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As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-23847;
333-23847-01
PROSPECTUS
LOGO
OFFER TO EXCHANGE ITS 11 3/4% SENIOR NOTES DUE 2004 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 11 3/4% SENIOR NOTES
DUE 2004.
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JUNE 10,
1997, UNLESS EXTENDED.
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Renaissance Cosmetics, Inc., a Delaware corporation ("RCI" or the
"Company") hereby offers to exchange up to $200,000,000 aggregate principal
amount of its 11 3/4% Senior Notes due 2004 (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this Prospectus is a part, for a
like principal amount of its 11 3/4% Senior Notes due 2004 outstanding on the
date hereof (the "Existing Notes") upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal
(which together constitute the "Exchange Offer"). The terms of the New Notes are
identical in all material respects to those of the Existing Notes, except for
certain transfer restrictions and registration rights relating to the Existing
Notes. The New Notes will be issued pursuant to, and entitled to the benefits
of, the indenture, dated as of February 7, 1997 (the "Indenture"), between the
Company and United States Trust Company of New York, as trustee, governing the
Existing Notes. The Existing Notes and New Notes outstanding under the Indenture
at any time are referred to collectively as the "Notes."
Interest on the Notes will be payable in cash semiannually on each February
15 and August 15, commencing August 15, 1997. In connection with the offering of
the Existing Notes on February 7, 1997 (the "Offering"), the Company transferred
$17.5 million of the net proceeds from the Offering to a newly-formed,
wholly-owned, single-purpose subsidiary (the "Guarantor") in exchange for a
limited guarantee by the Guarantor of the Company's obligations under the Notes.
The Guarantor then placed such amount into an escrow account (the "Escrow
Account") for the benefit of the holders of the Notes. Until disbursed in
accordance with the related escrow agreement and the Indenture, the Escrow
Account is designed to provide security for a portion of the Company's
obligations under the Notes for the first two years after the issue date of the
Notes. The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after February 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon to the redemption date.
In addition, the Company, at its option, may redeem at any time on or prior to
February 15, 2000, in the aggregate up to 35% of the original principal amount
of the Notes at a redemption price equal to 111.75% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon to the redemption date,
with the Net Proceeds (as defined herein) of one or more Public Equity Offerings
(as defined herein) or Strategic Equity Investments (as defined herein);
provided, that at least $130.0 million of the principal amount of the Notes
originally issued remains outstanding immediately after the occurrence of any
such redemption and that any such redemption occurs within 90 days following the
closing of any such Public Equity Offering or Strategic Equity Investment.
Upon a Change of Control (as defined herein), the Company will be required
to make an offer to purchase all outstanding Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest thereon
to the purchase date. There can be no assurance, however, that the Company would
have sufficient funds available to it to purchase the Notes upon a Change of
Control. See "Description of the Notes -- Change of Control Offer." In addition,
the Company will be obligated in certain instances to make an offer to purchase
the Notes at a purchase price equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the purchase date with the Available
Asset Sale Proceeds (as defined herein) of certain asset sales.
The Notes are general unsecured obligations of the Company except to the
extent they are collateralized by a first priority security interest in the
Escrow Account granted by the Guarantor. The Notes rank pari passu in right of
payment with all existing and future senior indebtedness of the Company (except
as to senior secured indebtedness of the Company) and rank senior to all
existing and future subordinated indebtedness of the Company. The Notes are
effectively subordinated to all existing and future indebtedness and other
liabilities and commitments of the Company's subsidiaries (other than the
Guarantor), including the New Revolving Credit Facility (as defined herein). The
New Revolving Credit Facility contains a provision which permits the lenders
thereunder to block payments to the Company from its subsidiaries (other than
the Guarantor) following a payment default, or for a period of 179 days
following a non-payment default, under the New Revolving Credit Facility. This
provision does not affect the ability of the holders of the Notes to accelerate
the maturity of the Notes or to seek other available remedies in the event of
any resulting payment default on the Notes. See "Description of Certain Other
Indebtedness -- New Revolving Credit Facility."
The Indenture permits the Company and its subsidiaries to incur additional
indebtedness, including up to $75.0 million of indebtedness of subsidiaries
under the New Revolving Credit Facility, subject to certain limitations. See
"Description of the Notes." At December 31, 1996, the Company had outstanding
$5.0 million aggregate principal amount ($3.8 million accreted amount) of
indebtedness which is subordinated to the Notes. The Company does not have
outstanding, and currently does not have any arrangements to issue, any other
significant indebtedness that will be subordinated to the Notes. See
"Description of the Notes -- General."
(Continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF EXISTING NOTES AND PROSPECTIVE
PURCHASERS OF NEW NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is May 8, 1997.
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(Continued from previous page)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Note Registration Rights Agreement,
dated as of February 7, 1997 (the "Registration Rights Agreement"), between the
Company and CIBC Wood Gundy Securities Corp., as the initial purchaser (the
"Initial Purchaser") of the Existing Notes, with respect to the initial sale of
the Existing Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders of
Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined) of the Exchange Offer. The Company expressly
reserves the right to terminate or amend the Exchange Offer and not to accept
for exchange any Existing Notes not theretofore accepted for exchange upon the
occurrence of any of the events specified under "The Exchange Offer--Conditions
to the Exchange Offer." If any such termination or amendment occurs, the Company
will notify the Exchange Agent and will either issue a press release or give
oral or written notice to the holders of the Existing Notes as promptly as
practicable. The Exchange Offer will expire at 5:00 P.M., New York City time, on
June 10, 1997, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open, provided, however, that the
Exchange Offer will not be extended beyond July 7, 1997. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Existing Notes with respect to the Exchange Offer, the Company will promptly
return such Existing Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivery of a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Existing Notes where such Existing Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. Holders of the Existing Notes whose Existing Notes are not
tendered and accepted in the Exchange Offer will continue to hold the Existing
Notes. Following consummation of the Exchange Offer, the holders of the Existing
Notes will continue to be subject to the existing restrictions upon transfer
thereof and, except as provided herein, the Company will have no further
obligation to such holders to provide for registration under the Securities Act
of the Existing Notes held by them. To the extent Existing Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Existing Notes could be adversely affected.
The Company currently does not intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active public market for the
New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange pursuant to the Exchange Offer.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE NEW NOTES OR EXISTING NOTES BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH
AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
EXCHANGE PROPOSED TO BE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
THE EXCHANGE OFFER IS NOT BEING MADE TO , NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF EXISTING NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. Reports and
other information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048; and Northwestern Atrium Center, 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661; and copies of such material may be obtained from the
Public Reference Section of the Commission, at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
an Internet Web Site at http://www.sec.gov that contains reports and other
information.
Pursuant to the Indenture, the Company has agreed to provide the Trustee
and holders and prospective holders of the Notes with annual, quarterly and
other reports at the times and containing in all material respects the
information specified in Sections 13 and 15(d) of the Exchange Act and to file
such reports with the Commission, whether or not the Company is subject to such
filing requirements.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus all
documents and reports filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering made hereby.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other document subsequently filed with the Commission which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
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THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN (NOT INCLUDING
THE EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS FOR SUCH COPIES SHOULD BE
DIRECTED TO: JOHN R. JACKSON AT 955 MASSACHUSETTS AVENUE, CAMBRIDGE,
MASSACHUSETTS 02139, TELEPHONE NUMBER (617) 497-5584.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Recent
Developments," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
Prospectus and the documents incorporated herein by reference constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Certain, but not necessarily all, of
such forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies that involve risks and
uncertainties. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, levels of
activity, performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business and acquisition
strategy, including the ability to integrate recently acquired businesses into
the Company; the ability of the Company to obtain financing for future
acquisitions, including obtaining required approvals from its existing lenders
for such acquisitions; changes in the retail industry; changes in consumer
preferences; competition; availability of key personnel; foreign currency
exchange rates; industry capacity; development and operating costs; advertising
and promotional efforts; brand awareness; acceptance of new product offerings;
and changes in, or the failure to comply with, government regulations
(especially environmental laws and regulations). See "Risk Factors." As a result
of the foregoing and other factors, no assurance can be given as to future
results, levels of activity and achievements and neither the Company nor any
other person assumes responsibility for the accuracy and completeness of these
statements.
Chantilly(R), White Chantilly(TM), Tabu(R), DREAMS BY TABU(TM), Lutece(R),
Raffinee(R), Demi-Jour(TM), Monsieur Musk(R), French Garden Flowers(TM), English
Waterlilys(TM), French Vanilla by Dana(TM), Ambush(R), Canoe(R), Canoe Sport(R),
Herbissimo(R), Navigator(TM), English Leather(R), British Sterling(R),
Love's(R), Heaven Sent(R), NaVy(R), Toujours Moi(R), NaVy for Men(TM),
Insignia(R), California for Men(R), le Jardin(TM), LaJoie(R), PRO(10)(R), Press
& Go(R), Petite Press & Go(TM), Sport Press & Go(TM), Quik Fit(R), Sculpture
Quik(R), Sculpture Quik II(TM), UltraGel(TM), Nail Fetish(TM), Wrap Quik(R),
Quikfile(TM), Quikshine(R), Filepro(R), Nat Robbins(R), Lip Lacquer(TM), Ever
Sheer(TM), COLORPOWER(R) and Color Intense 24(R) are trademarks and brands owned
by or licensed to the Company. All other trademarks or service marks referred to
in this Prospectus are the property of their respective owners and are not the
property of the Company.
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by reference
to the more detailed information and financial statements (including the notes
thereto) appearing elsewhere in this Prospectus and the documents incorporated
by reference in this Prospectus. References contained in this Prospectus to
"Fiscal 1994," "Fiscal 1995" and "Fiscal 1996" mean the fiscal years ended March
31, 1995, March 31, 1996 and March 31, 1997, respectively. Unless otherwise
indicated, (i) all industry and market share data set forth in this Prospectus
are based upon information supplied by Information Resources, Inc., an
independent market research firm ("IRI"), and reflect actual U.S. sales data for
the 52 week period ended November 3, 1996 scanned by IRI's InfoScan service
through retailers' store registers in the drug store and mass merchandiser
segments of the mass market, which, according to IRI, accounted for
approximately 87% of the entire mass market during that period; (ii) all
InfoScan data with respect to the Company include sales of GAC, MEM and the P&G
Brands (each as defined herein) for the 52 week period ended November 3, 1996;
and (iii) references to the mass market or segments thereof refer to the
domestic mass market. Unless the context otherwise requires, references in this
Prospectus to the "Company" refer to Renaissance Cosmetics, Inc. and its
subsidiaries.
THE COMPANY
The Company is a leading manufacturer and marketer of mass-market
fragrances, artificial nail care products, mid-priced lip and eye make-up, nail
polish and related products that are sold by more than 1,000 retailers in
approximately 25,000 locations in the United States and in 61 foreign countries.
The Company sells its products principally through the mass-market distribution
channel which includes drug stores (such as Walgreen and Revco), mass
merchandisers (such as Wal-Mart and Kmart) and supermarkets and combination
supermarket/drug stores (such as Kroger and Albertson's). In Fiscal 1995 and for
the nine months ended December 31, 1996, the Company generated net sales of
$131.3 million and $124.6 million, respectively, and EBITDA of $16.5 million and
$14.2 million, respectively.(1)
Through its wholly-owned Dana Perfumes Corp. subsidiary ("Dana"), the
Company sells women's and men's fragrances designed to appeal to a broad range
of consumers within the mass market, including several classic brands such as
Chantilly and Tabu for women and English Leather and Canoe for men, each of
which has enjoyed widespread sales and consumer loyalty for more than 30 years.
The Company has an 11.1% share and a 6.5% share of the women's and men's
mass-market fragrance categories, respectively, and is the third and fifth
largest marketer of women's and men's fragrances, respectively, in the mass
market.
The Company's women's fragrance brands represent two of the top seven and
14 of the top 100 women's fragrance brands sold through the drug store channel,
which represents approximately 50% of mass-market sales. The Company's men's
fragrance brands represent three of the top 20 men's fragrance brands sold
through the drug store channel. The Company's fragrance and related products are
marketed under established brand names including Chantilly, White Chantilly,
Tabu, DREAMS BY TABU, Ambush, NaVy, Insignia, Toujours Moi, le Jardin, Love's,
Heaven Sent, French Vanilla by Dana, Raffinee, Lutece, Canoe, English Leather,
British Sterling, NaVy for Men, California for Men and Herbissimo.
Through its wholly-owned Cosmar Corporation subsidiary ("Cosmar"), the
Company is the largest domestic manufacturer and marketer of artificial nail
care products and related accessories sold through the mass market. Cosmar has
the leading share in five of the top seven artificial nail care segments, and
its 33% share in the mass market is more than twice the share of its nearest
competitor. In 1995, the Company successfully entered the $300+ million nail
polish category with its line of PRO(10) nail lacquers. In the first year after
its introduction, PRO(10) ranked as the ninth best-selling nail lacquer brand in
the United States. The Company's artificial nail care products and related
accessories are marketed under the brand names LaJoie, Press & Go, Sculpture
Quik, Quik Fit, PRO(10), UltraGel and Nail Fetish.
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(1) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA should not be considered as an alternative to net
income or cash flow and is not a measure of performance under generally
accepted accounting principles but provides additional information for
evaluating the Company.
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Through its wholly-owned Great American Cosmetics, Inc. subsidiary ("GAC"),
which the Company acquired on August 21, 1996 (the "GAC Acquisition"), the
Company markets a leading brand of high quality, mid-priced lip, eye and nail
products sold in the mass market under the Nat Robbins name. These color
cosmetics products include lipliner pencils, lipsticks, eyeliner pencils, eye
shadow, mascara, nail enamel, make-up brushes and assorted accessories. In
addition to the Nat Robbins brand name, which appears on all packaging, products
are marketed under the brand names Lip Lacquer, Stay Put and Color Intense 24.
On December 4, 1996, the Company acquired MEM Company, Inc. ("MEM"), which
manufactures mass-market fragrances (the "MEM Acquisition"). MEM's fragrance
brands include classic men's brands, such as English Leather and British
Sterling, and established women's brands such as Love's and Heaven Sent. A
division of MEM manufactures and markets a line of children's cosmetics and
accessories, principally under the trademark Tinkerbell.
On December 6, 1996, the Company acquired certain of the mass-market
fragrance brands (the "P&G Brands") marketed by The Procter & Gamble Company
("P&G"). As a result of this acquisition (the "P&G Acquisition"), the Company
added several well-known brands to its fragrance portfolio, including NaVy,
Insignia and NaVy for Men. Concurrent with the P&G Acquisition, the Company
entered into transition agreements with P&G under which P&G will continue the
foreign marketing of the P&G Brands through June 30, 1997. The GAC Acquisition,
MEM Acquisition and P&G Acquisition are referred to collectively herein as the
"Acquisitions."
The Company's principal executive offices are located at 955 Massachusetts
Avenue, Cambridge, Massachusetts 02139, and its telephone number is (617)
497-5584.
BUSINESS STRATEGY
The Company's management team intends to continue to capitalize on
opportunities in the mass-market segment of the fragrance and cosmetics
industry, through both internal growth and acquisitions, and to maximize sales
and EBITDA by implementing a strategy based on the following elements:
- Acquisition and Reinvigoration of Underperforming and/or Undermarketed
Brands. Subject to the limitations imposed by the New Revolving Credit
Facility and the Indenture, the Company intends to continue to
selectively acquire and subsequently reinvigorate underperforming and/or
undermarketed established brands by: (i) reestablishing trust and
reliability with retail accounts that may have been lacking under
previous ownership; (ii) restoring the quality and brand franchise of
acquired fragrances by using original formulations and applying advanced
technology to improve acquired cosmetics products; (iii) redesigning the
packaging and advertising of certain acquired brands to modernize their
images and refocus them toward their target markets; and (iv) initiating
or expanding focused advertising and promotional programs. Advertising
and marketing support is particularly important in the mass market due to
minimal in-store sales support by store personnel or manufacturer
representatives. Management believes that the Company provides the
broad-based consumer advertising necessary to support new product
introductions and to motivate consumers to "pull" the Company's products
off of the shelf.
- Integration of Acquired Businesses into Existing Company
Infrastructure. Following its acquisition of brands or companies, the
Company reduces the operating costs of such acquired brands or companies
by: (i) eliminating redundant overhead; (ii) consolidating plants (such
as the closing of MEM's facilities); (iii) selling the acquired brands
through the Company's existing sales force; and (iv) using common
components (e.g., the same type of bottle for several brands) to reduce
manufacturing costs.
- Focused Flanking of Established Fragrance Brand Equities. Rather than
introduce completely new products into the mass market, the Company has
specialized in the launch of new products that leverage off of the strong
name recognition and brand equity ("trust") of the Company's portfolio of
classic fragrance brands. These new products, known as "focused
flankers," draw on the consumer recognition and heritage of the Company's
existing brand equities while simultaneously enhancing and revitalizing
the "parent" products being flanked. The Company's flanker introductions
are strongly
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related to their "parents" but are targeted toward a different consumer
segment, enabling the Company to increase shelf space allocated to, and
revenues generated by, the expanded brand family. To date, the Company
has successfully launched White Chantilly as a flanker of the classic
Chantilly brand in the fall of 1995, DREAMS BY TABU as a flanker of the
classic Tabu brand in February 1996 and Navigator from Canoe as a flanker
of the classic Canoe brand in September 1996. In addition, the Company
has identified several opportunities to launch focused flankers of its
recently acquired MEM and P&G fragrance brands. Management believes that
the reinvigoration of existing brands and the launch of focused flanker
products typically generate more predictable sales and require less
advertising and promotional expenditures than "cold" launches of
completely new products.
- Introduction of Complementary Products. Similar to its focused flanker
approach to fragrances, the Company also introduces complementary new
cosmetics products. For example, the Company enhanced its leadership
position in the artificial nail care market in Fiscal 1995 through the
introduction of products targeting new segments of the market, including
UltraGel (patented gel nails with built-in color targeting salon users)
and Nail Fetish (a line of artificial nail care products targeting
teenage consumers). In addition, in 1995 the Company successfully entered
the $300+ million nail polish category with the launch of its PRO(10)
line of nail lacquers, which ranked as the ninth best-selling nail
lacquer brand in the United States one year after its introduction.
Cosmar plans to introduce three innovative artificial nail sculpture kits
that management believes will address the growing consumer interest in
do-it-yourself home manicures.
- Use of Category Management Techniques to Increase the Company's Sales by
Increasing its Allocation of Shelf Space and Enhancing Relationships with
Retailers. Due to the consolidation in the mass-market retail industry,
the allocation of retail shelf space has become increasingly important.
To increase shelf space allocated to the Company's products and to build
stronger relationships with retailers, the Company purchases consumer
sales data derived from in-store checkout scanners in order to
mathematically quantify sales results for its own products (as well as
those of its competitors). The Company engages in account-specific
category management by offering to be a retailer's category advisor or
"category captain," a role that most retailers fill by electing one
manufacturer per category. The category captain assists the retailer in
deciding which products it will sell within the shelf space dedicated to
a specific category. Management believes that because the Company has
made a significant investment in data, systems and employee resources for
its category management program, the Company should maintain a
significant competitive advantage in this area that will be difficult for
its competitors to overcome.
- Expansion into Additional Retail Outlets and Alternative Distribution
Channels. The Company continually seeks to expand its sales and
distribution network (currently over 1,000 retailers with approximately
25,000 locations) for its existing and acquired products. Due to the
Company's long-standing relationships with retail buyers, extensive
domestic retailer network, ability to reinvigorate brands and category
management expertise, the Company has been able to significantly increase
the sales of its acquired brands by integrating them into its existing
distribution network. For example, under Cosmar's management, the Nat
Robbins line has increased its retail store door distribution ("doors")
from approximately 6,000 doors at the closing of the GAC Acquisition to
approximately 7,200 doors as of December 1996 as the Company introduced
the Nat Robbins line to a number of the Company's major accounts. The
Company continually explores alternative distribution channels (such as
the home shopping channel QVC) through which to sell its products. In
addition, the Company is increasing its worldwide doors by expanding the
number of foreign countries (61 as of March 31, 1997) in which it sells
its products.
The Company intends to continue to capitalize upon the success of its
previous fragrance and cosmetics product launches, market share gains and close
working relationships with mass-market retailers to launch additional focused
flanker fragrance products and new artificial nail care and cosmetics products.
Management believes that the Company has the management talent and corporate
infrastructure in place to continue to implement its proven growth strategy and
effectively manage future growth. See "Special Note Regarding Forward-Looking
Information."
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TRANSACTIONS RELATED TO THE OFFERING
On December 4, 1996, Cosmar entered into a Senior Secured Credit Agreement,
among Cosmar, as borrower, the Company and all of the Company's material
domestic and Canadian subsidiaries, as guarantors, and the lenders named therein
(the "Senior Secured Credit Facility"), pursuant to which Cosmar borrowed $117.5
million and received net proceeds of $113.2 million. Such net proceeds were used
to finance the MEM Acquisition (after application of a $33.8 million certificate
of deposit, plus approximately $537,000 of accrued interest thereon), to finance
the P&G Acquisition and to repay all outstanding indebtedness under the
Company's then-existing credit facility (the "Old Credit Facility") with Nomura
Holding America, Inc. ("Nomura"), which was terminated on such date
(collectively, the "Transactions"), and the remainder was used for general
corporate purposes. The Senior Secured Credit Facility had an initial term of
one year, subject to extension under certain circumstances, and the indebtedness
under the Senior Secured Credit Facility bore interest at an initial interest
rate of 11.5% per annum, which would have increased to 12.5% on June 4, 1997 and
by an additional 0.5% at the end of each 90-day period thereafter, subject to a
maximum rate per annum of 20%. The Senior Secured Credit Facility was secured by
substantially all of the assets of Cosmar, the Company and the other guarantors.
On December 24, 1996, the Company commenced an offer to purchase all of its
outstanding $65.0 million principal amount of 13 3/4% Senior Notes due 2001,
Series B (the "Old Senior Notes"), at a price of $1,165 for each $1,000
principal amount thereof (plus accrued interest thereon) (the "Old Senior Notes
Offer").
On February 7, 1997, the Company completed the Offering, pursuant to which
it received net proceeds of approximately $192.1 million. Such net proceeds,
together with $23.7 million of the Company's available cash were used as
follows: (i) $80.0 million was used to finance the purchase of all of the
then-outstanding $65.0 million principal amount of Old Senior Notes, which was
tendered and purchased by the Company pursuant to the Old Senior Notes Offer, at
a price of $1,165 for each $1,000 principal amount thereof (plus accrued
interest thereon); (ii) $118.3 million was used to repay all outstanding
indebtedness under the Senior Secured Credit Agreement; and (iii) $17.5 million
was used to fund the Escrow Account.
In connection with the Old Senior Notes Offer, the Company also solicited
and obtained consents from the holders of the then-outstanding Old Senior Notes
to amend the Indenture, dated as of August 18, 1994, as amended, between the
Company and American Bank National Association, as trustee (the "Old
Indenture"), pursuant to which the Old Senior Notes were issued. The amendments
eliminated substantially all of the restrictive covenants contained in the Old
Indenture. Shares of the Company's Redeemable Preferred Stock (as defined
herein) are exchangeable into senior notes issued under the Old Indenture under
certain circumstances.
6
<PAGE> 9
THE EXCHANGE OFFER
Securities Offered ............. Up to $200,000,000 aggregate principal amount
of 11 3/4% Senior Notes due 2004 (the "New
Notes") which have been registered under the
Securities Act. The terms of the New Notes
and those of the Existing Notes are identical
in all material respects, except for certain
transfer restrictions relating to the
Existing Notes.
The Exchange Offer ............ The New Notes are being offered in exchange
for a like principal amount of Existing
Notes. Existing Notes may be exchanged only
in integral multiples of $1,000. The issuance
of the New Notes is intended to satisfy
obligations of the Company under the
Registration Rights Agreement.
Expiration Date;
Withdrawal of Tender ........ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on June 10, 1997, or such
later date and time to which it is extended
by the Company, provided, however, that the
Exchange Offer will not be extended beyond
July 7, 1997. The tender of Existing Notes
pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. Any Existing Notes not accepted for
exchange for any reason will be returned
without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange
Offer.
Conditions to the Exchange
Offer .......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. The Company currently expects
that each of the conditions will be satisfied
and that no waivers will be necessary. See
"The Exchange Offer -- Conditions to the
Exchange Offer."
Procedures for Tendering
Existing Notes ............... Each holder of Existing Notes wishing to
accept the Exchange Offer must complete, sign
and date a Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Existing Notes and any other required
documentation, to the Exchange Agent (as
defined) at the address set forth herein. See
"The Exchange Offer -- Procedures for
Tendering Existing Notes."
Use of Proceeds ................ There will be no proceeds to the Company from
the exchange of Notes pursuant to the
Exchange Offer.
Certain Federal Income
Tax Considerations ........... The exchange pursuant to the Exchange Offer
should not be a taxable event for federal
income tax purposes. See "Certain Federal
Income Tax Considerations."
Exchange Agent ................. United States Trust Company of New York is
serving as the Exchange Agent in connection
with the Exchange Offer.
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<PAGE> 10
CONSEQUENCE OF EXCHANGING EXISTING NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on certain no action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or (ii) any broker-dealer that purchases Notes from the Company to resell
pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available exemption) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of the holder's business and such holders have
no arrangement or understanding with any person to participate in a distribution
of such New Notes and are not participating in, and do not intend to participate
in, the distribution of such New Notes. By tendering, each holder will represent
to the Company in the Letter of Transmittal that, among other things, the New
Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the holder, that neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes, that neither the holder nor any such other person is
participating in or intends to participate in the distribution of such New Notes
and that neither the holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company. Each broker-dealer
that receives New Notes for its own account in exchange for Existing Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdiction or an exemption from registration or qualification is
available and complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the Notes
reasonably requests in writing. If a holder of Existing Notes does not exchange
such Existing Notes for New Notes pursuant to the Exchange Offer, such Existing
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon. In general, the Existing Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. See "The Exchange Offer -- Consequences of Failure to
Exchange; Resales of New Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the New Notes will not be eligible for
PORTAL trading.
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<PAGE> 11
THE NOTES
Except as otherwise indicated, the following description relates both to
the Existing Notes issued pursuant to the Offering and to the New Notes to be
issued in exchange for Existing Notes in connection with the Exchange Offer. The
New Notes will be obligations of the Company evidencing the same indebtedness as
the Existing Notes, and will be entitled to the benefits of the same Indenture.
The form and terms of the New Notes are the same as the form and terms of the
Existing Notes, except that the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. For a more complete description of the Notes see "Description of
Notes." Throughout this Prospectus, references to the "Notes" refer to the New
Notes and the Existing Notes collectively.
Issuer ......................... Renaissance Cosmetics, Inc.
Securities Offered ............. $200,000,000 principal amount of 11 3/4%
Senior Notes due 2004.
Maturity Date .................. February 15, 2004.
Interest Rate .................. The Notes bear interest at a rate of 11 3/4%
per annum.
Interest Payment Dates ......... February 15 and August 15, commencing August
15, 1997.
Escrow Account ................. In connection with the closing of the
Offering, the Company transferred $17.5
million of the net proceeds from the Offering
to the Guarantor (as defined herein) in
exchange for a limited guarantee by the
Guarantor of the Company's obligations under
the Notes. The Guarantor then placed such
amount into an escrow account (the "Escrow
Account") for the benefit of the holders of
the Notes. Until disbursed in accordance with
the related escrow agreement and the
Indenture (as defined herein), the Escrow
Account is designed to provide security for a
portion of the Company's obligations under
the Notes for the first two years after the
Issue Date. Pending such disbursement, all
funds contained in the Escrow Account will be
invested in Temporary Cash Investments (as
defined herein).
Guarantor ...................... Renaissance Guarantor, Inc. (the
"Guarantor"), a special-purpose corporation,
is a newly-formed, wholly-owned subsidiary of
the Company and is subject to restrictions
substantially limiting its activities to
providing a guarantee (to the extent of the
value of the Guarantor's property) of the
obligations of the Company under the Notes,
holding title to the Escrow Account and
making payments from the proceeds of the
Escrow Account to the holders of the Notes.
Security; Ranking .............. The Notes are general unsecured obligations
of the Company except to the extent they are
collateralized by a first priority security
interest in the Escrow Account granted by the
Guarantor. The Notes rank pari passu in right
of payment with all existing and future
senior indebtedness of the Company (except as
to senior secured indebtedness of the
Company) and rank senior to all existing and
future subordinated indebtedness of the
Company. The Indenture permits the Company
and its subsidiaries to incur additional
indebtedness including up to $75.0 million of
indebtedness of subsidiaries under the New
Revolving Credit Facility, subject to certain
limitations. See "Description of the Notes."
At December 31, 1996, the Company had
outstanding $5.0 million aggregate principal
amount ($3.8 mil-
9
<PAGE> 12
lion accreted amount) of indebtedness which
is subordinated to the Notes. The Company
does not have outstanding, and currently does
not have any arrangements to issue, any other
significant indebtedness that will be
subordinated to the Notes. See "Description
of the Notes -- General." The Notes are
effectively subordinated to all existing and
future indebtedness and other liabilities and
commitments of the Company's subsidiaries,
including the Company's New Revolving Credit
Facility (as defined herein). The New
Revolving Credit Facility contains a
provision which permits the lenders
thereunder to block payments to the Company
from its subsidiaries (other than the
Guarantor) following a payment default, or
for a period of 179 days following a
non-payment default, under the New Revolving
Credit Facility. This provision will not
affect the ability of the holders of the
Notes to accelerate the maturity of the Notes
or to seek other available remedies in the
event of any resulting payment default on the
Notes.
Mandatory Redemption ........... There are no mandatory redemption
requirements with respect to the Notes.
Optional Redemption ............ The Notes will be redeemable at the option of
the Company, in whole or in part, at any time
on or after February 15, 2002, at the
redemption prices set forth herein, plus
accrued and unpaid interest thereon to the
redemption date. In addition, the Company, at
its option, may redeem at any time on or
prior to February 15, 2000, in the aggregate
up to 35% of the original principal amount of
the Notes at a redemption price equal to
111.75% of the aggregate principal amount
thereof, plus accrued and unpaid interest
thereon to the redemption date, with the Net
Proceeds (as defined herein) of one or more
Public Equity Offerings (as defined herein)
or Strategic Equity Investments (as defined
herein); provided, that at least $130.0
million of the principal amount of the Notes
originally issued remains outstanding
immediately after the occurrence of any such
redemption and that any such redemption
occurs within 90 days following the closing
of any such Public Equity Offering or
Strategic Equity Investment.
Change of Control .............. Upon a Change of Control (as defined herein),
the Company will be required to make an offer
to purchase all outstanding Notes at a
purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid
interest thereon to the purchase date.
Because the occurence of an event that would
trigger a Change of Control under the
Indenture also would constitute a change of
control or other default under the New
Revolving Credit Facility, all principal,
interest and other amounts due under the New
Revolving Credit Facility would be required
to be repaid before RCI's subsidiaries (other
than the Guarantor) could distribute funds to
RCI to repurchase the Notes in connection
with a Change of Control. In the event of a
Change of Control, there can be no assurance
that the Company would have sufficient assets
to satisfy all of its obligations under
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<PAGE> 13
the New Revolving Credit Facility and the
Notes. See "Description of the
Notes -- Change of Control Offer."
Asset Sale Proceeds............. The Company will be obligated in certain
instances to make an offer to purchase the
Notes at a purchase price equal to 100% of
the principal amount thereof plus accrued and
unpaid interest thereon to the purchase date
with the Available Asset Sale Proceeds (as
defined herein) of certain asset sales. See
"Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset
Sales."
Certain Covenants............... The Indenture governing the Notes (the
"Indenture") contains covenants for the
benefit of the holders of the Notes that,
among other things, restrict the ability of
the Company and its Subsidiaries (as defined
herein) to: (i) incur additional Indebtedness
(as defined herein); (ii) pay dividends and
make distributions; (iii) make certain
investments; (iv) create liens; (v) enter
into transactions with affiliates; (vi) issue
stock of its Subsidiaries; (vii) enter into
agreements restricting the ability of such
Subsidiaries to pay dividends and make
distributions; (viii) enter into sale and
leaseback transactions; (ix) merge or
consolidate the Company; (x) transfer or sell
assets; and (xi) finance certain
acquisitions. These covenants are subject to
a number of important exceptions. See
"Description of the Notes -- Certain
Covenants."
COMPARISON OF NEW NOTES WITH EXISTING NOTES
Freely Transferable ............ Generally, the New Notes will be freely
transferable under the Securities Act by
holders thereof other than any holder that is
either an affiliate of the Company or a
broker-dealer that purchased the Notes from
the Company to resell pursuant to Rule 144A
or any other available exemption. The New
Notes otherwise will be substantially
identical in all material respects (including
interest rate and maturity) to the Existing
Notes. See "The Exchange Offer."
Registration Rights ............ The holders of Existing Notes currently are
entitled to certain registration rights
pursuant to the Note Registration Rights
Agreement (the "Registration Rights
Agreement"), dated as of February 7, 1997,
between the Company and the Initial
Purchaser. However, upon consummation of the
Exchange Offer, subject to certain
exceptions, holders of Existing Notes who do
not exchange their Existing Notes for New
Notes in the Exchange Offer will no longer be
entitled to registration rights and will not
be able to offer or sell their Existing
Notes, unless such Existing Notes are
subsequently registered under the Securities
Act (which, subject to certain limited
exceptions, the Company will have no
obligations to do), except pursuant to an
exemption from, or in a transaction not
subject to, the Securities Act and applicable
state securities laws. See "Risk Factors --
Adverse Consequences of Failure to Adhere to
Exchange Offer Procedures."
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<PAGE> 14
Absence of a Public Market for
the New Notes................. The New Notes are new securities and there is
currently no established market for the New
Notes. Accordingly, there can be no assurance
as to the development or liquidity of any
market for the New Notes. The Company does
not intend to apply for listing on a
securities exchange of the New Notes.
RISK FACTORS
Holders of Existing Notes and prospective purchasers of New Notes should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the specific factors set forth under "Risk Factors"
in connection with the Exchange Offer.
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<PAGE> 15
RISK FACTORS
Set forth below are the principal risk factors involved in an exchange of
or investment in the Notes. Holders of Existing Notes and prospective purchasers
of the New Notes should carefully consider these risk factors as well as the
other information set forth elsewhere in this Prospectus, which may affect a
decision to acquire the New Notes. For a discussion of certain potential tax
consequences of such investment, see "Certain Federal Income Tax
Considerations."
HIGH LEVEL OF INDEBTEDNESS AND LEVERAGE AND POSSIBLE INABILITY TO MEET DEBT
SERVICE OBLIGATION
The Company is, and will continue to be, highly leveraged due to the
substantial indebtedness it has incurred and intends to incur primarily to
finance acquisitions and expand its operations. As of December 31, 1996, the
Company had $185.1 million of total debt and $203.8 million of total debt on a
pro forma basis after giving effect to the Offering and the use of proceeds
therefrom. Subject to the restrictions that may be in existence on its
outstanding indebtedness from time to time, the Company expects to incur
additional indebtedness from time to time to finance acquisitions or capital
expenditures or for other corporate purposes. The Company has entered into an
agreement with General Electric Capital Corporation ("GECC") with respect to a
revolving credit facility under which GECC and other lenders have agreed to
provide Dana with a senior secured revolving credit facility for working capital
purposes with a maximum committed amount of $75.0 million subject to a borrowing
base calculation based upon eligible inventories and accounts receivable (the
"New Revolving Credit Facility"). The New Revolving Credit Facility prohibits
the Company from making acquisitions without the consent of 66 2/3% the lenders
thereto. Any default under this facility would have a material adverse effect on
the Company including its ability to implement its current business plan. See
"Recent Developments -- New Revolving Credit Facility" and "Description of
Certain Other Indebtedness -- New Revolving Credit Facility."
The Company experienced net losses applicable to common stockholders of
$19.9 million, $13.4 million and $6.2 million in the nine months ended December
31, 1996, Fiscal 1995 and Fiscal 1994, respectively, although it has generated
cash flow from operations in excess of debt service requirements. There can be
no assurance, however, that the Company will continue to generate cash flow at
levels sufficient to meet these requirements. The Company's ability to meet its
debt service obligations in the long term will be dependent upon its future
performance (including the performance of any acquired business) which, in turn,
will be subject to general economic conditions and to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control. If the Company is unable to generate sufficient cash flow to
service its indebtedness, it may be forced to adopt an alternative strategy that
may include actions such as slowing down or stopping the Company's acquisition
program, reducing or delaying capital expenditures, selling assets, refinancing
all or a portion of its existing indebtedness or obtaining additional financing.
There can be no assurance that such actions would be possible or successful.
The level of the Company's indebtedness could have important consequences
to holders of the Notes including: (i) a substantial part of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain needed additional
financing in the future may be limited; (iii) the Company's leveraged position
and covenants contained in the Indenture (or any replacement thereof) and the
New Revolving Credit Facility (or any replacement thereof) could limit its
ability to expand and make capital improvements and acquisitions; and (iv) the
Company's level of indebtedness could make it more vulnerable to economic
downturns, limit its ability to withstand competitive pressures, and limit its
flexibility in reacting to changes in its industry and economic conditions
generally. Certain of the Company's competitors currently operate on a less
leveraged basis and have significantly greater operating and financing
flexibility than the Company.
STRUCTURAL SUBORDINATION AND LIMITS ON PAYMENTS FROM SUBSIDIARIES
The Company is a holding company and its assets consist primarily of
investments in its subsidiaries. The Company's ability to pay principal of and
interest on the Notes and to purchase Notes in the event of a Change of Control
(as defined herein) is dependent primarily upon the earnings of its
subsidiaries, and the
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<PAGE> 16
distribution or other payment of such earnings to the Company. The New Revolving
Credit Facility restricts (and any replacement thereof will likely restrict) the
ability of the Company's subsidiaries (other than the Guarantor) to pay
dividends to the Company. Except for the Guarantor, the Company's subsidiaries
have not guaranteed and will not be required to guarantee the Company's
obligations under the Notes. The Company's rights and the rights of its
stockholders and creditors to participate in the distribution of assets of any
person in which the Company owns only an equity interest upon such person's
liquidation or reorganization will be subject to prior claims of such person's
creditors, including trade creditors, except to the extent that the Company may
itself be a creditor with recognized claims against such person (in which case
the claims of the Company would still be subject to the prior claims of any
secured creditor of such person, including the lenders under the New Revolving
Credit Facility). Accordingly, the rights of holders of the Notes will be
effectively subordinated to such claims.
The New Revolving Credit Facility contains a provision which permits the
lenders thereunder to block payments to the Company from its subsidiaries (other
than the Guarantor) following a payment default, or for a period of 179 days
following a non-payment default, under the New Revolving Credit Facility. This
provision will not affect the ability of the holders of the Notes to accelerate
the maturity of the Notes or to seek other available remedies in the event of
any resulting payment default on the Notes. See "Description of Certain Other
Indebtedness -- New Revolving Credit Facility."
DEPENDENCE ON SUCCESSFUL COMPLETION OF ACQUISITIONS AND INTEGRATION OF ACQUIRED
BUSINESSES
The Company's success has been, and will continue to be, dependent upon the
availability, successful completion and integration of acquisitions. There can
be no assurance that the Company will find suitable acquisitions or sufficient
financing for such acquisitions. Increased competition for acquisitions may
increase purchase prices above levels considered appropriate by management, in
which case the Company would be required to rely primarily on growth by its
existing businesses rather than through acquisitions. The New Revolving Credit
Facility prohibits the Company from making acquisitions without the consent of
66 2/3% of the lenders thereto. Also, the Indenture generally requires that the
Company comply with the covenant described under "Description of the Notes --
Certain Covenants -- Limitation on Additional Indebtedness" in order to incur
indebtedness to complete acquisitions, including any borrowings under the New
Revolving Credit Facility. The Indenture, however, does allow the use of
borrowings under the New Revolving Credit Facility to complete acquisitions to
the extent permitted by the terms of the New Revolving Credit Facility if the
Company meets certain EBITDA targets. See "Description of the Notes -- Certain
Covenants -- Financing of Certain Acquisitions." If the Company is unsuccessful
in implementing its acquisition strategy, the Company's ability to compete with
other manufacturers and marketers of fragrance and cosmetics products could be
adversely affected, especially if the industry continues to move toward further
consolidation. Furthermore, other factors resulting from the completion of
additional acquisitions, such as increasing leverage and debt service
requirements, diversion of management time and attention and combining disparate
company cultures and facilities, could adversely affect the Company's operating
results.
The success of any completed acquisition, including the recently completed
Acquisitions, will depend in part on the Company's ability to effectively
integrate the acquired businesses into the Company and on the Company's ability
to revitalize underperforming and/or undermarketed fragrance and cosmetics
brands. The process of integrating such acquired businesses may involve
unforeseen difficulties and may utilize a substantial portion of the Company's
financial and other resources. Also, the Company may have difficulty
revitalizing the acquired fragrance and cosmetics brands, such as the P&G
Brands, sales of which have declined significantly over the past five years. Net
sales for MEM and the P&G Brands declined since the periods presented in the
financial statements and data included herein. See "Recent Developments --
Acquisition of MEM Company, Inc.; and -- Acquisition of the P&G Brands." Since
inception in 1994, the Company has acquired seven companies and/or licenses in
the fragrance and cosmetics industry for cash purchase prices aggregating
approximately $201.3 million. No assurance can be given that the recently
completed Acquisitions will be successful or that future acquisitions will be
completed or, if completed, will be successful.
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<PAGE> 17
The size, timing and integration of possible future acquisitions may cause
substantial fluctuations in operating results from quarter to quarter. As a
result, operating results for any quarter may not be indicative of results that
may be achieved for any subsequent quarter or for a full fiscal year.
RESTRICTIVE DEBT COVENANTS
The Indenture and the New Revolving Credit Facility contain (and any
replacement thereof likely will contain) a number of covenants that, among other
things, limit the Company's and its subsidiaries' ability to incur additional
indebtedness, pay certain dividends, prepay indebtedness, dispose of certain
assets, create liens, make capital expenditures, make certain investments or
acquisitions and otherwise restrict corporate activities. The Indenture and the
New Revolving Credit Facility also contain (and any replacement thereof likely
will contain) provisions relating to a change of control of the Company. The New
Revolving Credit Facility also requires (and any replacement thereof likely will
require) the Company to comply with certain financial ratios and tests, under
which the Company is required to achieve certain financial and operating
results. The ability of the Company to comply with such provisions may be
affected by events beyond its control including events such as prevailing
economic conditions, changes in consumer preferences and changes in the
competitive environment, which could impair the Company's operating performance.
A breach of any of these covenants would result in a default under the New
Revolving Credit Facility, in which event the lenders under the New Revolving
Credit Facility could elect to declare all outstanding amounts borrowed
thereunder, together with accrued interest thereon, to be due and payable. Such
acceleration could also constitute an event of default under the Notes. As a
result of the priority and security afforded to the New Revolving Credit
Facility, there can be no assurance that the Company would have sufficient funds
to pay indebtedness outstanding under both the New Revolving Credit Facility and
the Notes in the event of such acceleration. Acceleration of such indebtedness
would have a material adverse effect on the Company.
PRIORITY OF SECURED INDEBTEDNESS
The Company's obligations under the New Revolving Credit Facility are
secured by substantially all of the assets of the Company, all of its material
domestic subsidiaries (other than the Guarantor) and all directly-owned Canadian
subsidiaries of the Company and its domestic subsidiaries. In addition, the
Indenture does not limit the extent to which future indebtedness of the Company
or its subsidiaries, to the extent such indebtedness is permitted under the
Indenture, may be secured by liens on the assets and properties of the Company
or its subsidiaries (other than the Guarantor). See "Description of the
Notes -- Certain Covenants -- Limitation on Liens; and -- Limitation on
Dividends and Other Payment Restrictions Affecting Subsidiaries."
DEPENDENCE ON RESULTS OF OPERATIONS FOR FOURTH QUARTER OF FISCAL 1996
The Company's business plan for the fourth quarter of Fiscal 1996 called
for several new product launches or relaunches and various promotional programs,
as well as the continuing integration of the assets and operations acquired in
recent acquisitions, which required the Company to dedicate a considerable
amount of its resources and involved various degrees of risk. The Company is
relying on its results of operations for the fourth quarter of Fiscal 1996 to
achieve results of operations for Fiscal 1996 that will compare favorably to its
results of operations for Fiscal 1995. As a result of the uncertainties
involved, there can be no assurance that the Company achieved its business plan
for the fourth quarter of Fiscal 1996 or for Fiscal 1996. See "Special Note
Regarding Forward-Looking Statements."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends upon the efforts, abilities and
expertise of its executive officers and other key employees, including in
particular, Thomas V. Bonoma, Chairman, Chief Executive Officer and President of
the Company. The loss of the services of Dr. Bonoma could have a material
adverse effect on the Company's operations. Dr. Bonoma's current employment
contract, as amended, expires on August 18, 2000. Dr. Bonoma's employment
agreement will automatically terminate in the event of a change of control of
the Company resulting in a sale of all, or substantially all, of the stock or
assets of the Company in which the shareholders of the Company liquidate all or
substantially all of their equity interests in the Company. See
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<PAGE> 18
"Management -- Employment and Non-Compete Agreements." The Company currently has
key man life insurance on Dr. Bonoma. However, no assurance can be made that
such insurance will be adequate.
CONTROL BY KIDD KAMM
Kidd Kamm Equity Partners, L.P. ("KKEP"), an affiliate of Kidd, Kamm &
Company ("Kidd Kamm"), owned approximately 73.4% of the Company's outstanding
common stock and 39.3% of the Company's common stock on a fully diluted basis as
of March 31, 1997. As a result, KKEP will effectively be able to control the
outcome of matters requiring a stockholder vote, including the election of
directors, adopting or amending provisions of the Company's Certificate of
Incorporation and bylaws, and approving certain mergers or other similar
transactions, such as a sale of substantially all of the Company's assets. In
addition, a change of control under the Indenture would be triggered if, for
among other reasons, any person, other than KKEP and certain other permitted
holders, own more than 35% of the voting power of the Company and the permitted
holders, together with officers and employees of the Company, own a lesser
percentage of the total voting power of the Company and do not have the right to
elect a majority of the board of directors of the Company, thereby requiring the
Company to offer to purchase the Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon. The New Revolving
Credit Facility also includes provisions regarding a change of control. Under
the New Revolving Credit Facility, a change of control would be triggered if,
for among other reasons, any person, other than KKEP and certain other permitted
holders, own more than 35% of the voting power of the Company, or the permitted
holders together with the officers and employees of the Company beneficially own
a lesser percentage of the total voting power of the Company and do not have the
right or ability to elect a majority of the board of directors of the Company.
In the event of such a change of control, the lenders under the New Revolving
Credit Facility could cause the indebtedness thereunder to be accelerated. See
"Description of Certain Other Indebtedness -- New Revolving Credit Facility."
COMPETITION
The markets for the Company's products are highly competitive and sensitive
to changes in consumer preferences and demands. These markets are characterized
by the frequent introduction of competitive products, typically accompanied by
advertising and promotional campaigns, and in the overall fragrance and
cosmetics market, by the potential entry of other manufacturers as new
competitors. The Company competes against a number of companies, some of which
have substantially greater resources than the Company and many of which sell
their products through broader distribution channels than the Company. See
"Business -- Competition."
DEPENDENCE ON LICENSE AGREEMENTS; LICENSE AND ROYALTY OBLIGATIONS
Certain of the Company's key products incorporate intellectual property
rights, such as trademarks or brand names, that are proprietary to third
parties. In each instance, the Company typically enters into a long-term
exclusive license agreement to manufacture, distribute and sell fragrance and
cosmetics products covered by the trademark, use the trademark in conjunction
with the products in all advertising and letter heads and other promotional
material and use and exploit the know-how of the licensor in the manufacture of
the products in a given territory.
The Company's license agreements typically provide for the retention of
ownership of the trade name, know-how or other intellectual property by the
licensor and the payment of a royalty to the licensor. Such royalty payments
generally are based on the net sales of the licensed product for the duration of
the license and, depending on the revenues generated from the sale of the
licensed product, may be substantial. In addition, such agreements often provide
for a minimum level of royalties that may exceed the actual royalties generated
from net sales of the licensed product. Certain licenses also provide for
minimum net sales requirements.
Most of these licenses have fixed terms and are automatically renewable for
one or several additional terms. Some of these licenses may need to be renewed
or renegotiated prior to their expirations in order for the Company to continue
to sell the licensed product. The termination or non-renewal of a key license
would materially adversely affect the Company's operating results and financial
condition. The Company intends to
16
<PAGE> 19
continue to rely on third-party licenses in connection with the development of
its new products. There can be no assurance that the Company will be able to
obtain additional licenses or renew existing licenses for trade names or
trademarks on commercially reasonable terms. The inability of the Company to
obtain such licenses on commercially reasonable terms could have a material
adverse effect on the Company's operating results and financial condition.
The Company, through its subsidiaries, has entered into three license
agreements, which were amended during July 1996 (the "Houbigant License
Agreements"), with Houbigant, Inc., a Delaware corporation ("Houbigant"), that
has filed a petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code (the "Bankruptcy Code"). Houbigant has been authorized and
empowered by federal bankruptcy court orders to enter into each of the Houbigant
License Agreements. Except for the Houbigant License Agreement covering Canada,
the licenses provide, and the shareholders of Houbigant agreed, that in the
event that Houbigant determines to file a subsequent voluntary petition under
Chapter 11 of the Bankruptcy Code, the Company will be entitled to nominate a
person to act as its representative on the board of directors of Houbigant and
serve in meetings of the board of directors, including, without limitation, in
connection with any consideration by the board of directors of Houbigant to
authorize the rejection and disaffirmance of the Houbigant License Agreements
pursuant to Section 365 of the Bankruptcy Code. The Company's representative may
also be granted a veto right in certain circumstances. There can be no assurance
that these rights will be adequate to protect the Company in the case of a new
petition under Chapter 11 of the Bankruptcy Code. Further, should Houbigant or
any other licensor go bankrupt, there is a risk that the affected license may be
rejected in bankruptcy as an executory contract, which could have material
adverse effect on the Company. The loss of any of the Houbigant License
Agreements would have a material adverse effect on the Company. See
"Business -- Intellectual Property; and -- Legal Matters."
RISK ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS, OWNERSHIP CHANGES AND OTHER
CHANGES
IN THE RETAIL INDUSTRY
The retail industry has periodically experienced consolidation and other
ownership changes. Major retailers in the United States and in foreign markets
may in the future consolidate, undergo restructurings or realign their
affiliations, which could decrease the number of stores that sell the Company's
products or increase the ownership concentration within the retail industry.
While such changes in the retail industry to date have not had a material
adverse effect on the Company's business or financial condition, there can be no
assurance as to the future effect of any such changes.
SEASONALITY AND VARIATION IN QUARTERLY OPERATING RESULTS
Sales of fragrances, which for Fiscal 1995 and for the nine months ended
December 31, 1996 represented 63.4% and 67.8%, respectively, of the Company's
net sales, are highly seasonal at retail, with the majority of retail sales
occurring during the calendar year-end holiday season. Accordingly, the Company
expects that its operating results will vary significantly from quarter to
quarter, particularly in the third and fourth calendar quarters, when the
majority of holiday products are shipped, and the first calendar quarter, when a
disproportionate amount of receivables are collected and trade credits are
negotiated. In addition, although indications of interest are provided by
retailers earlier in the year for product shipments for the calendar year-end
holiday season, committed orders are not placed until later in the year and,
even when placed, such orders generally can be cancelled at any time without
penalty. Thus, the Company's working capital and liquidity may fluctuate during
the year. In addition, lower than expected sales during the calendar year-end
holiday season would have a material adverse effect on the Company. Sales of the
Company's cosmetics products are relatively stable throughout the year.
RISK ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC AND OTHER CONDITIONS
AFFECTING
FOREIGN OPERATIONS
The Company has manufacturing operations in four foreign countries and
sells its products in 61 foreign countries as of March 31, 1997. In Fiscal 1995
and for the nine month period ended December 31, 1996, net sales from the
Company's products sold abroad accounted for approximately 17.5% and 25.2%,
respectively, of its total net sales. Risks inherent in foreign operations
include changes in social, political and economic
17
<PAGE> 20
conditions. Changes in currency exchange rates may affect the relative prices at
which the Company and foreign competitors purchase and sell their products in
the same market. The Company does not hedge its exposure to foreign currency
exchange rate changes. The Company is also exposed to risks associated with
changes in the laws and policies that govern foreign investments in countries
where it has operations as well as, to a lesser extent, changes in United States
laws and regulations relating to foreign trade and investment. While such
changes in laws, regulations and conditions to date have not had a material
adverse effect on the Company's business or financial condition, there can be no
assurance as to the future effect of any such changes.
RISK OF DETERMINATION OF A FRAUDULENT CONVEYANCE AND BANKRUPTCY
If the court in a lawsuit brought by an unpaid creditor or representative
of creditors, such as a trustee in bankruptcy or the Company as a
debtor-in-possession, were to find under relevant federal or state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for certain of the indebtedness, including the
Notes, incurred by the Company, or for the transfer of $17.5 million of the net
proceeds of the issuance of the Notes to the Guarantor, and that, at the time of
such incurrence of debt or transfer of proceeds, the Company: (a) (i) was
insolvent; (ii) was rendered insolvent by reason of such incurrence or transfer;
(iii) was engaged in a business or transaction for which the assets remaining
with the Company constituted unreasonably small capital; or (iv) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, and (b) did not receive fair consideration or reasonably
equivalent value, in good faith, in exchange for such incurrence or transfer,
such court, subject to applicable statutes of limitation, could void the
Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company, recover the value of the property placed in the
Escrow Account, void the security interest of the holders of the Notes in the
Escrow Account and the property contributed to it, or take other action
detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair saleable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, or a transfer of property,
including the transfer of certain proceeds of the issuance of the Notes to the
Guarantor and the grant of a security interest in the Escrow Account for the
benefit of the holders of the Notes, if it determined that such transaction was
made with intent to hinder, delay or defraud creditors, or a court could
subordinate the indebtedness, including the Notes, to the claims of all existing
and future creditors on similar grounds. There can be no assurance as to what
standard a court would apply in order to determine whether the Company was
"insolvent" upon consummation of the sale of the Notes.
