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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: September 26, 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 September 26, 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.
<PAGE>
THE COSMETIC CENTER, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 27,
ASSETS 1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash.................................................... $ 2,747 $ 5,359
Accounts receivable, net................................ 1,556 1,320
Inventories............................................. 78,311 88,976
Deferred tax assets..................................... 2,794 2,879
Prepaid expenses and other.............................. 108 179
--------------- ---------------
Total current assets................................ 85,516 98,713
Property and equipment, net...................................... 12,878 14,172
Other assets..................................................... 870 1,031
Intangible assets related to businesses acquired, net............ 4,404 4,494
--------------- ---------------
Total assets......................................... $ 103,668 $ 118,410
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 16,054 $ 17,234
Accrued expenses and other............................... 10,139 9,715
Accounts payable to Products Corporation................. 11,624 2,500
Note payable - Bank...................................... 36,024 --
Notes payable - Products Corporation..................... 20,255 --
--------------- ---------------
Total current liabilities.......................... 94,096 29,449
Note Payable - Products Corporation............................... -- 13,255
Long-term debt.................................................... -- 38,954
Other long-term liabilities....................................... 1,337 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...................................... (31,199) (4,704)
--------------- ---------------
Total stockholders' equity........................... 8,235 34,687
--------------- ---------------
Total liabilities and stockholders' equity........... $ 103,668 $ 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 SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 26,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales........................................................ $ 40,653 $ 45,355 $ 118,047 $ 94,687
------------ ------------- ------------ -------------
Cost of sales, including buying, occupancy and distribution...... 30,845 32,250 97,205 65,908
Selling, general and administrative expenses..................... 13,159 13,330 43,464 31,732
Business consolidation costs..................................... - - - 4,000
------------ ------------- ------------ -------------
Operating expenses............................................... 44,004 45,580 140,669 101,640
------------ ------------- ------------ -------------
Loss from operations............................................. (3,351) (225) (22,622) (6,953)
Interest expense................................................. (1,331) (1,120) (3,945) (2,292)
Other income (expense), net...................................... 21 26 72 (38)
------------ ------------- ------------ -------------
Loss from operations before income taxes......................... (4,661) (1,319) (26,495) (9,283)
Provision for income taxes....................................... - - - 20
------------ ------------- ------------ -------------
Net loss......................................................... $ (4,661) $ (1,319) $ (26,495) $(9,303)
============ ============= ============ =============
Basic and diluted loss per common share:
Net loss........................................... $ (0.46) $ (0.13) $ (2.64) $ (1.00)
============ ============= ============ =============
Basic and diluted weighted average
common shares outstanding.......................... 10,025,601 10,015,101 10,022,870 9,345,665
============ ============= ============ =============
</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>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 26, SEPTEMBER 26,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
------------- -------------
<S> <C> <C>
Net loss........................................................... $(26,495) $ (9,303)
Adjustments to reconcile net loss to
net cash (used for) provided by operating activities:
Depreciation and amortization................................... 3,312 2,839
Inventory write-down............................................ 6,598 --
Change in assets and liabilities, net of aquired assets and
liabilities:
Increase in accounts receivable, net....................... (236) (194)
Decrease (increase) in inventories......................... 4,067 (5,902)
Decrease in prepaid expenses and other current assets...... 156 819
Decrease in other assets................................... 161 804
(Decrease) increase in accounts payable.................... (1,180) 11,324
Increase in accrued expenses and other..................... 424 1,340
Increase in accounts payable to Products Corporation....... 9,124 --
Decrease in other long-term liabilities.................... (728) (2,480)
-------- --------
Net cash used for operating activities............................. (4,797) (753)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (1,928) (3,463)
Acquisition of business, net of cash acquired...................... -- (19,883)
-------- --------
Net cash used for investing activities............................. (1,928) (23,346)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments to) borrowings from bank........................... (2,930) 23,271
Increase in notes payable - Products Corporation................... 7,000 940
Exercise of stock option.......................................... 43 --
-------- --------
Net cash provided by financing activities......................... 4,113 24,211
-------- --------
Net (decrease) increase in cash.................................... (2,612) 112
Cash at beginning of period........................................ 5,359 3,479
-------- --------
Cash at end of period.............................................. $ 2,747 $ 3,591
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest................................................... $ 3,689 $ 1,356
Income taxes, net of refunds............................... 16 36
</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)
(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") primarily at
discounted prices. As of September 26, 1998, the Company operated 60 retail
stores and 193 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 charges described in Note 5) 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
Statement of Financial Accounting Standards ("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 No. 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 do not effect the Company's
financial position or results of operations.
5
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(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 September 26, 1998, approximately $1,900 of these direct costs remained in
accrued liabilities and other long-term liabilities.
(4) LONG-TERM DEBT
As a result of the Company's operating losses, on September 25, 1998,
the financial covenants in the Company's credit facility were amended. The
credit facility carries interest at a rate of LIBOR plus 2.50% per annum or the
agent bank's prime rate plus 0.75% per annum.
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.
The credit facility 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 September 26, 1998 and October 31, 1998, $36.0 million and $42.2
million, respectively, was outstanding under the credit facility and an
additional $6.9 million and $5.8 million, respectively, was available for
borrowing under the credit facility.
In order to provide for its liquidity needs and to fund its strategic
initiatives, during the third quarter, the Company borrowed $7 million from
Products Corporation, $5 million of which had previously been disclosed in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 27, 1998.
