your name exactly as your name appears herein.
If the shares are held jointly, all owners must sign. When signing as attorney,
executor, administrator, trustee, guardian or other representative capacity,
please give full title.
Dated ________________, 1997
----------------------------
Signature of Stockholder
----------------------------
Signature of Stockholder
PLEASE COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THIS PROXY IN THE
ENCLOSED ENVELOPE WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED
STATES.
EXHIBIT 99(B)
FORM FOR
CASH ELECTION
with respect to
CLASS A and/or CLASS B COMMON STOCK
of
THE COSMETIC CENTER, INC.
Pursuant to the Proxy Statement/Prospectus Dated February , 1997 (the
"Proxy/Prospectus Statement")
ANY HOLDER OF SHARES OF CLASS A OR CLASS B COMMON STOCK ("SHARES")
OF THE COSMETIC CENTER, INC. WHO WISHES TO MAKE THE CASH ELECTION MUST DELIVER
THIS CASH ELECTION FORM TO FIRST UNION NATIONAL BANK OF NORTH CAROLINA)
(THE "EXCHANGE AGENT") BY 5:00 P.M., NEW YORK CITY TIME,
ON , FEBRUARY , 1997 (THE "EXPIRATION DATE").
This Cash Election Form should be sent or delivered as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier: By Hand:
First Union National Bank First Union National First Union National
of North Carolina Bank of North Carolina Bank of North Carolina
Attn: Proxy Tabulation Proxy Department, 11th Floor Proxy Department, 11th Floor
P.O. Box 217950 230 South Tryon St. 230 South Tryon St.
Charlotte, NC 28254-3555 Charlotte, NC 28288-1153 Charlotte, NC 28288-1153
(certified mail recommended)
</TABLE>
DELIVERY OF THIS CASH ELECTION FORM TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
STOCKHOLDERS SHOULD NOT SEND CERTIFICATES REPRESENTING CLASS A
OR CLASS B COMMON STOCK OF THE COSMETIC CENTER, INC.
TO THE EXCHANGE AGENT AT THIS TIME.
DESCRIPTION OF SHARES SUBJECT TO CASH ELECTION
NAME(S) AND ADDRESS(ES) OF
REGISTERED HOLDER(S) SHARES
Total
Number
of Shares
Total Subject to
Serial Number Cash
Number(s) of Shares Election*
--------- --------- ----------
--------- --------- ----------
--------- --------- ----------
--------- --------- ----------
* Unless otherwise indicated, it will be assumed that the total number of Shares
represented by the certificates bearing the serial numbers listed are subject
to the Cash Election.
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ
THE ACCOMPANYING INSTRUCTIONS CAREFULLY
<PAGE>
The Cosmetic Center, Inc. ("Cosmetic"), Revlon Consumer Products
Corporation ("Revlon") and Prestige Fragrance & Cosmetics, Inc., a wholly
owned, subsidiary of Revlon ("PFC"), have entered into an Agreement and Plan
of Merger dated as of November 27, 1996 (the "Merger Agreement"). Upon the
approval of the Merger Agreement by the holders of Cosmetic Class B common
stock (the only class of Cosmetic common stock entitled to vote on the Merger
Agreement) and the satisfaction of certain other conditions, PFC will be
merged in to Cosmetic, and the outstanding capital stock of Cosmetic and PFC
will be exchanged for newly issued Cosmetic Class C common stock (the
"Merger").
As a result of the Merger, Cosmetic stockholders will receive for each
share of Cosmetic Class A or Class B common stock they hold one share of
Cosmetic Class C common stock or, at each stockholder's election and subject
to the limitation discussed below, $7.63 in cash (the "Cash Election"). Holders
of options to purchase Cosmetic Class A or Class B common stock with an
exercise price of less than $7.63 may elect to receive for each such option they
hold an equivalent option to purchase Cosmetic Class C common stock or, at each
such optionholder's election and subject to the limitation discussed below,
cash equal to the difference between $7.63 and the exercise price per share
of such options. The right of stockholders and optionholders to receive cash is
limited to an aggregate of 2,829,065 Shares and options for Shares, and to the
extent that holders of more than 2,829,065 Shares and options for Shares
elect to receive cash, the Cash Election will be provided to such holders pro
rata. See "The Merger Agreement--Cash Election" in the accompanying Proxy
Statement/Prospectus for a more detailed description of the right to elect to
receive Cosmetic Class C common stock or cash.
Stockholders who wish to make the Cash election must complete and
deliver this Cash Election Form to the Exchange Agent at the address set forth
above by 5:00 p.m. New York City time on February , 1997. Stockholders who are
not record holders and who wish to make the Cash Election must have the broker,
bank or other person that holds their Shares complete and deliver a copy of
this Cash Election Form, on their behalf, to the Exchange Agent at the
address set forth above by 5:00 p.m. New York City time on February , 1997.
Stockholders who do not make the Cash Election or do not comply with the Cash
Election procedure set forth in the Proxy Statement/Prospectus and this Cash
Election Form will receive Cosmetic Class C common stock and will not receive
any cash in the Merger.
GENTLEMEN:
The undersigned hereby makes the Cash Election with respect to the
Shares listed on page 1 hereof, upon the terms and subject to the conditions
set forth in the Proxy Statement/Prospectus, the receipt of which is hereby
acknowledged, and in this Cash Election Form.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to make the Cash Election with respect to the
Shares. The undersigned will, upon request, execute and deliver any additional
documents deemed by Cosmetic to be necessary or desirable to complete the
Cash Election.
All obligation of the undersigned hereunder shall be binding upon the
heirs, personal representatives, successors and assigns of the undersigned.
Any Cash Election may only be revoked in accordance with the procedures set
forth in the Proxy Statement/Prospectus. See "The Merger Agreement--Cash
Election" in the accompanying Proxy Statement/Prospectus.
The undersigned understands that making a Cash Election pursuant to
the procedures described in the Proxy Statement/Prospectus and in this Cash
Election Form will constitute a binding agreement between the undersigned
and Cosmetic upon the terms and subject to the conditions set forth herein
and in the Proxy Statement/Prospectus.
-2-
<PAGE>
SHAREHOLDER(S) SIGN HERE
Signature of Owner
Signature of Co-Owner (if applicable)
Dated: ________________, 1997
(See instruction 3 of this Cash Election Form. This Cash Election Form
must be signed by registered holder(s) exactly as name(s) appear(s) on
the certificates for the Shares subject to the Cash Election. If
signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, please provide the following
information.)
Name(s)__________________________________________
(Please Print)
Capacity_________________________________________
Address__________________________________________
(Include Zip Code)
(Area Code and Tel. No.)_________________________
(Tax Identification or Social Security No.)__________________________________
-3-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE CASH ELECTION.
1. Delivery of Cash Election Form. This Cash Election Form is to
be used to make the Cash Election. A properly completed and duly executed Cash
Election Form, and any other documents required by this form, must be received
by the Exchange Agent at its address set forth above on or prior to the
Expiration Date. No alternative, conditional or contingent Cash Elections are
permitted.
THE METHOD OF DELIVERY OF THIS FORM AND ALL OTHER REQUIRED DOCUMENTS IS
AT THE ELECTION AND RISK OF THE STOCKHOLDER. IF THIS FORM IS SENT BY MAIL,
CERTIFIED MAIL WITH RETURN RECEIPT REQUESTED IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY TO THE EXCHANGE
AGENT.
2. Inadequate Space. If the space provided herein is inadequate,
list and attach hereto on a separate schedule, the Share serial numbers and the
number of Shares subject to a Cash Election.
3. Signatures on Cash Election Form. The signature om this form
must correspond with the name as written on the face of the Shares without
alteration, enlargement or any change whatsoever. If any of the Shares subject
to a Cash Election are owned of record by two or more joint owners, all such
owners must sign this form.
If any of the Shares subject to a Cash Election are registered in
different names, it will be necessary to complete, sign and submit as many
separate Cash Election Forms as there are different registrations of Shares.
If this Cash Election Form is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by Cosmetic, proper evidence
satisfactory to Cosmetic of their authority so to act must be submitted.
4. Irregularities and Waiver of Conditions. All questions as to
the validity, form and eligibility (including time of receipt) of any Cash
Election will be determined by Cosmetic, in its sole discretion, which
determination shall be final and binding. Cosmetic reserves the absolute right
to reject any Cash Election determined by it not to be in proper form, or the
acceptance of which may, in the opinion of Cosmetic's counsel, be unlawful.
Cosmetic also reserves the absolute right to waive any defect or irregularity in
any Cash Election with respect to any particular Shares or any particular
stockholder, and Cosmetic's interpretations of the terms and conditions of the
Cash Election (including these instructions) shall be final and binding. Unless
waived, any defects or irregularities in connection with a Cash Election must be
cured within such time as Cosmetic shall determine. Neither Cosmetic nor any
other person will be under any duty or obligation to give notice of any defects
or irregularities in Cash Elections, nor shall any of them incur any liability
for failure to give such notice.
5. Requests for Assistance or Additional Copies. Requests for
information or additional copies of this Cash Election Form should be directed
to the Exchange Agent at Proxy Department, 11th Floor, 230 South Tryon St.,
Charlotte, NC 28288-1153, telephone (800) 829-8438.
-4-
Summary of Findings
as Presented to the
Board of Directors
of
The Cosmetic Center, Inc.
November 15, 1996
Legg Mason Wood Walker
Incorporated
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
I. Executive Summary
A. Overview
B. Summary of Terms of the Transaction
C. Assumptions
D. Pro Forma Ownership
E. Shareholder Value Creation
- --------------------------------------------------------------------------------
II. COSCA Stand-Alone Valuation Analysis
A. Overview
B. COSCA Stand-Alone Historical and Projected
Financial Data
C. Comparable Company Analysis
D. Comparable Transaction Analysis
E. Acquisition Premiums Analysis
F. Discounted Cash Flow Analysis
- --------------------------------------------------------------------------------
III. Combined Company Analysis
A. Overview
B. Pro Forma Combined Financial Data
C. Comparable Company Analysis
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Addendum
A. Draft Opinion Letter
B. Comparable Company Analysis
C. Comparable Transaction Analysis
D. Discounted Cash Flow Analysis
E. COSCA Cost of Equity and WACC Calculations
F. COSCA Stock Price and Volume Graphs
G. PFC Stand-Alone Income Statements
H. Summary of Synergies, Cost Savings and One-Time Expenses
I. Pro Forma Combined Company Projections
- --------------------------------------------------------------------------------
<PAGE>
I. Executive Summary
================================================================================
A. Overview
Legg Mason Wood Walker, Incorporated ("Legg Mason") has been requested by the
Board of Directors (the "Board") of The Cosmetic Center, Inc. ("COSCA" or the
"Company") to render our opinion (the "Opinion") to the Board as to the fairness
to the shareholders of the Company, from a financial point of view, of the
consideration to be paid for COSCA Class A and Class B Common Stock, in the
merger of Prestige Fragrance & Cosmetics, Inc. ("PFC"), a subsidiary of Revlon
Consumer Products Corporation ("Revlon"), with and into COSCA (the
"Transaction").
These materials are being presented to the Board in support of our Opinion.
These materials do not, however, constitute our Opinion and are provided for
informational purposes only. Our Opinion is limited to the terms of our opinion
letter, a preliminary draft of which is included in Addendum A.
1
(Legg Mason logo appears here)
<PAGE>
I. Executive Summary
================================================================================
B. Summary of Terms of the Transaction
<TABLE>
<CAPTION>
Item Comments
<S> <C>
Structure: Merger of PFC with and into COSCA.
Consideration per Share: (i) $7.625 in cash, or
(ii) one share of COSCA Class C common stock, or
(iii) a pro rated combination of COSCA Class C common stock and cash.
Certain Conditions (a): o The maximum number of COSCA shares to be exchanged for cash shall
be 2,829,065 shares (the "Limit"), for
a total of $21.6 million.
o Approval by Revlon's Board of Directors.
o Approval by COSCA's Board of Directors and receipt of a Fairness
Opinion.
Ownership: o Revlon will own approximately:
- 65% of Class C Shares after shares are issued to Revlon.