Under the federal Bankruptcy Code (title 11, United States Code), interest
accruing on unsecured or undersecured debt after the commencement of bankruptcy
proceedings does not ordinarily give rise to an allowable claim. Accordingly, in
the event that the Company becomes the subject of federal bankruptcy
proceedings, the holders of Notes are not expected to have allowable claims
against the Company for interest accruing on the Notes after the date of
commencement of such proceedings. Under the terms of the Indenture and Escrow
Agreement, however, the Guarantor will be liable upon the occurrence and during
the continuation of an Event of Default (including the entry of the Company into
bankruptcy proceedings) to make the full amount of interest payments due under
the Notes as they come due, at the regular, pre-default interest rate specified
in the Indenture, if such payments are not made by the Company, using the
proceeds of the Escrow Account for such purpose. This obligation of the
Guarantor will continue until the proceeds of the Escrow Account have been fully
exhausted in payment to the holders of the Notes. If, under these provisions,
the Guarantor makes interest payments accruing under the Notes after the date of
the commencement of bankruptcy proceedings of the Company, a court in the
Company's bankruptcy proceedings may decide to treat such interest payments as
deemed reductions of the principal balance of the Notes for purposes of
calculating the claims of the holders of the Notes in the Company's bankruptcy.
18
<PAGE> 21
The Guarantor will be subject to certain restrictions intended to render it
separate from the Company and to prevent the Guarantor's own entry into
bankruptcy proceedings. However, there can be no assurance that in the event of
a bankruptcy of the Company the Guarantor will not also become the subject of
bankruptcy proceedings, or that a court in a bankruptcy proceeding of the
Company will not make the assets of the Guarantor (including the Guarantor's
interest in the Escrow Account) subject to administration in the Company's
bankruptcy under the doctrine of "substantive consolidation" or similar
equitable doctrines. If, notwithstanding the restrictions to which it is
subject, the Guarantor becomes the subject of bankruptcy proceedings or if the
doctrine of substantive consolidation is applied to its assets, the payment of
interest under the Notes by the Guarantor may be suspended, and the holders of
Notes may be held by a court not to have allowable claims in bankruptcy for such
interest payments. See "Description of the Notes -- Guarantor."
LACK OF PUBLIC MARKET FOR THE NOTES
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. The Company currently does not intend to list the New Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system and no active public market for the New Notes is currently
anticipated. There can be no assurance that an active public market for the New
Notes will develop.
Although the Initial Purchaser has acted as a market maker with respect to
the Existing Notes and has informed the Company that it currently intends to
make a market in the New Notes, it is not obligated to do so and any such market
making may be discontinued at any time without notice. Accordingly, there can be
no assurance as to the development or liquidity of any market for the New Notes.
ADVERSE CONSEQUENCES OF FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for Existing Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Existing Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Existing
Notes desiring to tender such Existing Notes in exchange for New Notes should
allow sufficient time to ensure timely delivery. Neither the Company nor the
Exchange Agent is under any duty to give notification of defects or
irregularities with respect to the tenders of Existing Notes for exchange.
Existing Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof and, upon consummation of the
Exchange Offer certain registration rights under the Registration Rights
Agreement will terminate.
RECEIPT OF RESTRICTED SECURITIES UNDER CERTAIN CIRCUMSTANCES
Any holder of Existing Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes may be deemed to
have received restricted securities and, if so, will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer -- Consequences
of Failure to Exchange; Resales of New Notes."
ADVERSE EFFECT ON MARKET FOR EXISTING NOTES
To the extent that Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered and tendered but unaccepted
Existing Notes could be adversely affected. See "The Exchange Offer."
19
<PAGE> 22
RECENT DEVELOPMENTS
EQUITY FINANCING
On August 15, 1996, September 16, 1996 and September 27, 1996, the Company
issued an aggregate of 115,000 shares of Senior Redeemable Preferred Stock,
Series B, with warrants to purchase common stock of the Company (the "Series B
Preferred Stock Offering"). Concurrently with the Series B Preferred Stock
Offering, the Company sold shares of common stock to CIBC WG Argosy Merchant
Fund 2, L.L.C. (the "CIBC Fund") and to Bastion Capital Fund, L.P.
(collectively, the "New Common Stock Sale"). The Company also received a refund
from the CIBC Fund of a portion of the fee paid to the CIBC Fund in connection
with the CIBC Fund's commitment to purchase $20.0 million of the Company's
Senior Redeemable Exchangeable Preferred Stock, Series A, which the CIBC Fund
purchased during May and June 1996 (the "Interim Preferred Facility") (such
purchase and refund are, collectively, the "CIBC Financing"). The Series B
Preferred Stock Offering, the New Common Stock Sale and the CIBC Financing are
referred to herein as the "Equity Financing."
The Company received aggregate net proceeds from the Equity Financing of
$119.1 million.
ACQUISITION OF GREAT AMERICAN COSMETICS, INC.
On August 21, 1996, the Company, through its wholly-owned subsidiary
Cosmar, completed its acquisition of all of the issued and outstanding capital
stock of GAC pursuant to a Stock Purchase Agreement, dated June 27, 1996, with
GAC and Messrs. Larry Pallini and Vincent Carbone, the sole shareholders of GAC
(the "Sellers"). GAC markets, distributes, advertises, promotes and merchandises
high quality, mid-priced lip and eye make-up, make-up brushes, nail polish and
related products sold under the Nat Robbins trademark.
The cash consideration paid for GAC was $15.3 million, approximately $14.2
million of which was paid to the Sellers at closing, approximately $41,000 of
which was retained by Cosmar to fund possible post-closing severance bonuses to
certain GAC employees and the remaining $1.0 million of which was placed in
escrow to secure the Sellers' post-closing obligation to indemnify Cosmar for
breaches of the Sellers' representations, warranties and covenants contained in
the Stock Purchase Agreement. Concurrent with the closing, the Company repaid
approximately $796,000 of GAC indebtedness. Immediately prior to the closing,
GAC repaid $184,000 of loans owed to its shareholders. In connection with the
closing, the Company agreed to fund up to approximately $141,000 (with up to
$100,000 of its own funds and up to $41,000 of the purchase price held back from
the Sellers for this purpose) of possible post-closing severance bonuses to
certain GAC employees, if earned.
In connection with the GAC Acquisition, Cosmar has retained Messrs. Pallini
and Carbone as consultants to Cosmar and its affiliates. Mr. Pallini's
consulting agreement is for a term of three years with annual compensation of
$200,000 per year, payable in thirty-six equal monthly installments. Mr.
Carbone's consulting agreement is for a term of one year with annual
compensation of $150,000, payable in twelve equal monthly installments.
ACQUISITION OF MEM COMPANY, INC.
On December 4, 1996, the Company, through its newly-formed, wholly-owned
subsidiary, Renaissance Acquisition, Inc. ("RAI"), completed its acquisition of
MEM. The aggregate cash consideration paid to the equity holders of MEM in
connection with the MEM Acquisition was $19.8 million. In addition, in
connection with the MEM Acquisition, the Company repaid all of MEM's outstanding
indebtedness in an amount equal to $18.1 million and incurred fees and expenses
of approximately $800,000.
MEM distributes a diversified line of fragrances and toiletries in the
mass-market distribution channel. MEM's products are marketed under the
nationally-advertised trademarks English Leather, British Sterling, Heaven Sent
and Love's. The principal market for MEM's products is the United States. Tom
Fields, Ltd. ("Tom Fields"), a division of MEM, manufactures and markets a line
of children's cosmetics and accessories
20
<PAGE> 23
principally under the trademark Tinkerbell. A subsidiary, Tom Fields (U.K.)
Ltd., markets this line of children's products in the United Kingdom and
elsewhere in Europe. MEM had net sales of approximately $44.8 million and a net
loss of approximately $3.0 million for the year ended December 31, 1995. MEM's
net sales declined to $22.6 million during the nine months ended September 30,
1996 from $27.7 million during the prior year's comparable period and its net
loss for the period increased to $4.6 million from $2.6 million in the prior
year's comparable period.
On February 7, 1997, the Company closed MEM's facilities in Northvale, New
Jersey and in Boucherville, Quebec. The Company expects to incur costs in
connection with the closure of such facilities and consolidation of MEM's
operations in an amount of approximately $5.0 million, including severance
payments, ERISA withdrawal liability costs and stay bonuses for selected
employees of MEM. The Company's estimate of its ERISA withdrawal liability costs
is an estimate for a 1996 withdrawal. The Company has been advised that the
liability for a 1997 withdrawal would be higher. See "Business -- Employees; and
Legal Matters -- Litigation -- MEM Litigation."
ACQUISITION OF THE P&G BRANDS
On December 6, 1996, the Company completed its acquisition from P&G of the
worldwide rights to manufacture and market certain mass-market fragrances,
including NaVy, NaVy for Men, Insignia, California for Men and le Jardin. The
cash portion of the purchase price was $43.0 million, of which $9.9 million
related to inventory (net of a receivable of approximately $283,000 for
inventory not purchased) and $33.1 million related to the licenses and rights to
market such fragrances. In addition, in connection with the P&G Acquisition, the
Company assumed certain specified trade-related obligations of P&G, including
liability for returns of products under the P&G Brands sold by P&G prior to the
closing and liabilities under certain advertising and business development
commitments. Based on P&G's past experience, the amount of the returns from such
products may be approximately $3.0 million. However, there can be no assurance
as to what the actual amount of the returns will be, and such amount may be
materially different from the estimated amount. See "Business -- Products."
Direct revenues from the P&G Brands for the year ended June 30, 1996 were $56.8
million and for the three months ended September 30, 1996 were $11.4 million.
Concurrent with the P&G Acquisition, the Company entered into transition
agreements with P&G under which P&G will continue the foreign marketing of the
P&G Brands through June 30, 1997.
RESTATEMENT OF OPERATING RESULTS
In January 1997, the Company restated (a) its previously-reported results
of operations for the three and six months ended September 30, 1996 and
September 30, 1995 and its previously-reported balance sheet data as of
September 30, 1996 and September 30, 1995, and (b) its previously-reported
results of operations for the three months ended June 30, 1996 and June 30, 1995
and its previously-reported balance sheet data as of June 30, 1996 and June 30,
1995 (the "Prior Restatements"). See the Quarterly Reports on Form 10-Q/A for
the three- and six-months ended June 30, 1996 and September 30, 1996. The Prior
Restatements did not require any restatement of the Company's
previously-reported audited financial statements for Fiscal 1995 and will not
have any impact on the Company's results of operations for Fiscal 1996 or its
balance sheet as of March 31, 1997.
NEW REVOLVING CREDIT FACILITY
On March 12, 1997, the Company entered into the New Revolving Credit
Facility. The New Revolving Credit Facility contains certain financial
covenants, affirmative and negative covenants, representations, warranties,
conditions and events of default. See "Description of Certain Other
Indebtedness -- New Revolving Credit Facility."
21
<PAGE> 24
USE OF PROCEEDS
No proceeds will be received by the Company from the Exchange Offer. The
aggregate net proceeds of the Offering, after deducting discounts to the Initial
Purchaser and fees and expenses of the Offering, were approximately $192.1
million. Such net proceeds, together with $23.7 million of the Company's
available cash were used as follows: (i) $80.0 million was used to finance the
purchase of all of the then-outstanding $65.0 million principal amount of Old
Senior Notes, which was tendered and purchased by the Company pursuant to the
Old Senior Notes Offer, at a price of $1,165 for each $1,000 principal amount
thereof (plus accrued interest thereon); (ii) $118.3 million was used to repay
all outstanding indebtedness under the Senior Secured Credit Agreement; and
(iii) $17.5 million was used to fund the Escrow Account.
The Company received net proceeds from borrowings under the Senior Secured
Credit Facility of $113.2 million. Of such net proceeds, (i) $3.9 million was
used to complete the MEM Acquisition (after the application of the $33.8 million
certificate of deposit, plus approximately $537,000 of accrued interest
thereon); (ii) $38.6 million was used to complete the P&G Acquisition, net of
pre-closing deposits and prepayments of $2.5 million; (iii) $54.3 million was
used to repay the outstanding indebtedness under the Old Credit Facility,
including accrued interest thereon; and (iv) the remainder was used for general
corporate purposes. All of the outstanding indebtedness under the Senior Secured
Credit Facility was repaid from a portion of the net proceeds of the sale of the
Existing Notes in the Offering.
Under the Old Credit Facility, dated as of December 21, 1994, as amended,
Nomura had provided to the Company a revolving credit facility in an aggregate
principal amount of $40.0 million, and term loans in an aggregate principal
amount of $30.0 million. Such loans bore interest at variable rates equal to the
bank base rate (8.25% at September 30, 1996) plus 4.5%. The weighted average
interest rate on indebtedness under the Old Credit Facility was 12.19% and
12.25%, respectively, for the year ended March 31, 1996 and the six months ended
September 30, 1996. All of the outstanding indebtedness under the Old Credit
Facility was repaid from a portion of the net proceeds of the Senior Secured
Credit Facility.
22
<PAGE> 25
CAPITALIZATION
The following table sets forth the historical and pro forma capitalization
of the Company as of December 31, 1996 as well as such pro forma capitalization
as adjusted to reflect the aggregate principal amount and liquidation value of
debt and preferred stock, respectively. Original issue discounts have been added
back to amounts in the Pro Forma as Adjusted column. The Equity Financing, the
GAC Acquisition, the MEM Acquisition, the P&G Acquisition and net borrowings
under the Senior Secured Credit Facility have been reflected in the historical
capitalization of the Company as these transactions were completed prior to
December 31, 1996. The Pro Forma Capitalization of the Company gives effect to
the sale of the Notes and the use of proceeds therefrom (including the
repurchase of the Old Senior Notes and the repayment of all indebtedness under
the Senior Secured Credit Facility), as if such transactions had occurred as of
December 31, 1996. The Pro Forma Capitalization is presented for information
purposes only and is not necessarily indicative of the future capitalization of
the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA ADJUSTMENTS AS ADJUSTED
--------------- --------- ----------- ----------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 51,513 $ 45,517 $ -- $ 45,517
======== ======== ======== ========
Senior Secured Credit Facility............. 117,500 -- -- --
Old Senior Notes(a)........................ 63,759 -- -- --
Notes...................................... -- 200,000 -- 200,000
Subordinated Seller Notes(b)............... 3,829 3,829 1,171 5,000
-------- -------- -------- --------
Total debt....................... 185,088 203,829 1,171 205,000
-------- -------- -------- --------
Senior Redeemable Preferred Stock (350,000
shares authorized; 119,018 shares issued
and outstanding)(c)(d)................... 82,576 82,576 39,546 122,122
Redeemable Preferred Stock (40,000 shares
authorized; 12,485 shares issued and
outstanding)(e)(f)....................... 12,783 12,783 350 13,133
-------- -------- -------- --------
Total preferred stock............ 95,359 95,359 39,896 135,255
-------- -------- -------- --------
Common Stockholders' Equity (3,000,000
shares authorized; 825,086 shares issued
and outstanding)......................... 28,139 6,262 (41,067) (34,805)
-------- -------- -------- --------
Total capitalization............. $ 308,586 $305,450 $ -- $305,450
======== ======== ======== ========
</TABLE>
See accompanying Notes to Capitalization.
23
<PAGE> 26
NOTES TO CAPITALIZATION
(a) The $65.0 million of Old Senior Notes are presented in the Historical column
net of an original issue discount and a discount as a result of an
allocation to the common stock warrants issued in connection therewith. The
Old Senior Notes were repaid from the proceeds of the Existing Notes.
(b) The Subordinated Seller Notes (the "Seller Notes"), initially issued to the
selling shareholders of Cosmar, accrue interest through August 1997 at a
rate of 8% per annum and thereafter at a rate which increases each year up
to a maximum of 11% per annum beginning in the sixth year after issuance.
The Seller Notes are due on August 15, 2002 and are shown in the Historical
and Pro Forma columns net of an unamortized discount of $1.2 million. The
Pro Forma as Adjusted column reflects the aggregate principal amount of the
Seller Notes, adding back the unamortized discount at December 31, 1996.
(c) The Senior Redeemable Preferred Stock is shown in the Historical and Pro
Forma columns net of a discount of $32.9 million as a result of an
allocation to the common stock warrants issued in connection therewith and
net of transaction fees and expenses of approximately $6.6 million. The Pro
Forma as Adjusted column reflects the aggregate liquidation value of the
Senior Redeemable Preferred Stock, adding back the unamortized discount at
December 31, 1996 and related fees.
(d) Dividends on the Senior Redeemable Preferred Stock are payable at 14.0% per
annum in cash or in kind, at the Company's option, through the November 17,
1997 dividend payment date, and in cash thereafter. If the Company does not
pay cash dividends after November 17, 1997, the per annum dividend rate
will be increased by 0.25% for each quarter in which the Company fails to
pay cash dividends, and if such non-cash payment has occurred during more
than four quarters by 0.50% for each quarter thereafter in which the
Company fails to pay cash dividends, with a maximum rate of 17.0% per
annum. See "Description of Outstanding Capital Stock -- Serial Preferred
Stock -- Series C Preferred Stock."
(e) The Redeemable Preferred Stock is shown in the Historical and Pro Forma
columns net of a discount of $350,000 as a result of an allocation to the common
stock warrants issued in connection therewith. The Pro Forma as Adjusted
column reflects the aggregate liquidation value of the Redeemable Preferred
Stock, adding back the unamortized discount at December 31, 1996.
(f) Dividends on the Redeemable Preferred Stock are payable in cash or in kind,
at the Company's option, at 10.0% per annum until August 15, 1997,
increasing each year thereafter. Subject to certain conditions and
commencing on August 16, 1999, the dividend rate will be 15%. Shares of the
Redeemable Preferred Stock are subject to mandatory redemption on August
15, 2002 and are exchangeable for senior notes issued under the Old
Indenture, subject to certain limitations, (i) by the Company at any time
and (ii) under certain circumstances, by the holders thereof on or after
August 15, 1997. See "Description of Outstanding Capital Stock -- Serial
Preferred Stock -- Cumulative Exchangeable Preferred Stock."
24
<PAGE> 27
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data of Cosmar (Predecessor) and the
Company set forth below have been derived from and should be read in conjunction
with the historical financial statements of the Company and the notes thereto
and the Company's "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The statement
of operations data for the nine months ended December 31, 1996 include the
results of GAC MEM and P&G Brands from the dates of their acquisitions.
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------
COSMAR (PREDECESSOR) PERIOD FROM
----------------------------------------- APRIL 15, 1994
JANUARY 1 TO (INCEPTION) TO YEAR ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, AUGUST 17, MARCH 31, MARCH 31, DECEMBER 31,
-------------------------- ------------ --------------- ---------- ---------------------
1991 1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------------ --------------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $9,500 $17,926 $25,844 $ 18,301 $ 57,714 $131,286 $ 94,339 $124,590
Operating income............ 1,378 3,899 5,063 3,326 2,744 8,450 8,137 6,299
Interest expense............ 14 37 132 61 8,694 19,458 14,241 17,206
Net income (loss)........... 1,357 3,768 4,801 3,364 (5,459) (12,057) (6,880) (10,028)
Net income (loss) applicable
to common stockholders.... 1,357 3,768 4,801 3,364 (6,174) (13,390) (7,872) (19,866)
Income (loss) before
extraordinary items per
common share.............. -- -- -- -- $ (8.50) $ (18.62) $ (10.93) $ (25.95)
BALANCE SHEET DATA (END OF
PERIOD):
Total assets................ $3,907 $ 7,216 $ 8,489 -- $ 162,253 $184,619 $178,185 $367,732
Intangible assets -- net.... -- -- -- -- 82,499 76,895 79,800 160,953
Long-term debt, excluding
current maturities........ 146 181 294 -- 97,032(a) 67,323(a) 121,244(a) 185,088(a)
Senior Redeemable Preferred
Stock -- Series B......... -- -- -- -- -- -- -- 82,576
Redeemable Preferred
Stock..................... -- -- -- -- 10,365 11,698 11,357 12,783
Common stockholders'
equity(b)................. 2,973 4,278 5,390 -- 20,189 6,452 12,110 28,139
Deficiency of earnings to
combined fixed charges and
preferred dividends....... -- -- -- -- (6,209) (12,086) (6,899) (19,297)
OTHER DATA:
EBITDA(c)................... -- -- -- -- $ 5,576 $ 16,501 $ 13,576 $ 14,155
Depreciation and
amortization.............. -- -- -- -- 2,832 8,051 5,439 7,856
Capital expenditures........ -- -- -- -- 629 8,166 5,426 2,826
</TABLE>
- ---------------
(a) Excludes (i) outstanding indebtedness under the Old Credit Facility of
$57,000 at March 31, 1996 which is classified within current liabilities and
(ii) long-term minimum royalty obligations of $4,686 and $6,158 at March 31,
1996 and 1995, respectively, and $4,899 and $6,924 at December 31, 1996 and
1995, respectively.
(b) No cash dividends have been paid since April 15, 1994 (Inception).
(c) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA should not be considered as an alternative to net
income or cash flow and is not a measure of performance under generally
accepted accounting principles but provides additional information for
evaluating the Company.
25
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
derived from the historical financial statements of the Company, GAC and MEM and
the statement of direct revenues and direct expenses for the mass fragrances
business of P&G, in each case included elsewhere in this Prospectus, and have
been prepared by the application of pro forma adjustments giving effect to (i)
in the case of the unaudited condensed pro forma consolidated balance sheet
data, the Offering and the use of proceeds therefrom, including the Senior Notes
Offer and the repayment of all indebtedness under the Senior Secured Credit
Facility, in each case as if such transactions had occurred December 31, 1996,
and (ii) in the case of the unaudited pro forma consolidated statement of
operations data, the foregoing transactions, the Equity Financing and the
Acquisitions, as if such transactions had occurred at the beginning of the
periods presented. The Equity Financing and the Acquisitions have been reflected
in the Company's historical balance sheet information at December 31, 1996, as
these transactions were completed prior to that date. The adjustments are
described in the accompanying notes.
The unaudited pro forma consolidated financial data is presented for
informational purposes only and is not necessarily indicative of actual results
that would have been achieved had such transactions been consummated on the
dates or for the periods indicated and do not purport to indicate results of
operations as of any future date or for any future period. The unaudited pro
forma consolidated financial data should be read in conjunction with the
historical financial statements of the Company, GAC and MEM and the statement of
direct revenues and direct expenses for the mass fragrances business of P&G and
the related notes thereto and the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in each case
included elsewhere in this Prospectus.
26
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------
COMPANY GAC MEM P&G BRANDS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PRO FORMA(b)
MARCH 31, DECEMBER 31, DECEMBER 31, JUNE 30, -----------------------------
1996 1995(a) 1995(a) 1996(a) ADJUSTMENTS COMBINED
----------- ------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES............................. $ 131,286 $ 7,886 $44,825 $56,777 $ -- $240,774
COST OF GOODS SOLD.................... 51,169 4,538 25,618 22,787 (1,272)(c) 102,840
-------- ------ ------- ------- -------- --------
GROSS PROFIT.......................... 80,117 3,348 19,207 33,990 1,272 137,934
OPERATING EXPENSES:
Selling............................. 52,781 838 14,742 24,374 (906)(d) 91,829
General and administrative.......... 13,679 617 5,215 2,199 (448)(e) 21,262
Amortization of intangible and other
assets............................ 5,207 224 478 -- 3,649(f) 9,558
-------- ------ ------- ------- -------- --------
Total operating expenses.......... 71,667 1,679 20,435 26,573 2,295 122,649
-------- ------ ------- ------- -------- --------
OPERATING INCOME (LOSS)............... 8,450 1,669 (1,228) 7,417 (1,024) 15,284
INTEREST EXPENSE (INCOME):
Interest expense.................... 19,458 8 1,773 -- 5,240(g) 26,479
Interest and other income........... (255) -- (19) -- (909)(h) (1,183)
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES..... (10,753) 1,661 (2,982) 7,417 (5,355) (10,012)
INCOME TAX PROVISION.................. 1,304 609 -- -- 1,514(i) 3,427
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS............................... (12,057) 1,052 (2,982) 7,417 (6,868) (13,438)
PREFERRED STOCK DIVIDENDS............. 1,333 -- -- -- 18,169(j) 19,502
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
STOCKHOLDERS........................ $ (13,390) $ 1,052 $(2,982) $ 7,417 $(25,037) $(32,940)
======== ====== ======= ======= ======== ========
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE.............. $ (18.62) $ (40.02)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING... 719,138 823,056(k)
======== ========
OTHER DATA:
Deficiency of earnings to combined
fixed charges and preferred
dividends........................... $(29,513)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations Data.
27
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(a) GAC and MEM each had a fiscal year which ended on December 31 and P&G had a
fiscal year which ended on June 30.
(b) Does not reflect severance and stay bonus payments and payments in respect
of the ERISA withdrawal liability, all incurred in connection with the MEM
Acquisition, which expenses may be capitalized. See
"Business -- Employees."
(c) Reflects the Company's estimate of the following adjustments to cost of
goods sold relating to the MEM Acquisition, primarily resulting from the
consolidation of duplicative manufacturing facilities:
<TABLE>
<S> <C>
Identified U.S. personnel terminations......................................... $(1,363)
Identified Canadian personnel terminations..................................... (284)
Less: Corresponding incremental additions to personnel at the Company's
Mountaintop facility......................................................... 375
-------
Total................................................................ $(1,272)
=======
</TABLE>
(d) Reflects the Company's estimate of the following adjustments to selling
expenses relating to the MEM Acquisition, primarily resulting from the
consolidation of duplicative sales forces:
<TABLE>
<S> <C>
Identified U.S. personnel terminations......................................... $(1,362)
Identified Canadian personnel terminations..................................... --
Less: Corresponding incremental additions to personnel at the Company's Dana
subsidiary................................................................... 456
-------
Total................................................................ $ (906)
=======
</TABLE>
(e) Reflects the Company's estimate of the following adjustments to general and
administrative expenses relating to the MEM Acquisition, primarily
resulting from the consolidation of duplicative corporate staffs:
<TABLE>
<S> <C>
Identified U.S. personnel terminations......................................... $(948)
Identified Canadian personnel terminations..................................... (133)
Less: Corresponding incremental additions to personnel at the Company's
Mountaintop facility...................................................... 633
------
Total................................................................ $(448)
======
</TABLE>
(f) Reflects the following adjustments to amortization of intangible and other
assets(1):
<TABLE>
<S> <C>
Amortization of excess of assets acquired over liabilities assumed -- GAC....... $ 845
Amortization of excess of assets acquired over liabilities assumed -- MEM....... 1,293
Amortization of excess of assets acquired over liabilities assumed -- P&G
Brands........................................................................ 2,213
Elimination of historical amortization -- GAC................................... (224)
Elimination of historical amortization -- MEM................................... (478)
------
Total................................................................. $3,649
======
</TABLE>
- ---------------
(1) The preliminary estimates of excess of assets acquired over liabilities
assumed include the Company's initial estimates of certain assumed
liabilities at the date of the Acquisitions. While the Company has yet
to complete the final allocation of the excess cost over net assets
acquired to the specific assets acquired, based on its preliminary
estimate, the Company believes that the excess will be allocated
principally to trademarks and goodwill, which will be amortized over an
average of 20 years.
28
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS DATA -- (CONTINUED)
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(g) Reflects the following adjustments to interest expense:
<TABLE>
<S> <C>
Elimination of historical interest expense -- GAC............................... $ (8)
Elimination of historical interest expense -- MEM............................... (1,773)
Elimination of historical interest expense -- Old Credit Facility............... (5,948)
Elimination of historical interest expense -- Old Senior Notes.................. (8,943)
Elimination of amortization of deferred financing costs -- Old Credit
Facility...................................................................... (1,157)
Elimination of amortization of deferred financing costs -- Old Senior Notes..... (1,106)
Elimination of accretion of interest expense -- Old Senior Notes................ (158)
Interest expense -- Notes(1).................................................... 23,500
Amortization of deferred financing costs -- Notes............................... 833
------
Total................................................................. $5,240
======
---------------
(1) Reflects the interest rate of 11.75% on the Notes.
</TABLE>
(h) Reflects interest income on the Escrow Account of $909.
(i) Reflects an adjustment to income taxes for a full year as if the
Acquisitions each had occurred on April 1, 1995.
(j) Reflects dividends on the Series B Preferred Stock as if such shares had
been issued on April 1, 1995. The Company is obligated to exchange shares
of its Senior Redeemable Preferred Stock, Series C ("Series C Preferred
Stock"), for all outstanding shares of its Series B Preferred Stock. The
dividends on the Series C Preferred Stock will be the same as the dividends
on the Series B Preferred Stock.
(k) Includes 103,918 shares issued to purchasers in connection with the Equity
Financing, as if such shares were issued on April 1, 1995.
29
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------
COMPANY GAC MEM P&G BRANDS
NINE MONTHS PERIOD FROM PERIOD FROM PERIOD FROM
ENDED APRIL 1, 1996 TO APRIL 1, 1996 JANUARY 1, 1996 PRO FORMA(a)
DECEMBER 31, AUGUST 20, TO DECEMBER 4, TO SEPTEMBER 30, -----------------------
1996 1996 1996 1996 ADJUSTMENTS COMBINED
------------ ---------------- -------------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES..................... $124,590 $8,633 $ 32,559 $ 29,993 $ -- $195,775
COST OF GOODS SOLD............ 48,082 3,057 21,928 11,292 (954)(b) 83,405
-------- ------ ------- ------- -------- --------
GROSS PROFIT.................. 76,508 5,576 10,631 18,701 954 112,370
OPERATING EXPENSES:
Selling..................... 48,341 1,692 10,068 11,540 (680)(c) 70,961
General and
administrative............ 16,727 1,306 3,467 1,512 (336)(d) 22,676
Amortization of intangible
and other assets.......... 5,141 87 305 -- 2,300(e) 7,833
-------- ------ ------- ------- -------- --------
Total operating
expenses................ 70,209 3,085 13,840 13,052 1,284 101,470
-------- ------ ------- ------- -------- --------
OPERATING INCOME (LOSS)....... 6,299 2,491 (3,209) 5,649 (330) 10,900
INTEREST EXPENSE (INCOME):
Interest expense............ 17,206 46 1,217 -- 2,305(f) 20,774
Interest and other income... (1,448) (7) (58) -- (765)(g) (2,278)
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES....................... (9,459) 2,452 (4,368) 5,649 (1,870) (7,596)
INCOME TAX PROVISION.......... 569 836 -- -- 961(h) 2,366
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY
ITEMS....................... (10,028) 1,616 (4,368) 5,649 (2,831) (9,962)
PREFERRED STOCK DIVIDENDS..... 9,838 -- -- -- 6,089(i) 15,927
-------- ------ ------- ------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
APPLICABLE TO COMMON
STOCKHOLDERS................ (19,866) $1,616 $ (4,368) $ 5,649 $(8,920) $(25,889)
======== ====== ======= ======= ======== ========
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS PER
COMMON SHARE................ (25.95) $(31.38)
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING................. 765,569 825,086 (j)
======== ========
OTHER DATA:
Deficiency of earnings to
combined fixed charges and
preferred dividends......... $(23,523)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations Data.
30
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) Does not reflect severance and stay bonus payments and payments with
respect to the ERISA withdrawal liability, all incurred in connection with
the MEM Acquisition, which expenses may be capitalized. See
"Business -- Employees."
(b) Reflects the Company's estimate of the following adjustments to cost of
goods sold relating to the MEM Acquisition, primarily resulting from the
consolidation of duplicative manufacturing facilities:
<TABLE>
<S> <C>
Identified U.S. personnel terminations........................................ $(1,022)
Identified Canadian personnel terminations.................................... (213)
Less: Corresponding incremental additions to personnel at the Company's
Mountaintop facility.......................................................... 281
-------
Total............................................................... $ (954)
=======
</TABLE>
(c) Reflects the Company's estimate of the following adjustments to selling
expenses relating to the MEM Acquisition, primarily resulting from the
consolidation of duplicative sales forces:
<TABLE>
<S> <C>
Identified U.S. personnel terminations........................................ $(1,022)
Identified Canadian personnel terminations.................................... --
Less: Corresponding incremental additions to personnel at the Company's Dana
subsidiary.................................................................... 342
-------
Total............................................................... $ (680)
=======
</TABLE>
(d) Reflects the Company's estimate of the following adjustments to general and
administrative expenses relating to the MEM Acquisition, primarily
resulting from the consolidation of duplicative corporate staffs:
<TABLE>
<S> <C>
Identified U.S. personnel terminations.......................................... $(711)
Identified Canadian personnel terminations...................................... (100)
Less: Corresponding incremental additions to personnel at the Company's
Mountaintop facility............................................................ 475
------
-
Total................................................................. $(336)
=======
</TABLE>
(e) Reflects the following adjustments to amortization of intangible and other
assets(1):
<TABLE>
<S> <C>
Amortization of excess of assets acquired over liabilities assumed -- GAC...... $ 634
Amortization of excess of assets acquired over liabilities assumed -- MEM...... 970
Amortization of excess of assets acquired over liabilities assumed -- P&G
Brands......................................................................... 1,660
Elimination of historical amortization -- GAC.................................. (87)
Elimination of historical amortization -- MEM.................................. (305)
Less: amortization relating to the Acquisitions included in the Company
historical column.............................................................. (572)
-----
Total................................................................ $2,300
=====
</TABLE>
- ---------------
(1) The preliminary estimates of excess of assets acquired over liabilities
assumed include the Company's initial estimates of certain assumed
liabilities at the date of the Acquisitions. While the Company has yet
to complete the final allocation of the excess cost over net assets
acquired to the specific assets acquired, based on its preliminary
estimate, the Company believes that the excess will be allocated
principally to trademarks and goodwill, which will be amortized over an
average of 20 years.
31
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS DATA -- (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(f) Reflects the following adjustments to interest expense:
<TABLE>
<S> <C>
Elimination of historical interest expense -- GAC............................... $ (46)
Elimination of historical interest expense -- MEM............................... (1,217)
Elimination of historical interest expense -- Old Credit Facility............... (4,912)
Elimination of historical interest expense -- Old Senior Notes.................. (6,706)
Elimination of historical interest expense -- Senior Secured Credit Facility.... (1,090)
Elimination of amortization of deferred financing costs -- Old Credit
Facility...................................................................... (1,089)
Elimination of historical accretion of debt discount -- Old Senior Notes........ (136)
Elimination of amortization of deferred financing costs -- Old Senior Notes..... (1,455)
Elimination of amortization of deferred financing costs -- Senior Secured Credit
Facility...................................................................... (335)
Interest expense -- Notes....................................................... 17,625
Amortization of deferred financing costs -- Notes............................... 1,666
-------
Total................................................................. $ 2,305
=======
</TABLE>
(g) Reflects interest income on the Escrow Account of $765.
(h) Reflects an adjustment to income taxes for the nine month period as if the
Acquisitions each had occurred on April 1, 1996.
(i) Reflects dividends on the Series B Preferred Stock as if such shares had
been issued on April 1, 1996. The Company is obligated to exchange shares
of its Series C Preferred Stock for all outstanding shares of its Series B
Preferred Stock. The dividends on the Series C Preferred Stock will be the
same as the dividends on the Series B Preferred Stock.
(j) Includes 103,918 shares issued to purchasers in connection with the Equity
Financing, as if such shares were issued on April 1, 1996.
32
<PAGE> 35
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER
31,
1996 ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C> <C>
Total Current Assets................................. $ 157,207 $ (5,996) (a) $ 151,211(b)
Total Long-Term Assets............................... 210,525 (1,582) (c) 208,943
-------- -------- --------
Total Assets............................... $ 367,732 $ (7,578) $ 360,154
======== ======== ========
Current Liabilities.................................. $ 54,247 $ (4,442) (d) $ 49,805
Long-Term Liabilities................................ 189,987 18,741 (e) 208,728
Preferred Stock...................................... 95,359 -- 95,359
Common Stockholders' Equity.......................... 28,139 (21,877) (f) 6,362
-------- -------- --------
Total Liabilities and Stockholders'
Equity................................... $ 367,732 $ (7,578) $ 360,154
======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Pro Forma Balance
Sheet Data.
33
<PAGE> 36
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
BALANCE SHEET DATA
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) Reflects the following adjustments to cash and cash equivalents:
<TABLE>
<S> <C>
Gross proceeds from the Notes................................................ $ 200,000
Repayment of the Senior Secured Credit Facility, including accrued interest
thereon.................................................................... (118,590)
Repayment of the Old Senior Notes, including accrued interest thereon(1)..... (79,077)
Deferred financing costs -- Notes............................................ (8,329)
---------
Total.............................................................. $ (5,996)
=========
</TABLE>
--------------------
(1) Actual accrued interest paid at closing was $4,270.
(b) Includes $17,500 of cash set aside in the Escrow Account.
(c) Reflects the following adjustments to deferred financing costs:
<TABLE>
<S> <C>
Deferred financing costs -- Notes............................................ $ 8,329
Write-off of deferred financing costs -- Old Senior Notes.................... (6,033)
Write-off of deferred financing costs -- Senior Secured Credit Facility...... (3,878)
---------
Total.............................................................. $ (1,582)
=========
</TABLE>
(d) Reflects the elimination of accrued interest on the Old Senior Notes and the
Senior Secured Credit Facility. See note (a)(1) above.
(e) Reflects the following adjustments to long-term debt:
<TABLE>
<S> <C>
Gross proceeds from the Notes................................................ $ 200,000
Repayment of the Senior Secured Credit Facility.............................. (117,500)
Repayment of the Old Senior Notes(1)......................................... (63,759)
---------
Total.............................................................. $ 18,741
=========
</TABLE>
--------------------
(1) Reflects carrying value of Old Senior Notes at December 31, 1996.
(f) Reflects the following adjustments to retained earnings (deficit):
<TABLE>
<S> <C>
Write-off of deferred financing costs -- Old Senior Notes.................... $ (6,033)
Write-off of deferred financing costs -- Senior Secured Credit Facility...... (3,878)
Write-off additional accretion of interest -- Old Senior Notes............... (1,241)
Premium paid to redeem Old Senior Notes...................................... (10,725)
---------
Total.............................................................. $ (21,877)
=========
</TABLE>
34
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus.
This discussion and analysis relates to the consolidated results of
operations of the Company, which includes the Company's major operating
divisions (the "Fragrance division," the "Cosmetics division" and the
"International division," which includes both fragrance and cosmetics sales),
resulting from the following acquisitions that have been consummated by the
Company from the date of such acquisitions.
1. The Houbigant acquisition in July and August 1994, the Cosmar
acquisition in August 1994, the Dana acquisition in December 1994, the ACB
acquisition in December 1994 and Great American Cosmetics, Inc. acquisition
in August 1996;
2. The MEM Acquisition in December 1996 (see "--Liquidity and Capital
Resources"), the domestic operations of which are being integrated into
Dana; and
3. The P&G Acquisition in December 1996 (see "--Liquidity and Capital
Resources"), the domestic operations of which are being integrated into
Dana.
OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales were as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
DIVISION NET SALES % OF TOTAL NET SALES % OF TOTAL
------------------------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Fragrance..................... $ 55,624 44.6% $ 50,582 53.6%
Cosmetics..................... 37,597 30.2 28,512 30.2
International................. 31,369 25.2 15,245 16.2
------- ------ ------- ------
Total.................... $124,590 100.0% $ 94,339 100.0%
======= ====== ======= ======
</TABLE>
Total sales increased 32.1% or $30,251,000 from $94,339,000 to
$124,590,000. Fragrance sales increased 10.0% from $50,582,000 to $55,624,000.
This increase was due principally to increased orders for promotional items and
Christmas items, sales of Navigator from Canoe and DREAMS BY TABU, which were
launched subsequent to December 1995 and sales of MEM and P&G Brand products,
after the completion of the Acquisitions. Cosmetics sales increased by 31.9%
from $28,512,000 to $37,597,000. Contributing to this increase were current year
sales of UltraGel and Nail Fetish,which were launched subsequent to December
1995, and the impact of Nat Robbins' sales since the date of the GAC Acquisition
in August 1996. International sales increased $16,124,000 attributable
principally to the Company's Canadian operations and to Dana Brazil (which was
acquired by the Company in December 1995).
Gross Profit. The Company's gross profit was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
DIVISION GROSS PROFIT % OF NET SALES GROSS PROFIT % OF NET SALES
-------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Fragrance....................... $ 36,682 65.9% $ 32,263 63.8%
Cosmetics....................... 21,892 58.2 17,865 62.7
International................... 17,834 57.2 8,159 53.5
------- ------ ------- ---- --
Total...................... $ 76,508 61.4% $ 58,287 61.8%
======= ====== ======= ======
</TABLE>
Fragrance gross profit margin improved to 65.9% from 63.8%. This increase
was due principally to changes in product mix, and an increase in sales.
35
<PAGE> 38
Cosmetics gross profit margin decreased to 58.2% from 62.7%, resulting
principally from the introduction into the product mix of Nat Robbins products
which have lower gross margins and an increase in lower-margin promotional sales
on the Company's base products.
International gross profit margin increased to 57.2% from 53.5% principally
because of higher sales in Brazil (which was acquired in December 1995) and in
Canada, which increased the proportion of direct international sales (versus
exports) to total international sales.
Selling Expenses. The Company's selling expenses in the first nine months
of Fiscal 1996 and Fiscal 1995 were $48,341,000 (38.8% of Net Sales) and
$33,388,000 (35.4% of Net Sales), respectively. The increase in selling expenses
as a percentage of sales was principally attributable to increased advertising
(media, artwork and production costs for a new expanded advertising campaign)
and increased promotional spending relative to the sales increase, both of which
continued the Company's strategy of reinvigorating existing brand equities.
General and Administrative Expenses. The Company's general and
administrative expenses in the first nine months of Fiscal 1996 and Fiscal 1995
were $16,727,000 (13.4% of Net Sales) and $13,198,000 (14.0% of Net Sales),
respectively. The increase in general and administrative expenses was
attributable in part to the addition of key personnel at both the Company's
corporate and operating levels in order to operate a larger organization. The
decrease in general and administrative costs as a percentage of sales, reflects
the effort by management to control overhead costs.
Amortization of Intangible and Other Assets. Amortization of intangible
and other assets during the first nine months of Fiscal 1996 was $5,141,000
(4.1% of Net Sales) compared to $3,564,000 (3.8% of Net Sales) during the first
nine months of Fiscal 1995. This increase reflects the amortization of
intangible assets relating to the GAC Acquisition, the MEM Acquisition, and the
P&G Acquisition (beginning from the date of such Acquisitions), and an increase
in amortization of minimum royalty agreements as such minimum payments increase
in later years.
Operating Income. Operating income was $6,299,000 (5.1% of Net Sales) for
the first nine months of Fiscal 1996 and $8,137,000 (8.6% of Net Sales) for the
first nine months of Fiscal 1995. The decrease in operating income for the first
nine months of Fiscal 1996 compared to the first nine months of Fiscal 1995 was
attributable to the increase in selling, general and administrative expenses and
an increase in non-cash amortization and depreciation expenses for Fiscal 1996
as compared to Fiscal 1995. Management believes that an additional measurement,
earnings before interest, income taxes, depreciation and amortization
("EBITDA"), is useful and meaningful to an understanding of the operating
performance of the Company. However, EBITDA should not be considered as an
alternative either to net income (loss) as an indicator of the Company's
operating performance or to cash flow as a measurement of liquidity. The
computation of EBITDA is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating Income........................................ $ 6,299 $ 8,137
Plus: Amortization...................................... 5,141 3,564
Plus: Depreciation...................................... 2,715 1,875
------- -------
EBITDA.................................................. $14,155 $13,576
======= =======
EBITDA as a % of Net Sales.............................. 11.4% 14.4%
</TABLE>
36
<PAGE> 39
Interest Expense. The Company's total interest expense was $17,206,000 for
the first nine months of Fiscal 1996 and $14,241,000 for the first nine months
of Fiscal 1995, while cash interest for the periods was $13,185,000 and
$11,391,000, respectively. Interest expense consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH INTEREST PAID OR ACCRUED:
Interest on Old Senior Notes.......................... $ 6,706 $ 6,708
Interest on Seller Notes (payable in 2002)............ 337 311
Interest on Old Credit Facility....................... 4,912 4,242
Interest on Senior Secured Credit Facility............ 1,090 --
Other Interest........................................ 140 130
------- -------
Total Cash Interest Expense................. $13,185 $11,391
------- -------
NON-CASH INTEREST EXPENSE:
Accretion of Existing Senior Notes and Seller Notes... $ 265 $ 211
Amortization of Deferred Financing Costs.............. 2,918 1,874
Accretion of Interest on Obligations for Minimum
Royalty Payments.................................... 838 765
------- -------
Total Non-Cash Interest Expense............. 4,021 2,850
------- -------
Total Interest Expense...................... $17,206 $14,241
======= =======
</TABLE>
Income Tax Expense. Income tax expense was $569,000 for the first nine
months of Fiscal 1996 and $973,000 for the first nine months of Fiscal 1995. The
effective tax rates differ from the United States federal income tax rate of 35%
due to the effects of filing separate income tax returns in certain state and
foreign jurisdictions and limitations on utilization of federal income tax
benefits.
OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1996 ("FISCAL 1995") AS COMPARED
TO THE PERIOD FROM APRIL 15, 1994 (INCEPTION) THROUGH MARCH 31, 1995 ("FISCAL
1994")
Net Sales. The Company's net sales were as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
------------------------------- -------------------------------
DIVISION NET SALES % OF TOTAL NET SALES % OF TOTAL
------------------------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Fragrance..................... $ 63,865 48.6% $ 31,931 55.3%
Cosmetics..................... 44,511 33.9 19,514 33.8
International................. 22,910 17.5 6,269 10.9
-------- ----- ------- -----
$131,286 100.0% $ 57,714 100.0%
======== ===== ======= =====
</TABLE>
Total sales increased by $73,572,000 (or 127.5%) to $131,286,000.
Approximately $32,700,000 of this increase was attributable to internal growth
through the implementation of focused sales and marketing programs. The
remaining increase is a result of including a full year of operations in Fiscal
1995 compared to a partial year of operations for the prior fiscal year.
Gross Profit. The Company's gross profit was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
------------------------------- -------------------------------
DIVISION GROSS PROFIT % OF NET SALES GROSS PROFIT % OF NET SALES
------------------------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Fragrance..................... $ 39,338 61.6% $ 18,681 58.5%
Cosmetics..................... 28,501 64.0 10,998 56.4
International................. 12,278 53.6 3,482 55.5
------- ---- ------- ----
$ 80,117 61.0% $ 33,161 57.5%
======= ==== ======= ====
</TABLE>
37
<PAGE> 40
The gross profit margin improvements in the Fragrance division and
Cosmetics division were the result of the consolidation of manufacturing
operations in the Company's Mountaintop facility at the Fragrance division and
the introduction of new, higher-margin products such as PRO(10) Nail Lacquer,
along with cost containment efforts in the Cosmetics division. The gross profit
margin decrease in the International division was attributable to an increase in
export sales and sales of fragrance products that typically carry a lower gross
margin than direct international sales and sales of cosmetics products,
respectively, resulting in a lower total International division gross profit
margin.
Selling Expense. The Company's selling expenses for Fiscal 1995 and Fiscal
1994 were $52,781,000 (40.2% of Net Sales) and $18,246,000 (31.6% of Net Sales),
respectively. The increase in selling expenses as a percentage of sales was
principally attributable to increased advertising and promotional spending
relating to the Company's strategy of reinvigorating existing brand equities and
introducing complementary new products.
General and Administrative Expenses. The Company's general and
administrative expenses for Fiscal 1995 and Fiscal 1994 were $13,679,000 (10.4%
of Net Sales) and $10,127,000 (17.5% of Net Sales), respectively. The decline in
general and administrative expenses as a percentage of sales was attributable to
what management believes is a high fixed component for such expenses and
management's ability to control the increase in such expenses as sales
increased.
Amortization of Intangible and Other Assets. Amortization of intangible
and other assets for Fiscal 1995 and Fiscal 1994 was $5,207,000 (4.0% of Net
Sales) and $2,044,000 (3.5% of Net Sales), respectively. The increased
amortization in Fiscal 1995 includes a full year of amortization resulting from
acquisitions, Fiscal 1994 includes goodwill amortization only as of the
effective date of the respective acquisitions. In addition, Fiscal 1995 includes
a full year of amortization of the minimum royalty obligation.
Operating Income. Operating Income for Fiscal 1995 and Fiscal 1994 was
$8,450,000 (6.4% of Net Sales) and $2,744,000 (4.8% of Net Sales), respectively.
Management believes that, as an additional measurement, EBITDA is useful and
meaningful to an understanding of the operating performance of the Company.
However, EBITDA should not be considered as an alternative either to net income
(loss) as an indicator of the Company's operating performance or to cash flow as
a measurement of liquidity. The computation of EBITDA is set forth below
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
----------- -----------
<S> <C> <C>
Operating Income........................................ $ 8,450 $ 2,744
Plus: Amortization...................................... 5,207 2,044
Plus: Depreciation...................................... 2,844 788
------- ------
EBITDA.................................................. $16,501 $ 5,576
======= ======
EBITDA as a % of Net Sales.............................. 12.6% 9.7%
</TABLE>
38
<PAGE> 41
Interest Expense. The Company's total interest expense for Fiscal 1995 and
Fiscal 1994 was $19,458,000 and $8,694,000, respectively, while cash interest
for the periods was $15,524,000 and $6,834,000, respectively. Interest expense
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
----------- -----------
<S> <C> <C>
CASH INTEREST PAID OR ACCRUED:
Interest on Existing Senior Notes....................... $ 8,943 $ 5,577
Interest on Seller Notes (payable in 2002).............. 420 247
Interest on Old Credit Facility......................... 5,948 971
Other Interest.......................................... 213 39
----------- -----------
Total Cash Interest Expense................. $15,524 $ 6,834
----------- -----------
NON-CASH INTEREST EXPENSE:
Accretion of Existing Senior Notes and Seller Notes..... $ 290 $ 154
Amortization of Deferred Financing Costs................ 2,623 993
Accretion of Interest on Obligations for Minimum Royalty
Payment............................................... 1,021 713
----------- -----------
Total Non-Cash Interest Expense............. 3,934 1,860
----------- -----------
Total Interest Expense...................... $19,458 $ 8,694
======== ========
</TABLE>
Income Tax Expense (Benefit). Income tax expense (benefit) for Fiscal 1995
and Fiscal 1994 was $1,304,000 and ($35,000), respectively. The effective tax
rates differ from the United States federal income tax rate of 34% due to state
and foreign income taxes and limitations on utilization of federal income tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used in/Provided by Operating, Investing and Financing Activities.
Net cash used by the Company in operating activities for the nine months
ended December 31, 1996 was $22,607,000, consisting primarily of a net loss of
$10,028,000, less the impact of non-cash items impacting the net loss of
$11,877,000, increases in accounts receivable, inventories and prepaid expenses
of $921,000, $6,986,000, and $9,357,000, respectively, and decreases in accounts
payable, other current liabilities and other of $11,135,000, $2,700,000 and
$1,098,000, respectively, offset by an increase in accrued expenses of
$7,741,000.
Net cash used in investing activities was $97,346,000, consisting primarily
of the cash paid for the Acquisitions of $94,109,000, net of cash acquired.
Net cash provided by financing activities was $170,034,000, consisting
primarily of the proceeds from the Equity Financing, consisting of $119.1
million, net of issuance costs, and the proceeds from the issuance of the Senior
Secured Credit Facility of $113.2, net of issuance costs offset by the repayment
of the Old Credit Facility. The net increase in cash and cash equivalents was
$50,081,000.
Recent Acquisitions.
On December 4, 1996, the Company acquired all of the issued and outstanding
stock of MEM for $19.8 million. In addition, in connection with the MEM
Acquisition, the Company repaid all of MEM's outstanding indebtedness in the
amount of $18.1 million and incurred fees and expenses of approximately
$800,000. See "Recent Developments -- Acquisition of MEM Company, Inc."
On February 7, 1997, the Company closed MEM's facilities in Northvale, New
Jersey, and Boucherville, Quebec. The Company expects to incur costs in
connection with the closings and the consolidation of MEM's operations in an
amount of approximately $5.0 million, including severance payments, ERISA
withdrawal liability and stay bonuses for selected employees of MEM. As of March
31, 1997, approximately $154,000 has
39
<PAGE> 42
been paid and an additional $47,000 is expected to be paid as stay bonuses for
selected employees of MEM. The Company's estimate of its ERISA withdrawal
liability costs is an estimate based upon a 1996 withdrawal, and the Company has
been advised that its liability for a 1997 withdrawal would be higher. The ERISA
withdrawal liability will be paid (with interest) in equal quarterly
installments over a period of years in an amount per installment to be
determined under a statutory formula and based in part on the employer's
contribution rate to the plan and highest employee head count over the last
decade. The MEM and Tom Fields combined contributions were approximately
$390,000 in 1995 and are expected to be approximately $250,000 in 1996, although
the number of MEM and Tom Fields employees has declined by approximately
one-half from its highest levels over the last decade. Accordingly, the annual
total of the quarterly payment amounts may be significantly higher than the
contributions to the union plan in recent years. See "Business -- Employees."
On December 6, 1996, the Company acquired from P&G the worldwide rights to
manufacture and market the P&G Brands. The cash portion of the purchase price
was $43.0 million, of which $9.9 million related to inventory (net of a
receivable of approximately $283,000 for inventory not purchased) and $33.1
million related to the licenses and rights to market such fragrances. In
addition, the Company assumed certain specified trade-related obligations of
P&G, including the liability for returns of products under the P&G Brands sold
prior to the closing and liabilities under certain advertising and business
development commitments. See "Recent Developments -- Acquisition of the P&G
Brands."
Concurrent with the P&G Acquisition, the Company entered into transition
services agreements, under which P&G will continue the foreign marketing of the
P&G Brands through June 30, 1997. P&G will remit to the Company, within 45 days
of the midpoint of a calendar month, the net amount of revenues earned from
product sales, less allowances for sales returns, discounts, bad debts, any
applicable sales and marketing costs and less any costs of goods in excess of
inventories already purchased by the Company.
Equity and Debt Financing Transactions.
On December 4, 1996, Cosmar entered into a Senior Secured Credit Facility
pursuant to which Cosmar borrowed $117.5 million and received net proceeds of
$113.2 million. Such net proceeds were used: (i) to finance the MEM Acquisition
(after the application of a $33.8 million certificate of deposit, plus
approximately $537,000 of interest thereon); (ii) to finance the P&G
Acquisition; (iii) to repay all outstanding indebtedness under the Old Credit
Facility (which was terminated on such date); and (iv) the remainder was used
for general corporate purposes. The indebtedness under the Senior Secured Credit
Facility was repaid in full on February 7, 1997 and all liens thereunder were
released at such time.
