<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: March 28, 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 April 15, 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 - 10
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THE COSMETIC CENTER, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 27,
ASSETS 1998 1997
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(Unaudited)
<S> <C> <C>
Current assets:
Cash............................................................... $ 2,586 $ 5,359
Accounts receivable, net........................................... 1,690 1,320
Inventories........................................................ 85,633 88,976
Deferred tax assets................................................ 2,879 2,879
Prepaid expenses and other......................................... 247 179
------------- -------------
Total current assets......................................... 93,035 98,713
Property and equipment, net................................................. 13,425 14,172
Other assets................................................................ 952 1,031
Intangible assets related to businesses aquired, net........................ 4,464 4,494
------------- -------------
Total assets.................................................. $ 111,876 $ 118,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 13,535 $ 17,234
Accrued expenses and other.......................................... 6,604 9,715
Due to Products Corporation......................................... 4,669 2,500
------------- -------------
Total current liabilities................................... 24,808 29,449
Note payable - Products Corporation.......................................... 13,255 13,255
Long-term debt............................................................... 43,000 38,954
Other long-term liabilities.................................................. 1,860 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................................................. (10,481) (4,704)
------------- -------------
Total stockholders' equity.................................... 28,953 34,687
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Total liabilities and stockholders' equity.................... $ 111,876 $ 118,410
============= =============
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
2
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THE COSMETIC CENTER, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 28, MARCH 31,
1998 1997
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<S> <C> <C>
Net sales........................................................... $ 37,916 $ 12,859
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Cost of sales, including buying, occupancy and distribution......... 28,796 8,703
Selling, general and administrative expenses........................ 13,618 6,698
----------- ------------
Operating expenses.................................................. 42,414 15,401
----------- ------------
Loss from operations................................................ (4,498) (2,542)
Interest expense.................................................... (1,311) (274)
Other income, net................................................... 32 -
----------- ------------
Loss from operations before income taxes............................ (5,777) (2,816)
Provision for income taxes.......................................... - 15
----------- ------------
Net loss............................................................ $ (5,777) $ (2,831)
=========== ============
Basic and diluted net loss per common share......................... $ (0.58) $ (0.33)
=========== ============
Basic and diluted weighted average
common shares outstanding...................................... 10,017,409 8,479,335
=========== ============
</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>
THREE MONTHS ENDED
----------------------------
MARCH 28, MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
------------ ------------
<S> <C> <C>
Net loss............................................................... $ (5,777) $ (2,831)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization...................................... 1,230 678
Change in assets and liabilities:
Increase in accounts receivable, net.......................... (370) -
Decrease in inventories....................................... 3,343 535
Increase in prepaid expenses and other current assets......... (68) -
Decrease in accounts payable.................................. (3,699) (710)
Decrease in accrued expenses and other current liabilities.... (3,111) (979)
Increase in due to Products Corporation ...................... 2,169 -
Other, net.................................................... (175) (636)
------------ ------------
Net cash used for operating activities................................. (6,458) (3,943)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (404) (259)
------------ ------------
Net cash used for investing activities................................. (404) (259)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under long-term debt..................................... 4,046 -
Increase in note payable - Products Corporation......................... - 2,238
Proceeds from the issuance of common stock.............................. 43 -
------------ ------------
Net cash provided by financing activities............................... 4,089 2,238
------------ ------------
Net decrease in cash................................................... (2,773) (1,964)
Cash at beginning of period............................................ 5,359 3,479
------------ ------------
Cash at end of period.................................................. $ 2,586 $ 1,515
============ ============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 1,242 -
Income taxes.................................................. 11 -
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
4
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THE COSMETIC CENTER, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 March 28, 1998, the Company operated 60 retail stores
and 190 outlet stores in 42 states. Retail stores operate in strip shopping
centers and sell, 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 the Company is 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) 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 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 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).
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.
5
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THE COSMETIC CENTER, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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 options. 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 March 28, 1998, approximately $2,569 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 (as amended, the "New Facility") 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.
6
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THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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 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 the Company is 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.