- 74% if only the family exchanges its shares for cash.
- 83% if the cash election Limit is reached.
</TABLE>
-------------------------------------
(a) A complete discussion of Terms and Conditions are listed in the Merger
Agreement.
2
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<PAGE>
I. Executive Summary
================================================================================
C. Assumptions
In connection with our review, we have assumed and relied upon the accuracy and
completeness of all financial and other information supplied to us by COSCA, PFC
and Revlon, and publicly available, and we have not independently verified such
information. We have also relied upon the managements of COSCA, PFC and Revlon
as to the reasonableness and achievability of the financial projections (and the
assumptions and bases thereof) provided to us for COSCA, PFC and the Combined
Company, and all publicly available information, and we have assumed that such
projections have been reasonably prepared on bases reflecting the best currently
available estimates and judgments as to the future operating performance of each
respective entity, including without limitation the tax benefits, cost savings
and operating synergies to be enjoyed by the Combined Company.
For the development of the Pro Forma operating performance of the Combined
Company, we excluded one-time charges and the effects of the NOLs on the
Company's after tax earnings, and valued these items separately. This is in
keeping with our belief that the market will attribute value to the Company's
earnings independent of these factors, and will evaluate them separately from
the Company's underlying performance.
We have not been requested to make, and we have not made, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
COSCA or of PFC and we have not been furnished with any such appraisal or
evaluation. Our Opinion is necessarily based upon COSCA's stock price as well as
economic and other conditions and circumstances as in effect on, and the
information made available to us as of, the date hereof.
This presentation summarizes the financial analyses we employed in reaching our
Opinion.
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<PAGE>
I. Executive Summary
================================================================================
C. Assumptions (cont.)
The valuation analyses and pro forma analyses which Legg Mason performed are
based on the most recent financial information provided by the managements of
COSCA, PFC and Revlon. Several changes have been made to the analyses to reflect
subsequent due diligence, recent operating results of both companies, and
current stock market valuations of comparable companies since our last
presentation to the Board on October 1, 1996. These changes include:
o a change in the valuation multiples of comparable public companies
o the inclusion of 1997 and 1998 projections for PFC (in the prior
presentation Legg Mason estimated projections for 1997 for PFC)
o the inclusion of 1997 and 1998 projections for the Combined Company
o an increase in the 1997 estimated merger synergies
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<PAGE>
I. Executive Summary
================================================================================
D. Pro Forma Ownership (a)
<TABLE>
<CAPTION>
Pre-Merger Cash Elections Post-Merger
Number of Shares Redeemed Shares Number of Shares
Class A Class B Total % Class A Class B Class C %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Shareholders 2,934,404 1,616,030 4,550,434 100% 1,824,358 1,004,707 1,721,369 17%
Revlon (b) -- -- -- -- -- -- 8,479,335 83%
Total Shares 2,934,404 1,616,030 4,550,434 100% 1,824,358 1,004,707 10,200,704 100%
-------------------------------------
(a) For purposes of this presentation, it is assumed that all COSCA
shareholders elect to redeem their shares and subsequently receive cash and
Class C Common Stock on a pro rata basis.
(b) Following the issuance of management incentive options, Revlon anticipates that its pro forma ownership will be between 80%
and 83%.
</TABLE>
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<PAGE>
I. Executive Summary
================================================================================
E. Shareholder Value Creation
<TABLE>
<CAPTION>
Scenarios
Pro Rata
Per Share Value of: All Cash All Stock Cash & Stock
<S> <C> <C> <C> <C> <C> <C>
A. Cash $7.63 $7.63 $7.63
Percentage 100% 0% 62%
$7.63 $0.00 $4.74
B. NOLs (a) $0.51 $0.51 $0.51
Percentage 0% 100% 38%
$0.00 $0.51 $0.19
C. One-Time Charges (b) $0.25 $0.25 $0.25
Percentage 0% 100% 38%
$0.00 $0.25 $0.09
Mean Median Mean Median Mean Median
D. Class C Stock (c) $9.25 $9.37 $9.25 $9.37 $9.25 $9.37
Percentage 0% 0% 100% 100% 38% 38%
$0.00 $0.00 $9.25 $9.37 $3.50 $3.55
Mean Median Mean Median Mean Median
Total Value of Offer (A+B+C+D) $7.63 $7.63 $9.51 $9.64 $8.34 $8.39
Unaffected COSCA Stock Price (d) $3.97 $3.97 $3.97 $3.97 $3.97 $3.97
Offer Premium 92% 92% 139% 143% 110% 111%
- -----------------------------------------
(a) Assumed combined company has $15 million of NOLs at closing utilized over four years and present valued at $5.2 million
using a 6.0% discount rate (COSCA's medium term after tax cost of debt) and a 40% tax rate.
(b) Represents the per share cost of one-time charges of $2.5 million (pre-tax cost $4.2 million).
(c) Assuming COSCA 1998 EPS of $0.63 and applying mean and median multiples of 14.7x and 14.9x (developed by discounting the
1997 mean and median multiples of 16.8x and 17.1x at the cost of equity of 14.5%).
(d) Weighted average price of COSCA Class A and Class B shares as of August 30, 1996, one month prior to announcement of the
Letter of Intent.
</TABLE>
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<PAGE>
I. Executive Summary
================================================================================
E. Shareholder Value Creation (cont.)
EPS Accretion Analysis (a)
(Bar Graph appears here, values are as follows)
1997P 1998P
COSCA Stand-Alone Projected EPS $0.18 $0.35
Pro Forma Combined Company
Projected EPS $0.24 $0.63
- ---------------------------------
(a) Excluded the effects of one-time charges and NOLs and assumes full
taxation for the Combined Company at a 40% rate.
7
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
A. Overview
In order to reach the conclusion expressed in our Opinion, we made use of
several valuation methodologies, including Comparable Company Analysis,
Comparable Transaction Analysis, Acquisition Premiums Analysis, and Discounted
Cash Flow Analysis. In addition we considered applying a Leveraged Buyout
Analysis and an Asset Liquidation Analysis but concluded those two analyses did
not support a meaningful evaluation.
Comparable Company Analysis: In a Comparable Company Analysis, the value of
a company is derived by comparing it to a universe of similar public
companies. The stock trading multiples of these public companies are then
applied to the company's historical and estimated financial results, to
derive a range of possible values for the business.
Comparable Transaction Analysis: In a Comparable Transaction Analysis, the
value of a company is derived by comparing it to a universe of transactions
which have occurred within the company's industry. The implied multiples of
these transactions are then applied to a company's historical financial
results, to derive a range of possible values for the business.
Acquisition Premiums Analysis: In an Acquisition Premiums Analysis, the
average percentage premium of offer prices is compared to trading prices
one month prior to the announcement date for publicly announced
transactions. The acquisition premiums are then applied to a company's
unaffected stock price to derive a range of possible values for the
business.
Discounted Cash Flow Analysis: In a Discounted Cash Flow Analysis ("DCF"),
the value derived for a company is equal to the present value of its future
after-tax cash flows, after allowing for required reinvestment in both
fixed assets and working capital. A DCF valuation focuses on the effects of
existing business strategies on cash flow, and deals specifically with a
number of key factors, including revenue growth, profitability,
reinvestment in fixed assets and working capital and return on capital.
Leveraged Buyout Analysis: A Leveraged Buyout Analysis ("LBO") is designed
to find the maximum price a financial buyer could pay for a company based
on the prevailing market rates of return for different types of debt and
the return demanded by equity investors. Based on COSCA's projected cash
flow assumptions, Legg Mason determined that a leveraged buyout is not a
feasible alternative.
Asset Liquidation Analysis: An Asset Liquidation Analysis is most relevant
when a company is likely to be liquidated, when certain assets are far more
valuable than their book value, or when certain intangible assets of a
company are extremely valuable. We have determined that this analysis is
not relevant to COSCA. This is often true for retailers, which in a
liquidation receive a minimal value for furniture fixtures, and equipment
and a 50% discount off of inventory value. In addition there are costs
associated with exiting from the ongoing lease obligations.
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
A. Overview (cont.)
A comparison of the results of the valuation methodologies and the Transaction
Value are presented below.
VALUATION METHODOLOGY Value per Share Range
Comparable Company Analysis $3.08 $5.17
Comparable Transaction Analysis $2.01 $3.37
Acquisition Premiums Analysis $5.12 $5.28
Discounted Cash Flow Analysis $0.56 (a) $3.41 (b)
TRANSACTION VALUATION
All Cash Offer $7.63 $7.63
All Stock Offer $9.51 $9.64
Pro-Rated Cash and Stock Offer $8.34 $8.39
- ---------------------------------
(a) Assumes a 5.0x exit multiple and a 19.4% discount rate (low end of
sensitivity analysis).
(b) Assumes a 7.0x exit multiple and a 11.4% discount
rate (high end of sensitivity analysis).
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
B. COSCA Stand-Alone Historical and Projected Financial Data
($ in Thousands)
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
For the Years Ended Nearest September 28, For the Years Ending Nearest December 31,
1993 1994 1995 1996E 1996E Adj. (a) 1997P 1998P 1999P 2000P 2001P
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $109,486 $123,551 $132,304 $133,795 $127,921 $140,552 $153,278 $168,914 $184,462 $195,434
Cost of Sales
(b) 86,514 96,574 105,094 107,467 102,835 97,399 105,550 115,938 126,575 133,996
Gross Profit 22,972 26,977 27,210 26,328 25,086 43,153 47,728 52,976 57,887 61,438
% Sales 21.0% 21.8% 20.6% 19.7% 19.6% 30.7% 31.1% 31.4% 31.4% 31.4%
Operating
Expenses 17,115 19,929 27,033 27,558 24,696 40,756 43,988 48,309 52,491 55,681
Operating
Income 5,857 7,048 177 (1,230) 390 2,397 3,740 4,667 5,396 5,757
% Sales 5.3% 5.7% 0.1% -0.9% 0.3% 1.7% 2.4% 2.8% 2.9% 2.9%
Other Income
(Expense) 84 110 670 (3,929) (429) 106 105 105 105 105
Interest
Income (Expense) (97) (166) (725) (1,030) (1,030) (1,105) (1,193) (1,288) (1,391)(1,470)
Pre-Tax Income 5,844 6,992 122 (6,189) (1,069) 1,398 2,652 3,484 4,110 4,392
Taxes 2,267 2,804 (157) (714) (123) 565 1,074 1,411 1,665 1,779
Net Income $3,577 $4,188 $279 $(5,475) $ (946) $833 $1,578 $2,073 $2,445 $2,613
EPS $0.82 $0.95 $0.06 $ (1.27) $(0.22) $0.18 $0.35 $0.46 $0.54 $0.57
Other Data:
Depreciation
& Amortization $1,392 $1,580 $2,341 $2,470 $2,470 $2,321 $2,375 $2,737 $2,962 $3,187
EBITDA $7,249 $8,628 $2,518 $1,240 $2,860 $4,718 $6,115 $7,404 $8,358 $8,944
Number of Shares 4,388 4,422 4,358 4,314 4,314 4,550 4,550 4,550 4,550 4,550
- ---------------------
(a) Excludes $5,874 in revenues, $4,632 in cost of goods sold, $2,862 in SG&A and $3,500 charge attributable to discontinued
operations in Atlanta.
(b) Includes costs for buying, occupancy and distribution.
