<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
INFORMATION STATEMENT
PURSUANT TO SECTION 14(F) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
------------------------
THE COSMETIC CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-14756 52-1266697
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
------------------------
8700 ROBERT FULTON DRIVE
COLUMBIA, MARYLAND 21046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(410) 309-4600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE>
THE COSMETIC CENTER, INC.
8700 ROBERT FULTON DRIVE
COLUMBIA, MARYLAND 21046
- -------------------------------------------------------------------------------
INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND RULE 14F-1 THEREUNDER
- -------------------------------------------------------------------------------
This Information Statement is being mailed on or about December 11,
1998 to holders of record as of December 7, 1998 of shares of Class C Common
Stock, par value $.01 per share ("Class C Common Stock"), of The Cosmetic
Center, Inc., a Delaware corporation (the "Company" or "Cosmetic"), in
connection with the election of persons designated by Prestige Holdings I, L.P.,
a Delaware limited partnership, (the "Limited Partnership"), an entity
controlled by York Management Services, Inc. ("York"), as directors of the
Company otherwise than at a meeting of the stockholders of the Company pursuant
to a Contribution Agreement, dated as of December 10, 1998 (the "Contribution
Agreement"), between the Limited Partnership and Revlon Consumer Products
Corporation, a Delaware corporation ("Products Corporation"), and an Agreement
of Limited Partnership dated as of December 10, 1998 by and among Products
Corporation as a Class B limited partner, Prestige II, L.L.C., an entity
controlled by an affiliate of York, as a Class A limited partner, and
Prestige I, L.L.C., an entity controlled by York, as the general partner, and
the resignation of eight of the nine directors of the Company. Products
Corporation is a wholly owned subsidiary of Revlon, Inc. Products Corporation
is the owner of 8,479,335 shares of Class C Common Stock (or approximately
84.6% of the outstanding shares of Class C Common Stock.)
Pursuant to the Contribution Agreement, Products Corporation
transferred to the Limited Partnership the following in exchange for a Class B
limited partnership interest in the Limited Partnership (the "Class B Limited
Partnership Interests"): (i) all of the Class C Common Stock owned by it, (ii)
its right to receive payment on approximately $20.3 million of intercompany
loans made by Products Corporation to the Company and (iii) a non-interest
bearing demand note representing $6.0 million of the payable owed by the
Company to Products Corporation (the "Assigned Trade Payable Note") arising
primarily from the sale of inventory by Products to the Company pursuant to the
Supply Agreement dated as of April 25, 1997 (the "Supply Agreement") between
Products Corporation and the Company (collectively, the "Transactions"). In
connection with the closing of the Transactions (the "Closing"), there were
certain amendments to certain of the agreements between Products Corporation
and Cosmetic. See "Certain Relationships and Related Transactions."
Simultaneously with the Closing, eight members of the Company's board
of directors (Messrs. Levin, Fox, Fellows, Nichols, Halperin, Drapkin, Dinkins
and Rosenthal) resigned from their positions as directors of the Company
effective (the "Resignation Effective Date") ten days after the date this
Schedule 14F was mailed to the stockholders of record of the Company and
transmitted to the Securities and Exchange Commission (the "SEC"). At the
Closing, two individuals designated by the Limited Partnership became directors
of the Company (the "Limited Partnership Designees"). Information with respect
to the Limited Partnership Designees is set forth below.
Pursuant to the Contribution Agreement, the Corporation's By-laws were
amended to require the affirmative vote of at least 85% of the directors
present at a meeting for meetings of the Board of
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Directors (but not committees thereof) where a quorum is present in order to
take action and to require that a quorum for meetings of the Board (but not
committees thereof) requires that at least 85% of the entire Board be present.
In addition, pursuant to the Contribution Agreement, all of the members of the
Executive Committee of the Board of Directors (the "Executive Committee") were
removed and replaced by Ms. Burton and the two Limited Partnership Designees.
No action is required on the part of the stockholders of the Company
in order to effect the election of the Limited Partnership Designees.
Nevertheless, Section 14(f) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires the mailing to the Company's stockholders of
record of the information set forth in this Information Statement at least ten
days prior to a change in a majority of the Company's directors otherwise than
at a meeting of the Company's stockholders. As a result of the resignation of
eight Directors effective on the Resignation Effective Date, on such date the
Limited Partnership Designees will constitute a majority of the members of the
Board of Directors. As of December 7, 1998, there were 10,025,601 shares of
Class C Common Stock outstanding, the holders of which shares are entitled to
cast one vote per share on all matters submitted to a vote of stockholders. The
Company is the surviving corporation of the merger in April 1997 (the "Merger")
of Prestige Fragrances & Cosmetics, Inc., which at that time was a wholly owned
subsidiary of Products Corporation ("PFC"), with and into The Cosmetic Center,
Inc.
The information contained in this Information Statement concerning the
Limited Partnership Designees has been furnished to the Company by the Limited
Partnership and the Company assumes no responsibility for such information. The
principal executive offices of the Company are located at 8700 Robert Fulton
Drive, Columbia, Maryland 21046, and the principal executive offices of the
Limited Partnership are located at 764 Easton Avenue, Suite #8, Somerset, New
Jersey 08873.
INFORMATION REGARDING THE LIMITED PARTNERSHIP DESIGNEES
None of the Limited Partnership Designees is a director of, or holds
any position with, the Company, and none of the Limited Partnership Designees
owns any shares of Class C Common Stock. The name, age, present principal
occupation or employment and five-year employment history of each of the Limited
Partnership Designees are set forth below. Each Limited Partnership Designee's
term of office as a director of the Company will expire as follows: Class II
Director (Mr. Massey) having a term expiring at the 2000 Annual Meeting of
Stockholders and Class III Director (Mr. Nacht) having a term expiring at the
2001 Annual Meeting of Stockholders or at the time such Limited Partnership
Designee's successor is duly elected and shall have qualified. Unless otherwise
indicated, the business address of each of the Limited Partnership Designees is
764 Easton Avenue, Suite #8, Somerset, New Jersey 08873. Mr. Massey is a citizen
of Canada and Mr. Nacht is a citizen of the United States.
DAVID R. MASSEY (32) has been Chief Financial Officer of National
Service Pros, LLC, a HVAC service provider, since October 1998. From 1989 to
1998 Mr. Massey worked at Kmart Canada Co. in increasingly senior positions,
with his last position being Treasurer from 1997 to 1998.
GARY A. NACHT (43) has been an Executive Vice President of York since
March 1996. From June 1994 to February 1996, Mr. Nacht was Executive Vice
President and Chief Financial Officer of Brassie Golf Corporation.
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INFORMATION REGARDING DIRECTORS OF COSMETIC PRIOR TO THE CLOSING
The Board of Directors of the Company is classified, with three Class I
Directors (Messrs. Drapkin, Fox and Nichols) have a term expiring at the 1999
Annual Meeting of Stockholders, three Class II Directors (Messrs. Fellows,
Halperin and Levin) have a term expiring at the 2000 Annual Meeting of
Stockholders and three Class III Directors (Messrs. Dinkins and Rosenthal and
Ms. Burton) have a term expiring at the 2001 Annual Meeting of Stockholders. At
each Annual Meeting, Directors are elected for a full term of three years to
succeed those directors whose terms expire on the date of the Annual Meeting.
The name, age, principal occupation for the last five years, selected
biographical information and period of service as a Director of the Company of
each of the nominees for election as a Class III Director and each of the other
current Directors are set forth below. Information regarding the Directors of
Cosmetics prior to the Closing is as of December 1, 1998.
MS. MARY ELIZABETH BURTON (46) has been President and Chief Executive
Officer and a Director (Class III) of the Company since June 1998. Ms. Burton
was Chairman and Chief Executive Officer of BB Capital, Inc., from 1994 to June
1998, Chairman and Chief Executive Officer of Supertans, Inc. from 1992 to 1994,
Chairman and Chief Executive Officer of PIP Printing from 1991 to 1992 and
Chairman and Chief Executive Officer of Supercuts, Inc. from 1987 to 1991. Ms.
Burton is a Director of the following corporations which file reports pursuant
to the Exchange Act: Staples, Inc. and Gantos, Inc.
MR. DINKINS (71) has been a Director (Class III) of the Company since
April 1997. He has been a professor at Columbia University School of
International and Public Affairs since January 1994. Mr. Dinkins was Mayor of
The City of New York from January 1990 through December 1993. Prior to serving
as Mayor of The City of New York, Mr. Dinkins served as Manhattan Borough
President from 1986 through 1989. Mr. Dinkins is a Director of the following
corporations which file reports pursuant to the Exchange Act: Carver Bancorp
Inc. and Transderm Laboratories Corporation. He is also a trustee of WSIS Series
Trust.