On February 7, 1997, the Company completed the Old Senior Notes Offer and
purchased all of the outstanding $65.0 million aggregate principal amount of the
Old Senior Notes at a price of $1,165 for each $1,000 principal amount, plus
accrued and unpaid interest thereon.
On February 7, 1997, the Company completed the sale of $200.0 million
aggregate principal amount of the Existing Notes. The net proceeds from the sale
of the Existing Notes, together with approximately $23.7 million of the
Company's available cash, were used (i) to finance the Old Senior Notes Offer,
(ii) to repay all outstanding indebtedness under the Senior Secured Credit
Facility (discussed above) and (iii) to fund an escrow account which will be
used to pay a portion of the interest expense on the Notes for two years.
Interest on the Notes is payable at the rate of 11 3/4% per year in cash.
The Notes mature on February 15, 2004. In connection with the sale of the
Existing Notes, the Company transferred $17.5 million to an escrow account
maintained by the Guarantor, a newly-formed single-purpose subsidiary, in
exchange for a limited guarantee by the Guarantor of the Company's obligations
under the Notes. The Notes are general unsecured obligations of the Company
except to the extent that they are collateralized by a first priority security
interest in the escrow account.
40
<PAGE> 43
Liquidity Requirements.
Because of the nature of the fragrance/cosmetics industry, both the
Company's need for working capital and its income streams are seasonal. The most
significant liquidity requirements occur in connection with the production of
inventory prior to the sales surge and related shipments to customers in advance
of the calendar year-end holiday sales season and other events such as new
product launches.
As a result of the repayment of all outstanding indebtedness under, and the
termination of, the Old Credit Facility on December 4, 1996, at December 31,
1996 the Company no longer had a revolving credit facility to fund working
capital needs. The completion of the GAC Acquisition, the MEM Acquisition and
the P&G Acquisition has resulted in a significant increase in the Company's
working capital needs.
In order to address its working capital needs, on March 12, 1997 the
Company entered into the New Revolving Credit Facility.
Amounts borrowed under the New Revolving Credit Facility bear interest, at
the option of Dana, at either (i) the Index Rate (i.e., the higher of the prime
rate or the overnight Federal funds rate plus 0.50%) plus 1.00% or (ii) absent a
default, the LIBOR rate plus 2.25%. The interest rate will be subject to
adjustment, on a quarterly basis, based on the Company's interest coverage ratio
during each fiscal quarter.
The New Revolving Credit Facility contains a number of covenants that
restrict the operation of the Company, including restrictions on, among other
things: (i) certain mergers, acquisitions or sales of the Company's assets or
stock (other than the stock of the Company); (ii) cash dividends and other
distributions to equity holders and to the Company; (iii) payments in respect of
subordinated debt; (iv) transactions with affiliates; and (v) indebtedness and
liens. The New Revolving Credit Facility prohibits the Company from making any
acquisitions without the consent of 66 2/3% of the Lenders. In addition, the New
Revolving Credit Facility limits the amount of dividends and similar payments
that Dana and other subsidiary guarantors can make to the Company to the amount
required to pay interest on the Notes (after application of amounts held in the
Escrow Account), taxes, holding company operating expense and certain other
matters specified in the New Revolving Credit Facility. The New Revolving Credit
Facility contains a provision which permits the Lenders thereunder to block
payments to the Company following a payment default, or for a period of 179 days
following a non-payment default, under the New Revolving Credit Facility.
The Company's ability to borrow under the New Revolving Credit Facility is
subject to, among other conditions, the satisfaction of certain financial
conditions.
41
<PAGE> 44
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $200.0 million
aggregate principal amount of New Notes for a like aggregate principal amount of
Existing Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Existing Notes: the total
aggregate principal amount of Existing Notes and New Notes will in no event
exceed $200.0 million.
The Existing Notes were issued in the Offering on February 7, 1997. As of
the date of this Prospectus, $200.0 million aggregate principal amount of the
Existing Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about May 9, 1997 to all holders of
Existing Notes known to the Company. The Company's obligation to accept Existing
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "-- Conditions to the Exchange Offer" below.
PURPOSE OF THE EXCHANGE OFFER
The Existing Notes were issued by the Company on February 7, 1997 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Existing Notes may not be reoffered, resold, or otherwise
transferred in the United States unless so registered or unless an applicable
exemption from the registration and prospectus delivery requirements of the
Securities Act is available.
In connection with the issuance and sale of the Existing Notes, the Company
entered into a Note Registration Rights Agreement, dated as of February 7, 1997
(the "Registration Rights Agreement"), which requires the Company to (x) file on
or before March 24, 1997 (45 days after the date of issuance of the Existing
Notes) a registration statement relating to the Exchange Offer (the "Exchange
Offer Registration Statement") and (y) use its best efforts to (i) cause the
Exchange Offer Registration Statement to become effective on or before June 22,
1997 (135 days after the date of issuance of the Existing Notes); (ii) keep the
Exchange Offer open for at least 30 days (or longer if required by applicable
law) after the date notice of the Exchange Offer is mailed to the holders of the
Existing Notes and (iii) consummate the Exchange Offer on or prior to the 60th
day following the date the Exchange Offer Registration Statement is declared
effective (or if such day is not a business day on the next succeeding business
day). In the event that (i) the Exchange Offer Registration Statement or a shelf
registration statement relating to resales of the Existing Notes (the "Shelf
Registration Statement") is not filed by March 24, 1997, (ii) the Exchange Offer
Registration Statement or Shelf Registration Statement is not declared effective
by June 22, 1997, or (iii) the Exchange Offer Registration Statement ceases to
be effective prior to the time the Exchange Offer is consummated, or the Company
has not exchanged the New Notes for the Existing Notes validly tendered under
the Exchange Offer by the 60th day after the Exchange Offer Registration
Statement has been declared effective, or a Shelf Registration Statement which
has been declared effective ceases to be effective during the effectiveness
period (each, a "Registration Default"), the annual interest rate on the Notes
will immediately increase by 0.5% per annum and the interest rate will increase
by an additional 0.25% for each subsequent 90-day period during which the
Registration Default remains uncured up to a maximum additional interest rate of
2.0% per annum. Upon the Registration Default being cured the interest rate
borne by the Notes will be reduced to the original interest rate. The Exchange
Offer is being made by the Company to satisfy its obligations with respect to
the Registration Rights Agreement.
Based on no-action letters issued by the staff of the Commission to third
parties in unrelated transactions, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Notes and are not
participating in, and do not intend to participate in, the distribution of such
New Notes. Any holder of Existing Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes
42
<PAGE> 45
may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. Thus, any
New Notes acquired by such holders will not be freely transferable except in
compliance with the Securities Act. See "-- Consequences of Failure to Exchange;
Resale of New Notes."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 P.M., New York City time, on June
10, 1997 unless the Company, in its sole discretion, has extended the period of
time for which the Exchange Offer is open (such date, as it may be extended, is
referred to herein as the "Expiration Date"). The Expiration Date will be at
least 20 business days after the commencement of the Exchange Offer in
accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open and thereby delay acceptance for
exchange of any Existing Notes, by giving oral notice (promptly confirmed in
writing) or written notice to United States Trust Company of New York (the
"Exchange Agent") and by giving written notice of such extension to the holders
thereof no later than 9:00 A.M. New York City time, on the next business day
after the previously scheduled Expiration Date. During any such extension, all
Existing Notes previously tendered will remain subject to the Exchange Offer
unless properly withdrawn.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any Existing Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "-- Conditions to the Exchange Offer." If any such
termination or amendment occurs, the Company will notify the Exchange Agent and
will either issue a press release or give oral or written notice to the holders
of the Existing Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 A.M. through 12:00 midnight, New York City time.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Existing Notes may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Existing Notes being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth below on or
prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF EXISTING NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO INSURE TIMELY DELIVERY. NO EXISTING NOTES OR LETTERS OF TRANSMITTAL
SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Existing Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the
Existing Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined below). In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantees must be by a firm
which is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. or by a clearing agency, an
insured credit union, a savings association or a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Existing Notes are registered in the name of a
person other than a signer of the Letter of Transmittal, the Existing Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of
43
<PAGE> 46
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the
Existing Notes at the book-entry transfer facility. The Depository Trust
Company, for the purpose of facilitating the Exchange Offer, and subject to the
establishment thereof, any financial institution that is a participant in the
book-entry transfer facility's system may make book-entry delivery of Existing
Notes by causing such book-entry transfer facility to transfer such Existing
Notes into the Exchange Agent's account with respect to the Existing Notes in
accordance with the book-entry transfer facility's procedures for such transfer.
Although delivery of Existing Notes may be effected through book-entry transfer
into the Exchange Agent's account at the book-entry transfer facility, an
appropriate Letter of Transmittal with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Existing Note to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date a letter,
telegram or facsimile transmission from an Eligible Institution setting forth
the name and address of the tendering holder, the names in which the Existing
Notes are registered and, if possible, the certificate numbers of the Existing
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date the
Existing Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Existing Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Existing Notes (or a confirmation of book-entry transfer of
such Existing Notes into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) from an Eligible Institution is received by the Exchange Agent.
Issuances of New Notes in exchange for Existing Notes tendered pursuant to a
Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect (as provided above) by an Eligible Institution will be made only
against deposit of the Letter of Transmittal (and any other required documents)
and the tendered Existing Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Existing Notes not properly tendered or to not accept
any particular Existing Notes which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Existing Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Existing Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Existing Notes either
before or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
Existing Notes for exchange must be cured within such reasonable period of time
as the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect
44
<PAGE> 47
or irregularity with respect to any tender of Existing Notes for exchange, nor
shall any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Existing Notes, such Existing Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders appear on the
Existing Notes.
If the Letter of Transmittal or any Existing Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
By tendering, each holder will represent to the Company in the Letter of
Transmittal that, among other things, the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, that
neither the holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes, that
neither the holder nor any such other person is participating in or intends to
participate in the distribution of such New Notes and that neither the holder
nor any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company.
Each broker-dealer that receives New Notes for its own account in exchange
for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent prior to the Expiration Date at its address
set forth below. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Existing Notes to be withdrawn (the "Depositor"),
(ii) identify the Existing Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Existing Notes), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Existing Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer such Existing Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Existing
Notes are to be registered, if different from that of the depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. Any Existing Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Existing Notes which have been tendered for
exchange and which are properly withdrawn will be returned to the holder thereof
without cost to such holder as soon as practicable after such withdrawal.
Properly withdrawn Existing Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Existing Notes" above at
any time on or prior to the Expiration Date.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the expiration Date, all Existing Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Existing Notes. See "-- Conditions to the Exchange Offer" below. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Existing Notes for exchange when, as and if the Company has given oral
and written notice thereof to the Exchange Agent.
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive a New Note having a principal amount equal to that of the
surrendered Existing Note.
In all cases, issuance of New Notes for Existing Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Existing Notes or a
timely Book-Entry Confirmation of such Existing Notes into the Exchange Agent's
account at the
45
<PAGE> 48
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Existing Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Existing Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Existing
Notes will be returned without expense to the tendering holder thereof (or, in
case of Existing Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Existing Notes will be credited
to an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration of the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Existing Notes and may terminate or amend the Exchange Offer if at any
time before the acceptance of such Existing Notes for exchange or the exchange
of the New Notes for such Existing Notes any of the following events shall
occur:
(i) any injunction, order or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time from
time to time in its reasonable judgment. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no New Notes will be issued in exchange for any such Existing
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act"). In any such event the Company is required to use
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Mail or Courier:
United States Trust United States Trust United States Trust
Company of New York Company of New York Company of New York
P.O. Box 844-Cooper Station 111 Broadway-Lower Level 770 Broadway, 13th Floor
New York, NY 10276 New York, NY 10006 New York, NY 10003
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
</TABLE>
For information, call:
(800) 548-6565
Fax: (212) 420-6152
DELIVERY OF THE EXISTING NOTES, LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION
OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE
A VALID DELIVERY.
46
<PAGE> 49
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The cash
expenses to be incurred by the Company in connection with the Exchange Offer
will be paid by the Company.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Existing Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith except that holders who
instruct the Company to register New Notes in the name of, or request that
Existing Notes not tendered or not accepted in the Exchange Offer be returned
to, a person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax thereon.
ACCOUNTING TREATMENT
The New Notes will be recorded at the carrying value of the Existing Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of New Notes for Existing Notes. Expenses incurred in
connection with the issuance of the New Notes will be amortized over the term of
the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
remain outstanding in accordance with their terms. In general, the Existing
Notes may not be altered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Existing Notes under the
Securities Act. However, (i) if the Initial Purchaser so requests with respect
to Existing Notes not eligible to be exchanged for New Notes in the Exchange
Offer and held by it following consummation of the Exchange Offer or (ii) if any
holder of Existing Notes is not eligible to participate in the Exchange Offer
or, in the case of any holder of Existing Notes that participates in the
Exchange Offer, does not receive freely tradable New Notes in exchange for
Existing Notes, the Company is obligated to file a registration statement on the
appropriate form under the Securities Act relating to the Existing Notes held by
such persons.
Based on certain no-action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate"
47
<PAGE> 50
of the Company within the meaning of Rule 405 under the Securities Act or (ii)
any broker-dealer that purchases Notes from the Company to resell pursuant to
Rule 144A or any other available exemption) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement or understanding with any person
to participate in the distribution of such New Notes and are not participating
in, and do not intend to participate in, the distribution of such New Notes. If
any holder has any arrangement or understanding with respect to the distribution
of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. A
broker-dealer who holds Existing Notes that were acquired for its own account as
a result of market making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
Participation in the Exchange Offer is voluntary, and holders of Existing
Notes should carefully consider whether to participate. Holders of the Existing
Notes are urged to consult their financial and tax advisors in making their own
decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Existing Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Existing Notes who do not tender their Existing Notes in
the Exchange Offer will continue to hold such Existing Notes and will be
entitled to all the rights, and limitations applicable thereto, under the
Indenture, except for any such rights under the Registration Rights Agreement
that by their terms terminate or cease to have further effectiveness as a result
of the making of this Exchange Offer. See "Description of Exchange Notes." All
untendered Existing Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
Existing Notes could be adversely affected.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Existing
Notes which are not tendered in the Exchange Offer.
48
<PAGE> 51
BUSINESS OF THE COMPANY
GENERAL
The Company is a leading manufacturer and marketer of mass-market
fragrances, artificial nail care products, mid-priced lip and eye make-up, nail
polish and related products that are sold by more than 1,000 retailers in
approximately 25,000 locations in the United States and in 61 foreign countries.
The Company sells its products principally through the mass-market distribution
channel which includes drug stores (such as Walgreen and Revco), mass
merchandisers (such as Wal-Mart and Kmart) and supermarkets and combination
supermarket/drug stores (such as Kroger and Albertson's). In Fiscal 1995 and for
the nine months ended December 31, 1996, the Company generated net sales of
$131.3 million and $124.6 million, respectively, and EBITDA of $16.5 million and
$14.2 million, respectively.(1)
Through Dana, the Company sells women's and men's fragrances designed to
appeal to a broad range of consumers within the mass market, including several
classic brands such as Chantilly and Tabu for women and English Leather and
Canoe for men, each of which has enjoyed widespread sales and consumer loyalty
for more than 30 years. The Company has an 11.1% share and a 6.5% share of the
women's and men's mass-market fragrance categories, respectively, and is the
third and fifth largest marketer of women's and men's fragrances, respectively,
in the mass market.
The Company's women's fragrance brands represent two of the top seven and
14 of the top 100 women's fragrance brands sold through the drug store channel,
which represents approximately 50% of mass-market sales. The Company's men's
fragrance brands represent three of the top 20 men's fragrance brands sold
through the drug store channel. The Company's fragrance and related products are
marketed under established brand names including Chantilly, White Chantilly,
Tabu, DREAMS BY TABU, Ambush, NaVy, Insignia, Toujours Moi, le Jardin, Love's,
Heaven Sent, French Vanilla by Dana, Raffinee, Lutece, Canoe, English Leather,
British Sterling, NaVy for Men, California for Men and Herbissimo.
Through Cosmar, the Company is the largest domestic manufacturer and
marketer of artificial nail care products and related accessories sold through
the mass market. Cosmar has the leading share in five of the top seven
artificial nail care segments, and its 33% share in the mass market is more than
twice the share of its nearest competitor. In 1995, the Company successfully
entered the $300+ million nail polish category with its line of PRO(10) nail
lacquers. In the first year after its introduction, PRO(10) ranked as the ninth
best-selling nail lacquer brand in the United States. The Company's artificial
nail care products and related accessories are marketed under the brand names
LaJoie, Press & Go, Sculpture Quik, Quik Fit, PRO(10), UltraGel and Nail Fetish.
The following table breaks down the Company's net sales for Fiscal 1995 and
the nine months ended December 31, 1996 between fragrance and cosmetics (dollars
in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL 1995 DECEMBER 31, 1996
-------------------------- --------------------------
NET SALES % OF TOTAL NET SALES % OF TOTAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Fragrance......................... $ 83.2 63.4% $ 84.5 67.8%
Cosmetics......................... 48.1 36.6 40.1 32.2
------ ---- ----- -----
Total................... $ 131.3 100.0% $ 124.6 100.0%
====== ==== ===== =====
</TABLE>
BACKGROUND
Based on management's estimates, the entire mass-market distribution
channel (i.e., chain drug stores, mass merchandisers and supermarkets and
combination supermarket/drug stores), in the United States, where the Company's
products are sold, generated sales of approximately $4.5 billion in 1995 and is
the largest
- ---------------
(1) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA should not be considered as an alternative to net
income or cash flow and is not a measure of performance under generally
accepted accounting principles but provides additional information for
evaluating the Company.
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<PAGE> 52
and fastest growing segment of the estimated $9.0 billion domestic fragrance and
cosmetics market. Management believes that this growth is attributable to a
recent consumer trend of seeking increased value per dollar spent. Mass-market
retailers account for approximately 50% of total domestic fragrance and
cosmetics sales, with department and specialty stores accounting for the
remaining 50%. In recent years there has been substantial consolidation within
the mass-market distribution channel. As a result of such consolidation, large
chains such as Wal-Mart and Revco have been driving smaller, independent general
merchandise stores and drug stores out of existence.
Management believes that the fragrance and cosmetics industry is highly
fragmented and is undergoing a similar consolidation. As the importance of the
mass-market distribution channel continues to increase, the fragrance and
cosmetics industry consolidation should accelerate because smaller private
companies typically lack the management skills, technical expertise, worldwide
marketing capabilities and capital resources necessary to: (i) introduce new
products; (ii) provide the financial reporting and management information
systems necessary to satisfy stringent mass-market retailer service
requirements; (iii) develop, fund and utilize the sophisticated advertising and
marketing programs required to compete in the mass market; (iv) provide
sophisticated category management services to retailers designed to maximize the
profitability of their shelf space; and (v) establish effective international
distribution networks.
The Company was formed in April 1994 by Kidd Kamm, together with Thomas V.
Bonoma, Chairman, Chief Executive Officer and President of the Company, to
participate in the aforementioned fragrance and cosmetics industry
consolidation. Prior to forming the Company, Dr. Bonoma was chief executive
officer of Benckiser America ("Benckiser"), a subsidiary of Joh. A. Benckiser,
GmbH, a $3.0 billion privately-held German producer of packaged goods in the
fragrance, cosmetics and cleaning products industries ("Benckiser, GmbH").
During Dr. Bonoma's tenure at Benckiser, he, along with his team of senior
managers (eleven of which have since joined him at the Company), were directly
responsible for building Benckiser's North and Latin American-based operations
from inception in 1986 to worldwide sales in excess of $700 million by 1993.
This increase was accomplished through both internal growth and the acquisition
and integration of seven companies. Dr. Bonoma and his management team improved
the sales and cash flow of these acquired companies by, among other things,
reducing administrative overhead, rationalizing operations and developing
cost-effective advertising and marketing programs to restore and expand
prominent fragrance brands such as Jovan, Coty and Stetson, and soap brands such
as ElectraSol and Jet-Dry. At the time of Dr. Bonoma's departure from Benckiser
in mid-1993, fragrances under his management represented six of the top 25
women's fragrances and ten of the top 25 men's fragrances in the mass market.
At inception, the Company's strategic plan was to build a substantial
fragrance and cosmetics company within five years with annual sales in excess of
$750 million by implementing Dr. Bonoma's previously successful growth strategy
of acquiring and successfully integrating underperforming brands or companies
and restoring and expanding brand equities through the initiation or expansion
of focused marketing programs. In May 1994, KKEP invested $22.5 million in the
common equity of the Company, which represented the largest investment ever made
by KKEP or any of its principals. Management and certain other investors
invested an additional $4.0 million in the common equity of the Company.
In July and August 1994, the Company entered into long-term exclusive
license agreements with Houbigant to manufacture, distribute, use and sell
throughout the world (excluding Canada) 12 mass-market fragrances formerly
marketed by Houbigant (the "Houbigant Fragrances"), including Chantilly, Lutece
and Raffinee. In December 1994, the Company acquired the assets of ACB
Mercantile, Inc. and related companies (collectively, "Houbigant ACB") through
which the Company acquired certain rights to manufacture, distribute, use and
sell the Houbigant Fragrances in Canada which, when combined with the previous
Houbigant license agreements, gave the Company the exclusive worldwide right to
manufacture and market the Houbigant Fragrances. In July 1996, the Company
entered into a restated license agreement with Houbigant.
In August 1994, the Company purchased the operations of Cosmar, the largest
manufacturer and marketer in the United States of artificial fingernails and
related nail care products. In December 1994, the Company acquired Les Parfums
de Dana, Inc. and related companies, which manufactured mass-market
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<PAGE> 53
fragrances and related products sold in the United States and in 20 foreign
countries, including such classic brands as Tabu, Canoe and Ambush.
In August 1996, the Company acquired GAC, a company that markets,
distributes, advertises, promotes and merchandises high-quality, mid-priced lip
and eye make-up, nail polish and related products. In December 1996, the Company
acquired MEM, which manufactures mass-market fragrances, and the P&G Brands. See
"Recent Developments" for a description of the Acquisitions.
BUSINESS STRATEGY
The Company's management team intends to continue to capitalize on
opportunities in the mass-market segment of the fragrance and cosmetics
industry, through both internal growth and acquisitions, and to maximize sales
and EBITDA by implementing a strategy based on the following elements:
- Acquisition and Reinvigoration of Underperforming and/or Undermarketed
Brands. Subject to the limitations imposed by the New Revolving Credit
Facility and the Indenture, the Company intends to continue to
selectively acquire and subsequently reinvigorate underperforming and/or
undermarketed established brands by: (i) reestablishing trust and
reliability with retail accounts that may have been lacking under
previous ownership; (ii) restoring the quality and brand franchise of
acquired fragrances by using original formulations and applying advanced
technology to improve acquired cosmetics products; (iii) redesigning the
packaging and advertising of certain acquired brands to modernize their
images and refocus them toward their target markets; and (iv) initiating
or expanding focused advertising and promotional programs. Advertising
and marketing support is particularly important in the mass market due to
minimal in-store sales support by store personnel or manufacturer
representatives. Management believes that the Company provides the
broad-based consumer advertising necessary to support new product
introductions and to motivate consumers to "pull" the Company's products
off of the shelf.
- Integration of Acquired Businesses into Existing Company
Infrastructure. Following its acquisition of brands or companies, the
Company reduces the operating costs of such acquired brands or companies
by: (i) eliminating redundant overhead; (ii) consolidating plants (such
as the closing of MEM's facilities); (iii) selling the acquired brands
through the Company's existing sales force; and (iv) using common
components (e.g., the same type of bottle for several brands) to reduce
manufacturing costs.
- Focused Flanking of Established Fragrance Brand Equities. Rather than
introduce completely new products into the mass market, the Company has
specialized in the launch of new products that leverage off of the strong
name recognition and brand equity ("trust") of the Company's portfolio of
classic fragrance brands. These new products, known as "focused
flankers," draw on the consumer recognition and heritage of the Company's
existing brand equities while simultaneously enhancing and revitalizing
the "parent" products being flanked. The Company's flanker introductions
are strongly related to their "parents" but are targeted toward a
different consumer segment, enabling the Company to increase shelf space
allocated to, and revenues generated by, the expanded brand family. To
date, the Company has successfully launched White Chantilly as a flanker
of the classic Chantilly brand in the fall of 1995, DREAMS BY TABU as a
flanker of the classic Tabu brand in February 1996 and Navigator from
Canoe as a flanker of the classic Canoe brand in September 1996. In
addition, the Company has identified several opportunities to launch
focused flankers of its recently acquired MEM and P&G fragrance brands.
Management believes that the reinvigoration of existing brands and the
launch of focused flanker products typically generate more predictable
sales and require less advertising and promotional expenditures than
"cold" launches of completely new products.
- Introduction of Complementary Products. Similar to its focused flanker
approach to fragrances, the Company also introduces complementary new
cosmetics products. For example, the Company enhanced its leadership
position in the artificial nail care market in Fiscal 1995 through the
introduction of products targeting new segments of the market, including
UltraGel (patented gel nails with built-in color targeting salon users)
and Nail Fetish (a line of artificial nail care products targeting
teenage consumers). In addition, in 1995 the Company successfully entered
the $300+ million nail
51
<PAGE> 54
polish category with the launch of its PRO(10) line of nail lacquers,
which ranked as the ninth best-selling nail lacquer brand in the United
States one year after its introduction. Cosmar plans to introduce three
innovative artificial nail sculpturing kits that management believes will
address the growing consumer interest in do-it-yourself home manicures.
- Use of Category Management Techniques to Increase the Company's Sales by
Increasing its Allocation of Shelf Space and Enhancing Relationships with
Retailers. Due to the consolidation in the mass-market retail industry,
the allocation of retail shelf space has become increasingly important.
To increase shelf space allocated to the Company's products and to build
stronger relationships with retailers, the Company purchases consumer
sales data derived from in-store checkout scanners in order to
mathematically quantify sales results for its own products (as well as
those of its competitors). The Company engages in account-specific
category management by offering to be a retailer's category advisor or
"category captain," a role that most retailers fill by electing one
manufacturer per category. The category captain assists the retailer in
deciding which products it will sell within the shelf space dedicated to
a specific category. Management believes that because the Company has
made a significant investment in data, systems and employee resources for
its category management program, the Company should maintain a
significant competitive advantage in this area that will be difficult for
its competitors to overcome.
- Expansion into Additional Retail Outlets and Alternative Distribution
Channels. The Company continually seeks to expand its sales and
distribution network (currently over 1,000 retailers with approximately
25,000 locations) for its existing and acquired products. Due to the
Company's long-standing relationships with retail buyers, extensive
domestic retailer network, ability to reinvigorate brands and category
management expertise, the Company has been able to significantly increase
the sales of its acquired brands by integrating them into its existing
distribution network. For example, under Cosmar's management, the Nat
Robbins line has increased its retail store door distribution from
approximately 6,000 doors at the closing of the GAC Acquisition to
approximately 7,200 doors as of December 1996 as the Company introduced
the Nat Robbins line to a number of the Company's major accounts. The
Company continually explores alternative distribution channels (such as
the home shopping channel QVC) through which to sell its products. In
addition, the Company is increasing its worldwide doors by expanding the
number of foreign countries (61 as of March 31, 1997) in which it sells
its products.
The Company intends to continue to capitalize upon the success of its
previous fragrance and cosmetics product launches, market share gains and close
working relationships with mass-market retailers to launch additional focused
flanker fragrance products and new artificial nail care and cosmetics products.
Management believes that the Company has the management talent and corporate
infrastructure in place to continue to implement its proven growth strategy and
effectively manage future growth. See "Special Note Regarding Forward-Looking
Information."
INDUSTRY OVERVIEW
General. Based on management's estimates, the worldwide fragrance and
cosmetics industry is approximately $17 billion in size and growing at a rate of
approximately 3%-5% per year due to the emergence of new markets and increased
penetration in existing markets. The domestic portion of the fragrance and
cosmetics industry represents approximately $9 billion in annual sales (53% of
the worldwide market). The mass-market distribution channel of the domestic
fragrance and cosmetics industry represents an estimated $4.5 billion in annual
revenues, accounting for 50% of total domestic industry revenues, and is growing
at the rate of approximately 3%-5% per year. The entire mass-market fragrance
and cosmetics industry is divided into six major product categories: men's and
women's fragrances (13% and 23%, respectively), face make-up (20%), nail care
(16%), eye make-up (15%) and lip products (13%) based on 1995 market share data.
Distribution Channels. The fragrance and cosmetics industry relies on two
primary channels of distribution: mass-market retailers and department and
specialty stores. These two channels have materially different sales and
marketing processes because of the contrasting economic, demographic, demand and
usage characteristics of their consumers.
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<PAGE> 55
The mass-market distribution channel is characterized by value-oriented
products with emphasis placed on both price and image. Since mass-market
retailers depend on self-selection of products by consumers and employ only a
nominal amount of in-store sales support personnel, the allocation and placement
of retail shelf space is one of the most important means of gaining consumer
awareness in this channel. Accordingly, mass-market retailers are becoming more
aware of the benefits of sophisticated category management systems, such as
those utilized by the Company, to maximize the sales generated by their existing
shelf space. Retailers have become more reluctant to allow new products to
displace proven, high-volume products without a guarantee of extensive
advertising support to generate consumer interest. As a result, the introduction
of new products into the mass market is more difficult and relatively more
expensive than in department and specialty stores. Manufacturers of mass-market
products must provide broad-based consumer advertising to support new product
introductions and to get consumers to "pull" products off of the shelf. These
characteristics of the mass market limit the number of new product offerings,
enabling proven products to retain existing shelf space and creating barriers to
entry. As a result, the mass-market distribution channel for fragrances and
cosmetics is generally characterized by greater brand stability, consumer
loyalty and repeat purchases than the department and specialty store channel.
In contrast to the mass market, fragrance and cosmetics products sold
through the department and specialty store channel are generally characterized
as "prestige" brands which are primarily sold based upon perceived image and
quality at substantially higher price points (average retail price point of
$35.00 per one-ounce size for fragrances) than those sold in the mass-market
channel (average retail price point of $14.00 per one-ounce size for
fragrances). Consequently, product offerings in the department and specialty
store channel tend to be much more sensitive to changes in fashion and popular
trends than those sold in the mass market. Such fashion consciousness results in
a greater number of product introductions in this channel than in the mass
market. The introduction of new products in department and specialty stores is
facilitated, in part, by a greater level of personal customer service during the
sales process through the use of sales personnel or in-store manufacturer
representatives who "push" new products to consumers. In addition, department
and specialty retailers generally reallocate their selling space and product mix
several times per year to accommodate changing fashion trends, whereas
mass-market retailers generally do so only once per year. As a result,
manufacturers are able to introduce new products more easily and frequently in
the department and specialty store channel, as well as depend on in-store direct
selling efforts rather than broad-based consumer advertising to attract
consumers. While such reallocation results in greater flexibility to change
product offerings to match current fashion trends, it also reduces brand
stability and consumer loyalty over time.
As the department and specialty store channel selling "prestige" fragrances
has been consolidating, there has been increasing pressure to introduce certain
fragrances into mass-market channels which were historically sold primarily in
department and specialty stores. Management believes, however, that increased
penetration by such fragrances into the mass market is not a material
competitive threat to those mass-market brands supported by strong management,
marketing and advertising because: (i) a significant portion of prestige
products sold in the mass market have been diverted from their normal
distribution channels, thus constituting an unsteady supply source; (ii) such
prestige fragrances are often marketed toward different consumers than
mass-market fragrances; and (iii) the "push" and promotional marketing support
(i.e., gift with a purchase, high sales and display intensity) typically
associated with prestige brands is not replicable in the self-select,
mass-market channel. Certain prestige marketers have attempted to adopt
mass-market methods including less intensive sales support, lower packaging
quality and broader distribution. However, management believes that the
resulting pressure for price discounts on these prestige products has threatened
the perception of exclusivity associated with their up-market trademarks.
Fragrance Market. The domestic fragrance market, which represented sales
of approximately $4 billion in 1995, is growing at a rate of approximately 3%-5%
per year according to management's estimates. The entire mass-market segment of
the retail fragrance industry generated sales of $1.4 billion in 1995 based on
management's estimates. The market for both men's and women's fragrances is
highly fragmented, with the most popular brand in each segment commanding a
share of less than 5% of the total market (although there are large competitors
with significant aggregate market shares). The mass-market fragrance industry is
relatively recession-resistant due to its low average price point ($14.00 per
one ounce size) and more frequent
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usage of the product, which is evidenced by industry growth rates which have
varied between negative 5% to positive 5% over the last ten years according to
management's estimates. Fragrance products sold in the mass market, where the
Company operates, typically have the following characteristics in relation to
prestige brands: (i) more frequent purchase/use; (ii) sales that are less
affected by changing fashions (which results in fewer new product
introductions); (iii) lower packaging costs; (iv) faster inventory turnover; and
(v) lower prices. Management believes that these characteristics enable the
Company's products to achieve, on average, greater customer loyalty and more
stable sales volume than prestige products.
In addition to "prestige" fragrance products sold in the mass-market
channel, the Company competes with alternative designer fragrances ("ADFs"),
which are impostors of designer and prestige fragrances. ADFs began capturing
market share from both designer and prestige fragrances and mass-market products
in 1990. Since 1992, however, sales of ADFs and prestige fragrances in the mass
market have been declining as consumers have retreated to classic fragrances
that offer greater value for their money. For example, sales of women's ADFs
have declined by 21%, and sales of women's prestige fragrances sold in the mass
market have declined by 16% for the 52 weeks ended November 3, 1996 over the
comparable prior period.
Cosmetics Market. The domestic cosmetics market, which generated sales of
approximately $5 billion in 1995, has grown at a rate of approximately 2%-3% per
year over the last five years according to management's estimates. The entire
mass-market segment of the domestic cosmetics market generated sales of $2.8
billion in 1995. The Cosmetics division primarily focuses on the artificial nail
care, lip and eye make-up segments of the mass market. The Cosmetics division
has also entered into other segments of the cosmetics market, including the
$300+ million nail polish category with the introduction of its line of PRO(10)
nail lacquers.
Nail Care Market. The retail nail care mass market is divided into four
major product categories: (i) nail polish (47%); (ii) artificial nail care
(24%); (iii) nail implements (18%); and (iv) nail polish removers (11%). The
mass-market segment of the artificial nail care category, which generated retail
sales of approximately $170 million in 1996 based on management estimates, is
the fastest growing segment of the $700 million domestic retail nail care
market. Management believes that the compound annual growth rate in the
mass-market segment of the artificial nail care category exceeded 18% from 1984
to 1995. Management attributes the rapid growth in this market primarily to a
greater acceptance of artificial nail care products and a shift in consumer
preferences from more expensive salon services to significantly less expensive
self-application products such as those manufactured by the Company. Other
factors causing the shift include improved product quality (e.g., a more natural
appearance), simplified product application and a greater selection of products.
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Although the mass-market artificial nail care market has many participants,
the top three brands generate over 60% of total category sales. As the following
table indicates, Cosmar brands dominate the artificial nail care products
category sold through the mass market as measured by total sales dollars:
U.S. ARTIFICIAL NAIL CARE MARKET (DRUG AND MASS MERCHANDISER)
<TABLE>
<CAPTION>
CONSOLIDATED MARKET SHARE
BRAND OWNER 52 WEEKS ENDED 11/3/96
------------------------------------ -------------------------- -------------------------
<S> <C> <C>
COSMAR.............................. THE COMPANY 33.2%
Nailene............................. Pacific World Corp. 16.0
Kiss Professional................... Dae Do 11.5
Jonel............................... Barristo Ltd. 10.7
Fing'rs............................. Entrecap Corp. 9.4
Sally Hansen........................ Del Laboratories 8.6
IBD................................. Intl. Beauty Distributors 3.8
Lee Fancy Fingers................... Lee Pharmaceutical 1.3
All Other Brands.................... Various 5.5
------
Total Category 100.0%
===================
</TABLE>
- ---------------
Source: InfoScan, Total U.S. Drug and Mass Merchandisers, 52 weeks ended
November 3, 1996.
Repeat purchases by consumers, who typically purchase 10 to 15 packages per
year, as well as high inventory turnover have resulted in increased retail shelf
space allocation and market stability for artificial nail care products. It is
expected that in the future there will be less opportunity for niche players in
the artificial nail care market, with more shelf space being allocated to market
leaders with sophisticated category management capabilities such as the Company.
The domestic artificial nail care market is expected to continue to grow as
consumer penetration throughout the United States expands. According to Nails
Magazine, the total market for artificial nail care and related products,
including those sold in salons, has grown from approximately $1.4 billion in
1989 to $3.0 billion in 1995. According to 1995 consumer survey results,
approximately 31% of all American women use artificial nail tips, with the
majority of users under the age of 35, and 77% of all American women use nail
glue. However, according to consumer surveys, over 60% of artificial nail care
product users still have their nails done at salons at an average cost of
approximately $30.00, representing a significant opportunity for considerable
growth in the retail nail care market, where an average mass-market application
costs approximately $10.00. Additional growth opportunities exist in the United
States, as well as abroad, to attract the millions of potential new consumers
that currently do not use artificial nail care products.
Lip and Eye Make-up Markets. The domestic lip and eye make-up markets are
highly competitive and dependent upon strong brand recognition, consumer trust
in product quality, product selections aligned with current fashion and color
trends and distinct price brackets that meet particular consumer needs and
demographics. Within the approximately $1.2 billion entire mass-market segment
of the lip and eye make-up markets, there are higher priced brands, generally
priced at $3.25 to $7.00 per unit, followed by mid-priced brands at $2.00 to
$3.75 per unit and lower-priced brands at $0.99 to $1.79 per unit. The Company
has focused on the mid-priced segment through its acquisition of GAC. In
general, the Company believes that the lip and eye make-up markets have
experienced strong growth over the past year because of enhancements in color
cosmetics technology and formulations coupled with a renewed emphasis on
fashion-conscious color selections. The most prevalent trends include
longer-lasting applications (such as "smudge-free" lipstick), healthier products
(such as moisturizing and vitamin-added formulas) and fashionable color ranges
(such as browns and purples). In addition, manufacturers are now utilizing
point-of-purchase displays or "wall units" that emphasize certain products and
features and educate consumers on the use of cosmetics in an attempt to further
stimulate category expansion.
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PRODUCTS
Fragrance. The Company manufactures and markets a wide variety of men's
and women's fragrances, which include some of the oldest, most recognized
"classic" brand names in the industry. Classic brands, which generally have more
than 20 years of sales history, are typically characterized by extensive brand
name recognition and strong consumer loyalty. The Company estimates that less
than 1% of all fragrance brands introduced each year achieve such classic
status. The Company currently manufactures nine classic brands: Chantilly, Tabu,
Ambush, Toujours Moi, Raffinee, Heaven Sent, Canoe, English Leather and British
Sterling. In addition to the Company's classic fragrances, the Company markets
its women's fragrance brands under such names as White Chantilly, DREAMS BY
TABU, NaVy, le Jardin and Love's and markets its men's fragrance brands under
such names as Navigator from Canoe, NaVy for Men, Insignia, California for Men
and Herbissimo.
Within its current portfolio of classic and established brands, the Company
focuses on reinvigorating its largest and most recognized brands. For its
smaller brands, the Company applies various cost-reduction methods designed to
result in production savings by utilizing less expensive common componentry and
standard packaging. Additionally, the Company minimizes advertising and
promotion costs by offering these products in the same packaging on a year-round
basis. The Company passes along these cost savings by offering value pricing to
customers with primary advertising occurring only in-store, leaving the majority
of its advertising funds to be spent on its better known brands.
The Company produces and markets men's and women's fragrances through Dana.
Among the Company's most well-known brand names are Chantilly and Tabu.
Introduced in 1941 and 1931, respectively, Chantilly and Tabu are two of the
oldest "classic" fragrances in the United States. Both the Chantilly and Tabu
brand families include a complete line of products including perfumes, colognes,
bath gels, powders and lotions. The items in the Chantilly family are
merchandised as premium mass-market products. Based upon Chantilly's and Tabu's
longevity in the market and market share, the Company believes that the
Chantilly and Tabu brands enjoy significant consumer loyalty and name
recognition.
Following the four acquisitions completed by the Company in 1994,
management was able to regain the confidence of its retail accounts by
supporting its brands with increased advertising and promotional expenditures,
reestablishing efficient production scheduling and shipping processes,
maintaining adequate inventory levels and creating responsive order fulfillment
practices. Under current management's leadership, the Chantilly and Tabu brands
have risen to the fourth and seventh positions respectively in market share of
the domestic women's fragrance market sold in drug stores. In addition to the
Company's growth in its existing product lines, the Company also grew through
the launch of new brands such as Classic Gardenia and the fall of 1995 launch of
White Chantilly, a flanker product for the core Chantilly brand. In Fiscal 1995,
in addition to $16.4 million of Chantilly gross sales (before giving effect to
product returns), White Chantilly generated $11.6 million in gross sales (before
giving effect to product returns) due to its significant product differentiation
and marketing focus targeting more youthful consumers. White Chantilly was
nominated for a 1995 FiFi (Fragrance Foundation) award as new product of the
year. In the spring of 1996, the Company launched DREAMS BY TABU, a focused
flanker of Tabu, which has generated over $11 million in gross sales (before
giving effect to product returns) since February 1996. During such period, sales
of Tabu increased by 12% over the comparable period in 1995, which management
attributes to increased advertising and promotional expenditures for the Tabu
family name. The Company's Ambush line for women was introduced in 1962, and the
Company is relaunching this classic fragrance following an extensive packaging
and positioning change. The Company commenced shipment of the repackaged Ambush
in the fourth quarter of Fiscal 1996.
The recent acquisition of the MEM and P&G fragrance brands, including NaVy,
NaVy for Men, California for Men, English Leather, British Sterling, Insignia,
Love's and Heaven Sent, further strengthens the Company's position in the
fragrance market. The Company believes that the MEM Acquisition and the P&G
Acquisition will enhance the Company's position in the mass merchandiser segment
of the mass market, thereby improving the position of its existing brands in
this market. The Company believes that the acquired brands represent a
significant opportunity for growth through the reinvigoration of underperforming
brands
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<PAGE> 59
and through the use of its proven flanker strategy. Significant marketing
expenditures have been made on many of these brands over the past several years.
According to information provided by P&G to the Company, P&G has spent a
substantial amount in the last five years on the marketing of the P&G Brands
worldwide. Although sales of several of the P&G Brands have declined
significantly in recent years under P&G's management, the Company's management
believes that opportunities exist to reinvigorate the brands with more focused
marketing campaigns and product offerings. In addition, management believes that
the Company should benefit from the international distribution of the P&G
Brands, especially in the United Kingdom, which, prior to the P&G Acquisition,
was not a significant market for the Company's products. See "Special Note
Regarding Forward-Looking Information."
As demonstrated in the following table, two of the Company's products
command the fourth and seventh highest market share of all domestic women's
fragrances sold through drugstores:
U.S. WOMEN'S FRAGRANCE MARKET (DRUG STORES)
<TABLE>
<CAPTION>
CONSOLIDATED MARKET SHARE
BRAND OWNER 52 WEEKS ENDED 11/3/96
- ----------------------- -------------------------------- -------------------------
<S> <C> <C>
Vanilla Fields......... Coty, Inc. 3.8%
Jean Nate.............. Revlon, Inc. 3.1
Vanderbilt............. Cosmair 3.0
CHANTILLY.............. THE COMPANY 3.0
E.T. White Diamond..... Parfums International (Unilever) 2.9
Charlie................ Revlon, Inc. 2.3
TABU................... THE COMPANY 2.2
Jovan Musk............. Coty, Inc. 2.1
Exclamation............ Coty, Inc. 2.0
Sand & Sable........... Coty, Inc. 2.0
</TABLE>
- ---------------
Source: InfoScan, Total U.S. Drug, 52 weeks ended November 3, 1996.
In men's fragrances, the Company manufactures and markets three classic
brands, Canoe, English Leather and British Sterling, each of which has more than
30 years of sales history. The Company recently successfully completed the
relaunch of Canoe after completely repackaging the product and creating a new
advertising campaign. The Company significantly enhanced its position in the
men's fragrance mass market with the acquisition of MEM's and P&G's men's
fragrance brands. Prior to the acquisitions, the Company did not have a
significant presence in the men's fragrance category. With the acquisition of
MEM, the Company added English Leather and British Sterling. With the
acquisition of the P&G Brands, the Company added such well known men's brands as
NaVy for Men and California for Men. Three of the Company's products, English
Leather, British Sterling and Canoe, command the 12th, 13th and 19th highest
market shares, respectively, of all men's fragrances sold through the chain drug
store channel, with market shares of 2.6%, 2.1% and 1.5%, respectively.
Navigator from Canoe, which the Company launched in September 1996, had the 24th
highest market share for the 12 weeks ended November 3, 1996, with a 1.2% market
share.
Sales of women's fragrances are highly seasonal at retail, with over
one-half of the mass-market fragrance industry's sales occurring during the
calendar year-end holiday season from October to December. The Company calendar
1996 holiday sales in the women's fragrances category outpaced all other
competitors and the category as a whole. The Company's holiday season women's
fragrance sales at retail decreased 1.9% in the fourth quarter of calendar 1996
over the fourth quarter of the prior year while its nearest competitor's
decreased by 7.3%. Sales of Christmas gift sets increased by 10% over the prior
year although the entire category decreased by 13%. Men's fragrance sales
increased by 100% over the comparable period in the prior year while overall
growth in the category was down 6%. Such growth was led by the new launch of
Navigator and a 42% increase in sales of Canoe due to its relaunch.
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Nail Care. Through Cosmar, the Company is the largest manufacturer and
marketer of artificial nail care products and related accessories sold through
the mass-market channel. The Company's nail care products include full-length,
artificial press-on or glue-on fingernails, artificial fingernail tips,
fingernail sculpturing kits, nail lacquer, natural fingernail cuticle treatments
and strengtheners and related accessories. The Company markets its products
under such brand names as LaJoie (Sculpture Quik, Press & Go and Quik Fit),
PRO(10), UltraGel and Nail Fetish. The LaJoie line is an easy-to-use line of
artificial fingernail products, acrylic applications and accessories targeted at
the consumer who generally does not visit a professional nail care salon. The
PRO(10) line has established itself as a leading professional "salon-standard"
nail care line sold through retailers. This line includes artificial fingernail
tips, a selection of nail sculpturing applications and abrasives. These products
are similar to those commonly used by professional nail technicians, but are
designed, formulated and packaged for retail purchase. This line of products
also permits customers to maintain their natural nails with professional quality
nail strengtheners, nail builders, finish coats and cuticle creams. In addition,
for extremely easy applications, the Company's Press & Go colored nails dominate
the instant pre-colored nail care segment (originally pioneered by Lee
Pharmaceutical) of the mass market with a 90% market share.
Throughout Fiscal 1995, the Company continued to grow its nail care segment
through increased marketing and improved packaging of existing brands and the
introduction of new products. In Fiscal 1995, the Company targeted new users and
younger women with its Nail Fetish brand. In February 1996, the Company launched
an innovative new line of products under the UltraGel brand name that offers a
unique two-step gel nail process with built-in color. The Company also launched
new nail care products including COLORPOWER, French Express, FilePro and Nail
Fetish Polish in February 1997. Management believes that these new product
introductions will contribute to Cosmar's continued sales growth and market
share gains. See "Special Note Regarding Forward-Looking Information."
Lip and Eye Make-up. As a result of the GAC Acquisition, the Company is a
leading marketer of high quality, mid-priced lip and eye make-up, make-up
brushes and nail polish and related products sold through the mass-market
channel, with net sales under the prior management of GAC of $7.9 million for
the year ended December 31, 1995. The Company's lip and eye cosmetics include
lipliner pencils, lipstick, lipgloss, eyeliner pencils, eye shadow, mascara and
assorted accessories. Under previous ownership, the Nat Robbins line
successfully achieved a leading position in the mid-priced cosmetics market by
offering high quality, consumer-friendly products, in an assortment of colors.
Management believes that GAC has attracted loyal consumers who trust the name
Nat Robbins and associate the brand with both year-round and season-specific
color selections. The Company expects to continue to add new formulations and
colors to the Nat Robbins line and expand the number of doors in which Nat
Robbins products are sold in an attempt to realize continued sales growth and
market share gains. See "Special Note Regarding Forward-Looking Information."
INTERNATIONAL OPERATIONS
The Company has manufacturing operations in four foreign countries and
sells its products in 61 foreign countries as of March 31, 1997. In Fiscal 1995
and for the nine-month period ended December 31, 1996, net sales from the
Company's products sold abroad were $22.9 million ($6.9 million of which were
export sales from the United States) and $31.4 million ($5.8 million of which
were export sales from the United States), respectively, accounting for
approximately 17.5% and 25.2%, respectively, of its total net sales for Fiscal
1995 and for the nine-month period ended December 31, 1996.
In December 1995, the Company exercised its option to acquire the Brazilian
operations of Les Parfums de Dana for $100,000. Prior to the acquisition, the
Company received management fees from the operations of the Brazilian
subsidiary. This operation alone contributed approximately $12 million in net
sales during the nine months ended December 31, 1996 which, when combined with
other international growth, generated increases in international net sales of
over 100% during the nine month period ended December 31, 1996 over the
comparable period in the prior fiscal year.
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Since the respective dates of acquisition of each of the Company's
wholly-owned subsidiaries in Canada, Spain, Argentina and Brazil, the Company
has significantly improved the operations of such subsidiaries. Information
systems have been improved and detailed performance measurements have been
established. Additionally, further investments are planned that are expected to
increase capacity, improve productivity and lead to higher volume growth.
The Company remains committed to actively expanding its sales effort
abroad. The Company will continue to capitalize on its strong brand equities to
tap foreign markets and will consolidate selling efforts between its fragrance
and cosmetics subsidiaries. Accordingly, the Company is seeking substantial
growth in this arena and expects to eventually achieve foreign sales equal to at
least 30% of total Company sales. Based upon historical information provided by
P&G, approximately 49% of direct revenues from the P&G Brands for the year ended
June 30, 1996 was from the sale of products marketed abroad. See "Special Note
Regarding Forward-Looking Information."
In connection with the P&G Acquisition, the Company entered into transition
agreements with P&G under which P&G will continue the foreign marketing of the
P&G Brands through June 30, 1997. These transition agreements cover the majority
of the P&G Brands in Japan, the United Kingdom, Poland and South Africa. Under
the transition agreements, P&G employees will continue to be responsible for
marketing and distribution of the P&G Brands in the specified jurisdictions, and
the Company will be obligated to reimburse P&G for its direct costs and will be
entitled to receive any gross profit from the sale of such brands. The Company
currently is in the process of establishing its own marketing and administrative
organizations to replace those of P&G and obtaining any necessary local licenses
and permits in the jurisdictions where it currently does not have its own
operations. If the Company is unable to establish its own operations in any of
these jurisdictions by June 30, 1997, it may be required to negotiate an
extension of the transition arrangements with P&G. There can be no assurance
that the Company could successfully negotiate such an extension on terms
satisfactory to it.
PRODUCT DEVELOPMENT AND NEW PRODUCT LAUNCHES
In developing new products, the Company seeks to build on its growing brand
values, expanding customer base, increasing allocation of retail shelf space and
point-of-sale consumer access. The Company believes its existing fragrance and
cosmetics businesses will provide a basis for product extensions into additional
segments of the mass market.
The Company's product development activity is primarily conducted in-house,
utilizing feedback from consumer focus groups, tests in fingernail care salons
for its nail care products and consumer questionnaires. The cycle of market
research, product conceptualization, product design and development, consumer
testing and package design typically requires approximately six months for the
Company. The Company believes that the average cycle for the industry is
approximately 18 months. The Company invested $548,000 and $526,000 in Fiscal
1994 and Fiscal 1995, respectively, on new product development.
Since inception, management believes that it has successfully reestablished
trust and a reputation for reliability with the buyers of the Company's retail
accounts resulting from the Company's reinvigoration of previously
underperforming fragrances and the successful launch of focused flankers. This
retail acceptance is evidenced by the Company's receipt of several awards and
honors, including the Sears Roebuck & Company "Partner in Progress" award in
1995, the appointment to the "Sears Retail Advisory Council" for 1996,
recognition as "Best Small Fragrance Vendor" in a Goldman, Sachs & Co. survey
and being named the "Best Cosmetics Vendor of the Year" by Rite Aid Corporation.
Recent launches by the Company include French Vanilla by Dana in October
1994, Classic Gardenia in the spring of 1995, White Chantilly in the fall of
1995, DREAMS BY TABU in February 1996 and Navigator from Canoe in September
1996. The Company relaunched Ambush in February 1997.
Recent launches by Cosmar include PRO10 in 1995, UltraGel in February 1996,
and COLORPOWER, French Express, FilePro and Nail Fetish Polish in February 1997.
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DISTRIBUTION
The Company's products are sold principally through the mass-market
distribution channel and through international subsidiaries and distributors.
The mass-market distribution channel, with estimated domestic sales of $4.5
billion in 1996, is the largest and fastest growing distribution channel in the
estimated $9.0 billion domestic fragrance and cosmetics market. This channel
includes chain drug stores (such as Revco and Walgreen), mass merchandisers and
discount stores (such as Wal-Mart and Kmart) and supermarkets and combination
supermarket/drug stores (such as Kroger and Albertson's). The Company's brands
are sold to over 1,000 retailers with approximately 25,000 locations. The
Company also sells a limited amount of its artificial nail care products to
professional salon owners. The Company's top ten mass-market customers for the
year ended March 31, 1996 represented 50% of the Company's gross sales (before
giving effect to product returns), and no one customer represented more than 10%
of the Company's sales.
The Company's products are sold in 61 foreign countries primarily through
distributors, as well as through direct sale by the Company's sales force in
Canada, Spain, Argentina and Brazil. The Company has been rapidly expanding its
U.S. dollar-denominated export sales. See "International Operations."
The Company customarily accepts returns of its products that are not sold
by its customers (mass-market retailers), and such customers' accounts with the
Company are credited in amounts equal to the purchase price paid for these
products. The Company believes that its policy regarding its acceptance of
returns is consistent with industry practice. The amount of returns in any given
period is a function of many factors, including (without limitation) general
economic conditions and their effect on retail businesses; the popularity of the
Company's products; the magnitude and success of the Company's marketing
efforts; competition; and product placement by retailers. Returns in any period
may be significantly more or less than in comparable prior periods. In addition,
the Company will be required to accept returns of products sold by MEM and P&G
prior to the Company's acquisitions. The Company, however, is unable to
determine at this time the extent of such potential returns. The Company
endeavors to resell products received as returns, although this is not always
possible and may, when possible, require packaging modifications, labor and
other expenses that reduce the Company's profits on such products. See "Special
Note Regarding Forward-Looking Information."