</TABLE>
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
B. COSCA Stand-Alone Historical and Projected Financial Data (cont.)
($ in Thousands)
<TABLE>
<CAPTION>
Consolidated Stand-Alone Balance Sheets
As of the Date Nearest September 28, As of the Date Nearest December 31,
1993 1994 1995 1996 1997P 1998P 1999P 2000P 2001P
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash & Cash Equivalents $1,767 $1,382 $1,320 $979 $1,500 $1,600 $1,700 $1,800 $1,900
Accounts Receivable 1,073 1,557 881 1,774 1,500 1,500 1,500 1,500 1,500
Inventories 45,002 50,422 61,891 57,379 53,200 55,700 58,200 61,200 64,200
Other Current Assets 1,015 1,232 2,641 2,033 1,550 1,560 1,590 1,610 1,630
Total Current Assets 48,857 54,593 66,733 62,165 57,750 60,360 62,990 66,110 69,230
PP&E, Net 5,468 7,115 10,801 8,492 6,210 5,035 3,339 1,919 331
Other Assets 440 426 433 505 485 506 535 615 695
Total Assets $54,765 $62,134 $77,967 $71,162 $64,445 $65,901 $66,864 $68,644 $70,256
Current Liabilities
Accounts Payable $12,817 $9,922 $19,309 $15,956 $8,488 $8,756 $7,097 $7,045 $5,809
Note Payable 0 5,025 11,985 12,220 9,900 9,900 9,900 9,900 9,900
Other Current Liabilities 2,654 3,607 4,349 4,798 6,074 5,550 5,975 6,153 6,278
Total Current Liabilities 15,471 18,554 35,643 32,974 24,462 24,206 22,972 23,098 21,987
Other Long-Term Liabilities 1,858 1,918 2,383 1,722 1,321 1,455 1,579 1,688 1,798
Stockholders' Equity 37,436 41,662 41,941 36,466 38,662 40,240 42,313 43,858 46,471
Total Liabilities & Stockholders' Equity $54,765 $62,134 $79,967 $71,162 $64,445 $65,901 $66,864 $68,644 $70,256
</TABLE>
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
C. Comparable Company Analysis
The Comparable Company Analysis provides us with a "feel" for what the financial
markets, on average, are willing to pay for businesses with similar economics
and industry dynamics as COSCA. While not identical to COSCA, the selected
companies do evidence similarities in product lines. The companies included in
the Comparable Company Analysis are presented below:
================================================================================
Retailers of Cosmetics
o Arbor Drugs, Inc. o Perfumania, Inc.
o Drug Emporium, Inc. o Revco D.S., Inc.
o Genovese Drug Stores, Inc. o Rite Aid Corp.
o Longs Drug Stores Corp. o Walgreen Co.
================================================================================
The analysis sets out, for the respective companies, market values as of
November 13, 1996 and multiples of market value or enterprise value (market
value plus debt less cash) to:
================================================================================
<TABLE>
<CAPTION>
Market Value Enterprise Value
<S> <C>
o Projected 1997 and 1998 earnings per share o LTM revenues
o Latest twelve months ("LTM") earnings per share o LTM earnings before interest, taxes, depreciation and
o Most recent book value amortization ("EBITDA")
o LTM earnings before interest and taxes ("EBIT")
</TABLE>
================================================================================
A summary of the results of this analysis follows. A complete version of the
Comparable Company Analysis may be found in Addendum B.
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
C. Comparable Company Analysis (cont.)
Following are the summary multiples for the comparable companies. We have relied
on multiples of projected 1997 and 1998 EPS to derive a value for COSCA on a
stand-alone basis. COSCA's earnings have been significantly depressed, as a
result multiples of latest twelve month Revenues, EBITDA, EBIT, Book Value and
EPS would result in distorted or not meaningful valuations. In order to derive a
value based on 1998 projected EPS, Legg Mason utilized comparable company
multiples of 1997 projected EPS and adjusted by a discount rate of 14.5%. Latest
twelve months operating results have been depressed by a variety of factors
including the unsuccessful expansion into and exit from the Atlanta market, the
upfront cost of expanding into salons and certain factors specific to the
industry and retail environment. The comparable companies, because they carry
broader product lines than the Company and have greater geographic diversity,
have not been affected to the same extent as the Company by certain industry
factors.
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
C. Comparable Company Analysis (cont.)
<TABLE>
<CAPTION>
Retailers of Cosmetics (a)
Market Value plus Net Debt Market Value
as a Multiple of: as a Multiple of:
LTM LTM LTM Book Projected Projected Projected
Revenues EBITDA (b) EBIT (c) Value LTM EPS 1997 EPS 1998 EPS (d)
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Data Points 8 8 8 8 8 7 7
Mean 0.52 x 8.58 x 12.12 x 2.36 x 18.06 x 16.85 x 14.71 x
Median 0.49 7.91 12.28 2.21 18.36 17.08 14.92
COSCA LTM Adj. Data $127.92 $2.86 $0.39 $36.47 $(0.22) $0.18 $0.35
Implied Enterprise Value
Mean $ 66.06 $24.55 $4.73 -- -- -- --
Median 63.24 22.62 4.79 -- -- -- --
Net Debt $8.40 $8.40 $8.40 -- -- -- --
Implied Equity Value
Mean $ 57.66 $16.15 NMF $86.04 -- -- --
Median 54.84 14.22 NMF 80.62 -- -- --
Value per Share:
Mean $ 12.67 $3.55 NMF $18.91 NMF $3.08 $5.10
Median 12.05 3.13 NMF 17.72 NMF 3.13 5.17
- ----------------------------------------------
(a) $ in millions, except per share values.
(b) EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
(c) EBIT is Earnings Before Interest and Taxes.
(d) Multiples were derived from 1997 multiples and adjusted by a discount rate of 14.5%.
</TABLE>
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
D. Comparable Transaction Analysis
The multiples paid for the acquisition of a public company are typically higher
than the price a company trades for in the public market because the value of a
controlling ownership on a per share basis is greater than the value of a single
share. In analyzing comparable transactions, the relevant financial parameters
are the same as those utilized in evaluating public companies. As with the
Comparable Company Analysis, Legg Mason did not rely on multiples of latest
twelve month Revenues, EBITDA, EBIT, Book Value and Net Income for the same
reasons cited previously. Legg Mason did, however, apply multiples of projected
net income to COSCA's projected 1997 net income and 1998 net income (after
utilizing a discount rate of 14.5%). It should be noted, however, that most
transactions involved private companies. As a result, operating data was
available on only three transactions and the usefulness of the Comparable
Transaction Analysis is limited.
The information on the following page sets out the value of and multiples paid
in several recent transactions within the COSCA comparable universe (i.e.,
"Retailers of Cosmetics"), broadly defined. A complete version of the Comparable
Transaction Analysis may be found in Addendum C.
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
D. Comparable Transaction Analysis (cont.)
<TABLE>
<CAPTION>
Retailers of Cosmetics (a)
Transaction Value plus Net Debt Transaction Value
as a Multiple of: as a Multiple of:
LTM One-Year Two-Year Premium to
LTM LTM LTM Net Projected Projected Book Unaffected
Revenues EBITDA EBIT Income Net Income (b) Net Income (b) Value Share Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No. of Data Points 11 3 3 3 3 3 4 3
Mean 0.39 x 9.09 x 15.90 x 34.26 x 12.87 x 9.73 x 2.79 x 62.18%
Median 0.39 8.88 14.81 39.12 11.00 8.90 2.76 62.96%
COSCA LTM Adj. Data $127.92 $2.86 $0.39 $(0.22) $0.18 $0.35 $36.47 $3.97
Implied Enterprise Value
Mean $49.57 $26.00 $6.20 -- -- -- -- --
Median 49.89 25.40 5.78 -- -- -- -- --
Net Debt $8.40 $8.40 $8.40 -- -- -- -- --
Implied Equity Value
Mean $41.17 $17.60 NMF -- -- -- $101.57 --
Median 41.49 17.00 NMF -- -- -- 100.81 --
Value per Share:
Mean $9.05 $3.87 NMF NMF $2.36 $3.37 $22.32 $6.44
Median 9.12 3.74 NMF NMF 2.01 3.09 22.15 6.47
- ----------------------------------------------
(a) $ in millions, except per share amounts.
(b) Sources: Valuline and analyst research reports immediately prior to transaction announcement dates.
</TABLE>
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
E. Acquisition Premiums Analysis
The Acquisition Premiums Analysis shows the average premium to unaffected share
price paid by a broad spectrum of acquirors of public companies. Strategic
acquirors normally must pay a control premium in order to acquire a company. The
size of the premium is determined by several factors, including the
attractiveness of the industry, the attractiveness of a company relative to its
competitors and the aggressiveness of other bidders. This analysis provides a
simple reality check for the Comparable Company and Comparable Transaction
analyses, and is most useful in cases when those analyses are inconclusive. The
analysis covered 1,286 transactions from January 1, 1991 to September 30, 1996.
The results of the analysis are shown in the table below.
<TABLE>
<CAPTION>
No. of Data Mean Median COSCA Implied Valuation
Year Points Premium (a) Premium (a) Share Price (b) Mean Median
<S> <C> <C> <C> <C> <C> <C>
1991 136 54% 46% $3.97 $6.11 $5.80
1992 147 42% 38% $3.97 5.64 5.48
1993 190 40% 36% $3.97 5.56 5.40
1994 299 43% 35% $3.97 5.68 5.36
1995 341 42% 35% $3.97 5.64 5.36
===================== =====================
3Q 1996 173 33% 29% $3.97 5.28 5.12
===================== =====================
- -------------------------
(a) Assumes four weeks prior to announcement date. Source: Securities Data Corporation.
(b) Weighted average price of COSCA Class A and Class B shares as of August 30, 1996, one month prior to announcement of the
Letter of Intent.
</TABLE>
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
E. Acquisition Premiums Analysis (cont.)
(Median Premium Bar Graph appears here, values are as follows)
1991 1992 1993 1994 1995 3Q1996(a)
Median Market Acquisition Premium 46% 38% 36% 35% 35% 29%
All Cash Offer Premium 92%
Pro Rata Cash & Stock Offer Premium 111%
All Stock Offer Premium 143%
- ------------------------------
(a) For the first three quarters of 1996.
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<PAGE>
II. COSCA Stand-Alone Valuation Analysis
================================================================================
F. Discounted Cash Flow Analysis
The Discounted Cash Flow value for a company is derived by calculating the
present value of its projected operating, unleveraged, after-tax cash flows over
a forecasted period of time, plus the estimated value of that company at the
conclusion of the cash flow forecasting period (terminal value). Operating cash
flow incorporates reinvestment through capital expenditures and investments in
working capital to facilitate growth.
The DCF valuation assumed a terminal value for COSCA based on multiples of EBIT
for the year ending nearest September 28, 2001 of 5.0x to 7.0x. The cash flows
for the years 1997 to 2001 and the range of terminal values were discounted back
to January 1, 1997, using discount rates of 11.39% to 19.39%. We applied
discount rates derived from the Company's implied weighted average cost of
capital (which is based on general risk factors within COSCA's comparable
universe adjusted to reflect COSCA's capital structure) and developed a range of
rates which we felt reflected the additional risk implied by COSCA's recent and
projected operating performance.
The table below contains a matrix of values which were derived using the DCF
analysis. Additional detail on the DCF may be found in Addendum D.
<TABLE>
<CAPTION>
Terminal EBIT Discount Rate
Multiple - 2001 11.39% 13.39% 15.39% 17.39% 19.39%
<S> <C> <C> <C> <C> <C> <C>
Total Equity Value 5.0 x $8.0 $6.4 $4.9 $3.6 $2.4
6.0 11.4 9.4 7.7 6.1 4.7
7.0 14.7 12.5 10.5 8.7 7.1
Per Share Value 5.0 x $1.85 $1.48 $1.14 $0.83 $0.56
6.0 2.64 2.18 1.79 1.41 1.09
7.0 3.41 2.90 2.43 2.02 1.65
</TABLE>
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<PAGE>
III. Combined Company Analysis
===============================================================================
A. Overview
Legg Mason analyzed the pro forma operating performance of the Combined Company
in order to determine the value of the Class C Stock to be received by COSCA's
Class A and Class B stockholders as a portion of the Consideration. The analysis
is based upon the projections jointly developed by the managements of COSCA, PFC
and Revlon. Based on the analysis which follows, the Transaction is expected to
improve COSCA's earnings per share in each of the two forecasted years following
the closing of the Transaction.