MR. DRAPKIN (50) has been a Director (Class I) of the Company since
August 1997. He has been a Director of Revlon, Inc. and of Products Corporation
since their respective formations in 1992. He has been Vice Chairman of the
Board of MacAndrews & Forbes Holdings, Inc. ("MacAndrews Holdings") and various
of its affiliates since March 1987. Mr. Drapkin was a partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom for more than five years prior to March
1987. Mr. Drapkin is a Director of the following corporations which file reports
pursuant to the Exchange Act: Algos Pharmaceutical Corporation, Anthracite
Capital, Inc., BlackRock Asset Investors, Cardio Technologies, Inc., The Molson
Companies, Playboy Enterprises, Inc., Products Corporation, Revlon, Inc., VIMRx
Pharmaceuticals Inc. and Weider Nutrition International, Inc. (On December 27,
1996, Marvel Entertainment Group, Inc. ("Marvel"), Marvel Holdings Inc., Marvel
(Parent) Holdings Inc. and Marvel III Holdings Inc., of which Mr. Drapkin was a
Director on such date, and several subsidiaries of Marvel filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.)
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MR. FELLOWS (56) has been a Director (Class II) of the Company since
August 1997. He has been President and Chief Executive Officer of Revlon, Inc.
and of Products Corporation since January 1997. He was President and Chief
Operating Officer of Revlon, Inc. and Products Corporation from November 1995
until January 1997 and has been a Director of Revlon, Inc. since November 1995
and a Director of Products Corporation since September 1994. Mr. Fellows was
Senior Executive Vice President of Revlon, Inc. and of Products Corporation and
President and Chief Operating Officer of Products Corporation's Consumer Group
from February 1993 until November 1995. From 1989 through January 1993, he was a
senior executive officer of Mennen Corporation and then Colgate-Palmolive
Company, which acquired Mennen Corporation in 1992. From 1986 to 1989 he was
Senior Vice President of Revlon Holdings Inc. ("Holdings"). Mr. Fellows is a
Director of Revlon, Inc., Products Corporation and VF Corporation, each of which
files reports pursuant to the Exchange Act.
MR. FOX (42) has been Vice Chairman of the Company since January 1998.
He was Vice President of the Company from April 1997 until January 1998 and has
been a Director (Class I) of the Company since April 1997. He was a Vice
President and a Director of PFC from June 1992 until the Merger. Mr. Fox has
been Senior Executive Vice President of Revlon, Inc. and of Products Corporation
since January 1997, was Chief Financial Officer of Revlon, Inc. and Products
Corporation from their respective formations in 1992 until January 1998 and was
also Executive Vice President of Revlon, Inc. and of Products Corporation from
their respective formations in 1992 until January 1997. In January 1998, Mr. Fox
was appointed President, Strategic and Corporate Development, Revlon Worldwide
of Revlon, Inc. and Products Corporation and Chief Executive Officer, Revlon
Technologies. He has been Senior Vice President of MacAndrews Holdings since
August 1990. He was Vice President of MacAndrews Holdings from February 1987 to
August 1990 and was Treasurer of MacAndrews Holdings from February 1987 to
September 1992. Prior to February 1987, he was Vice President and Assistant
Treasurer of MacAndrews Holdings. Mr. Fox joined MacAndrews & Forbes Group,
Incorporated in 1983 as Assistant Controller, prior to which time he was a
certified public accountant at the international auditing firm of Coopers &
Lybrand. Mr. Fox is a Director of Revlon, Inc., Products Corporation and Vice
Chairman and a Director of The Hain Food Group, Inc., each of which files
reports pursuant to the Exchange Act.
MR. HALPERIN (44) has been a Director (Class II) of the Company since
October 1997. Mr. Halperin has been Executive Vice President of MacAndrews
Holdings and various of its affiliates and Special Counsel to the Chairman of
the Board of MacAndrews Holdings since January 1993. Mr. Halperin was Senior
Vice President of MacAndrews Holdings from April 1986 to January 1993 and Vice
President of MacAndrews Holdings from December 1984 to April 1986. Prior to
joining MacAndrews Holdings in 1984, Mr. Halperin worked for the office of the
New York State Attorney General.
MR. LEVIN (54) has been Chairman of the Board and a Director (Class II)
of the Company since April 1997 and was a Director of PFC from October 1995
until the Merger. Mr. Levin has been Chairman and Chief Executive Officer and a
Director of Sunbeam Corporation since June 1998. Mr. Levin was Chairman and
Chief Executive Officer of The Coleman Company, Inc. from 1997 to April 1998. He
was Chairman of the Board of Revlon, Inc. and of Products Corporation from 1995
to June 1998 and has been a Director of Revlon, Inc. since its formation in 1992
and a Director of Products Corporation from its formation in 1992 to November
1998. Mr. Levin was Chief Executive Officer of Revlon, Inc. and of Products
Corporation from their respective formations in 1992 until 1997 and
5
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President of Revlon, Inc. and of Products Corporation from their respective
formations in 1992 until 1995. Mr. Levin has been Executive Vice President of
MacAndrews Holdings since March 1989. For 15 years prior to joining MacAndrews
Holdings, he held various senior executive positions with The Pillsbury Company.
Mr. Levin is a Director of the following corporations which file reports
pursuant to the Exchange Act: U.S. Bancorp, Inc., Meridian Sports Incorporated,
Revlon, Inc., Sunbeam Corporation and The Coleman Company, Inc.
MR. NICHOLS (56) has been Vice President and a Director (Class I) of
the Company since April 1997. He was Vice President and a Director of PFC from
June 1992 until the Merger. He has been Executive Vice President and General
Counsel of Revlon, Inc. and of Products Corporation since January 1998 and
served as Senior Vice President and General Counsel of Revlon, Inc. and Products
Corporation from their respective formations in 1992 until January 1998. Mr.
Nichols has been Vice President of MacAndrews Holdings since 1988.
MR. ROSENTHAL (56) has been a Director (Class III) of the Company since
April 1997. He was President and Chief Operating Officer of Melville
Corporation, now known as CVS Corporation, from 1994 until October 1996. From
1984 to 1994, Mr. Rosenthal was President and Chief Executive Officer of the CVS
division of Melville Corporation. Mr. Rosenthal joined the CVS division of
Melville Corporation in 1969 and held various executive positions in
merchandising, marketing and operations until 1984. Mr. Rosenthal is a Director
of the following corporations which file reports pursuant to the Exchange Act:
LoJack Corporation and Schein Pharmaceutical, Inc. He is also a trustee of EQ
Advisors Trust.
COMMITTEES
The Board of Directors has an Executive Committee, an Audit Committee
and a Compensation and Stock Plan Committee (the "Compensation Committee").
Pursuant to the Contribution Agreement, all of the members of the
Executive Committee were removed and replaced by Ms. Burton and the two
Limited Partnership Designees. Prior to the Closing, the Executive Committee
consisted of Messrs. Levin and Fox and Ms. Burton. The Executive Committee may
exercise all of the powers and authority of the Board, except as otherwise
provided under the Delaware General Corporation Law. The Executive Committee
also serves as the Company's nominating committee for Board membership. The
Audit Committee, consisting of Messrs. Dinkins, Rosenthal and Fox, makes
recommendations to the Board of Directors regarding the engagement of the
Company's independent auditors, reviews the plan, scope and results of the
audit, and reviews with the auditors and management the Company's policies and
procedures with respect to internal accounting and financial controls, changes
in accounting policy and the scope of the non-audit services which may be
performed by the Company's independent auditors, among other things. The Audit
Committee also monitors policies designed to prohibit unethical, questionable or
illegal activities by the Company's employees. The Compensation Committee,
consisting of Messrs. Drapkin, Dinkins and Rosenthal, makes recommendations to
the Board of Directors regarding compensation and incentive arrangements
(including performance-based arrangements) for the Chief Executive Officer,
other executive officers, and officers and other key managerial employees of the
Company. The Compensation Committee also considers and recommends awards of
stock options to purchase shares of Class C Common Stock pursuant to The
Cosmetic Center 1997 Stock Plan (the "1997 Option Plan")
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and administers the 1997 Option Plan and the Company's Amended and Restated 1991
Stock Option Plan (the "1991 Option Plan").
During 1997, the Board of Directors held four meetings and acted five
times by unanimous written consent, the Executive Committee acted five times by
unanimous written consent, the Audit Committee held three meetings and the
Compensation Committee held three meetings and acted twice by unanimous written
consent. During 1997, all Directors attended 75% or more of the meetings of the
Board of Directors and of the Committees of which they were members.
COMPENSATION OF DIRECTORS
Directors who currently are not receiving compensation as officers or
employees of the Company or any of its affiliates are paid an annual retainer
fee of $25,000, payable in quarterly installments, and a fee of $1,000 for each
meeting of the Board of Directors or any committee thereof they attend.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
the executive officers of the Company as of December 1, 1998.