SALES AND MARKETING
To induce consumers' trial and repeat purchases, the Company relies
primarily on price, quality, effective product packaging and distinctive
in-store displays that are generally provided to retailers free-of-charge. In
addition to these proven advertising and promotion methods, the Company's
management has instituted significant promotions for the Company's products
through ongoing trade advertising for its artificial nail care and fragrance
products directed toward chain drug retailers, mass merchandisers and
supermarket chains. The Company also advertises in many national women's
magazines including Cosmopolitan, Glamour, Harper's Bazaar, Mademoiselle,
Seventeen and Vogue and runs focused television advertising campaigns during new
product launches or relaunches of existing brands. In its nail care business,
the Company's national advertising campaigns represent a significant level of
total category spending, which enhances the Company's trade relationships and
leads to better shelf space allocation and increased distribution.
The Company's domestic fragrance and cosmetics products are sold primarily
through an in-house sales force comprised of a dedicated staff of 18 people,
including three account managers, nine regional managers, four national key
account managers and two vice presidents of sales. Additional sales are
generated by a network of over 100 independent sales representatives, who are
compensated solely on a commission basis. These sales representatives are
supervised by the Company's internal sales personnel who specialize in
understanding retailer needs in specific segments of the mass-market
distribution channel.
Domestically, the Company communicates directly with its nail care product
consumers through its Consumer Assistance Hotline. The Company's toll-free
number for consumer assistance is displayed on each nail care product package.
Consumers are assisted on any questions that arise as they use the Company's
products by a licensed, in-house nail technician and manicurist. The Company
believes that its toll-free number has enhanced the Company's consumer loyalty.
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The Company's fragrances are currently sold abroad in Europe, Asia, South
America, Central America, the United Kingdom, Australia, New Zealand, the Middle
East and Africa through distributors or licensees. The Company sells its
fragrance products directly in Brazil, Spain, Argentina and Canada through
subsidiary operations. The Company's artificial nail care products are currently
sold abroad by local distributors in Europe, Canada, Mexico, Puerto Rico,
Paraguay and Australia and directly in Brazil through a subsidiary operation.
Management believes that opportunities exist to cross-distribute the
Company's fragrance and nail care product lines in Europe and Latin America,
where the Company's products are either undermarketed or underrepresented. The
Company plans to pursue such opportunities in the fragrance market through the
European and Latin American manufacturing facilities acquired in the Dana
Acquisition. See "Special Note Regarding Forward-Looking Information."
As of March 31, 1997 and 1996, the Company had an immaterial amount of
backlog orders.
COMPETITION
The fragrance and cosmetics business is characterized by vigorous
competition throughout the world. Brand recognition, together with product
quality, performance and price and the extent to which consumers are educated
about specific product attributes, have a marked influence on consumers' choices
among competing products and brands. Advertising, promotion, merchandising,
packaging and the timing of new and focused flanker product introductions also
have a significant impact on buying decisions. Further, the structure and
quality of the manufacturer's sales force affects product reception, in-store
position, permanent display space and inventory levels in retail outlets. The
Company competes in most of its product categories against a large number of
companies, some of which have substantially greater resources than the Company.
In addition to products sold in the mass-market and department and specialty
store distribution channels, the Company's products also compete with similar
products sold door-to-door or through mail order or telemarketing by
representatives of direct sales companies.
In the fragrance market, the Company competes with numerous companies
domestically and internationally, including more than 500 brands competing for
market share in the mass-market chain drug store segment. The Company's
principal competitors in this market include Benckiser, Revlon, P&G, Cosmair and
Unilever N.V.
The artificial nail care market is dominated by Cosmar with its 33% market
share in the mass market, making it more than twice the size of its nearest
competitor. For the last three years, Cosmar has virtually driven the category's
growth via new product launches and has realized significant shelf space gains
as a result of such launches, category management expertise and strong in-store
promotional support. Cosmar has made these gains against competitors such as
Nailene (Pacific World Corp.), Jonel (a division of Barristo Ltd.), Kiss
Professional Fingernail Products (Dae Do, a Korean manufacturer), Sally Hansen
(Del Laboratories), Fing'rs (a division of Entrecap Corp.), Lee (Lee
Pharmaceutical) and Kristy Wells in the mass-market distribution channel and
several companies such as International Beauty Distributors and Orly that sell
their professional salon products into the retail market.
The Company's principal competitors in the nail lacquer category include
Revlon, Del Laboratories, L'Oreal S.A., Maybelline, Inc., Estee Lauder, Inc.,
Helene Curtis Industries, Inc., Unilever N.V. and P&G.
The Company believes that GAC's products occupy a leading position within
the mid-priced lipstick and eye make-up segments because they offer superior
quality, consumer-friendly products. GAC's competitors include Lancetti
Cosmetics, and Eco Beauty Inc., both marketers of mid-priced lipstick and eye
make-up products. GAC also competes with Revlon, L'Oreal S.A., Maybelline, Inc.,
P&G and Pavion, Ltd.
Management believes that the Company is well positioned to compete
effectively in its markets and to continue to gain market share as a result of
the established brand names and quality of its nail care products, the pricing
of its products, the strength of the Company's relationships with
mass-merchandisers, its retailer marketing programs, its category management
services and its state-of-the-art information systems. See "Special Note
Regarding Forward-Looking Information."
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CATEGORY MANAGEMENT
Management believes that the Company's category management skills are
unsurpassed in the industry and represent a significant competitive advantage
for the Company. Category management involves strategic partnering with
retailers whereby manufacturers such as the Company utilize state-of-the-art
mathematical modeling tools to understand the sales dynamics of categories,
brands and specific SKUs so that retailers can offer the best mix of products to
boost category sales, profits and customer satisfaction. Management believes
that the Company is the category captain for eight of its top ten nail care
accounts and is category captain or advisor for most of its major fragrance
accounts. As category captain, the Company works with retailers to define
optimum space allocation for their fragrance and nail care product categories
and, as advisor, the Company validates the analysis provided by the category
captain. The Company has invested significant resources in category management,
and as of December 31, 1996, the Company had a staff of five people dedicated
specifically to the process and annual expenditures of approximately $2.0
million for payroll and purchased data. The Company commits significant funds
each year to Information Resources, Inc. ("IRI") to track weekly sales data on
all products it sells through mass-market channels. Management believes that the
Company is one of the few companies in the industry to employ this degree of
information utilization to analyze sales data. By utilizing the information
available through IRI, the Company enhances its relationships with its retail
accounts by supplying them with key selling information presented in a
user-friendly manner for both the Company's and its competitors' products.
Category management allows the Company to work with retailers to: (i)
assist the retailers in determining the optimal product mix for each category;
(ii) recommend the SKUs in the entire category that the retailer should carry;
and (iii) monitor the sales results, both for the Company's products and its
competitors' products, on a weekly basis. These steps, when combined with the
Company's dedicated category management staff, allow the Company to, whenever
possible, replace less profitable competitors' products with its own brands,
leading to better shelf space allocation and increased sales volume for the
Company. In addition, the Company is able to penetrate different functional
areas within retailers' operations, thereby strengthening its overall
relationship with retailers which contributes favorably to future sales and
marketing efforts. The Company's category management program also enables the
Company's marketing department to perform a variety of functions including: (i)
real time understanding of relaunch marketing effectiveness; (ii) gauging new
product success rates for the Company's products and its competitors' products;
and (iii) amassing competitive intelligence about consumer buying patterns.
MANUFACTURING
Fragrance. The Company's fragrance and related products sold in the United
States and in selected export markets (other than the fragrances it acquired
from P&G) are manufactured in the Company's facilities in Mountaintop,
Pennsylvania where the production of the Houbigant and Dana fragrances was
successfully consolidated in 1995 to achieve manufacturing economies of scale
and cost reduction. The P&G Brands that the Company acquired in the P&G
Acquisition are currently being manufactured by a contract packer. Additionally,
four of the Company's facilities in Canada, Spain, Argentina and Brazil
manufacture fragrances and related products for local markets and for export.
The Spanish and Brazilian facilities are being upgraded to become regional
production and export facilities. The Company closed MEM's facilities in New
Jersey and in Boucherville, Quebec on February 7, 1997. The Company plans to
consolidate the Canadian manufacturing operations for Houbigant (1995) Limited
and MEM at a new location.
The Company's strategy for sourcing, producing and distributing its
fragrance products generally consists of: (i) conducting operations in-house
that add significant value to the Company's products and that can be executed
economically based upon volume efficiencies; (ii) sourcing component materials
and products from outside vendors when reliable, ongoing and multiple sources
can be secured at competitive prices; and (iii) least-cost sourcing for local
markets whereby international subsidiary facilities will become regional
producers of products for export to their regional markets.
Key supplies in the manufacturing and packaging of fragrances, including
bottles, scents and packages, are all sourced from a network of reliable vendors
which is consolidated following each acquisition to achieve
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purchasing economies of scale. Final assembly of finished products, warehousing
and shipping of fragrance products to customers is performed at the Mountaintop
and foreign subsidiary facilities.
Nail Care. The Company's strategy for contracting, producing and
distributing its nail care products consists of: (i) maintaining centralized
coordination of these operations in the Company's Garden Grove, California
facilities; (ii) conducting operations in-house that add significant value to
the Company's products and that can be executed economically based on volume
efficiencies; and (iii) sourcing from outside vendors component materials and
products when reliable, ongoing and multiple sources can be secured at
competitive prices. The Company uses an injection molding process to manufacture
all artificial nails and tips for the LaJoie product line at its
state-of-the-art manufacturing facility in Sparks, Nevada. All glues, hardeners
and other chemical compounds included in the Company's artificial nail kits are
supplied to the Company by third-party contract manufacturers. Most of the raw
materials and components sourced externally are readily available through
standard industry sources and represent small percentages of unit manufacturing
costs.
Lip and Eye Make-up. The Company outsources substantially all of its raw
materials, manufacturing and distribution needs for its lip and eye make-up
products. By sourcing from industry-leading color cosmetics suppliers that also
service large manufacturers such as Revlon and Estee Lauder, management believes
it can purchase the latest technologically advanced components at reasonable
prices. The Company currently intends to continue to outsource the production of
its lip and eye make-up products.
See "-- Facilities" for additional information regarding the Company's
manufacturing facilities.
SUPPLIERS AND RAW MATERIAL
The principal raw materials for the Company's fragrance products are
fragrance oils (which are either purchased from third parties or manufactured by
the Company from individual raw materials), bottles, caps, pumps and sprayers.
The principal raw materials used by the Company in the manufacture of its nail
care products are common polymers, waxes, pigments, dyes and other processing
components, such as bottles and brushes, all of which are readily available. The
principal materials that the Company sources for its Nat Robbins line from
industry-leading color cosmetics suppliers include waxes, pigments and silicone
commonly used to manufacture lip and eye make-up products. While all raw
materials are purchased from outside sources, the Company is not dependent upon
a single supplier in any of its operations for any materials essential to its
business that are not otherwise commercially available to the Company.
Historically, the Company has been able to obtain an adequate supply of raw
materials, and no shortage of such materials is currently anticipated.
MANAGEMENT INFORMATION SYSTEMS
Since inception, management has invested a significant amount of capital in
its MIS infrastructure to install new corporate information systems,
sales/marketing systems, personal computers and communication systems throughout
the Company. The new MIS platform is based on an IBM AS/400 mini computer with
personal computers on local and wide area networks. This platform allows the
Company to: (i) connect more than 200 of its key employees; (ii) conduct
electronic data interchange ("EDI") with its top customers which enables
customers to place orders electronically; (iii) enable sales force and accounts
receivable managers to process and track orders and returns; (iv) provide
sophisticated inventory management and distribution capabilities; and (v)
install corporate-wide measurement systems which yield accurate and timely
information regarding sales, costs, profits, accounting functions, customer
service and asset management.
The Company also uses a sales order processing system ("SOP"), developed by
JD Edwards, along with a sales order pick management system ("PKMS") developed
by Manhattan Associates. The integration of these two systems allows the Company
to closely manage each step of the selling process (i.e., from a sales order to
the distribution and actual delivery of products).
Management believes that its investment in state-of-the-art information
systems has established a strong platform for both internal growth and growth
through acquisitions. Such a platform provides the capacity base
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and the ability to rapidly integrate acquired companies into an established and
effective information management structure, thereby reducing costs and
increasing the effectiveness of the Company's manufacturing and product
distribution process.
EMPLOYEES
As of April 1, 1997, the Company employed 1,142 people, of whom 318 were
general and administrative personnel and 48 were sales and marketing personnel.
All of the Company's production employees at its Mountaintop, Pennsylvania
manufacturing facilities, as well as the plants located in Spain, Argentina and
Brazil, are covered by collective bargaining agreements. The collective
bargaining agreements for the Company's production employees at its Mountaintop,
Pennsylvania and Brazilian manufacturing facilities expire in February 1999 and
November 1997, respectively. There can be no assurance that the Company will be
able to negotiate extensions to such agreements on terms acceptable to it and
the failure to obtain such extensions could have a material adverse effect on
the Company. The Company considers its relations with its employees to be good.
The following table provides information relating to the Company's employees:
<TABLE>
<CAPTION>
PRODUCTION
----------------------
LOCATION ADMINISTRATIVE SALES PERMANENT SEASONAL TOTAL
--------------------------------- -------------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C>
RCI Corporate.................... 32 -- -- -- 32
RCI -- Tinkerbell................ 3 1 -- -- 4
Cosmar -- California............. 39 6 50 139 234
Cosmar -- Nevada................. 4 -- 55 103 162
Dana -- Connecticut.............. 17 13 -- -- 30
Dana -- Illinois................. 3 1 -- -- 4
Dana -- Pennsylvania............. 72 -- 190 87 349
Dana -- Brazil................... 75 9 73 -- 157
Dana -- Argentina................ 13 8 10 -- 31
Dana -- Spain.................... 30 4 2 10 46
Houbigant -- Canada.............. 30 6 24 33 93
--- --- --- ---
--
Total 318 404 372 1,142
48
=== === === ===
==
</TABLE>
On February 7, 1997, the Company closed the Northvale, New Jersey and
Boucherville, Quebec facilities of MEM and Tom Fields which were acquired in the
MEM Acquisition and terminated substantially all of the employees working at
such facilities. In connection with the closures in the United States, the
Company will incur an ERISA withdrawal liability to a multiemployer pension plan
(the "Union Plan") covering certain MEM and Tom Fields employees. The Union
Plan's actuary has advised the Company that it estimates that the Company's
withdrawal liability would be approximately $3.4 million for a 1996 withdrawal.
The Union Plan's actuary has advised that the liability for a 1997 withdrawal
would be higher than the estimate for 1996, although it could not currently
provide a 1997 estimate. There can be no assurance that the actual amount of the
withdrawal liability would not exceed the estimate for a withdrawal for 1996.
The Company is permitted to pay the withdrawal liability (with interest) in
equal quarterly installments over a period of years. The quarterly payment
amount (inclusive of interest) is calculated under a statutory formula and the
quarterly payment amount so calculated does not vary regardless of the amount of
the withdrawal liability itself, the amount of the withdrawal liability being
relevant only in determining how long the quarterly payments will continue. The
statutory calculation of the quarterly payment amount is based in part on the
employer's contribution rate to the plan and the highest employee head count
over the last decade. All relevant information to make this calculation is not
readily available and the Company's quarterly payment amount cannot be
calculated at this time. The MEM and Tom Fields combined contributions to the
Union Plan were approximately $390,000 in 1995 and are expected to be
approximately $250,000 in 1996 although the number of MEM and Tom Fields
employees has declined by approximately one-half from its highest levels over
the last decade. Accordingly, the annual total of the quarterly payment amounts
may be significantly higher than the contributions to the
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Union Plan in recent years. In addition, under ERISA, the Company's withdrawal
liability can be recalculated if the Union Plan terminates within three years of
the withdrawal, which could significantly increase the amount of the liability.
In addition to the foregoing, the Union Plan's actuary has informed the Company
that for several years the Union Plan has not received the minimum annual level
of contributions required by ERISA and that the Union Plan is in the process of
seeking to obtain appropriate waivers under ERISA and the Internal Revenue Code
so that the participating employers will not have to pay any penalties for the
Union Plan's failure to receive such minimum levels of contributions. If the
Union Plan fails to obtain such waivers, it is possible that the Company could
incur additional liabilities on account of its participation in the Union Plan,
but the amount of such liabilities cannot readily be determined at this time.
FACILITIES
The Company manufactures its fragrances at its 155,000 square-foot
Mountaintop, Pennsylvania facility and other facilities in Mountaintop
Pennsylvania, and at its facilities in Buenos Aires, Argentina, Sao Paolo,
Brazil, Granollers, Spain and Chomedey (Laval), Canada. Each of these facilities
contains production, warehouse and office facilities. The Company owns the
facilities in Pennsylvania, Argentina, Brazil and Spain and leases the facility
in Canada. In addition, Dana leases facilities in Calumet City, Illinois which
the Company uses as its company store and will use as its returns processing
center, pursuant to a lease agreement that will expire in February 2000.
The Company's artificial nail care business, Cosmar, occupies approximately
102,000 square feet in leased facilities in Garden Grove, California, pursuant
to a sublease that expires on December 31, 1997. These new facilities house
management, sales and marketing, warehouse and production assembly operations.
The Company performs most of its manufacturing for its artificial nail care
business at its 44,000 square-foot Sparks, Nevada facility which is leased
pursuant to an agreement that expires on December 31, 2002.
The Company leases or subleases facilities in New York City, Cambridge,
Massachusetts and Stamford and Greenwich, Connecticut at which it conducts
executive and administrative activities. The Company currently utilizes its
facilities fully.
As a result of the MEM Acquisition, the Company owns a 206,000 square-foot
building located on 16.3 acres in Northvale, New Jersey, which MEM used for its
executive offices and main plant. The Tom Fields plant was located in a 53,000
square-foot building in Northvale, New Jersey and is owned by a subsidiary of
MEM. Manufacturing facilities in Canada were located in a 32,000 square-foot
plant in Boucherville, Quebec which is owned by MEM Company (Canada) Ltd. Tom
Fields (U.K.) assembles products in leased facilities in Folkestone, United
Kingdom. On February 7, 1997, the Company closed MEM's facilities in Northvale,
New Jersey and in Boucherville, Quebec. See "-- Employees."
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The following table provides information on each of the Company's operating
facilities:
<TABLE>
<CAPTION>
APPROX.
YEAR LAST SIZE LEASED/
SUBSIDIARY LOCATION OPENED EXPANSION (SQ. FT.) OWNED
- ----------- --------------------------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C>
Dana Mountaintop, PA 1963 1996 155,000 Owned
Dana Chomedey (Laval), Canada 1994 -- 43,087 Leased
Dana Granollers, Spain 1971 -- 67,500 Owned
Dana Sao Paolo, Brazil 1954 1984 20,810 Owned
Dana Buenos Aires, Argentina 1955 -- 24,600 Owned
Dana Calumet City, IL 1997 -- 42,000 Leased
Cosmar Sparks, NV* 1987 -- 43,859 Leased
Cosmar Garden Grove, CA** 1996 -- 95,320 Leased
Cosmar Garden Grove, CA** 1996 -- 7,000 Leased
MEM Folkestone, United Kingdom -- -- 9,500 Leased
-------
508,676
=======
</TABLE>
- ---------------
* Assumed by Cosmar in 1994.
** Sublease.
INTELLECTUAL PROPERTY
The Company believes that the trademarks relating to its brand and product
names and patents are important to both its fragrance and artificial nail care
businesses. In addition to "Cosmar," an unregistered brand name used in its
artificial nail care business, the Company's principal product trademarks which
it owns or licenses are Chantilly, White Chantilly, Lutece, Raffinee, Tabu,
DREAMS BY TABU, Ambush, French Vanilla by Dana, Classic Gardenia, Monsieur Musk,
French Garden Flowers, English Waterlilys, Canoe, Canoe Sport, Herbissimo,
English Leather, British Sterling, Love's, Heaven Sent, NaVy, Toujours Moi, NaVy
for Men, Insignia, California for Men and le Jardin with respect to its
fragrance products, COLORPOWER, Press & Go, Petite Press & Go, Sport Press & Go,
PRO(10), Sculpture Quik, Sculpture Quik II, UltraGel, Nail Fetish, Wrap Quik,
Quikfile, Quikshine, Filepro, Quik Fit, and LaJoie with respect to its
artificial nail care products and Nat Robbins, Lip Lacquer, Ever Sheer, and
Color Intense 24 with respect to its lip and eye make-up products. The Company's
or its licensors' applications to register Demi-Jour, Navigator, DREAMS BY TABU,
French Vanilla by Dana, Classic Gardenia, UltraGel, Nail Fetish, White Chantilly
and Ever Sheer in the United States are currently pending. The Company's other
principal trademarks are registered in the United States and several are
registered in other countries.
In July and August 1994, the Company entered into two long-term license
agreements pursuant to which it obtained certain exclusive rights to
manufacture, sell, use and distribute the Houbigant Fragrances, including
Chantilly, Lutece and Raffinee, worldwide (excluding Canada). The Company
acquired similar rights for the Houbigant Fragrances in Canada in December 1994
through the purchase of the assets of Houbigant ACB and the execution of a new
license agreement with Houbigant in July 1996, which superseded and restated its
prior rights acquired from Houbigant ACB. Each of these licenses is with
Houbigant and has an initial term ending in 2001 with options for seven
additional five-year terms, or a total extension of 35 years if all of the
options are exercised. Since November 18, 1993, Houbigant has been the subject
of a proceeding under Chapter 11 of the Bankruptcy Code. Houbigant has been
authorized and empowered to enter into each license by the federal bankruptcy
court. Under such license agreements, the Company generally is obligated to pay
royalties at a rate of 7% of net sales of the Houbigant Fragrances, decreasing
to a minimum of 5% depending on the volume of net sales. Aggregate annual
minimum royalty payments will total $2.7 million during the initial terms of
these agreements. During each renewal period, annual minimum royalties are
adjusted based on increases in the U.S. Consumer Price Index. The Company has
prepaid royalties of $5.0 million, which will be credited against royalties
payable under these agreements in excess of $500,000 per year after the Company
has paid Houbigant an aggregate of $7.6 million in royalties. In August 1994,
the Company
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entered into an assumption and assignment agreement with Houbigant and Harby's
Corporation NV under which it was granted exclusive western hemisphere rights to
the fragrances that are marketed under the Alyssa Ashley and Robert Ashley names
(including Alyssa Ashley, Alyssa Ashley Musk and French Garden Flowers) for a
total term of 25 years if all options for additional terms are exercised. The
assignment was authorized by the federal bankruptcy court. In connection with
the MEM Acquisition, the Company acquired the exclusive and perpetual rights to
manufacture and sell fragrances under the Heaven Sent trademark.
The Company, through Cosmar, has various patent rights and a pending
application in connection with its cosmetics and nail care business including:
(i) an artificial nail sizing ring which allows for manufacturing efficiencies
and ease of measurement and application by women; (ii) a clam shell package
design that displays artificial nails in a unique manner; and (iii) an
artificial nail file/buffer that is more comfortable for a woman to use due to
its unique cushion and plastic core. In addition, Cosmar is the exclusive
licensee for two patented artificial nail sculpturing applications.
LEGAL MATTERS
Litigation
Atlantis Litigation. The Company is a defendant in a lawsuit filed in New
York State Supreme Court in March 1995 by Atlantis International, Ltd.
("Atlantis") and Brian Appel. The complaint alleges defamation conspiracy,
unfair competition, intentional interference with Atlantis's contractual and
business relationships, prima facie tort and breach of warranty and seeks
damages allegedly suffered in the amount of $6.0 million and punitive damages in
the amount of $1.0 million. The Company has been given an indefinite extension
of time to answer or move against the complaint but intends to vigorously defend
this lawsuit and believes that it has substantial and meritorious defenses.
ACB Litigation. In April 1995, the Company and Houbigant, Inc. secured a
temporary restraining order barring the importation or sale in the United States
of certain trademarked goods in an action (the "New York action") commenced in
the United States District Court for the Southern District of New York against
ACB Fragrances and Cosmetics, Inc., and ACB Mercantile Inc. (the "ACB
Companies"), the principals of the ACB Companies, and V&B Distributors, Harold
Schiff, A. Rosenblum Sales, Inc. and Bernard Rosenblum (the "Resellers"). The
claims against the Resellers have been settled. In June 1995, the ACB Companies
filed an answer asserting counterclaims for, inter alia, defamation, conspiracy,
and cancellation of trademarks. In October 1995 and January 1996 the court
granted the Company's motion to dismiss as to all counts of the ACB Companies'
counterclaims against the Company and its affiliates except for three counts
against the Company's Canadian affiliate, Houbigant (1995) Limited
("PPI-Canada"), for breach of contract and tortious interference with business
relations, and two counts against the Company and its affiliates for tortious
interference.
In May 1995, PPI-Canada filed suit in the Superior Court of the District of
Montreal, Canada against the ACB Companies and the principals of the ACB
Companies, seeking damages and/or restitution in the amount of approximately
$8.0 million (Canadian) for breach of contract and fraud in connection with the
Company's acquisition of substantially all of the assets of the ACB Companies in
December 1994 (the "Canadian action").
In July 1996, the parties to the New York action and the Canadian action
entered into a settlement agreement with respect to all litigation. Under the
settlement, ACB dismissed its remaining counterclaims against the Company and
its affiliates and on August 21, 1996, the Company paid $2.7 million in
connection with the purchase of certain inventory from Houbigant in 1994. The
settlement also included certain modifications of existing royalty agreements in
order to consolidate the worldwide rights to manufacture and distribute the
Houbigant Fragrances.
MEM Litigation. An action (seeking class action certification) was filed
on July 31, 1996 on behalf of the shareholders of MEM against MEM and four of
its current and former directors, alleging that the compensation offered to the
shareholders in the MEM Acquisition was inadequate and grossly unfair and that
the defendants had violated their fiduciary duties by not seeking additional
potential purchasers for MEM. The action sought, among other things, a court
order requiring the defendants to seek other purchasers, or, if the MEM
Acquisition was consummated, damages. Although MEM and the Company believe that
the suit is
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without merit, because of the expense of continued legal proceedings, MEM has
entered into a settlement agreement with the named plaintiff for settlement of
the lawsuit without the admission of liability or wrongdoing by the defendants.
The terms of the settlement include some additional disclosure to be made to
shareholders through the settlement notice, a payment of up to $25,000 for
plaintiffs' attorneys fees and the exchange of releases by the parties. The
settlement is subject to, among other things, final approval by the court.
The Company is involved from time to time in various legal proceedings
arising from the ordinary course of business. The Company believes that the
outcome of all pending legal proceedings in the aggregate will not have a
material effect on the financial condition or results of operations of the
Company.
Environmental and Other Regulation
Due to the nature of the Company's business, its operations are subject to
a variety of environmental laws relating to the storage, discharge, handling,
emission, generation, manufacture, use and disposal of chemicals, solid and
hazardous waste and other toxic and hazardous materials used to manufacture the
Company's products. The Company believes that it has been operating its
facilities in substantial compliance in all material respects with existing laws
and regulations.
Compliance with federal, state and local laws and regulations pertaining to
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not anticipated to have a material effect upon
the operations of the Company.
The Company is subject to regulation by the United States Food and Drug
Administration. The Company's advertising and sales practices are subject to the
jurisdiction of the Federal Trade Commission. In addition, the Company is
subject to numerous federal, state and local laws relating to marketing and to
the content, labeling and packaging of its products.
BUSINESS OF THE GUARANTOR
The Guarantor was incorporated in the State of Delaware on February 6, 1997
for the purpose of receiving a portion of the proceeds of the Offering, issuing
the Subsidiary Guarantee (as defined herein) and establishing the Escrow
Account. Under the terms of its certificate of incorporation and the Indenture,
the permissible activities of the Guarantor are subject to limitations intended
to preserve its separateness from the Company and the Company's other
subsidiaries, and to prevent the Guarantor's becoming the subject of bankruptcy
proceedings, and, in the event of the Company or its other subsidiaries becoming
the subject of bankruptcy proceedings, to permit the payment of interest under
the Subsidiary Guarantee. Among other things, these resolutions preclude the
Guarantor from engaging in any business transaction, acquiring any assets or
incurring or guaranteeing any debt, other than as contemplated and required in
connection with the issuance and guarantee of the Notes and the maintenance of
the Escrow Account. In addition, the certificate of incorporation of the
Guarantor and the Indenture requires that the assets, properties and liabilities
of the Guarantor be at all times maintained separately from the assets,
properties, liabilities and business of the Company and the Company's other
subsidiaries, and that the Company and its other subsidiaries not hold out or
treat the Guarantor or its assets as available to pay the debts of the Company
or its other subsidiaries (other than the Notes). Further, under such
certificate of incorporation and the Indenture, the board of directors of the
Guarantor is required at all times to include at least two "independent"
directors who have no interest in or relationship with the Company or its other
subsidiaries, and the affirmative vote of both independent directors is
required, among other things, to authorize the filing of a bankruptcy petition
with respect to the Guarantor or the making of any other act of bankruptcy by
the Guarantor or the amendment or modification of any term of the Indenture or
the Escrow Agreement. No assurance can be given, however, that these
restrictions will be sufficient to prevent the entry of the Guarantor into
bankruptcy proceedings, or, in the event that the Company or its other
subsidiaries become the subject of bankruptcy proceedings, that these
restrictions will be sufficient to prevent a court in such proceedings from
making the assets of the Guarantor (including the Guarantor's interest in the
Escrow Account) subject to such proceedings under the doctrine of "substantive
consolidation" or similar equitable doctrines. See "Risk Factors -- Risk of a
Determination of Fraudulent Conveyance and Bankruptcy."
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<PAGE> 71
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning the executive
officers, directors and certain key employees of the Company as of May 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Thomas V. Bonoma................ 50 Chairman, Chief Executive Officer and Director
Norbert Becker.................. 48 President and Chief Operating Officer
Ronald D. Bowen................. 53 Group Vice President, Corporate Production and
Operations
Albert E. DeChellis............. 47 Group Vice President and President, Fragrance
Sean E. Greene.................. 56 Group Vice President, President Renaissance Sales
John R. Jackson................. 38 Group Vice President, General Counsel and Secretary
Thomas T.S. Kaung............... 59 Group Vice President and Chief Financial Officer
Gay A. Mayer.................... 54 Group Vice President, Market Development
Marc L. Rovner.................. 45 Group Vice President and President, International
Eric R. Hamburg................. 34 Director
Kurt L. Kamm.................... 54 Director
William J. Kidd................. 55 Director
John H. Lynch................... 44 Director
E. Mark Noonan.................. 44 Director
Terry M. Theodore............... 33 Director
Daniel D. Villanueva............ 59 Director
</TABLE>
Thomas V. Bonoma, Chairman, Chief Executive Officer and a director, is
responsible for the overall administration and direction of the Company. From
1987 to 1993, Dr. Bonoma was employed by Benckiser, GmbH, a $3 billion
privately-held international manufacturer of fragrances, cosmetics and cleaning
products, as the chief executive officer of its business in the United States,
Canada and Latin America. In this capacity, Dr. Bonoma directed the acquisition
of seven businesses with aggregate annual gross revenues in excess of $800
million. Products under his management while at Benckiser, GmbH included Coty,
Jovan and Quintessence brands in the fragrance and cosmetics business and Calgon
Bubble Bath, Cling Free Fabric Softener, ElectraSol and Jet-Dry, in the cleaning
products business. Since 1987, Dr. Bonoma has been a partner of BGI, a
consulting firm. From 1979 to 1990, he was Professor of Business Administration
at the Harvard Business School. Dr. Bonoma is a director of Griffin Corp., an
agricultural chemicals company.
Norbert Becker, President and Chief Operating Officer, joined the Company
in July 1996. From April 1981 to 1996, Mr. Becker held a number of positions
with Benckiser, GmbH in different countries. His last position was as President
and Chief Executive Officer of Lancaster Group USA, the American subsidiary of
Benckiser, GmbH, selling and marketing prestige fragrances in the United States.
Previously, Mr. Becker was Chief Operating Officer of Lancaster Group USA and
Executive Vice President for Finance and Administration for Lancaster Worldwide,
a division of Benckiser, GmbH. Mr. Becker is a graduate of Frankfurt University,
in Frankfurt, Germany.
Ronald D. Bowen, Group Vice President, Corporate Production and Operations,
joined the Company in June 1994. From 1988 to 1994, Mr. Bowen served as
Benckiser, GmbH's Vice President of Operations. In this capacity Mr. Bowen
supervised all of Benckiser, GmbH's North American production activities,
including manufacturing, logistics and distribution and was actively involved in
acquiring and restructuring facilities and implementing production policies for
certain businesses acquired by Benckiser, GmbH. Mr. Bowen worked closely with
Dr. Bonoma on the acquisition and integration of Beecham Household Products
(Calgon), Germaine Monteil (Revlon), Quintessence, Inc. and Coty, Inc. For 17
years prior to joining Benckiser, GmbH, Mr. Bowen was employed by General Foods
Corporation in manufacturing, logistics, marketing and
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<PAGE> 72
MIS positions and as a Vice President of Culinova Group, a General Foods
Corporation subsidiary. Mr. Bowen is a graduate of Harvard University's Program
for Management Development and the United States Military Academy.
Albert E. DeChellis, Group Vice President and President, Fragrance, joined
the Company in June 1994. From 1992 to 1994, Mr. DeChellis was the President and
Chief Operating Officer of Benckiser, GmbH Consumer Products. Previously, Mr.
DeChellis was Benckiser, GmbH's Vice President of Sales. Mr. DeChellis was
integrally involved with Dr. Bonoma in the acquisition and restructuring of
several companies while at Benckiser, GmbH. Mr. DeChellis helped orchestrate the
acquisition and restructuring of Calgon, Inc., Quintessence, Inc. and Coty,
Inc., and was directly responsible for the restructuring of the sales
organizations for each of those acquired companies. Prior to 1987, Mr. DeChellis
was employed by Ecolab in various sales capacities for almost 15 years, where he
held positions such as District Manager, Assistant Vice President of Regional
Sales and Vice President of Eastern Area Sales. Mr. DeChellis is a graduate of
Kent State University.
Sean E. Greene, Group Vice President, President Renaissance Sales, joined
the Company in June 1994. From 1991 to 1994, Mr. Greene served as Vice President
of Sales of Quintessence, Inc., which was acquired by Benckiser, GmbH in 1991.
In 1994, Mr. Greene became Senior Vice President of Sales for Coty, Inc.,
another Benckiser, GmbH subsidiary. Prior to joining Benckiser, GmbH, Mr. Greene
was Senior Vice President of the Fine Fragrance Division of Faberge, Inc. and a
Vice President of Mary Quant Cosmetics, an international cosmetics and fragrance
company. Mr. Greene is a graduate of Belvedere College in Dublin, Ireland.
John R. Jackson, Group Vice President, General Counsel and Secretary,
joined the Company in June 1995. From 1994 to 1995, Mr. Jackson was the Vice
President of Acquisitions and General Counsel and Secretary for Brothers Gourmet
Coffees, Inc. From 1983 to 1988, he was engaged in the practice of law at the
Denver office of Kirkland and Ellis. From 1988 to 1994, Mr. Jackson was engaged
in the practice of law at the Denver office of the firm of Ballard Spahr Andrews
& Ingersoll, where he became a partner in 1990. While engaged in private
practice, Mr. Jackson focused on merger and acquisition transactions and private
and public financing. Mr. Jackson taught Business Planning as an adjunct
professor of law at the University of Denver Law School. He holds a B.A. degree
from Davidson College and a J.D. degree from Vanderbilt Law School.
Thomas T.S. Kaung, Group Vice President and Chief Financial Officer, joined
the Company in July 1995. From 1991 to 1995, Mr. Kaung was President of River
International, Inc., a consulting firm. From 1990 to 1991 he was the Executive
Vice President and Chief Financial Officer for Zale Corporation, which operates
a large national chain of fine jewelry stores. Zale Corporation filed for
bankruptcy protection on January 23, 1992. Prior thereto, he spent 12 years at
Cole National Corporation, a leading specialty retailer, where he served as
Executive Vice President, Administration and Chief Financial Officer. In
addition, Mr. Kaung rose to the position of Divisional Vice President for
Finance for the Dayton Hudson Corporation after ten years of service. Mr. Kaung
holds a B.S. degree from Southwestern University and an M.S. degree from the
University of Iowa.
Gay A. Mayer, Group Vice President, Market Development, joined the Company
on December 4, 1996. From 1990 to 1996, Mr. Mayer was President, Chief Executive
Officer and Chairman of the Board of Directors of MEM.
Marc L. Rovner, Group Vice President and President, International, joined
the Company in May 1995. Mr. Rovner's background spans 16 years of international
sales and marketing experience with Fortune 500 companies such as International
Paper, Unilever and Benckiser, GmbH. From 1992 to 1995, he served as U.K.
General Manager at Benckiser, GmbH. From 1981 to 1992, Mr. Rovner served as
Divisional Category Manager at Unilever, where he directed the launch of ten
major detergent and personal care products, both in the United States and Japan.
From 1978 to 1980, he served as Product Manager at International Paper, where he
was responsible for the introduction of its first consumer products' ad
campaign. Mr. Rovner holds a B.A. degree from the University of Pennsylvania and
an M.A. degree from the University of Chicago.
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<PAGE> 73
Eric R. Hamburg, Director, was elected as a director in October 1994. Mr.
Hamburg is the founder and President of Industrial Renaissance Inc., which was
founded in September 1996 and has been active since November 1996. In 1993, he
joined Kidd, Kamm & Company as a partner after serving as a senior manager with
Andersen Consulting from 1985 to 1993. While at Andersen Consulting, Mr. Hamburg
led the design and implementation of numerous business turnarounds and profit
improvement initiatives in a wide variety of industries. He has extensive
experience in just-in-time manufacturing, distribution, management information
systems and plant start-ups.
Kurt L. Kamm, Director, was elected as a director in October 1994. In 1979,
Mr. Kamm joined Lineberger Kidd Kamm & Company. He helped to establish Kidd,
Kamm & Company in 1987. Mr. Kamm is a director of Wright Medical Technology,
Inc., a manufacturer and marketer of orthopaedic implant devices. In January
1997, Mr. Kamm formed a separate entity for future investments, Kamm Theodore,
LLC.
William J. Kidd, Director, was elected as a director in May 1994. In 1974,
Mr. Kidd helped to form and became a principal of Lineberger, Kidd & Company
which, in turn, became Lineberger Kidd Kamm & Company in 1979. In 1987, Mr. Kidd
helped to establish Kidd, Kamm & Company. Mr. Kidd is a director of Wright
Medical Technology, Inc., a manufacturer and marketer of orthopaedic implant
devices. In January 1997, Mr. Kidd formed a separate entity for future
investments, Kidd & Company, LLC.
John H. Lynch, Director, was elected as a director in March 1995. Mr. Lynch
has been the Vice Chairman and President since 1994 of Knoll Inc., a firm
engaged in the manufacture of office furniture. He has been a partner since 1987
of BGI, a consulting firm. From 1982 to 1990, Mr. Lynch was employed by the
Harvard Business School, as Assistant Dean and Director of the MBA program from
1982 to 1986 and as Associate Dean from 1988 to 1990. Mr. Lynch has been elected
to the board of directors pursuant to the right of Dr. Bonoma, under his
employment agreement, to designate one additional director.
E. Mark Noonan, Director, has been a Managing Director since 1990 of
Triumph Capital Group, Inc., a firm engaged in investment banking and investment
management. He served as a Vice President and then a Managing Director of Drexel
Burnham Lambert from 1984 to 1990. Mr. Noonan has been elected to the board of
directors pursuant to the right of the holders of the Company's Cumulative
Exchangeable Preferred Stock to elect one director under the Company's restated
certificate of incorporation.
Terry M. Theodore, Director, was elected as a director in May 1994. Mr.
Theodore, a partner at Kidd Kamm & Company, joined Kidd, Kamm & Company in 1989
after serving in the Financial Institutions Group of Bear, Stearns & Co. from
1988 to 1989. In January 1997, Mr. Theodore formed a separate entity for future
investments, Kamm Theodore, LLC.
Daniel D. Villanueva, Director, was elected as a director in September
1996. Mr. Villanueva has been the Chairman and Managing Director since 1990 of
Bastion Capital Corporation, a minority-controlled private equity investment
firm specializing in management-led buyouts of leading middle market companies
and related transactions. He has served since April 1996 on the Board of
Directors of Telemundo Group, Inc., a publicly traded Spanish-language
television company, and since October 1996 on the Board of Directors of
Seven-Up/RC Bottling Company of Southern California, Inc., a manufacturer and
distributor of beverage products. Mr. Villanueva has been elected to the board
of directors as the designee selected by the holders of a majority of the shares
of Senior Redeemable Preferred Stock.
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<PAGE> 74
EXECUTIVE OFFICERS AND DIRECTORS OF THE GUARANTOR
The following table sets forth certain information concerning the executive
officers, directors and certain key employees of the Guarantor as of May 1,
1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Thomas V. Bonoma................. 50 Chief Executive Officer and President
Vice President, General Counsel, Secretary and
John R. Jackson.................. 38 Director
Thomas T.S. Kaung................ 59 Vice President, Chief Financial Officer and Director
Anthony J. Wesley................ 41 Vice President, Treasurer and Director
Martin Byman..................... 38 Director
Mary Ellen Spiegel............... 47 Director
</TABLE>
Anthony J. Wesley, Vice President, Treasurer and a director, joined the
Guarantor in March 1997. Mr. Wesley has also been Vice President and Treasurer
of the Company since February 1997. From 1990 to 1997, Mr. Wesley was founder
and shareholder in Wesley Mills and Company, an accountancy practice in
Cleveland, Ohio. Prior thereto, he spent six years as the Manager, Tax Planning
of Cole National Corporation, a leading specialty retailer. Mr. Wesley holds a
B.B.A. from the University of Notre Dame and is a Certified Public Accountant.
Martin Byman, Director, was elected as a director of the Guarantor in March
1997. Mr. Byman has been the General Counsel of Odyssey Partners, L.P., a
leading private investment firm, since January 1994. From 1984 to 1987 and from
1988 to 1994, he was engaged in the practice of law at Paul, Weiss, Rifkind,
Wharton & Garrison. Mr. Byman was elected to the board of directors of the
Guarantor as one of the "independent directors."
Mary Ellen Spiegel, Director, was elected as a director of the Guarantor in
March 1997. Ms Spiegel has been Director of Planned Giving of the Catholic
Archdiocese of New York since September 1996. From 1995 through such date, she
was a licensed agent of The Equitable Life Insurance Company of New York. She is
the founder and, since January 1994, has been the principal of Fiscal Plus, a
financial planning firm that specializes in assisting women to achieve long-term
financial security. From April 1986 to December 1993, Ms. Spiegel was a managing
director of Maurice & Associates, Inc., a marketing consulting firm to clients
in the healthcare publishing industry. She was elected to the board of directors
of the Guarantor as one of the "independent directors."
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<PAGE> 75
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation for services rendered in all capacities earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers (collectively, the "Named Executive Officers")
during the fiscal period from April 15, 1994 (Inception) to March 31, 1995 and
Fiscal 1995 and Fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL SHARES
COMPENSATION UNDERLYING
FISCAL ------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS GRANTED COMPENSATION
- ----------------------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas V. Bonoma......................... 1996 $470,592 $150,000 -- --
Chairman and Chief Executive Officer 1995 400,000 -- -- --
1994 233,338 -- 93,182 --(1)
Sean E. Greene........................... 1996 275,000 125,000 -- --
Group Vice President, President 1995 250,000 -- -- --
Renaissance Sales
1994 145,836 175,000 9,318 $ 62,500(2)
Albert E. DeChellis...................... 1996 244,094 80,000 -- --
Group Vice President and President, 1995 225,000 -- -- --
Fragrance
1994 131,250 125,000 9,318 37,500(2)
Thomas T.S. Kaung........................ 1996 254,115 100,000 -- --
Group Vice President and Chief 1995(3) 177,385 -- 9,318 --
Financial Officer
Ronald D. Bowen.......................... 1996 206,960 120,000 -- --
Group Vice President, Corporate 1995 166,667 -- -- --
Production and Operations 1994 93,333 125,000 9,318 40,000(2)
</TABLE>
- ---------------
(1) Does not include $85,000 paid to a company controlled by Dr. Bonoma during
May through July 1994 for consulting services.
(2) Represents amounts paid in respect of services rendered as a consultant
prior to the individual's employment by the Company.
(3) Mr. Kaung joined the Company during the fiscal year ended March 31, 1996.
There was no grant of stock options during the fiscal year ended March 31,
1997 to the Named Executive Officers.
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<PAGE> 76
DIRECTORS
Directors of the Company are elected annually and hold office until the
next annual meeting of shareholders or until their successors are duly elected
and qualified. Officers of the Company are appointed by and serve at the
discretion of the Board of Directors of the Company. Under the Company's
restated certificate of incorporation, the holders of the outstanding shares of
the Company's cumulative exchangeable preferred stock have the right to elect
one member of the Company's Board of Directors. Mr. Noonan has been elected to
the Board of Directors pursuant to this right. In addition, pursuant to Dr.
Bonoma's employment agreement with the Company, Dr. Bonoma has been elected a
director and has the right to designate one additional director. Mr. Lynch has
been elected to the Board of Directors pursuant to this right. Holders of the
Series C Preferred Stock (acting together with the holders of the Series B
Preferred Stock, as a single class) will have the right to nominate three
candidates for consideration for the Company's Board of Directors. The Company
shall use all reasonable commercial efforts to cause the election of one of such
nominees selected by the Company (the "Series C Preferred Nominee"). Mr.
Villanueva has been elected to the Board of Directors pursuant to this right.
Pursuant to the Securities Purchase Agreement, dated as of September 27, 1996,
between the Company and Bastion Capital Fund, L.P. ("Bastion"), the Company has
agreed in the event that Bastion is not entitled to designate the Series C
Preferred Nominee, the Company will include one person selected by Bastion in
its nominations for the Company's Board of Directors and to use all reasonable
commercial efforts to cause the election of such person to the Board, so long as
Bastion owns 75% (in value) of (i) the shares of common stock purchased by
Bastion in the New Common Stock Sale and (ii) the Units purchased by Bastion
pursuant to the Series B Offering (the "Minimum Share Amount"). In addition,
pursuant to a Voting Agreement, dated as of September 27, 1996, KKEP agreed
that, in the event that Bastion is not entitled to designate the Series C
Preferred Nominee, KKEP will vote its shares of common stock in favor of a
nominee designated by Bastion for election to the Company's Board of Directors
provided that Bastion has the Minimum Share Amount.
Directors of the Company and directors of the Guarantor (other than
"independent" directors) are not compensated for their services as directors.
The "independent" directors of the Guarantor, however, are each compensated for
their services $1,500 annually and $500 for each meeting the director attends.
All non-employee directors of the Company and the Guarantor are reimbursed for
ordinary and necessary expenses incurred in attending board or committee
meetings.
The Board of Directors intends to create a Financial Affairs Committee of
the Board of Directors and to appoint Messrs. Kidd, Noonan and Theodore to such
committee. It is expected that the Financial Affairs Committee would consider
matters pertaining to the Company's financing and business strategies, although
the Board of Directors has not yet determined the extent of the authority to be
delegated to such committee. Other than the Compensation Committee, the Stock
Option Committee and the Audit Committee of the Board of Directors and the
contemplated Financial Affairs Committee, there are no other committees of the
Board of Directors.
STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Plan") was approved by the
Company's Board of Directors and stockholders in January 1995. The Company has
reserved 111,320 shares of its common stock, par value $.01 per share (the
"Common Stock"), under the Plan. The Company's Board of Directors has also
reserved an additional 25,000 shares of its Common Stock to be available for
grants subject to stockholders' approval. Options granted under the Plan may
include those qualified as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock options. The
Plan is administered by a Stock Option Committee of the Board of Directors (the
"Stock Option Committee") consisting of Dr. Bonoma and Mr. Kidd. The Stock
Option Committee has wide latitude in determining the recipients of options and
numerous other terms and conditions of the options. All regular employees and
all directors may be chosen by the Stock Option Committee to participate in the
Plan. Non-employees may receive only nonqualified options. Options become
exercisable in such amounts and at such intervals as the Stock Option Committee
provides for in the applicable option agreement. At March 31, 1997, there were
outstanding options under the Plan with respect to 101,805 shares of Common
Stock. These options generally
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<PAGE> 77
become exercisable with respect to 25% of their shares in each of the four years
1995 through 1998, and expire in January 2005.
The exercise price for the shares purchased upon exercise of all options
granted under the Plan is determined by the Stock Option Committee. The exercise
price of an incentive stock option must be at least equal to the fair market
value of the Common Stock on the date such option is granted (110% of the fair
market value for stockholders who, at the time the option is granted, own more
than 10% of the total combined classes of stock of the Company or any
subsidiary).
No option may have a term of more than ten years (five years for incentive
stock options granted to 10% or greater stockholders). Options generally may be
exercised only if the option holder remains continuously associated with the
Company or a subsidiary from the date of grant to the date of exercise. However,
options may be exercised within certain specified periods following termination
of employment or ceasing to be a director by reason of death, disability or
retirement of the optionee or any reason other than termination of employment
for cause or without the consent of the Company. The Stock Option Committee may
cancel, by giving an optionee written notice, any option that remains
unexercised upon the date of the consummation of a merger, consolidated
reorganization, liquidation or dissolution in which the Company does not survive
or a sale, lease exchange or other disposition of all or substantially all of
the property and assets of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Bonoma
Employment Agreement"), dated as of August 6, 1996, with Dr. Bonoma, which
agreement supersedes his prior employment agreement with the Company. Pursuant
to the Bonoma Employment Agreement, Dr. Bonoma is employed as the chief
executive officer of the Company and each of its present and future subsidiaries
and is responsible for managing the day-to-day affairs of the Company and its
subsidiaries.
Dr. Bonoma will receive a base salary of $500,000 per year and will be
eligible to receive an additional annual bonus of 100% of his annual base salary
if certain objectives, to be established by the Board of Directors of the
Company, are met. If Dr. Bonoma's employment is terminated without cause or if
Dr. Bonoma terminates his employment for good reason, Dr. Bonoma will be
entitled to the greater of his annual base salary for the remaining term of his
employment or for one year, and to a bonus equal to the greater of 75% of his
annual base salary for the remaining term of his employment or for one year.
The Bonoma Employment Agreement will expire on August 18, 2000 and is
automatically renewable for additional one-year periods unless Dr. Bonoma or the
Company, upon 90 days notice, decides not to renew it. The Bonoma Employment
Agreement will automatically terminate in the event of a change of control of
the Company resulting in a sale of all or substantially all of the stock or
assets of the Company in which the shareholders of the Company liquidate all or
substantially all of their equity interests in the Company.
The Company and Mr. Gay A. Mayer, the former Chief Executive Officer and
President of MEM, entered into an employment agreement dated August 6, 1996,
pursuant to which Mr. Mayer is employed as Group Vice President of Market
Development of the Company. Mr. Mayer will receive an annual gross salary of
$250,000 and will be eligible to participate in all bonus programs for
executives of the Company, on the same terms and conditions as such executives.
The Company also granted Mr. Mayer an option to purchase 5,000 shares of Common
Stock under the Company's stock option plan at a per share exercise price of
$104.00. Mr. Mayer's employment will terminate 30 months after consummation of
the MEM Acquisition, which was completed on December 4, 1996.
BONUS PLANS
The Company and each of its principal divisions -- the Fragrance division,
Cosmetics division and International division -- have adopted an incentive bonus
plan for Fiscal 1996 (the "1996 Bonus Plan") under which eligible employees of
the Company (including the Named Executive Officers) or such division, as the
case may be, who are actively employed on the day the bonus is paid, will be
entitled to receive cash bonuses as a percentage of such employee's base salary
depending upon whether target levels of EBITDA established
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<PAGE> 78
by the Company's Board of Directors are met or exceeded. Five percent of a
target award amount is paid if 90% of the established EBITDA target is met and
10% of a target award is paid if 91% of the established EBITDA target is met.
Thereafter increasing percentages of the target award are paid until 100% of the
established EBITDA target is met (at which point 100% of the target award is
paid). In the event that the established EBITDA target is exceeded, bonus levels
will increase above 100% of the target award by one percentage point for each
full percentage point by which the applicable EBITDA target is exceeded.
Employees who are actively employed for less than one full year will have the
award pro-rated for each full month of employment. Final award payments are
subject to the approval of the Chairman. If the established EBITDA target for
Fiscal 1996 is met, approximately $4.1 million would be payable under the 1996
Bonus Plan.
In October 1996, the Board of Directors elected to pay to certain employees
of the Company approximately $1.5 million as a non-returnable advance against
incentive bonuses that may be earned under the 1996 Bonus Plan. Amounts advanced
will offset on a dollar-for-dollar basis the bonuses actually earned, but such
advances are not required to be returned even if not ultimately earned. The
Named Executive Officers received advances as follows: Thomas V.
Bonoma -- $150,000; Sean E. Greene -- $125,000; Albert E. DeChellis -- $80,000;
Thomas T.S. Kaung -- $100,000; and Ronald D. Bowen -- $120,000.
In connection with the MEM Acquisition, the Company established the MEM
Employee Stay Bonus Program for twenty-nine employees of MEM in order to
encourage the selected employees to remain in the employ of the Company
following the closing. On the closing date of the MEM Acquisition, $207,932 was
deposited in an escrow account. As of March 31, 1997, approximately $154,000 has
been paid and an additional $47,000 is expected to be paid pursuant to the MEM
Employee Stay Bonus Program.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Bonoma and Mr. Kidd functionally act as the Company's Compensation
Committee. Dr. Bonoma's salary is established by his employment agreement with
the Company. Dr. Bonoma and Mr. Kidd constitute the Stock Option Committee of
the Board of Directors. Messrs. Kidd, Lynch and Noonan constitute the Audit
Committee of the Board of Directors. Mr. Kidd, Mr. Noonan and Mr. Theodore are
expected to constitute the Financial Affairs Committee. There are no other
committees of the Board of Directors.