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 cosmetics, fragrances, skincare and treatment,
haircare, bath and body, personal care appliances, hosiery, beauty care, and
related items (also referred to herein as "Beauty Products") at discounted
prices. As of March 28, 1998, the Company operated 60 retail stores and 190
outlet stores in 42 states. Retail stores operate in strip shopping centers
and sell, 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 implementing a strategy to increase net sales and
efficiencies through, among other things: (i) adding new stores, (ii) closing
underperforming stores, (iii) remodeling and refurbishing older stores, (iv)
improving inventory control and utilization of capital, (v) rationalizing
product lines, including a significant reduction in SKU's, (vi) reducing
overhead and (vii) improving management information systems.
RESULTS OF OPERATIONS
Net sales for the three months ended March 28, 1998 were $37.9
million, an increase of $25.0 million, or 195%, from the $12.9 million in net
sales for the three months ended March 31, 1997. The increase in net sales is
primarily attributable to the acquisition of CCI, which contributed
approximately $25.7 million for the three months ended March 28, 1998, and was
partially offset by a decline in PFC comparable store sales. The Company
operated 250 stores at March 28, 1998 and 194 stores at March 31, 1997. PFC
comparable store sales for the three months ended March 28, 1998 declined to
$11.7 million from $12.3 million for the three months ended March 31, 1997 and
CCI comparable store sales for three months ended March 28, 1998 declined to
$24.3 million from $24.9 million for the three months ending March 31, 1997.
The decline in comparable store sales results primarily from among other
things, sales declines in older stores and stores in malls and shopping
centers suffering sales declines, increased competitive activity and product
mix.
Cost of sales, including buying, occupancy and distribution expenses
("COS"), was $28.8 million (75.9% of net sales) for the three months ended
March 28, 1998 compared to $8.7 million (67.7% of net sales) for the three
months ended March 31, 1997. COS as a percentage of net sales for the three
months ended March 28, 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.
Selling, general and administrative ("SG&A") expenses were $13.6
million (35.9% of net sales) for the three months ended March 28, 1998
compared to $6.7 million (52.1% of net sales) for the three months ended March
31, 1997. SG&A expenses as a percentage of net sales decreased in the three
months ended March 28, 1998, primarily due to the inclusion of the CCI
operations and the benefit of certain synergies achieved as a result of the
consolidation of the CCI and PFC operations.
7
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THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interest expense was $1.3 million for the three months ended March
28, 1998 compared to $0.3 million for the three months ended March 31, 1997.
The increase in interest expense for the 1998 period is primarily attributable
to higher outstanding borrowings under the New Facility as a result of the
Cash Election, the repayment of CCI's previous credit facility (the "Former
Facility"), and additional borrowings to fund operations during the three
months ended March 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $6.5 million for the three
months ended March 28, 1998 and $3.9 million for the three months ended March
31, 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.
Net cash used for investing activities was $0.4 million and $0.3
million for the three months ended March 28, 1998 and March 31, 1997,
respectively, consisting in both periods of capital expenditures.
Net cash provided by financing activities was $4.1 million for the
three months ended March 28, 1998 compared to $2.2 million for the three
months ended March 31, 1997. The increase resulted primarily from borrowings
under the New Facility to fund working capital requirements. The New 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 New Facility. Availability under the New Facility varies with the
borrowing base. As of March 28, 1998, $43.0 million was outstanding and an
additional $6.4 million was available for borrowing under the New Facility.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the New Facility. The Company's
principal uses of funds are expected to be the payment of operating expenses,
working capital and costs to integrate further the operations of CCI and PFC,
costs to expand the operations of the Company, including store openings and
closings, capital expenditures and debt service on the New Facility.
Based upon the Company's current level of operations and anticipated
growth as a result of its business strategy, the Company is unable to predict
whether cash flows from operations and funds from the New 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 reducing or delaying capital expenditures and store openings and
closings, borrowing additional funds or, restructuring indebtedness, selling
assets or operations or issuing additional shares of capital stock of the
Company or seeking capital contributions or loans from 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 capital requirements or that they would be permitted under the
terms of the New Facility or the Products Corporation or REV Holdings Inc.
debt instruments then in effect.
The Company estimates that capital expenditures for 1998 will be
approximately $5 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.