<TABLE>
<CAPTION>
NAME POSITION
- ----------- ------------------------------------------------------------
<S> <C>
Jerry W. Levin Chairman of the Board and Class II Director
William J. Fox Vice Chairman of the Board and Class I Director
Mary Elizabeth Burton President and Chief Executive Officer and Class III Director
Dwight W. Crawley Senior Vice President -- Finance and Chief Financial Officer
Steven R. Isko Senior Vice President, General Counsel and Secretary
</TABLE>
In connection with the Transactions, Messrs. Levin, Fox and Isko
resigned as officers of the Company.
The following sets forth the age, positions held with the Company and
selected biographical information for the executive officers of the Company who
are not directors. Biographical information with respect to Messrs. Levin and
Fox and Ms. Burton are set forth above under the caption "Information Regarding
Directors Of Cosmetic Prior To The Closing."
MR. CRAWLEY (37) has been Senior Vice President -- Finance and Chief
Financial Officer of the Company since February 1998. From September 1992 to
January 1998 he served as Controller and Secretary of Harris Teeter, Inc. and
from July 1990 to August 1992 was Assistant Controller and Assistant Secretary
of Harris Teeter, Inc. From June 1984 to July 1990 he worked as a certified
public accountant at the international accounting firm of Arthur Andersen & Co.
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MR. ISKO (34) was elected Senior Vice President, General Counsel and
Secretary of the Company in June 1998. From July 1997 until April 1998 he served
as Vice President -- Legal of The Coleman Company, Inc. From June 1996 until
July 1997 Mr. Isko served as Vice President - Legal of Marvel. For more than
five years prior to June 1996, Mr. Isko was an associate at the law firm of
Skadden, Arps, Slate, Meagher and Flom.
EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the persons who
served as Chief Executive Officer of the Company during 1997 and the four most
highly paid executive officers, other than the Chief Executive Officer, who
served as executive officers of the Company as of December 27, 1997
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to the Company and its subsidiaries during such periods (including
for services to PFC in the period during 1997 prior to the Merger).
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (a) AWARDS
---------------------------------------------
NAME AND YEAR SALARY BONUS OTHER SECURITIES ALL OTHER
PRINCIPAL POSITION ($) ($) ANNUAL UNDERLYING COMPENSATION
COMPENSATION OPTIONS ($)
($)
<S> <C> <C> <C> <C> <C> <C>
I. Howard Diener 1997 365,782 50,000 5,589 100,000 4,110
Former President and Chief Executive
Officer (b)
Ben Kovalsky 1997 194,010 -- 3,484 -- 1,185,109
Former President, Chief Operating 1996 314,644 ---- ---- 13,500 ----
Officer and Chief Executive Officer (c) 1995 306,680 ---- ---- 13,500 ----
Mark Weinstein 1997 387,474 -- 2,524 -- 8,800
Former Vice Chairman of the Board (d) 1996 241,416 -- -- 15,000 8,800
1995 232,045 -- -- 15,000 8,800
Bruce Strohl 1997 154,140 -- 899 10,000 29,737
Former Senior Vice President and Chief 1996 120,075 -- -- 7,500 --
Financial Officer (e) 1995 117,814 -- -- 8,000 --
Helen Kuebler 1997 139,590 15,000 2,587 10,000 91,545
Former Senior Vice President--Store
Operations (f)
Allan Goldman 1997 157,177 6,300 592 5,000 --
Former Senior Vice 1996 152,396 -- -- -- --
President--Merchandising (g) 1995 81,237 -- -- -- --
</TABLE>
(a) The amounts shown in Annual Compensation for 1997, 1996 and 1995 reflect
salary, bonus and other annual compensation awarded to, earned by or paid to the
persons listed for services rendered to the Company during such years as they
served as executive officers of the Company.
(b) Mr. Diener served as Chief Executive Officer of the Company from April 1997
to June 1998 when his employment with the Company was terminated. The amount
shown for Mr. Diener under Salary for 1997 includes $108,740 earned by Mr.
Diener for services provided by Mr. Diener to PFC as PFC's president prior to
the Merger, with the balance earned by Mr. Diener for services provided during
1997 to the Company. The amount shown for Mr. Diener under Other Annual
Compensation for 1997 reflects payments in respect of gross ups for taxes on
imputed income arising out of premiums paid or reimbursed by the Company in
respect of life insurance. The amount shown for Mr. Diener under All Other
Compensation for 1997 reflects premiums paid or reimbursed by the Company in
respect of life insurance.
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(c) Mr. Kovalsky served as President, Chief Operating Officer and Chief
Executive Officer of the Company from July 1995 until April 1997 and as
President of the Company's retail division from April 1997 until August 1997
when his employment with the Company was terminated. The amount shown for Mr.
Kovalsky under Other Annual Compensation for 1997 reflects payments in respect
of gross ups for taxes on imputed income arising out of premiums paid or
reimbursed by the Company in respect of life insurance. The amount shown for Mr.
Kovalsky under All Other Compensation for 1997 reflects amounts payable to him
upon termination of his employment agreement for accrued vacation, salary,
non-competition covenant payments, payments in respect of cancellation of
options and certain other amounts due under his agreement.
(d) Mr. Weinstein was Chairman of the Board of the Company from July 1995 until
April 1997 and Vice Chairman of the Board during the remainder of 1997. Mr.
Weinstein resigned as Vice Chairman of the Board and Director effective January
1998 but remains employed by the Company. The amount shown for Mr. Weinstein
under Other Annual Compensation for 1997 reflects payments in respect of gross
ups for taxes on imputed income arising out of premiums paid or reimbursed by
the Company in respect of life insurance. The amount shown for Mr. Weinstein
under All Other Compensation for 1997 reflects split-dollar life insurance
premiums (under which policy the Company is the beneficiary to the extent of the
premiums paid by it). The amount shown for Mr. Weinstein under All Other
Compensation for 1996 reflects split-dollar life insurance premiums. The amount
shown for Mr. Weinstein under Long-Term Compensation Awards for 1995 reflects
stock option grants at the fair market value of the Company's Class A Common
Stock on the date of grant upon surrender of a like number of stock options.
(e) Mr. Strohl was Senior Vice President and Chief Financial Officer of the
Company from April 1997 until February 1998 when his employment with the Company
was terminated. Mr. Strohl served as Vice President and Chief Financial Officer
of the Company during 1995, 1996 and until April 1997. The amount shown for Mr.
Strohl under Other Annual Compensation for 1997 reflects payments in respect of
gross ups for taxes on imputed income arising out of premiums paid or reimbursed
by the Company in respect of life insurance. The amount shown for Mr. Strohl
under All Other Compensation for 1997 reflects amounts paid to Mr. Strohl for
accrued vacation. The amount shown for Mr. Strohl under Long-Term Compensation
Awards for 1995 reflects stock option grants at the fair market value of the
Company's Class A Common Stock on the date of grant upon surrender of a like
number of stock options.
(f) Ms. Kuebler served as Senior Vice President -- Store Operations of the
Company from August 1997 to June 1998 when her employment with the Company was
terminated. The amount shown for Ms. Kuebler under Salary for 1997 includes
$39,982 earned for services provided by Ms. Kuebler to PFC as PFC's Senior Vice
President -- Store Operations prior to the Merger, with the balance earned by
Ms. Kuebler for services provided during 1997 to the Company. The amount shown
for Ms. Kuebler under Other Annual Compensation for 1997 reflects payments in
respect of gross ups for taxes on imputed income arising out of premiums paid or
reimbursed by the Company in respect of life insurance and on imputed income
arising out of certain relocation expenses paid or reimbursed by the Company.
The amount shown for Ms. Kuebler under All Other Compensation for 1997 reflects
payments in respect of certain relocation expenses paid or reimbursed by the
Company.
(g) Mr. Goldman served as Senior Vice President -- Merchandising from 1995 to
June 1998, when his employment with the Company was terminated. The amount shown
for Mr. Goldman under Other Annual Compensation for 1997 reflects payments in
respect of gross ups for taxes on imputed income arising out of premiums paid by
or reimbursed by the Company in respect of life insurance.