CERTAIN OTHER MATTERS
From March 1994 to August 1995, Dr. Bonoma was a director (including
chairman of the board from September 1994 to August 1995) of Brothers Gourmet
Coffees, Inc. ("Brothers"). During September and October 1995, three shareholder
suits were commenced against Brothers, naming, among others, Dr. Bonoma as a
defendant. These suits alleged, among other things, that Brothers and the
individual defendants violated federal securities laws in connection with the
initial public offering of Brothers's common stock in December 1993 (prior to
the time Dr. Bonoma became a director) and certain public statements made by
Brothers through May 1995. Dr. Bonoma believes that the allegations made in the
suits as they concern him are without merit. The parties to the suits have
entered into a stipulation of settlement under which the plaintiffs will receive
a total of approximately $8 million in cash and Brothers common stock, although
there is no admission of wrongdoing. Dr. Bonoma is not required to contribute
any amounts in respect of the settlement.
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<PAGE> 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1997, information with
respect to the beneficial ownership of shares of the Company's Common Stock by
(i) each stockholder known by the Company to be the beneficial owner of more
than 5% of such shares, (ii) each director of the Company, the Company's Chief
Executive Officer and each of the other named executive officers in the Summary
Compensation Table contained herein and (iii) directors and executive officers
of the Company as a group. The Company is the beneficial owner of 100% of the
Guarantor's Common Stock.
<TABLE>
<CAPTION>
PERCENT
ON A
NO. OF FULLY DILUTED
NAME OF STOCKHOLDER SHARES PERCENT+ BASIS
- ----------------------------------------------------------------- ------- -------- -------------
<S> <C> <C> <C>
Kidd, Kamm Equity Partners, L.P.(1).............................. 605,286 73.4% 39.3%
c/o Kidd, Kamm & Company
Three Pickwick Plaza
Greenwich, CT 06830
Thomas V. Bonoma(2).............................................. 26,902 3.3% 1.7%
Ronald D. Bowen.................................................. 3,632 * *
Albert E. DeChellis.............................................. 6,053 * *
Sean E. Greene................................................... 8,070 1.0% *
Thomas T.S. Kaung................................................ 2,690 * *
John H. Lynch.................................................... 2,690 * *
E. Mark Noonan(3)................................................ 59,825 6.8% 3.9%
Triumph-Connecticut Limited Partnership(3)....................... 59,825 6.8% 3.9%
60 State Street, 21st Floor
Boston, MA 02109
Daniel D. Villanueva(4).......................................... 95,766 11.0% 6.2%
Bastion Capital Corporation
Suite 2960
1999 Avenue of the Stars
Los Angeles, CA 90067
CIBC WG Argosy Merchant Fund 2, L.L.C.(5)........................ 51,959 6.3% 3.4%
c/o CIBC Wood Gundy Securities Corp.
425 Lexington Avenue, 3rd Floor
New York, NY 10017
All directors and executive officers as a group (14 persons)..... 810,914 87.3% 52.7%
</TABLE>
- ---------------
* Less than 1%.
+ The percentages in this column have been calculated pursuant to Rule
13d-3(d)(1) of the Exchange Act and do not give effect to options and
warrants, except for options and warrants of the person for whom the
percentage is being calculated that are exercisable within 60 days.
(1) William J. Kidd, Kurt L. Kamm, Terry M. Theodore and Eric R. Hamburg are
principals of Kidd, Kamm & Company, an entity affiliated with Kidd, Kamm
Equity Partners, L.P., and for purposes of this report may be deemed to
beneficially own the shares owned of record by Kidd, Kamm Equity Partners,
L.P.
(2) Includes 26,902 shares held by a trust for the benefit of Dr. Bonoma but
excludes 93,182 shares of Common Stock issuable to Dr. Bonoma under a stock
option which is not currently exercisable.
(3) Represents shares issuable upon exercise of Common Stock purchase warrants
acquired by Triumph-Connecticut Limited Partnership ("Triumph-Connecticut")
in connection with the purchase by that entity of shares of the Company's
Cumulative Exchangeable Preferred Stock. Does not include 175 shares
issuable upon exercise of warrants held by Jeffrey Lane and Meri Lane
(collectively, the "Lanes"), as trustees of a trust that is not affiliated
with Triumph-Connecticut. Jeffrey Lane is affiliated with
Triumph-Connecticut. Mr. Noonan is a Managing Director of Triumph Capital
Group Inc., a general partner of Triumph-Connecticut Capital Advisors,
Limited Partnership, the general partner of Triumph-Connecticut, and for
purposes of this table Mr. Noonan may be considered to be the owner of
these shares. As of March 31, 1997, Triumph-Connecticut and the Lanes also
hold approximately
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<PAGE> 80
12,753 shares and approximately 45 shares, respectively, of the Cumulative
Exchangeable Preferred Stock.
(4) Represents 51,959 shares of Common Stock acquired by Bastion in the New
Common Stock Sale and includes 43,807 shares of Common Stock issuable upon
exercise of Common Stock warrants acquired by Bastion in the Series B
Preferred Stock Offering. Mr. Villanueva is the Chairman and Managing
Director of Bastion and for purposes of this table Mr. Villanueva may be
considered to be the owner of such shares.
(5) The Initial Purchaser, an affiliate of the CIBC Fund, may from time to time
hold a position in the Series B Warrants (as defined herein).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Ownership and Compensation. In August 1994, Dr. Bonoma,
together with other members of senior management, acquired 68,922 shares of
Common Stock in consideration of the payment of approximately $3 million. In
addition, the Company has granted options to officers and other employees under
the Plan referred to above under the caption "Stock Option Plan" and additional
options may be granted under the Plan to directors, officers and other
employees.
Management Agreement. On August 16, 1994 the Company entered into a
Management Agreement (the "Management Agreement") with Kidd Kamm. Pursuant to
the Management Agreement, Kidd Kamm received a fee of $675,000 upon the closing
of the Cosmar Acquisition and, subject to certain restrictions contained in the
Indenture governing the Company's Senior Notes, is entitled to receive an annual
management fee of $675,000 subject to increases as determined by the Board of
Directors of the Company, plus out-of-pocket expenses incurred for management,
consulting and related services to be rendered to the Company. At the closing of
the Offering, Kidd Kamm received management fees equal to $1.35 million for the
previous two fiscal years. Principals of Kidd Kamm organized KKEP which is the
owner of 73.4% of the currently outstanding Common Stock.
In November 1996, the partners of Kidd Kamm agreed to a division of the
firm and its operations in relation to future investments. The firm's two
founding partners, William J. Kidd and Kurt L. Kamm, formed separate entities
for future investments, including the formation of two firms, Kidd & Company,
LLC and Kamm Theodore, LLC in January, 1997. The ongoing support and management
provided to the Company under the Management Agreement will not be affected by
the aforementioned changes in Kidd Kamm. Members of the investment firms to be
formed by the founding partners of Kidd Kamm who were primarily responsible for
providing support and management assistance to the Company as employees of Kidd
Kamm will continue to provide such services throughout the term of the
Management Agreement.
Stockholders Agreement. Management, Kidd Kamm and certain other equity
holders have entered into a stockholders agreement dated August 18, 1994 with
the Company (the "Stockholders Agreement"), whereby such equity holders of the
Company are restricted in the transfer of their shares of Common Stock of the
Company for a period of eight years from that date unless such transfer is made
in accordance with the Stockholders Agreement.
Financing Fees. In May 1996, the Company paid the CIBC Fund a $2.1 million
commitment fee for committing to provide the Interim Preferred Facility, $1.1
million of which was refunded to the Company as part of the CIBC Financing. In
addition, the Initial Purchaser, an affiliate of the CIBC Fund, has from time to
time provided investment banking services to the Company in connection with
various transactions and proposed transactions for which it has received
customary compensation. The Initial Purchaser acted as initial purchaser of the
Series B Preferred Stock, provided the initial commitment in connection with the
Senior Secured Credit Facility, purchased a portion of the notes issued in the
initial funding under the Senior Secured Credit Facility, and acted as initial
purchaser of the Existing Notes in each case in return for customary fees and
reimbursement of expenses. In connection with the Equity Financing, Triumph-
Connecticut, a partnership in which E. Mark Noonan serves as a general partner
of the general partner, received a referral fee of $600,000 from the Initial
Purchaser. In addition, Triumph-Connecticut received a
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<PAGE> 81
referral fee of $1.0 million from the Initial Purchaser in connection with the
Offering and may receive additional fees from the Initial Purchaser from time to
time.
Bastion Securities Purchase Agreement. On September 27, 1996, the Company
entered into a Securities Purchase Agreement (the "Bastion Securities Purchase
Agreement") with Bastion pursuant to which it sold 51,959 shares of Common Stock
to Bastion for an aggregate purchase price of $5.0 million. Pursuant to the
terms of the Bastion Securities Purchase Agreement, the Company has agreed to
include one person selected by Bastion in its nominations for the Company's
Board of Directors and to use all reasonable commercial efforts to cause the
election of such person to the Board, so long as Bastion owns 75% (in value) of
the shares of Common Stock purchased thereunder and of the Units purchased by
Bastion pursuant to the Series B Preferred Stock Offering. Bastion agreed that
the Common Stock purchased thereunder shall be bound by the terms of the
Stockholders Agreement.
In addition, pursuant to a Voting Agreement, dated as of September 27,
1996, KKEP agreed that, in the event that Bastion is not entitled to designate
the Series C Preferred Nominee, KKEP will vote its shares of Common Stock in
favor of a nominee designated by Bastion for election to the Company's Board of
Directors provided that Bastion has the Minimum Share Amount.
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<PAGE> 82
DESCRIPTION OF THE NOTES
Except as otherwise indicated, the following description relates both to
the Existing Notes issued in the Offering and the New Notes to be issued in
exchange for Existing Notes in connection with the Exchange Offer. The form and
terms of the New Notes are the same as the form and terms of the Existing Notes,
except that the New Notes have been registered under the Securities Act and
therefore will not bear legends restricting the transfer thereof. The New Notes
will be obligations of the Company evidencing the same indebtedness as the
Existing Notes, and will be entitled to the benefits of the Indenture, dated as
of February 7, 1997 (the "Indenture") between the Company and United States
Trust Company of New York, as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act as in effect on the date of the Indenture.
The Notes are subject to all such terms, and holders of the Notes are referred
to the Indenture and the Trust Indenture Act for a statement of them. The
following is a summary of the material terms and provisions of the Notes. This
summary does not purport to be a complete description of the Notes and is
subject to the detailed provisions of, and qualified in its entirety by
reference to, the Notes and the Indenture (including the definitions contained
therein). A copy of the Indenture may be obtained from the Company by any holder
or prospective investor upon request. In addition, the Company has filed the
Indenture with the Commission as an exhibit to the registration statement of
which this Prospectus is a part. The definitions of certain capitalized terms
are set forth under "-- Certain Definitions" and throughout this description.
Capitalized terms that are used but not otherwise defined herein have the
meanings assigned to them in the Indenture and such definitions are incorporated
herein by reference. For purposes of this section, references to the "Company"
include only the Company and not its Subsidiaries.
GENERAL
The Notes are general unsecured obligations of the Company except to the
extent they are collateralized by a first priority security interest in the
Escrow Account granted by the Guarantor. The Notes rank pari passu in right of
payment to all existing or future senior indebtedness of the Company (except as
to future senior secured indebtedness of the Company) and rank senior in right
of payment to any current or future subordinated indebtedness of the Company.
The Notes are effectively subordinated to all existing and future indebtedness
of the Company's Subsidiaries (other than the Guarantor), which indebtedness, to
the extent permitted to be incurred under the Indenture, is also permitted to be
secured by Liens on the assets and properties of such Subsidiaries. See
"Limitation on Additional Indebtedness," "Limitation on Liens" and "Description
of Other Indebtedness -- New Revolving Credit Facility." The New Revolving
Credit Facility contains a provision which permits the lenders thereunder to
block all payments to the Company from Dana and the Subsidiaries of the Company
that are guarantors thereunder either (i) following the occurrence and during
the continuation of a payment default under the New Revolving Credit Facility or
(ii) for a period of up to 179 days following the occurrence and during the
continuation of any event of default for reasons other than failure to make
payments due thereunder. This provision will not affect the ability of the
holders of the Notes to accelerate the maturity of the Notes or to seek other
remedies available to them under the Indenture in the event of any payment
default on the Notes.
The Trustee and, by their acceptance thereof, the holders of the Notes will
be deemed to have agreed not to contest the Liens granted to the lenders under
the New Revolving Credit Facility.
MATURITY, PRINCIPAL AND INTEREST
The Notes will mature on February 15, 2004 and are limited in aggregate
principal amount to $200.0 million. The Notes will bear interest at a rate of
11 3/4% per annum from the date of issuance of the Notes (the "Issue Date")
until maturity. Interest will be payable in cash semiannually in arrears on each
February 15 and August 15, commencing on August 15, 1997, to holders of record
of the Notes at the close of business on the immediately preceding February 1,
and August 1, respectively.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
In connection with the closing of the Offering, the Company transferred
$17.5 million of the net proceeds from the Offering to Renaissance Guarantor,
Inc., a single-purpose corporation (the "Guarantor"), which is a
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<PAGE> 83
wholly-owned subsidiary of the Company, in exchange for a limited guarantee by
the Guarantor of the Company's obligations under the Notes to the extent of the
value of the property owned by the Guarantor (the "Subsidiary Guarantee"). The
Guarantor then placed such amount into an escrow account (the "Escrow Account")
for the benefit of the holders of the Notes. Until disbursed in accordance with
the related escrow and disbursement agreement (the "Escrow Agreement") among the
Guarantor, the Trustee and U.S. Trust Company of New York, as escrow agent (the
"Escrow Agent"), and the Indenture, the Escrow Account is designed to provide
security for a portion of the Company's obligations under the Notes. The
Subsidiary Guarantee constitutes a limited guarantee by the Guarantor of all
sums due under the Notes limited in amount to the value of the property held in
the Escrow Account. In addition, the Indenture provides that, so long as no
Event of Default has occurred and is continuing, the Guarantor will be obligated
to pay to the Trustee for the benefit of the holders of the Notes, on each
interest payment date, an amount equal to the amount of interest then due on
$79.0 million aggregate principal amount of the Notes (or, if less than $79.0
million aggregate principal amount of the Notes are outstanding, funds
representing the interest payment then due on the amount by which $79.0 million
exceeds the outstanding aggregate principal of the Notes may be paid to the
Company) (such amount, the "Interest Portion"). The Indenture provides that upon
the occurrence and during the continuation of an Event of Default the Guarantor
must pay the full amount of interest on the Notes at the regular, pre-default
rate, as the same becomes due and payable, unless paid from another source. The
Escrow Agreement will provide, among other things, that funds will be disbursed
from the Escrow Account (i) on any interest payment date, to pay the Interest
Portion and (ii) upon an Event of Default, to pay the full amount due on the
Notes under the Subsidiary Guarantee. Pending such disbursement, the Escrow
Agent will cause all funds contained in the Escrow Account to be invested in
Temporary Cash Investments. Interest earned on these Temporary Cash Investments
will be added to the Escrow Account. The Indenture provides that the proceeds of
the Escrow Account will be applied first to the payment of interest on the Notes
so long as interest thereon is due or will become due under the Notes and that
only in the event that interest is no longer due and will not become due
(whether because the full principal amount of the Notes is to be repaid or
otherwise) will the proceeds of the Escrow Account be applied to principal or
premium, if any.
The Guarantor's obligations under the Subsidiary Guarantee are secured by a
first priority security interest in the Escrow Account and the Temporary Cash
Investments held therein. See "Security."
GUARANTOR
Under the terms of its certificate of incorporation and the Indenture, the
permissible activities of the Guarantor are subject to limitations intended to
preserve its separateness from the Company and the Company's other subsidiaries,
and to prevent the Guarantor's becoming the subject of bankruptcy proceedings,
and, in the event of the Company or its other subsidiaries becoming the subject
of bankruptcy proceedings, to permit the payment of interest under the
Subsidiary Guarantee. Among other things, these restrictions preclude the
Guarantor from engaging in any business transaction, acquiring any assets or
incurring or guaranteeing any debt, other than as contemplated and required in
connection with the issuance and guarantee of the Notes and the maintenance of
the Escrow Account. In addition, the certificate of incorporation of the
Guarantor and the Indenture requires that the assets, properties and liabilities
of the Guarantor be at all times maintained separately from the assets,
properties, liabilities and business of the Company and the Company's other
subsidiaries, and that the Company and its other subsidiaries not hold out or
treat the Guarantor or its assets as available to pay the debts of the Company
or its other subsidiaries (other than the Notes). Further, under such
certificate of incorporation and the Indenture, the board of directors of the
Guarantor is required at all times to include at least two "independent"
directors who have no interest in or relationship with the Company or its other
subsidiaries, and the affirmative vote of both independent directors is
required, among other things, to authorize the filing of a bankruptcy petition
with respect to the Guarantor or the making of any other act of bankruptcy by
the Guarantor or the amendment or modification of any term of the Indenture or
the Escrow Agreement. No assurance can be given, however, that these
restrictions will be sufficient to prevent the entry of the Guarantor into
bankruptcy proceedings, or, in the event that the Company or its other
subsidiaries become the subject of bankruptcy proceedings, that these
restrictions will be sufficient to prevent a court in such proceedings from
making the assets of the Guarantor (including the Guarantor's
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<PAGE> 84
interest in the Escrow Account) subject to such proceedings under the doctrine
of "substantive consolidation" or similar equitable doctrines. See "Risk
Factors -- Fraudulent Conveyance and Bankruptcy."
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after February 15, 2002, at the following redemption
prices (expressed as a percentage of principal amount), together, in each case,
with accrued and unpaid interest thereon to the redemption date, if redeemed
during the twelve-month period beginning on February 15, of each year listed
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------------------------------- ----------
<S> <C>
2002...................................................................... 103.358%
2003 and thereafter....................................................... 101.679%
</TABLE>
Notwithstanding the foregoing, the Company, at its option, may redeem, at
any time and from time to time on or prior to February 15, 2000, in the
aggregate up to 35% of the original principal amount of the Notes at a
redemption price equal to 111.75% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon to the redemption date with the Net
Proceeds of one or more Public Equity Offerings or Strategic Equity Investments;
provided, that at least $130.0 million of the principal amount of the Notes
originally issued remains outstanding immediately after the occurrence of any
such redemption and that any such redemption occurs within 90 days following the
closing of any such Public Equity Offering or Strategic Equity Investment.
In the event of redemption of fewer than all of the Notes, the Trustee
shall select by lot or in such other manner as it shall deem fair and equitable
the Notes to be redeemed; provided, however, that if a partial redemption is
made with the Net Proceeds of a Public Equity Offering or Strategic Equity
Investment, selection of the Notes for redemption shall be made by the Trustee
only on a pro rata basis, unless such method is otherwise prohibited. The Notes
will be redeemable in whole or in part upon not less than 30 nor more than 60
days' prior written notice, mailed by first class mail to a holder's last
address as it shall appear on the register maintained by the Registrar of the
Notes. On and after any redemption date, interest shall cease to accrue on the
Notes or portions thereof called for redemption unless the Company shall fail to
redeem any such Note.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Additional Indebtedness
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, incur (as defined) any Indebtedness (including Acquired
Indebtedness), other than Permitted Indebtedness, unless (a) after giving effect
to the incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, the ratio of total Indebtedness (which, for purposes of
determining this ratio only, shall not include any shares of the Existing
Preferred Stock) of the Company and its Subsidiaries as of the date of any
determination (the "Determination Date") to the Company's Adjusted EBITDA
(including Acquisition EBITDA) for the four fiscal quarters ended immediately
prior to the Determination Date (the "Reference Period") is less than (i) 6.00
to 1 if the Indebtedness is incurred prior to February 15, 2000 and (ii) 5.75 to
1 if the Indebtedness is incurred thereafter; provided, however, that if the
Indebtedness which is the subject of a determination under this provision is
Acquired Indebtedness, or Indebtedness incurred in connection with the
simultaneous acquisition of any Person, business, property or assets, then such
ratio will be determined by giving effect (on a pro forma basis, as if the
transaction had occurred at the beginning of the four quarter period used to
make such calculation) to the incurrence or assumption of such Acquired
Indebtedness or such other Indebtedness by the Company or one of its
Subsidiaries; and (b) no Default or Event of Default will have occurred and be
continuing at the time or as a consequence of the incurrence of such
Indebtedness. In determining the Company's total Indebtedness for purposes of
this covenant, borrowings under the New Revolving Credit Facility will be
computed based on the lowest amount outstanding during a period of 30
consecutive days during the four quarter period used to make the calculations
referred to in this paragraph.
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<PAGE> 85
The Company will not, directly or indirectly, incur any Indebtedness that
is expressly subordinated to any other Indebtedness of the Company unless such
Indebtedness is also expressly subordinated to the Notes to the same extent and
in the same manner as such Indebtedness is subordinated to such other
Indebtedness of the Company.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, make any Restricted Payment, unless:
a. no Default or Event of Default will have occurred and be
continuing, at the time of or immediately after giving effect to such
Restricted Payment;
b. immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant described under "Limitation
on Additional Indebtedness"; and
c. immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 100% of the Company's Cumulative EBITDA
minus 1.6 times the Company's Cumulative Consolidated Interest Expense,
plus (2) 100% of the aggregate Net Proceeds and the fair market value of
securities or other property received by the Company from the issue or
sale, after the Issue Date, of Capital Stock (other than Disqualified
Capital Stock or Capital Stock of the Company issued to any Subsidiary of
the Company) of the Company or any Indebtedness or other securities of the
Company convertible into or exercisable or exchangeable for Capital Stock
(other than Disqualified Capital Stock) of the Company which has been so
converted or exercised or exchanged, as the case may be, plus (3) $1.0
million.
The provisions of this covenant will not prohibit: (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture; (ii) the acquisition and cancellation or retirement of any shares of
Capital Stock of the Company or Subordinated Indebtedness by conversion into, or
by or in exchange for, shares of Capital Stock (other than Disqualified Capital
Stock), or out of the Net Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of shares of Capital Stock of the Company
(other than Disqualified Capital Stock); (iii) the redemption or retirement of
Subordinated Indebtedness of the Company in exchange for, by conversion into, or
out of the Net Proceeds of, a substantially concurrent sale or incurrence of
Indebtedness (other than any Indebtedness owed to a Subsidiary of the Company)
of the Company that is contractually subordinated in right of payment to the
Notes to at least the same extent as the Subordinated Indebtedness being
redeemed or retired; (iv) the retirement of any shares of Disqualified Capital
Stock by conversion into, or by exchange for, shares of Disqualified Capital
Stock, or out of the Net Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of other shares of Disqualified Capital
Stock; (v) the purchase, redemption or other acquisition for value of shares of
Capital Stock of the Company (other than Disqualified Capital Stock) or options
on such shares held by the Company's or its Subsidiaries' officers or employees
or former officers or employees (or their estates or beneficiaries under their
estates) upon the death, disability, retirement or termination of employment of
such current or former officers or employees pursuant to the terms of an
employee benefit plan or any other agreement pursuant to which such shares of
Capital Stock or options were issued or pursuant to a severance, buy-sell or
right of first refusal agreement with such current or former officer or
employee; provided, that the aggregate cash consideration paid, or distributions
made, pursuant to this clause (v) shall not in any one fiscal year exceed $1.0
million; and (vi) so long as no Default or Event of Default will have occurred
and be continuing at the time of or immediately after giving effect to such
payment, the payment of management and advisory fees to KKEP and its Affiliates
and successors and assigns that, when taken together with all previous amounts
paid in respect thereof since April 15, 1994, does not exceed an average annual
amount of $675,000 per year.
Not later than the date of any Restricted Payment, the Company will deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant described under "Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements, and that no
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<PAGE> 86
Default or Event of Default exists and is continuing and no Default or Event of
Default will occur immediately after giving effect to any Restricted Payments.
Limitation on Investments
The Company will not, and will not permit any of its Subsidiaries to, make
any Investment other than (i) a Permitted Investment or (ii) an Investment that
is made as a Restricted Payment in compliance with the covenant described under
"Limitation on Restricted Payments" after the Issue Date.
Limitation on Liens
The Company will not, and will not permit any of its Subsidiaries to,
create, incur or otherwise cause or suffer to exist or become effective any
Liens of any kind (other than Permitted Liens) upon any Property of the Company
or any such Subsidiary or any shares of stock or debt of any such Subsidiary
which owns Property, now owned or hereafter acquired, unless (i) if such Lien
secures Indebtedness which is pari passu with the Notes, then the Notes are
secured on an equal and ratable basis with the obligations so secured until such
time as such obligation is no longer secured by a Lien or (ii) if such Lien
secures Subordinated Indebtedness, any such Lien will be subordinated to a Lien
granted to the holders of the Notes in the same collateral as that securing such
Lien to the same extent as such Subordinated Indebtedness is subordinated to the
Notes. Because the Notes will be effectively subordinated to all current and
future indebtedness of the Company's Subsidiaries, this covenant will not limit
the extent to which current or future indebtedness of such Subsidiaries may be
secured by Liens on the assets and properties of such Subsidiaries.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate (including
entities in which the Company or any of its Subsidiaries own a minority
interest) or holder of 10% or more of the Company's Common Stock (each of the
foregoing, an "Affiliate Transaction") (other than Affiliate Transactions
entered into prior to the Issue Date) or extend, renew, waive or otherwise
modify the terms of any Affiliate Transaction entered into prior to the Issue
Date unless (i) such Affiliate Transaction is between or among the Company
and/or Wholly-Owned Subsidiaries; or (ii) the terms of such Affiliate
Transaction are fair and reasonable (as determined by the Board of Directors in
good faith) to the Company or such Subsidiaries, as the case may be, and the
terms of such Affiliate Transaction are at least as favorable as the terms which
could be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis between unaffiliated
parties. In any Affiliate Transaction involving an amount or having a value less
than $1.0 million which is not permitted under clause (i) above, the Company
must obtain a resolution of the Board of Directors approved by a majority of the
members of the Board of Directors (and a majority of the disinterested members
of the Board of Directors) certifying that such Affiliate Transaction complies
with clause (ii) above. In transactions with a value of $1.0 million or more
which are not permitted under clause (i) above, the Company must obtain a
written opinion as to the fairness to the Company or such Subsidiary from a
financial point of view of such a transaction from an independent investment
banking firm of nationally recognized standing.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the covenant described under "Limitation on Restricted
Payments" contained herein, (ii) any transaction, approved by the Board of
Directors or the board of directors of the Subsidiary party thereto, as the case
may be, with an officer or director of the Company or of any Subsidiary of the
Company in his or her capacity as officer or director entered into in the
ordinary course of business, including without limitation compensation, employee
benefit and indemnification agreements and arrangements with any officer or
director of the Company or of any such Subsidiary, or (iii) the payment of
management and advisory fees to KKEP and its Affiliates and successors and
assigns permitted by the covenant described under "Limitation on Restricted
Payments."
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Limitation on Creation of Subsidiaries
The Company will not create or acquire, or permit any of its Subsidiaries
to create or acquire, any Subsidiary other than (i) a Subsidiary existing as of
the Issue Date, or (ii) a Subsidiary conducting a business similar or reasonably
related, ancillary or incidental to the business of the Company and its
Subsidiaries as conducted on the Issue Date.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any such Subsidiary
to (a)(i) pay dividends or make any other distributions to the Company or any of
its Subsidiaries (A) on its Capital Stock or (B) with respect to any other
interest or participation in, or measured by, its profits, or (ii) pay any
Indebtedness owed to the Company or any of its Subsidiaries or (b) make loans or
advances or capital contributions to the Company or any of its Subsidiaries or
(c) transfer any of its properties or assets to the Company or any of its
Subsidiaries (any such restriction or encumbrance, other than those excepted in
clauses (i) through (ix) below, a "Payment Restriction"), except for such
encumbrances or restrictions existing under or by reason of: (i) encumbrances or
restrictions existing on the Issue Date; (ii) any instruments governing Ratio
Indebtedness or Permitted Indebtedness, in either case other than Subordinated
Indebtedness; provided, that such encumbrance or restriction is as described in
"Description of Other Indebtedness -- New Revolving Credit Facility"; (iii) the
Indenture and the Notes; (iv) applicable law; (v) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries or of any Person that becomes a Subsidiary of the Company as in
effect at the time of such acquisition or such Person becoming such a
Subsidiary, which encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person, or the property
or assets of the Person (including any Subsidiary of the Person), so acquired;
provided, that the EBITDA of such Person is not taken into account (to the
extent of such restriction) in determining whether any financing or Restricted
Payment in connection with such acquisition was permitted by the terms of the
Indenture; (vi) customary non-assignment provisions in leases or other
agreements entered into in the ordinary course of business and consistent with
past practice; (vii) Refinancing Indebtedness; provided, that such restrictions
are not materially less favorable, taken as a whole, to the holders of the Notes
than those contained in the agreements governing the Indebtedness being amended,
extended, refinanced, renewed, replaced, defeased or refunded; (viii) customary
restrictions in security agreements or mortgages securing Indebtedness of the
Company or any of its Subsidiaries to the extent such restrictions restrict the
transfer of the property subject to such security agreements and mortgages; or
(ix) customary covenants to maintain a minimum net worth or ratio of net worth
to other financial measures contained in leases and other agreements entered
into in the ordinary course of business.
Limitation on Certain Asset Sales
The Company will not, and will not permit any of its Subsidiaries to,
consummate an Asset Sale unless (i) the Company or such Subsidiary, as the case
may be, receives consideration at the time of such sale or other disposition at
least equal to the fair market value thereof (as determined in good faith by the
Board of Directors, and evidenced by a board resolution); (ii) not less than 80%
of the consideration received by the Company or such Subsidiary, as the case may
be, is in the form of cash or cash equivalents (meaning those equivalents
allowed under "Temporary Cash Investments"); provided, however, that the amount
of (x) any liabilities of the Company or any of its Subsidiaries that are
assumed by the transferee of such assets, including any Indebtedness of such a
Subsidiary whose stock is purchased by the transferee and (y) any notes or other
securities received by the Company or any such Subsidiary which are converted
into cash within 180 days of such Asset Sale (to the extent of cash received)
will be deemed to be cash for purposes of this provision; provided, further,
that the Company or such Subsidiary will not be required to comply with this
clause (ii) with respect to a Permitted Asset Swap; and (iii) an amount at least
equal to the Asset Sale Proceeds received by the Company or such Subsidiary are
applied (a) first, to the extent the Company is required to prepay, repay or
purchase Indebtedness (other than Subordinated Indebtedness) of the Company or
any of its Subsidiaries, or elects to prepay, repay or purchase other senior
Indebtedness of the Company,
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within 180 days following the receipt of the Asset Sale Proceeds from any Asset
Sale, to the prepayment, repayment or purchase of such Indebtedness; provided,
that any such repayment will result in a permanent reduction of the commitments
thereunder in an amount at least equal to the principal amount so repaid; and,
provided, further, that in the event no Indebtedness under the New Revolving
Credit Facility is outstanding at the time of such Asset Sale, or to the extent
the Asset Sale Proceeds exceed the amount of Indebtedness outstanding under the
New Revolving Credit Facility, a permanent reduction in the commitments
thereunder will constitute a repayment for purposes hereof; (b) second, to the
extent of the balance of Asset Sale Proceeds after application as described
above, to the extent the Company elects, to an investment in assets (including
Capital Stock or other securities purchased in connection with the acquisition
of Capital Stock or property of another Person) used or useful in businesses
similar or ancillary to the business of the Company and its Subsidiaries as
conducted at the time of such Asset Sale; provided, that such investment occurs
or the Company or one of its Subsidiaries enters into contractual commitments to
make such investment, subject only to customary conditions (other than the
obtaining of financing), on or prior to the 181st day following receipt of such
Asset Sale Proceeds (the "Reinvestment Date") and Asset Sale Proceeds
contractually committed are so applied within 270 days following the receipt of
such Asset Sale Proceeds; and (c) third, if on the Reinvestment Date with
respect to any Asset Sale, the Available Asset Sale Proceeds exceed $5.0
million, the Company shall apply an amount equal to such Available Asset Sale
Proceeds to an offer to purchase the Notes, at a purchase price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest thereon to
the purchase date (an "Available Proceeds Offer"). If an Available Proceeds
Offer is not fully subscribed, the Company may retain the portion of the
Available Asset Sale Proceeds not required to purchase Notes, and such amount
shall not be considered in the calculation of "Available Asset Sale Proceeds"
with respect to any subsequent offer to purchase Notes.
If the Company is required to make an Available Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (i) that such Holders have the right to
require the Company to apply the Available Asset Sale Proceeds to purchase such
Notes at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to the purchase date; (ii) the
purchase price and the purchase date, which shall be no less than 30 days and no
more than 60 days after the notice is mailed; (iii) the instructions, determined
by the Company, that each Holder must follow in order to have such Notes
purchased; and (iv) the calculations used in determining the amount of Available
Asset Sale Proceeds to be applied to the purchase of such Notes.
Limitation on Preferred Stock of Subsidiaries
The Company will not permit any of its Subsidiaries to issue any Preferred
Stock (except to the Company or a Subsidiary of the Company) or permit any
Person (other than the Company or a Subsidiary of the Company) to hold any such
Preferred Stock unless the Company or such Subsidiary would be entitled to incur
or assume Indebtedness under the covenant described under "Limitation on
Additional Indebtedness" in the aggregate principal amount equal to the
aggregate liquidation value of the Preferred Stock to be issued.
Limitation on Capital Stock of Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Subsidiary of the Company or (ii) permit any
Subsidiary to issue any Capital Stock, other than to the Company or a
Wholly-Owned Subsidiary. The foregoing restrictions will not apply to (i) an
Asset Sale made in compliance with the covenant described under "Limitation on
Certain Asset Sales," (ii) the issuance of Preferred Stock in compliance with
the covenant described under "Limitation on Preferred Stock of Subsidiaries" or
(iii) Liens securing Permitted Indebtedness or Ratio Indebtedness.
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale and Lease-Back Transaction unless (i) the consideration received
in such Sale and Lease-Back Transaction is at least equal to the fair market
value of the property sold, as determined by the Board of Directors in good
faith and (ii) the Company could incur the Attributable Indebtedness in respect
of such Sale and Lease-Back Transaction in compliance with the covenant
described under "Limitation on Additional Indebtedness."
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Financing of Certain Acquisitions
The Company will not, and will not permit any of its Subsidiaries to, use
either proceeds from Indebtedness incurred under the New Revolving Credit
Facility or cash (whether alone, together or in combination with other
Indebtedness) to finance acquisitions unless the amount of such Indebtedness or
cash, as the case may be, could be incurred (in the case of cash, as if the
amount of such cash were Indebtedness) as Ratio Indebtedness; provided, that the
foregoing covenant shall be of no further force or effect at such time as the
Company's actual EBITDA (without giving effect to any EBITDA generated by the
acquired entities or assets subsequent to the acquisition thereof for
acquisitions consummated after the Issue Date) for the last four quarters for
which financial statements are available equals or exceeds $34.0 million as
determined in good faith by the Board of Directors, as evidenced by a board
resolution certified by an Officers' Certificate filed with the Trustee and
accompanied by a certificate of the Chief Financial Officer to the effect that
such actual EBITDA was calculated without giving effect to any EBITDA generated
by the acquired entities or assets and that the resulting adjustments were
reasonable in the circumstances; and, provided, further, that the foregoing
covenant shall not apply to cash constituting the Net Proceeds of an issuance by
the Company of its Capital Stock (other than Disqualified Capital Stock) after
the Issue Date.
Payments for Consent
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration whether by way
of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to such
consent, waiver or agreement.
CHANGE OF CONTROL OFFER
Within 30 days of the occurrence of a Change of Control, the Company will
notify the Trustee in writing of such occurrence and will make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon to the Change of Control Payment Date (such applicable purchase
price being referred to herein as the "Change of Control Purchase Price") in
accordance with the procedures set forth below.
Within 30 days of the occurrence of a Change of Control, the Company also
will (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(i) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(ii) the Change of Control Purchase Price and the purchase date (which
will be a business day no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"));
(iii) that any Note not tendered will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest after the Change of
Control Payment Date;
(v) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the business day preceding the Change of Control
Payment Date;
(vi) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
business day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount
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of the Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased;
(vii) that holders whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered; provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(viii) any other procedures that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance; and
(ix) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company will, to the extent
lawful: (i) accept for payment Notes or portions thereof or beneficial interests
under a Global Note (as defined herein) properly tendered pursuant to the Change
of Control Offer; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof or beneficial interests so
tendered; and (iii) deliver or cause to be delivered to the Trustee Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof tendered to the Company. The Paying Agent will promptly (1) mail to each
holder of Notes so accepted and (2) cause to be credited to the respective
accounts of the holders under a Global Note of beneficial interests so accepted,
payment in an amount equal to the purchase price for such Notes, and the Company
will execute and issue, and the Trustee will promptly authenticate and mail to
such holder, a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered; provided, that each such new Note will be issued in an
original principal amount in denominations of $1,000 and integral multiples
thereof.
Neither the Board of Directors of the Company nor the Trustee may waive
compliance by the Company with its obligations under the Change of Control
covenant. The Change of Control covenant may be amended in a manner that
eliminates or limits a holder's ability to cause the Company to repurchase such
holder's Notes only if such amendment is approved by such holder. See
"-- Modification of Indenture."
Subject to the limitations described herein, including the limitation on
the Company's ability to incur additional indebtedness, the Company is not
prohibited from entering into certain transactions, including acquisitions,
refinancings, recapitalizations or other highly leveraged transactions, that do
not constitute a Change of Control under the Indenture. Such transactions could
adversely affect holders by increasing the indebtedness of the Company or
otherwise adversely affecting the Company's capital structure.
The occurrence of events that would trigger a Change of Control under the
Indenture also would constitute a change of control or other default under the
New Revolving Credit Facility. In the event of such a change of control or
default, the lenders under the New Revolving Credit Facility could cause the
indebtedness thereunder to be accelerated. Payment of principal of and interest
on the Notes from funds of RCI's subsidiaries (other than the Guarantor) is
structurally subordinated to the payment of principal, interest and other
amounts due under the New Revolving Credit Facility. Therefore, any principal,
interest and other amounts due under the New Revolving Credit Facility would be
required to be repaid before the Company's subsidiaries (other than the
Guarantor) could distribute funds to RCI to repurchase the Notes in connection
with a Change of Control. To the extent that RCI has its own funds, its
obligation to repurchase the Notes under the Indenture would rank pari passu
with its guarantee of Dana's obligations under the New Revolving Credit
Facility. As of April 30, 1997, the Company had no outstanding loans under the
New Revolving Credit Facility. See "Description of Certain Other
Indebtedness -- New Revolving Credit Facility."
The Company currently does not have outstanding any securities or other
liabilities which have similar change of control provisions and rank pari passu
with the Notes other than the guarantee by RCI of Dana's obligations under the
New Revolving Credit Facility. Nonetheless, future indebtedness or liabilities
which rank pari passu with the Notes or future senior indebtedness of the
Company also may contain prohibitions of certain events which would constitute a
Change of Control or require such indebtedness to be repurchased upon a Change
of Control which could adversely affect the Company's ability to repurchase the
Notes.
The exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not cause a default, due to the
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financial effect of such repurchase on the Company. Moreover, the Company's
ability to pay the holders upon a repurchase may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available to make any required repurchases of the Notes upon the
occurrence of a Change of Control.
The Indenture will provide that, (A) if the Company or any of its
Subsidiaries has issued any outstanding Indebtedness that is subordinated in
right of payment to the Notes or the Company has issued any Preferred Stock, and
the Company or such Subsidiary is required to make a Change of Control Offer or
to make a distribution with respect to such subordinated Indebtedness or
Preferred Stock in the event of a Change of Control, the Company or such
Subsidiary will not consummate any such offer or distribution with respect to
such subordinated Indebtedness or Preferred Stock until such time as the Company
will have paid the Change of Control Purchase Price in full to the holders of
Notes that have accepted the Company's Change of Control Offer and will
otherwise have consummated the Change of Control Offer made to holders of the
Notes and (B) except for shares of Existing Preferred Stock issued in accordance
with the terms thereof (including as dividends) as in effect on the Issue Date,
the Company or any of its Subsidiaries will not issue Indebtedness that is
subordinated in right of payment to the Notes and the Company will not issue
Preferred Stock with change of control provisions requiring the payment of such
Indebtedness or Preferred Stock prior to the payment of the Notes in the event
of a Change of Control under the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-1 as
then in effect with respect to such purchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not consolidate with, merge with or into, or transfer all
or substantially all of its assets (as an entirety or substantially as an
entirety in one transaction or a series of related transactions), to any Person,
and the Company will not permit any Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions would result in a transfer of all or substantially all of
the assets of the Company and its Subsidiaries, taken as a whole, to another
Person, unless: (i) the Company or such Subsidiary, as the case may be, will be
the continuing Person, or the Person (if other than the Company or such
Subsidiary) formed by such consolidation or into which the Company or such
Subsidiary, as the case may be, is merged or to which the properties and assets
of the Company or such Subsidiary, as the case may be, are transferred will be a
corporation, partnership, limited liability company, joint-stock company or
business trust organized and existing under the laws of the United States or any
State thereof or the District of Columbia and will expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of the Company or such
Subsidiary, as the case may be, under the Notes and the Indenture, and the
obligations under the Indenture will remain in full force and effect; provided,
that at any time the Company or its successor is a partnership, limited
liability company, joint-stock company or business trust, there will be a
co-issuer of the Notes that is a corporation; (ii) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (i) above (including, without limitation, giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with the transaction), no Default or
Event of Default will have occurred and be continuing; and (iii) immediately
after giving effect to such transaction and the assumption contemplated by
clause (i) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with the transaction), the Company or the continuing Person, as the
case may be, could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant described under "Limitation on
Additional Indebtedness."
Notwithstanding clause (ii) above, the Company may merge with an Affiliate
incorporated for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company will deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or
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transfer and the supplemental indenture in respect thereto comply with this
provision and that all conditions precedent herein provided for relating to such
transaction or transactions have been complied with.
SECURITY
The Guarantor's obligations under the Subsidiary Guarantee are secured,
pending disbursement pursuant to the Indenture and the Escrow Agreement, by a
pledge of the Escrow Account and the Temporary Cash Investments held therein
(the "Collateral"). $17.5 million of the net proceeds from the sale of the Notes
was deposited in the Escrow Account in connection with the closing of the
Offering.
The Guarantor is a party to the Escrow Agreement, which provides for the
grant by the Subsidiary Guarantor to the Trustee for the benefit of the holders
of the Notes of security interests in the Collateral. All such security
interests secure the payment and performance when due of the obligations of the
Guarantor under the Subsidiary Guarantee with respect to the Notes. The Liens
created by the the Escrow Agreement are first priority security interests in the
Collateral. The ability of holders of the Notes to realize upon any such funds
or securities may be subject to certain bankruptcy law limitations in the event
of the bankruptcy of the Subsidiary Guarantor or the Company. See "Risk
Factors -- Fraudulent Conveyance and Bankruptcy."
Funds will be disbursed from the Escrow Account as described under
"-- Disbursement of Funds; Escrow Account." Pending such disbursements, all
funds contained in the Escrow Account will be invested in Temporary Cash
Investments.
Upon the acceleration of the maturity of the Notes or the failure to pay
principal at maturity or upon certain redemptions and purchases of Notes by the
Company, the Escrow Agreement provides for the foreclosure by the Trustee upon
the net proceeds of the Escrow Account, to be applied first to the continued
payment of the full amount of interest on the Notes in accordance with the
Indenture.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) default in payment of any principal of, or premium, if any, on the
Notes;
(b) default for 30 days in payment of any interest on the Notes;
(c) default by the Company in the observance or performance of any
other covenant in the Notes, the Indenture or the Escrow Agreement for 60
days after written notice from the Trustee or the holders of not less than
25% in aggregate principal amount of the Notes then outstanding;
(d) default in the payment at final maturity of principal in an
aggregate amount of $5.0 million or more with respect to any Indebtedness
of the Company or any of its Subsidiaries which default shall not be cured,
waived or postponed pursuant to an agreement with the holders of such
Indebtedness within 60 days after written notice, or the acceleration of
any such Indebtedness aggregating $5.0 million or more which acceleration
will not be rescinded or annulled within 20 days after written notice as
provided in the Indenture;
(e) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5.0 million (not paid or covered by
third party insurance provided by financially sound insurers that have not
disclaimed coverage) shall be rendered against the Company or any of its
Subsidiaries and will not be discharged for any period of 60 consecutive
days during which a stay of enforcement shall not be in effect;
(f) certain events involving bankruptcy, insolvency or reorganization
of the Company or any of its Significant Subsidiaries;
(g) repudiation by the Company of its obligations under the Escrow
Agreement for any reason; and
(h) repudiation by the Guarantor of its obligations under, or the
unenforceability of, the Subsidiary Guarantee.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
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The Indenture provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest thereon to the
date of acceleration following five business days' prior notice to the lenders
under the New Revolving Credit Facility; provided, however, that after such
acceleration but before a judgment or decree based on acceleration is obtained
by the Trustee, the holders of a majority in aggregate principal amount of
outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than nonpayment of accelerated
principal, premium or interest, have been cured or waived as provided in the
Indenture. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to the Company shall
occur, the principal, premium and interest amount with respect to all of the
Notes shall be due and payable immediately without any declaration or other act
on the part of the Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
have the right to waive any existing default or compliance with any provision of
the Indenture or the Notes and to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as a trustee,
and unless the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and will have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted on such Note
on or after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to the outstanding Notes
(except for the obligations to register the transfer or exchange of such Notes,
to replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain
an office or agency in respect of the Notes and to hold monies for payment in
trust) ("legal defeasance") or (b) to be released from its obligations with
respect to the Notes under certain covenants contained in the Indenture and
described above under "Certain Covenants" ("covenant defeasance"), upon the
deposit with the Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or U.S. Government Obligations (as defined in the
Indenture) which through the payment of principal and interest in accordance
with their terms will provide money, in an amount sufficient to pay the
principal of, premium, if any, and interest on the Notes, on the scheduled due
dates therefor or on a selected date of redemption in accordance with the terms
of the Indenture. Such a trust may only be established if, among other things,
the Company has delivered to the Trustee an opinion of counsel (as defined in
the Indenture) (i) to the effect that neither the trust nor the Trustee will be
required to register as an investment company under the Investment Company Act
of 1940, as amended, and (ii) in the case of a legal defeasance, describing
either a private ruling concerning the Notes or a published ruling of the
Internal Revenue Service, to the effect that, and in the case of a covenant
defeasance, stating that, holders of the Notes or persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount and in the same manner and at the same times, as
would have been the case if such deposit, defeasance and discharge had not
occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantor and the Trustee may, without
the consent of holders of the Notes, amend the Indenture or the Notes or
supplement the Indenture for certain specified purposes, including providing for
uncertificated Notes in addition to certificated Notes, and curing any
ambiguity, defect or inconsistency, or making any other change that does not
materially and adversely affect the rights of any
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holder. The Indenture contains provisions permitting the Company, the Guarantor
and the Trustee, with the consent of holders of at least a majority in principal
amount of the outstanding Notes, to modify or supplement the Indenture or the
Notes, except that no such modification will, without the consent of each holder
affected thereby: (i) reduce the amount of Notes whose holders must consent to
an amendment, supplement, or waiver to the Indenture or the Notes; (ii) reduce
the rate of or change the time for payment of interest on any Note; (iii) reduce
the principal of or premium on or change the stated maturity of any Note; (iv)
make any Note payable in money other than that stated in the Note; (v) change
the amount or time of any payment required by the Notes or reduce the premium
payable upon any redemption of Notes, or change the time before which no such
redemption may be made; (vi) waive a default on the payment of the principal of,
interest on, or redemption payment with respect to any Note; (vii) amend, alter,
change or modify the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate an
Available Proceeds Offer after such obligation has arisen, or waive any Default
in the performance of any such offers or modify any of the provisions or
definitions with respect to any such offers; (viii) affect the ranking of the
Notes in a manner adverse to the holders of the Notes; (ix) take any other
action for which the Indenture requires the consent of each holder affected
thereby; or (x) directly or indirectly release Liens on all or substantially all
of the Collateral except as permitted by the Escrow Agreement.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission and to the holders of the Notes. The Indenture provides that
even if the Company is entitled under the Exchange Act not to furnish such
information to the Commission or to the holders of the Notes, it will
nonetheless continue to furnish such information to the Commission (if then
permissible), the Trustee and holders of the Notes on or before 100 days after
the end of the Company's fiscal year and on or before 50 days after the end of
each of the first, second and third fiscal quarter in each year.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 100 days after the end
of the Company's fiscal year and on or before 50 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The Notes will be issued in a transaction exempt from registration under
the Act and will be subject to the restrictions described in "Notice to
Investors."
The registered holder of a Note may be treated as the owner of it for all
purposes.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or assumed in connection with the acquisition
of assets from such Person.
"Acquisition EBITDA" means, without duplication, (i) EBITDA for the last
four fiscal quarters for which financial statements are available at the
Determination Date (the "Acquisition EBITDA Period") with respect to a business
or Person which has been acquired by the Company or one of its Subsidiaries or
which is the subject of a binding acquisition agreement requiring the
calculation of EBITDA for purposes of the covenant restricting the incurrence of
Indebtedness and, in each case, with respect to which financial results on a
consolidated basis with the Company have not been made available for all or any
portion of the related Reference Period; plus (ii) in connection with any such
acquisition, projected quantifiable improvements in operating results due to an
established program of cost reductions (reasonably consistent with the cost
reductions actually achieved by the Company in connection with prior
acquisitions) adopted, in good faith, by the Company or one of its Subsidiaries
through a board resolution certified by an Officers' Certificate filed with the
Trustee (calculated on a pro forma basis for the Acquisition EBITDA Period as if
the program had been implemented at the beginning of the Acquisition EBITDA
Period), without giving effect to any operating losses of the acquired Person.
Such Officers' Certificate will confirm that any such anticipated cost
reductions in excess of $4.0 million have been reviewed for reasonableness and
consistency with past practice by an independent nationally recognized
investment banking firm or one of the "Big Six" firms of independent public
accountants and such firm will not have raised any material objections thereto.
Each such Officers' Certificate will be signed by the Chief Financial Officer
and another officer of the Company. Acquisition EBITDA of a business will be a
fixed number determined as of the date the calculation of EBITDA for purposes of
the covenant restricting the incurrence of Indebtedness is first required with
respect to the acquisition of such business (the "First Determination Date") and
will be utilized from the First Determination Date through the date financial
results are available for the four full fiscal quarters following the
acquisition (except to the extent that the EBITDA of such acquired Person or
business will have been included for one or more full fiscal quarters in the
calculation of the Company's EBITDA, in which case the actual EBITDA of such
business or Person will be included in the EBITDA of the Company for such
period). For purposes of determining Acquisition EBITDA with respect to the
acquisition of a particular business or Person, Acquisition EBITDA will include
not only the Acquisition EBITDA of such business or Person, but also the
Acquisition EBITDA of any business previously acquired by the Company or the
subject of a pending acquisition agreement to the extent that, as of the First
Determination Date, the financial results for such business or Person have not
been included in the calculation of the Company's EBITDA for the entire
Reference Period.
"Acquisition Indebtedness" means Indebtedness incurred by the Company or by
any of its Subsidiaries the proceeds of which are used for the acquisition of a
mass-market fragrance or cosmetics business and related facilities and assets.
"Adjusted EBITDA" means the sum, without duplication, of (a)(i) from the
Issue Date until (but not including) the date on which financial statements are
first available for the second quarter of the Company's fiscal year ending March
31, 1998 ("Fiscal 1997"), actual EBITDA of the Company for the four fiscal
quarters ending with the most recent fiscal quarter for which financial
statements are available; (ii) beginning on the date on which the financial
statements referred to in clause (i) are first available until (but not
including) the date on which financial statements for the third quarter of
Fiscal 1997 are first available, an amount equal to the greater of (A) actual
EBITDA of the Company for the four fiscal quarters ending with the most recent
fiscal quarter for which financial statements are available or (B) if the actual
EBITDA of the Company for the two most recently completed fiscal quarters equals
or exceeds $17.0 million, $34.0 million; (iii) beginning on the date on which
the financial statements referred to in clause (ii) are first available until
(but not including) the date on which financial statements for the fourth
quarter of Fiscal 1997 are first available, an amount equal to the greater of
(x) actual EBITDA for the Company for the four fiscal quarters
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ending with the most recent fiscal quarter for which financial statements are
available or (y) if the actual EBITDA of the Company for the three most recently
completed fiscal quarters equals or exceeds $25.5 million, $34.0 million; and
(iv) thereafter, actual EBITDA of the Company for the four fiscal quarters
ending with the most recent fiscal quarter for which internal financial
statements are available, plus (b) Acquisition EBITDA.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling" "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Subsidiaries) in any single transaction or series of
related transactions having a fair market value in excess of $1.0 million of (a)
any Capital Stock of or other equity interest in any Subsidiary, (b) all or
substantially all of the assets of the Company or of any Subsidiary, (c) real
property; provided, that any sale, transfer or other disposition of real estate
should not be deemed an "Asset Sale" if and for so long as the proceeds thereof
are used by the Company and its Subsidiaries to purchase, make improvements to
or commence operations on any real property owned or acquired by the Company and
its Subsidiaries promptly but in any event no later than 90 days after such
sale, transfer or other disposition, or (d) all or substantially all of the
assets of any business owned by the Company or any Subsidiary or a division,
line of business or comparable business segment of the Company or any Subsidiary
thereof; provided, that Asset Sales shall not include sales, leases,
conveyances, transfers or other dispositions to the Company, to a Subsidiary, to
a Permitted Joint Venture or to any other Person if after giving effect to such
sale, lease, conveyance, transfer or other disposition such other Person becomes
a Subsidiary or a Permitted Joint Venture.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any of its Subsidiaries from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses (including without limitation fees, disbursements and other charges of
attorneys, accountants and appraisers) related to such Asset Sale, (c) provision
for minority interest holders in any Subsidiary of the Company as a result of
such Asset Sale and (d) deduction of appropriate amounts to be provided by the
Company or such Subsidiary as a reserve, in accordance with GAAP, against any
liabilities associated with the assets sold or disposed of in such Asset Sale
and retained by the Company or such Subsidiary after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters or against any indemnification
obligations associated with the assets sold or disposed of in such Asset Sale,
and (ii) promissory notes and other non-cash consideration received by the
Company or any of its Subsidiaries from such Asset Sale or other disposition
upon the liquidation or conversion of such notes or non-cash consideration into
cash.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the greater of (i) the fair value of the
property subject to such arrangement (as determined by the Board of Directors)
and (ii) the present value (discounted according to GAAP at the cost of
indebtedness implied in the lease) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such Sale and
Lease-Back Transaction (including any period for which such lease has been
extended).
