<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 27, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to _______________
Commission file number 0-14756
THE COSMETIC CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1266697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8700 ROBERT FULTON DRIVE,
COLUMBIA, MARYLAND 21046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410-309-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of June 27, 1998, 10,025,601 shares of Class C Common Stock, par value $.01
per share, and no shares of Class A Common Stock, par value $.01 per share, or
Class B Common Stock, par value $.01 per share, were outstanding.
Total Pages 14
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THE COSMETIC CENTER, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 27,
ASSETS 1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,518 $ 5,359
Accounts receivable, net................................. 787 1,320
Inventories.............................................. 73,871 88,976
Deferred tax assets...................................... 2,794 2,879
Prepaid expenses and other............................... 284 179
------------ -----------
Total current assets.................................. 80,254 98,713
Property and equipment, net................................. 13,086 14,172
Other assets................................................ 913 1,031
Intangible assets related to businesses acquired, net....... 4,434 4,494
------------ -----------
Total assets.......................................... $ 98,687 $118,410
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 13,397 $ 17,234
Accrued expenses and other............................... 9,681 9,715
Accounts payable to Products Corporation................. 5,812 2,500
Note payable - Bank...................................... 41,779 -
------------ -----------
Total current liabilities............................ 70,669 29,449
Note payable - Products Corporation.......................... 13,255 13,255
Long-term debt............................................... - 38,954
Other long-term liabilities.................................. 1,867 2,065
Stockholders' equity:
Class A common stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding............ - -
Class B common stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding............ - -
Class C common stock, $.01 par value; 40,000,000 shares
authorized; 10,025,601 and 10,015,101, respectively,
issued and outstanding ................................. 100 100
Additional paid in capital............................... 39,334 39,291
Accumulated deficit...................................... (26,538) (4,704)
------------ ------------
Total stockholders' equity.......................... 12,896 34,687
------------ ------------
Total liabilities and stockholders' equity.......... $ 98,687 $118,410
============ ============
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
2
<PAGE>
THE COSMETIC CENTER, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
JUNE 27, JUNE 27, JUNE 27, JUNE 27,
1998 1997 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales........................................................... $ 39,478 $ 36,473 $ 77,394 $ 49,332
----------- ---------- ---------- ---------
Cost of sales, including buying, occupancy and distribution......... 37,564 24,955 66,360 33,658
Selling, general and administrative expenses........................ 16,687 11,704 30,305 18,402
Business consolidation costs........................................ -- 4,000 -- 4,000
----------- ---------- ---------- ---------
Operating expenses.................................................. 54,251 40,659 96,665 56,060
----------- ---------- ---------- ---------
Loss from operations................................................ (14,773) (4,186) (19,271) (6,728)
Interest expense.................................................... (1,303) (898) (2,614) (1,172)
Other income, net................................................... 19 (64) 51 (64)
----------- ---------- ---------- ---------
Loss from operations before income taxes............................ (16,057) (5,148) (21,834) (7,964)
Provision for income taxes.......................................... -- 5 -- 20
----------- ---------- ---------- ---------
Net loss............................................................ $ (16,057) $ (5,153) $ (21,834) $ (7,984)
============ ========== ========== =========
Basic and diluted loss per common share:
Loss from operations........................................... $ (1.47) $ (0.44) $ (1.92) $ (0.75)
============ ========== ========== =========
Net loss....................................................... $ (1.60) $ (0.54) $ (2.18) $ (0.89)
=========== ========== ========== =========
Basic and diluted weighted average
common shares outstanding...................................... 10,025,601 9,542,558 10,021,505 9,010,946
=========== ========== ========== =========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
3
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THE COSMETIC CENTER, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 27, JUNE 27,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
-------------- ------------
<S> <C> <C>
Net loss...................................................................... $ (21,834) $ (7,984)
Adjustments to reconcile net loss to
net cash (used for) provided by operating activities:
Depreciation and amortization................................................ 2,303 1,706
Non-Cash restructuring charges............................................... 10,538 --
Change in assets and liabilities, net of aquired assets and liabilities:
Decrease (increase) in accounts receivable, net......................... 533 (204)
Decrease in inventories................................................. 8,507 69
(Increase) decrease in prepaid expenses and other current assets........ (20) 754
(Decrease) increase in accounts payable................................. (3,837) 2,843
(Decrease) increase in accrued expenses and other....................... (3,974) 2,249
Increase in accounts payable to Products Corporation - current ......... 3,312 647
Other, net.............................................................. (80) 404
----------- -----------
Net cash (used for) provided by operating activities.......................... (4,552) 484
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (1,157) (1,162)
Acquisition of business, net of cash acquired................................. -- (19,883)
----------- -----------
Net cash used for investing activities........................................ (1,157) (21,045)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from bank...................................................... 2,825 18,848
Increase in accounts payable to Products Corporation - non-current, net....... -- 940
Exercise of stock option..................................................... 43 --
----------- -----------
Net cash provided by financing activities.................................... 2,868 19,788
----------- -----------
Net decrease in cash.......................................................... (2,841) (773)
Cash at beginning of period................................................... 5,359 3,479
----------- -----------
Cash at end of period......................................................... $ 2,518 $ 2,706
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................................... $ 2,495 315
Income taxes, net of refunds........................................... 16 12
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
4
<PAGE>
THE COSMETIC CENTER, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(1) BASIS OF PRESENTATION
The Cosmetic Center, Inc. (the "Company") operates in one segment as a
specialty retailer primarily engaged in the sale of a wide range of prestige
and mass-merchandised brand name cosmetics, fragrances, skincare and treatment,
haircare, bath and body, personal care appliances, hosiery, beauty care and
related items (sometimes referred to herein as "Beauty Products") at discounted
prices. As of June 27, 1998, the Company operated 60 retail stores and 192
outlet stores in 42 states. Retail stores operate in strip shopping centers and
sell, primarily at discount prices, an extensive selection of first quality
Beauty Products that are usually found in mass market retailers and department
stores. Outlet stores operate in outlet centers and sell, at deep discount
prices, a wide range of first quality, first quality excess, returned,
refurbished and discontinued brand name Beauty Products.
The Company is an approximately 85% owned subsidiary of Revlon
Consumer Products Corporation (together with its subsidiaries other than the
Company, "Products Corporation"), which is a direct wholly owned subsidiary of
Revlon, Inc.
On April 25, 1997, Prestige Fragrance & Cosmetics, Inc. ("PFC"), then
a wholly owned subsidiary of Products Corporation, merged (the "Merger") with
and into The Cosmetic Center, Inc. (prior to the Merger, "CCI"), with the
Company being the surviving corporation. The Merger was accounted for as a
reverse acquisition using the purchase method of accounting, and PFC is
considered to be the acquiring entity and CCI the acquired entity for
accounting purposes, even though CCI was the surviving legal entity. The
historical financial statements of the Company for the period prior to the
Merger include the results of operations of PFC only, and for the period
subsequent to the Merger include the results of operations of both entities. As
a result of the Merger, the Company changed its fiscal year to a 52- or 53-week
year ending on the last Saturday in December. See Note 3.