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OPTION GRANTS IN THE LAST FISCAL YEAR
During 1997, the following grants of options to purchase Common Stock
were made pursuant to the 1997 Option Plan to the executive officers named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
GRANT
INDIVIDUAL GRANTS DATE
VALUE (A)
---------------------------------------------------------------------
NUMBER OF PERCENT OF EXERCISE OR EXPIRATION GRANT
SECURITIES TOTAL OPTIONS BASE PRICE DATE DATE
UNDERLYING GRANTED TO ($/SH) PRESENT
OPTIONS EMPLOYEES IN VALUE $
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR
<S> <C> <C> <C> <C> <C>
I. Howard Diener 100,000 38% $3.13 4/29/07 $247,858
Former President and Chief Executive
Officer
Ben Kovalsky 0 -- -- -- --
Former President, Chief Operating Officer
and Chief Executive Officer
Mark Weinstein 0 -- -- -- --
Former Vice Chairman of the Board
Bruce Strohl 10,000 4% $3.13 4/29/07 $25,079
Former Senior Vice President and Chief
Financial Officer
Helen Kuebler 10,000 4% $3.13 4/29/07 $25,079
Former Senior Vice President--Store
Operations
Allan Goldman 5,000 2% $3.13 4/29/07 $12,540
Former Senior Vice President--Merchandising
</TABLE>
(a) Present values were calculated using the Black-Scholes option pricing model.
The model as applied used the grant date of April 30, 1997. The model also
assumes (i) risk-free rate of return of 6.79%, which was the rate as of the
grant date for the U.S. Treasury Zero Coupon Bond issues with a remaining term
similar to the expected term of the options, (ii) stock price volatility of 116%
based upon the volatility of the Company's stock price, (iii) a constant
dividend rate of zero percent and (iv) that the options normally would be
exercised on the final day of their sixth year after grant. No adjustments to
the theoretical value were made to reflect the waiting period, if any, prior to
vesting of the stock options or the transferability (or restrictions related
thereto) of the stock options.
The grants made during 1997 under the 1997 Option Plan to Messrs.
Diener, Strohl and Goldman and Ms. Kuebler were made on April 30, 1997 and
consisted of non-qualified options to purchase Common Stock having a term of 10
years. The options granted to Mr. Diener were to become 100% vested on the third
anniversary of the grant date, with acceleration of vesting of a portion of such
options upon termination of employment by the Company other than for "cause".
Mr. Diener's employment with the Company terminated in June 1998, and as part of
Mr. Diener's separation agreement with the Company, all of Mr. Diener's options
were cancelled (See "Employment Agreements and Termination of Employment
Arrangements"). The options granted in 1997 to the other Named Executive
Officers were to vest 25% each year beginning on the first anniversary of the
grant date and become 100% vested on the fourth anniversary of the grant date,
however, such options have been cancelled as a result of the termination of
employment by the
11
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Company of such individuals. The above table does not include options granted
prior to 1997 to Messrs. Weinstein, Kovalsky, Strohl and Goldman to purchase
shares of Class A Common Stock, which options were converted into options to
purchase a like number of shares of Class C Common Stock pursuant to the Merger.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following chart shows the number of stock options exercised during
1997 and the 1997 year-end value of the stock options held by the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-
SHARES OPTIONS AT FISCAL MONEY OPTIONS
ACQUIRED VALUE YEAR-END AT FISCAL YEAR-END
ON EXERCISE REALIZED (#) EXERCISABLE/
NAME (#) ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE ($)(A)
- ---- --- --- ------------------------- --------------------
<S> <C> <C> <C> <C>
I. Howard Diener 0 0 0/100,000 0/0
Former President and Chief Executive
Officer
Ben Kovalsky 82,000 218,040 0/0 0/0
Former President, Chief Operating
Officer and Chief Executive Officer
Mark Weinstein 11,240 34,844 18,760/0 0/0
Former Vice Chairman of the Board
Bruce Strohl 0 0 19,000/10,000 0/0
Former Senior Vice President and
Chief Financial Officer (b)
Helen Kuebler 0 0 0/10,000 0/0
Former Senior Vice President--Store
Operations
Allan Goldman 0 0 1,879/5,000 0/0
Former Senior Vice
President--Merchandising
</TABLE>
(a) Since $2.375, the December 26, 1997, Nasdaq National Market closing price
per share of the Class C Common Stock, is less than the exercise price of the
stock options held by the executive officers in the above table, no in-the-money
options existed at the end of fiscal 1997. The actual value, if any, an
executive may realize is dependent upon the amount by which the market price of
shares of Class C Common Stock exceeds the exercise price per share when the
stock options are exercised. Accordingly, actual value may be realized.
(b) Mr. Diener is no longer employed by the Company. All option held by Mr.
Diener were cancelled. Mr. Kovalsky is no longer employed by the Company. Mr.
Weinstein is no longer Vice Chairman of the Company but remains an employee of
the Company. Mr. Strohl is no longer employed by the Company and, as a result,
all options held by him and not exercised within 30 days of his termination of
employment with the Company were cancelled. Ms Kuebler is no longer employed by
the Company and, as a result, all options held by her and not exercised within
30 days of her termination of employment with the Company were cancelled.
12
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company has an employment agreement with Ms. Burton effective for
the term June 8, 1998 through December 31, 2000. The employment agreement
provides for a base salary of $400,000 per annum, and participation in the
Company's incentive plan with a 100% target bonus opportunity and a guaranteed
bonus of $100,000 for 1998. The employment agreement with Ms. Burton also
provides for, among other things, participation in the Company's medical, dental
and other benefit plans, certain relocation benefits, and payments upon death,
disability, and termination without cause. Upon a termination of employment
without cause, Ms. Burton would be entitled, among other things, to receive
payments equal to, at the Company's option, base salary and participation in the
Company's medical and dental plans for either (i) the balance of the term of the
agreement or (ii) one year. Pursuant to Ms. Burton's employment agreement with
the Company, Ms. Burton was granted at the time of the execution of her
employment agreement with the Company (i) options to purchase 100,000 shares of
the Class C Common Stock at an exercise price equal to the then current market
price per share, (ii) options to purchase 150,000 shares of Class C Common Stock
at an exercise price equal to the then current market price per share, subject
to shareholder approval of (x) the number of shares of Class C Common Stock
subject to the 1997 Option Plan and (y) the number of shares subject to options
that may be granted to a participant in the 1997 Option Plan in any one calendar
year (clauses (x) and (y) are collectively, the "Stock Plan Amendments"), (iii)
options to purchase 250,000 shares at an exercise price of $5.00 per share,
subject to shareholder approval of the Stock Plan Amendments, and (iv) options
to purchase 500,000 options at an exercise price of $7.50 per share, subject to
shareholder approval of the Stock Plan Amendments. The foregoing option grants
provides that the exercisability of such options will be accelerated upon a
change of control, which includes the consummation of the Transactions. The
agreement with Ms. Burton also provides for Company-paid supplemental term life
insurance in the amount of $300,000.
The Company has an employment agreement with Mr. Crawley effective for
the term September 1, 1998 through December 31, 1999. The employment agreement
provides for a base salary of $150,000 per annum, and participation in the
Company's incentive plan with a 30% target bonus opportunity with up to 60%
bonus upon significant overacheivement of performance objectives. The employment
agreement with Mr. Crawley also provides for, among other things, participation
in the Company's medical, dental and other benefit plans and payments upon
death, disability and termination without cause. Upon a termination of
employment without cause, Mr. Crawley would be entitled, among other things, to
receive payments equal to base salary and participation in the Company's medical
and dental plans and certain other benefit plans for the balance of the term of
the agreement.
Mr. Isko has a severance agreement with the Company which provides for
the payment of base salary and medical and dental benefits for nine months
following (i) a "change of control" (as defined in the severance agreement,
which includes consummation of the Transactions) of the Company, (ii)
termination without "cause" (as defined in the severance agreement) or (iii)
termination by Mr. Isko for "good reason" (as defined in the severance
agreement). In connection with the Transactions, the severance agreement between
Mr. Isko and the Company has been terminated.
Mr. Diener's employment with the Company was terminated in June 1998.
Pursuant to Mr. Diener's separation agreement with the Company, Mr. Diener will
receive separation payments at a
13
<PAGE>
rate of $400,000 per annum, medical and dental benefits until August 31, 2000,
and certain other benefits. Pursuant to his separation agreement, Mr. Diener was
paid $75,000 for the cancellation of all of his exercisable and unexercisable
options to purchase Class C Common Stock, and certain other benefits.
At the time of the Merger, Mr. Weinstein entered into an employment and
non-competition agreement with the Company that provides for annual payments of
$315,000 and $150,000 in respect of salary and a non-competition covenant,
respectively. The agreement provides that Mr. Weinstein may participate in
certain of the Company's benefit programs (including medical and disability
insurance). The agreement expires April 24, 2001 and provides that if Mr.