"Available Asset Sale Proceeds" means, with respect to an Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (iii)(a) or (iii)(b), and which have not yet been the
basis for an Available Proceeds Offer in accordance with clause (iii)(c), of the
first paragraph of "Limitation on Certain Asset Sales."
"Board of Directors" means the board of directors of the Company or any
duly constituted committee thereof which is authorized to make determinations
under the Indenture.
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"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
will be the capitalized amount of such obligations determined in accordance with
GAAP.
"Change of Control" means the occurrence of one or more of the following
events: (i) any Person (including a Person's Affiliates and associates), other
than a Permitted Holder, becomes the beneficial owner (as defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange Act) of
50% or more of the total voting power of the Company's Common Stock, (ii) prior
to a Public Equity Offering, the Permitted Holders collectively shall dispose of
more than 50% of the shares of the Company's Common Stock owned by the Permitted
Holders in the aggregate as of the Issue Date (excluding dispositions made to
another Permitted Holder), (iii) any Person (including a Person's Affiliates and
associates), other than a Permitted Holder, becomes the beneficial owner of more
than 35% of the total voting power of the Company's Common Stock, and the
Permitted Holders together with the officers and employees of the Company
beneficially own, in the aggregate, a lesser percentage of the total voting
power of the Company's Common Stock than such other Person and do not have the
right or ability by voting power, contract or otherwise to elect or designate
for election a majority of the Board of Directors of the Company, (iv) there
shall be consummated any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which the
Company's Common Stock would be converted into cash, securities or other
property, other than a merger or consolidation of the Company in which the
holders of the Company's Common Stock outstanding immediately prior to the
consolidation or merger hold, directly or indirectly, at least a majority of the
Common Stock of the surviving corporation immediately after such consolidation
or merger, or (v) subsequent to a Public Equity Offering, during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company has been approved by 66 2/3% of the
directors then still in office who either were directors at the beginning of
such period or whose election or recommendation for election was previously so
approved) cease to constitute a majority of the Board of Directors of the
Company.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries on a consolidated basis,
imputed interest included in Capitalized Lease Obligations, all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, the net costs associated with hedging
obligations, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other non-cash interest
expense (other than interest amortized to cost of sales), plus, without
duplication, all net capitalized interest for such period and all interest
incurred or paid under any guarantee of Indebtedness (including a guarantee of
principal, interest or any combination thereof) of any Person, plus the amount
of all dividends or distributions paid on Disqualified Capital Stock (other than
dividends paid or payable in shares of Capital Stock of the Company); provided,
however, that, solely for purposes of the calculation of 1.6 times the Company's
Cumulative Consolidated Interest Expense in clause (c) of the "Limitation on
Restricted Payments" covenant, Consolidated Interest Expense will exclude the
amortization of deferred financing costs.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income (before preferred stock dividends) of
such Person and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP; provided, however, that (a) the Net Income
of any
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Person (the "other Person") in which the Person in question or any of its
Subsidiaries has less than a 100% interest (which interest does not cause the
net income of such other Person to be consolidated into the net income of the
Person in question in accordance with GAAP) will be included only to the extent
of the amount of dividends or distributions paid to the Person in question or
such Subsidiary, (b) the Net Income of any Subsidiary of the Person in question
the distribution of which for the relevant period was restricted by any Payment
Restriction (as defined under "Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries") will be excluded to the extent of such
Payment Restriction, (c)(i) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
and (ii) any net gain (but not loss) resulting from an Asset Sale by the Person
in question or any of its Subsidiaries other than in the ordinary course of
business shall be excluded, and (d) extraordinary gains and losses shall be
excluded.
"Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense of the Company from January 1, 1997
to the end of the Company's most recently ended full fiscal quarter prior to
such date, taken as a single accounting period.
"Cumulative EBITDA" means, as of any date of determination, EBITDA of the
Company from January 1, 1997 to the end of the Company's most recently ended
full fiscal quarter prior to such date, taken as a single accounting period.
"Disqualified Capital Stock" means any Capital Stock of the Company or any
of its Subsidiaries which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder), or upon the happening of any event (other than an event which
constitutes a Change of Control), (i) matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof (except upon the occurrence of a Change of
Control), in whole or in part, on or prior to the maturity date of the Notes, or
(ii) is convertible into or exchangeable for (at the sole option of the holder
thereof) (a) debt securities or (b) any Capital Stock referred to in (i) above,
in each case at any time prior to the final maturity of the Notes; provided,
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the option
of the holder thereof prior to such final maturity date will be deemed to be
Disqualified Capital Stock; provided, however, that Preferred Stock of the
Company that is issued with the benefit of provisions requiring a change of
control offer to be made for such Preferred Stock in the event of a change of
control of the Company, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control," will not be
deemed to be Disqualified Capital Stock solely by virtue of such provisions.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of, without duplication, (i) Consolidated Net Income for such period, plus
(ii) the provision for taxes for such period based on income or profits to the
extent such income or profits were included in computing Consolidated Net Income
and any provision for taxes utilized in computing net loss under clause (i)
hereof, plus (iii) Consolidated Interest Expense for such period (but only
including Redeemable Dividends in the calculation of such Consolidated Interest
Expense to the extent that such Redeemable Dividends have been deducted in the
calculation of Consolidated Net Income), plus (iv) depreciation for such period
on a consolidated basis, plus (v) amortization of intangible and other assets
for such period on a consolidated basis, plus (vi) any other non-cash items
reducing Consolidated Net Income for such period, minus (b) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and its
Subsidiaries determined in accordance with GAAP; provided, however, that, for
purposes of calculating EBITDA during any fiscal quarter, cash income from a
particular Investment of such Person (other than Investments in Subsidiaries of
such Person or Investments in Permitted Joint Ventures) will be included only
(x) to the extent cash income has been received by such Person with respect to
such Investment, or (y) if the cash income derived from such Investment is
attributable to Temporary Cash Investments.
"Equity Market Capitalization" of any Person means the aggregate market
value of the outstanding Capital Stock (other than Preferred Stock and excluding
any Capital Stock held in treasury by such Person) of such Person of a class
that is listed or admitted to unlisted trading privileges on a United States
national securities exchange or included for trading on the Nasdaq National
Market System. For purposes of this
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definition the "market value" of any such Capital Stock shall be the average of
the high and low sale prices, or if no sales are reported, the average of the
high and low bid prices, as reported on the principal national securities
exchange on which such Capital Stock is listed or admitted to trading or, if
such Capital Stock is not listed or admitted to trading on a national securities
exchange, as reported by Nasdaq, for each trading day in a 20 consecutive
trading day period ending not more than 45 days prior to the date such Person
commits to make an investment in the Capital Stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Preferred Stock" means (i) all shares of the Company's Cumulative
Exchangeable Redeemable Preferred Stock, Series B, par value $.01 per share, and
14% Senior Redeemable Preferred Stock, Series B and C, par value $.01 per share,
outstanding on the Issue Date, (ii) all shares of 14% Senior Redeemable
Preferred Stock, Series C, par value $.01 per share, issued in exchange for
shares of 14% Senior Redeemable Preferred Stock, Series B, after the Issue Date
and (iii) any shares thereof issued thereafter as payment of dividends on such
outstanding shares.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such person (and
"incurrence," "incurred," "incurable," and "incurring" will have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and will also include, to the extent not otherwise included (i) any
Capitalized Lease Obligations, (ii) obligations secured by a lien to which the
property or assets owned or held by such Person is subject, whether or not the
obligation or obligations secured thereby shall have been assumed, (iii)
guarantees of items of other Persons which would be included within this
definition for such other Persons (whether or not such items would appear upon
the balance sheet of the guarantor), (iv) all obligations for the reimbursement
of any obligor on any banker's acceptance, letter of credit or similar
transaction, (v) in the case of the Company, Disqualified Capital Stock of the
Company or any of its Subsidiaries, and (vi) obligations of any such Person
under any Interest Rate Agreement applicable to any of the foregoing (if and to
the extent such Interest Rate Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP). The
amount of Indebtedness of any Person at any date will be the outstanding balance
at such date of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligations; provided, that (i) the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the principal amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP and (ii) Indebtedness will not include any
liability for federal, state, local or other taxes. Notwithstanding any other
provision of the foregoing definition, (a) any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business will not be deemed to be Indebtedness of the Company or any of its
Subsidiaries for purposes of this definition and (b) guarantees of (or
obligations with respect to letters of credit supporting) Indebtedness otherwise
included in the determination of such amount will not also be included.
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"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business), loan or capital contribution to (by means of transfers of property to
others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, or the acquisition, by purchase
or otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person. Investments will exclude
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices. The amount of an Investment will be equal to the
original cost thereof plus the cost of all additions thereto less the sum of all
amounts received as a return on such Investment.
"Issue Date" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the Board of Directors, at the time of
receipt) and (b) in the case of any exchange, exercise, conversion or surrender
of outstanding securities of any kind for or into shares of Capital Stock of the
Company which is not Disqualified Capital Stock, the net book value of such
outstanding securities on the date of such exchange, exercise, conversion or
surrender (plus any additional amount required to be paid by the holder to the
Company upon such exchange, exercise, conversion or surrender, less any and all
payments made to the holders, e.g., on account of fractional shares and less all
expenses incurred by the Company in connection therewith).
"New Revolving Credit Facility" means a revolving credit facility to be
entered into between one or more subsidiaries of the Company (other than the
Guarantor) and an institutional lender or lenders as the same may be amended,
extended, renewed, restated, supplemented, replaced, refinanced or otherwise
modified from time to time.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer of such Person that shall comply
with applicable provisions of the Indenture.
"Peak Amount" of acquired accounts receivable or inventory, as the case may
be, means the amount thereof shown on the quarterly financial statements of the
acquired entity (or the entity from which such assets were acquired) on which
the accounts receivable and inventory reflected thereon from among the financial
statements for the four most recent fiscal quarters of such entity prior to such
acquisition would result in the highest level of availability under the New
Revolving Credit Facility.
"Permitted Asset Swap" means any transfer of properties or assets in which
90% of the consideration received by the transferor consists of properties or
assets (other than cash) that will be used in the business of the transferor;
provided, that (i) the aggregate fair market value (as determined in good faith
by the Board of Directors of the Company) of the property or assets being
transferred by the Company or such Subsidiary is not greater than the aggregate
fair market value (as determined in good faith by the Board of Directors) of the
property or assets received by the Company or such Subsidiary in such exchange
and (ii) the aggregate fair market value (as determined in good faith by the
Board of Directors) of all property or assets transferred by
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the Company and any of its Subsidiaries in connection with exchanges in any
period of twelve consecutive months shall not exceed $5.0 million.
"Permitted Holders" means (i) KKEP or Thomas V. Bonoma, (ii) the heirs,
executors, administrators, testamentary trustees, legatees or beneficiaries of
KKEP or Thomas V. Bonoma or of any Person described in this clause (ii), (iii) a
trust the beneficiaries of which include only persons described in clauses (i)
and (ii) above and their respective spouses and lineal descendants, (iv) the
general partner and each limited partner of KKEP and (v) any Subsidiary of
either KKEP or Thomas V. Bonoma or both of them jointly.
"Permitted Indebtedness" means any:
(i) Indebtedness of the Company or any of its Subsidiaries pursuant to
the New Revolving Credit Facility in an amount not to exceed (a) until such
time as the covenant described under "Financing of Certain Acquisitions" is
by its terms of no further force and effect, $75.0 million (less any
mandatory prepayments actually made thereunder to the extent the
corresponding commitments thereunder have been permanently reduced);
provided, that such amount will be increased in the event the Company or
any of its Subsidiaries consummates an acquisition including inventory and
receivables by an amount equal to the sum of (1) the product of the Peak
Amount of accounts receivable acquired in such acquisition times the
advance rate provided in the New Revolving Credit Facility applicable to
accounts receivable in effect at the time of such acquisition plus (2) the
product of the Peak Amount of inventory acquired in such acquisition times
the advance rate provided in the New Revolving Credit Facility applicable
to inventory in effect at the time of such acquisition; and provided,
further, that until such time as the covenant described under "Financing of
Certain Acquisitions" is by its terms of no further force and effect,
Indebtedness pursuant to the New Revolving Credit Facility incurred for the
purpose of acquisition financing will not be deemed Permitted Indebtedness;
and (b) thereafter, the greater of (1) $75.0 million (less any mandatory
prepayments actually made thereunder to the extent the corresponding
commitments thereunder have been permanently reduced) or (2) the sum of (x)
85% of gross eligible accounts receivable of the Company and its
Subsidiaries and (y) 75% of gross eligible inventory (valued at the lower
of cost (first-in, first-out) or market) of the Company and its
Subsidiaries, in either case less reserves;
(ii) Indebtedness under the Notes and the Subsidiary Guarantee;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the Issue Date;
(iv) Indebtedness of the Company to any Wholly-Owned Subsidiary and
Indebtedness of any Subsidiary of the Company to the Company or another
Subsidiary of the Company;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business and
additional Indebtedness of foreign subsidiaries of the Company for working
capital purposes, which Purchase Money Indebtedness, Capitalized Lease
Obligations and additional Indebtedness do not in the aggregate at any one
time outstanding exceed 5% of the Company's consolidated total assets as of
the end of the last preceding fiscal quarter for which financial statements
are available;
(vi) Interest Rate Agreements;
(vii) commercial documentary letters of credit issued for the account
of the Company or any of its Subsidiaries in the ordinary course of
business in an aggregate amount not to exceed the greater of $5.0 million
or 1.5% of the Company's consolidated total assets as of the end of the
last preceding fiscal quarter for which financial statements are available,
in either case at any one time outstanding;
(viii) additional Indebtedness of the Company or any of its
Subsidiaries not to exceed $2.0 million in aggregate principal amount
outstanding at any time;
(ix) any guarantees by the Company or its Subsidiaries of otherwise
Permitted Indebtedness or Ratio Indebtedness; and
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(x) Refinancing Indebtedness.
"Permitted Investments" means, for any Person, Investments made on or after
the Issue Date consisting of:
(a) Investments by the Company or by a Subsidiary of the Company in
(i) the Company or a Subsidiary of the Company or (ii) Permitted Joint
Ventures;
(b) Temporary Cash Investments;
(c) Investments by the Company or by any of its Subsidiaries in a
Person (or in all or substantially all of the business or assets of such
Person), if as a result of such Investment (i) such Person becomes a
Subsidiary of the Company or a Permitted Joint Venture, (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Subsidiary or (iii) such business or assets are owned by the Company or a
Subsidiary of the Company;
(d) reasonable and customary loans made to employees not to exceed
$1.0 million in the aggregate at any one time outstanding;
(e) an Investment that is made by the Company or any of its
Subsidiaries in the form of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are issued
by a third party to the Company or such Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "Limitation on Certain Asset
Sales";
(f) accounts receivable of the Company and its Subsidiaries generated
in the ordinary course of business;
(g) miscellaneous Investments in the ordinary course of business in an
aggregate amount not to exceed $1.0 million at any one time outstanding;
and
(h) Investments existing on the Issue Date.
"Permitted Joint Venture" means a Person (other than an individual or
government) that is not a Subsidiary of the Company and a majority of whose
revenues are derived or will, as a consequence of the Company's or one of its
Subsidiaries' Investment therein, be derived from the operation of any line of
business engaged in or reasonably related to a line of business engaged in by
the Company and its Subsidiaries as of the Issue Date; provided that the
aggregate amount of the Company's and its Subsidiaries' Investments in Permitted
Joint Ventures (including transfers of tangible assets otherwise excluded from
the definition of Asset Sale) at any one time outstanding will not exceed: (i)
until the first anniversary of the Issue Date, 4% of the Company's consolidated
total assets as of the end of the last preceding fiscal quarter for which
financial statements are available; (ii) until the second anniversary of the
Issue Date, 5% of the Company's consolidated total assets as of the end of the
last preceding fiscal quarter for which financial statements are available; and
(iii) thereafter, 6% of the Company's consolidated total assets as of the end of
the last preceding fiscal quarter for which financial statements are available.
"Permitted Liens" means: (i) Liens existing on the Issue Date; (ii) Liens
on property or assets of, or any shares of stock of or secured debt of, any
corporation existing at the time such corporation becomes a Subsidiary of the
Company or at the time such corporation is merged into the Company or any of its
Subsidiaries; provided, that such Liens are not incurred in connection with, or
in contemplation of, such corporation becoming a Subsidiary of the Company or
merging into the Company or any of its Subsidiaries; (iii) Liens securing
Permitted Indebtedness or Ratio Indebtedness; (iv) Liens in favor of the Company
or any of its Subsidiaries; (v) statutory liens or landlords', carriers',
warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business which do not secure any
Indebtedness and with respect to amounts not yet delinquent or being contested
in good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (vi) other Liens securing obligations incurred in the ordinary
course of business which obligations do not exceed $500,000 in the aggregate at
any one time outstanding; (vii) Liens for taxes, assessments or governmental
charges that are being contested in good faith by appropriate proceedings;
(viii) easements or minor defects or irregularities in title and other similar
charges or encumbrances on property not interfering in any material respect with
the Company's or any of its
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Subsidiaries' use of such property and (ix) Liens for the benefit of the Holders
created by the Escrow Agreement. Notwithstanding the foregoing, Permitted Liens
may not extend to the Escrow Account or the Escrow Agreement.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government (including any agency or political
subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Public Equity Offering" means a public offering by the Company of shares
of its common stock (however designated and whether voting or non-voting) and
any and all rights, warrants or options to acquire such common stock pursuant to
a registration statement registered pursuant to the Act.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Ratio Indebtedness" means Indebtedness of the Company or any of its
Subsidiaries (other than Permitted Indebtedness) incurred in compliance with the
first paragraph of the covenant "Limitation on Additional Indebtedness."
"Redeemable Dividend" means, for any dividend or distribution with regard
to Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to the
issuer of such Disqualified Capital Stock.
"Reference Period" has the meaning set forth in the covenant described
under "Limitation on Additional Indebtedness."
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends (a) any Indebtedness of the Company or its Subsidiaries outstanding on
the Issue Date or (b) any other Indebtedness permitted to be incurred by the
Company or its Subsidiaries pursuant to the terms of the Indenture, but only to
the extent that: (i) the Refinancing Indebtedness is subordinated to the Notes
to at least the same extent that the Indebtedness being refunded, refinanced or
extended is so subordinated, if at all; (ii) the Refinancing Indebtedness is
scheduled to mature either (A) no earlier than the Indebtedness being refunded,
refinanced or extended, or (B) after the maturity date of the Notes; (iii) the
portion, if any, of the Refinancing Indebtedness that is scheduled to mature on
or prior to the maturity date of the Notes has a weighted average life to
maturity at the time such Refinancing Indebtedness is incurred that is equal to
or greater than the weighted average life to maturity of the portion of the
Indebtedness being refunded, refinanced or extended that is scheduled to mature
on or prior to the maturity date of the Notes; (iv) such Refinancing
Indebtedness is in an aggregate principal amount that is equal to or less than
the sum of (x) the aggregate principal amount then outstanding under the
Indebtedness being refunded, refinanced or extended (or, in the case of a credit
or other facility represented by commitments (such as, but not limited to, the
New Revolving Credit Facility), the sum of the outstanding principal amount plus
the maximum amount of the unused commitments thereunder), (y) the amount of
accrued and unpaid interest, if any, and premiums owed, if any, not in excess of
preexisting prepayment provisions on such Indebtedness being refunded,
refinanced or extended and (z) the amount of customary fees, expenses and costs
related to the incurrence of such Refinancing Indebtedness; and (v) such
Refinancing Indebtedness is not incurred by a Subsidiary to refinance
Indebtedness of the Company. Refinancing Indebtedness does not include any
Indebtedness permitted to be incurred under any other provision of the
Indenture.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any of its Subsidiaries or any payment
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made to the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company or any such Subsidiary (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Capital
Stock) or in options, warrants or other rights to purchase Capital Stock (other
than Disqualified Capital Stock), (y) dividends on shares of the Company's
preferred stock outstanding on the Issue Date payable solely in shares of
preferred stock of the same series (whether or not Disqualified Capital Stock)
and dividends on such additional dividend shares, and (z) in the case of
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Wholly-Owned Subsidiary); (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company or any
of its Subsidiaries (other than Capital Stock owned by the Company or a
Wholly-Owned Subsidiary, excluding Disqualified Capital Stock); (iii) the making
of any principal payment on, or the purchase, defeasance, repurchase, redemption
or other acquisition or retirement for value, prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, of any Subordinated
Indebtedness (other than Subordinated Indebtedness acquired in anticipation of
satisfying a scheduled sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition); (iv) the
making of any Investment or guarantee of any Investment in any Person other than
a Permitted Investment; and (v) forgiveness of any Indebtedness of an Affiliate
of the Company to the Company or any of its Subsidiaries. For purposes of
determining the amount expended for Restricted Payments, cash distributed or
invested shall be valued at the face amount thereof and property other than cash
shall be valued at its fair market value, as determined in good faith by the
Board of Directors.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any of its Subsidiaries of any real
or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Subsidiary to such Person in contemplation of
such leasing.
"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
under the Act and the Exchange Act, as in effect on the Issue Date.
"Strategic Equity Investment" means the issuance and sale of Capital Stock
(other than Disqualified Capital Stock) of the Company to a Person substantially
engaged in the business of manufacturing or marketing fragrances or cosmetics
through the mass-market distribution channel or any other business reasonably
related to the Company's business that has an Equity Market Capitalization of at
least $200.0 million.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first-named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-named Person for
financial statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in certificates of deposit issued by a
bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500.0 million and rated at least A by
Standard & Poor's Corporation and A-2 by Moody's Investors Service, Inc.,
maturing within 365 days of purchase; or (iii) Investments not exceeding 365
days in duration in money market funds that invest substantially all of such
funds' assets in the Investments described in the preceding clauses (i) and
(ii).
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"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof to vote
under ordinary circumstances in the election of members of the board of
directors or other governing body of such Person.
"Wholly-Owned Subsidiary" means any Subsidiary, all of the outstanding
voting securities (other than directors' qualifying shares or an immaterial
number of shares required to be owned by other Persons pursuant to applicable
law) of which are owned, directly or indirectly, by the Company.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will be issued in the form of one
or more registered notes in global form without coupons (each a "Global Note").
Each Global Note will be deposited with, or on behalf of, The Depository Trust
Company (the "Depository") and registered in the name of Cede & Co., as nominee
of the Depository, or will remain in the custody of the Trustee pursuant to the
FAST Balance Certificate Agreement between the Depository and the Trustee.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchaser), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit the
accounts of Participants with an interest in the Global Note and (ii) ownership
of the New Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depository (with respect to the
Interest of Participants), the Participants and the Indirect Participants. The
laws of some states require that certain persons take physical delivery in
definitive form of securities that they own and that security interests in
negotiable instruments can only be perfected by delivery of certificates
representing the instruments. Consequently, the ability to transfer New Notes to
pledge the New Notes as collateral will be limited to such extent.
So long as the Depository or its nominee is the registered owner of a
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the New Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or Holders thereof under the Indenture for any
purpose, including with respect to the giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in New Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depository's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each Person owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such Person is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such Person owns its interest, to exercise any rights of a Holder
under the indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
Holders or a Person that is an owner of a beneficial interest in a Global Note
desires to take any action that the Depository, as the Holder of such Global
Note, is entitled to take, the Depository would authorize the Participants to
take such action and the Participant would authorize Persons owning through such
Participants to take such action or would otherwise act upon the instruction of
such
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Persons. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by the Depository, or for maintaining, supervising or reviewing any
records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered Holder of the Global Note representing such New Notes under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the New Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of New Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The following summary of the material terms of the New Revolving Credit
Facility does not purport to be complete and is qualified in it entirety by
reference to the provisions of such agreement, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
NEW REVOLVING CREDIT FACILITY
On March 12, 1997, Dana entered into a credit agreement with the lenders
party thereto (the "Lenders") and General Electric Capital Corporation, as agent
(the "New Revolving Credit Facility"). Capitalized terms not otherwise defined
in this section have the meanings given to them in the New Revolving Credit
Facility.
Pursuant to the New Revolving Credit Facility, the Lenders provided Dana
with a $75.0 million revolving credit facility. Availability under the New
Revolving Credit Facility is limited to the sum of 85% of gross eligible
accounts receivable and 75% of gross eligible inventory, less reserves, if any,
as specified in the New Revolving Credit Facility. The term of the New Revolving
Credit Facility is five years.
Amounts borrowed under the New Revolving Credit Facility bear interest, at
the option of Dana, at either (i) the Index Rate (i.e., the higher of prime rate
or the overnight Federal funds rate plus 0.50%) plus 1.00%, or (ii) absent a
default, the LIBOR rate plus 2.25%. The interest rate will be subject to
adjustment, on a quarterly basis, based on the Company's Interest Coverage Ratio
during each fiscal quarter.
The full and prompt payment and performance, when due, of the obligations
of Dana under the New Revolving Credit Facility are guaranteed by the Company,
all of its material domestic subsidiaries (other than the Guarantor) and all
directly-owned Canadian subsidiaries of the Company, and are secured by a
perfected first priority security interest in substantially all of the existing
and after-acquired tangible and intangible assets of Dana and the guarantors.
The Lenders do not have a security interest in the Escrow Account securing the
Notes nor in the funds in the Escrow Account. The obligations of Dana under the
New Revolving Credit Facility are also secured by a pledge of 66% of the capital
stock of all non-Canadian foreign subsidiaries of Dana and the guarantors.
The New Revolving Credit Facility contains a number of covenants that
restrict the operation of the Company, including restrictions on, among other
things: (i) certain mergers, acquisitions or sales of the Company's assets or
stock (other than the stock of the Company); (ii) cash dividends and other
distributions to equity holders and to the Company; (iii) payments in respect of
subordinated debt; (iv) transactions with affiliates; and (v) indebtedness and
liens. The New Revolving Credit Facility prohibits the Company from making any
acquisitions without the consent of the Lenders having at least 66 2/3% of the
commitments to make revolving credit advances under the New Revolving Credit
Facility. In addition, the New Revolving Credit Facility limits the amount of
dividends and similar payments that Dana and other subsidiary guarantors can
make to the Company to the amount required to pay interest on the Notes (after
application of amounts held in the Escrow Account), taxes, holding company
operating expense and certain other matters specified in the New Revolving
Credit Facility. The New Revolving Credit Facility contains a provision which
permits the Lenders thereunder to block payments to the Company following a
payment default, or for a period of 179 days following a non-payment default,
under the New Revolving Credit Facility.
The New Revolving Credit Facility also includes certain financial
covenants, affirmative and negative covenants, representations, warranties,
conditions and events of default.
Upon the occurrence of an Event of Default under the New Revolving Credit
Facility, the Lenders may accelerate the maturity of the Loans and any other
amounts due from Dana under the New Revolving Credit Facility.
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DESCRIPTION OF OUTSTANDING CAPITAL STOCK
The following summary of the outstanding capital stock of the Company does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the following documents: (i) the Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation"), including the
Certificates of Designation referred to herein and (ii) the Company's by-laws.
GENERAL
Under the Company's Certificate of Incorporation, the Company is authorized
to issue 4,000,000 shares of capital stock, of which 3,000,000 shares are Common
Stock, par value $.01 per share, and 1,000,000 shares are preferred stock, par
value $.01 per share (the "Serial Preferred Stock"). As of December 31, 1996,
825,086 shares of Common Stock were issued and outstanding, 198,000 shares were
reserved for issuance pursuant to the Initial Warrant Agreement (as defined
herein), 341,550 shares were reserved for issuance pursuant to the Series B
Warrant Agreement (as defined herein), 204,502 shares were reserved for issuance
in connection with the Company's stock option plan and agreements and the
Company has issued options to purchase 192,987 shares pursuant to such plan and
agreements.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share of
Common Stock on all matters voted on by stockholders of the Company. Subject to
any preferential rights of any outstanding series of preferred stock designated
by the Board of Directors, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive pro rata all assets of the Company available for
distribution to such holders after distribution in full of the preferential
amount to be distributed to holders of shares of Serial Preferred Stock. All
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. The Common Stock has no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the Common Stock.
SERIAL PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares of
Serial Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, option or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series, without further vote or action by the shareholders. The
issuance of Serial Preferred Stock by the Board of Directors could affect the
rights of holders of Common Stock. For example, such issuance could result in a
class of securities outstanding that would have preferences with respect to
voting rights and dividends, and in liquidation, over the Common Stock, and
could (upon conversion or otherwise) enjoy all of the rights appurtenant to
Common Stock. The authority possessed by the Board of Directors to issue Serial
Preferred Stock could potentially be used to discourage attempts by others to
obtain control of the Company through a merger, tender offer, proxy contest or
otherwise by making such attempts more difficult to achieve or more costly.
Cumulative Exchangeable Preferred Stock
40,000 shares have been designated in the Certificate of Incorporation as
Cumulative Exchangeable Preferred Stock (the "Cumulative Exchangeable Preferred
Stock" or "Redeemable Preferred Stock"). The Company originally issued 10,000
shares of Cumulative Exchangeable Preferred Stock with a par value of $.01 per
share. The outstanding liquidation preference of the Cumulative Exchangeable
Preferred Stock at December 31, 1996 was $12.8 million. The Cumulative
Exchangeable Preferred Stock was issued in units with warrants to purchase
50,000 shares of Common Stock. See "-- Warrants."
Dividends on shares of Cumulative Exchangeable Preferred Stock are
cumulative from the date of issue and are payable quarterly in arrears on
February 15, May 15, August 15 and November 15 of each year. The
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initial dividend rate on the Cumulative Exchangeable Preferred Stock was 10% per
annum. Dividends are payable in (i) cash, (ii) additional shares of Cumulative
Exchangeable Preferred Stock or (iii) any combination thereof, at the option of
the Company, up to and including the August 15, 1997 dividend, and in cash
thereafter. Commencing on August 16, 1999, the dividend rate per share will be
15% per annum.
At any time after August 15, 1997, and prior to August 16, 1999, if (i) the
Cumulative Exchangeable Preferred Stock is not exchangeable into Existing Senior
Notes because the Fixed Charge Coverage Ratio (as described in the Existing
Indenture) for the Company's most recently ended four full fiscal quarters for
which internal financial information is available is less than 2.0:1, or (ii) in
the event that a cash dividend is not declared and paid when due and the
Cumulative Exchangeable Preferred Stock is not then exchangeable into Existing
Senior Notes for any reason, then, in each case, the dividend rate thereafter
shall be 12.5% per annum for the period from August 16, 1997 until August 15,
1998 and 13.75% per annum for the period from August 16, 1998 to August 15,
1999.
The Company may at any time exchange all, but not less than all, of the
then outstanding Cumulative Exchangeable Preferred Stock for senior notes to be
issued under the Old Indenture. On or after August 15, 1997, holders of
Cumulative Exchangeable Preferred Stock may demand the exchange of any or all of
their shares for Existing Senior Notes if (i) the Connecticut-based employees of
the Company have not increased to a minimum of 30 persons and (ii) the Fixed
Charge Coverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial information is available is greater than
or equal to 2.0:1.
The Cumulative Exchangeable Preferred Stock is redeemable at any time at
the option of the Company, in whole or in part, at $1,000 per share plus all
accumulated and unpaid dividends, if any, to the date of redemption. The Company
must redeem all outstanding Cumulative Exchangeable Preferred Stock on August
15, 2002.
So long as the Cumulative Exchangeable Preferred Stock is outstanding, the
holders of the Cumulative Exchangeable Preferred Stock, by the affirmative vote
of the holders of at least a majority of all outstanding Cumulative Exchangeable
Preferred Stock, voting separately as a class, will have the exclusive right to
elect one director to the Board of Directors of the Company. The holders of
Cumulative Exchangeable Preferred Stock will have no other voting rights with
respect to their Cumulative Exchangeable Preferred Stock except as may be
required by applicable law.
The Company has agreed to make an offer to purchase shares of Cumulative
Exchangeable Preferred Stock to the extent permitted by the Existing Indenture,
(i) upon the consummation of an Asset Sale Offer, with any Excess Proceeds from
an Asset Sale that exceed the aggregate purchase price of the Existing Senior
Notes tendered pursuant to such Asset Sale Offer, or (ii) upon the consummation
of a Change of Control Offer, in either case, at $1,000 per share plus all
accumulated and unpaid dividends, if any, to the date of such purchase. (All
capitalized terms used herein and not otherwise defined shall have the meaning
set forth in the Existing Indenture.)
Series B Preferred Stock
350,000 shares have been designated in a Certificate of Designation as
Series B Preferred Stock. The Company issued an aggregate of 115,000 shares of
Series B Preferred Stock with a par value of $.01 per share on August 15, 1996,
September 16, 1996 and September 27, 1996 and 8,381 shares were issued on
November 15, 1996 and February 18, 1997 as dividends in respect of the Series B
Preferred Stock. Pursuant to a registration statement filed by the Company,
122,632 shares of Series B Preferred Stock were exchanged for shares of Series C
Preferred Stock pursuant to an exchange offer (the "Preferred Stock Exchange
Offer"). The terms of the Series B Preferred Stock are substantially identical
to the terms of the Series C Preferred Stock, except that the shares of Series B
Preferred Stock have not been registered under the Securities Act and contain
terms restricting the transfer of such shares.
Series C Preferred Stock
350,000 shares have been designated in a Certificate of Designation as the
Series C Preferred Stock. The Series C Preferred Stock when issued in exchange
for the Series B Preferred Stock in accordance with the
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terms of the Preferred Stock Exchange Offer will be fully paid and
nonassessable, and the holders thereof will have no subscription or preemptive
rights related thereto.
The Series C Preferred Stock, with respect to dividends and distributions
upon the liquidation, winding-up and dissolution of the Company, ranks senior
to: (i) all classes of Common Stock of the Company; (ii) the Cumulative
Exchangeable Preferred Stock; and (iii) each other class of capital stock issued
by the Company after the Exchange Offer. The Series C Preferred Stock will rank
pari passu with the Series B Preferred Stock.
Dividends on the Series C Preferred Stock are payable quarterly in arrears
on February 15, May 15, August 15 and November 15 of each year (each, a
"Dividend Payment Date") at an initial rate of 14.0% per annum. Dividends on the
Series C Preferred Stock issued in exchange for the Series B Preferred Stock
will be cumulative (whether or not earned or declared) from the later of (a) the
last Dividend Payment Date on which dividends were paid on the Series B
Preferred Stock surrendered in exchange therefor or (b) if no dividends have
been paid on such Series B Preferred Stock, from the date of issuance of the
Series B Preferred Stock. Dividends on the Series C Preferred Stock issued as
dividends in respect of the Series C Preferred Stock will be cumulative (whether
or not earned or declared) from the date of issuance of the Series C Preferred
Stock. Dividends which are not declared and paid when due will compound
quarterly on each Dividend Payment Date at the dividend rate until payment is
made.
Dividends may, at the option of the Company, be paid on any Dividend
Payment Date either in cash or by issuing fully paid and nonassessable shares of
Series C Preferred Stock with an aggregate liquidation preference equal to the
amount of such dividends through the November 17, 1997 Dividend Payment Date,
and in cash thereafter. If the Company does not pay cash dividends after
November 17, 1997, the per annum dividend rate will be increased by 0.25% during
each quarter ended on each Dividend Payment Date on which non-cash payment
occurs, unless such non-cash payment has occurred during more than four
quarters, in which case the per annum dividend rate will be increased by 0.5% in
each additional quarter in which such non-cash payment occurs, with a maximum
rate of 17.0% per annum. If the dividend rate has been increased as a result of
a non-cash payment, the rate will not revert to the original rate even when the
Company begins to pay cash dividends.
The Series C Preferred Stock will be redeemable, at the Company's option,
in whole or in part, at any time and from time to time on or after September 1,
1999, at the following redemption prices (expressed in percentages of
liquidation preference), plus accrued and unpaid dividends, if any, to the
redemption date, if redeemed during the 12-month period set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------------------------------------------------------------------- ----------------
<S> <C>
September 1, 1999 to and including August 31, 2000................. 108%
September 1, 2000 to and including August 31, 2001................. 106%
September 1, 2001 to and including August 31, 2002................. 104%
September 1, 2002 to and including August 31, 2003................. 102%
September 1, 2003 and thereafter................................... 100%
</TABLE>
In addition, at any time prior to September 1, 1999, the Company may redeem
(pursuant to one or more redemptions) up to 35% of the aggregate liquidation
preference of the Series C Preferred Stock (and the Series B Preferred Stock,
taken together) with net proceeds received from one or more public offerings of
equity securities of the Company at a redemption price equal to 110% of the
liquidation preference thereof, plus accrued and unpaid dividends thereon to the
date of redemption. Any such redemption will be required to occur on or prior to
120 days after the receipt of such net proceeds.
The Company is obligated to redeem all shares of the Series C Preferred
Stock outstanding on August 31, 2006 (the "Mandatory Redemption Date"), at a
redemption price equal to the liquidation preference of the Series C Preferred
Stock, payable in cash, plus accrued and unpaid dividends, which shall also be
payable in cash (whether or not otherwise payable in cash), to the date of
redemption.
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Upon a Change of Control of the Company only if and only to the extent
permitted by the Existing Senior Notes, the Senior Secured Credit Facility, the
Notes and the New Revolving Credit Facility and any other long-term indebtedness
outstanding at such time, the Company is obligated to make an offer to purchase
the outstanding shares of the Series C Preferred Stock at a purchase price equal
to 101% of the liquidation preference of the Series C Preferred Stock, plus
accrued and unpaid dividends, if any, to the purchase date; provided that such
offer will not result in the Series C Preferred Stock being deemed to be
Disqualified Stock under the Existing Indenture. If the Company does not make an
offer to purchase the Series C Preferred Stock upon a Change of Control, the
dividend rate will be increased to an annual rate of 17% per annum. The
Company's obligation to redeem the Series C Preferred Stock will be subject to
the legal availability of funds therefor. A "Change of Control" of the Company
will be deemed to have occurred at such time as (i) any person other than KKEP,
Dr. Bonoma, the heirs, executors, administrators testamentary, trustees,
legatees or beneficiaries of KKEP or Dr. Bonoma, a trust the beneficiaries of
which include only persons described above and their respective spouses and
lineal descendants, the general partner and each limited partner of KKEP and any
subsidiary of either KKEP or Dr. Bonoma or both of them jointly (collectively,
the "Permitted Holders"), becomes the beneficial owner of 50% or more of the
total voting power of the Common Stock; (ii) prior to a public equity offering
of Common Stock, Permitted Holders collectively dispose of more than 50% of the
shares of the Common Stock owned by the Permitted Holders in the aggregate as of
the date hereof (excluding dispositions made to any other Permitted Holders);
(iii) any person other than a Permitted Holder becomes the beneficial owner of
more than 35% of the total voting power of the Common Stock and the Permitted
Holders together with officers and employees of the Company beneficially own, in
the aggregate, a lesser percentage of the total voting power of the Common Stock
than such other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the Board
of Directors of the Company; (iv) there shall be consummated any consolidation
or merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which the Common Stock would be converted into cash,
securities or other property, other than a merger or consolidation of the
Company in which the holders of the Common Stock outstanding immediately prior
to the consolidation or merger hold, directly or indirectly, at least a majority
of the common stock of the surviving corporation immediately after such
consolidation or merger; or (v) subsequent to a public equity offering of Common
Stock during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by the stockholders of the
Company has been approved by 66 2/3% of the directors then still in office who
either were directors at the beginning of such period or whose election or
recommendation or election was previously so approved) cease to constitute a
majority of the Board of Directors of the Company.
Holders of the Series C Preferred Stock (acting together with the holders
of the Series B Preferred Stock, as a single class) will have the right to
nominate three candidates for directors on the Company's Board of Directors. The
Company shall use all reasonably commercial efforts to cause the election of one
of such nominees selected by the Company. Holders of the Series C Preferred
Stock otherwise have no general voting rights except as provided by law.
The Certificate of Designation generally imposes certain restrictions on
the ability of the Company to declare dividends or make distributions with
respect to, or purchase, or redeem or exchange any capital stock of the Company
other than the Series C Preferred Stock and the Series B Preferred Stock, except
in or for capital stock (other than capital stock which matures or is
mandatorily redeemable prior to the latest maturity date of the Existing Senior
Notes or the Series C Preferred Stock ("Disqualified Capital Stock")), unless
dividends on the Series C Preferred Stock have been paid in cash for the most
recent quarterly period and the payments made on capital stock shall not in the
aggregate exceed 50% of consolidated net income less 100% of consolidated net
loss of the Company from August 31, 1996 to the date of such payment. Such
restrictions do not prohibit: (i) the retirement of shares of capital stock in
exchange for shares of capital stock (other than Disqualified Capital Stock) or
out of the net proceeds of substantially concurrent sales of capital stock
(other than Disqualified Capital Stock); (ii) the retirement of Disqualified
Capital Stock by exchange of shares of Disqualified Capital Stock or out of net
proceeds of substantially concurrent sales of Disqualified Capital Stock; (iii)
the payment of cash dividends on the Cumulative Exchangeable Preferred Stock if
dividends have been paid in cash on the Series C Preferred Stock for the most
recently ended quarterly period; or (iv) the
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payment of management or advisory fees to KKEP or to its affiliates in an amount
that, when taken with all such previous amounts paid since April 15, 1994, does
not exceed an average annual amount of $675,000.
The Certificate of Designation prohibits the Company from exercising its
option to exchange, either in whole or in part, the Cumulative Exchangeable
Preferred Stock for notes without the prior consent of the holders of the
majority in aggregate liquidation preference of the Series C Preferred Stock and
the Series B Preferred Stock, voting as a single class.
WARRANTS
Initial Warrants
The Company issued warrants to purchase shares of Common Stock of the
Company (the "Initial Warrants") under a Warrant Agreement, dated as of August
18, 1994, between the Company and American Bank National Association as warrant
agent (the "Initial Warrant Agreement"), as part of the issuance of the Existing
Senior Notes and Cumulative Exchangeable Preferred Stock and has reserved
180,000 shares of Common Stock for issuance pursuant to the Initial Warrants.
Each Initial Warrant, when exercised, will entitle the holder thereof to receive
the number of shares of the Company's Common Stock set forth in such Initial
Warrant at $.01 per share. The number of shares of Common Stock into which an
Initial Warrant is convertible (the "Warrant Shares") may be subject to
adjustment in certain cases referred to below and detailed in the Initial
Warrant Agreement. The Initial Warrants are exercisable at any time on or after
their date of issuance and unless exercised, will automatically expire at 5:00
p.m. Eastern Standard Time on August 15, 2001. The Initial Warrants and the
Warrant Shares have not been registered under the Securities Act and are subject
to certain transfer restrictions.
The holders of the Initial Warrants have no right to vote on matters
submitted to the shareholders of the Company and have no right to receive
dividends. The holders of the Initial Warrants are not entitled to share in the
assets of the Company in the event of liquidation, dissolution or the winding up
of the affairs of the Company.
If the Company: (i) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock or other shares of its capital stock; (ii)
subdivides its outstanding shares of Common Stock into a greater number of
shares; (iii) combines its outstanding shares of Common Stock into a smaller
number of shares; or (iv) issues by reclassification of its Common Stock any
shares of its capital stock, then the number of shares of Common Stock issuable
upon exercise of each Initial Warrant immediately prior to such action shall be
proportionately adjusted so that the holder of any Initial Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company that such holder would have owned immediately following such
action if such Initial Warrant had been exercised immediately prior to such
action.
If the Company distributes to all holders of its Common Stock any of its
assets (including but not limited to cash), securities (other than capital
stock), or any rights or warrants to purchase securities (including but not
limited to Common Stock) of the Company, the Company will make the same
distribution to holders of the Initial Warrants as though, immediately prior to
the record date with respect to such distribution, each such holder owned the
number of shares of Common Stock such holder could have purchased upon the
exercise of the Initial Warrants held by such holder.
Subject to certain exceptions set forth in the Initial Warrant Agreement,
if the Company issues (i) shares of Common Stock for a consideration per share
less than the Current Market Price per share (as defined in the Initial Warrant
Agreement), or (ii) any securities convertible into or exchangeable for Common
Stock for a consideration per share of Common Stock initially deliverable upon
conversion or exchange of such securities that is less than the Current Market
Price per share on the date of issuance of such securities, the Company shall
offer to sell to each holder of Initial Warrants, at the same price and on the
same terms offered to all other prospective buyers (provided that the holders of
Initial Warrants shall not be required to buy any other security in order to buy
such Common Stock or convertible securities), a portion of such Common Stock or
convertible securities that is equal to such holder's portion of the Common
Stock then outstanding if
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immediately prior thereto all the Initial Warrants had been exercised. Each such
holder may elect to buy all or any portion of the Common Stock or convertible
securities offered or may decline to purchase any.
Notwithstanding the foregoing, no adjustment or action need be made for:
(i) a change solely in the par value or no par value of the Common Stock,
provided that the Company shall not increase the par value to exceed the
exercise price of the Initial Warrants; (ii) the conversion or exchange (other
than pursuant to a reclassification), in any case on a share-for-share basis, of
Common Stock for non-voting common stock that has rights (other than voting
rights) identical to the Common Stock, or of such non-voting stock for Common
Stock; (iii) shares of Common Stock (or options to purchase such shares) issued
to employees of the Company or any of its Subsidiaries pursuant to certain stock
option agreements (as described in the Initial Warrant Agreement); or (iv) the
exercise of the Initial Warrants.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Initial Warrant will thereafter be exercisable for the right to receive the
kind and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Initial Warrants been exercised immediately prior thereto.
Except under certain circumstances including, without limitation, an
underwriter's market cut-back and registration of shares to be offered pursuant
to an employee benefit plan, an exchange offer or certain merger transactions,
whenever the Company proposes to register any shares of its Common Stock under
the Securities Act, the Company will notify each holder of the Initial Warrants
or Warrant Shares of the proposed filing and if so requested by such holders,
the Company will use its best efforts to register Warrant Shares under the
Securities Act.
The holders of Initial Warrants and Warrant Shares are entitled, with
certain limitations, to demand registration rights with respect to the Warrant
Shares at any time after 90 days following an initial public offering of the
Common Stock, provided that the managing underwriter may require such period to
be extended to up to 180 days following such initial public offering.
Series B Warrants
The Company issued warrants to purchase shares of Common Stock (the "Series
B Warrants") under a Warrant Agreement, dated as of August 15, 1996, between the
Company and Firstar Trust Company as warrant agent, as amended (the "Series B
Warrant Agreement"), as part of the issuance of the Series B Preferred Stock and
has reserved 341,550 shares of Common Stock for issuance pursuant to the Series
B Warrants. Each Series B Warrant, when exercised, will entitle the holder
thereof to purchase 2.970 shares of Common Stock (each such share, a "Series B
Warrant Share") at an exercise price equal to $.01 per share (the "Exercise
Price"). The number of Series B Warrant Shares may be adjusted from time to time
upon the occurrence of certain events as provided in the Series B Warrant
Agreement. The Series B Warrants are exercisable at any time on or after the
date of issuance and, unless exercised, will automatically expire on August 31,
2006. The Series B Warrants are detachable from the Series B Preferred Stock and
separately transferable, subject to compliance with applicable federal and state
securities laws. The Series B Warrants and the Series B Warrant Shares have not
been registered under the Securities Act and are subject to certain transfer
restrictions.
The holders of Series B Warrants have no right to vote on matters submitted
to the shareholders of the Company and have no right to receive dividends. The
holders of the Series B Warrants will not be entitled to share in the assets of
the Company in the event of dissolution, liquidation or the winding up of the
affairs of the Company.
The number of shares of Common Stock issuable upon the exercise of each
Series B Warrant (the "Series B Exercise Rate") will be subject to adjustment
from time to time in certain events including: (i) the payment or distribution
of a dividend on the Common Stock in shares of the Common Stock or other capital
stock of the Company; (ii) subdivisions, combination or reclassification of the
outstanding shares of Common Stock; (iii) the issuance of shares of Common Stock
or distribution of any right, options or warrants to any
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person entitling them to purchase shares of Common Stock, or securities
convertible into or exchangeable for Common Stock, at a price per share less
than the current market value; (iv) the distribution to all holders of its
Common Stock of any evidences of indebtedness of the Company or of its
subsidiaries; (v) distribution of any assets of the Company or any of its
subsidiaries (other than cash dividends or other cash distributions or
distributions from current or retained earnings and earned surplus); or (vi)
distribution of any rights, options or warrants to acquire any of the foregoing
referred to in clauses (iv) and (v).
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Series B Warrant shall thereafter be exercisable for the right to receive
the kind and amount of shares of stock or other securities or property to which
such holders would have been entitled as a result of such consolidation, merger
or sale had the Series B Warrants been exercised immediately prior thereto.
If, at any time prior to the Company's public offering of stock resulting
in gross proceeds to the Company of at least $10.0 million (the "Drag-Along
Termination Date"), holders of Common Stock and/or rights, warrants, options,
convertible securities or convertible indebtedness, exchangeable securities or
exchangeable indebtedness, or other rights, exercisable for or convertible or
exchangeable into Common Stock, whether at the time or upon the occurrence of
some future event (collectively, "Common Stock Equivalents") determine to sell
shares of Common Stock and/or Common Stock Equivalents representing more than
50% of the shares of Common Stock outstanding and the shares of Common Stock
into or for which rights, options, warrants or other securities outstanding are
exercisable or convertible (other than the Series B Warrants) (collectively, the
"Fully Diluted Shares"), the holders of a majority of such shares shall have the
right to require holders of the Series B Warrants (including any Series B
Warrant Shares) to sell their shares on a pro rata basis on the same terms.
If, at any time prior to the earlier of the Drag-Along Termination Date or
August 31, 2002, any holder of Series B Warrants and/or Series B Warrant Shares
transfers more than 5% of the Fully Diluted Shares, the holders of the Series B
Warrants shall be entitled to sell the Series B Warrants and/or the Series B
Warrant Shares on a pro rata basis and on the same terms.
Five years following the date of issuance of the Series B Warrants, the
holders of 25% of the Series B Warrants and/or Series B Warrant Shares will have
the right, subject to the Company's right to purchase such shares at their fair
market value, to demand registration of not less than 25% of the Series B
Warrant Shares, such offering to be consummated by a nationally recognized
investment banking firm selected by the Company and reasonably acceptable to the
holders of the Series B Warrants. The holders of the Series B Warrants also
shall be entitled to piggyback registration rights if at any time after the
Company's initial public offering of Common Stock, the Company proposes to file
a registration statement under the Securities Act with respect to an offering by
the Company (other than certain enumerated exceptions) subject to cutback by
underwriters.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain of the anticipated federal income tax
consequences of an exchange of Existing Notes for New Notes and of the purchase,
ownership, and disposition of the New Notes is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the final, temporary,
and proposed regulations promulgated thereunder, and administrative rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. This summary does not
purport to deal with all aspects of federal income taxation that may be relevant
to a particular investor, nor any tax consequences arising under the laws of any
state, locality, or foreign jurisdiction, and it is not intended to be
applicable to all categories of investors, some of which, such as dealers in
securities, banks, insurance companies, tax-exempt organizations, foreign
persons, persons that hold New Notes as part of a straddle or conversion
transaction, or holders subject to the alternative minimum tax, may be subject
to special rules. In addition, the summary is limited to persons that will hold
the New Notes as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. ALL INVESTORS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN
TAX CONSEQUENCES OF THE EXCHANGE AND THE OWNERSHIP AND DISPOSITION OF NEW NOTES.
TAXATION OF HOLDERS ON EXCHANGE
Although the matter is not free from doubt, an exchange of Existing Notes
for New Notes should not be a taxable event to holders of Existing Notes and
holders should not recognize any taxable gain or loss as a result of such an
exchange. Accordingly, a holder would have the same adjusted basis and holding
period in the New Notes as it had in the Existing Notes immediately before the
exchange. Further, the tax consequences of ownership and disposition of any New
Notes should be the same as the tax consequences of ownership and disposition of
Existing Notes.
MARKET DISCOUNT
If a holder purchases a Note for an amount that is less than its principal
amount, the amount of the difference will be treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such a Note at the time of such payment or disposition. In
addition, the holder may be required to defer, until the maturity of the Note or
its earlier disposition in a taxable transaction, the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the holder
elects to accrue on a constant interest method. A holder of a Note may elect to
include market discount in income currently as it accrues (on either a ratable
or constant interest method), in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service (the "IRS").
AMORTIZABLE BOND PREMIUM
A holder that purchases a Note for an amount in excess of the sum of its
principal amount will be considered to have purchased the Note at a "premium." A
holder generally may elect to amortize the premium over the remaining term of
the Note on a constant yield method. The amount amortized in any year will be
treated as a reduction of the holder's interest income from the Note. Bond
premium on a Note held by a holder that does not make such an election will
decrease the gain or increase the loss otherwise recognized on disposition of
the Note. The election to amortize premium on a constant yield method once made
applies to
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all debt obligations held or subsequently acquired by the electing holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked with the consent of the IRS.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A holder's tax basis in a Note will, in general, be the holder's cost
therefor, increased by market discount previously included in income by the
holder and reduced by any amortized premium. Upon the sale, exchange or
retirement of a Note, a holder will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange or retirement
(less any accrued interest, which will be taxable as such) and the adjusted tax
basis of the Note. Except as described above with respect to market discount,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange or retirement the Note has been
held for more than one year. Under current law, long-term capital gains of
individuals are, under certain circumstances, taxed at lower rates than items of
ordinary income. The deductibility of capital losses is subject to limitations.
BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Notes and to the proceeds of
sale of a Note made to holders other than certain exempt recipients (such as
corporations). A 31% backup withholding tax will apply to such payments if the
holder fails to provide a taxpayer identification number or certification of
foreign or other exempt status or fails to report in full dividend and interest
income.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
THE FOREGOING SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES TO
HOLDERS DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE
RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF HIS PARTICULAR
CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF NOTES SHOULD CONSULT SUCH
HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, OR SUBSEQUENT VERSIONS THEREOF.
ERISA CONSIDERATIONS
Sections 406 and 407 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of the Code prohibit certain
employee benefit plans, individual retirement accounts, individual retirement
annuities, and employee annuity plans ("Plans") from engaging in certain
transactions with persons who, with respect to such Plan, are "parties in
interest" under ERISA or "disqualified persons" under the Code. A violation of
these "prohibited transactions" rules may generate excise taxes under the Code
and other liabilities under ERISA for such persons. Possible violations of the
prohibited transaction rules occur if the Notes are purchased with the assets of
any Plan if the Company or any of its affiliates is a party in interest or
disqualified person with respect to such Plan, unless such acquisition is
subject to a statutory or administrative exemption.