8
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THE COSMETIC CENTER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended March 28,
1998 as well as other public documents of the Company contain forward-looking
statements which involve risks and uncertainties. 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, costs to integrate further the operations of CCI and PFC
after the Merger, costs associated with anticipated store openings and
closings, implementing the Company's business strategy, costs to expand the
operations of the Company, capital expenditures including information system
upgrades, expectations as to the Company's cash flows from operations and the
availability of funds from the New Facility and borrowing additional funds and
restructuring indebtedness, capital contributions or loans from affiliates 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 New Facility or sufficient cash flows from operations or, the
inability to secure capital contributions or loans from affiliates or sell
assets or additional shares of the Company, to fund the Company's cash
requirements, (ii) unanticipated costs or difficulties or delays in
integrating further the operations of CCI and PFC after the Merger, (iii)
unanticipated costs or difficulties or delays in connection with store
openings or closings, (iv) unanticipated costs or difficulties or delays in
connection with increasing net sales and expanding the operations of the
Company, (v) unanticipated capital expenditures, (vi) actions by competitors,
including combinations within the retail industry, pricing pressure or
successful new retail store concepts, (vii) the lack of commercial success of
the Company's new salon arrangement, (viii) the unavailability of product or
the loss of suppliers, including secondary source suppliers, (ix)
unanticipated difficulties or delays in implementing the Company's business
strategy, and (x) general business and economic conditions, as well as other
factors described from time to time in the Company's reports filed with the
Commission. 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.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
4.1 - Amendment dated as of March 28, 1998 to the Loan and Security
Agreement dated as of April 25, 1997 by and among the Company, BankAmerica
Business Credit, Inc., as agent, and the lenders that are parties thereto.
(b) REPORTS ON FORM 8-K - None
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)
<TABLE>
<CAPTION>
<S> <C>
By : /s/ I. HOWARD DIENER By: /s/ DWIGHT W. CRAWLEY
----------------------------- ----------------------------
I. HOWARD DIENER DWIGHT W. CRAWLEY
President and Chief Executive Officer Senior Vice President - Finance,
Chief Financial Officer and
Chief Accounting Officer
</TABLE>
Dated: May 11, 1998
<PAGE>
AMENDMENT No. 1, dated as of March 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 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 agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein have the respective meanings ascribed thereto in the Agreement.
2. Amendments to the Agreement. The Agreement is hereby amended as
follows:
(a) The definition of Applicable Margin in Section 1.1 of the
Agreement is amended in its entirety to read as follows:
"Applicable Margin" means (i) with respect to Base Rate
Revolving Loans and all other Obligations (other than LIBOR Rate
Loans), three quarters of one percentage point (0.75%) and
(ii) with respect to LIBOR Rate Loans, two and one-half
percentage points (2.50%); provided, however, "Applicable
Margin" shall mean (a) five-eighths of one percentage point
(.625%) for Base Rate Loans and two and three-eighths percentage
points (2.375%) for LIBOR Rate Loans if the Interest Coverage
Ratio is equal to or greater than 2.0:1.0, but less than 3.0:1.0
and (b) one-half of one percentage point (0.50%) for Base Rate
Loans and two and one-quarter percentage points (2.25%) for
LIBOR Rate Loans if the Interest Coverage Ratio is equal to or
greater than 3.0:1.0.
Any change in the Applicable Margin shall be effective from the
first day of the month following receipt by the Agent of the
most current certificate
<PAGE>
delivered pursuant to Section 7.2(e), provided that such
certificate indicates that the Interest Coverage Ratio
corresponding to such Applicable Margin has been met or
exceeded for the preceding four fiscal quarters ended on the
last day of the fiscal quarter covered by such certificate.
If the Borrower fails to timely deliver the certificate required
pursuant to Section 7.2(e) or if an Event of Default occurs, the
Applicable Margin shall be immediately increased to the highest
rate set forth above until the requisite certificate is
delivered to Lender and/or the Event of Default is cured or
waived, as the case may be.
(b) The definition of "Stated Termination Date" in Section 1.1 of
the Agreement is amended in its entirety to read as follows:
"Stated Termination Date" means April 30, 1999 or such later
date to which it may have been extended pursuant to the last
sentence of Section 12.1."
(c) Section 7.2(e) of the Agreement is amended by changing the
phrase "covenant set forth in Section 9.28" to read "covenants
set forth in Section 9.28 and 9.29".