Weinstein is terminated for other than "good cause" (as defined in the
agreement), the Company would be obligated to pay Mr. Weinstein the balance of
the salary and non-competition payment due over the remaining term of the
agreement. If there is a "change in control" (as defined in the agreement) of
the Company, Mr. Weinstein may elect to treat such change of control as a
termination for other than "good cause," and the Company would be obligated to
pay Mr. Weinstein the balance of the salary and non-competition payments due in
a single lump sum payment. Mr. Weinstein has agreed to waive such right to
demand a lump sum payment in connection with the Transactions. Additionally,
upon death, expiration of the term of the agreement, "change in control" of the
Company or termination for other than "good cause," the Company would be
obligated to purchase all of Mr. Weinstein's options at the difference between
the market price of the Class C Common Stock on the termination date and the
exercise prices of the options. The agreement also requires that the Company
continue in effect and pay the premium on a life insurance policy in the face
amount of $1 million. The Company is the beneficiary of the policy to the extent
of the premiums paid by it. The consummation of the Transactions constitutes a
"change of control" under Mr. Weinstein's employment and non-competition
agreement.
Mr. Kovalsky was party to an employment agreement with the Company that
was amended as of April 25, 1997. Pursuant to his employment agreement, upon his
resignation in August 1997, Mr. Kovalsky received a lump sum payment equal to
his salary and non-competition payments through February 2000 (the end of the
term of the agreement) and payment for his options at the difference between
market price on the date of termination (but not less than $7.63) and the
exercise prices of such options.
Mr. Strohl's employment with the Company terminated in February 1998.
In connection with such termination of employment, the Company and Mr. Strohl
entered into a separation agreement which provides for a lump sum payment of
$170,100 and medical and dental benefits until February 10, 1999.
Mr. Goldman's employment with the Company terminated June 19, 1998.
Pursuant to a Separation Agreement with Mr. Goldman, Mr. Goldman will receive
separation payments at a rate of $176,000 per annum from June 20, 1998 through
June 19, 1999, certain medical and dental benefits for the period June 20, 1998
through June 19, 1999 as well as certain other benefits.
Ms. Kuebler's employment with the Company terminated June 19, 1998.
Pursuant to a Separation Agreement with the Company, Ms. Kuebler will receive
separation payments at a rate of $152,800 per annum from June 20, 1998 through
December 19, 1999, certain medical and dental
14
<PAGE>
benefits for the period June 20, 1998 through December 19, 1999, relocation to
any place within the continental United States as well as certain other
benefits.
OWNERSHIP OF CLASS C COMMON STOCK
The following table sets forth as of December 10, 1998, the number of
shares of Class C Common Stock beneficially owned, and the percent so owned, by
(i) each person known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Class C Common Stock, (ii) each director of the
Company, (iii) the Chief Executive Officers during 1997 and each of the other
Named Executive Officers during 1997 and (iv) all current directors and
executive officers of the Company as a group. The number of shares owned are
those beneficially owned, as determined under the rules of the SEC, and such
information is not necessarily indicative of beneficial ownership for any other
purpose.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP
<S> <C> <C>
Prestige Holdings I, L.P. 8,479,335(1) 84.6%
David R. Massey 0 *
Gary A. Nacht 0 *
Betsy Burton 100,000(2) *
I. Howard Diener 0
David N. Dinkins 0
Donald G. Drapkin 20,200(3) *
George Fellows 15,000 *
William J. Fox 7,500(4) *
Allan Goldman 1,000(5) *
Richard Halperin 0
Ben Kovalsky 2,500(5) *
Helen Kuebler 0(5) *
Jerry W. Levin 230,200(6) 2.3%
Wade H. Nichols 12,500(7) *
Harvey Rosenthal 0
Bruce Strohl 2,300(5) *
Mark Weinstein 295,680(8) 2.9%
All Current Directors and Executive Officers as a Group (11 Persons) 485,400(9) 4.7%
*Less than one percent.
</TABLE>
15
<PAGE>
(1) Represents the shares of Class C Common Stock formerly owned by Products
Corporation received by the Limited Partnership at the Closing.
(2) Includes 100,000 shares which may be acquired under options which vested
upon consummation of the Transactions. Ms. Burton is also entitled to additional
options. See "Employment Agreements and Termination of Employment Arrangements"
.
(3) Includes 200 shares held by trust for Mr. Drapkin's children as to which
beneficial ownership is disclaimed.
(4) Includes 1,250 shares owned by Mr. Fox's daughter as to which beneficial
ownership is disclaimed and 6,250 shares which may be acquired under options
which vest on April 30, 1998.
(5) The Company is unable to verify the accuracy of this information.
(6) Includes 5,200 shares owned by Mr. Levin's daughter as to which beneficial
ownership is disclaimed and 150,000 shares which may be acquired under options.
(7) Includes 2,500 shares which may be acquired under options.
(8) Includes 62,033 shares held by a family limited partnership, 46,838 shares
owned by Mr. Weinstein's children and 3,924 shares owned by Mr. Weinstein's
spouse, as to all of which Mr. Weinstein disclaims beneficial ownership, and
18,760 shares which may be acquired under options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997 prior to the Merger, the Compensation Committee was made up
of Ms. Anita Weinstein, who was an executive officer of the Company during 1997
prior to the Merger, and Mr. Donald Rogers. During 1997 after the Merger, the
Compensation Committee (made up of Messrs. Drapkin (since August 1997) and
Dinkins and Rosenthal (since April 1997)) determined compensation of executive
officers of the Company for 1997.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report was submitted by the Compensation Committee of the
Company's Board of Directors, which consists of Messrs. Dinkins, Rosenthal and
Drapkin as part of the Company's Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders' and accordingly speaks of April 9, 1998, the date such
Proxy Statement was first mailed to the Company's stockholders, except for
changes arising from events since such date.
Pursuant to the rules promulgated under the Exchange Act, set forth
below is the report of the Compensation Committee regarding its compensation
policies for 1997 for the Company's executive officers, including the Chief
Executive Officer. The key elements of compensation used by the Company are base
salary and performance-based incentives, including annual cash bonuses and stock
options. This report discusses the Company's practices regarding each of these
elements as applied to the executive officers generally and concludes with a
separate discussion of Mr. Diener's compensation in particular.
The Company's executive compensation practices are designed to support
its business goals of fostering profitable growth and increasing long-term
stockholder value. The Company seeks to align the interests of executives and
stockholders through the use of a performance-based cash bonus plan and a
stock-based compensation plan, and the Company's policy is to reward superior
performance: the better the individual and/or Company performance against
established goals and objectives, the greater
16
<PAGE>
the compensation reward. Finally, the Company's compensation package is designed
to be competitive with the compensation practices of other comparable retailers
of similar size.
In addition to Company sources, the Compensation Committee retains the
services of independent compensation consultants from time to time to help it
assess the competitiveness of the Company's executive compensation practices. In
connection with the Merger, KPMG Peat Marwick LLC reviewed the salaries of
selected executive officers of the Company, establishing norms for salary, bonus
and long-term equity compensation based on the practices of similarly-sized
retail companies.
BASE SALARY
The Company's practice is to pay salaries that reflect the executive's
position in the Company, the scope of his or her responsibilities and his or her
contributions as determined by the Compensation Committee and that are
competitive with other retail companies of similar size.
The policy is to target the salary range for executive officers at a
level which is competitive with the practices of other retail companies of
similar size, with salaries above that level available to exceptional performers
and key contributors to the success of the Company. The annual salaries of
Messrs. Diener, Weinstein and Goldman, established in their respective
employment agreements, and of Ms. Kuebler, are based upon this policy. Annual
salary adjustments are based on individual performance, assumption of new
responsibilities, competitive data and the Company's overall annual salary
budget guidelines.
ANNUAL CASH BONUS
1997 EXECUTIVE BONUS ARRANGEMENT AND 1998 EXECUTIVE BONUS PLAN
During 1997, the Company had a discretionary bonus arrangement (the
"1997 Executive Bonus Arrangement") in which certain executives (including
Messrs. Diener and Goldman and Ms. Kuebler) participated. Messrs. Weinstein and
Kovalsky did not participate in the 1997 Executive Bonus Arrangement. The 1997
Executive Bonus Arrangement provided for payment of cash compensation at the
discretion of the Company to the extent of achievement of certain performance
goals for 1997 subsequent to the Merger.
Bonuses under the 1997 Executive Bonus Arrangement for executive
officers for 1997 were determined based on the extent of performance of the
executive officers against specific performance goals. The performance measures
for Mr. Diener were based principally upon the integration of PFC and the
Company after the Merger. The performance measures for Mr. Goldman were based
principally upon gross margin, asset management, net sales and reduction of
advertising expenses. The performance measures for Ms. Kuebler were based
principally upon net sales, store openings and expense control. The Compensation
Committee determined to pay Mr. Diener a bonus of $50,000 in respect of 1997.
During 1997, Mr. Goldman achieved 35% of his performance objectives, and Ms.
Kuebler achieved 70% of her performance objectives. Mr. Strohl did not receive a
bonus under the 1997 Executive Bonus Arrangement.