The accompanying Condensed Financial Statements are unaudited. In
management's opinion, all adjustments (consisting only of normal recurring
adjustments other than the one-time charges described in Note 6) necessary for
a fair presentation have been made. In the Unaudited Condensed Financial
Statements, 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 revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The results of
operations and financial position, including working capital, for interim
periods are not necessarily indicative of results to be expected for a full
year, due, in part, to seasonal fluctuations, which are normal for the
Company's business. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes contained
in the Company's 1997 Annual Report on Form 10-K.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income (loss) and its components in a
full set of general-purpose financial statements. The only component of
comprehensive income for the Company is net income (loss).
Also in June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Due to the similarity in type of product and
method of distribution of products for CCI and PFC stores, and the similarity
of customers for the products, the Company's financial reports are presented as
a single operating segment.
The aforementioned recently issued accounting pronouncements establish
standards for disclosures only and therefore there will be no effect on the
Company's financial position or results of operation.
5
<PAGE>
THE COSMETIC CENTER, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(2) BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per common share has been computed based upon
the weighted average number of shares of common stock outstanding during the
period. The Company's outstanding stock options represent the only dilutive
potential common stock outstanding. The amounts of loss and number of shares
used in the calculations of basic and diluted loss per common share were the
same for the periods presented, and diluted loss per share does not include any
incremental shares that would have been outstanding assuming the exercise of
any stock options because the effect of those incremental shares would have
been antidilutive. Weighted average shares outstanding is computed assuming
that the 8,479,335 shares of the Company's Class C Common Stock, par value
$0.01 per share (the "Class C Common Stock"), that Products Corporation
received in the Merger were outstanding and owned by Products Corporation for
all periods prior to the Merger.
(3) THE MERGER
Pursuant to the Merger, Products Corporation received 8,479,335 shares
of Class C Common Stock. As a result of the Merger, CCI's stockholders
received, for each share of Class A Common Stock or Class B Common Stock held,
one share of newly issued Class C Common Stock or, at each stockholder's
election subject to a limitation, $7.63 in cash (the "Cash Election"). Holders
of options to purchase CCI's Class A Common Stock or Class B Common Stock with
an exercise price of less than $7.63 received for each such option they held,
an equivalent option to purchase Class C Common Stock or, at each such
optionholder's election and subject to a limitation, cash equal to the
difference between $7.63 and the exercise price per share of such option. The
number of shares of Class C Common Stock owned by Products Corporation after
the Merger constitutes approximately 85% of the outstanding Class C Common
Stock after giving effect to the Cash Election.
The Merger was accounted for as a reverse acquisition, using the
purchase method of accounting, for a purchase price of approximately $27,905.
This amount was allocated to the assets of CCI acquired and liabilities of CCI
assumed to the extent of Products Corporation's ownership interest based upon
their estimated fair values. The excess of acquisition cost over estimated fair
value of CCI's net tangible assets of $3,280 has been allocated to goodwill and
is being amortized over 40 years. As a result of the Merger, the Company
incurred costs of approximately $6,800, which costs were included in the
purchase price of CCI and primarily related to direct costs of the acquisition,
closing certain CCI stores and severance benefits for certain CCI employees. As
of June 27, 1998, approximately $2,183 of these direct costs remained in
accrued liabilities and other long-term liabilities.
(4) LONG TERM DEBT
The Company's current credit facility was amended as of March 28, 1998
to, among other things, adjust the interest rate to LIBOR plus 2.50% per annum
or the bank's prime rate plus 0.75% per annum and amend certain financial
covenants.
The outstanding balance of the Company's credit facility is reflected
as current debt since it expires in less than one year on April 30, 1999. The
Company intends to refinance its credit facility, although no assurance can be
given that such refinancing will be consummated or if consummated, will be
consummated on favorable terms.
6
<PAGE>
THE COSMETIC CENTER, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The credit facility, which expires on April 30, 1999, provides up to
$70 million of revolving credit tied to a borrowing base of 65% of eligible
inventory, as defined in the credit facility. Availability under the credit
facility varies with the borrowing base. As of June 27, 1998, $41.8 million was
outstanding and an additional $3.5 million was available for borrowing under
the credit facility.
As a result of the Company's operating losses, the Company obtained a
waiver of compliance with the financial covenants contained in its credit
facility as of June 27,1998. The Company is in discussions with its lenders for
an amendment to the financial covenants contained in its credit facility. There
can be no assurances that the Company will obtain such amendment or if
obtained, that such amendment will be on favorable terms.
(5) SUBSEQUENT EVENTS
In order to provide for its liquidity needs and to fund its new
business strategy, following the end of the second quarter, the Company
borrowed $5 million from Products Corporation. Such borrowings bear interest at
9.25% and may be repaid following demand by Products Corporation in whole or in
part only if after such repayment the Company has a certain minimum
availability under its credit facility. Such amount is in addition to the
"Notes payable - Products Corporation" and "Accounts payable to Products
Corporation".
(6) RESTRUCTURING CHARGES
The Company incurred one-time charges, resulting in an accrual of
$10.5 million for the three months ended June 27, 1998. These charges include
write-offs of $6.6 million for inventory, primarily resulting from
remerchandising plans related to the Company's new strategic plan, and
$3.9 million of SG&A (as defined below) related write-offs of which
$2.3 million related to severance and other employment costs and $1.6 million
related to other charges in connection with the implementation of the Company's
new strategic plan.
7
<PAGE>
THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On April 25, 1997, PFC, then a wholly owned subsidiary of Products
Corporation, merged with and into CCI, with the Company being the surviving
corporation. The Merger has been accounted for as a reverse acquisition using
the purchase method of accounting, and PFC is considered to be the acquiring
entity and CCI the acquired entity for accounting purposes, even though CCI was
the surviving legal entity. The historical financial statements and all other
financial data included herein of the Company for the period prior to the
Merger include the results of operations of PFC only, and for the period
subsequent to the Merger include the results of operations and other financial
data of both entities. This Quarterly Report on Form 10-Q should be read in
conjunction with the Company's 1997 Annual Report on Form 10-K.
The Company operates in a single business segment as a specialty
retailer primarily engaged in the sale of a wide range of prestige and
mass-merchandised brand name Beauty Products at discounted prices. As of June
27, 1998, the Company operated 60 retail stores and 192 outlet stores in 42
states. Retail stores operate in strip shopping centers and sell, primarily at
discount prices, an extensive selection of first quality Beauty Products that
are usually found in mass market retailers and department stores. Outlet stores
operate in outlet centers and sell, at deep discount prices, a wide range of
first quality, first quality excess, returned, refurbished and discontinued
brand name Beauty Products.
The Company has been experiencing declining comparable store sales
resulting in losses due primarily to difficulties in the integration of the
operations of CCI and PFC. In the second quarter of 1998, the Company initiated
the implementation of a new strategic plan intended to focus on improving
financial and operating performance. The Company's strategic plan is intended
to increase sales, enhance profitability and improve operational performance
through, among other things, (i) strengthening the organization, including
hiring a new President and Chief Executive Officer with significant experience
in the retail industry, (ii) remerchandising stores to improve sales and
productivity by implementing newly developed, rationalized planograms which are
expected to have an updated appeal with a focus on differentiation from the
competition, (iii) opening new stores in high growth, densely populated,
middle-to-higher income regions, (iv) closing stores which do not meet
financial return expectations, (v) developing a new store prototype to provide
the Company's customers with a more pleasant shopping experience, (vi) focusing
on operational disciplines intended to improve inventory controls and increase
warehouse and distribution efficiencies and (vii) improving information systems
by, among other things, upgrading the Company's merchandise management and
financial systems and introducing scanning into stores.