(d) Section 9.28 of the Agreement is amended in its entirety as
follows:
9.28 Adjusted Tangible Net Worth. CCI on a consolidated basis shall
maintain Adjusted Tangible Net Worth, determined as of the last day of each
fiscal quarter indicated below, of not less than the following amounts:
2nd Fiscal Quarter 1997 $22,400,000
3rd Fiscal Quarter 1997 22,000,000
4th Fiscal Quarter 1997 29,200,000
1st Fiscal Quarter 1998 24,000,000
2nd Fiscal Quarter 1998 22,308,000
3rd Fiscal Quarter 1998 23,847,000
4th Fiscal Quarter 1998 30,288,000
1st Fiscal Quarter 1999 and thereafter 27,288,000
(e) Section 9.29 of the Agreement is amended in its entirety as
follows:
9.29 Interest Coverage Ratio. Beginning with the fourth fiscal quarter of
1997, the Borrower shall maintain an Interest Coverage Ratio, determined as of
the last day of each fiscal quarter for the four fiscal quarters ending on
such last day (except that, with respect to the fourth fiscal quarter of 1997,
for the three fiscal quarters ending on the last day of such fiscal quarter),
of not less than the amount set forth below:
2
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Period Interest
Ending Coverage Ratio
-------- --------------
4th Fiscal Quarter 1997 2.2:1
1st Fiscal Quarter 1998 1.15:1
2nd Fiscal Quarter 1998 1.25:1
3rd Fiscal Quarter 1998 1.75:1
4th Fiscal Quarter 1998 and thereafter 2.0:1
(f) Section 12.1 of the Agreement is amended by inserting the words
"but prior to April 30, 1999 or (iii) .125% of the Total Facility
if such termination is made on or after April 30, 1999 but prior
to April 30, 2000" after the words "after the first Anniversary
Date" in clause (c)(ii) of the second sentence thereof.
(g) Section 12.1 of the Agreement is amended by inserting the words
"but prior to April 30, 1999 or (z) .125% of the Total Facility
if such termination is made on or after April 30, 1999 but prior
to April 30, 2000" after the words "after the first Anniversary
Date" in clause (y) of the last sentence thereof.
(h) Section 12.1 of the Agreement is amended by inserting the words
"extended or" between the words "unless" and "terminated" in the
first sentence thereof and adding the following immediately after
the last sentence of Section 12.1:
"The Lenders may, at their option, elect to extend this Agreement
to April 30, 2000, by giving the Borrower written notice of such
election not later than July 15, 1998."
3. 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 or by-laws or any
material agreement or legal requirement binding on the Borrower.
3
<PAGE>
(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.
4. 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", "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.
5. Conditions of Effectiveness. This Amendment shall become effective as
of March 28, 1998 when and only when this Amendment shall be executed and
delivered by the Borrower, the Agent and the Lenders.
6. 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.
7. 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.
8. 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.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective power and duly authorized
officers as of the day and year first above written.
"BORROWER"
The Cosmetic Center, Inc., as the Borrower
By /s/ DWIGHT W. CRAWLEY
---------------------------------------
Name: DWIGHT W. CRAWLEY
Title: CHIEF FINANCIAL OFFICER
"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
Bank Boston, N.A., as a Lender
By /s/ JOSEPH BECKER
---------------------------------------
Name: JOSEPH BECKER
Title: VICE PRESIDENT
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The Cosmetic
Center, Inc.'s March 28, 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> MAR-28-1998
<CASH> $2,586
<SECURITIES> 0
<RECEIVABLES> 1,690
<ALLOWANCES> 2
<INVENTORY> 85,633
<CURRENT-ASSETS> 93,035
<PP&E> 24,408
<DEPRECIATION> (10,983)
<TOTAL-ASSETS> 111,876
<CURRENT-LIABILITIES> 24,808
<BONDS> 56,255
0
0
<COMMON> 100
<OTHER-SE> 28,853
<TOTAL-LIABILITY-AND-EQUITY> 111,876
<SALES> 37,916
<TOTAL-REVENUES> 37,916
<CGS> 28,796
<TOTAL-COSTS> 28,796
<OTHER-EXPENSES> 13,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,311
<INCOME-PRETAX> (5,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,777)
<EPS-PRIMARY> $(0.58)
<EPS-DILUTED> $(0.58)
</TABLE>