17
<PAGE>
Effective for 1998, the Company adopted a bonus plan (the "1998
Executive Bonus Plan") in which executives will participate. The 1998 Executive
Bonus Plan provides for payment of cash compensation in respect of 1998 upon the
achievement of predetermined corporate and/or individual performance goals
during 1998. The maximum award payable to any participant under the 1998
Executive Bonus Plan with respect to any bonus year is 100% of base salary.
LONG-TERM PERFORMANCE-BASED INCENTIVES
The Company's principal compensation vehicle for encouraging long-term
growth and performance is the grant of stock options under the Stock Plan.
THE STOCK PLAN
Under the Stock Plan, stock options generally are granted annually to
executive officers. Guidelines for the size of stock option awards are developed
based on factors similar to those used to determine salary and bonus, including
the executive's position in the Company and his or her contributions as
determined by the Compensation Committee and a review of the practices of retail
companies of similar size. Since the Company, with the concurrence of the
Compensation Committee, views the granting of stock options as a way to obtain
competitive compensation advantage, it is the Company's policy to target award
levels so that, when taken together with salary and cash bonus, total
compensation would be competitive with the total compensation of executives in
retail companies of similar size. Actual grants may vary from target levels
based on individual performance, Company performance or the assumption of
increased responsibilities.
The grants of options for shares of Class C Common Stock made under the
Stock Plan during 1997 to Messrs. Diener, Strohl and Goldman and Ms. Kuebler and
the grants of options to all other executive officers and employees of the
Company are comprised of non-qualified options having a term of 10 years. The
options granted to Mr. Diener were to become 100% vested on the third
anniversary of the grant date, except that upon termination of employment by the
Company other than for "cause" under his employment agreement, such options will
vest with respect to 25% of the shares (if termination is between the first and
second anniversaries of the grant date) and 50% of the shares (if termination is
between the second and third anniversaries of the grant date). The options
granted in 1997 to Mr. Levin, Chairman of the Board, vested 50% on the grant
date and will vest 100% on the first anniversary of the grant date. The options
granted to all other executive officers and employees of the Company will vest
25% each year beginning on the first anniversary of the grant date and will
become 100% vested on the fourth anniversary of the grant date. This approach is
designed to motivate the creation of stockholder value over the long term since
the full benefit of the stock option grant cannot be realized unless stock price
appreciation occurs over a number of years.
The Company also had a 1991 Option Plan, which was amended by the
Company's Board of Directors at the time of the Merger to provide that no
further options are to be granted under the 1991 Option Plan. Pursuant to the
terms of the 1991 Option Plan, all outstanding but unexercised options to the
extent that they were not fully vested became exercisable in full on the date of
the Merger. Pursuant to the Merger, holders of options to purchase shares of
Class A Common Stock or Class B Common Stock under the 1991 Option Plan received
equivalent options to purchase Class C Common Stock (other than with respect to
any options with an exercise price of less than $7.63 for which the
18
<PAGE>
holders had the option to elect to receive cash equal to the difference between
$7.63 and the exercise price per share of such options as a result of the cash
election in connection with the Merger). The 1991 Option Plan will terminate on
December 31, 2000, or on such earlier date as the Company's Board of Directors
may determine.
As of April 9, 1998, Messrs. Weinstein and Goldman held options under
the 1991 Option Plan for 18,760 and 1,879 shares of Class C Common Stock,
respectively, all of which at that time were vested.
1997 CHIEF EXECUTIVE OFFICER COMPENSATION
The Compensation Committee reviewed and recommended the overall
compensation of I. Howard Diener, who during 1997 since the Merger served as the
Chief Executive Officer of the Company. In setting Mr. Diener's 1997 base salary
and bonus eligibility in his employment agreement, the Compensation Committee
considered Mr. Diener's tenure and performance as President of PFC and the
contributions that would be required of him in connection with the Merger and
the post-Merger integration and operations of the Company, as well as a
comparison of base salaries, annual bonus and long-term compensation of chief
executive officers at similarly-sized retail companies.
As discussed above in the Annual Cash Bonus section, the Compensation
Committee determined to make a discretionary bonus payment to Mr. Diener in
respect of 1997 based upon Mr. Diener's achievements in connection with the
post-Merger integration.
The stock option grant to Mr. Diener during 1997 was specified in his
Employment Agreement and, as with base salary and bonus eligibility, was
determined by the Compensation Committee with reference to Mr. Diener's position
in the Company, his tenure and performance as President of PFC, the
contributions that would be required of him in connection with the Merger and
the post-Merger integration and operations of the Company and retail industry
practices. The Compensation Committee's intent was to condition a meaningful
portion of Mr. Diener's total compensation upon Company performance and
stockholder value and to serve as a means to retain Mr. Diener.
In summary, the Compensation Committee believes that executive
performance significantly influences Company performance and, therefore, the
Compensation Committee's approach to executive compensation has been guided by
the principle that executives should have the potential for increased earnings
when performance objectives are exceeded, provided there is appropriate downside
risk if performance targets are not met.
Compensation and Stock Plan Committee
Donald G. Drapkin (Chairman)
David N. Dinkins
Harvey S. Rosenthal
19
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return
for the last fiscal year (commencing April 30, 1997, the first day of trading in
the Class C Common Stock after the Merger) of shares of Class C Common Stock
with that of the Total Return Index for the Nasdaq Stock Market (U.S. Companies)
and the Total Return Industry Index for the Nasdaq Retail Stocks. The comparison
for the period presented assumes that $100 was invested on April 30, 1997 in
Class C Common Stock and in the stocks in the indexes and that all dividends are
reinvested. The indexes, which reflect formulas for dividend reinvestment and
weighting of individual stocks, do not necessarily reflect returns that could be
achieved by individual investors.
[PERFORMANCE GRAPH]
4/30/97 12/26/97
Cosmetic Center 100 76.00
Nasdaq U.S. Index 100 121.00
Nasdaq Retail Trade Index 100 122.00
<TABLE>
<CAPTION>
APRIL 30, 1997 DECEMBER 26, 1997
-------------- -----------------
<S> <C> <C>
The Cosmetic Center, Inc. Class C Common Stock ....... $100 $76.00
Nasdaq U.S. Index .................................... 100 121.00
Nasdaq Retail Trade Index ............................ 100 122.00
</TABLE>
On December 26, 1997, the last business day before the Company's fiscal
year end, the closing sales price of the Class C Common Stock as reported by the
Nasdaq National Market was $2.375. On December 10, 1998, the day before the
mailing of this Schedule 14F, the closing sales price per share of the Class C
Common Stock as reported by the Nasdaq National Market was $1.0625.
The Company received a letter from the Nasdaq Stock Market, Inc. (the
"Nasdaq") stating that the Class C Common Stock of the Company would 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. The Nasdaq has notified the Company that such petition is
expected to be heard on December 18, 1998. There can be no assurance that such
petition will be successful.
20
<PAGE>
SOURCE AND AMOUNT OF FUNDS FOR CHANGE IN CONTROL
Pursuant to the Contribution Agreement, Products Corporation
transferred to the Limited Partnership the following in exchange for a Class B
Limited Partnership Interest: (i) all of the Class C Common Stock owned by it,
(ii) its right to receive payment on approximately $20.3 million of
intercompany loans made by Products Corporation to the Company and (iii) the
Assigned Trade Payable Note. As a result, no cash was used by the Limited
Partnership to acquire the Class C Common Stock owned by Products Corporation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following disclosure as it relates to Products Corporation only
relates to periods on and prior to the Closing.
HOLMDEL LEASE
During 1997 prior to the Merger, PFC occupied a headquarters office,
warehouse and distribution facility in Holmdel, New Jersey owned by Products
Corporation without any written arrangement with Products Corporation. The
amount charged to PFC by Products Corporation for the Holmdel facility amounted
to approximately $211,000 for the period in 1997 prior to the Merger. During
1997 after the Merger, the Company leased from Products Corporation the
headquarters and warehouse and distribution facility that PFC occupied in
Holmdel, New Jersey at a base rental of $395,250 per annum plus the Company's
proportionate share of operating and tax expense escalations (the "Holmdel
Lease"). The Holmdel Lease was terminated by the Company effective June 25,
1997. The Company paid Products Corporation approximately $141,000 under the
Holmdel Lease for the period in 1997 after the Merger until the termination of
the Holmdel Lease.
EMPLOYEE STORE LEASES
During 1997 prior to the Merger, PFC occupied the employee stores
located in New York City and Apex, North Carolina, which were leased from
unaffiliated third parties by Products Corporation and a subsidiary of Products
Corporation, respectively, and occupied the five remaining employee stores
located in Edison, New Jersey (two stores); Irvington, New Jersey; Phoenix,
Arizona and Oxford, North Carolina without any written arrangement with Products
Corporation. PFC did not make any payments to Products Corporation for the New
York City store for the period in 1997 prior to the Merger. PFC paid Products
Corporation approximately $5,200 for the Apex, North Carolina employee store for
the period in 1997 prior to the Merger. PFC paid to Products Corporation rental
and other allocated charges for the five employee stores that amounted to
approximately $30,000 in the aggregate for the period in 1997 prior to the
Merger.