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<PAGE>
III. Combined Company Analysis
================================================================================
B. Pro Forma Combined Financial Data
($ in Thousands)
For the Years Ended(ing) December 31,
-----------------------------------------------
1995H 1996H 1997P 1998P
------ ----- ------ ------
Net Sales $205,021 $206,826 $226,552 $247,278
Cost of Goods Sold 141,138 139,763 138,116 148,140
--------- -------- ------- --------
Gross Profits 63,883 67,063 88,436 99,138
%Sales 31.2% 32.4% 39.0% 40.1%
Operating Expenses 59,103 61,295 78,605 83,308
Restructuring Cost(a) 0 0 0 0
-------- ------- ------ -------
Operating Income 4,780 5,768 9,831 15,830
% Sales 2.3% 2.8% 4.3% 6.4%
Other Income 670 (103) 106 105
Interest Income (5,054) (5,869) (5,795) (5,253)
--------- -------- ------- -------
Pre-Tax Income 396 (204) 4,142 10,682
Taxes (107) (24) 1,657 4,273
-------- ------- ------- -------
Net Income $503 ($180) $2,485 $6,409
======== ======== ======== ========
EPS $0.05 ($0.02) $0.24 $0.63
Other Data:
----------
Depreciation & Amortization $4,337 $4,937 $5,083 $4,939
EBITDA 9,117 10,705 14,914 20,769
Number of Shares 10,201 10,201 10,201 10,201
- ------------------------------
(a) Excluded for Pro Forma presentation. See Addendum I for more detail.
21
(Legg Mason logo appears here)
<PAGE>
III. Combined Company Analysis
================================================================================
B. Pro Forma Combined Financial Data (cont.)
($ in Thousands)
<TABLE>
<CAPTION>
1996 1996 Projected
1996 1996 Combined Pro Forma Pro Forma As of December 31,
PFC COSCA Company Adjustments Combined 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash $ 1,940 $ 979 $ 2,919 $ 2,919 $ 4,558 $ 4,658
Accounts Receivable 0 1,774 1,774 1,774 1,500 1,500
Inventory 32,686 57,379 90,065 90,065 80,200 84,700
Other Current Assets 775 2,033 2,808 2,808 2,325 2,335
Total Current Assets 35,401 62,165 97,566 0 97,566 88,583 93,193
PP&E, Net 7,703 8,492 16,195 16,195 16,124 15,280
Goodwill 1,461 0 1,461 1,521(a) 2,982 4,069 3,855
Other Assets 0 505 505 505 485 506
Total Assets $ 44,565 $ 71,162 $ 115,727 $ 1,521 $ 117,248 $ 109,261 $ 112,834
Current Liabilities
Accounts Payable $ 2,831 $ 15,956 $ 18,787 $ 18,787 $ 9,238 $ 9,506
Notes Payable 0 12,220 12,220 37,586(b) 49,806 48,423 44,640
Accrued Expenses 1,773 4,928 6,701 6,700 13,401 10,630 9,568
Other Current Liabilities 0 (130) (130) (130) 1,074 550
Total Current Liabilities 4,604 32,974 37,578 44,286 81,864 69,365 64,264
Long-Term Liabilities 18,746 1,722 20,468 (15,000)(c) 5,468 1,321 1,455
Stockholders' Equity 21,215 36,466 57,681 (27,765) 29,916 38,574 47,116
Total Liabilities & Stockholders'
Equity $ 44,565 $ 71,162 $ 115,727 $1,521 $ 117,248 $ 109,260 $ 112,835
</TABLE>
- ------------------------------
(a) Goodwill attributable to the purchase of COSCA
(b) Note payable to finance cash election, and partial repayment of Revlon
intercompany payable
(c) Partial repayment of Revlon intercompany payable of $18,746.
22
(Legg Mason logo appears here)
<PAGE>
<PAGE>
III. Combined Company Analysis
===============================================================================
C. Comparable Company Analysis
($ in Millions)
To value the Combined Company, Legg Mason applied the comparable company
multiples to pro forma combined company 1996 (as a proxy for the latest twelve
months) Revenues, EBITDA, EBIT, Net Income and Book Value and projected 1997 and
1998 EPS. For valuation purposes, Legg Mason relied primarily on 1998 projected
EPS because the 1996 Combined Company data is a mathematical calculation in
combining the historical results of the two companies and does not reflect the
way management expects to operate the business on a combined basis. It is our
belief that investors will emphasize 1998 projected performance (as compared to
1997) because it will be the first year that will include the full impact of
synergies and cost savings in operating the Combined Company.
23
<PAGE>
III. Combined Company Analysis
===============================================================================
C. Comparable Company Analysis (cont.)
($ in Millions)
<TABLE>
<CAPTION>
Retailers of Cosmetics (a)
Market Value plus Net Debt Market Value
as a Multiple of : as a Multiple of:
LTM LTM LTM Book Projected Projected
Revenues EDITDA (b) EBIT (c) Value 1997 EPS 1998 EPS (d)
<S> <C>
No. of Data Points 8 8 8 8 7 7
Mean 0.52 x 8.58 x 12.12 x 2.36 x 16.85 x 14.71 x
Median 0.49 7.91 12.28 2.21 17.08 14.92
Combined Company Data $206.83 $10.71 $5.77 $29.92 $0.24 $0.63
Implied Enterprise Value
Mean $106.81 $91.90 $69.90 -- -- --
Median 102.25 84.67 70.85 -- -- --
Net Debt $43.87 $43.87 $43.87 -- -- --
Implied Equity Value
Mean $62.94 $48.03 $26.04 $70.59 -- --
Median 58.39 40.80 26.98 66.14 -- --
Value per Share
Mean $6.17 $4.71 $2.55 $6.92 $4.10 $9.25
Median 5.72 4.00 2.65 6.48 4.16 9.37
</TABLE>
- ------------------------------
(a) $ in millions, except per share values.
(b) EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
(c) EBIT is Earnings Before Interest and Taxes.
(d) Multiples were derived from 1997 multiples and adjusted by a discount
rate of 14.5%.
24
<PAGE>
DRAFT - SUBJECT TO REVIEW OF FINAL MERGER AGREEMENT
December ______, 1996
The Board of Directors
The Cosmetic Center, Inc.
8839 Greenwood Place
Savage, MD 20763
Members of the Board:
The Cosmetic Center, Inc. ("Cosmetic"), Prestige Fragrance & Cosmetics,
Inc. ("PFC") (a subsidiary of Revlon Consumer Products Corporation ("Revlon")),
and Revlon have entered into an Agreement and Plan of Merger (the "Agreement")
dated December __, 1996, which provides, among other things, for the merger of
PFC with and into Cosmetic (the "Merger").
Pursuant to the Agreement and as a result of the Merger: (a) the
Certificate of Incorporation of Cosmetic would be amended to create a new class
of voting Common Stock ("Class C Common Stock") of Cosmetic, (b) Revlon would
receive newly issued Class C Common Stock, and (c) at the time of the Merger,
each existing Stockholder of Cosmetic could elect to receive, in exchange for
each share of Class A Common Stock or Class B Common Stock held by such
stockholder, either (i) one share of Class C Common Stock or (ii) cash in the
amount of $7.63 per share (the "Cash Election"). The Cash Election is subject to
the limitation that not more than {2,829,065} shares of Class A Common Stock and
Class B Common Stock and options on Class A and Class B Common Stock will be
exchangeable for cash pursuant to the Cash Election (the "Limit"). To the extent
that the aggregate shares and options as to which a Cash Election has been made
exceed the Limit, each stockholder's and optionholder's Cash Election will be
reduced pro rata. The Principal Stockholders have agreed to elect to make the
Cash Election for all of their Class A and Class B Common Stock and all options
which have an exercise price of less than $7.63. Based on the number of Class C
Common shares to be issued to Revlon, Revlon's ownership of the resulting
Combined Company would be at least 65%; after giving effect to the Cash Election
by the Principal Stockholders, Revlon's ownership would be approximately 74%;
and if the Limit is reached, then Revlon's ownership would be increased to
approximately 83%. The terms and conditions of the Merger are more fully set
forth in the Agreement.
We have acted as financial advisor to the Board of Directors of
Cosmetic in connection with the Merger and will receive a fee for our services,
a portion of which is contingent upon the consummation of the transaction. In
addition, we will receive a separate fee for providing this opinion.
<PAGE>
The Board of Directors December , 1996
The Cosmetic Center, Inc. Page 2
DRAFT - SUBJECT TO REVIEW OF FINAL MERGER AGREEMENT
In arriving at our opinion set forth below, we have, among other
things: (i) reviewed the Merger Agreement; (ii) reviewed certain publicly
available audited and unaudited financial statements of Cosmetic and certain
other publicly available information of Cosmetic; (iii) reviewed certain
internal information, primarily financial in nature, concerning Cosmetic and
PFC, prepared by their respective managements; (iv) discussed the past and
current operations and financial condition and prospects of Cosmetic with the
senior management of Cosmetic; (v) discussed the past and current operations and
financial condition and prospects of PFC with the senior management of PFC; (vi)
reviewed forecast financial statements of Cosmetic prepared and furnished to us
by the senior management of Cosmetic; (vii) reviewed forecast financial
statements of PFC prepared and furnished to us by the senior management of PFC;
(viii) reviewed pro forma Combined Company financial statements prepared jointly
by the managements of Cosmetic and PFC; (ix) held meetings and discussions with
certain officers and employees of Cosmetic and PFC, concerning the operations,
financial condition and future prospects of the Combined Company; (x) reviewed
recent stock market data relating to Cosmetic; (xi) reviewed certain publicly
available financial and stock market data relating to selected public companies
that we considered relevant to our inquiry; (xii) analyzed certain publicly
available information concerning the terms of selected merger and acquisition
transactions that we considered relevant to our inquiry; (xiii) considered the
pro forma financial effects of the Merger on Cosmetic; and, (xiv) conducted such
other financial studies, analyses and investigations and considered such other
information as we deemed necessary or appropriate.
We are not expressing an opinion as to what the value of Cosmetic Class
C Common Stock actually will be when issued to current holders of Cosmetic's
Class A and Class B Common Stock pursuant to the Merger Agreement, or as to the
price or trading range at which shares of Cosmetic Class C Common Stock may
trade following the Merger.
In connection with our review, we have assumed and relied upon the
accuracy and completeness of all financial and other information supplied to us
by Cosmetic and PFC, and all publicly available information, and we have not
independently verified such information. We also have relied upon the
managements of Cosmetic and PFC as to the reasonableness and achievability of
the financial projections (and the assumptions and bases therein) provided to us
for Cosmetic, PFC and the Combined Company, respectively, and we have assumed
that such projections have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of management as to the future
operating performance of each respective entity, including without limitation
the tax benefits, cost savings and operating synergies to be enjoyed by the
Combined Company. Neither Cosmetic nor PFC publicly discloses internal
management projections of the type provided to Legg Mason in connection with
Legg Mason's review of the Merger. Such projections were not prepared with the
expectation of public disclosure. The projections were based on numerous
variables and assumptions that are inherently uncertain, including without
limitation,
<PAGE>
The Board of Directors December , 1996
The Cosmetic Center, Inc. Page 3
DRAFT - SUBJECT TO REVIEW OF FINAL MERGER AGREEMENT
factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such projections.
We have not been requested to make, and we have not made, an
independent appraisal or evaluation of the assets, properties, facilities or
liabilities of either Cosmetic or PFC and we have not been furnished with any
such appraisals or evaluations. Estimates of values of companies and assets do
not purport to be appraisals or necessarily reflect the prices at which
companies and assets may actually be sold. Because such estimates are inherently
subject to uncertainty, Legg Mason assumes no responsibility for their accuracy.
Furthermore, Legg Mason did not consider the range of possible tax consequences
facing individual Cosmetic stockholders, and the valuations per share derived by
Legg Mason are prior to any tax impact on individual Cosmetic stockholders.
Our opinion is necessarily based on stock prices and economic and other
conditions and circumstances as in effect on, and the information made available
to us as of, the date of our opinion. In arriving at our opinion, we were not
authorized to solicit, and did not solicit, third party indications of interest
from any party with respect to an acquisition of Cosmetic, its assets, or any
part thereof. In this regard, we have been advised by Cosmetic's senior
management that since the first public announcement of the Merger, no person has
contacted either Cosmetic's senior management or Board of Directors regarding
any potential alternative transaction to the Merger. We have assumed that the
Merger and related transactions described above will be consummated on the terms
and conditions described in the forms of the agreements reviewed by us, without
any waiver of material terms or conditions by Cosmetic or PFC, and that
obtaining any necessary regulatory approvals or satisfying any other conditions
for consummation of the Merger will not have an adverse effect on the Combined
Company.