The Company incurred one-time charges, resulting in an accrual of
$10.5 million for the three months ended June 27, 1998. These charges include
write-offs of $6.6 million for inventory, primarily resulting from
remerchandising plans related to the Company's new strategic plan and $3.9
million of SG&A (as defined below) related write-offs of which, $2.3 million
related to severance and other employment costs and $1.6 million related to
other charges in connection with the implementation of the Company's new
strategic plan.
RESULTS OF OPERATIONS
Net sales for the three months ended June 27, 1998 were $39.5 million,
an increase of $3.0 million, or 8.2%, from the $36.5 million in net sales for
the three months ended June 27, 1997. Net sales for the six months ended June
27, 1998 were $77.4 million, an increase of $28.1 million, or 57.0%, from the
$49.3 million in net sales for the six months ended June 27, 1997. The increase
in net sales for both periods was attributable primarily to incremental sales
resulting from the Merger with CCI, which contributed approximately $25.1
million for the three months ended June 27, 1998 and $50.8 million for the six
months ended June 27, 1998 compared with $21.4 million from the date of the
Merger to June 27, 1997. The increase in net sales from the Merger was offset,
primarily, by a decline in comparable store sales. On a proforma basis for the
Merger, comparable store sales for the three months ended June 27, 1998
declined to $38.1 million from $41.2 million for the three months ended June
27, 1997 and on a proforma basis, comparable store sales for the six months
ended June 27, 1998 declined to $74.1 million from $78.4 million for the six
months ended June 27, 1997. The decline in comparable store sales resulted
primarily from disruptions resulting from the Merger and the integration of the
operations of CCI and PFC, sales declines in older stores and stores in malls
and shopping centers experiencing sales declines and increased competitive
activity.
Cost of sales, including buying, occupancy and distribution expenses
("COS"), excluding the impact of one-time charges of $6.6 million which are
more fully described above, were $31.0 million (78.5% of net sales) for the
three months ended June 27, 1998 compared to $25.0 million (68.4% of net sales)
for the three months ended June 27, 1997. COS, excluding the impact of such
one-time charges, were $59.8 million (77.3% of net sales) for the six months
ended June 27, 1998 compared to $33.7 million (68.2% of net sales) for the six
months ended June 27, 1997. COS as a percentage of net sales, excluding one
time charges for the three and six months ended June 27, 1998 increased
primarily as a result of higher COS in the CCI stores included from the date of
the Merger associated with the product mix in such stores. Including the effect
of inventory write-offs, COS was $37.6 million for the three months ended
June 27, 1998 and $66.4 million for the six months ended June 27, 1998.
Selling, general and administrative ("SG&A") expenses, excluding the
impact of one-time charges of $3.9 million which are more fully described
above, were $12.8 million (32.4% of net sales) for the three months ended June
27, 1998 compared to $11.7 million (32.1% of net sales) for the three months
ended June 27, 1997. SG&A expenses, excluding the impact of such one-time
charges, were $26.4 million (34.1% of net sales) for the six months ended June
27, 1998 compared to $18.4 million (37.3% of net sales) for the six months
ended June 27, 1997. SG&A expenses as a percentage of net sales decreased for
the six months ended June 27, 1998 compared with the prior year period primarily
due to the inclusion of the CCI operations and the benefit of certain synergies
achieved as a result of the consolidation
8
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THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
of CCI and PFC. Including the effect of one-time charges, SG&A expenses would
have been $16.7 million for the three months ended June 27, 1998 and
$30.3 million for the six months ended June 27, 1998.
Interest expense was $1.3 million for the three months ended June 27,
1998 compared to $0.9 million for the three months ended June 27, 1997 and $2.6
million for the six months ended June 27, 1998 compared to $1.2 million for the
six months ended June 27, 1997. The increase in interest expense for the 1998
periods is primarily attributable to higher borrowings under the Company's
credit facility.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by operating activities was ($4.6)
million for the six months ended June 27, 1998 and $0.5 million for the six
months ended June 27, 1997. The increase in cash used for operating activities
in the 1998 period compared with the 1997 period resulted primarily from the
increase in the net loss of the Company in the 1998 period, partially offset by
a decrease in inventories.
Net cash used for investing activities was $1.2 million and $21.0
million for the six months ended June 27, 1998 and June 27, 1997, respectively.
The decrease in cash used for investing activities during the 1998 period
compared with the 1997 period is due to the cash used in the Merger during the
1997 period.
Net cash provided by financing activities was $2.9 million for the six
months ended June 27, 1998 compared with $19.8 million for the six months ended
June 27, 1997. The decrease in the 1998 period compared with the 1997 period
resulted primarily from reduced borrowings under the credit facility as
borrowings under the Company's credit facility were used to fund the Merger
during the six months ended June 27, 1997. The credit facility, which expires
on April 30, 1999, provides up to $70 million of revolving credit tied to a
borrowing base of 65% of eligible inventory, as defined in the credit facility.
Availability under the credit facility varies with the borrowing base. As of
June 27, 1998, $41.8 million was outstanding and an additional $3.5 million was
available for borrowing under the credit facility.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the credit facility. The
Company's principal uses of funds are expected to be the payment of operating
expenses, working capital, costs to implement the Company's strategic plan,
capital expenditures and debt service on the Company's credit facility.
As a result of the Company's operating losses, the Company obtained a
waiver of compliance with the financial covenants contained in its credit
facility as of June 27, 1998. The Company is in discussions with its lenders
for an amendment to the financial covenants contained in its credit facility.
There can be no assurances that the Company will obtain such amendment or, if
obtained, that such amendment will be on favorable terms. In addition, to
provide for its liquidity needs and to fund its new business strategy,
following the end of the second quarter, the Company borrowed $5 million from
Products Corporation. Such borrowings bear interest at 9.25% and may be repaid
following demand by Products Corporation in whole or in part only if after such
repayment the Company has certain minimum availability under its credit
facility.
The outstanding balance of the Company's credit facility is reflected
as current debt since it expires in less than one year on April 30, 1999. The
Company intends to refinance its credit facility, although no assurance can be
given that such refinancing will be consummated or if consummated, will be
consummated on favorable terms.
Based upon the Company's current level of operations and anticipated
growth as a result of its strategic plan, the Company is unable to predict
whether cash flows from operations and funds from the credit facility will be
sufficient to enable the Company to meet its anticipated cash requirements for
the foreseeable future. If the Company is unable to satisfy such cash
requirements, the Company could be required to adopt one or more alternatives,
such as
9
<PAGE>
THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
reducing or delaying capital or other expenditures, store openings and closings
or other aspects of the Company's strategic plan, borrowing additional funds,
or restructuring indebtedness, selling assets or operations, issuing additional
shares of capital stock of the Company or seeking capital contributions from
third parties or affiliates. There can be no assurance that any of such actions
could be effected or effected on favorable terms, that if effected they would
enable the Company to continue to satisfy its cash requirements or that they
would be permitted under the terms of the credit facility or the Products
Corporation or REV Holdings Inc. debt instruments then in effect.