The Company sublet the New York City employee store from Products
Corporation from the date of the Merger through the end of fiscal 1997, and
approximately $68,000 was payable to Products
21
<PAGE>
Corporation under such sublease from the date of the Merger through the end of
fiscal 1997. At the end of fiscal 1997, the lease for the employee store in New
York City was assigned by Products Corporation to the Company. The lease for
the Apex, North Carolina store was assigned to the Company by a subsidiary of
Products Corporation at the time of the Merger. Prior to the Closing, the lease
for the New York City store was assigned back to Products Corporation and the
Company subleases (the "Sublease") from Products Corporation the New York City
store for a term ending December 31, 1999 and otherwise on substantially the
same terms as the lease for such store. From and after the Merger, the Company
occupied the employee stores located in Irvington, New Jersey; Oxford, North
Carolina and Phoenix, Arizona pursuant to leases from Products Corporation and
the employee stores located in Edison, New Jersey pursuant to leases with
Holdings, an affiliate of Products Corporation, with terms of one year at an
annual rent of $20,064, $39,600, $31,200 and $73,150 respectively, for the
first year, with the option to renew for nine additional one-year periods with
rent increases of 5% of the annual base rent for each renewal year (the
"Employee Store Leases"). Operating costs are included in the rent. If at any
time during the term of such Employee Store Leases Products Corporation or,
with respect to the employee store in Edison, New Jersey, Holdings, enters into
an agreement with a non-affiliate for the sale or lease of the facility in
which a store is located, Products Corporation (or Holdings) may terminate the
relevant lease upon notice effective the earlier to occur of five business days
before the closing of such sale or lease transaction, or 180 days following the
giving of such notice. As a result of the sale by Holdings of the Edison
facility, Holdings has terminated the two Employee Store Leases at such
facility. In addition, at any time during the term either party may terminate
the applicable lease if Products Corporation ceases or substantially diminishes
its operations in the portion of a building in which a store is located.
Products Corporation may terminate at any time after the second anniversary of
the date of the leases upon certain changes of control (and the consummation of
the Transactions constitutes such a change of control) or sale of all or
substantially all of the Company's assets (in each case as defined in the
applicable Employee Store Lease). If Products Corporation exercises such
termination right after the second year of the leases but before the beginning
of the fifth year, Products Corporation must give at least one year's notice
and thereafter must give 180 days' notice. In accordance with the Contribution
Agreement, the term of each of the Employee Store Leases for Oxford, North
Carolina, Phoenix, Arizona and Irvington, New Jersey was amended to provide
that such lease will terminate December 31, 1999. The amendment to each of the
Employee Store Leases for the employee stores in Oxford, North Carolina,
Irvington, New Jersey, and Phoenix, Arizona, and the Sublease provide that
during the period from the Closing to the termination date for each such lease,
the Company shall operate the employee store in the ordinary course and at the
expiration of each such Employee Store Lease or Sublease the inventory at such
employee store will be substantially equivalent value and mix as the inventory
at the end of 1997 and any inventory and fixtures remaining in such stores will
be transferred to Products Corporation, provided that the Company shall not be
required to transfer to Products Corporation aggregate inventory in excess of
$250,000 for all such Employee Stores Leases and the Sublease.
SERVICES AGREEMENT
During 1997 prior to the Merger, Products Corporation provided certain
services to PFC for which PFC was charged direct and indirect expenses incurred
by Products Corporation in providing such services. Such services included
insurance and risk management services, travel, legal services, treasury and
finance services, customer service, information systems and audit services. The
amounts
22
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charged by Products Corporation to PFC for such allocated expenses amounted to
approximately $689,000 for the period in 1997 prior to the Merger.
On April 25, 1997, Products Corporation and the Company entered into a
services agreement (the "Services Agreement") pursuant to which Products
Corporation provides services, including executive, treasury, legal, human
resources, accounting, tax, real estate, management information services,
corporate information services, including investor relations, risk management,
participation in Products Corporation's insurance and self-insurance programs
and warehouse and distribution services (collectively, the "Services"), as and
to the extent requested by the Company. The Company pays Products Corporation
the actual cost incurred by Products Corporation in providing the Services. To
the extent the Services are secured from third party providers such as
insurance carriers or outside advisors such as lawyers and accountants, the
Company pays to Products Corporation that portion of the amounts due to such
third party providers as is allocable to the Services purchased for and
provided to or for the benefit of the Company. Additionally, the Company
reimburses Products Corporation for all other reasonable out-of-pocket expenses
incurred by Products Corporation in providing the Services. During 1997, the
Company paid Products Corporation a one-time payment of $340,000 to cover all
severance costs expected to be incurred by Products Corporation with respect to
the termination of certain Products Corporation employees who provided Services
to PFC prior to the Merger as a result of the Company's decision to consolidate
certain warehouse, distribution and headquarters operations in Maryland. The
Services Agreement provides that Products Corporation need not make available
any Services to the Company to the extent doing so would cause an unreasonable
burden to Products Corporation or to the extent that Products Corporation
discontinues such Services within its organization. The total amount paid to
Products Corporation in connection with the provision of such Services during
1997 after the Merger was approximately $628,000 (not including the one-time
payment of $340,000 to cover severance costs), and was approximately $628,000
for the nine months ended September 26, 1998. Pursuant to the Contribution
Agreement, the Services Agreement was terminated as of the Closing.
SUPPLY AGREEMENT
During 1997 prior to the Merger, PFC purchased products for
approximately $2.8 million from Products Corporation and its affiliate,
Holdings, without any written arrangement.
On April 25, 1997, Products Corporation and the Company entered into
the Supply Agreement for a term of at least two and a maximum of four years
pursuant to which Products Corporation supplies to the Company for resale in its
retail stores, and not for wholesale distribution, first quality products and
first quality excess products, and for resale only in the PFC outlet stores, and
not for wholesale distribution, discontinued and returned and refurbished
products (subject in all cases to the availability of product) (collectively,
"Retail Sale Requirements"). During 1997 subsequent to the Merger, the Company
purchased products under the Supply Agreement from Products Corporation for
approximately $7.8 million and during the nine months ended September 26, 1998
the Company purchased approximately $11.0 million of products under the Supply
Agreement. Pursuant to the Contribution Agreement, $3.3 million of payables owed
to Products Corporation primarily for products supplied under the Supply
Agreement was forgiven, $850,000 of payables owed by the Corporation to Products
Corporation primarily for products supplied under the Supply Agreement were
converted to a non-interest bearing (other than default interest) note payable
at the rate of $106,250 per month from
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May 1, 1999 through December 1, 1999 (provided that monthly payments may not be
made if as a result of such payment the availability of the Company under its
credit facility would be less than $3.0 million, and any monthly payments not
made as a result of such restriction will be due and payable in the next month)
and $850,000 of payables owed by the Company to Products Corporation primarily
for products supplied under the Supply Agreement were converted to a
non-interest bearing (other than default interest) note payable at the rate of
$106,250 per month from May 1, 2000 through December 1, 2000. Such notes are
subject to a subordination agreement with the lenders under the Company's
credit facility which provides, among other things, that monthly payments may
not be made if as a result of such payment the availablity under the Company's
current credit facility would be less than $3.0 million. In addition, the
Company and Products Corporation entered into an agreement whereby Products
Corporation offset $100,000 due by it to the Company against amounts owed by
the Company to Products Corporation under the Supply Agreement. The Supply
Agreement was amended to provide that Products Corporation may terminate the
agreement upon 30 days notice if the Limited Partnership together with its
affiliates no longer has the power to vote, directly or indirectly, a majority
of the voting power of the outstanding shares of the Company or all or
substantially all of the assets of the Company are sold to an entity other than
an affiliate. In addition, pursuant to the Contribution Agreement, the Supply
Agreement was also amended to provide that Products Corporation may terminate
the Supply Agreement immediately upon written notice if the Company fails to
pay amounts when due (including payment of the two $850,000 notes described
above and, in the event of reversion to Products Corporation, the approximately
$20.3 million of intercompany notes contributed to the Limited Partnership) and
upon certain other events of defaults or if the Company breaches the Retail
Sale Requirement.