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
6
<PAGE>
repayment the Company has a certain minimum availability under its credit
facility. These borrowings are in addition to the "Accounts payable to Products
Corporation."
(5) CHARGES RELATED TO STRATEGIC INITIATIVES
The Company incurred charges related to the implementation of certain
strategic initiatives, resulting in an accrual of $10.5 million during the
second quarter of 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. As of September 26,
1998, $3.1 million and $2.3 million of these charges remained in inventory
reserves and accrued expenses, respectively.
(6) SUBSEQUENT EVENTS
The Company announced that it received a letter from the Nasdaq (as
defined below) stating that the Class C Common Stock of the Company will be
delisted from the Nasdaq National Market at the opening of business on November
11, 1998 for failure to satisfy the continuing listing requirement that the
minimum value of publicly held shares is at least $5 million. The Company has
petitioned the Nasdaq for a waiver from such listing requirements and the
de-listing of the Company's Class C Common Stock will be stayed during the
review of such petition by the Nasdaq. There can be no assurance that such
petition will be successful.
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 primarily at discounted prices. As
of September 26, 1998, the Company operated 60 retail stores and 193 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 and
increasing losses. In the second quarter of 1998, the Company initiated the
implementation of strategic initiatives 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 product scanning into stores. There can be no
assurance that the Company's strategic initiatives will be successful. If such
strategic initiatives are unsuccessful, the Company may be required to adopt
one or more alternatives including but not limited to reducing or delaying one
or more aspects of such strategic alternatives, selling assets or operations,
or closing stores.
The Company incurred charges related to the implementation of certain
strategic initiatives, resulting in an accrual of $10.5 million in the second
quarter of 1998. These charges included 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. As of September 26,
1998, $3.1 million and $2.3 million of these charges remained in inventory
reserves and accrued expenses, respectively.
RESULTS OF OPERATIONS
Net sales for the three months ended September 26, 1998 were $40.7
million, a decrease of $4.7 million, or 10.4%, from the $45.4 million in net
sales for the three months ended September 26, 1997. Net sales for the nine
months ended September 26, 1998 were $118.0 million, an increase of $23.3
million, or 24.6%, from the $94.7 million in net sales for the nine months
ended September 26, 1997. The decrease in net sales for the three months ended
September 26, 1998 was attributable primarily to a decline in comparable store
sales and a reduction in the number of stores compared with the prior period.
Comparable store sales for the three months ended September 26, 1998 declined
to $39.1 million from $42.4 million for the three months ended September 26,
1997. Comparable store sales declined for the third quarter primarily due to
sales declines in older stores and stores in certain underperforming malls and
strip shopping centers, increased competitive activity, as well as reduced
advertising, disruptions due to the remerchandising
8
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program, a planned reduction in stock keeping units to eliminate unprofitable
or low-margin merchandise and a decline in prestige brand offerings. The
increase in net sales for the nine months ended September 26, 1998 was
attributable primarily to incremental sales resulting from the Merger with CCI,
in which CCI contributed approximately $73.6 million for the nine months ended
September 26, 1998 compared with $49.6 million from the date of the Merger to
September 26, 1997, offset in part primarily by a decline in comparable store
sales and a reduction in the number of stores compared with the prior period.
On a proforma basis, comparable store sales for the nine months ended September
26, 1998 declined to $113.2 million from $120.8 million for the nine months
ended September 26, 1997 due primarily to the reasons set forth above for the
three month period ended September 26, 1998, as well as disruptions resulting
from the Merger and the integration of the operations of CCI and PFC.
Cost of sales, including buying, occupancy and distribution expenses
("COS"), were $30.8 million (75.9% of net sales) for the three months ended
September 26, 1998 compared to $32.3 million (71.1% of net sales) for the three
months ended September 26, 1997. COS as a percentage of net sales for the three
months ended September 26, 1998 increased primarily as a result of the planned
markdown program to sell-through slow moving and discontinued merchandise, and
product mix. COS for the nine months ended September 26, 1998, excluding the
impact of the inventory charges taken in the second quarter of 1998, were $90.6
million (76.7% of net sales) compared to $65.9 million (69.6% of net sales) for
the nine months ended September 26, 1997. COS as a percentage of net sales,
excluding the impact of inventory charges, increased for the nine months ended
September 26, 1998 over the comparable 1997 period due to the planned markdown
program to sell-through slow moving and discontinued merchandise, product mix
and the higher COS in the CCI stores included from the date of the Merger.
Including the effect of the inventory charges taken in the second quarter of
1998, COS were $97.2 million for the nine months ended September 26, 1998.
Selling, general and administrative ("SG&A") expenses were $13.2
million (32.4% of net sales) for the three months ended September 26, 1998
compared to $13.3 million (29.4% of net sales) for the three months ended
September 26, 1997. SG&A expenses as a percent of net sales for the three
months ended September 26, 1998 increased due to lower net sales. SG&A
expenses for the nine months ended September 26, 1998, excluding the impact of
the charges taken in the second quarter of 1998, were $39.6 million (33.5% of
net sales) compared to $31.7 million (33.5% of net sales) for the nine months
ended September 26, 1997. Including the impact of the charges taken in the
second quarter of 1998, SG&A expenses for the nine months ended September 26,
1998, were $43.5 million (36.8% of net sales).