It is understood that this letter is directed solely to Cosmetic's
Board of Directors and does not constitute a recommendation to any stockholder
of Cosmetic as to how such stockholder should vote on the Merger. This letter is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without the prior written consent of Legg Mason
Wood Walker, Incorporated, provided that this opinion may be included in its
entirety in any filing made by Cosmetic with the Securities and Exchange
Commission with respect to the Merger and the transactions related thereto.
<PAGE>
The Board of Directors December , 1996
The Cosmetic Center, Inc. Page 4
DRAFT - SUBJECT TO REVIEW OF FINAL MERGER AGREEMENT
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be paid for the Class A Common Stock
and Class B Common Stock pursuant to the Agreement is fair to the stockholders
of Cosmetic, from a financial point of view.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
<PAGE>
The Cosmetic Center, Inc.
Summary Comparison of Market Multiples for Retailers of Cosmetics
(Dollars in Millions)
<TABLE>
<CAPTION>
Market Value as a Multiple of: Market Value Plus Net Debt as a Multiple of:
1997 1996 LTM 1995 BOOK LTM LTM LTM
EPS EPS EPS EPS VALUE REVENUES EBITDA EBIT ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mean 16.8 x 18.1 x 19.3 x 20.9 x 2.36 x 0.52 x 8.6 x 12.1 x 1.3 x
Median 17.1 18.4 18.8 19.7 2.21 0.49 7.9 12.3 1.2
High 20.8 23.9 28.0 31.3 5.03 0.87 13.8 17.1 2.8
Low 12.5 7.3 8.2 14.1 0.65 0.17 3.8 6.0 0.5
* Not included in Mean, Median, High or Low calculations.
The Cosmetic Center, Inc. 11.5 x* 21.7 x* NMF NMF 0.45 x* 0.19 x* 20.6 x* NMF 0.4 x*
Operates a chain of 77 cosmetics stores
located primarily in the eastern and
midwestern United States.
Arbor Drugs, Inc. (ARBR) 18.3 21.1 24.1 x 24.1 x 3.74 0.78 12.1 15.7 x 2.4
Operates a chain of 167 drugstores
located primarily in southeastern
Michigan.
Drug Emporium, Inc. (DEMP) 12.5 17.5 14.6 14.1 1.17 0.19 7.3 10.8 0.7
Operates a chain of 136 drugstores
and franchises an additional 88 drugstores
throughout the United States.
Genovese Drug Stores, Inc. (GDXA) 17.1 19.2 19.5 20.2 1.20 0.17 3.8 6.0 0.5
Operates a chain of 120 drugstores located
in the eastern United States.
Longs Drug Stores Corp. (LDG) 14.7 15.9 16.9 17.7 1.81 0.33 6.7 9.7 1.1
One of the largest drugstore chains in
North America serving the American West
(CA, CO, HI, NV).
Perfumania, Inc. (PRFM) #N/A 7.3 8.2 14.3 0.65 0.44 7.0 12.0 0.5
Leading specialty retailer and wholesale
distributor of a wide range of brand name
and designer fragrances.
<PAGE>
The Cosmetic Center, Inc.
Summary Comparison of Market Multiples for the Retailers of Cosmetics Industry
(Dollars in Millions)
Market Value as a Multiple of:
1997 1996 LTM 1995 BOOK LTM LTM LTM
EPS EPS EPS EPS VALUE REVENUES EBITDA EBIT ASSETS
Revco D.S., Inc. (RXR) 19.6 x 22.6 x 25.2 x 6.8 x 2.61 x 0.55 x 8.5 x 12.5 x 1.3 x
Operates 2,184 drugstores in 14
contiguous Midwestern, Eastern
and Southeastern states.
Rite Aid Corp. (RAD) 14.9 16.9 18.2 9.1 2.66 0.80 9.4 13.1 1.4
Operates approximately 2,800 drugstore
chain in 21 eastern states.
Walgreen Co. (WAG) 20.8 23.9 28.0 1.3 5.03 0.87 13.8 17.1 2.8
America's largest drugstore retailer (sales)
with 2,083 drug stores in 31 states
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Summary Comparison of Operating and Valuation Data for the Retailers of
Cosmetics Industry
(Dollars in Millions)
<TABLE>
<CAPTION>
Latest Twelve Months (LTM) Book Share Price Market Mkt Value
Revenues EBITDA EBIT Net Income Assets Value (11/13/96) Value & Net Debt
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Cosmetic Center, Inc. $133.80 $1.24 ($1.23) ($1.92) $65.73 $37.83 $3.98 $17.17 $25.57
Arbor Drugs, Inc. (ARBR) 826.13 53.21 41.24 27.02 273.71 176.17 26.00 658.58 646.00
Drug Emporium, Inc. (DEMP) 825.20 21.05 14.22 3.94 223.38 49.12 4.38 57.53 153.94
Genovese Drug Stores, Inc. (GDXA) 651.65 28.79 18.19 8.61 209.61 71.44 15.38 85.49 109.53
Longs Drug Stores Corp. (LDG) 2,705.13 135.59 93.80 56.42 846.45 524.29 47.88 948.88 906.06
Perfumania, Inc. (PRFM) 130.33 8.23 4.81 3.34 106.88 48.02 4.00 31.24 57.81
Revco D.S., Inc. (RXR) 5,190.60 332.80 225.70 88.70 2,151.20 874.20 33.25 2,283.28 2,830.08
Rite Aid Corp. (RAD) 5,591.16 473.45 341.27 167.50 3,102.48 1,141.64 36.25 3,041.74 4,473.53
Walgreen Co. (WAG) 11,425.88 723.30 581.70 358.28 3,504.26 1,986.36 40.63 9,999.44 9,951.30
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Summary Comparison of Growth Rates and Margins for the Retailers of
Cosmetics Industry
(Dollars in Millions)
<TABLE>
<CAPTION>
1993-1995 Compound Annual Growth Rate LTM Margins 1993-1995 Average Margins
Revenues EBITDA EBIT Net Income EBITDA EBIT Net Income EBITDA EBIT Net Income
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Cosmetic Center, Inc. 4.06% -62.09% NMF NMF 0.93% -0.92% -1.43% 3.27% 1.64% 0.72%
Arbor Drugs, Inc. (ARBR) 15.57% 9.27% 14.24% 21.86% 6.44% 4.99% 3.27% 6.96% 5.05% 3.16%
Drug Emporium, Inc. (DEMP) -0.69% 15.98% 25.04% 79.82% 2.55% 1.72% 0.48% 2.40% 1.46% 0.34%
Genovese Drug Stores, Inc. (GDXA) 11.88% 3.81% -1.21% 0.13% 4.42% 2.79% 1.32% 4.68% 3.15% 1.56%
Longs Drug Stores Corp. (LDG) 2.86% 6.58% 5.08% 4.81% 5.01% 3.47% 2.09% 4.74% 3.30% 1.99%
Perfumania, Inc. (PRFM) 18.28% 90.78% NMF NMF 6.32% 3.69% 2.56% 4.30% 1.85% 0.29%
Revco D.S., Inc. (RXR) 42.54% 45.90% 47.55% 46.18% 6.41% 4.35% 1.71% 6.17% 4.09% 1.52%
Rite Aid Corp. (RAD) 15.84% 17.83% 20.49% 19.22% 8.47% 6.10% 3.00% 8.07% 5.84% 2.93%
Walgreen Co. (WAG) 11.95% 12.93% 13.15% 13.40% 6.33% 5.09% 3.14% 6.21% 4.94% 3.05%
* Not included in Mean, Median, High or Low calculations.
Mean 14.78% 25.39% 17.76% 26.49% 5.74% 4.03% 2.20% 5.44% 3.71% 1.85%
Median 13.76% 14.46% 14.24% 19.22% 6.32% 4.02% 2.32% 5.46% 3.69% 1.77%
High 42.54% 90.78% 47.55% 79.82% 8.47% 6.10% 3.27% 8.07% 5.84% 3.16%
Low -0.69% 3.81% -1.21% 0.13% 2.55% 1.72% 0.48% 2.40% 1.46% 0.29%
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Operating Data Comparisons
(Dollars in Millions)
<TABLE>
<CAPTION>
EBITDA EBIT Net Income
Net Sales EBITDA Margin EBIT Margin Net Income Margin EPS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Cosmetic Center, Inc. LTM (9/29/96) $133.80 $1.24 0.93% ($1.23) -0.92% ($1.92) -1.43% ($0.44)
Fiscal Year Ended 9/29/96, 1995 133.80 1.24 0.93% (1.23) -0.92% (1.92) -1.43% (0.44)
1994 132.30 2.52 1.90% 0.18 0.13% 0.28 0.21% 0.06
1993 123.55 8.63 6.98% 7.05 5.70% 4.19 3.39% 0.95
Arbor Drugs, Inc. (ARBR) LTM (7/31/96) 826.13 53.21 6.44% 41.24 4.99% 27.02 3.27% 1.08
Fiscal Year Ended 7/31/96, 1995 826.13 53.21 6.44% 41.24 4.99% 27.02 3.27% 1.08
1994 707.15 51.10 7.23% 35.61 5.04% 23.07 3.26% 0.94
1993 618.56 44.56 7.20% 31.60 5.11% 18.20 2.94% 0.74
Drug Emporium, Inc. (DEMP) LTM (6/01/96) 825.20 21.05 2.55% 14.22 1.72% 3.94 0.48% 0.30
Fiscal Year Ended 3/02/96, 1995 738.77 20.31 2.75% 13.37 1.81% 4.14 0.56% 0.31
1994 729.50 17.77 2.44% 10.36 1.42% 2.20 0.30% 0.17
1993 749.04 15.10 2.02% 8.55 1.14% 1.28 0.17% 0.10
Genovese Drug Stores, Inc. (GDXA) LTM (5/24/96) 651.65 28.79 4.42% 18.19 2.79% 8.61 1.32% 0.79
Fiscal Year Ended 2/02/96, 1995 612.28 25.81 4.21% 16.28 2.66% 8.33 1.36% 0.76
1994 569.98 28.12 4.93% 19.35 3.39% 9.21 1.62% 0.83
1993 489.14 23.95 4.90% 16.68 3.41% 8.31 1.70% 0.75
Longs Drug Stores Corp. (LDG) LTM (07/25/96) 2,705.13 135.59 5.01% 93.80 3.47% 56.42 2.09% 2.84
Fiscal Year Ended 01/25/96, 1995 2,644.38 131.18 4.96% 90.83 3.43% 54.65 2.07% 2.71
1994 2,558.27 118.64 4.64% 80.83 3.16% 48.73 1.90% 2.35
1993 2,499.22 115.49 4.62% 82.25 3.29% 49.75 1.99% 2.41
Perfumania, Inc. (PRFM) LTM (08/03/96) 130.33 8.23 6.32% 4.81 3.69% 3.34 2.56% 0.49
Fiscal Year Ended 02/03/96, 1995 129.16 7.25 5.62% 3.95 3.06% 2.00 1.55% 0.28
1994 115.58 5.92 5.12% 3.01 2.61% 1.33 1.15% 0.21
1993 92.32 1.99 2.16% (0.11) -0.12% (1.70) -1.84% (0.30)
Revco D.S., Inc. (RXR) LTM (08/24/96) 5,190.60 332.80 6.41% 225.70 4.35% 88.70 1.71% 1.32
Fiscal Year Ended 06/01/96, 1995 5,087.70 325.90 6.41% 218.80 4.30% 82.70 1.63% 1.24
1994 4,431.90 266.10 6.00% 175.70 3.96% 61.10 1.38% 0.95
1993 2,504.00 153.10 6.11% 100.50 4.01% 38.70 1.55% 0.77
</TABLE>
o Cosmetic Center's 1996 EBIT, NI and EPS exclude a one-time $4.0 million
restructuring charge.
o Arbor Drugs 1994 EBIT, NI and EPS exclude provisions for third party
settlements of $7.0 million.
o Drug Emporium's 1996 and 1995 EBIT, NI and EPS exclude store closure expenses
of $3.0 and $11.9 million, respectively.
o Genovese's 1996 NI and EPS exclude a $1.3 million gain on the sale of a
division.
o Long's 1996 EBIT, NI and EPS exclude a $14.0 million lawsuit settlement.
o Perfumania's 1994 EBIT, NI and EPS exclude a one-time $0.8 million provision
for potential inventory losses.
o Revco's 1996 EBIT, NI and EPS exclude a $12.6 million non-recurring charge
relating to a failed merger with Rite-Aid.
o Rite Aid's LTM EBIT, NI and EPS exclude a $16.1 million non-recurring charge
related to acquisition costs.
o Walgreen's 1993 NI and EPS exclude $6.8 million in debt redemption costs. LTM
D&A is estimated at 1995 D&A plus 75% of 1995 D&A less 75% of 1994 D&A.