EMPLOYEE BENEFITS
During 1997 prior to the Merger, PFC employees were eligible to
participate in Products Corporation-sponsored employee pension benefit plans,
including the Revlon Savings, Investment and Profit Sharing Plan and the Revlon
Employees' Retirement Plan and Products Corporation-sponsored employee welfare
benefit plans, including medical, dental, life and disability insurance
coverage. The minimum amounts required pursuant to the Employee Retirement
Income Security Act, as amended, were contributed annually by Products
Corporation on behalf of PFC employees who participated in the Products
Corporation-sponsored plans. PFC recorded approximately $1.3 million in 1997
during the period prior to the Merger, in benefit expenses for its share of the
pension and welfare benefit plans liability for PFC's employees. Products
Corporation union employees who provided services to PFC prior to the Merger
were covered by the Revlon/UAW Pension Plan and the UAW Group Welfare Plan.
Pension and welfare expenses for the Products Corporation union employees were
charged directly to PFC and were included within amounts reflected in the
"Services Agreement" paragraph above. From and after the Merger, employees of
the Company participate in benefit plans sponsored by the Company and no longer
participate in plans sponsored by Products Corporation.
TAX SHARING AGREEMENT
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries, including PFC during 1997 prior to the Merger, and Mafco Holdings,
Inc. ("Mafco Holdings") are parties to a tax sharing agreement (as subsequently
amended, the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has
agreed to indemnify Revlon, Inc. and Products Corporation against federal, state
or local income tax liabilities of the consolidated or combined group of which
Mafco Holdings (or a subsidiary of Mafco Holdings other than Revlon, Inc. and
Products Corporation or its subsidiaries) is the common
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parent for taxable periods beginning on or after January 1, 1992 during which
Revlon, Inc. and Products Corporation or a subsidiary of Products Corporation is
a member of such group. On April 25, 1997 the Company became a party to the Tax
Sharing Agreement. Revlon, Inc. has agreed to pay Products Corporation its share
of any payment received by Revlon, Inc. from Mafco Holdings under the Tax
Sharing Agreement and Products Corporation has agreed to pay to each of its
subsidiaries, including the Company, its share of any payment received by
Products Corporation from Revlon, Inc. under the Tax Sharing Agreement. Pursuant
to the Tax Sharing Agreement, for all taxable periods beginning on or after
January 1, 1992, Products Corporation will pay to Revlon, Inc., which in turn
will pay to Mafco Holdings, amounts equal to the taxes that such corporation
would otherwise have to pay if it were to file separate federal, state or local
income tax returns (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Products Corporation), except that Products Corporation will not be entitled to
carry back any losses to taxable periods ending prior to January 1, 1992. No
payments are required by Products Corporation or Revlon, Inc. if and to the
extent Products Corporation is prohibited under its credit agreement from making
cash tax sharing payments to Revlon, Inc. Products Corporation's credit
agreement currently prohibits Products Corporation from making tax sharing
payments other than in respect of state and local income taxes.
Pursuant to the Tax Sharing Agreement, each of the subsidiaries of
Products Corporation, including the Company, agreed to pay to Products
Corporation an amount equal to its liability for federal, state and local income
taxes (including estimated taxes), if any, calculated as if it were filing
separate returns. Since the payments to be made by subsidiaries of Products
Corporation, including the Company, to Products Corporation under the Tax
Sharing Agreement will be determined by the amount of taxes that such
subsidiaries would otherwise have to pay if they were to file separate federal,
state or local income tax returns, the Tax Sharing Agreement will benefit
Products Corporation to the extent Products Corporation can offset the taxable
income generated by such subsidiaries, including the Company, against losses and
tax credits generated by Products Corporation and its other subsidiaries. There
were no cash payments in respect of federal taxes made by the Company to
Products Corporation pursuant to the Tax Sharing Agreement for 1997. As a result
of the consummation of the Transactions, the Company is no longer a member of
the combined tax group for which Mafco Holdings is the common parent. The Tax
Sharing Agreement (as it relates to the Company) terminated as of the Closing as
a result of the consummation of the Transactions. Pursuant to the Contribution
Agreement, Products Corporation will indemnify the Company for any and all
federal and state and local (but only to the extent the Company filed state and
local consolidated or combined income or franchise tax returns with a group in
which Products Corporation was a member or would have been included in a state
and local consolidated or combined income or franchise tax return in which
Products Corporation was a member if the shares of Class C Common Stock owned by
Products Corporation and transferred to the Limited Partnership had been owned
by Products Corporation for all periods prior to the date of the Closing) income
tax liabilities relating to periods ending on or prior to the date of the
Closing.
PROMISSORY NOTES PAYABLE
In connection with the Merger, the Company issued a promissory note to
Products Corporation for approximately $13.3 million, which was the amount due
to Products Corporation from PFC on
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April 25, 1997, the date of the Merger, with interest payable quarterly at a
rate of 11% per annum. The promissory note matures on June 30, 1999. At
December 27, 1998, approximately $13.3 million was outstanding under this
promissory note. During the third quarter of 1998, the Company borrowed $7
million from Products Corporation to fund its liquidity needs and evidenced by
a promissory note (collectively with the approximately $13.3 million promissory
note, the "Promissory Notes"). 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 had $7.5 million of availability under its
credit facility in effect at that time. At the end of the Company's third
fiscal quarter on September 26, 1997, approximately $20.3 million were
outstanding under the Promissory Notes. Pursuant to the Contribution Agreement,
the Promissory Notes were amended to make such Promissory Notes due 364 days
following the Closing and the interest rate on each Promissory Note was amended
to 4.33%, provided that interest may not be paid on the Promissory Notes while
the Company's current credit facility is outstanding. Pursuant to the
Contribution Agreement, the Promissory Notes were assigned by Products
Corporation to the Limited Partnership, subject to the right of Products
Corporation to reacquire such Promissory Notes and the Assigned Trade Payable
Note in the event of certain conditions. The Promissory Notes are subject to a
subordination agreement with the lenders under the Company's credit facility
which provides, among other things, that payment of principal on the Promissory
Notes may not be made if as a result of such payment the availability under the
Company's current credit facility would be less than $5.0 million and unless
certain fixed charge ratio tests are satisfied.
REGISTRATION RIGHTS AGREEMENTS
On April 25, 1997, the Company entered into a registration rights
agreement with Products Corporation pursuant to which Products Corporation is
entitled to demand on any three occasions that the Company file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the sale of the Company's Class C Common Stock owned by
Products Corporation and will also be entitled to include such shares in certain
registration statements filed for the benefit of the Company (the "Registration
Rights Agreement"). The Company will bear all expenses of such registration
statements, except for fees and expenses of counsel for Products Corporation and
underwriters' discounts, fees and expenses. Pursuant to the Contribution
Agreement, Products Corporation assigned its rights under the Registration
Rights Agreement to the Limited Partnership.
The Company has entered into a registration rights agreement with the
Weinstein Group (as defined under "--Stockholders' Agreement") effective April
25, 1997 which provides that members of the Weinstein Group holding at least 25%
of all outstanding Class C Common Stock held by the Weinstein Group in the
aggregate are entitled to demand on one occasion that the Company file a
registration statement under the Securities Act for the sale of their Class C
Common Stock. Mr. Weinstein and the other members of the Weinstein Group are
also entitled to include their Class C Common Stock in certain registration
statements filed for the benefit of the Company. The Company will bear all
expenses of such registration statements, except for fees and expenses of
counsel for the Weinstein Group and underwriters' discounts, fees and expenses.
STOCKHOLDERS' AGREEMENT
At the time of the Merger, Mark Weinstein, Vice Chairman and a Director
of the Company during 1997, and certain members of his family (the "Weinstein
Group") and Products Corporation entered into a stockholders' agreement (the
"Stockholders Agreement"). Pursuant to the Stockholders Agreement, members of
the Weinstein Group were granted certain registration rights (see
"--Registration Rights Agreements"). The Stockholders Agreement provides that
for three years from the
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consummation of the Merger, Mr. Weinstein and the other members of the Weinstein
Group will vote all of their Class C Common Stock in favor of Products
Corporation's nominees for director so that Products Corporation will at all
times maintain representation on the Company's Board of Directors equal to
Products Corporation's percentage ownership of Class C Common Stock, but not
less than seven board seats, including two independent directors, and Products
Corporation will vote its shares in favor of Mr. Weinstein or the Weinstein
Group's nominee for director equal to the Weinstein Group's aggregate percentage
ownership of Class C Common Stock, after giving effect to the Merger and the
cash election, but not less than one nor more than two board seats. In
connection with the consummation of the Transactions, the Stockholders Agreement
was terminated.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's executive officers, directors and 10% stockholders are
required under the Exchange Act to file reports of ownership and changes in
ownership with the SEC. Copies of these reports also must be furnished to the
Company.
Based solely upon a review of copies of such reports furnished to the
Company through the date hereof and written representations that no reports were
required, the Company believes that all filing requirements applicable to its
executive officers, directors and 10% holders were complied with during 1997,
except that the Form 3 filed by Mr. Drapkin was amended in November 1998, to
include 200 shares held by an immediate family member and Mr. Drapkin disclaims
beneficial ownership of such shares.