Interest expense was $1.3 million for the three months ended September
26, 1998 compared to $1.1 million for the three months ended September 26, 1997
and was $3.9 million for the nine months ended September 26, 1998 compared to
$2.3 million for the nine months ended September 26, 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 operating activities was $4.8 million for the nine
months ended September 26, 1998 and $0.8 million for the nine months ended
September 26, 1997. The increase 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 and an increase
in accounts payable.
Net cash used for investing activities was $1.9 million and $23.3
million for the nine months ended September 26, 1998 and September 26, 1997,
respectively. The decrease in cash used for investing activities during the
1998 period compared with the 1997 period is primarily due to lower capital
expenditures in the 1998 period as well as the cash used in the Merger during
the 1997 period.
Net cash provided by financing activities was $4.1 million for the
nine months ended September 26, 1998 compared with $24.2 million for the nine
months ended September 26, 1997. The decrease in the 1998 period compared with
the 1997 period resulted primarily from the net repayment of borrowings under
the credit facility in the 1998 period partially offset by increased
borrowings from Products Corporation in the 1998 period, compared with
borrowings under the Company's credit facility in the 1997 period which were
used to fund the Merger.
9
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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 September 26, 1998 and October
31, 1998, $36.0 million and $42.2 million, respectively, was outstanding under
the credit facility and an additional $6.9 million and $5.8 million,
respectively, 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, debt service and principal repayment on the Company's
credit facility at maturity on April 30, 1999.
As a result of the Company's operating losses, on September 25, 1998,
the financial covenants in the Company's credit facility were amended. The
credit facility carries interest at a rate of LIBOR plus 2.50% per annum or the
agent bank's prime rate plus 0.75% per annum. The outstanding balance of the
Company's credit facility is reported as a current liability since it expires 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.
To provide for its liquidity needs and to fund its new strategic
initiatives, the Company borrowed $7 million from Products Corporation during
the three months ended September 26, 1998, $5 million of which had previously
been disclosed in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1998. 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.
Based upon the Company's current level of operations and anticipated
growth as a result of its strategic initiatives, the Company is unable to
predict whether cash flows from operations and funds from its 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 reducing or delaying capital or other expenditures, store
openings, or other aspects of the Company's strategic initiatives, borrowing
additional funds, restructuring indebtedness, selling assets or operations or
closing stores, 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 alternatives could be adopted or that they could be
adopted on favorable terms, or if adopted 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 fourth fiscal
quarter of 1998 are expected to be approximately $2.3 million, including
upgrades to the Company's 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.
The Company announced that it received a letter from the Nasdaq Stock
Market, Inc. (the "Nasdaq") stating that the Class C Common Stock of the
Company will be delisted from the Nasdaq National Market at the opening of
business on November 11, 1998 for failure to satisfy the continuing listing
requirement that the minimum value of publicly held shares is at least $5
million. The Company has petitioned the Nasdaq for a waiver from such listing
requirements and the de-listing of the Company's Class C Common Stock will be
stayed during the review of such petition by the Nasdaq. There can be no
assurance that such petition will be successful.
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YEAR 2000
The Company has developed a comprehensive plan to address Year 2000
issues. The plan addresses three main areas: (a) information technology
systems; (b) non-information technology systems (including point of sale
systems and other embedded systems); and (c) business partner readiness
(including customers, inventory and non-inventory suppliers, banks, insurance
companies and tax and other governmental agencies). The Company has designated
the Company's Chief Financial Officer and Vice President of Information Systems
to oversee the process.
The Company has identified potential deficiencies related to Year 2000
in its information systems, both hardware and software, and is in the process
of addressing them through upgrades and other remediation. The Company expects
to complete remediation and testing of its internal systems in the third
quarter of 1999. In respect to other equipment with date sensitive operating
controls such as HVAC, security and other similar systems, the Company is in
the process of identifying those items which may require remediation or
replacement. The Company expects to complete remediation or replacement and
testing of these systems in the third quarter of 1999. As for business
partners, the Company is in the process of identifying and contacting
suppliers, both inventory and non-inventory, customers and other strategic
business partners, including banks and insurance companies. This process
includes the solicitation of written responses to questionnaires and/or
meetings with certain of such third parties. The Company expects to have a
better understanding of the Year 2000 readiness of these third parties over the
next several months.
The Company has determined to upgrade its merchandising, distribution,
and financial information systems due to, among other things, their age and
absence of functionality that the Company views as important. Such new
information systems will be Year 2000 compliant. The expenditures for such
upgrade is expected to be $1.5 million, of which $.4 million has been spent,
and $.2 million will be spent in the fourth quarter of 1998 and $.9 million
will be spent in 1999. Based upon the Company's current estimates, any
additional out-of-pocket costs of its Year 2000 program are expected to be
immaterial. These additional costs are expected to be incurred primarily in
1999 and include third party consultants, remediation or replacement of PC
based store controller and cash register software and replacement or
remediation of embedded systems. The Company intends to develop contingency
plans in the event the Year 2000 compliant information systems are not expected
to be installed and running by the end of 1999.