<PAGE>
The Cosmetic Center, Inc.
Operating Data Comparisons
(Dollars in Millions)
<TABLE>
<CAPTION>
EBITDA EBIT Net Income
Net Sales EBITDA Margin EBIT Margin Net Income Margin EPS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rite Aid Corp. (RAD) LTM (06/01/96) $5,591.16 $473.45 8.47% $341.27 6.10% $167.50 3.00% $1.99
Fiscal Year Ended 03/02/96, 1995 5,446.02 443.21 8.14% 324.54 5.96% 158.95 2.92% 1.90
1994 4,533.85 372.32 8.21% 273.76 6.04% 141.29 3.12% 1.67
1993 4,058.71 319.22 7.86% 223.55 5.51% 111.83 2.76% 1.27
Walgreen Co. (WAG) LTM (05/31/96) 11,425.88 723.30 6.33% 581.70 5.09% 358.28 3.14% 1.45
Fiscal Year Ended 08/31/95, 1995 10,395.10 651.56 6.27% 520.02 5.00% 320.79 3.09% 1.30
1994 9,234.98 573.76 6.21% 455.64 4.93% 281.93 3.05% 1.14
1993 8,294.84 510.87 6.16% 406.21 4.90% 249.48 3.01% 1.01
</TABLE>
o Cosmetic Center's 1996 EBIT, NI and EPS exclude a one-time $4.0 million
restructuring charge.
o Arbor Drugs 1994 EBIT, NI and EPS exclude provisions for third party
settlements of $7.0 million.
o Drug Emporium's 1996 and 1995 EBIT, NI and EPS exclude store closure expenses
of $3.0 and $11.9 million, respectively.
o Genovese's 1996 NI and EPS exclude a $1.3 million gain on the sale of a
division.
o Long's 1996 EBIT, NI and EPS exclude a $14.0 million lawsuit settlement.
o Perfumania's 1994 EBIT, NI and EPS exclude a one-time $0.8 million provision
for potential inventory losses.
o Revco's 1996 EBIT, NI and EPS exclude a $12.6 million non-recurring charge
relating to a failed merger with Rite-Aid.
o Rite Aid's LTM EBIT, NI and EPS exclude a $16.1 million non-recurring charge
related to acquisition costs.
o Walgreen's 1993 NI and EPS exclude $6.8 million in debt redemption costs. LTM
D&A is estimated at 1995 D&A plus 75% of 1995 D&A less 75% of 1994 D&A.
<PAGE>
The Cosmetic Center, Inc.
Comparative Capitalization Profile
(Dollars in Millions)
<TABLE>
<CAPTION>
The Cosmetic Center, Inc. Arbor Drugs, Inc. Drug Emporium, Inc.
ARBR DEMP
<S> <C> <C> <C>
Net Assets:
Cash & Equivalents $1.5 $35.0 $0.8
Accounts Receivable 1.5 17.5 15.7
Inventories 53.0 106.3 164.6
Other Current Assets 1.7 4.7 3.6
Total Current Assets 57.7 163.4 184.8
Accounts Payable 8.0 51.0 51.5
Other Current Liabilities 8.5 17.9 21.2
Net Working Capital 41.2 94.5 112.1
Net Plant & Equipment 7.7 89.1 31.8
Other Tangible Assets 0.4 0.0 1.7
Net Tangible Assets 49.3 183.6 145.7
Intangible Assets 0.0 21.1 5.0
Net Assets $49.3 $204.8 $150.7
Capitalization:
Total Debt $9.9 20.1% $22.4 10.9% $97.2 64.5%
Other Liabilities 1.5 3.1% 6.2 3.0% 4.3 2.9%
Preferred Stock (Liquidation Value) 0.0 0.0% 0.0 0.0% 0.0 0.0%
Total Common Equity 37.8 76.8% 176.2 86.0% 49.1 32.6%
Total Capitalization $49.3 100.0% $204.8 100.0% $150.7 100.0%
<CAPTION>
Genovese Drug Stores Longs Drug Stores Perfumania, Inc. Revco D S, Inc.
GDXA LDG PRFM RXR
<C> <C> <C> <C>
Net Assets:
$1.6 $52.6 $1.2 $5.5
Cash & Equivalents 16.3 49.1 11.5 145.8
Accounts Receivable 106.2 313.5 64.9 972.7
Inventories 2.1 26.3 11.6 24.7
Other Current Assets
126.1 441.5 89.1 1,148.7
Total Current Assets
61.7 147.6 24.8 375.1
Accounts Payable 0.0 129.9 4.5 303.2
Other Current Liabilities
64.4 164.0 59.8 470.4
Net Working Capital
75.7 393.9 15.5 312.6
Net Plant & Equipment 7.8 11.1 2.2 129.2
Other Tangible Assets
147.9 568.9 77.6 912.2
Net Tangible Assets
0.0 0.0 0.0 560.7
Intangible Assets
$147.9 $568.9 $77.6 $1,472.9
Net Assets
Capitalization:
Total Debt $25.6 17.3% $9.8 1.7% $27.7 35.7% $552.3 37.5%
Other Liabilities 50.8 34.3% 34.9 6.1% 1.8 2.3% 46.4 3.2%
Preferred Stock (Liquidation Value) 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0%
Total Common Equity 71.4 48.3% 524.3 92.2% 48.0 61.9% 874.2 59.4%
Total Capitalization $147.9 100.0% $568.9 100.0% $77.6 100.0% $1,472.9 100.0%
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Comparative Capitalization Profile
(Dollars in Millions)
<TABLE>
<CAPTION>
Rite Aid Corp. Walgreen Co.
RAD WAG
<S> <C> <C> <C> <C>
Net Assets:
Cash & Equivalents $9.4 $48.1
Accounts Receivable 248.0 301.0
Inventories 1,222.1 1,531.9
Other Current Assets 40.9 87.7
Total Current Assets 1,520.5 1,968.9
Accounts Payable 253.3 631.7
Other Current Liabilities 152.5 473.5
Net Working Capital 1,114.7 863.6
Net Plant & Equipment 1,142.1 1,374.7
Other Tangible Assets 67.6 160.7
Net Tangible Assets 2,324.4 2,399.0
Intangible Assets 372.3 0.0
Net Assets $2,696.7 $2,399.0
Capitalization:
Total Debt $1,441.2 53.4% $0.0 0.0%
Other Liabilities 113.9 4.2% 412.7 17.2%
Preferred Stock (Liquidation Value) 0.0 0.0% 0.0 0.0%
Total Common Equity 1,141.6 42.3% 1,986.4 82.8%
Total Capitalization $2,696.7 100.0% $2,399.0 100.0%
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Summary of Recent Trading History
(Dollars in Millions)
<TABLE>
<CAPTION>
Primary Stock Price Shares Market Mkt Value 1996E 1997E (1993 - 1995)
Exchange (11/13/96) Outstanding Value & Net Debt EPS EPS EPS CAGR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Cosmetic Center, Inc. OTC $3.98 (a) 4.31 $17.17 $25.57 $0.18 $0.35 NMF LTM (b)
Fiscal Year Ended 9/29/96, 1995(b)
1994(b)
1993(b)
Arbor Drugs, Inc. (ARBR) OTC 26.00 25.33 658.58 646.00 1.23 1.42 14.67% LTM
Fiscal Year Ended 7/31/96, 1995
1994
1993
Drug Emporium, Inc. (DEMP) OTC 4.38 13.15 57.53 153.94 0.25 0.35 6.26% LTM
Fiscal Year Ended 3/02/96, 1995
1994
1993
Genovese Drug Stores, Inc. (GDXA) ASE 15.38 5.56 85.49 109.53 0.80 0.90 8.82% LTM
Fiscal Year Ended 2/02/96, 1995
1994
1993
Longs Drug Stores Corp. (LDG) NYSE 47.88 19.82 948.88 906.06 3.01 3.25 9.51% LTM
Fiscal Year Ended 01/25/96, 1995
1994
1993
Perfumania, Inc. (PRFM) OTC 4.00 7.81 31.24 57.81 0.55 #N/A #N/A LTM
Fiscal Year Ended 02/03/96, 1995
1994
1993
Revco D.S., Inc. (RXR) NYSE 33.25 68.67 2,283.28 2,830.08 1.47 1.70 17.09% LTM
Fiscal Year Ended 06/01/96, 1995
1994
1993
<CAPTION>
Share Price P/E Ratio
High Low High Low
<S> <C> <C> <C> <C>
The Cosmetic Center, Inc. $9.00 $3.75 NMF NMF
Fiscal Year Ended 9/29/96, 14.00 5.75 NMF NMF
20.63 12.75 343.75 x 212.50 x
18.75 11.00 19.74 11.58
Arbor Drugs, Inc. (ARBR) 26.00 18.00 24.07 16.67
Fiscal Year Ended 7/31/96, 22.25 13.67 20.60 12.66
14.70 10.83 15.64 11.52
15.50 10.58 20.95 14.29
Drug Emporium, Inc. (DEMP) 4.63 3.25 15.42 10.83
Fiscal Year Ended 3/02/96, 5.63 3.63 18.15 11.69
6.50 4.00 38.24 23.53
7.63 3.63 76.25 36.25
Genovese Drug Stores, Inc. (GDXA) 15.50 8.38 19.62 10.60
Fiscal Year Ended 2/02/96, 12.27 8.75 16.14 11.51
11.36 8.27 13.69 9.96
10.64 6.48 14.19 8.65
Longs Drug Stores Corp. (LDG) 48.63 38.25 17.12 13.47
Fiscal Year Ended 01/25/96, 47.88 31.25 17.67 11.53
39.63 30.38 16.86 12.93
37.38 31.75 15.51 13.17
Perfumania, Inc. (PRFM) 7.38 3.25 15.05 6.63
Fiscal Year Ended 02/03/96, 7.00 2.75 25.00 9.82
5.88 2.50 27.98 11.90
9.75 3.50 NMF NMF
Revco D.S., Inc. (RXR) 33.25 22.00 25.19 16.67
Fiscal Year Ended 06/01/96, 28.25 17.75 22.78 14.31
24.00 14.00 25.26 14.74
17.00 8.75 22.08 11.36
</TABLE>
(a) C's stock price represents a weighted average of class A and class B share
prices one month prior to announcement of merger (8/30/96).
(b) C's share price and p/e ratio information are based on just class A shares
in these columns only.
<PAGE>
The Cosmetic Center, Inc.
Summary of Recent Trading History
(Dollars in Millions)
<TABLE>
<CAPTION>
Primary Stock Price Shares Market Mkt Value 1996E 1997E (1993 - 1995)
Exchange (11/13/96) Outstanding Value & Net Debt EPS EPS EPS CAGR
<S> <C> <C> <C> <C> <C> <C> <C>
Rite Aid Corp. (RAD) NYSE $36.25 83.91 $3,041.74 $4,473.53 $2.14 $2.43 13.09% LTM
Fiscal Year Ended 03/02/96, 1995
1994
1993
Walgreen Co. (WAG) NYSE 40.63 246.14 9,999.44 9,951.30 1.70 1.95 22.47% LTM
Fiscal Year Ended 08/31/95, 1995
1994
1993
<CAPTION>
Share Price P/E Ratio
High Low High Low
<S> <C> <C> <C> <C>
Rite Aid Corp. (RAD) $36.38 $27.00 18.28 x 13.57 x
Fiscal Year Ended 03/02/96, 34.25 22.25 18.03 11.71
24.00 16.38 14.37 9.81
21.50 15.25 16.93 12.01
Walgreen Co. (WAG) 40.63 28.50 28.02 19.66
Fiscal Year Ended 08/31/95, 31.25 22.38 24.04 17.21
22.50 17.06 19.74 14.97
22.25 18.06 22.03 17.88
</TABLE>
<PAGE>
The Cosmetic Center, Inc.