The Company estimates that capital expenditures for the remainder of
1998 will be approximately $3.1 million, including upgrades to the Company's
management information systems. Pursuant to a tax sharing agreement, the
Company may be required to pay Products Corporation amounts equal to the taxes
that the Company would otherwise have to pay if it were to file separate
federal, state and local tax returns. The Company currently anticipates that no
significant federal tax payments or payments in lieu of federal taxes pursuant
to the tax sharing agreement will be made by the Company for 1998.
In addition, Products Corporation has announced that it is
implementing its previously announced strategy of withdrawing from operating
retail stores and has determined to dispose of its 85% interest in the Company.
As a result of Products Corporation's determination, the Company has determined
to explore its strategic alternatives. There can be no assurance that any
strategic alternative will be consummated or, if consummated, as to the terms
of any such strategic alternative.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended June 27, 1998
as well as other public documents of the Company contain forward-looking
statements which involve risks and uncertainties. Any statment in this
Form 10-Q that is not historical should be considered forward-looking. The
Company's actual results may differ materially from those discussed in such
forward-looking statements. Such statements include, without limitation,
statements regarding anticipated growth in sales, profit enhancement and
improved operational performance, costs to integrate further the operations of
CCI and PFC, costs associated with anticipated store openings, closings and
relocations and otherwise, implementing the Company's strategic plan, costs to
expand the operations of the Company, capital expenditures including
information system upgrades, the Company's intent to refinance the credit
facility and amend financial covenants in the credit facility, the Company's
intent to explore strategic alternatives, expectations as to the Company's cash
flows from operations and the availability of funds from the credit facility,
and borrowing additional funds and restructuring indebtedness, capital
contributions or loans from affiliates or third parties, and the sale of assets
or additional shares of the Company. Readers are urged to consider that
statements which use the terms "believes," "does not believe," "no reason to
believe," "expects," "plans," "intends," "estimates," "anticipated,"
"anticipates" or similar expressions, as they relate to the Company or the
Company's management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions. In
addition to factors that may be described in the Company's filings with the
Securities and Exchange Commission (the "Commission"), including this filing,
the following factors, among others, could cause the Company's actual results
to differ materially from those expressed in any forward-looking statements
made by the Company: (i) the unavailability of funds from the credit facility
or sufficient cash flows from operations, or the inability to secure capital
contributions or loans from affiliates or the inability to sell assets or
additional shares of the Company to affiliates or third parties to fund the
Company's cash requirements, (ii) lack of success of the Company's new
marketing and advertising initiatives in maintaining or increasing the
Company's customer base, (iii) unanticipated costs or difficulties or delays in
increasing net sales, or negative effects on net sales as a result of new store
prototypes and remerchandising efforts, (iv) unanticipated costs or
difficulties or delays in integrating further the operations of CCI and PFC,
(v) unanticipated costs or difficulties or delays in connection with store
openings, closings, remodelings or relocations, (vi) unanticipated capital
expenditures arising from implementation of the Company's strategic plan,
(vii) unanticipated costs or difficulties or delays in implementing the new
management information systems, including scanning, (viii) lack of success in
reducing costs
10
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THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
through improved inventory and warehouse efficiencies, (ix) actions by
competitors, including combinations within the retail industry, pricing
pressure, marketing initiatives or successful new retail store concepts, (x)
the lack of commercial success of the Company's salon arrangement, (xi) the
unavailability of product or the loss of suppliers, including secondary source
suppliers, (xii) unanticipated costs or difficulties or delays in implementing
the Company's strategic plan or lack of success of the Company's strategic
plan, (xiii) general business and economic conditions, as well as other factors
described from time to time in the Company's reports filed with Commission,
(xiv) inability to obtain an amendment to the Company's credit facility or the
terms of any such amendment or the inability to refinance such credit facility
when due and (xv) the results of the Company's efforts to pursue strategic
alternatives, including disruption to the Company's business as a result of
such efforts, whether any strategic alternatives will ultimately be pursued or
entered into or the terms of any such strategic alternatives. The Company
assumes no responsibility to update forward looking information contained
herein.
EFFECT OF NEW ACCOUNTING STANDARD
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires capitalization of
certain development costs of software to be used internally. The effect of
adopting the statement has not yet been determined.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Stockholders was held on May 5, 1998. Three
Class III Directors were elected at the meeting: I. Howard Diener, David N.
Dinkins and Harvey S. Rosenthal. All of the Class III Directors were elected
without opposition. There were no broker non-votes. The only other matter voted
on was the ratification of the appointment by the Board of Directors of KPMG
Peat Marwick LLP as the Company's independent certified public accountants for
1998.
The tabulation of votes for each matter is as follows:
1. Election of Directors:
Nominees for Director For Withheld
--------------------- --- --------
I. Howard Diener 9,204,609 404
David N. Dinkins 9,204,584 429
Harvey S. Rosenthal 9,204,609 404
2. Ratification of Independent Certified Public Accountants:
For Against Abstain
--- ------- --------
9,204,753 0 260
In June 1998, Mr. Diener resigned from the Board and as President and
Chief Executive Officer and Ms. Mary Elizabeth Burton was elected a Class III
Director by the Board to fill such vacancy. Ms. Burton was also elected by the
Board as President and Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
4.1 - Waiver and Amendment No. 2 dated as of June 27, 1998 to the Loan
and Security Agreement dated as of April 25, 1997, as amended, by and
among the Company, BankAmerica Business Credit, Inc., as agent, and
the lenders that are party thereto.
10.1 - Employment agreement dated as of June 8, 1998 between the
Company and Mary Elizabeth Burton.
(b) REPORTS ON FORM 8-K - None
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE COSMETIC CENTER, INC.
-------------------------
(Registrant)
By : By:
------------------------------------- -------------------------------
MARY ELIZABETH BURTON DWIGHT W. CRAWLEY
President and Chief Executive Officer Senior Vice President - Finance,
Chief Financial Officer and
Chief Accounting Officer
Dated: August __, 1998
13
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WAIVER AND AMENDMENT No. 2, dated as of June 28, 1998 (this
"Amendment"), to the Loan and Security Agreement, dated as of April 25, 1997
(as heretofore or hereafter amended, supplemented and otherwise modified, the
"Agreement"), among The Cosmetic Center, Inc. (the "Borrower"), the financial
institutions listed therein and BankAmerica Business Credit, Inc., as Agent.
W I T N E S S E T H:
WHEREAS, the Borrower and the Lenders are parties to the Agreement;
WHEREAS, the Borrower has requested that the Lenders waive and modify
certain provisions of the Agreement and the Lenders are willing to do so on the
terms and conditions as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto hereby agrees as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein have the respective meanings ascribed thereto in the Agreement.
2. Waiver of certain Covenants. The Lender hereby waives any
non-compliance by Borrower with the financial covenants set forth in Section
9.28 and Section 9.29 as of the last day of the second fiscal quarter of 1998.
3. Amendments to the Agreement. The Agreement is hereby amended as
follows:
(a) Section 1.1 of the Agreement is amended by inserting the
following new definition between the definitions "Account
Debtor" and "Adjusted Tangible Net Worth"
"Additional Revlon Note" means a demand promissory note from
the Borrower to Revlon which shall be executed after the date
hereof. Such promissory note shall have, among others, the
following terms and conditions: (1) principal shall not be less
than $5,000,000, (2) the interest rate shall not be greater
than 9 1/4%, (3) interest payment dates shall be the same as
set forth in the Revlon Note, (4) principal and interest
payments shall only be
<PAGE>
made if no Event of Default has occurred and is continuing, (5)
principal payments shall only be made if Lender has received
from the Borrower at least one Business Day's notice of such
payment and for ten consecutive Business Day's prior to such
principal payment, and after giving effect thereto,
Availability shall be at least $7,500,000. The Borrower shall
deliver the Additional Revlon Note to the Agent prior to its
execution for Lenders' approval.