At this stage of the process, the Company believes that it is
difficult to specifically identify the cause of the most reasonably likely
worst case Year 2000 scenario. A reasonably likely worst case scenario would
be the result of failures of the Company's information systems and inability to
effectively purchase and/or distribute products or failure of one or more
strategic business partners to supply product or other goods and services upon
which the Company is dependent, which if continued for more than a brief period,
could have a material adverse effect on the Company's results of operations.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve, as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and
the ability of third parties with which the Company relies on directly, or
indirectly, to be Year 2000 compliant.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended September 26,
1998 as well as other public documents of the Company contain forward-looking
statements which involve risks and uncertainties and such statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Any statement in this Form 10-Q that is not historical is a
forward-looking statement. The Company's actual results may differ materially
from those discussed in such forward-looking statements. 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 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
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associated with anticipated store openings, closings and relocations and
otherwise, implementing the Company's strategic initiatives, costs to expand
the operations of the Company, capital expenditures including information
system upgrades, the Company's intent to refinance 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, borrowing additional funds and restructuring indebtedness,
capital contributions or loans from affiliates or third parties, the sale of
assets or operations or closing stores, issuing additional shares of the
Company and obtaining a waiver from the Nasdaq. 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 have
been or 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 sufficient funds from the Company's credit
facility, insufficient cash flows from operations, 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) the inability of the Company to refinance, or
repay borrowings under, its credit facility upon such facility's expiration on
April 30, 1999, or the terms and conditions of any refinancing of the Company's
credit facility, (iii) the inability of the Company to satisfy the financial or
other covenants in its credit facility, the inability of the Company to obtain
any necessary amendments or waivers of such covenants or the terms of any
amendments or waivers that may be obtained, (iv) lack of success of the
Company's new marketing and advertising initiatives in maintaining or
increasing the Company's customer base or net sales, (v) negative effects on
net sales as a result of new store prototypes and remerchandising efforts, (vi)
unanticipated costs or difficulties or delays in integrating further the
operations of CCI and PFC, (vii) unanticipated costs or difficulties or delays
in connection with store openings, closings, remodelings or relocations, (viii)
unanticipated costs or difficulties or delays in implementing the new
information systems, including the merchandising and purchasing systems and
product scanning, or in the Company's information systems becoming Year 2000
compliant, (ix) lack of success improving inventory and distribution
efficiencies and reducing costs through such efficiencies, (x) actions by
competitors, including combinations within the retail industry, expansion of
the number of stores of competitors, pricing pressure, marketing initiatives or
successful new retail store concepts, (xi) the lack of commercial success of
the Company's salon arrangement, (xii) the unavailability of product or the
loss of suppliers, including salon product and secondary source suppliers,
(xiii) unanticipated capital expenditures or other costs or difficulties or
delays in implementing the Company's strategic initiatives or lack of success
of the Company's strategic initiatives, (xiv) general business and economic
conditions, (xv) the Company's inability to obtain a waiver of the Nasdaq's
listing requirements, (xvi) 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 and
(xvii) the success of the Company's Year 2000 compliance program and that of
its strategic business partners. 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 and the timing of its adoption have not yet been
determined.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a respondent in an arbitration filed by Dromineen
Partners LLC ("Dromineen") on September 2, 1998 with the American Arbitration
Association. Dromineen and the Company had entered into an agreement for the
creation and implementation of a web site for the Company. Dromineen claims
that the Company breached its obligations under the web site agreement and
seeks alleged out-of-pocket expenses and alleged lost profits pursuant to the
contract. The Company believes that the claims are without merit and intends to
contest the claims vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 -- Amendment No. 3 dated as of September 25, 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 -- The Cosmetic Center, Inc. Amended and Restated 1991
Stock Option Plan.
(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)
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: November ___, 1998
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AMENDMENT No. 3, dated as of September 25, 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.
WITNESSETH:
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. Amendment to the Agreement. The Agreement is hereby amended as follows:
(a) Section 1.1 of the Agreement is amended by deleting the
definition "Adjusted Tangible Net Worth" and inserting the
following new definition between the definitions "Fiscal
Year" and "Funding Date":
"Fixed Maturity Ratio" means, for any period, the ratio of
(a) EBITDA during such period plus any increase in the
principal amount of the Revlon Note and/or Additional Revlon
Note during such period, less any decrease in the principal
amount of the Revlon Note and/or Additional Revlon Note
during such period to (b) the sum of the following during
such period (i) total interest expense, (ii) Capital
Expenditures, (iii) cash payments made against second fiscal
quarter of 1998 restructuring charges and any restructuring
charges subsequent to the second fiscal quarter or 1998, and
(iv) principal payments made on long-term debt other than the
Revlon Note and the Additional Revlon Note.
(b) Section 9.28 of the Agreement is deleted in its entirety and
replaced by the following new Section 9.28:
<PAGE>
"9.28 Fixed maturity Ratio. Beginning with the third fiscal
quarter of 1998, the Borrower shall maintain a Fixed Maturity
Ratio for any Testing Period of not less than 1.1:1.
Compliance with the Fixed Maturity Ratio shall be determined
as of the last day of fiscal quarter. The "Testing Period"
for (i) the third fiscal quarter of 1998 shall be the third
fiscal quarter of 1998, (ii) the fourth fiscal quarter of
1998 shall be third and fourth fiscal quarters of 1998, (iii)
the first fiscal quarter of 1999 shall be the third and
fourth quarters of 1998 and the first fiscal quarter of 1999,
(iv) the second fiscal quarter of 1999 shall be the four
fiscal quarters ending on the last day of such second fiscal
quarter and (v) each fiscal quarter subsequent to the second
fiscal quarter of 1999, shall be the four fiscal quarters
ending on the last day of such fiscal quarter."