Selected Merger Transactions in the Drugstore Industry
<TABLE>
<CAPTION>
Transaction Value as a
Transaction Multiple of:
Date of Transaction Value Plus Net 1 Yr. Projected 2 Yr. Projected Book
Announcement Acquiror/Target Value Net Debt Income Net Income Net Income Value
<S> <C> <C> <C> <C> <C> <C>
12/21/94 American Stores/ $39.0 $39.0 #N/A #N/A #N/A #N/A
Clark Drugs
Drugstore chain
05/06/96 Drug Emporium Inc./ 11.0 11.0 #N/A #N/A #N/A #N/A
Eagleville Pharmacy (I Got It at Gary's)
Drugstore chain
06/28/95 Eckerd Corp./ 75.0 75.0 #N/A #N/A #N/A #N/A
Rite Aid Corp. (Florida)
Drugstore chain
07/11/96 JC Penney Co./ 285.0 358.4 39.1 #N/A #N/A 2.95 x
Fay's Inc.
Drugstore chain
01/10/95 JC Penney Co./ 75.0 75.0 #N/A #N/A #N/A #N/A
Kerr Drug Stores Inc.
Drugstore chain
02/01/95 Pharmhouse Corp./ 37.0 37.0 #N/A #N/A #N/A #N/A
FW Woolworth (Rx place)
Drugstore chain
09/09/96(a) Revco D.S. Inc./ 380.0 465.1 NMF 18.6x 12.4x 2.57
Big 8, Inc.
Drugstore Chain
04/04/94 Revco D.S. Inc./ 300.0 611.7 41.9 11.0 8.9 3.26
Hook-SupeRx, Inc.
Drugstore chain
06/21/95 Rite Aid Corp./ 63.6 63.6 #N/A #N/A #N/A #N/A
Pathmark (Drug Stores)
Drugstore chain
12/27/94 Rite Aid Corp./ 132.3 218.2 21.8 9.0 7.9 2.35
Perry Drug Stores Inc.
Drugstore chain
12/02/93 Thrifty PayLess Holdings, Inc./ 1334.4 1,504.4 NMF #N/A #N/A 46.99 *
PayLess Drug Stores Northwest, Inc.
Drugstore chain
<CAPTION>
Transaction Value Plus Net Debt as Implied Control Premium
Date of Multiple of: Target Price Target Price
Announcement Revenues EBITDA EBIT One Day Prior One Month Prior
<S> <C> <C> <C> <C> <C>
12/21/94 0.39 % #N/A #N/A
05/06/96 0.20 #N/A #N/A
06/28/95 0.39 #N/A #N/A
07/11/96 0.36 10.6 x 19.8 x 27.5% 56.9%
01/10/95 0.41 #N/A #N/A
02/01/95 0.19 #N/A #N/A
09/09/96 0.61 27.5* 178.0* NMF(b) NMF(b)
04/04/94 0.26 7.8 14.8 50.7% 66.7%
06/21/95 0.44 #N/A #N/A
12/27/94 0.30 8.9 13.1 46.7% 63.0%
12/02/93 0.71 161.8 * 185.7 *
</TABLE>
- --------------------
(a) This is the announcement date of the original Revco Offer. A subsequent
revised offer was announced on 10/28/96.
(b) Not included in analysis because the revised offer was made almost two
months prior to the first announcement. Hence, an unaffected price would be
approximatley three months out of date during a time of significant
market movement.
* Excluded from the calculation of Mean, Median, High and Low.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mean: 34.3 x 12.9 x 9.7 x 2.79 x 0.39 x 9.1 x 15.9 x 41.6% 62.2%
Median: 39.1 11.0 8.9 2.76 0.39 8.9 14.8 46.7% 63.0%
High: 41.9 18.6 12.4 3.26 0.71 10.6 19.8 50.7% 66.7%
Low: 21.8 9.0 7.9 2.35 0.19 7.8 13.1 27.5% 56.9%
11/14/96 05:20 PM
</TABLE>
<PAGE>
LEGG MASON WOOD WALKER, INC. DISCOUNTED CASH FLOW ANALYSIS
The Cosmetic Center, Inc. ($ millions)
A. Assumptions
Base Case:
After-Tax Discount Rate 11.39%
Post-2001 EBITA Multiple 6.00 x
<TABLE>
<CAPTION>
B. Projected Cash Flow
Fow the Years Ending 12/31/ 1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C>
Sales $140.55 $153.28 $168.91 $184.46 $195.43
Growth Rate % 9.3 % 9.1 % 10.2 % 9.2 % 5.9 %
Gross Margin % 30.7 % 31.1 % 31.4 % 31.4 % 31.4 %
Gross Profit $43.15 $47.73 $52.98 $57.89 $61.44
Operating Expenses % 29.0 % 28.7 % 28.6 % 28.5 % 28.5 %
Operating Expenses $40.76 $43.99 $48.31 $52.49 $55.68
EBIT $ 2.40 $ 3.74 $ 4.67 $ 5.40 $ 5.76
Less: Tax 40.0% 0.96 1.50 1.87 2.16 2.30
Earnings Bef. Interest Aft. Taxes $ 1.44 $ 2.24 $ 2.80 $ 3.24 $ 3.45
Depreciation $ 2.32 $ 2.38 $ 2.90 $ 3.02 $ 3.19
Change in Non-Cash WC 1.99 2.77 3.76 2.89 4.13
Capital Expenditures 0.85 1.20 1.20 1.60 1.60
Net Unlevered Cash Flow $ 0.92 $ 0.65 $ 0.73 $ 1.76 $ 0.91
Terminal Value 34.54
Total Cash Flow $ 0.92 $ 0.65 $ 0.73 $ 1.76 $35.45
</TABLE>
C. Net Present Value (NPV) Analysis
<TABLE>
<CAPTION>
Total Enterprise Value Net Equity Value
<S> <C> <C> <C>
PV of Annual Cash Flow $ 2.9 Total Enterprise Value $23.0
PV of Terminal Value 20.1 Total Debt 12.6
Total Enterprise Value $23.0 Cash 1.0
Net Equity Value $11.4
Shares Outstanding 4.3
Net Equity Value per share $2.64
</TABLE>
D. Equity Value Sensitivity Analysis
Discount Post-2001 EBITA Multiple
Rate 5.00 6.00 7.00
19.4% $2.4 $4.7 $7.1
17.4% 3.6 6.1 8.7
15.4% 4.9 7.7 10.5
13.4% 6.4 9.4 12.5
11.4% 8.0 11.4 14.7
E. Equity Value per Share--Sensitivity Analysis
Discount Post-2001 EBITA Multiple
Rate 5.00 6.00 7.00
19.4% $0.55 $1.10 $1.65
17.4% 0.82 1.42 2.02
15.4% 1.13 1.79 2.44
13.4% 1.48 2.19 2.90
11.4% 1.86 2.64 3.42
<PAGE>
The Cosmetic Center, Inc. Legg Mason Wood Walker, Incorporated
Weighted Average Cost of Capital Calculations 1/28/97
I. Cost of Debt (Kd)
Estimated All-In Cost for Target 10.00%
Tax Rate 40.00%
Kd = 0.1 * (1 - 0.4) = 6.00%
II. Cost of Equity (Ke)
Risk Free Rate (30 Year Treasury) 6.45%
Beta (See Calculation Below) 0.98
Market Risk Premium 8.20%
Ke= 0.06453 + 0.98058325318507 * 0.082 = 14.49%
III. Weighted Average Cost of Capital (K)
Target Debt to Capitalization Ratio 36.57%
Implicit Equity to Capitalization Ratio 63.43%
K = (0.06 * 0.3657) + (0.1449 * 0.634 = 11.39%
<TABLE>
<CAPTION>
BETA CALCULATIONS
Total Debt & Market Value Total Market Net Debt to Net Debt to Effective
Preferred Net Debt of Equity Capitalization Cap. Ratio Equity Ratio Tax Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Arbor Drugs, Inc. $22.37 -12.59 658.58 646.00 -1.95% -1.91% 40.00%
Drug Emporium, Inc. 97.24 96.41 57.53 153.94 62.63% 167.58% 40.00%
Longs Drug Stores Corp. 25.65 24.05 85.49 109.53 21.96% 28.13% 40.00%
Perfumania, Inc. 27.73 26.57 31.24 57.81 45.96% 85.05% 40.00%
Revco D.S., Inc. 552.30 546.80 2,283.28 2830.08 19.32% 23.95% 40.00%
Rite Aid Corp. 1,441.20 1,431.80 3,041.74 4473.53 32.01% 47.07% 40.00%
Walgreen Co. 0.00 -48.13 9,999.44 9951.30 -0.48% -0.48% 40.00%
Mean 25.63% 49.91%
Median 21.96% 28.13%
<CAPTION>
Short Term Unlevered Target
Levered Beta Beta Beta
<S> <C> <C> <C>
Arbor Drugs, Inc. 0.96 0.97 0.98
Drug Emporium, Inc. 0.73 0.36
Longs Drug Stores Corp. 0.86 0.74
Perfumania, Inc. 1.21 0.80
Revco D.S., Inc. 0.80 0.70
Rite Aid Corp. 0.81 0.63
Walgreen Co. 1.10 1.10
Mean 0.76
Median 0.74
</TABLE>
<PAGE>
=============================================================================
Addendum F
==============================================================================
COSCA Stock Price and Volume Graphs
CLOSING STOCK PRICE
<TABLE>
<CAPTION>
9/30/94 12/9/94 2/17/95 4/28/95 7/7/95 9/15/95 11/24/96 2/2/96 4/12/96
<S> <C>
Class A 18.5 13.5 8 7.875 7.5 8.625 6.75 5.375 5.125
Class B 18.25 13.25 8.875 10 8 8.75 8 6 5.125
<CAPTION>
6/21/96 8/30/96 11/8/96
<S> <C>
Class A 5.125 3.75 5.5
Class B 6.25 4.375 5.5
</TABLE>
Trading Volume
<TABLE>
<CAPTION>
9/30/94 12/9/94 2/17/95 4/28/95 7/7/95 9/15/95 11/24/96 2/2/96 4/12/96
<S> <C>
Class A 11,900 39,700 92,500 67,700 13,000 113,300 49,700 230,700 38,600
Class B 12,600 7,200 19,900 43,700 900 10,900 10,900 29,100 5,800
<CAPTION>
6/21/96 8/30/96 11/8/96
<S> <C>
Class A 66,500 43,800 73,600
3,600 6,000 7,700
</TABLE>
Latest Twelve Months (a) Class A Class B
Average Daily Share Price: $5.44 5.88
Average Daily Volume: 19,786 4,051
- --------------------
(a) Pre-announcement date.