(b) Section 9.13 of the Agreement is amended by adding the
following immediately after the words "Exhibit C" in clause (b)
thereof:
"and Debt under the Additional Revlon Note"
(c) Section 9.15 is hereby amended by replacing the word
"and" immediately before clause (v) with comma, and adding the following
immediately after the word "detail" in clause (v):
"and (vi) if no Event of Default has occurred and is
continuing, (A) make interest payments under the
Additional Revlon Note and (B) make principal payments
under the Additional Revlon Note, provided that with
respect to each such principal payment Lender has received
from the Borrower at least one Business Day's notice of such
payment and either (1) the Majority Lenders have consented
thereto or (2) ten consecutive Business Days prior to such
payment and after giving effect to such payment,
Availability shall be at least $7,500,000."
4. Representations and Warranties. To induce the Lenders to enter into
this Amendment, the Borrower hereby represents and warrants as follows, with the
same effect as if such representations and warranties were set forth in the
Agreement:
(i) the Borrower has the power and authority to enter into this Amendment
and has taken all corporate action required to authorize the
Borrower's execution, delivery and performance of this Amendment.
This Amendment has been duly executed and delivered by the Borrower,
and the Agreement, as amended hereby, constitutes the valid and
binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms. The execution, delivery, and
performance of this Amendment and the Agreement, as amended hereby,
by the Borrower will not violate its certificate of incorporation
2
<PAGE>
or by-laws or any material agreement or legal requirement
binding on the Borrower.
(ii) On the date hereof and after giving effect to the terms of
this Amendment, (A) the Agreement and the other Loan Documents
are in full force and effect and constitute binding
obligations, enforceable against the Borrower in accordance
with their respective terms; (B) no Default or Event of Default
has occurred and is continuing; and (C) the Borrower has no
defense to or setoff, counterclaim or claim against payment of
the Obligations and enforcement of the Loan Documents based
upon a fact or circumstance existing or occurring on or prior
to the date hereof.
5. Limited Effect. Except as expressly amended hereby, all of the
covenants, representations and warranties (including, without limitation,
those found in Section 9.1), and provisions of the Agreement are and shall
continue to be in full force and effect. Upon the effectiveness of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import and each reference in the other
Loan Documents to the Agreement shall mean and be a reference to the Agreement
as amended hereby.
6. Conditions of Effectiveness. This Amendment shall become effective
as of June 27, 1998 when and only when this Amendment shall be executed and
delivered by the Borrower, the Agent and the Lenders.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE
CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.
8. Counterparts. This Amendment may be executed by the parties hereto
in any number of separate counterparts, each of which shall be an original, and
all of which taken together shall be deemed to constitute one and the same
instrument.
9. Amendment. No modification or waiver of any provision of this
Amendment, or any consent to any departure by the Borrower therefrom, shall in
any event be effective unless the same shall be in writing, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
"BORROWER"
The Cosmetic Center, Inc., as the Borrower
By /s/ Steven Berns
----------------------
Name: Steven Berns
Title: Vice President & Treasurer
"AGENT"
BankAmerica Business Credit, Inc., as the Agent
By /s/ Ira A. Mermelstein
---------------------------
Name: Ira A. Mermelstein
Title: Vice President
"LENDERS"
BankAmerica Business Credit, Inc., as a Lender
By /s/ Ira A. Mermelstein
---------------------------
Name: Ira A. Mermelstein
Title: Vice President
BankBoston, N.A., as a Lender
By /s/ Joseph Becker
---------------------------
Name: Joseph Becker
Title: Vice President
4
<PAGE>
10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of June 8, 1998 (this "Agreement")
between The Cosmetic Center , Inc., a Delaware corporation (the "Company"), and
Mary Elizabeth Burton (the "Executive").
The Company wishes to employ the Executive, and the Executive wishes
to accept such employment, on the terms and conditions set forth in this
Agreement.
Accordingly, the Company and the Executive hereby agree as follows:
1. Employment, Duties and Acceptance.
1.1 Employment, Duties. The Company hereby employs the Executive for
the Term (as defined in Section 2.1) to render exclusive and full-time services
to the Company or any subsidiary thereof as President and Chief Executive
Officer of the Company, and to perform such other duties consistent with such
position as may be assigned to the Executive by the Chairman or the Board of
Directors of the Company. The Executive shall be permitted to serve on the
Board of Directors of no more than two (2) publicly traded corporations (which
as of the date hereof consist of Staples, Inc. and Gantos, Inc. ), provided
that (i) the business conducted by any of such corporations is not competitive
with the business of the Company or one of its affiliates and (ii) prior to
being elected or appointed to a Board of Directors, the Executive shall have
received the approval of the Chairman of the Company. The Executive serving on
the Board of Directors of Staples, Inc. and Gantos, Inc. are hereby approved.
For each of such two (2) Board of Directors the Executive may serve on, the
Executive shall not spend more than fourteen (14) business days per year on
matters relating to each of such two Board of Directors.
1.2 Acceptance. The Executive hereby accepts such employment and
agrees to render the services described above. During the Term, the Executive
agrees to serve the Company faithfully and to the best of the Executive's
ability, to devote the Executive's entire business time, energy and skill to
such employment, and to use the Executive's best efforts, skill and ability to
promote the Company's interests. The Executive further agrees to accept
election, and to serve during all or any part of the Term, as an officer or
director of the Company and of any subsidiary or affiliate of the Company,
without any compensation therefor other than that specified in this Agreement,
if elected to any such position by the shareholders or by the Board of
Directors of the Company or of any subsidiary or affiliate, as the case may be.
The Executive hereby represents and warrants that the Executive is not subject
to any confidentiality or non-compete provisions except as set forth in this
Agreement or otherwise with the Company.
1.3 Location. The duties to be performed by the Executive hereunder
shall be performed primarily at the offices of the Company in the Columbia,
Maryland metropolitan area subject to reasonable travel requirements to New
York City and other locations on behalf of the Company.
<PAGE>
2. Term of Employment; Certain Post-Term Benefits.
2.1 The Term. The term of the Executive's employment under this
Agreement (the "Term") shall commence on June 8, 1998, and shall end on
December 31, 2000, or such later date to which the Term is extended pursuant
to Section 2.2.
2.2 End-of-Term Provisions. The Company and the Executive may give
notice of non-renewal of the Term at any time. In the event the Company gives
notice of non-extension of the Term on or after December 31, 1999, the Term
automatically shall be extended so that it ends twelve months after the last
day of the month in which the Company gives such notice. From and after
December 31, 2000, unless and until the Company or the Executive gives written
notice of non-extension to the other party pursuant to this Section 2.2, the
Term automatically shall be extended day-by-day; upon the giving of notice of
non-extension by the Company, the Term automatically shall be extended so that
it ends twelve months after the last day of the month in which the Company
gives such notice.