(c) Section 9.29 of the Agreement is deleted in its entirety and
replaced by the following:
"Section 9.29 [Intentionally Left Blank]"
(d) Section 7.2(e) of the Agreement is amended by changing clause
(i) thereof to read as follows: "setting forth in reasonable
detail (x) the Interest Coverage Ratio and (y) the
calculations required to establish that CCI was in compliance
with its covenant set forth in Section 9.28".
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
authorized the Borrower's execution, delivery and performance
of the 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 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
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<PAGE>
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", "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.
5. Conditions of Effectiveness. This Amendment shall become effective as of
September 25, 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.
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<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 Ira A. Mermelstein
---------------------------------
Name: Ira A. Mermelstein
Title: Vice President
BankAmerica Business Credit, Inc., as a
Lender
By /s/ Joseph Becker
---------------------------------
Name: Joseph Becker
Title: VP
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<PAGE>
THE COSMETIC CENTER, INC.
AMENDED AND RESTATED 1991 STOCK OPTION PLAN
1. PURPOSE
This Stock Option Plan (the "Plan") for The Cosmetic Center, Inc. (the
"Company") is intended to provide incentive to directors, officers and key
employees of the Company by providing those persons with opportunities to
purchase shares of the Company's Common Stock under (a) incentive stock options
("Incentive Stock Options") as such term is defined under Section 422A of the
Internal Revenue Code of 1986, as amended and (b) other stock options. (As used
herein, "Options" refers to Incentive Stock Options and other options
hereunder.)
2. DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Class A Stock" shall mean the Class A Common Stock of The
Cosmetic Center, Inc.
(d) "Class B Stock" shall mean the Class B Common Stock of The
Cosmetic Center, Inc.
(e) "Common Stock" shall mean the Class A Stock and/or the Class B
Stock of The Cosmetic Center, Inc.
(f) "Company" shall mean The Cosmetic Center, Inc., the employer which
has established this Plan.
(g) "Disability" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medically determinable physical
of mental impairment which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than
twelve (12) months.
(h) "Fair Market Value" per share as of a particular date shall mean
(i) the closing sales price per share of Common Stock on the principal national
securities exchange, if any, on which the shares of Common Stock shall then be
listed for the last preceding date on which there was a sale of such Common
Stock on such exchange, or (ii) if the shares of Common Stock are not then
listed on a national securities exchange, the last sales price per share of
Common Stock entered on a national inter-dealer quotation system for the last
preceding date on which there was a sale of such Common Stock on such national
inter-dealer quotation system, or (iii) if no closing or last sales price per
share of Common Stock is entered on a national inter-dealer quotation system,
the average of the closing bid and asked prices for the shares of Common Stock
in the
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over-the-counter market for the last preceding date on which there was a
quotation for such Common Stock in such market, or (iv) if no price can be
determined under the preceding alternatives, then the price per share as most
recently determined by the Board, which shall make such determinations of value
at least once annually.
(i) "Incentive Stock Option" means one or more options to purchase
Common Stock which, at the time such options are granted under this Plan or any
other such plan of the Company, qualify as incentive stock options under Section
422A of the Code.
(j) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an Option, each of the corporations other than the Company owns stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
(k) "Plan" shall mean this Stock Option Plan.
(l) "Option" shall mean any option issued pursuant to this Plan.
(m) "Optionee" shall mean any person to whom an Option is granted
under this Plan.
(n) "Recapitalization" shall mean the recapitalization of the
Company's Common Stock consummated on March 13, 1992 pursuant to which the
common stock was changed into Class A Stock and Class B Stock.
(o) "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of granting an Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
(p) "Ten Percent Shareholder" shall mean on Optionee who, at the time
an Option is granted, owns directly or indirectly (within the meaning of
section 425(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, its Parent
or a Subsidiary.
3. GENERAL ADMINISTRATION
(a) Unless otherwise determined by the Board, the Plan shall be
administered by a committee of the Board ("Committee"), which shall consist of
two or more members of the Board who are "outside directors" within the meaning
of section 162(m) of the Code. The Committee may, in its discretion, delegate
to a subcommittee or to an officer of the Company its duties hereunder,
including the grant of Awards. The full Board shall also have the authority, in
its discretion, to grant Awards under the Plan and to administer the Plan. For
all purposes under
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<PAGE>
the Plan, any entity that performs the duties described herein shall be
referred to as the "Committee."
(b) Except as set forth in Section 4, the Committee shall have the
authority in its discretion, subject to and not inconsistent with the express
provisions of the Plan, to administer the Plan and to exercise all the powers
and authorities either specifically granted to it under the Plan or necessary
or advisable in the administration of the Plan, including, without limitation,
the authority to grant Options; to determine the purchase price of shares of
Common Stock covered by each Option (the "Option Price") to determine the
persons to whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to interpret the
Plan; to prescribe, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of the Option Agreements (which
need not be identical) entered into in connection with Options granted under
the Plan; and to make all other determinations deemed necessary or advisable
for the administration of the Plan.
(c) The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to the
Committee, and may at any time remove one of more Committee members and
substitute others.
(d) No member of the Board or Committee shall be liable for any action
taken or determination made in good faith will respect to the Plan or any
Option granted hereunder.
4. NON-DISCRETIONARY GRANTS
Intentionally deleted.