25
<PAGE>
Addendum G
==============================================================================
PFC Stand-Alone Income Statements
For the Years Ended(ing) December 31,
1993 1994 1995 1996 1997P 1998P
Net Sales $54,677 $62,674 $72,717 $78,905 $86,000 $94,000
Cost of Sales 27,636 31,922 38,044 37,928 41,717 45,590
------- ------- ------- ------- ------- -------
Gross Profit 27,041 30,752 34,673 40,977 44,283 48,410
% Sales
Operating Expenses 27,641 31,441 36,500 38,976 40,552 43,410
------ ------ ------ ------ ------ ------
Operating Income
% Sales (600) (689) (1,827) 2,001 3,731 5,000
Other Income 0 0 0 0 0 0
Interest Income (1,589) (2,023) (3,380) (1,149) (1,000) (700)
------- ------- ------- ------- ------- -------
Pre-Tax Income (2,189) (2,712) (5,207) 852 2,731 4,300
Taxes
17 25 50 0 0 0
------- ------- ------- ------- ------- -------
Net Income (2,206) (2,737) (5,207) 852 2,731 4,300
======== ======= ======= ======= ======= ======
Other Data:
Depreciation & Amortization $1,071 $1,388 $1,996 $2,218 $2,564 $2,564
EBITDA $471 $699 $169 $4,219 $6,295 $7,564
26
<PAGE>
Addendum H
===============================================================================
Summary of Synergies, Cost Savings and One-Time Expenses
<TABLE>
<CAPTION>
1996 1997
---- ----------------------------------------------------------------
Full Year 1Q 2Q 3Q 4Q Full Year
<S> <C>
Sales Expenses
Wholesale & Telemarketing
Payroll $73.0
Other 74.0
Synergies Offset (233.0)
------ -------- ---------- ------- -------- ---------
Sales Total ($86.0) ($21.5) ($21.5) ($43.0)
====== ======== ========== ======= ======== =========
General & Administrative
MIS
Payroll Net $212.3
Consulting 12.0
AS/400 Lease 98.0
------ -------- ---------- ------- -------- ---------
322.3 80.6 80.6 161.2
Executive
Payroll 956.5
Other, Net 137.0
------ -------- ---------- ------- -------- ---------
1,093.5 273.4 273.4 273.4 273.4 1,093.6
Counsel 0.0
Corporate Allocations, Net 525.0 131.3 131.3 262.6
Real Estate, Net 56.0 14.0 14.0 28.0
Human Resources, Net 100.0 25.0 25.0 50.0
Reduction in Benefits of PFC 700.0 150.0 150.0 300.0
Finance
Payroll, Net 305.8
Mgr Inv & Cash Acctg (100.0)
Loss Prevention (73.8)
Miscellaneous 30.7
------ -------- ---------- ------- -------- ---------
162.7 40.7 40.7 81.4
Merchandising
Payroll, Net 387.3
Miscellaneous 28.9
------ -------- ---------- ------- -------- ---------
416.2 104.1 104.1 208.2
Office Services 0.0 40.5 40.5 81.0
Stores 161.9 40.5 40.5 81.0
Contingency (250.0) (62.5) (62.5) (125.0)
------ -------- ---------- ------- -------- ---------
G&A Total $3,287.6 $273.4 $273.4 $797.1 $797.1 $2,141.0
========= ========= ======== ========== ======== =========
Distribution
Distribution Center
Direct Payroll $1,102.0
Indirect Payroll, Net 237.0
Rent, Net 267.0
------ -------- ---------- ------- -------- ---------
Distribution Total $1,606.0 $401.5 $401.5 $803.0
========= ========= ======== ========== ======== =========
Cost of Goods Sold
Increased Revlon Product Margin $1,650.0 $275.0 $825.0 $1,100.0
Increased 3rd Party Margin 1,350.0 $225.0 $675.0 $900.0
Increased COSCA Inventory Reserve 0.0 (250.0) (250.0) (250.0) (250.0) (1,000.0)
------ -------- ---------- ------- -------- ---------
COGS Total $3,000.0 ($250.0) ($250.0) $250.0 $1,250.0 $1,000.0
========= ========= ======== ========== ======== =========
TOTAL SYNERGIES $ 7,807.6 $23.4 $23.4 $1,427.1 $2,427.1 $3,901.0
========= ========= ======== ========== ======== =========
Inventory Reduction ($5,000.0) ($2,500.0) ($5,000.0)
========= ========== =========
</TABLE>
27
<PAGE>
Addendum I
================================================================================
Pro Forma Combined Company Projections
It should be noted that the projections jointly produced by Revlon, PFC & COSCA
for the Combined Company made use of more consecutive projection for COSCA than
did the COSCA stand-alone projections. Specifically the Combined Company
projections incorporated the following adjustments:
<TABLE>
<CAPTION>
Change To COSCA Stand - Alone Projections
1997 1998 Comments
<S> <C>
Salon Sales $(1.0) $(1.0) But did not reduce corresponding salon expenses
Retail Sales Value Reduction (3.5) (3.5) 3.0% growth vs. 5.0% growth in comparable store sales
Cost of Sales (2.5) (2.5)
-------- -------
Gross Profit (1.0) (1.0) Gross margin assumption was 28.6%
-------- -------
Total Change in Operating Income $(2.0) $(2.0)
======= ========
</TABLE>
In order to be consistent with regard to the COSCA stand-alone projections, Legg
Mason reversed these adjustments in the Combined Company projections.
28
<PAGE>
Addendum I
============================================================================
Pro Forma Combined Company Projections (cont.)
1995 Combined Income Statements
<TABLE>
<CAPTION>
Pro Forma Pro Forma
PFC COSCA Adjustments (a) Combined
<S> <C>
Net Sales $72,717 $132,304 $0 $205,021
Cost of Goods Sold 38,044 105,094 (2,000) 141,138
-------- --------- -------- ---------
Gross Profit 34,673 27,210 2,000 63,883
% Sales 47.7% 20.6% 31.2%
Operating Expenses 36,500 27,033 (4,430) 59,103
Restructuring Costs 0 0 0 0
-------- --------- ---------- --------
Operating Income (1,827) 177 6,430 4,780
% Sales -2.5% 0.1% 2.3%
Other Income (Expense) 0 670 0 670
Interest Income (Expense) (3,380) (725) (949) (5,054)
-------- --------- ---------- --------
Pre-Tax Income (5,207) 122 5,481 396
Taxes 50 (157) 0 (107)(d)
-------- --------- ---------- --------
Net Income $(5,257) $279 $5,481 $503
========= ========= ========== ========
EPS $0.06 $0.05
Other Data:
Depreciation &
Amortization $ 1,996 $2,341 $0 $4,337
EBITDA 169 2,518 6,430 9,117
Number of Shares 4,314 10,201
</TABLE>
29
<PAGE>
Addendum I
================================================================================
Pro Forma Combined Company Projections (cont.)
($ in Thousands)
<TABLE>
<CAPTION>
1996 Combined Income Statements
PRO FORMA COMBINED PRO FORMA PRO FORMA
PFC COSCA ADJUSTMENTS (A) COSCA COMPANY ADJUSTMENTS (B) COMBINED
------- -------- --------------- --------- -------- --------------- ---------
<S> <C>
Net Sales $78,905 $133,795 ($5,874) $127,921 $206,826 $ 0 $206,826
Cost of Goods Sold 37,928 107,467 (4,632) 102,835 140,763 (1,000) 139,763
------- -------- ------- -------- -------- ------- --------
Gross Profit 40,977 26,328 (1,242) 25,086 66,063 1,000 67,063
% Sales 51.9% 19.7% 19.6% 32.4%
Operating Expenses 38,976 27,558 (2,338) 25,220 64,196 (2,901) 61,295
Restructuring Costs 0 4,024 (4,024) 0 0 0 0
------- -------- ------- ------- -------- ------- --------
Operating Income 2,001 (5,254) 5,120 (134) 1,867 3,901 5,768
% Sales 2.5% -3.9% -0.1% 2.8%
Other Income 0 95 0 95 95 (198)(c) (103)
Interest Income (1,149) (1,030) 0 (1,030) (2,179) (3,690) (5,869)
------- -------- ------- ------- -------- ------- --------
Pre-Tax Income 852 (6,189) 5,120 (1,069) (217) 13 (204)
Taxes 0 (714) 0 (123)(d) (25) 0 (24)(d)
------- -------- ------- ------- -------- ------- --------
Net Income $852 ($5,475) $5,120 ($946) ($192) $13 ($180)
======= ======== ======= ======= ======== ======= ========
EPS ($1.27) ($0.22) ($0.02) ($0.02)
Other Data:
Depreciation & Amortization $2,218 $2,719 $0 $0 $4,937 $0 $4,937
EBITDA 4,219 (2,535) 5,120 (134) 6,804 3,901 10,705
Number of Shares 4,314 4,314 10,201 10,201
</TABLE>
- -------------------------
(a) Adjustments to back out revenue and costs associated with the operation and
discontinuation of the Atlanta operations. No other adjustments.
(b) Adjustments to incorporate synergies and cost savings resulting from the
merger, as well as increases in goodwill and interest expense. Used 1997
#'s for all items.
(c) Goodwill amortization
(d) Applied COSCA implied standalone tax rate of 11.5% to losses for pro
forma COSCA and pro forma Combined pre tax income.
- -------------------------------------------------------------------------------
30
<PAGE>
Addendum I
================================================================================
Pro Forma Combined Company Projections (cont.)
($ in Thousands)
<TABLE>
<CAPTION>
1997 Combined Income Statements
Transaction Combined Pro Forma Pro Forma
PFC COSCA Adjustments Company Adjustments Combined
-------- -------- ----------- -------- ----------- ---------
<S> <C>
Net Sales $86,000 $140,552 $0 $226,552 $0 $226,552
Cost of Goods Sold 41,717 97,399 (1,000) 138,116 0 138,116
-------- -------- ----------- -------- ----------- ---------
Gross Profit 44,283 43,153 1,000 88,436 0 88,436
% Sales 51.5% 30.7% 39.0%
Operating Expenses 40,552 40,756 (2,703) 78,605 0 78,605
Restructuring Costs 0 0 4,176 4,176 (4,176) 0
-------- -------- ----------- -------- ----------- ---------
Operating Income 3,731 2,397 (473) 5,655 0 9,831
% Sales 4.3% 1.7% 4.3%
Other Income 0 106 0 106 0 106
Interest Income (1,000) (1,105) (3,690) (5,795) 0 (5,795)
-------- -------- ----------- -------- ----------- ---------
Pre-Tax Income 2,731 1,398 (4,163) (34) 0 4,142
Taxes 0 565 0 565 0 1,657 (a)
-------- -------- ----------- -------- ----------- ---------
Net Income $2,731 $833 ($4,163) ($599) $0 $2,485
======== ======== =========== ======== =========== =========
EPS $0.18 $0.24
Other Data:
Depreciation & Amortization $2,564 $2,321 $198 $5,083 $0 $5,083
EBITDA 6,295 4,718 (275) 10,738 0 14,914
Number of Shares 4,550 5,650 (b) 10,201
</TABLE>
- -------------------
(a) Applied 40% tax rate to pro forma combined company pre-tax income.
31
<PAGE>
Addendum I
================================================================================
Pro Forma Combined Company Projections (cont.)
($ in Thousands)
<TABLE>
<CAPTION>
1998 Combined Income Statements
Transaction Combined Pro Forma Pro Forma
PFC COSCA Adjustments Company Adjustments Combined
-------- -------- ----------- -------- ----------- ---------
<S> <C>
Net Sales $94,000 $153,278 $0 $247,278 $0 $247,278
Cost of Goods Sold 45,590 105,550 (3,000) 148,140 0 148,140
-------- -------- ----------- -------- ----------- ---------
Gross Profit 48,410 47,728 3,000 99,138 0 99,138
% Sales 51.5% 31.1% 40.1%
Operating Expenses 43,410 43,988 (4,090) 83,308 0 83,308
Restructuring Costs 0 0 0 0 0 0
-------- -------- ----------- -------- ----------- ---------
Operating Income 5,000 3,740 7,090 15,830 0 15,830
% Sales 5.3% 2.4% 6.4%
Other Income 0 105 0 105 0 105
Interest Income (700) (1,193) (3,360) (5,253) 0 (5,253)
-------- -------- ----------- -------- ----------- ---------
Pre-Tax Income 4,300 2,652 (3,730) 10,682 0 10,682
Taxes 0 1,074 0 1,074 0 4,273 (a)
-------- -------- ----------- -------- ----------- ---------
Net Income $4,300 $1,578 ($3,730) ($9,608) $0 $6,409
======== ======== =========== ======== =========== =========
EPS $0.35 $0.63
Other Data:
Depreciation & Amortization $2,564 $2,375 $0 $4,939 $0 $4,939
EBITDA 7,564 6,115 7,090 20,769 0 20,769
Number of Shares 4,550 5,650 (b) 10,201
</TABLE>
- -------------------
(a) Applied 40% tax rate to pro forma combined company pre-tax income.
32