2.3 Special Curtailment. The Term shall end earlier than the original
December 31, 2000, termination date provided in Section 2.1 or any extended
termination date provided in Section 2.2, in either case, if sooner terminated
pursuant to Section 4. Non-extension of the Term shall not be deemed to be a
wrongful termination of the Term or this Agreement by the Company pursuant to
Section 4.4.
3. Compensation; Benefits.
3.1 Salary. As compensation for all services to be rendered pursuant
to this Agreement, the Company shall pay the Executive during the Term a base
salary, payable bi-weekly in arrears, at the annual rate of $400,000, less such
amounts as are required to be withheld by applicable law and regulations and
deductions authorized by the Executive in writing (the "Base Salary"). In the
event that the Company, in its sole discretion, from time to time determines to
increase the Base Salary, such increased amount shall, from and after the
effective date of the increase, constitute "Base Salary" for purposes of this
Agreement.
3.2 Bonus. In addition to the amounts to be paid to the Executive
pursuant to Section 3.1, the Executive shall participate in the Company's
executive bonus plan, as from time to time in effect, or its successor plan(s),
with a targeted bonus of 50% of Base Salary at the rate in effect during the
calendar year in which bonus is earned for achievement of performance
objectives and a maximum bonus potential of 100% of Base Salary at the rate in
effect during the calendar year in which bonus is earned for significant
overachievement of performance objectives, in each case subject to the terms of
the plan. The performance objectives shall be set annually by the Compensation
Committee of the Board of Directors of the Company. The amount payable for 1998
shall be pro-rated for the number of months worked, and provided further that
the bonus payable for 1998 shall not be less than $100,000. Any such bonus
shall be payable on or before March 30 of the year following the fiscal year in
which bonus is earned and shall not be earned and payable unless the Executive
is actively employed by the Company on the last date of the fiscal year
relating to such bonus.
2
<PAGE>
3.3 Business Expenses. The Company shall pay or reimburse the
Executive for all reasonable expenses actually incurred or paid by the
Executive during the Term in the performance of the Executive's services under
this Agreement, upon presentation of expense statements or vouchers or such
other supporting information as the Company customarily may require of its
officers, subject to and in accordance with the Company's applicable expense
reimbursement and related policies and procedures as in effect from time to
time.
3.4 Vacation. During the Term, the Executive shall be entitled to a
vacation period or periods of four weeks taken in accordance with the vacation
policy of the Company during each year of the Term. Vacation time not used by
the end of a year shall be forfeited.
3.5 Fringe Benefits. During the Term, the Executive shall be entitled
to all benefits for which the Executive shall be eligible or qualify for under
any 401(k) plan, group insurance or other so-called "fringe" benefit plan which
the Company provides to its senior officers generally, as such may be in effect
from time to time. The Company's group life insurance provided to its employees
in effect on the date hereof provides for coverage of up to two times an
employees base salary, subject to a maximum amount of $500,000 of insurance.
The Company will provide to the Executive an additional $300,000 of
supplemental life insurance through the Company's supplemental life insurance
program offered to employees and the premium for such insurance shall be paid
for by the Company, provided that the Company's obligation to provide such
insurance is subject to the insurer's satisfaction with any required medical
examination and otherwise complying with the terms of such supplemental life
insurance.
3.6 Stock Options. (a) The Executive shall be recommend to the
Compensation Committee or other committee of the Board administering the
Company's 1997 Stock Option Plan (the "Option Plan") to receive (i) a stock
option effective June 5, 1998 to purchase 100,000 shares of the Company's Class
C common stock with an exercise price of the closing price per share of Class C
common stock on June 5, 1998, (ii) a stock option, subject to shareholder
approval of an increase in the number of shares authorized under the Option
Plan and an increase in the number of options that may be granted per year to
one optionee (the "Shareholder Approval"), effective June 5 1998 to purchase
150,000 shares of the Company's Class C common stock with an exercise price of
the closing price per share of Class C common stock on June 5, 1998, (iii) a
stock option, subject to the Shareholder Approval, effective June 5, 1998 to
purchase 250,000 shares of the Company's Class C common stock with an exercise
price of $5.00 per share of Class C common stock and (iv) a stock option,
subject to the Shareholder Approval, effective June 5 1998 to purchase 500,000
shares of the Company's Class C common stock with an exercise price of $7.50
per share of Class C common stock, in each case having a term of 10 years with
25% of each such stock option grant becoming exercisable on the anniversary of
the date of grant, provided that upon a Change of Control (as defined below),
the foregoing stock options, except those that have been previously terminated
or exercised, shall become immediately exercisable.
(b) In the event the Executive determines to exercise all or any
portion of the stock options granted by the Company, the Executive shall give
the Company at least five (5)
3
<PAGE>
business days notice of such determination by the Executive (such notice, an
"Exercise Notice'). The Exercise Notice shall specify the number of stock
options to be exercised, the number of shares of common stock of the Company
subject to such stock options and the date on which such stock options shall be
exercised (the "Exercise Date"). In order to assist the Company maintaining (i)
tax or financial consolidation with Mafco (as defined below) or any of its
subsidiaries or to prevent a Change of Control (as defined below), the Company
shall have the right, by providing written notice (the "Election Notice") to
the Executive no later than one (1) business day prior to the Exercise Date, to
elect to pay the Executive cash in lieu of permitting the Executive to exercise
all or a portion of such stock options set forth in the Exercise Notice (the
`Cash Payment"), and the Election Notice shall identify the stock options and
the number of shares under each such stock option as to which the Company has
so determined to exercise its rights. The amount of the Cash Payment shall (on
an option-by-option basis) equal the number of shares to which the Executive
would otherwise would have become entitled (the "Shares") on exercise of the
stock options set forth in the Company's Election Notice, multiplied by the
difference between (A) the closing price of a Share on the Nasdaq Stock Market
(or any successor exchange or market on which the Company's common stock may be
traded) on the Exercise Date minus (B) the per share exercise price of such
stock option. Any stock options or portion of stock options not subject to an
Election Notice may be exercised by the Executive as set forth in the Exercise
Notice on the Exercise Date, and the stock options not exercised by the
Executive on the Exercise Date shall be subject to the Company's election under
this Section 3.6(b).
(c) "Change of Control" shall mean that any of the following events
will be deemed to have taken place:
(i) any "person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as modified in
Sections 13(d) and 14(d) of the Exchange Act) other than (A) the Corporation or
any of its subsidiaries, (B) any employee benefit plan of the Corporation or
one of its subsidiaries, or (C) MacAndrews & Forbes Holdings Inc. or any
affiliate thereof (collectively, "MAFCO"), (D) a corporation owned, directly or
indirectly, by shareholders of the Corporation in substantially the same
proportions as their ownership of the Corporation, or (E) an underwriter
temporarily holding securities pursuant to an offering of such securities (a
"Person"), becomes a "beneficial owner" (as defined in Rule 13(d)(3) of the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 20% or more of the shares of common stock of the Corporation then
outstanding, and such Person's beneficial ownership level then exceeds the
percentage of the Corporation's outstanding shares beneficially owned by MAFCO;
(ii) the consummation of any merger or consolidation of the
Corporation or one of its subsidiaries with or into another corporation, other
than a merger or consolidation which would result in the holders of the voting
securities of the Corporation outstanding immediately prior thereto holding
securities which represent immediately after such merger or consolidation more
than 80% of the combined voting power of the voting securities of the
Corporation or the surviving corporation or the parent of such surviving
corporation;
4
<PAGE>
(iii) the shareholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition by
the Corporation of all or substantially all of the Corporation's assets; or
(iv) a majority of the Board of Directors votes in favor of a decision
that a Change of Control has occurred.