The foregoing discussion is general in nature and is not intended to be
all-inclusive. Any fiduciary of a Plan considering the purchase of the Notes
should consult its legal advisors regarding the consequences of such purchases
under ERISA and the Code. If the Plan is not subject to ERISA, the fiduciary
should consult its legal advisors regarding the consequences of any state law or
Code considerations.
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PLAN OF DISTRIBUTION
Based on certain no action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or (ii) any broker-dealer that purchases Notes from the Company to resell
pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available exemption) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of the holder's business and such holders have
no arrangement or understanding with any person to participate in a distribution
of such New Notes and are not participating in, and do not intend to participate
in, the distribution of such New Notes. In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdiction or an exemption from registration or qualification is
available and complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register to qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the Notes
reasonably request in writing.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Existing Notes
where such Existing Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of 180
days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the close of the Exchange Offer the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Existing Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Existing Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
115
<PAGE> 118
EXPERTS
The financial statements of the Company as of March 31, 1996 and 1995 and
for the year ended March 31, 1996 and for the period from April 15, 1994
(Inception) to March 31, 1995 and of Cosmar Corporation and Affiliate for the
period from January 1, 1994 to August 17, 1994, included in this Prospectus and
the related financial statement schedules included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of the Cosmar Corporation and Affiliate (the prior
owners of the assets of the Company's Cosmar subsidiary) as of December 31, 1993
and for the year then ended included in this Prospectus have been audited by
Windes & McClaughry Accountancy Corporation, independent auditors, as stated in
their report appearing herein and elsewhere in the Registration Statement, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of GAC as of December 31, 1995 and December 31,
1994 and for the years then ended included in this Prospectus have been audited
by Deutsch, Marin & Company, independent auditors, as stated in their report
appearing herein and elsewhere in the Registration Statement, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of MEM at December 31, 1995 and 1994
and for each of the three years in the period ended December 31, 1995, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statement of direct revenues and direct expenses of the mass fragrances
business of P&G for the year ended June 30, 1996, included in this Prospectus
has been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and has been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
116
<PAGE> 119
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RENAISSANCE COSMETICS INC. AND SUBSIDIARIES:
Consolidated Balance Sheets -- December 31, 1996 (Unaudited) and March 31, 1996................ F-2
Consolidated Statements of Operations -- Nine Months Ended December 31, 1996 and 1995
(Unaudited).................................................................................. F-3
Consolidated Statements of Cash Flows -- Nine Months Ended December 31, 1996 and 1995
(Unaudited).................................................................................. F-4
Notes to Consolidated Financial Statements..................................................... F-5
Independent Auditors' Report................................................................... F-9
Consolidated Balance Sheets -- March 31, 1996 and 1995......................................... F-10
Consolidated Statements of Operations -- Year Ended March 31, 1996 and Period from April 15,
1994 (Inception) to March 31, 1995........................................................... F-11
Consolidated Statements of Stockholders' Equity -- Year Ended March 31, 1996 and Period
from April 15, 1994 (Inception) to March 31, 1995............................................ F-12
Consolidated Statements of Cash Flows -- Year Ended March 31, 1996 and
Period from April 15, 1994 (Inception) to March 31, 1995..................................... F-13
Notes to Consolidated Financial Statements..................................................... F-14
COSMAR CORPORATION AND AFFILIATE (PREDECESSOR):
Independent Auditors' Report................................................................... F-27
Combined Statement of Operations of Assets Acquired and Liabilities Assumed and Changes in
Excess of Assets Acquired Over Liabilities Assumed -- Period from January 1, 1994 to
August 17, 1994.............................................................................. F-28
Combined Statement of Cash Flows of Assets Acquired and Liabilities Assumed -- Period from
January 1, 1994 to August 17, 1994........................................................... F-29
Notes to the Combined Financial Statements..................................................... F-30
Independent Auditors' Report................................................................... F-32
Combined Statement of Income -- For the Year Ended December 31, 1993........................... F-33
Combined Statement of Cash Flows -- For the Year Ended December 31, 1993....................... F-34
Notes to the Combined Financial Statements..................................................... F-35
GREAT AMERICAN COSMETICS, INC.:
Balance Sheet as at June 30, 1996 (Unaudited).................................................. F-37
Statements of Income and Retained Earnings -- For the Six Months Ended June 30, 1996 and 1995
(Unaudited).................................................................................. F-38
Statements of Cash Flows -- For the Six Months Ended June 30, 1996 and 1995 (Unaudited)........ F-39
Notes to Financial Statements.................................................................. F-40
Report of Independent Accountants.............................................................. F-41
Balance Sheet as at December 31, 1995 and 1994................................................. F-42
Statements of Income and Retained Earnings -- For the Years Ended December 31, 1995
and 1994..................................................................................... F-43
Statements of Cash Flows -- For the Years Ended December 31, 1995 and 1994..................... F-44
Notes to Financial Statements.................................................................. F-45
MEM COMPANY INC. AND SUBSIDIARIES:
Consolidated Balance Sheet -- September 30, 1996 (Unaudited) and December 31, 1995............. F-48
Consolidated Statements of Operations -- Nine Months Ended September 30, 1996 and 1995
(Unaudited).................................................................................. F-49
Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1996 and 1995
(Unaudited).................................................................................. F-50
Notes to Consolidated Financial Statements..................................................... F-51
Report of Independent Auditors................................................................. F-52
Consolidated Statements of Operations -- Years Ended December 31, 1995, 1994 and 1993.......... F-53
Consolidated Balance Sheets -- December 31, 1995 and 1994...................................... F-54
Consolidated Statements of Changes in Stockholders' Equity -- Years Ended December 31, 1995,
1994 and 1993................................................................................ F-55
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and 1993.......... F-56
Notes to Consolidated Financial Statements..................................................... F-57
THE MASS FRAGRANCES BUSINESS OF THE PROCTER & GAMBLE COMPANY:
Independent Auditors' Report................................................................... F-62
Statement of Direct Revenues and Direct Expenses -- For the Year Ended June 30, 1996 and the
Three-Month Period Ended September 30, 1996 (Unaudited)...................................... F-63
Notes to Financial Statement................................................................... F-64
</TABLE>
F-1
<PAGE> 120
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 51,513 $ 1,432
Marketable securities........................................................ 585 174
Accounts receivable -- Net................................................... 38,226 34,557
Inventories.................................................................. 55,724 30,237
Prepaid expenses and other current assets.................................... 11,159 6,540
-------- --------
Total current assets...................................................... 157,207 72,940
PROPERTY, PLANT AND EQUIPMENT -- Net........................................... 24,007 14,535
DEFERRED FINANCING COSTS -- Net................................................ 10,759 8,007
OTHER ASSETS -- Net............................................................ 14,806 12,242
INTANGIBLE ASSETS -- Net....................................................... 160,953 76,895
-------- --------
TOTAL ASSETS................................................................... $367,732 $184,619
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable................................................................ $ -- $ 57,000
Accounts payable............................................................. 14,858 19,463
Accrued expenses............................................................. 39,389 15,157
Other current liabilities.................................................... -- 2,700
-------- --------
Total current liabilities................................................. 54,247 94,320
-------- --------
LONG-TERM LIABILITIES:
Long-term debt............................................................... 185,088 67,323
Minimum royalty obligation................................................... 4,899 4,686
Deferred tax liability....................................................... -- 141
-------- --------
Total long-term liabilities............................................... 189,987 72,150
-------- --------
TOTAL LIABILITIES.............................................................. 244,234 166,470
-------- --------
COMMITMENTS AND CONTINGENCIES
SENIOR REDEEMABLE PREFERRED STOCK -- SERIES B:
Par value $.01 -- authorized, 350,000 shares; issued, 119,018 shares at
December 31, 1996......................................................... 82,576 --
-------- --------
REDEEMABLE PREFERRED STOCK:
Par value $.01 -- authorized, 40,000 shares; issued, 12,485 shares at
December 31, 1996; 11,594 shares at March 31, 1996........................ 12,783 11,698
-------- --------
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $.01 -- authorized, 3,000,000 shares; issued, 830,736
shares at December 31, 1996; 726,818 shares at March 31, 1996............. 8 7
Notes receivable from sale of common stock................................... (518) (518)
Additional paid-in capital................................................... 69,403 26,787
Treasury stock, at cost (5,650 shares)....................................... (210) (210)
Deficit...................................................................... (39,430) (19,564)
Cumulative translation adjustment............................................ (1,114) (51)
-------- --------
Total common stockholders' equity......................................... 28,139 6,451
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $367,732 $184,619
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 121
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
NET SALES........................................................................ $124,590 $ 94,339
COST OF GOODS SOLD............................................................... 48,082 36,052
-------- --------
GROSS PROFIT..................................................................... 76,508 58,287
-------- --------
OPERATING EXPENSES:
Selling........................................................................ 48,341 33,388
General and administrative..................................................... 16,727 13,198
Amortization of intangible and other
assets...................................................................... 5,141 3,564
-------- --------
Total operating expenses.................................................... 70,209 50,150
-------- --------
OPERATING INCOME................................................................. 6,299 8,137
INTEREST EXPENSE (INCOME):
Interest expense............................................................... 17,206 14,241
Interest income................................................................ (1,448) (197)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES................................................ (9,459) (5,907)
INCOME TAX PROVISION............................................................. 569 973
-------- --------
NET INCOME (LOSS)................................................................ (10,028) (6,880)
PREFERRED STOCK DIVIDENDS........................................................ 9,838 992
-------- --------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS....................................... $(19,866) $ (7,872)
======== ========
NET LOSS PER COMMON SHARE........................................................ $ (25.95) $ (10.93)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING.............................................. 765,569 720,093
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 122
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31
------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $(10,028) $ (6,880)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 2,715 1,875
Amortization of intangible assets................................................ 2,576 2,404
Amortization of minimum royalty and other assets................................. 2,565 1,160
Amortization of deferred financing costs......................................... 2,918 1,874
Accrued interest on senior notes, subordinated seller notes and minimum royalty
obligation..................................................................... 1,103 976
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable.............................................................. (921) (17,418)
Inventories...................................................................... (6,986) (1,977)
Prepaid expenses and other assets................................................ (9,357) (3,422)
Accounts payable................................................................. (11,135) (5,685)
Accrued expenses................................................................. 7,741 3,728
Other current liabilities........................................................ (2,700) --
Other............................................................................ (1,098) 88
-------- --------
Net cash used in operating activities.......................................... (22,607) (23,277)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities................................................ (411) --
Sale of marketable securities.................................................... -- 324
Capital expenditures............................................................. (2,826) (5,426)
Acquisition of business -- net of cash acquired.................................. (94,109) --
-------- --------
Net cash used in investing activities.......................................... (97,346) (5,102)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable.................................................. 4,200 24,000
Proceeds from Senior Secured Credit Facility..................................... 117,500 --
Repayment of notes payable....................................................... (61,200) --
Payment of minimum royalty obligations........................................... (1,386) --
Net proceeds of issuance of preferred stock -- Series A.......................... 18,955 --
Payment of deferred financing costs.............................................. (5,670) (914)
Redemption of preferred stock -- Series A........................................ (20,434) --
Net proceeds of issuance of redeemable preferred stock -- Series B............... 108,319 --
Net proceeds from issuance of common stock....................................... 9,750 --
-------- --------
Net cash provided by financing activities...................................... 170,034 23,086
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 50,081 (5,293)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................... 1,432 7,001
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................... $ 51,513 $ 1,708
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................................................... $ 10,117 $ 7,141
======== ========
Income taxes................................................................... $ 463 $ 728
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS:
Accrued dividends and accretion on redeemable preferred stocks................... $ 9,838 $ 992
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 123
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Renaissance Cosmetics, Inc. (the
"Company") have been prepared by the Company and are unaudited and include the
accounts of the Company and its wholly-owned subsidiaries, Cosmar Corporation
("Cosmar"), Houbigant Ltee, and Dana Perfumes Corporation ("Dana"), Great
American Cosmetics, Inc. ("GAC") from the date of its acquisition on August 21,
1996, and MEM Company, Inc. ("MEM") from the date of its acquisition on December
4, 1996. All significant intercompany activity has been eliminated. The results
of operations for the nine months ended December 31, 1996 are not necessarily
indicative of the results to be expected for any other interim period or for the
entire year.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company have been made on
a consistent basis. Certain information and footnote disclosures included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited financial
statements should be read in conjunction with management's discussion and
analysis of financial condition and results of operations and the consolidated
financial statements included in the Company's Annual Report on Form 10K for the
year ended March 31, 1996 filed with the Securities and Exchange Commission.
Certain reclassifications were made to the 1995 financial statements to conform
to the current presentation.
In January 1997, the Company restated (a) its previously-reported results
of operations for the three and six months ended September 30, 1996 and
September 30, 1995 and its previously-reported balance sheet data as of
September 30, 1996 and September 30, 1995, and (b) its previously-reported
results of operations for the three months ended June 30, 1996 and June 30, 1995
and its previously-reported balance sheet data as of June 30, 1996 and June 30,
1995 (the "Prior Restatements"). See the Quarterly Reports on Form 10-Q/A for
the three-and six-months ended June 30, 1996, and September 30, 1996. The Prior
Restatements did not require any restatement of the Company's
previously-reported audited financial statements for Fiscal 1995, did not have
any impact on the Company's results of operations for the nine-months ended
December 31, 1996 or the Company's balance sheet as of December 31, 1996, and
will not have any impact on the Company's results of operations for Fiscal 1996
or its balance sheet as of March 31, 1997.
2. INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Raw material and advertising supplies.......................... $ 25,481 $16,957
Work in process................................................ 3,020 2,860
Finished goods................................................. 27,223 10,420
-------- -------
$ 55,724 $30,237
======== =======
</TABLE>
The above components are shown net of excess and obsolete inventory
reserves of $2,864,000 and $1,540,000 at December 31, 1996 and March 31, 1996,
respectively. At December 31, 1996 and March 31, 1996 approximately 49.8% and
60.7%, respectively, of the Company's inventories are stated at the lower of
LIFO cost or market. The excess of current replacement cost over the stated LIFO
value was $0 at December 31, 1996 and March 31, 1996, respectively.
3. NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which is effective for the Company beginning April 1, 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation arrangements
with employees in Notes to Annual Financial Statements and encourages (but does
not require)
F-5
<PAGE> 124
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share in its annual
financial statements.
4. RECENT ACQUISITIONS
A. MEM Acquisition. On December 4, 1996, the Company, through its
wholly-owned subsidiary, Renaissance Acquisition, Inc. ("RAI"), completed its
acquisition (the "MEM Acquisition") of MEM Company, Inc. ("MEM"), pursuant to a
Merger Agreement, dated August 6, 1996, as amended.
MEM distributes a diversified line of fragrances and toiletries in the
mass-market distribution channel. MEM's products are marketed under the
nationally-advertised trademarks English Leather, British Sterling, Heaven Sent
and Love's. The principal market for MEM's products is the United States. Tom
Fields, Ltd. ("Tom Fields"), a division of MEM, manufactures and markets a line
of children's cosmetics and accessories principally under the trademark
Tinkerbell. A subsidiary, Tom Fields (U.K.) Ltd., markets this line of
children's products in the United Kingdom and elsewhere in Europe.
The aggregate cash consideration paid to the equity holders of MEM in
connection with the MEM Acquisition was $19.8 million. In addition, in
connection with the MEM Acquisition, the Company repaid all of MEM's outstanding
indebtedness in an amount equal to $18.1 million and incurred fees and expenses
of approximately $800,000.
See Note 6.D., entitled "Subsequent Event -- MEM Facility Closing" below.
B. P&G Brands Acquisition. On December 6, 1996, the Company completed its
acquisition from The Proctor & Gamble Company ("P&G") of the worldwide rights to
manufacture and market certain mass-market fragrances, including Navy, Navy For
Men, Insignia, California For Men and Le Jardin (the "P&G Acquisition"). The
cash portion of the purchase price paid through the closing was $41.1 million,
of which $8.0 million related to inventory and $33.1 million related to the
licenses and rights to market such fragrances. The purchase price for the
inventory is subject to adjustment based on the actual value of inventory
purchased. Based upon information received from P&G, the amount of such
adjustment may result in an increase in the purchase price of approximately $2.5
million. In addition, in connection with the P&G Acquisition, the Company
assumed certain specified trade-related obligations of P&G, including the
liability for returns of products under the P&G Brands sold prior to the closing
and liabilities under certain advertising and business development commitments.
Concurrent with the P&G Acquisition, the Company entered into transition service
agreements under which P&G will continue the foreign marketing of the P&G Brands
through June 30, 1997.
The MEM Acquisition and the P&G Acquisition are collectively referred to
herein as the "Acquisitions." Both Acquisitions have been accounted for under
the purchase method of business combinations. The Company has not yet completed
the process of allocating the excess of assets acquired over liabilities assumed
to specific assets and liabilities, but believes that this excess will relate
principally to goodwill and trademarks which will be amortized over an average
of 20 years.
The following unaudited pro forma summary presents the consolidated results
of operations as if the Acquisitions had occurred as of the beginning of each
period presented and do not purport to be indicative of what would have occurred
had the Acquisitions been made as of those dates or of results which may occur
in the future (in millions).
F-6
<PAGE> 125
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net Sales.................................. $196 $181
==== ====
Operating Income........................... $ 14 $ 15
==== ====
</TABLE>
5. FINANCING TRANSACTIONS
A. Senior Secured Credit Facility. On December 4, 1996, Cosmar, as
borrower, the Company and all of the Company's material domestic and Canadian
subsidiaries, as guarantors, entered into a Senior Secured Credit Facility with
the lenders named therein (the "Senior Secured Credit Facility"), pursuant to
which Cosmar borrowed $117.5 million and received net proceeds of $113.2
million. Such net proceeds were used: (i) to finance the MEM Acquisition (after
the application of a $33.8 million certificate of deposit, plus approximately
$537,000 of interest thereon); (ii) to finance the P&G Brands Acquisition; (iii)
to repay all outstanding indebtedness under the Company's then-existing credit
facility (the "Old Credit Facility") with Nomura Holding America, Inc.
("Nomura"), which was terminated on such date; and (iv) the remainder was used
or was to be available for general corporate purposes.
The Senior Secured Credit Facility had an initial term of one year, subject
to extension under certain circumstances, and an initial interest rate of 11.5%
per annum, which was scheduled to increase to 12.5% on June 4, 1997 and by an
additional 0.5% at the end of each 90-day period thereafter, subject to a
maximum rate per annum of 20%. The Senior Secured Credit Facility was secured by
substantially all of the assets of Cosmar, the Company and the other guarantors.
The indebtedness under the Senior Secured Credit Facility was repaid in full on
February 7, 1997 and the liens thereunder were released.
See Note 6.A. entitled "Subsequent Events -- New Senior Notes Offering".
6. SUBSEQUENT EVENTS
A. New Senior Notes Offering. On February 7, 1997, the Company completed
the sale of $200.0 million aggregate principal amount of its 11 3/4% Senior
Notes due 2004 (the "New Senior Notes"). The net proceeds from the sale of the
New Senior Notes, together with a portion of the Company's available cash, were
used (i) to refinance the Company's outstanding $65.0 million principal amount
of 13 3/4% Senior Notes due 2001, Series B (the "Old Senior Notes"), (ii) to
repay all outstanding indebtedness under the Senior Secured Credit Facility and
(iii) to fund an escrow account as discussed below.
The New Senior Notes may be redeemed at the option of the Company on or
after February 15, 2002, initially at 103.358% of the principal amount,
declining to 101.679% of the principal amount on or after February 15, 2003, in
each case, plus accrued and unpaid interest thereon. The Company also may redeem
up to 35% of the original principal amount of the New Senior Notes on or after
February 15, 2000, at a redemption price equal to 111.75% of the principal
amount thereof, plus accrued and unpaid interest thereon, with the net proceeds
of one or more public equity offerings or strategic equity investments that have
occurred within 90 days prior to the redemption, provided that at least $130
million of the principal amount of the New Senior Notes originally issued
remains outstanding.
In connection with the sale of the New Senior Notes, the Company
transferred $17.5 million to a newly-formed, single-purpose wholly-owned
subsidiary, Renaissance Guarantor, Inc., a Delaware corporation ("RGI"), in
exchange for a limited guarantee by RGI of the Company's obligations under the
New Senior Notes. RGI placed such amount into an escrow account (the "Escrow
Account"). The New Senior Notes will be general unsecured obligations of the
Company except to the extent that they are collateralized by a first priority
security interest in the Escrow Account.
B. Old Senior Notes Offering. On February 7, 1997, the Company completed
its offer to purchase and purchased all of the outstanding $65.0 million
aggregate principal amount of the Old Senior Notes at a price of $1,165 for each
$1,000 principal amount, plus accrued and unpaid interest (the "Old Senior Notes
Offer").
F-7
<PAGE> 126
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Old Senior Notes Offer, the Company received consents
from the holders of all of the aggregate principal amount of the outstanding Old
Senior Notes to amend the Old Indenture. The amendments eliminated substantially
all of the restrictive covenants contained in the Old Indenture. The Redeemable
Preferred Stock is exchangeable into notes to be issued under the Old Indenture
(i) by the Company at any time and (ii) under certain circumstances, by the
holders thereof on or after August 15, 1997.
C. New Revolving Credit Facility. The Company has received a commitment
letter from a major institutional lender with respect to a proposed revolving
credit facility under which such institutional lender and other lenders would
agree to provide Dana with a senior secured revolving credit facility (the "New
Revolving Credit Facility") with a maximum committed amount of $75.0 million.
Availability under the New Revolving Credit Facility will be based on a
borrowing base consisting of a percentage of gross eligible accounts receivable
and gross eligible inventory, less reserves, if any. The term of the New
Revolving Credit Facility is expected to be five years.
Amounts borrowed under the New Revolving Credit Facility will bear
interest, at the option of Dana, at either (i) the Index Rate (i.e., the higher
of the prime rate or the overnight Federal funds rate plus 0.50%) plus 1.00% or
(ii) absent a default, the LIBOR rate plus 2.25%. The interest rate will be
subject to adjustment, on a quarterly basis, based on the average outstanding
during each quarter.
Under the commitment letter, obligations under the New Revolving Credit
Facility would be guaranteed by the Company, all of its domestic subsidiaries
and all directly-owned Canadian subsidiaries of the Company and will be secured
by a perfected first priority security interest in substantially all of the
existing and after-acquired tangible and intangible assets of Dana and the
guarantors, other than the Escrow Account. The New Revolving Credit Facility is
expected to contain a number of convenants that restrict the operation of the
Company (including financial covenants), which covenants are typical of a
facility of this nature.
There can be no assurance as to when or whether the New Revolving Credit
Facility will be entered into or as to whether the New Revolving Credit Facility
will contain the terms and conditions described above, and such New Revolving
Credit Facility may contain terms and conditions more favorable or less
favorable to the Company than set forth above.
D. MEM Facility Closings. On February 7, 1997, the Company closed MEM'S
facilities in Northvale, New Jersey, and in Boucherville, Quebec. The Company
has estimated its costs in connection with the closure of such facilities to be
approximately $6.1 million, including severance payments, ERISA withdrawal
liability and stay bonuses for selected employees of MEM, which have been
accrued as of December 31, 1996. The Company's estimate of its ERISA withdrawal
liability costs is an estimate for a 1996 withdrawal and the Company has been
advised that its liability for a 1997 withdrawal would be higher.
E. Series C Preferred Stock. On January 31, 1997, the Company filed
Amendment No. 1 to the Company's Registration Statement on Form S-4 (the
"Registration Statement") for its 14.0% Senior Redeemable Preferred Stock,
Series C (the "Series C Preferred Stock"), filed on October 1, 1996. Pursuant to
the terms of the Registration Rights Agreement for the Company's 14.0% Senior
Redeemable Preferred Stock, Series B (the "Series B Preferred Stock"), the
annual dividend rate for the Series B Preferred Stock increased by 0.5% per
annum on January 11, 1997, to 14.5% per annum and the dividend rate will
increase by an additional 0.25% per annum for each 90-day period after January
11, 1997, until the Registration Statement is declared effective (up to a
maximum additional dividends of 2.0% per annum). When the Registration Statement
is declared effective, the dividend rate on the Series B Preferred Stock will be
reduced to the original dividend rate of 14.0% per annum. If the Exchange Offer
is not consummated by March 12, 1997, the dividend rate on the Series B
Preferred Stock will increase by 0.5% per annum and additional 0.25% per annum
for each 90-day period thereafter (up to a maximum additional dividends of 2.0%
per annum), until the Exchange Offer is consummated, at which time the dividend
rate will be reduced to 14.0% per annum.
F-8
<PAGE> 127
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Renaissance Cosmetics, Inc.:
We have audited the accompanying consolidated balance sheets of Renaissance
Cosmetics, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended March 31, 1996 and for the period from April 15, 1994 (Inception)
to March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Renaissance Cosmetics, Inc. and
subsidiaries as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for the year ended March 31, 1996 and the period from April
15, 1994 (Inception) to March 31, 1995 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
June 14, 1996
F-9
<PAGE> 128
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 1,431,809 $ 7,001,170
Marketable securities........................................... 173,604 814,554
Accounts receivable -- Net...................................... 34,557,409 15,557,859
Inventories..................................................... 30,236,739 21,906,326
Prepaid expenses and other current assets....................... 6,539,828 4,030,231
------------ ------------
Total current assets......................................... 72,939,389 49,310,140
PROPERTY, PLANT AND EQUIPMENT -- Net.............................. 14,535,363 8,508,123
DEFERRED FINANCING COSTS -- Net................................... 8,006,782 9,590,535
OTHER ASSETS -- Net............................................... 12,242,090 12,345,686
INTANGIBLE ASSETS -- Net.......................................... 76,895,294 82,498,616
------------ ------------
TOTAL ASSETS...................................................... $184,618,918 $162,253,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable................................................... $ 57,000,000 $ --
Accounts payable................................................ 19,462,868 12,699,355
Accrued expenses................................................ 15,157,127 13,008,982
Other current liabilities....................................... 2,700,000 2,700,000
------------ ------------
Total current liabilities.................................... 94,319,995 28,408,337
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt.................................................. 67,322,944 67,032,468
Notes payable................................................... -- 30,000,000
Minimum royalty obligation...................................... 4,686,039 6,158,000
Deferred tax liability.......................................... 140,619 100,000
------------ ------------
Total long-term liabilities.................................. 72,149,602 103,290,468
------------ ------------
TOTAL LIABILITIES................................................. 166,469,597 131,698,805
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Par value $.01 -- authorized, 40,000 shares; issued, 11,594
shares at March 31, 1996; 10,503 shares at March 31, 1995.... 11,697,624 10,364,802
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $.01 -- authorized, 3,000,000 shares;
issued, 726,818 shares....................................... 7,268 7,268
Notes receivable from sale of common stock...................... (517,609) (517,609)
Additional paid-in capital...................................... 26,786,732 26,786,732
Treasury stock, at cost (1996 -- 5,650 shares; 1995 -- 6,725
shares)...................................................... (210,000) (250,000)
Deficit......................................................... (19,563,738) (6,174,085)
Cumulative translation adjustment............................... (50,956) 337,187
------------ ------------
Total common stockholders' equity............................ 6,451,697 20,189,493
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $184,618,918 $162,253,100
============ ============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 129
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15, 1994
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH 31,
1996 1995
------------ --------------
<S> <C> <C>
NET SALES......................................................... $131,285,624 $ 57,714,409
COST OF GOODS SOLD................................................ 51,169,043 24,552,991
------------ -------------
GROSS PROFIT...................................................... 80,116,581 33,161,418
------------ -------------
OPERATING EXPENSES:
Selling......................................................... 52,780,737 18,245,950
General and administrative...................................... 13,679,180 10,127,482
Amortization of intangible and other assets..................... 5,207,046 2,043,960
------------ -------------
Total operating expenses..................................... 71,666,963 30,417,392
------------ -------------
OPERATING INCOME.................................................. 8,449,618 2,744,026
INTEREST EXPENSE (INCOME):
Interest expense................................................ 19,458,278 8,693,822
Interest income................................................. (255,500) (455,431)
------------ -------------
LOSS BEFORE INCOME TAXES.......................................... (10,753,160) (5,494,365)
INCOME TAX PROVISION (BENEFIT).................................... 1,303,671 (35,081)
------------ -------------
NET LOSS.......................................................... (12,056,831) (5,459,284)
PREFERRED STOCK DIVIDENDS......................................... 1,332,822 714,801
------------ -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS........................ $(13,389,653) $ (6,174,085)
============ =============
NET LOSS PER COMMON SHARE......................................... $(18.62) $(8.50)
============ =============
WEIGHTED AVERAGE SHARES OUTSTANDING............................... 719,138 726,374
============ =============
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 130
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ADDITIONAL TREASURY STOCK CUMULATIVE TOTAL COMMON
FROM SALE OF PAID-IN ------------------- TRANSLATION STOCKHOLDERS'
SHARES AMOUNT COMMON STOCK CAPITAL SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
------- ------ ------------ ----------- ------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common
stock......... 726,818 $7,268 $ (517,609) $27,010,341 -- $ -- $ -- $ -- $ 26,500,000
Issuance of
warrants in
conjunction
with senior
notes and
redeemable
preferred
stock......... -- -- -- 1,260,000 -- -- -- -- 1,260,000
Accrued
dividend, and
accretion on
redeemable
preferred
stock......... -- -- -- -- -- -- (714,801) -- (714,801)
Predecessor
basis
accounting
adjustment.... -- -- -- (1,483,609) -- -- -- -- (1,483,609)
Purchase of
treasury
stock......... -- -- -- -- 6,725 (250,000) -- -- (250,000)
Cumulative
translation
adjustment.... -- -- -- -- -- -- -- 337,187 337,187
Net loss........ -- -- -- -- -- -- (5,459,284) -- (5,459,284)
------- ------ ---------- ----------- ------ --------- ------------ --------- ------------
BALANCE, MARCH
31, 1995...... 726,818 7,268 (517,609) 26,786,732 6,725 (250,000) (6,174,085) 337,187 20,189,493
Accrued
dividends and
accretion on
redeemable
preferred
stock......... -- -- -- -- -- -- (1,332,822) -- (1,332,822)
Purchase of
treasury
stock......... -- -- -- -- 3,632 (135,000) -- -- (135,000)
Sale of treasury
stock......... -- -- -- -- (4,707) 175,000 -- -- 175,000
Cumulative
translation
adjustment.... -- -- -- -- -- -- -- (388,143) (388,143)
Net loss........ -- -- -- -- -- -- (12,056,831) -- (12,056,831)
------- ------ ---------- ----------- ------ --------- ------------ --------- ------------
BALANCE, MARCH
31, 1996...... 726,818 $7,268 $ (517,609) $26,786,732 5,650 $(210,000) $(19,563,738) $ (50,956) $ 6,451,697
======= ====== ========== =========== ====== ========= ============ ========= ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 131
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO MARCH
MARCH 31, 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $(12,056,831) $(5,459,284)
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred taxes........................................................... 40,619 (96,927)
Depreciation............................................................. 2,843,535 787,733
Amortization of intangible assets........................................ 3,208,320 1,860,310
Amortization of minimum royalty and other assets......................... 1,998,726 183,650
Amortization of deferred financing costs................................. 2,616,472 993,307
Accrued interest on senior notes, subordinated seller notes and minimum
royalty obligation.................................................... 1,311,420 866,802
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable...................................................... (16,635,634) (8,520,720)
Inventories.............................................................. (7,560,525) (6,802,298)
Prepaid expenses and other current assets................................ (2,977,456) (1,026,695)
Other assets............................................................. 427,349 (477,344)
Accounts payable......................................................... 6,284,133 2,135,227
Accrued expenses......................................................... (3,288,380) 5,605,116
Other current liabilities................................................ -- (1,881,420)
Other.................................................................... (388,143) 304,605
----------- -----------
Net cash used in operating activities................................. (24,176,395) (11,527,938)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired......................... 1,384,120 (100,707,219)
Sale of marketable securities............................................ 640,950 134,863
Capital expenditures..................................................... (8,165,699) (629,062)
----------- -----------
Net cash used in investing activities................................. (6,140,629) (101,201,418)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................................. -- 26,500,000
Issuance of senior notes................................................. -- 63,378,900
Net proceeds from notes payable.......................................... 27,000,000 30,000,000
Payment of minimum royalty obligation.................................... (1,259,618) (225,000)
Issuance of redeemable preferred stock................................... -- 9,650,000
Issuance of warrants..................................................... -- 1,260,000
Payment of deferred financing costs...................................... (1,032,719) (10,583,374)
Purchase of treasury stock............................................... (135,000) (250,000)
Sale of treasury stock................................................... 175,000 --
----------- -----------
Net cash provided by financing activities............................. 24,747,663 119,730,526
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....................... (5,569,361) 7,001,170
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 7,001,170 --
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 1,431,809 $ 7,001,170
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $14,603,651 $ 5,111,171
=========== ===========
Income taxes.......................................................... $ 880,415 $ 93,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS:
Accrued dividends and accretion on redeemable preferred stock............ $ 1,332,822 $ 714,801
Sale of common stock for notes........................................... $ -- $ 517,609
Issuance of seller notes................................................. $ -- $ 3,500,000
Other current liability -- installment obligation for purchase of
inventory and accounts receivable from Houbigant, Inc................. $ -- $ 2,700,000
Other liability -- present value of minimum royalties.................... $ 1,398,080 $ 6,623,283
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE> 132
RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
The consolidated financial statements of Renaissance Cosmetics, Inc. (the
"Company") include the accounts of the Company for the period from April 15,
1994 (date of Inception), and its wholly-owned subsidiaries from their
respective dates of acquisition, Cosmar Corporation from August 18, 1994,
Parfums Parquet Incorporated ("Parfums Parquet") from July 1, 1994, Houbigant
Ltee from December 13, 1994, Dana Perfumes Corporation ("Dana") from December
23, 1994 and Perfums Dana Do Brasil ("Dana Brazil") from December 31, 1995. All
significant intercompany activity has been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- The Company manufactures and sells its fragrance and
nail care products principally through the mass-market or self-select
distribution channel which includes drug stores, mass merchandisers, discount
stores, supermarkets and combination supermarket/drug stores, throughout the
United States.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period. The preparation of financial statements in conformity with
generally accepted accounting principles also requires management to make
estimates and assumptions that affect the disclosures of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
Cash Equivalents -- Cash equivalents consist of highly liquid investments
with an original maturity of three months or less.
Marketable Securities -- The Company classifies its investments in debt and
equity securities as available for sale, and accordingly, reflects unrealized
holding gains and losses as a separate component of stockholders' equity.
Inventories -- Inventories are stated at the lower of cost (on the
first-in, first-out (FIFO) and last-in, first-out (LIFO) methods) or market.
Property, Plant and Equipment -- Property, plant and equipment additions
are stated at cost and depreciation is computed using the straight-line and the
declining-balance methods over the estimated useful lives of the assets, ranging
from three to forty years. Amortization of leasehold improvements is computed
using the straight-line and the declining-balance methods over the lesser of the
estimated useful lives of the assets or the remaining life of the lease.
Deferred Financing Costs -- Deferred financing costs represent direct costs
relating to closing on the long-term debt and notes payable. These costs are
being amortized over the life of the related debt.
Foreign Currency Translation -- For the Company's international operations,
assets and liabilities are translated at year-end exchange rates and income
statement amounts are translated at average exchange rates prevailing during the
year. Gains and losses resulting from translating foreign currency financial
statements are recorded as a separate component of stockholders' equity.
Transaction gains and losses are included in results of operations and were not
material for any period presented.
Intangible Assets -- Costs of acquisitions of net tangible assets acquired
are stated at cost less accumulated amortization and include trademarks and
goodwill. These costs are being amortized using the straight-line method over
the periods benefited, ranging from 25 to 40 years. The Company assesses the
recoverability of these costs on a regular basis by evaluating the carrying
value of the intangible assets based upon projected net income and undiscounted
future cash flows.
Revenue Recognition -- Sales are recognized when goods are shipped. An
accrual for customer returns is recorded based upon historical experience.
F-14
<PAGE> 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The Company uses an asset and liability approach to the
computation of income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
of temporary differences between the financial reporting and tax bases of assets
and liabilities based upon enacted tax rates in effect when such amounts are
expected to be realized or settled. The effects of changes in tax laws or rates
on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
Loss Per Common Share -- Loss per common share is based on the weighted
average number of common shares outstanding during the year. The dilutive effect
of stock options and warrants were not considered since the effect would be
antidilutive.
Fair Value of Financial Instruments -- The carrying values of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the short-term maturities of
those instruments. The fair values of the Company's long-term debt, notes
payable and preferred stock are disclosed in the notes.
Accounting Pronouncements -- In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. This statement is effective
for fiscal years beginning after December 15, 1995. The Company does not expect
that the adoption of this statement will have a material affect on its
consolidated financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. This statement is effective for
fiscal years beginning after December 15, 1995. The new standard defines a "fair
value" method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period.
Pursuant to this Standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
The new standard also requires increased footnote disclosures, regardless of the
method chosen to measure and recognize compensation, for employee stock-based
arrangements. The Company has not yet determined if it will elect to change to
the fair value method, nor has it determined the effect the new Standard will
have on net loss and loss per share should it elect to make such a change.
Reclassifications -- Certain reclassifications were made to the 1995
financial statements to conform to the current year's presentation.
3. ACQUISITIONS
The Company, Houbigant, Inc. ("Houbigant") and other parties entered into
license and sublicense agreements (the "Agreements"), the first of which became
effective as of July 1, 1994, whereby the Company has obtained certain exclusive
rights to manufacture and sell on a worldwide basis (excluding Canada -- see
below) certain fragrance products owned and licensed by Houbigant (the
"Houbigant Fragrances"), for initial periods of five and seven years. The
Company agreed to pay royalties generally at the rate of seven percent of net
sales, with annual minimums aggregating $2,730,000 during the initial terms of
the Agreements. Total minimum payments under the terms of the Agreements are
$15,360,000, including the $5,000,000 prepayment. The Company has the option to
renew the Agreements generally for up to seven successive five-year periods.
During each renewal period, annual minimum royalties are adjusted based on
increases in the Consumer Price Index.
Additionally, under the terms of the Agreements, the Company also agreed to
pay $6,000,000 in installments, for the existing inventory, certain trade
receivables and all product returns received subsequent to the closing date of
the Agreements. As of March 31, 1996, $3,300,000 has been paid.
On August 18, 1994, the Company purchased certain assets and assumed
certain liabilities of Cosmar Corporation and its Affiliate, Precision Molded
Plastics, Inc. ("Cosmar") for $64,827,978. Consideration
F-15
<PAGE> 134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisted of $61,327,978 in cash and sellers notes with a face value of
$5,000,000 and an estimated market value of $3,500,000 based on an effective
interest rate of 14.48%. Because the acquisition qualifies as a highly-leveraged
transaction and certain shareholders of Cosmar have or had a continuing interest
as shareholders of the Company, application of leveraged buyout accounting
resulted in a predecessor basis adjustment to common stockholders' equity of
$1,483,609.
On December 13, 1994, the Company acquired substantially all of the assets
of Houbigant Ltee for an aggregate purchase price of $5,800,000. Houbigant Ltee
includes three companies engaged in the manufacture and sales of Houbigant
Fragrances in Canada. There are no minimum royalties required to be paid in
connection with these license rights.
On December 23, 1994, Dana purchased the assets and business of a group of
companies that manufactured and marketed internationally the Dana line of
fragrance products, for an aggregate cash purchase price of $21,900,000. Such
transaction was financed through term loan borrowings from a financial
institution, with an aggregate value of $30,000,000.
On December 31,1995, Dana exercised its option to purchase the assets and
liabilities of Dana Brazil for $100,000.
The above acquisitions were all accounted for by the purchase method of
accounting for business combinations.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred at the beginning of each
period and do not purport to be indicative of what would have occurred had the
acquisitions been made as of that date or of results which may occur in the
future.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
PERIOD FROM
APRIL 15, 1994
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH 31,
1996 1995
----------- --------------
<S> <C> <C>
Net sales................................................. $140,741,000 $ 109,912,000
============ =============
Net loss.................................................. $(12,645,000) $ (17,313,000)
============ =============
Net loss per common share................................. $ (17.58) $ (23.83)
============ =============
</TABLE>
4. MARKETABLE SECURITIES
Marketable securities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Mutual funds.............................................. $ 173,604 $ 772,554
Bonds..................................................... -- 42,000
------------ -----------
$ 173,604 $ 814,554
============ ===========
</TABLE>
At March 31, 1996 and 1995, fair value of marketable securities
approximated cost.
F-16
<PAGE> 135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Raw materials and advertising supplies.................... $16,956,874 $11,859,958
Work in process........................................... 2,860,139 1,423,799
Finished goods............................................ 10,419,726 8,622,569
----------- -----------
$30,236,739 $21,906,326
=========== ===========
</TABLE>
The above components are shown net of excess and obsolete inventory
reserves of approximately $1,540,000 and $3,449,000 at March 31, 1996 and 1995,
respectively. At March 31, 1996 and 1995, 60.7% and 27.5%, respectively, of the
Company's inventories are stated at the lower of LIFO cost or market. The excess
of current replacement cost over the stated LIFO value was $-0- at March 31,
1996 and 1995.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
Land....................................................... $ 476,691 $ 182,297
Buildings.................................................. 4,896,008 5,570,042
Machinery and equipment.................................... 7,451,977 3,145,677
Computer equipment......................................... 4,880,815 --
Leasehold improvement...................................... 461,140 397,840
----------- ----------
18,166,631 9,295,856
Accumulated depreciation................................... 3,631,268 787,733
----------- ----------
$14,535,363 $8,508,123
=========== ==========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Trademarks................................................ $42,144,000 $42,144,000
Goodwill.................................................. 39,819,924 42,214,926
----------- -----------
81,963,924 84,358,926
Accumulated amortization.................................. 5,068,630 1,860,310
----------- -----------
$76,895,294 $82,498,616
=========== ===========
</TABLE>
Trademarks relate principally to Cosmar and Dana and are being amortized,
on a straight-line basis, over their estimated useful lives, 25 and 40 years,
respectively. Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition and is being
amortized by the straight-line method over a 25-year period. Upon completion of
all the required valuations associated with the acquisitions, goodwill increased
during the period from April 15, 1994 (Inception) to March 31, 1995 by
approximately $5,000,000 from the Company's original estimate. Negative goodwill
of approximately $2.3 million which was generated as a result of the acquisition
of Dana Brazil, and is being amortized over a life of 5 years, is also included
in goodwill above.
F-17
<PAGE> 136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current portion of minimum royalty obligation............. $ 3,597,884 $ 966,000
Accrued interest payable.................................. 2,380,384 1,675,176
Acquired plant consolidation and restructuring costs...... 244,000 1,842,000
Accrued marketing and advertising expenses................ 2,492,720 1,424,952
Accrued financing and acquisition costs................... -- 1,955,000
Other..................................................... 6,442,139 5,145,854
----------- -----------
$15,157,127 $13,008,982
=========== ===========
</TABLE>
9. LONG-TERM DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Senior Notes............................................ $63,623,473 $63,465,317
Subordinated seller notes............................... 3,699,471 3,567,151
----------- -----------
$67,322,944 $67,032,468
=========== ===========
</TABLE>
The Senior notes are senior unsecured obligations of the Company with a
principal amount of $65,000,000 at a stated interest rate of 13.75% with
interest payable semi-annually beginning February 15, 1995 and due August 15,
2001. The notes were issued in units with warrants to purchase 130,000 shares of
common stock. The notes were issued with an original discount of $711,100 and
were further discounted as a result of an allocation of $910,000 to the common
stock warrants. The effective interest rate on the Senior notes is 14.33%.
The Senior notes and warrants were detached in December 1994 prior to the
filing of the Company's registration statement with respect to the Senior notes.
The warrants are exercisable at any time and expire on August 15, 2001. The
exercise price of the warrants is $.01 per share.
The Senior notes are fully and unconditionally guaranteed, on a
subordinated basis, as to principal and interest, jointly and severally by all
present and future subsidiaries of the Company.
The Seller notes are subordinated promissory notes of the Company amounting
to $5,000,000 and accruing interest at 8% initially and escalating to 11% over
an eight-year period with a balloon payment of principal and accrued interest on
August 15, 2002. Based on an estimate of their fair market value, these notes
were recorded at a discount of $1,500,000, yielding an effective interest rate
of 14.48%.
The fair value of the Senior notes at March 31, 1996 and 1995 were
$65,000,000 and $61,750,000, respectively. The fair value of the warrants at
March 31, 1996 and 1995 were $2,925,000 and $1,950,000, respectively. Such fair
value are estimated based on quoted market prices for such notes and warrants.
The fair value of the Subordinated seller notes is estimated based on rates
currently available to the Company for debt with similar terms and remaining
maturities. Such fair value was approximately $4,617,000 and $3,721,000 at March
31, 1996 and 1995, respectively.
10. NOTES PAYABLE
On December 22, 1994, as amended, the Company and a financial institution
entered into a note purchase agreement (the "Current Credit Facility"), which
provides for revolving credit in an aggregate principal amount of $30,000,000,
and term loans in an aggregate principal amount of $30,000,000. Such loans
F-18
<PAGE> 137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bear interest at the bank base rate (8.25% at March 31, 1996) plus 3% until June
30, 1995, 3.5% thereafter until December 31, 1995, 4% thereafter until June 30,
1996 and 4.5% thereafter. The weighted average interest rates on the notes
payable were 12.19% and 11.66% for the year ended March 31, 1996 and for the
period from December 23, 1994 to March 31, 1995, respectively. The Company paid
a commitment fee of $500,000, a structuring fee of $500,000 and a funding fee of
$600,000 which was equal to 2% of the aggregate unpaid principal of the term
notes in excess of fees already paid. During fiscal 1996 the Company paid
funding fees on the available portion of the original revolving credit of
$20,000,000, aggregating $400,000. On September 8, 1995, the Company paid an
additional commitment fee of $400,000. The Company paid a continuation fee of
$100,000 on each of July 1, 1995 and January 2, 1996 and will be required to pay
an additional continuation fee of $100,000 on July 1, 1996 unless the loans have
been terminated.
Borrowings under the revolving credit portion are subject to a borrowing
base availability consisting of eligible inventory and receivables. As of March
31, 1996, $3,000,000 of the revolving credit portion of the Current Credit
Facility was available to the Company for additional borrowings.
The Current Credit Facility includes numerous affirmative and negative
covenants applicable to the Company, including restrictions on indebtedness and
payment of dividends, liens and capital expenditures, and compliance with net
worth, operating earnings and various other financial ratios and covenants.
Based on rates currently available to the Company for debt with similar
terms and remaining maturities, fair value of the notes payable is estimated to
be $29,638,000 at March 31, 1995. At March 31, 1996, carrying value of the notes
payable approximated fair value.
The Current Credit Facility matures in December 1996 and is collateralized
by substantially all of the assets of the Company. The Company is currently
pursuing several financing alternatives, including both equity and debt
financing to replace the Current Credit Facility and to provide funds for new
acquisitions. The Company is currently in discussions with several financial
institutions and believes that it will be able to obtain such financing.
However, the Company has no binding commitment from any financial institution,
and accordingly, there can be no assurance that such additional financing
alternatives will be available to the Company. If the Company is unable to
obtain the financing, it may be required to postpone and/or change significant
elements of its business strategy.
11. INCOME TAXES
The Company records deferred tax liabilities and assets for estimated
future tax consequences attributable to temporary differences. Such temporary
differences exist when the tax basis differs from the financial reporting amount
of assets or liabilities. A valuation allowance is recorded to reduce deferred
tax assets to amounts which, in management's judgment, are more likely than not
to be realized.
The income tax expense is comprised of state tax in the amount of $311,467
and foreign taxes of $1,270,993, and a federal income tax benefit of $278,789
resulting from a carryback of a net operating loss. There is no Federal tax
liability as a result of Federal tax operating losses in the amount of
approximately $13,677,000. Such losses expire in accordance with provisions of
applicable tax law and expire beginning in 2010 as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
-------------------------------------------------------- ----------
<S> <C>
2010.................................................... $3,646,000
2011.................................................... 10,031,000
</TABLE>
F-19
<PAGE> 138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15, 1994
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH 31,
1996 1995
---------- --------------
<S> <C> <C>
Current:
Federal.................................................. $ (278,789) $ (200,000)
State.................................................... 411,467 251,605
Foreign.................................................. 1,111,025 10,241
---------- ----------
1,243,703 61,846
---------- ----------
Deferred:
Federal.................................................. -- (175,000)
State.................................................... (100,000) 78,073
Foreign.................................................. 159,968 --
---------- ----------
59,968 (96,927)
---------- ----------
Total income tax expense (benefit)......................... $1,303,671 $ (35,081)
========== ==========
</TABLE>
The following reconciles the income tax expense (benefit) computed at the
Federal statutory income tax rate to the benefit recorded in the statements of
operations:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15,
1994
(INCEPTION)
YEAR ENDED TO
MARCH 31, MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
Federal benefit at statutory rate......................... $(3,656,074) $(1,923,028)
Limitation of utilization of tax benefits................. 5,164,532 1,528,300
Benefit of carryback not previously recorded.............. (278,790) --
State income taxes........................................ 311,467 329,678
Foreign income............................................ (1,508,457) --
Foreign income taxes...................................... 1,270,993 10,241
Other..................................................... -- 19,728
----------- -----------
$ 1,303,671 $ (35,081)
=========== ===========
</TABLE>
F-20
<PAGE> 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Current deferred income tax assets (liabilities):
Allowance for sales returns............................. $2,195,425 $1,297,280
Inventory reserves...................................... 697,305 (207,500)
Other non-deductible reserves........................... 1,997,260 539,500
Royalties............................................... 866,485 --
Other, net.............................................. 46,630 --
---------- ----------
5,803,105 1,629,280
Less valuation allowance................................ (5,803,105) (1,629,280)
---------- ----------
$ -- $ --
========== ==========
Non-current deferred income tax assets (liabilities):
Depreciation............................................ (1,091,625) (1,522,220)
Amortization of intangible assets....................... (1,058,915) (654,455)
Federal net operating loss carryforwards................ 4,650,170 1,647,590
State net operating loss carryforwards.................. 1,276,565 --
Foreign tax credit carryforwards........................ 790,065 --
Other -- net............................................ -- 749,075
---------- ----------
4,566,260 219,990
Less valuation allowance................................ (4,566,260) (219,990)
---------- ----------
$ -- $ --
========== ==========
Deferred state tax liability.............................. $ -- $ 100,000
========== ==========
Deferred foreign tax liability............................ $ 140,619 $ --
========== ==========
</TABLE>
Foreign pretax income (loss) was $4,446,593 and $(551,200) for the year
ended March 31, 1996 and for the period from April 15, 1994 (Inception) to March
31, 1995.
12. CAPITAL STOCK
a. Serial Preferred Stock--The Board of Directors has the authority to
issue up to 1,000,000 shares of Preferred Stock in one or more series of which
40,000 shares have been designated as redeemable preferred stock.
b. Stock Option Plan--The Company's stock option plan provides for
nonqualified stock options for employees. All options have been granted at
exercise prices at or above fair market value at the date of grant and vest over
periods of up to ten years. At March 31, 1996, 4,762 shares were available for
future grants under the plan.
The following table summarizes the activity of options in the stock option
plan:
<TABLE>
<CAPTION>
SHARES PRICE
------- ------
<S> <C> <C>
Options granted................................................... 75,181 $37.17
Options canceled.................................................. (9,318) 37.17
------- ------
Total options outstanding at March 31,1995........................ 65,863 37.17
Options granted................................................... 31,377 37.17
Options canceled.................................................. (13,512) 37.17
------- ------
Total options outstanding at March 31, 1996....................... 83,728 37.17
======= ======
Total exercisable options at March 31, 1996....................... 14,832 $37.17
======= ======
</TABLE>
No compensation expense was recognized in 1996 or 1995 relating to such
options.
F-21
<PAGE> 140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. REDEEMABLE PREFERRED STOCK
The Company issued for $10,000,000, 10,000 shares of cumulative
exchangeable preferred stock with a par value of $.01 per share. Such preferred
stock has an initial dividend of 10% per annum. Commencing August 16, 1999 the
dividend rate changes to 15% per annum. The preferred stock was issued in units
with warrants to purchase 50,000 shares of common stock. Dividends are payable
in cash, additional shares of redeemable preferred stock or any combination
thereof, at the option of the Company, up to and including the August 15, 1997
dividend, and in cash thereafter. The proceeds from issuance of the preferred
stock were reduced by an allocation of $350,000 to the common stock warrants.
Such warrants are exercisable at any time and expire on August 15, 2001. These
warrants have an exercise price of $.01 per share. The effective dividend rate
on the preferred stock is approximately 12.01%.
The redeemable preferred stock must be redeemed on August 15, 2002 for
$10,000,000, plus all accumulated and unpaid dividends. The redeemable preferred
stock is exchangeable for senior notes by the Company at any time and under
certain circumstances by the holders of the preferred stock on or after August
15, 1997.
Based on rates currently available to the Company for debt with similar
terms, the fair value of the redeemable preferred stock is estimated to be
$10,907,000 and $8,673,000 at March 31, 1996 and 1995, respectively. Based on
quoted market prices at March 31, 1996 and 1995 of the warrants, the fair value
is estimated to be $1,125,000 and $750,000, respectively.
14. COMMITMENTS AND CONTINGENCIES
a. Leases -- The Company leases certain warehouses, office facilities, and
automobiles, under operating lease agreements, certain of which are subject to
escalation, expiring at various dates through 2001.
Future minimum lease payments under noncancellable operating leases as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, AMOUNT
------------------------------------------------------- ----------
<S> <C>
1997................................................... $1,914,119
1998................................................... 1,486,949
1999................................................... 1,155,570
2000................................................... 748,700
2001................................................... 471,677
----------
$5,777,015
==========
</TABLE>
Rent expense associated with operating leases for the year ended March 31,
1996 and the period from April 15, 1994 (Inception) to March 31, 1995 was
$1,998,893 and $336,945, respectively.