5. GRANTING OF OPTIONS
Options may be granted under the Plan at any time prior to December
31, 2000. From and after the merger (the "Merger") of the Company and Prestige
Fragrances & Cosmetics, Inc. ("PFC"), pursuant to the Agreement and Plan of
Merger dated as of November 27, 1996, as amended, by and among the Company, PFC
and Revlon Consumer Products Corporation, there shall be no further grants of
Options under the Plan.
6. ELIGIBILITY
(a) Except as set forth in Section 4, Options may be granted to any
director, officer or key employee of the Company. In determining from time to
time the officers and employees to whom Options shall be granted and the number
of shares to be covered by each Option, the Committee shall take into account
the duties of the respective officers and employees, their present and
potential contributions to the success of the Company and such other factors as
the Committee shall deem relevant in connection with accomplishing the purposes
of the Plan.
(b) Except as set forth in Section 4, at the time of the grant of each
Option under
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<PAGE>
the Plan, the Committee shall determine whether such Option is to be designated
an Incentive Stock Option. Incentive Stock Options shall not be granted to a
director who is not an employee of the Company. The length of the exercise
period of Incentive Stock Options shall be governed by Section 8(e)(1) of the
Plan; the exercise period of all other Options will be governed by Section
8(e)(2).
(c) Except Options granted pursuant to Section 4, an Option designated
an
Incentive Stock Option can, prior to its exercise, be changed to a
non-incentive Option if the Optionee consents to amend his Option Agreement to
provide that the exercise period of such Option will be governed by Section
8(e)(2) of the Plan.
7. STOCK
(a) The stock subject to the Options shall be shares of Class A Stock
except for options granted pursuant to the Recapitalization, for which the
Stock subject to options shall be Class A Stock and Class B Stock, as provided
in Section 8(i)(1). Such shares may, in whole or in part, be authorized but
unissued shares contributed directly by the Company or shares which shall have
been or which may be acquired by the Company. The aggregate number of shares of
Common Stock as to which Options may be granted from time to time under the
Plan shall be 362,888 shares of Class A Stock and 137,112 shares of Class B
Stock, including 137,112 shares of Class A Stock and 137,112 shares of Class B
Stock subject to Options previously granted pursuant to (i) the Company's 1986
Stock Option Plan and (ii) this Plan prior to the Recapitalization. The
limitation established by the preceding sentence shall be subject to adjustment
as provided in Section 8(i) hereof. No Options for shares of Class B Stock
shall be granted under this Plan after the Recapitalization.
(b) If any outstanding Option under the Plan for any reason expires or
is terminated without having been exercised in full, the shares of Class A
Stock allocable to the unexercised portion or such Option shall (unless the
Plan shall have been terminated) become available for subsequent grants of
Options under the Plan.
8. TERMS AND CONDITIONS OF OPTIONS
Each Option granted pursuant to the Plan shall be evidenced by Option
Agreements in such forms as the Committee may from time to time approve.
Options shall comply with the be subject to the following terms and conditions:
(a) OPTION PRICE. Each Option shall state the Option Price, which with
respect to Incentive Stock Options shall be not less than one hundred percent
(100%) of the Fair Market Value of the shares of Common Stock on the date of
grant of the Option; provided, however, that in the case of an Incentive Stock
Option granted to a Ten Percent Shareholder, the Option Price shall not be less
than one hundred ten percent (110%) of such fair market value. The Option Price
for Options that are not Incentive Stock Options shall not be less than fifty
percent (50%) of the Fair Market Value of the shares of Common Stock on the
date of grant of the Option. The Option price shall be subject to adjustment as
provided in Section 8(i) hereof. The date on which
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<PAGE>
the Committee adopts a resolution expressly granting an Option, or the date
specified in Section 4, shall be considered the day on which such Option is
granted.
(b) RESTRICTIONS. Except for Options granted pursuant to Section 4,
any Common Stock issued under the Plan may contain restrictions including, but
not limited to, limitations on transferability that may constitute substantial
risks of forfeiture, as the Committee may determine.
(c) VALUE OF SHARES. Options may be granted to any eligible person for
shares of Common Stock of any value, provided that the aggregate Fair Market
Value (determined at the time the Option is granted) of the stock with respect
to whish Incentive Stock Options are exercisable for the first time by the
Optionee during any calendar year (under all the plans of the Company, its
Parent and its Subsidiaries) shall not exceed $100,000.
(d) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in
full, at the time of exercise, in cash, in shares of Common Stock owned by the
optionee free and clear of all liens having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and such
shares. Shares acquired upon exercise of an Option shall not be accepted as
payment unless such Option exercise occurred at least six months prior to the
exercise of the Option, the Option Price of which is proposed to be paid in
part or in full by the tender of shares of Common Stock.
(e) TERM AND EXERCISE OF OPTIONS.
(1) Except as set forth in Section 4, Incentive Stock
Options shall be exercisable over the exercise period specified by the
Committee in the Option Agreement, but in no event shall such period exceed ten
(10) years from the date of the grant of each such Incentive Stock Option;
provided, however, that in the case of an Incentive Stock Option granted to a
Ten Percent Shareholder, the exercise period shall not exceed five (5) years
from the date of grant of such Option. The exercise period of an Option shall
be subject to earlier termination as provided in Section 8(f) and 8(g) hereof.
An Option may be exercised, as to any or all full shares of Common Stock as to
which the Option has become exercisable, by giving written notice of such
exercise to the Committee; provided that an Option may not be exercised at any
one time as to less than 100 shares (or such number of shares as to which the
Option is then exercisable if such number of shares is less than 100).