3.7 Relocation. (a) The Company shall provide to the Executive
relocation from her home in Malibu, California to the Washington, D.C., or
Baltimore, Maryland metropolitan area in accordance with the relocation policy
of the Company in effect on the date hereof, and in addition to such policy,
the Company will reimburse the Executive for any loss on the sale of the
Executive's residence Malibu, California (provided that the Company shall
control the sale process of such residence) in the manner set forth in clause
(b) below. In addition, notwithstanding anything to the contrary, the Company
will not provide any tax gross-ups for any payments pursuant to this Section
3.7 or the Company's relocation policy.
(b)(i) The Company shall reimburse the Executive for the payments of
$7,760.12 per month on the mortgage for the Executive's principle home for a
period from the date hereof to the date of the sale of such residence, but in
no event longer than six months. The Executive shall, on behalf of the Company,
list the Executive's residence with a broker for the sale of such residence.
The Third Party Relocation Services (as defined below) exclusion clause shall
be included in the broker's listing. Upon the sale of the Executive's residence
the cash proceeds from such sale, less brokerage commission and other fees and
expenses (the "Sale Proceeds") shall be (i) first applied to repay the mortgage
on such residence, (ii) then be applied to repay the Executive the Executive's
equity investment in the residence, and (iii) the balance of the Sale Proceeds
will be paid to the Company. In the event the Sale Proceeds are not sufficient
to repay the Executive her equity investment in her home, the Company shall pay
to the Executive an amount equal to her equity investment in her home less the
Sale Proceeds paid to the Executive in clause (ii) above. The Executive shall
provide the Company such documents it reasonably requests to verify and
determine the Executive's equity investment in her present home.
(ii) In the event the Company and Executive determine to utilize a
third party relocation service (the "Third Party Relocation Service") to assist
the Company with the disposal of the Executive's present home, the Company
shall engage the Third Party Relocation Service. The Executive shall choose one
appraiser and the Company shall choose one appraiser from a list of independent
appraisers provided by the Third Party Relocation Service. The appraisers will
submit their written appraisals to the Third Party Relocation Service for
review. If the value of each of the two appraisals are within 5% of each other,
the average of such two values will be the purchase price for the Executive's
home. If the value of the two appraisals are not within 5% of each, the
Executive shall be entitled to elect by written notice to the Company (within
10 days of the receipt by the Executive of the last of the two appraisals) to
have a third appraiser appraise the Executive's present home. The "Purchase
Price" shall be the average of the two, and if there is a third, the three,
appraisals on the Executive's present home. Following the determination of the
Purchase Price, an amount (the "Equity Payment") equal to (i) the Purchase
Price less (ii) the unpaid amount of the mortgage (including unpaid interest),
if any, on the Executive's home will be paid to the
5
<PAGE>
Executive. In the event the Executive's equity investment in the home is
greater than the Equity Payment, the Company shall make an additional payment
to the Executive in the amount of the Executive's equity investment in the home
less the Equity Payment to the Executive in the preceding sentence. The
Executive shall provide the Company such documents it reasonable requests to
verify and determine the Executive's equity investment in her present home.
(c) The Executive shall have 60 days to vacate the property following
the sale of the home pursuant to clause (b)(i) or the determination of the
Purchase Price pursuant to clause (b)(ii). The Executive shall provide
reasonable assistance requested by the Company in connection with the sale of
the Executive's home and the relocation of the Executive. Each of the Company
and the Executive shall use their reasonable efforts to have the foregoing sale
and/or appraisals and payment to the Executive to be completed as soon as
possible. In the event the processes set forth in clause (b) is not practicable
due to the value of the Executive's present home or otherwise, or the sale of
the Executive's home in clause (b)(i) will likely not be completed within six
months from the date hereof, then the Company and the Executive shall negotiate
in good faith an alternative process, with such alternative process having as
two primary goals of the prompt payment to the Executive for the Executive's
equity investment in the home and the prompt disposition by the Company of the
Executive's home.
3.8 Automobile. The Company shall provide to the Executive use of an
automobile on a continuing basis in accordance with the Company's automobile
policy.
3.9 Legal Fees. The Company shall reimburse the Executive for legal
fees paid by the Executive, or pay the fees of the Executive incurred, in
connection with the negotiation of this Agreement, up to a maximum amount of
$5,000.
4. Termination.
4.1 Death. If the Executive shall die during the Term, the Term shall
terminate and no further amounts or benefits shall be payable hereunder ,
except that the Executive's legal representatives shall be entitled to receive
the life insurance benefits provided for in Section 3.5.
4.2 Disability. If during the Term the Executive shall become
physically or mentally disabled, whether totally or partially, such that the
Executive is unable to perform the Executive's services hereunder for (i) a
period of six consecutive months or (ii) for shorter periods aggregating six
months during any twelve month period, the Company may at any time after the
last day of the six consecutive months of disability or the day on which the
shorter periods of disability shall have equaled an aggregate of six months, by
written notice to the Executive (but before the Executive has recovered from
such disability), terminate the Term and no further amounts or benefits shall
be payable hereunder, except that the Executive shall be entitled to receive
(i) continued payments in an amount equal to 60% of the Base Salary, in the
manner specified in Section 3.1, until the end of the Term (as in effect
immediately prior to such termination) or, if the Company has not then given
notice of non-renewal pursuant to Section 2.2, for a period of twelve months
after the last day of the month in which the termination described in this
Section 4.2 occurred, whichever is longer (the "Disability Period"), and (ii)
the medical, dental and
6
<PAGE>
supplemental life insurance benefits provided for in Section 3.5 during the
Disability Period. If the Executive shall die before receiving all payments to
be made by the Company in accordance with the foregoing, the payments specified
in this Section 4.2 shall cease and Executive's beneficiaries or legal
representatives shall be entitled to the life insurance benefits set forth in
Section 3.5 as provided for in Section 4.1.
4.3 Cause. In the event of gross neglect by the Executive of the
Executive's duties hereunder, conviction of the Executive of any felony,
conviction of the Executive of any lesser crime or offense involving the
property of the Company or any of its subsidiaries or affiliates, willful
misconduct by the Executive in connection with the performance of any material
portion of the Executive's duties hereunder or breach by the Executive of any
material provision of this Agreement or the Code of Business Conduct of the
Company as it may be in effect from time to time or any other conduct on the
part of the Executive which would make the Executive's continued employment by
the Company materially prejudicial to the best interests of the Company, the
Company may, at any time by written notice to the Executive, terminate the
Term, and, upon such termination, this Agreement shall terminate and the
Executive shall be entitled to receive no further amounts or benefits
hereunder, except any as shall have been earned to the date of such
termination.