Incentive Stock Options granted to any person prior to January 1, 1987 shall
not be exercisable by the Optionee while any Incentive Stock Option of the
Company (or any incentive stock option of any Parent or Subsidiary of the
Company or the predecessor of any of them) granted to such Optionee prior to
the Incentive Stock Options in question remains outstanding (that is, has not
been exercised in full or lapsed because of time).
(2) NON-INCENTIVE STOCK OPTIONS. Except as set forth in
Section 4, Options that have not been designated by the Committee as Incentive
Stock Options shall be exercisable over a period of eleven (11) years.
(f) TERMINATION OF EMPLOYMENT. Except as provided in this Section 8(f)
and
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Section 8(g) hereof, an Option may not be exercised unless the Optionee is then
a director of or in the employ of the Company or any Parent or Subsidiary of
the Company (or a corporation or a Parent of Subsidiary of such corporation
issuing or assuming the Option in a transaction to which Section 425(a) of the
Code applies), and unless the Optionee has remained continuously a director or
so employed since the date of grant of the Option. In the event all association
of an Optionee with the Company (as an employee, a director or both) shall
terminate (other than by reason of death or Disability), all Options or
unexercised portions thereof granted to such Optionee which are then
exercisable may, unless earlier terminated in accordance with their terms, be
exercised within thirty (30) days after such termination; provided, however,
that if the association of the Optionee with the Company shall terminate for
"cause" (as determined by the Committee), all Options theretofore granted to
such Optionee shall, to the extent not theretofore exercised, terminate
forthwith. A bona fide leave of absence shall not be considered a termination
or break in continuity of employment for any purpose of the Plan so long as the
period of such leave does not exceed ninety (90) days or such longer period
during which the Optionee's right to reemployment is guaranteed by statute or
by contract. Where the period of such leave exceeds ninety (90) days and the
Optionee's right to reemployment is not guaranteed, the Optionee's employment
will be deemed to have terminated on the ninety-first (91st) day of such leave.
Nothing in the Plan or in any Option granted pursuant hereto shall confer upon
an employee any right to continue in the employ of the Company or any of its
divisions or Parent or Subsidiaries or interfere in any way with the right of
the Company or any such divisions or Parent or Subsidiary to terminate such
employment at any time.
(g) DEATH OR DISABILITY OF OPTIONEE. If an Optionee shall die while a
director of or employed by the Company or any Parent or Subsidiary of the
Company, or if the Optionee's employment shall terminate by reason of
Disability, all Options theretofore granted to such Optionee may, unless
earlier terminated in accordance with their terms, be exercised by the Optionee
or by the personal representative of the Optionee's estate or by a person who
acquired the right to exercise such Option by bequest or inheritance or
otherwise by reason of death of the Optionee, at any time within nine (9)
months after the date of death or Disability of the Optionee, but in no event
later than the date of expiration of the Option, provided that during the
lifetime of the Optionee any Option granted to him may be exercised only by the
Optionee.
(h) NONTRANSFERABILITY OF OPTIONS. Options granted under the Plan
shall not be transferable other than by will or by the laws of descent and
distribution, or pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or
the rules thereunder.
(i) EFFECT OF CERTAIN CHANGES.
(1) If there is any change in the number of shares of Common
Stock through the declaration of stock dividends, recapitalization resulting in
stock splits, or combinations or exchanges of such shares, then the number of
shares of Common Stock available for Options, the number of such shares covered
by outstanding Options, and the price per share of such Options shall be
proportionately adjusted to reflect any increase or decrease in
6
<PAGE>
the number of issued shares of Common Stock; provided, however, that any
fractional shares resulting from such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or liquidation
of the Company, or in the event of any corporate separation or division,
including, but not limited to, a split-up, a split-off or spin-off, the
Committee may provide that the holder of each Option then exercisable shall
have the right to exercise such Option (at its then Option Price) solely for
the kind and amount of shares of stock and other securities, property, cash or
any combination thereof receivable upon such dissolution or liquidation, or
corporate separation or division; or the Committee may provide, in the
alternative, that each Option granted under the Plan shall terminate as of a
date to be fixed by the Board, provided, however, that no less than thirty (30)
days' written notice of the date so fixed shall be given to each Optionee, who
shall have the right, during the period of thirty (30) days preceding such
termination, to exercise the Options as to all or any part of the shares of
Common Stock covered thereby, including shares as to which such Options would
not otherwise be exercisable.
(3) If while unexercised Options remain outstanding under the
Plan (i) the Company executes a definitive agreement to merge or consolidate
with or into another corporation or to sell or otherwise dispose of
substantially all its assets, or (ii) more than 50% of the Company's then
outstanding voting stock is acquired by any person or group (other than any
group existing on the date hereof composed of members of the Weinstein family),
or (iii) during any year, individuals who at the beginning of such period were
members of the Board cease for any reason to constitute at least a majority
thereof (unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period), then from and after the date of any such agreement or
the date on which public announcement of the acquisition of such percentage
shall have been made or the date on which the change in the composition of the
Board set forth above shall have occurred (any such date being referred to
herein as the "Acceleration Date"), all Options shall be exercisable in full,
whether or not otherwise exercisable. Following the Acceleration Date, (a) the
Committee shall, in the case of a merger, consolidation or sale or disposition
of assets, promptly make an appropriate adjustment to the number and class of
shares of Common Stock available for Options, and to the amount and kind of
shares or other securities or property receivable upon exercise of any
outstanding Options after the effective date of such transaction, and the price
thereof, and (b) the Committee may, in its discretion, permit the cancellation
of outstanding Options in exchange for a cash payment in an amount per share
subject to any such Option determined by the Committee in its sole discretion,
but not less than the difference between the Option Price per share and the
Fair Market Value per share of Common Stock on the Acceleration Date.