4.4 Company Breach; Company Termination. In the event of the breach of
any material provision of this Agreement by the Company or the failure of the
Compensation Committee (or other appropriate Committee of the Company's Board
of Directors) to fully implement the Company's recommendation pursuant to
Section 3.3, the Executive shall be entitled to terminate the Term upon 60
days' prior written notice to the Company. The Company shall have the right to
terminate the Term at any time and without prior notice other than pursuant to
Sections 4.1, 4.2, or 4.3 upon notice to the Executive. Upon such termination
by the Executive, or in the event the Company terminates the Term other than
pursuant to the provisions of Sections 4.1, 4.2 or 4.3, the Company shall
either (i) to make payments in the amounts prescribed by Section 3.1 (less
amounts required by law to be withheld) and to continue the Executive's
participation in the group medical and dental plans of the Company under COBRA
at the active employee contribution rate then in effect, conditioned upon the
Executive's execution of a release and confidentiality agreement satisfactory
to the Company in its sole discretion, in each case until December 31, 2000, or
(ii) to pay severance at the Base Salary in effect as of the date of
termination of the Term for a total of twelve months (the "Severance Period")
and to continue the Executive's participation in the group medical and dental
plans of the Company under COBRA at the active employee contribution rate then
in effect for the Severance Period conditioned upon the Executive's execution
of a release and confidentiality agreement satisfactory to the Company in its
sole discretion. Any compensation earned by the Executive from other employment
or a consultancy (without regard to when such compensation is paid) shall
reduce the post-employment payments provided for herein and provided further
that the Executive shall cease to be covered by medical and/or dental plans of
the Company at such time as the Executive becomes covered by like plans of
another company. Notwithstanding the foregoing, if during the period that such
post-employment payments are made to the Executive, the Executive undertakes
Permanent Employment (as hereinafter defined), then in lieu of reduction of
such payments as provided in the preceding sentence, within 10 days after the
Company determines that the Executive has undertaken Permanent Employment the
Company may, in its sole discretion elect to pay to the Executive a lump sum
equal to the lesser of (i) the then
7
<PAGE>
present value (discounted at the rate of 6% per annum from the date of
termination of the Term to the date of such determination) of 50% of the
balance of the payments or (ii) six months' payments at the Base Salary in
effect as of the date of termination of the Term, in either case less amounts
required by law to be withheld, in satisfaction and discharge of any further
obligation pursuant to this Section. For purposes hereof, "Permanent
Employment" shall mean employment undertaken by the Executive (i) pursuant to
an agreement, offer letter or policy which provides for not less than six
months' severance upon termination of such employment otherwise than for cause,
or (ii) which continues with an employer and/or its affiliates for not less
than three months, or (iii) which the Executive elects, by written notice to
the Company, to treat as Permanent Employment for purposes of this Section.
4.5 Litigation Expenses. Except as provided for in the attached
Employee Agreement as to Confidentiality and Non-Competition, in the event the
Company and the Executive become involved in any action, suit or proceeding
relating to the alleged breach of this Agreement by the Company or the
Executive, and if a judgment in such action, suit or proceeding is rendered in
favor of the Executive, the Company shall reimburse the Executive for all
expenses (including reasonable attorneys' fees) incurred by the Executive in
connection with such action, suit or proceeding. Such costs shall be paid to
the Executive promptly upon presentation of expense statements or other
supporting information evidencing the incurrence of such expenses.
5. Protection of Confidential Information; Non-Competition.
The Executive agrees to be bound by and comply with all provisions of
the attached Employee Agreement as to Confidentiality and Non-Competition.
6. Inventions and Patents; Intellectual Property.
The Executive agrees to be bound by and comply with all provisions of
the attached Employee Agreement on Confidentiality and Non-Competition.
7. Indemnification.
The Company will indemnify the Executive, to the maximum extent
permitted by applicable law, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred or sustained by the
Executive in connection with any action, suit or proceeding to which the
Executive may be made a party by reason of the Executive being an officer,
director or employee of the Company or of any subsidiary or affiliate of the
Company.
8. Notices.
All notices, requests, consents and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, sent by overnight courier or mailed
first class, postage prepaid, by registered or certified mail (notices mailed
shall be deemed to have been given on the third date after the date mailed), as
8
<PAGE>
follows (or to such other address as either party shall designate by notice in
writing to the other in accordance herewith):
If to the Company, to:
The Cosmetic Center, Inc.
625 Madison Avenue
New York, NY 10022
Attention: Secretary
Fax.: 212-527-4895
If to the Executive, to:
An address (with fax number, if any), will specified by the Executive
as soon as possible.
With a copy to:
Richard Waller, Esq.
Katten, Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Fax: (302) 902-1061
9. General.
9.1 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Maryland applicable to
agreements made and to be performed entirely in Maryland.
9.2 Headings. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.3 Entire Agreement. This Agreement, along with the Company's Code Of
Conduct and related policies (as in effect from time to time), the Employee
Agreement as to Confidentiality of Information and Securities Trading executed
by the Executive and the Employee Agreement as to Confidentiality and
Non-Competition executed by the Executive, sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, relating to the subject matter hereof. No representation, promise or
inducement has been made by either party that is not embodied in this
Agreement, and neither party shall be bound by or liable for any alleged
representation, promise or inducement not so set forth.
9
<PAGE>
9.4 Assignment. This Agreement, and the Executive's rights and
obligations hereunder, may not be assigned by the Executive. The Company may
assign its rights, together with its obligations, hereunder (i) to any
affiliate or (ii) to third parties in connection with any sale, transfer or
other disposition of all or substantially all of its business or assets and, in
any event, the obligations of the Company hereunder shall be binding on its
successors or assigns, whether by merger, consolidation or acquisition of all
or substantially all of its business or assets.
9.5 Amendment; Waiver. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms or covenants hereof
may be waived, only by a written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party waiving compliance. The
failure of either party at any time or times to require performance of any
provision hereof shall in no manner affect the right at a later time to enforce
the same. No waiver by either party of the breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in this Agreement.
9.6 Counterparts. This Agreement may be executed in two or more
counterparts, all of which together shall be considered one and the same
instrument.
9.7 Severability. In the event any of the covenants contained in this
Agreement, or any part thereof, hereafter are construed to be invalid or
unenforceable, the same shall not affect the remainder of the covenant or
covenants, which shall be given full effect, without regard to the invalid
portions.
9.8 Subsidiaries. As used herein, the term "subsidiary" shall mean any
corporation or other business entity controlled directly or indirectly by the
corporation or other business entity in question, and the term "affiliate"
shall mean and include any corporation or other business entity directly or
indirectly controlling, controlled by or under common control with the
corporation or other business entity in question.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COSMETIC CENTER, INC.
By:
---------------------------
Chairman
------------------------------[L.S.]
Mary Elizabeth Burton
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The Cosmetic
Center, Inc's June 27, 1998 financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> JUN-27-1998
<CASH> 2,518
<SECURITIES> 0
<RECEIVABLES> 787
<ALLOWANCES> 2
<INVENTORY> 73,871
<CURRENT-ASSETS> 80,254
<PP&E> 25,161
<DEPRECIATION> (12,075)
<TOTAL-ASSETS> 98,687
<CURRENT-LIABILITIES> 70,669
<BONDS> 13,255
0
0
<COMMON> 100
<OTHER-SE> 12,896
<TOTAL-LIABILITY-AND-EQUITY> 98,687
<SALES> 39,478
<TOTAL-REVENUES> 39,478
<CGS> 37,564
<TOTAL-COSTS> 37,564
<OTHER-EXPENSES> 16,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,303
<INCOME-PRETAX> (16,057)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,057)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