(4) Paragraphs (2) and (3) of this Section 8(i) shall not
apply to a merger or consolidation in which the Company is the surviving
corporation and shares of Common Stock are not converted into or exchanged for
stock, securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or merger
of another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change
7
<PAGE>
to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from par value to no par value, or
as a result of a subdivision or combination, but including any change in such
shares into two or more classes or series of shares), the Committee may provide
that the holder of each Option then exercisable shall have the right to
exercise such Option solely for the kind and amount of shares of stock and
other securities (including those of any new direct or indirect Parent of the
Company), property, cash or any combination thereof receivable by the holder of
the number of shares of Common Stock for which such Option might have been
exercised upon such reclassification, change, consolidation or merger.
(5) In the event of a change in the Common Stock as presently
constituted, which is limited to a change of all of its authorized shares, with
par value into the same number of shares with a different par value or without
par value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
(6) To the extent that the foregoing adjustments related to
stock or securities of the Company, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive, provided that each Option granted pursuant to this Plan and
designated an Incentive Stock Option shall not be adjusted in a manner that
causes the Option to fail to continue to qualify as an Incentive Stock Option
within the meaning of section 422A of the Code.
(7) Except as hereinbefore expressly provided in this Section
8(i), the Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, merger, or
consolidation, and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
Option Price of shares of Common Stock subject to an Option. The grant of an
Option pursuant to the Plan shall not affect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business or
assets.
(j) RIGHTS AS A SHAREHOLDER. An Optionee or a transferee or an Option
shall have no rights as a shareholder with respect to any shares covered by his
Option until the date of the issuance of a stock certificate to him for such
shares. No adjustments shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such certificate is issued,
except as provided in Section 8(i) hereof.
(k) OTHER PROVISIONS. The Option Agreements authorized under the Plan
shall contain such other provisions, including, without limitation, (i) the
imposition of restrictions upon the exercise of an Option and (ii) the
inclusion of any condition not inconsistent with such
8
<PAGE>
Option qualifying as an Incentive Stock Option, as the Committee shall deem
advisable, including provision with respect to compliance with federal and
applicable state securities laws.
9. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes or any kind required by law to be withheld upon the exercise of such
Option, and
(b) The Company shall, to the extent permitted or required by law,
have the right to deduct from any payment of any kind otherwise due to the
Optionee any federal, state or local taxes or any kind required by law to be
withheld upon the exercise of such Option.
10. TERM OF PLAN
Options may be granted pursuant to the Plan from time to time within a
period of ten (10) years from the date on which the Plan is adopted by the
Board, provided that no Options granted under the Plan (except the Options
described in Section 13) shall become exercisable unless and until the Plan
shall have been approved by the Company's shareholders. From and after the
Merger, there shall be no further grants of Options under the Plan.
11. SAVINGS CLAUSE
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422A of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422A of the
Code or the regulations promulgated thereunder, such invalidity or failure
shall not affect the remaining parts of this Plan, but rather it shall be
construed and enforced as if the Plan or the affected provision thereof, as the
case may be, complied in all respects with the requirements of Section 422A of
the Code.
12. AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time and from time to time suspend, terminate,
modify or amend the Plan, provided that (a) any amendment that would materially
increase the aggregate number of shares of Class A Stock or Class B Stock as to
which Options may be granted under the Plan, materially increase the benefits
accruing to participants under the Plan, or materially modify the requirements
as to eligibility for participation in the Plan shall be subject to the
approval of the holders of a majority of the Class B Stock issued and
outstanding, except that any such increase or modification that may result from
adjustments authorized by Section 8(i) hereof shall not require such approval
and (b) Section 4 shall not be amended more than once every six months, other
than to comport with changes in the Code, ERISA or the rules thereunder. Except
as provided in Section 8 hereof, no suspension, termination, modification or
amendment of the Plan may adversely affect any Option previously granted unless
the written consent or the Optionee is obtained.
9
<PAGE>
13. OPTIONS GRANTED UNDER PRIOR PLAN
Under adoption of the Plan, Options granted under the Company's 1986
Plan, as amended, shall become Options under this Plan, but shall be deemed to
remain outstanding and not to have been regranted.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The Cosmetic
Center, Inc's September 26, 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> SEP-26-1998
<CASH> 2,747
<SECURITIES> 0
<RECEIVABLES> 1,556
<ALLOWANCES> 2
<INVENTORY> 78,311
<CURRENT-ASSETS> 85,516
<PP&E> 25,931
<DEPRECIATION> (13,053)
<TOTAL-ASSETS> 103,668
<CURRENT-LIABILITIES> 94,096
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 8,235
<TOTAL-LIABILITY-AND-EQUITY> 103,668
<SALES> 40,653
<TOTAL-REVENUES> 40,653
<CGS> 30,845
<TOTAL-COSTS> 30,845
<OTHER-EXPENSES> 13,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,331
<INCOME-PRETAX> (4,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,661)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