F-22
<PAGE> 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b. Royalties -- Future minimum royalty payments at March 31, 1996, which
resulted from acquisitions of companies, together with the present value of
minimum royalty payments, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, AMOUNT
----------------------------------------------------------------------- ----------
<S> <C>
1997................................................................... $3,597,884
1998................................................................... 3,017,500
1999................................................................... 550,000
2000................................................................... 462,500
2001................................................................... 2,572,500
Thereafter............................................................. 562,500
----------
10,762,884
Amounts representing interest.......................................... 2,478,961
----------
Present value of minimum royalty payments.............................. 8,283,923
Current portion........................................................ 3,597,884
----------
Long-term portion...................................................... $4,686,039
==========
</TABLE>
Royalty expense totaled $1,930,785 and $1,489,465 for the year ended March
31, 1996 and the period from April 15, 1994 (Inception) to March 31, 1995,
respectively.
c. Other Employee Stock Options -- Dr. Thomas V. Bonoma has been granted
stock options whereby he has the right to acquire a total of 93,182 shares of
Common Stock of the Company. The earliest date on which these options can become
exercisable generally is August 18, 1997, based on the value of the Company's
equity reaching certain thresholds; however, the valuation date is accelerated
prior to that date (and if the thresholds are reached the options become
exercisable) upon a sale or merger of the Company or public offering of the
Company's Common Stock. Notwithstanding whether the earnings of the Company meet
any of the tests enunciated in the stock option agreement, Dr. Bonoma will be
entitled to exercise these options commencing on August 18, 2000. The exercise
price for each purchasable share under this stock option is $37.17237.
The above stock options have been authorized by the Board of Directors and
granted outside of the Company's stock option plan. No options have been
exercised as of March 31, 1996.
15. LEGAL PROCEEDINGS
a. In April 1995 the Company and Houbigant Inc. commenced an action against
the ACB Companies (the former holders of Houbigant's Canadian licenses) and
their agents (the "Resellers"), alleging that the ACB companies manufactured and
sold Houbigant trademarked products in the US through the Resellers. This
violated both Houbigant's and the Company's rights pursuant to the Agreements,
as well as certain US federal laws. The claims against the Resellers were
settled. The ACB Companies filed counterclaims, most of which were subsequently
dismissed.
Additionally, in May 1995, Houbigant Ltee filed an action against the ACB
companies for approximately $8,000,000 (Canadian) for breach of contract and
fraud. The ACB companies have not as yet asserted any counter claims. The
parties to both of the above cases have agreed in principle to a settlement
whereby the ACB companies will dismiss its remaining asserted and unasserted
counterclaims, and will pay $850,000 to the Company in settlement of all the
remaining claims.
The Company does not believe that this litigation will have a material
adverse effect on its financial condition or its results of operations.
b. The Company is a defendant in a lawsuit where the plaintiff alleges
defamation and interference with business relationships, and is seeking
$7,000,000 in damages. The Company intends to vigorously defend this lawsuit and
believes it has substantial and meritorious defenses. Management believes that
the outcome of this litigation will not have a material effect on the results of
operations or financial condition of the Company.
F-23
<PAGE> 142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c. The Company is subject to legal proceedings and claims which arise in
the normal course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
16. RETIREMENT PROGRAMS
In June 1995, the Company established a 401(k) Pension Plan (the "Company
Plan") for all U.S. employees, with the exception of Dana union members for
which the Company maintains a separate 401(k) plan. The prior plan covering Dana
non-union members was merged into the Company Plan. Plans are available to all
employees who have been employed continuously for at least one year. The
participants contribution ceiling is 20% of their annual compensation, as
defined, and a matching contribution is provided by the Company at 50% of the
first 6% of the participants' salary for the non-union members and 12 1/2% of
the first 6% of the participants' salary for the union plan. The participants
become fully vested after four years of service. The contributions made by the
Company during the year ended March 31, 1996 and the three months ended March
31, 1995 (for the Dana Plans) were $166,290 and $11,705, respectively. Certain
of the administrative expenses are paid by the Company, the Plans' sponsor.
17. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high quality financial
institutions.
Credit risk with respect to trade accounts receivable is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion throughout the United States. The Company
generally does not require collateral, and the majority of its trade receivables
are unsecured. The Company does, however, perform ongoing credit evaluations of
its customers' financial condition.
The Company sells a significant portion of its products through third-party
drug store and discount retailers and as a result, maintains individually
significant accounts receivable balances with major retailers. If the financial
condition and operation of these retailers deteriorate below critical levels,
the Company's operating results could be adversely affected. An allowance for
doubtful accounts and sales returns is maintained at a level which management
believes is sufficient to cover potential credit losses. The ten largest
accounts receivable balances collectively represented 54% and 50% of total
accounts receivable at March 31, 1996 and 1995, respectively. Sales to ten
customers represented 50% and 46% of gross revenues during the year ended March
31, 1996 and the period April 15, 1994 (Inception) to March 31, 1995. No single
customer accounted for greater than 10% of the Company's revenues for the year
ended March 31, 1996 or for the period April 15, 1994 (Inception) to March 31,
1995.
18. RELATED PARTIES
Pursuant to a management agreement, the Company pays management fees to
Kidd, Kamm & Company ("KK & Co."), a related party, subject to certain operating
and financial ratios being met. During the year ended March 31, 1996 and the
period April 15, 1994 (Inception) to March 31, 1995, the Company paid $-0-and
$225,000, respectively, in management fees to KK & Co. Deferred financing costs
include approximately $675,000 of financing fees paid to KK & Co.
In December 1995, the holders of the Sellers Notes sold such notes to a
third party who is a holder of a substantial portion of the Company's redeemable
preferred stock (the "Holder"). In a related transaction, the Company signed an
agreement with the Holder, whereby in exchange for $225,000, the Company agreed
not to pursue any claims against the Holder relating to the acquisition of
Cosmar. All other terms and provisions of the sellers' note remained the same.
19. INFORMATION CONCERNING FINANCIAL REPORTING FOR SEGMENTS AND OPERATIONS IN
GEOGRAPHIC AREAS
The Company is engaged in two main businesses, the manufacturing and
marketing of fragrances and associated products and the manufacturing and
marketing of artificial fingernail care products.
F-24
<PAGE> 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FRAGRANCES NAIL CARE CORPORATE CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Year ended March 31, 1996:
Net sales (A)....................... $83,152,748 $48,132,876 $ -- $131,285,624
=========== =========== ============ ============
Operating income (loss)............. $ 7,607,931 $ 9,159,638 $ (8,317,951) $ 8,449,618
Interest expense -- net............. 3,738,863 12,169,302 3,294,613 19,202,778
Income tax provision (benefit)...... 1,328,163 3,593 (28,085) 1,303,671
----------- ----------- ------------ ------------
Net income (loss)................... $ 2,540,905 $(3,013,257) $(11,584,479) $(12,056,831)
=========== =========== ============ ============
Identifiable assets................. $90,709,215 $83,074,198 $ 10,835,505 $184,618,918
=========== =========== ============ ============
Depreciation and amortization....... $ 4,534,781 $ 3,304,496 $ 211,304 $ 8,050,581
=========== =========== ============ ============
Capital expenditures................ $ 4,338,514 $ 1,942,510 $ 1,884,675 $ 8,165,699
=========== =========== ============ ============
Period April 15, 1994 (Inception) to
March 31, 1995:
Net sales (A)....................... $33,602,772 $24,111,637 $ -- $ 57,714,409
=========== =========== ============ ============
Operating income (loss)............. $ 2,889,464 $ 4,387,301 $ (4,532,739) $ 2,744,026
Interest expense -- net............. 665,192 924,145 6,649,054 8,238,391
Income tax provision (benefit)...... -- -- (35,081) (35,081)
----------- ----------- ------------ ------------
Net income (loss)................... $ 2,224,272 $ 3,463,156 $(11,146,712) $ (5,459,284)
=========== =========== ============ ============
Identifiable assets................. $71,092,482 $74,730,544 $ 16,430,074 $162,253,100
=========== =========== ============ ============
Depreciation and amortization....... $ 878,383 $ 1,953,310 $ -- $ 2,831,693
=========== =========== ============ ============
Capital expenditures................ $ 33,243 $ 478,197 $ 117,622 $ 629,062
=========== =========== ============ ============
</TABLE>
- ---------------
(A) There were no material intersegment sales during the year ended March 31,
1996 and the period from April 15, 1994 (Inception) to March 31, 1995.
F-25
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information related to the Company's operations in different geographic
areas is shown below:
<TABLE>
<CAPTION>
UNITED LATIN
STATES CANADA AMERICA EUROPE CONSOLIDATED
----------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996:
Net sales (B)(C)........ $115,299,244 $8,026,473 $4,824,576 $3,135,331 $131,285,624
============ ========== ========== ========== ============
Net income (loss)....... $(15,332,431) $ 260,038 $1,435,796 $1,579,766 $(12,056,831)
============ ========== ========== ========== ============
Identifiable assets..... $156,951,317 $9,674,562 $7,107,409 $10,885,630 $184,618,918
============ ========== ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
UNITED LATIN
STATES CANADA AMERICA EUROPE CONSOLIDATED
----------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Period April 15, 1994 (Inception) to March 31, 1995:
Net sales (B)(C)........ $56,152,467 $ 633,411 $ 385,392 $ 543,139 $ 57,714,409
============ ========== ========== ========== ============
Net income (loss)....... $(5,145,843) $(277,611) $(185,732) $ 149,902 $ (5,459,284)
============ ========== ========== ========== ============
Identifiable assets..... $155,389,035 $ 609,403 $1,891,969 $4,362,693 $162,253,100
============ ========== ========== ========== ============
</TABLE>
(B) There were no material intercompany sales between geographic areas during
the year ended March 31, 1996 and the period from April 15, 1994
(Inception) to March 31, 1995.
(C) The above-mentioned revenues for the United States include export sales of
$6,924,161 and $4,706,980 during the year ended March 31, 1996 and the
period from April 15, 1994 (Inception) to March 31, 1995 respectively.
20. SUBSEQUENT EVENTS
On May 29, 1996, the Company entered into a Securities Purchase Agreement
with an investor, under which the Company can issue up to $20,000,000 of Senior
Exchangeable Preferred Stock, Series A. On May 30, 1996, the Company issued
$10,000,000 of such preferred stock. The Preferred Stock has a dividend rate of
12% per annum, payable quarterly, in cash or additional preferred stock, at the
option of the Company. If the Preferred Stock remains outstanding on or after
August 31, 1998, it will be exchangeable, at the option of the Company into an
equal amount of Senior Notes. Under certain circumstances the Holder of the
Preferred Stock, may exercise an option to acquire Common Stock in exchange for
a portion of the Preferred Stock held.
On June 14, 1996 the financial institution with which the Company has its
Current Credit Facility, has agreed to increase its revolving credit from the
current $30,000,000 aggregate principal amount to $40,000,000, upon the issuance
of $20,000,000 of Senior Exchangeable Preferred Stock, Series A.
F-26
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cosmar Corporation and Affiliate
We have audited the accompanying combined statements of operations of
assets acquired and liabilities assumed and changes in excess of assets acquired
over liabilities assumed and of cash flows of the assets acquired and
liabilities assumed of Cosmar Corporation and Affiliate (the "Company") for the
period from January 1, 1994 to August 17, 1994. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the results of operations and cash flows of the assets
acquired and liabilities assumed of Cosmar Corporation and Affiliate for the
period from January 1, 1994 to August 17, 1994, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Long Beach, California
October 28, 1994
F-27
<PAGE> 146
COSMAR CORPORATION AND AFFILIATE
COMBINED STATEMENT OF OPERATIONS OF ASSETS
ACQUIRED AND LIABILITIES ASSUMED
AND CHANGES IN EXCESS OF ASSETS ACQUIRED OVER LIABILITIES ASSUMED
PERIOD FROM JANUARY 1, 1994 TO AUGUST 17, 1994
<TABLE>
<S> <C>
NET SALES (Note 1).............................................................. $18,300,944
COST OF SALES................................................................... 7,394,576
-----------
GROSS PROFIT.................................................................... 10,906,368
-----------
OPERATING EXPENSES:
Selling and marketing......................................................... 3,876,975
Shipping and warehousing...................................................... 729,212
General and administrative (Note 3)........................................... 2,272,700
Research and development (Note 1)............................................. 701,513
-----------
Total operating expenses................................................... 7,580,400
-----------
OPERATING INCOME................................................................ 3,325,968
-----------
OTHER INCOME (EXPENSE):
Interest expense.............................................................. (60,500)
Other income, net (Note 1).................................................... 185,988
-----------
Total other income......................................................... 125,488
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES........................................ 3,451,456
PROVISION FOR INCOME TAXES (Note 1)............................................. 87,297
-----------
NET INCOME...................................................................... $ 3,364,159
Distributions to shareholders................................................... (2,151,871)
BALANCE, JANUARY 1, 1994 (Note 1)............................................... 3,296,371
-----------
BALANCE, AUGUST 17, 1994........................................................ $ 4,508,659
===========
</TABLE>
See accompanying notes to combined financial statements
F-28
<PAGE> 147
COSMAR CORPORATION AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS OF ASSETS
ACQUIRED AND LIABILITIES ASSUMED
PERIOD FROM JANUARY 1, 1994 TO AUGUST 17, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $3,364,159
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for doubtful accounts and sales returns........................ 105,719
Depreciation............................................................. 337,784
Changes in operating assets and liabilities:
Accounts receivable.................................................... 1,136,778
Inventory.............................................................. (390,079)
Prepaid expenses and other current assets.............................. 8,181
Other assets........................................................... 1,149
Accounts payable....................................................... 941,241
Accrued expenses....................................................... 478,584
Deferred income........................................................ (43,750)
----------
Net cash provided by operating activities........................... 5,939,766
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (247,682)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit................................................. (1,300,000)
Repayment of notes payable.................................................. (466,059)
Cash distributions.......................................................... (2,151,871)
----------
Net cash (used in) financing activities............................. (3,917,930)
----------
NET INCREASE IN CASH.......................................................... 1,774,154
CASH, BEGINNING OF PERIOD..................................................... 140,426
----------
CASH, END OF PERIOD, NOT ACQUIRED (Note 1).................................... $1,914,580
==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Interest................................................................. $ 60,500
==========
Income taxes............................................................. $ 67,231
==========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 148
COSMAR CORPORATION AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 TO AUGUST 17, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- On August 18, 1994, CP Holding Company acquired substantially
all of the assets and assumed substantially all of the liabilities of Cosmar
Corporation and its Affiliate, Precision Molded Plastics ("PMP"), who are
engaged in the manufacture and marketing of artificial nail care products and
related accessories. The assets acquired and liabilities assumed comprised all
of the operating assets and liabilities of Cosmar Corporation and PMP except for
cash and certain other assets of $2,043,541 and certain legal claims asserted
against Cosmar Corporation or PMP. Cosmar Corporation and PMP sell their
products to chain drug stores and mass merchandisers principally located
throughout the United States and Europe.
Principles of Combination -- Cosmar Corporation and PMP are controlled by
common shareholders. The combined financial statements include the accounts of
Cosmar Corporation and PMP, collectively referred to as the "Company". All
significant intercompany transactions have been eliminated.
Revenue Recognition -- Revenue is recognized upon shipment of product to
the customer, with appropriate allowance for estimated returns and other
allowances. The Company also has a consulting and exclusive production agreement
with a customer. The agreement provides for royalties to be received each
calendar quarter in the amount of $65,625. Royalties received in advance are
deferred and recognized as income in the month earned. Consulting income earned
for the period from January 1, 1994 to August 17, 1994 was $175,000 which is
included in other income in the accompanying combined statement of operations.
Research and Development Costs -- Research and development costs related to
the designing, development and testing of new products are charged to expense as
incurred.
Income Taxes -- The Company has elected to be taxed as an S Corporation
under the provisions of the Internal Revenue Code through August 17, 1994. Under
those provisions, the Company does not pay federal or state corporate income
taxes on its taxable income. Instead, the shareholders are liable for federal
and state income taxes on the Company's taxable income. Under California state
law the S Corporation are subject to a 1 1/2 percent franchise tax charged at
the corporate level.
2. COMMITMENTS
Operating Leases -- The Company leases certain warehouse and office
facilities and automobiles under operating lease agreements certain of which are
subject to escalations, expiring at various dates through 1996. Rent expense
associated with operating leases for the period from January 1, 1994 to August
17, 1994 was $219,362.
Future minimum lease payments under noncancellable operating leases as of
August 17, 1994 are:
<TABLE>
<S> <C>
1994................................................... $ 155,408
1995................................................... 434,417
1996................................................... 416,320
----------
$1,006,145
==========
</TABLE>
F-30
<PAGE> 149
COSMAR CORPORATION AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PERIOD FROM JANUARY 1, 1994 TO AUGUST 17, 1994
Under the terms of a license agreement, the Company is obligated to pay to
the licensors royalties equal to a specified percentage of the sales of the
Company's products subject to the license agreement. The Company is obligated to
pay minimum royalties aggregating approximately $767,000 through 2004. Royalty
expense recognized under this agreement totaled $116,000 for the period from
January 1, 1994 to August 17, 1994.
3. RELATED PARTY TRANSACTIONS
The Company paid consulting fees to a shareholder in the amount of $40,000
for the period ended August 17, 1994, which are included in general and
administrative expenses in the accompanying statement of operations.
F-31
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cosmar Corporation and Affiliate
We have audited the accompanying combined statements of income and cash
flows of Cosmar Corporation and Affiliate for the year ended December 31, 1993.
These combined statements of income and cash flows are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined statements of income and cash flows based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statements of income and cash
flows are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statements of
income and cash flows. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined statements of income and cash flows
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined statements of income and cash flows referred
to above present fairly, in all material respects, the results of operations and
cash flows of Cosmar Corporation and Affiliate for the year ended December 31,
1993 in conformity with generally accepted accounting principles.
Windes & McClaughry
Long Beach, California
April 26, 1994
F-32
<PAGE> 151
COSMAR CORPORATION AND AFFILIATE
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
SALES........................................................................... $25,844,062
COST OF SALES................................................................... 10,852,670
-----------
GROSS PROFIT.................................................................... 14,991,392
-----------
OPERATING EXPENSE
Shipping and warehouse........................................................ 1,076,022
Selling....................................................................... 5,198,714
Administrative................................................................ 3,085,282
Research and development...................................................... 567,968
-----------
9,927,986
-----------
INCOME FROM OPERATIONS.......................................................... 5,063,406
-----------
OTHER INCOME (EXPENSE)
Interest (expense)............................................................ (131,711)
Other income.................................................................. 5,797
-----------
(125,914)
-----------
INCOME BEFORE STATE FRANCHISE TAX............................................... 4,937,492
STATE FRANCHISE TAX............................................................. 136,000
-----------
NET INCOME...................................................................... $ 4,801,492
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE> 152
COSMAR CORPORATION AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................... $4,801,492
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................................. 476,766
(Increase) decrease in:
Accounts receivable..................................................... 255,072
Inventory............................................................... (1,162,557)
Prepaid expenses........................................................ (118,587)
Other assets............................................................ (5,027)
Increase (decrease) in:
Accounts payable........................................................ (44,851)
Accrued expenses........................................................ 219,499
----------
Net Cash Provided By Operating Activities............................... 4,421,807
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................................... (877,025)
----------
Net Cash Used In Investing Activities..................................... (877,025)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings.......................................... 300,000
Proceeds from notes payable.................................................. 238,000
Repayment of notes payable................................................... (94,501)
Repayment of due to shareholders............................................. (457,175)
Distributions to shareholders................................................ (3,689,099)
----------
Net Cash Used In Financing Activities..................................... (3,702,775)
----------
NET CHANGE IN CASH............................................................. (157,993)
CASH AT BEGINNING OF YEAR...................................................... 298,419
----------
CASH AT END OF YEAR............................................................ $ 140,426
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE> 153
COSMAR CORPORATION AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Cosmar Corporation and
Affiliate (the Company) is presented to assist in understanding the Company's
combined financial statements.
Organization and Operation
Cosmar Corporation and Precision Molded Plastics are incorporated under the
laws of the State of California and are controlled by common shareholders. The
Company's principal business activity is the manufacture and distribution of
fingernail products. The Company has a diversified customer base including
national and international retailers.
Principles of Combination
The combined financial statements include the accounts of Cosmar
Corporation and Precision Molded Plastics. All material intercompany accounts
and transactions have been eliminated.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by
using the straight-line and accelerated methods over the estimated useful lives
of three to 31 1/2 years.
Expenditures for fixed asset additions and major improvements are
capitalized, and expenditures for maintenance and repairs are expensed as
incurred.
Income Taxes
Both Cosmar Corporation and Precision Molded Plastics shareholders elected
to be taxed as S Corporations for federal and California tax purposes, and as
such, the income is primarily taxed directly to the shareholders. There is a
2 1/2 percent California franchise tax charged at the corporate level and
reflected in the provision for state franchise tax expense. Cash paid for taxes
amounted to approximately $223,000 for 1993.
NOTE 2 -- COMMITMENTS
Operating Leases
The Company leases certain warehouse, office facilities, automobile and
office equipment under operating lease agreements expiring at various dates
through 1996. Rent expense associated with operating leases for the year ended
December 31, 1993 was $276,950.
Noncancellable operating lease obligations as of December 31, 1993 are:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------------------------------------- ----------
<S> <C>
1994................................................... $ 303,730
1995................................................... 360,225
1996................................................... 352,178
----------
$1,016,133
==========
</TABLE>
F-35
<PAGE> 154
COSMAR CORPORATION AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE 3 -- RELATED PARTY TRANSACTION
The Company paid consulting fees to a shareholder in the amount of $60,000
for the year ended December 31, 1993.
NOTE 4 -- MAJOR CUSTOMERS
During 1993, the Company had three major customers each representing
approximately 10% of sales.
NOTE 5 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash financing activities:
The Company refinanced $300,000 of notes payable during the year ended
December 31, 1993.
F-36
<PAGE> 155
GREAT AMERICAN COSMETICS, INC.
BALANCE SHEET
AS AT JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash........................................................................... $1,019,888
Accounts receivable............................................................ 1,607,763
Merchandise inventories -- submitted........................................... 2,686,789
Prepaid expenses and other current assets...................................... 9,437
----------
Total Current Assets................................................... 5,323,877
Fixed Assets..................................................................... 131,503
Accumulated depreciation....................................................... 81,141
----------
50,362
Intangible assets, net of accumulated amortization of $817,679................... 1,157,321
Deposits......................................................................... 8,139
----------
Total Assets........................................................... $6,539,699
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt......................................... $ 220,440
Accounts payable............................................................... 737,886
Due to shareholders............................................................ 81,500
Accrued expenses and taxes payable............................................. 1,640,621
----------
Total Current Liabilities.............................................. 2,680,447
Long-term debt................................................................... 591,590
Commitments and contingencies....................................................
Shareholders' Equity
Capital stock.................................................................. 2,000
Retained earnings.............................................................. 3,265,662
----------
Total Shareholders' Equity............................................. 3,267,662
----------
Total Liabilities and Shareholders' Equity............................. $6,539,699
==========
</TABLE>
See notes to financial statements.
F-37
<PAGE> 156
GREAT AMERICAN COSMETICS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
INCOME
From Sales -- net................................................. $7,029,488 $3,702,990
COST OF GOODS SOLD
Inventories -- January 1.......................................... 2,201,359 789,786
Purchases......................................................... 4,266,476 2,725,329
Freight and duty.................................................. 258,559 94,821
Other direct costs................................................ 9,180 24,240
---------- ----------
TOTAL AVAILABLE FOR SALES................................. 6,735,574 3,634,176
Inventories -- June 30............................................ 2,686,789 1,537,086
Cost of Goods Sold........................................ 4,048,785 2,097,090
GROSS MARGIN ON SALES............................................... 2,980,703 1,605,900
OPERATING EXPENSES
Selling........................................................... 810,896 353,786
General and administrative........................................ 303,714 195,381
Officers' salaries................................................ 128,546 65,910
Taxes............................................................. 22,833 13,289
Depreciation and amortization..................................... 131,069 128,557
---------- ----------
TOTAL OPERATING EXPENSES.................................. 1,397,058 756,923
---------- ----------
NET OPERATING INCOME FOR PERIOD BEFORE
OTHER INCOME...................................................... 1,583,645 848,977
Gain on restructuring of debt..................................... 409,000 --
Interest income................................................... 3,959 451
---------- ----------
NET INCOME FOR PERIOD BEFORE PROVISION
FOR INCOME TAXES.................................................. 1,996,604 849,428
Provision for income taxes........................................ 601,400 322,000
---------- ----------
NET INCOME FOR PERIOD............................................... 1,395,204 527,428
Retained earnings -- January 1...................................... 1,870,458 818,859
---------- ----------
Retained earnings -- June 30........................................ $3,265,662 $1,346,287
========== ==========
</TABLE>
See notes to financial statements.
F-38
<PAGE> 157
GREAT AMERICAN COSMETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income for period............................................... $1,395,204 $ 527,428
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization....................................... 131,069 128,557
Gain on restructuring of debt....................................... (409,000) --
Changes in assets and liabilities:
Accounts receivable.............................................. (736,565) (631,207)
Inventory........................................................ (485,430) (747,300)
Prepaid expenses................................................. 16,029 (722)
Accounts payable................................................. 176,352 420,284
Accrued expenses and taxes payable............................... 1,008,828 354,563
---------- ---------
Net cash provided by operating activities................... 1,096,487 51,603
Cash Flows from Investing Activities:
Purchase of fixed assets............................................ (25,127) (12,406)
Repayment of loans from shareholders................................ (100,000) (30,000)
---------- ---------
Net cash (used in) investing activities..................... (125,127) (42,406)
---------- ---------
Cash Flows from Financing Activities:
Proceeds of notes payable........................................... 1,500,000 200,000
Repayment of installation indebtedness.............................. (1,762,375) (134,190)
---------- ---------
Net cash (used in) financing activities..................... (262,375) 65,810
---------- ---------
Net Changes in Cash................................................... 708,985 75,007
Cash balance -- January 1,............................................ 310,903 130,081
---------- ---------
Cash balance -- June 30,.............................................. $1,019,888 $ 205,088
========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest......................................................... $ 26,334 $ 2,225
Income taxes..................................................... $ 22,770 $ 6,840
========== =========
</TABLE>
See notes to financial statements.
F-39
<PAGE> 158
GREAT AMERICAN COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows of Great American Cosmetics, Inc. (the
"Company") are presented on a consistent basis. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative of the results
of be expected for any other interim period or for the entire year. Certain
information and footnote disclosures have been condensed or omitted. The
financial statements should be read in conjunction with the financial statements
for the years ended December 31, 1995 and 1994.
NOTE 2 -- INVENTORIES
The components of inventories at June 30, 1996 are as follows:
<TABLE>
<S> <C>
Raw materials.................................................................... $ 775,898
Finished goods................................................................... 1,910,891
----------
$2,686,789
==========
</TABLE>
The Company's inventories are stated at the lower of cost (FIFO) or market.
NOTE 3 -- SUBSEQUENT EVENTS
On June 27, 1996, the Company and Messrs. Larry Pallini and Vincent
Carbone, the sole shareholders of the Company entered into a stock purchase
agreement with Cosmar Corporation, a wholly owned subsidiary of Renaissance
Cosmetics, Inc. to sell all the issued and outstanding capital stock of the
Company. The transaction closed on August 21, 1996.
F-40
<PAGE> 159
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Great American Cosmetics, Inc.
Port Washington, New York
We have audited the accompanying Balance Sheets of Great American
Cosmetics, Inc. as of December 31, 1995 and 1994 and the related Statements of
Income, Retained Earnings, and Cash Flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
We did not observe the taking of the physical inventory at December 31,
1993, 1994, and 1995 since we were not engaged to audit the Company's records
until after that date. We were able to satisfy ourselves by means of other
procedures concerning inventory quantities.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Cosmetics,
Inc. as of December 31, 1995 and 1994 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Deutsch, Marin & Company
July 11, 1996
F-41
<PAGE> 160
GREAT AMERICAN COSMETICS, INC.
BALANCE SHEETS
AS AT DECEMBER 31
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.............................................................. $ 310,903 $ 130,081
Accounts receivable............................................... 871,198 715,052
Merchandise inventories (Note 1).................................. 2,201,359 789,786
Prepaid expenses and other current assets......................... 25,466 5,402
---------- ----------
Total Current Assets........................................... 3,408,926 1,640,321
Fixed Assets (Note 1, 3)............................................ 44,637 46,508
Intangible assets, net of accumulated amortization of $706,012
and $482,678 (Note 2)............................................. 1,268,988 1,492,322
Deposits............................................................ 8,139 7,750
---------- ----------
Total Assets........................................................ $4,730,690 $3,186,901
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt (Note 4)................... $ 425,000 $ 250,000
Accounts payable.................................................. 561,533 310,164
Due to shareholders (Note 5)...................................... 100,000 80,000
Accrued expenses and taxes payable................................ 631,794 183,783
---------- ----------
Total Current Liabilities...................................... 1,718,327 823,947
Long-term debt (Note 4)............................................. 1,058,405 1,360,595
Due to shareholders (Note 5)........................................ 81,500 181,500
Commitments and contingencies (Note 7)..............................
Shareholders' Equity
Common stock -- no par value; 200 shares issued and outstanding... 2,000 2,000
Retained earnings................................................. 1,870,458 818,859
---------- ----------
Total Shareholders' Equity..................................... 1,872,458 820,859
---------- ----------
Total Liabilities and Shareholders' Equity.......................... $4,730,690 $3,186,901
========== ==========
</TABLE>
The accompanying letter and notes are an integral part of these statements.
F-42
<PAGE> 161
GREAT AMERICAN COSMETICS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
INCOME
From Sales...................................................... $7,885,916 $4,175,342
COST OF GOODS SOLD
Inventories -- January 1,....................................... 789,786 411,337
Purchases....................................................... 5,557,433 2,716,179
Freight and duty................................................ 341,459 130,156
Other direct costs.............................................. 50,735 22,948
---------- ----------
TOTAL AVAILABLE FOR SALES.................................... 6,739,413 3,280,620
Inventories -- December 31,..................................... 2,201,359 789,786
---------- ----------
COST OF GOODS SOLD........................................... 4,538,054 2,490,834
---------- ----------
GROSS MARGIN ON SALES............................................. 3,347,862 1,684,508
---------- ----------
OPERATING EXPENSES
Selling......................................................... 837,947 512,944
General and administrative...................................... 429,035 272,023
Management fees................................................. -- 84,500
Taxes........................................................... 28,018 18,722
Officers' salaries.............................................. 134,850 94,000
Depreciation and amortization................................... 257,113 238,573
---------- ----------
TOTAL OPERATING EXPENSES..................................... 1,686,963 1,220,762
---------- ----------
NET INCOME FOR YEAR BEFORE PROVISION FOR INCOME TAXES............. 1,660,899 463,746
Provision for income taxes...................................... 609,300 147,633
---------- ----------
NET INCOME FOR YEAR............................................... 1,051,599 316,113
Retained earnings -- January 1,................................... 818,859 502,746
---------- ----------
Retained earnings -- December 31,................................. $1,870,458 $ 818,859
========== ==========
</TABLE>
The accompanying letter and notes are an integral part of these statements.
F-43
<PAGE> 162
GREAT AMERICAN COSMETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income for year.............................................. $ 1,051,599 $ 316,113
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization................................. 257,113 238,573
Changes in assets and liabilities:
Accounts receivable......................................... (156,146) (197,316)
Inventories................................................. (1,411,573) (378,449)
Prepaid expenses............................................ (20,064) 231
Deposits.................................................... (389) (7,750)
Accounts payable............................................ 251,369 238,841
Accrued expenses and taxes payable.......................... 448,011 79,299
----------- ---------
Net cash provided by operating activities................ 419,920 289,542
----------- ---------
Cash Flows from Investing Activities:
Repayment of shareholder loans................................... (80,000) (54,500)
Purchase of fixed assets......................................... (31,908) (30,630)
----------- ---------
Net cash (used in) investing activities.................. (111,908) (85,130)
----------- ---------
Cash Flows from Financing Activities:
Proceeds of notes payable........................................ 150,000 --
Repayment of installment indebtedness............................ (277,190) (236,961)
----------- ---------
Net cash (used in) financing activities.................. (127,190) (236,961)
----------- ---------
Net Changes in Cash................................................ 180,822 (32,549)
Cash balance -- January 1,......................................... 130,081 162,630
----------- ---------
Cash balance -- December 31,....................................... $ 310,903 $ 130,081
=========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest...................................................... $ 8,496 $ 6,011
=========== =========
Taxes......................................................... $ 93,275 $ 29,021
=========== =========
</TABLE>
The accompanying letter and notes are an integral part of these statements.
F-44
<PAGE> 163
GREAT AMERICAN COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1: -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities -- The Company is a New York corporation, organized in
May, 1990, and formerly known as Unforgettable Cosmetics, Inc. The Company is a
wholesaler of health, beauty aids and fragrances selling to predominantly chain
drugstores, mass merchandisers and other wholesalers.
Merchandise Inventories -- Inventories consist of finished goods,
unpackaged product components (bulk), and displays, materials and supplies and
are valued at the lower of cost or market, primarily on a first-in, first-out
(FIFO) cost basis. All obsolete or non saleable merchandise has been valued at
net realizable value.
Fixed Assets and Depreciation -- Fixtures and equipment are stated at cost
and are depreciated for both financial reporting and income tax purposes under
the Modified Accelerated Cost Recovery System (MACRS). In accordance with this
provision, equipment is being depreciated using the double declining balance
method over a five/seven-year period. These procedures differ from generally
accepted accounting principles, which require depreciation to be provided over
the estimated average useful lives of the assets. Any difference in the current
year's provision for depreciation on these assets, based upon the usage of
MACRS, rather than the estimated average useful lives, is not significant.
Property sold or retired is eliminated from the asset and reserve accounts
in the year of disposition. Any differences between the proceeds on disposition
and undepreciated cost are reflected in other income.
Expenditures for maintenance, repairs and minor renewals which do not
naturally extend the life of assets are charged against earnings when incurred.
Additions and major renewals are capitalized.
Concentration of Credit Risk -- The Company's credit risks primarily
consist of accounts receivable from various drug store chains. Management
performs ongoing credit evaluations of its customers and provides allowances as
deemed necessary.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2: -- ACQUISITION OF NAT ROBBINS LTD.
On December 1, 1992, the Company acquired the operations and substantially
all assets of Nat Robbins Ltd., a New York corporation in a business similar to
their own.
Assets included were as follows:
<TABLE>
<S> <C>
Trademark................................................ $ 1,000,000
Customer list............................................ 400,000
Goodwill................................................. 75,000
Equipment................................................ 25,000
-----------
$ 1,500,000
===========
</TABLE>
In addition, a four-year non-competition agreement was entered into between
the seller and the Company, at a cost of $500,000. With the exception of the
noncompete covenant and equipment, each asset acquired is amortized over a
fifteen-year period in accordance with the Revenue Reconciliation Act of 1993.
F-45
<PAGE> 164
GREAT AMERICAN COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 3: -- FIXED ASSETS
Fixed assets and depreciation are comprised as follows:
<TABLE>
<CAPTION>
ACCUMULATED BOOK
COST DEPRECIATION VALUE DEPRECIATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
December 31, 1995
Machinery and equipment............. $ 81,254 $ 38,915 $ 42,339 $ 13,304
Furniture and fixtures.............. 10,975 10,975 -- 9,753
Shelves and racks................... 14,147 11,849 2,298 10,722
-------- -------- -------- --------
Total............................... $106,376 $ 61,739 $ 44,637 $ 33,779
======== ======== ======== ========
December 31, 1994
Machinery and equipment................ $60,282 $ 25,611 $ 34,671 $ 12,892
Furniture and fixtures................. 8,551 1,222 7,329 1,222
Shelves and racks...................... 5,635 1,127 4,508 1,127
------- -------- -------- --------
Total.................................. $74,468 $ 27,960 $ 46,508 $ 15,241
======= ======== ======== ========
</TABLE>
NOTE 4: -- LONG-TERM DEBT
Long-term debt is comprised as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Various installment notes for equipment and intangibles..... $1,333,405 $1,610,595
Notes payable -- Quality Supply Corp., with interest
at 13%, due November 5, 1996.............................. 100,000 --
Notes payable -- Christine Tsaktsirlis, with interest
at 13%, due November 5, 1996.............................. 50,000 --
---------- ----------
1,483,405 1,610,595
Amounts due within one year................................. 425,000 250,000
---------- ----------
$1,058,405 $1,360,595
========== ==========
</TABLE>
The various installment notes result from an agreement dated December 1,
1992 for the purchase of the name and sundry assets of Nat Robbins, Ltd. (Note
2). The total purchase price was $2,000,000, which included the assumption by
the Company of certain liabilities of the seller in the amount of $328,000. The
payments due under the note are calculated at 8% of the net sales of Nat Robbins
products and are payable on a monthly basis. The seller has received a security
interest in the acquired assets, which the seller assigned to Extebank. At the
direction of the seller, the Company had been remitting any amounts due under
the agreement equally to pay both the assumed liabilities and Extebank. At
December 31, 1994, the assumed liabilities were paid in full.
Management has been negotiating with a third party lender a refinancing of
the Extebank indebtedness so as to achieve more favorable principal repayment
terms. (See Note 8.)
Management, based upon its 1995 and 1994 sales of "Nat Robbins" products,
has classified $275,000 and $250,000 respectively, of the obligation as a
current maturity of long-term debt.
F-46
<PAGE> 165
GREAT AMERICAN COSMETICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 5: -- RELATED PARTY TRANSACTIONS
The shareholders of the Company have made various advances of working
capital, when needed, to the Company. These advances are payable on demand,
without collateral, and interest is charged at prevailing market rates.
The shareholders have agreed not to withdraw portions of their respective
loans to the company for the next twelve (12)-month period. As such, these
amounts have been classified as long-term.
NOTE 6: -- INCOME TAXES
The provision for income taxes consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Federal income tax, at applicable rates........................ $453,400 $119,588
New York State franchise tax................................... 155,900 28,045
-------- --------
Total........................................................ $609,300 $147,633
======== ========
</TABLE>
The Company is currently being audited by the Internal Revenue Service for
years 1993 and 1994. Management does not feel that any adjustment will be
material. The issues under review, if adjusted by the IRS, will merely result in
a timing difference as to the deduction of certain costs.
NOTE 7: -- COMMITMENTS AND CONTINGENCIES
In November of 1994, the Company moved to a new location where the minimum
annual rental commitment in effect at December 31, 1995 is as follows:
<TABLE>
<S> <C>
1996....................................................................... $48,205
1997....................................................................... 50,065
1998....................................................................... 51,925
1999....................................................................... 53,785
2000....................................................................... 4,495
</TABLE>
The lease requires payment of real estate taxes, electric and other
expenses. The Company also leases additional office space in Florida under a
lease expiring February, 1997, which provides for the lessee to be responsible
for all insurance, utilities and real estate taxes. Rent expense relating to
these arrangements aggregated $58,511 and $21,539 for 1995 and 1994
respectively.
NOTE 8: -- SUBSEQUENT EVENT
Refinancing -- In April 1996, the Company obtained a $600,000 loan from
Chase Manhattan Bank, which funds were used for the purpose of repayment of the
existing notes with Extebank. In accordance with an agreement with Extebank, the
Company received a $350,000 discount on the early retirement of the debt. In
addition, the Company entered into a revolving credit agreement with Chase that
provides for advances up to a maximum of $900,000.
Pending Sale -- The shareholders of the Company have entered into a stock
purchase agreement dated June 27, 1996 with Cosmar Corporation (the Buyer).
Pursuant to the agreement, the Buyer is acquiring from the shareholders all of
the outstanding capital stock of Great American Cosmetics, Inc. The transaction
contemplated under the agreement is scheduled to close by August 31, 1996.
* * * * *
F-47
<PAGE> 166
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
9/30/96 12/31/95
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash.......................................................... $ 468,725 $ 957,562
Accounts receivable, less allowance for doubtful accounts of
$644,621 at 9/30/96 and $680,319 at 12/31/95................ 12,966,038 13,381,468
Inventories, at lower of cost (first-in, first-out) or market:
Finished goods.............................................. 8,528,299 6,021,947
Raw materials and work in process........................... 9,510,215 8,582,573
Prepaid expenses.............................................. 987,029 825,377
------------ ------------
Total current assets.......................................... 32,460,306 29,768,927
Property, plant and equipment, at cost........................ 19,437,440 19,106,128
Less accumulated depreciation................................. (14,770,521) (13,924,996)
------------ ------------
Net property, plant and equipment............................. 4,666,919 5,181,132
Other assets:
Advance royalty payments -- net............................... 460,530 567,450
Other assets.................................................. 76,717 208,132
Intangibles -- net............................................ 9,740,707 10,098,702
------------ ------------
Total assets.................................................. $ 47,405,179 $ 45,824,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Loans payable to financial institutions and banks............. $ 15,879,572 $ 10,791,385
Accounts payable.............................................. 5,178,849 3,523,504
Accrued expenses.............................................. 2,576,427 1,928,989
Notes payable -- current portion.............................. 1,554,043 1,553,990
------------ ------------
Total current liabilities..................................... 25,188,891 17,797,868
Long-term notes............................................... 2,047,294 3,369,813
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value; 6,000,000 shares authorized,
3,000,000 shares issued..................................... 150,000 150,000
Additional paid-in capital.................................... 3,090,110 3,090,110
Retained earnings............................................. 21,850,673 26,460,779
Less: Common stock in treasury, at cost....................... (4,488,680) (4,597,430)
Cumulative translation adjustment....................... (433,109) (446,797)
------------ ------------
Total stockholders' equity.................................... 20,168,994 24,656,662
------------ ------------
Total liabilities and stockholders' equity.................... $ 47,405,179 $ 45,824,343
============ ============
</TABLE>
F-48
<PAGE> 167
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1996 1995 1995
QUARTER YEAR TO DATE QUARTER YEAR TO DATE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $13,396,336 $ 22,577,167 $16,699,114 $ 27,684,336
Costs and expenses:
Cost of sales............................... 8,182,743 13,846,143 8,894,995 15,097,363
Selling and shipping expense................ 3,969,150 8,178,273 5,407,422 10,215,308
General and administrative expense.......... 1,224,904 3,904,142 1,323,450 3,764,704
----------- ------------ ----------- ------------
Total costs and expenses.................. 13,376,797 25,928,558 15,625,867 29,077,375
----------- ------------ ----------- ------------
19,539 (3,351,391) 1,073,247 (1,393,039)
Other income (expense):
Royalties, interest and other income........ 107,492 239,572 77,013 254,183
Amortization of intangibles................. (119,382) (358,143) (119,394) (358,083)
Merger expenses............................. (419,178) (707,454) -- --
Proceeds from settlement of lawsuit......... 691,669 691,669 -- --
Interest expense............................ (433,826) (1,018,872) (440,244) (1,028,138)
Financing expense........................... (30,026) (105,487) (36,586) (116,881)
----------- ------------ ----------- ------------
Net profit (loss)........................... $ (183,712) $ (4,610,106) $ 554,036 $ (2,641,958)
----------- ------------ ----------- ------------
Net profit (loss) per share................. $ (.07) $ (1.78) $ .22 $ (1.02)
----------- ------------ ----------- ------------
Average shares outstanding.................. 2,594,059 2,587,534 2,580,184 2,580,184
</TABLE>
Net income (loss) per share was determined by dividing net income (loss) by
the average number of shares outstanding during the respective period.
See accompanying notes.
F-49
<PAGE> 168
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................... $(4,610,106) $(2,641,958)
Depreciation and amortization................................... 1,304,785 1,268,186
Provision for losses on accounts receivable..................... 225,398 163,589
(Increase) decrease in accounts receivable...................... 193,760 (2,649,881)
(Increase) decrease in inventory................................ (3,418,488) (5,208,810)
(Increase) decrease in other current assets..................... (153,747) 118,870
(Increase) decrease in other assets............................. 131,415 (13,854)
Increase (decrease) in accounts payable......................... 1,652,764 473,229
Increase (decrease) in accrued expenses......................... 646,790 1,742,695
----------- -----------
Net cash provided by (used in) operating activities............. (4,027,429) (6,747,934)
Cash Flows from Investing Activities:
Additions to plant and equipment................................ (324,488) (783,343)
----------- -----------
Net cash (used in) investing activities......................... (324,488) (783,343)
Cash Flows from Financing Activities:
Short-term borrowings........................................... 11,495,718 14,238,231
(Repayments of) short-term borrowings........................... (6,416,264) (6,316,076)
Sale of treasury stock on exercise of stock options............. 108,750 --
(Payments of) long-term notes................................... (1,323,339) (1,311,868)
----------- -----------
Net cash (used in) provided by financing activities............. 3,864,865 6,610,287
Effect of exchange rate changes on cash......................... (1,785) 25,340
----------- -----------
Net (decrease) in cash.......................................... (488,837) (895,650)
Cash at the beginning of the year............................... 957,562 1,128,897
----------- -----------
Cash at the end of the period................................... $ 468,725 $ 233,247
=========== ===========
</TABLE>
See accompanying notes.
F-50
<PAGE> 169
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-and nine-month
periods ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto of MEM Company, Inc. and Subsidiaries for the year ended December 31,
1995 included herein.
NOTE 2 -- SETTLEMENT OF LITIGATION
In September, 1996, the Company received $692,000 as the result of a final
judgment lettered by the Supreme Court of the State of New York in an action
brought by the Company against the owners of the Heaven Sent trademark. The
court held that the defendant failed to protect the Company's United States
trademark license by refusing to participate in efforts to stop the gray-market
import of goods into the United States.
*****
F-51
<PAGE> 170
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MEM Company, Inc.
We have audited the accompanying consolidated balance sheets of MEM
Company, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MEM Company, Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Hackensack, New Jersey
February 21, 1996
F-52
<PAGE> 171
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $44,825,314 $53,094,217 $38,453,774
Costs and expenses:
Cost of sales....................................... 25,618,098 28,541,205 22,622,236
Selling and shipping expense........................ 15,108,538 19,612,873 13,281,251
General and administrative expense.................. 5,215,135 5,202,902 4,892,234
----------- ----------- -----------
Total costs and expenses.......................... 45,941,771 53,356,980 40,795,721
----------- ----------- -----------
(1,116,457) (262,763) (2,341,947)
Other income (expense):
Royalty income...................................... 361,085 264,535 409,119
Interest income..................................... 18,726 226,226 247,245
Amortization of intangibles......................... (477,460) (306,326) (57,936)
Other income (expense).............................. 5,124 11,816 (48,617)
Interest expense.................................... (1,602,038) (1,112,403) (489,363)
Financing expense................................... (170,957) (149,362) (288,407)
----------- ----------- -----------
Net (loss).......................................... $(2,981,977) $(1,328,277) $(2,569,906)
=========== =========== ===========
Per share, based on weighted average shares
outstanding....................................... $ (1.16) $ (.52) $ (1.00)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-53
<PAGE> 172
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 957,562 $ 1,128,897
Accounts receivable, less allowance for doubtful accounts of
$680,319 in 1995 and $661,654 in 1994........................... 13,381,468 12,843,943
Inventories, at lower of cost (first-in, first-out) or market:
Finished goods.................................................. 6,021,947 6,095,908
Raw materials & work in process................................. 8,582,573 9,228,083
Prepaid expenses.................................................. 825,377 1,163,589
----------- -----------
Total current assets.............................................. 29,768,927 30,460,420
Property, plant & equipment, at cost:
Land.............................................................. 341,752 340,829
Buildings & improvements.......................................... 4,466,224 4,250,376
Machinery & equipment............................................. 11,812,562 11,174,123
Furniture & fixtures.............................................. 2,485,590 2,347,180
----------- -----------
19,106,128 18,112,508
Less accumulated depreciation..................................... (13,924,996) (12,788,644)
----------- -----------
Net property, plant & equipment................................... 5,181,132 5,323,864
Other assets:
Advance royalty payments & license agreements -- net of
accumulated amortization of $747,050 in 1995 and $604,490 in
1994............................................................ 567,450 710,010
Net cash value of life insurance and other assets................. 208,132 193,729
Intangible assets -- net of accumulated amortization of $1,240,107
in 1995 and $761,765 in 1994.................................... 10,098,702 10,572,940
----------- -----------
Total assets...................................................... $45,824,343 $47,260,963
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable..................................................... $10,791,385 $ 6,528,016
Accounts payable.................................................. 3,523,504 4,488,160
Accrued expenses.................................................. 853,001 1,004,720
Accrued advertising and promotion................................. 1,075,988 1,303,667
Notes payable-current portion..................................... 1,553,990 1,534,066
----------- -----------
Total current liabilities......................................... 17,797,868 14,858,629
Long-term notes:
8% -- payable to 1997......................................... 644,000 1,288,000
8.19% -- payable to 1998......................................... 620,521 642,039
10.5% -- payable to 1999......................................... 2,105,292 2,976,585
----------- -----------
Total long-term notes............................................. 3,369,813 4,906,624
Commitments and contingencies
Stockholders' equity:
Common stock, $.05 par value; shares authorized: 6,000,000;
issued: 3,000,000............................................... 150,000 150,000
Additional paid-in capital........................................ 3,090,110 3,090,110
Retained earnings................................................. 26,460,779 29,442,756
----------- -----------
29,700,889 32,682,866
Less common stock in treasury, at cost (1995 -- 416,816 shares;
1994 -- 419,816)................................................ (4,597,430) (4,607,180)
Cumulative translation adjustment................................. (446,797) (579,976)
----------- -----------
Total stockholders' equity........................................ 24,656,662 27,495,710
----------- -----------
Total liabilities and stockholders' equity........................ $45,824,343 $47,260,963
=========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 173
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
-------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992... $150,000 $3,090,110 $33,340,939 $(4,644,010) $(348,135) $31,588,904
Issuance of treasury
shares.................... -- -- -- 6,500 -- 6,500
Translation adjustment...... -- -- -- -- (106,859) (106,859)
Net income (loss)........... -- -- (2,569,906) -- -- (2,569,906)
-------- ---------- ----------- ----------- --------- -----------
Balance December 31, 1993... 150,000 3,090,110 30,771,033 (4,637,510) (454,994) 28,918,639
Issuance of treasury
shares.................... -- -- -- 30,330 -- 30,330
Translation adjustment...... -- -- -- -- (124,982) (124,982)
Net income (loss)........... -- -- (1,328,277) -- -- (1,328,277)
-------- ---------- ----------- ----------- --------- -----------
Balance December 31, 1994... 150,000 3,090,110 29,442,756 (4,607,180) (579,976) 27,495,710
Issuance of treasury
shares.................... -- -- -- 9,750 -- 9,750
Translation adjustment...... -- -- -- -- 133,179 133,179
Net income (loss)........... -- -- (2,981,977) -- -- (2,981,977)
-------- ---------- ----------- ----------- --------- -----------
Balance December 31, 1995... $150,000 $3,090,110 $26,460,779 $(4,597,430) $(446,797) $24,656,662
======== ========== =========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-55
<PAGE> 174
MEM COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss).................................. $ (2,981,977) $(1,328,277) $(2,569,906)
Depreciation and amortization...................... 1,719,514 1,640,308 1,451,331
Provision for losses on accounts receivable........ 368,330 445,065 119,098
(Increase) decrease in accounts receivable......... (901,284) (4,762,020) 1,705,326
(Increase) decrease in inventory................... 748,628 (3,512,810) 2,079,755
(Increase) decrease in other current assets........ 337,909 20,741 270,840
Increase (decrease) in accounts payable............ (964,631) 2,205,017 (377,412)
Increase (decrease) in other accrued expenses...... (383,047) 980,500 (315,929)
(Increase) decrease in other assets................ (14,403) (15,253) (27,941)
------------ ----------- -----------
Net cash (used in) provided by operating
activities....................................... (2,070,961) (4,326,729) 2,335,162
Cash Flows from Investing Activities
Additions to plant and equipment................... (946,333) (1,023,003) (719,030)
Payment in lieu of future royalties................ -- -- (500,000)
Acquisition of intangibles......................... -- (6,409,215) --
Collection of note receivable...................... -- 2,635,989 240,473
------------ ----------- -----------
Net cash (used in) investing activities............ (946,333) (4,796,229) (978,557)
Cash Flows from Financing Activities
Short-term borrowings.............................. 16,894,091 14,709,272 7,326,415
(Repayments of) short-term borrowings.............. (12,622,580) (9,209,825) (9,121,954)
Proceeds from long-term notes...................... -- 7,050,000 --
(Payments of) long-term notes...................... (1,535,260) (3,220,833) (12,691)
Issuance of treasury stock......................... 9,750 8,250 6,500
------------ ----------- -----------
Net cash provided by (used in) financing
activities....................................... 2,746,001 9,336,864 (1,801,730)
Effect of exchange rate changes on cash............ 99,958 (77,028) (11,643)
------------ ----------- -----------
Net increase (decrease) in cash.................... (171,335) 136,878 (456,768)
Cash at the beginning of the year.................. 1,128,897 992,019 1,448,787
------------ ----------- -----------
Cash at the end of the year........................ $ 957,562 $ 1,128,897 $ 992,019
============ =========== ===========
Supplemental cash flow data: Interest paid......... $ 1,581,743 $ 995,727 $ 530,488
============ =========== ===========
</TABLE>
See accompanying notes.
F-56
<PAGE> 175
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. ACCOUNTING POLICIES
Nature of business: The Company's business consists of manufacturing,
selling and distributing a diversified line of toiletries and accessories to
retailers of all sizes. The Company operates in one industry segment. One
national customer represented 13% of net sales in 1995 and 14% in 1994. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Financial information about
geographic data is disclosed in Item 1(b) of the Company's 1995 Form 10-K.
Consolidation: The consolidated financial statements include the accounts
of the Company's subsidiaries. All material intercompany items have been
eliminated. The assets and liabilities of foreign subsidiaries have been
translated at the exchange rate at the balance sheet date. Revenues, expenses,
gains and losses are translated at the average rate for the year, determined by
averaging the rates at the end of each calendar quarter.
Deferred financing costs: Deferred financing costs are included in prepaid
expenses and are being amortized over the life of the loans.
Intangible assets: Intangible assets arising from the excess of purchase
price of subsidiaries acquired prior to 1971 over the fair value of the net
assets acquired have not been amortized. Other intangible assets are being
amortized on a straight-line basis over twenty to forty years. Impairments are
recognized whenever events or changes in circumstances indicate that the
carrying amount of intangible assets may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than its carrying
value. In 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121 and utilized its provisions in the evaluation of intangible and
other long-lived assets. The adoption of SFAS No. 121 had no effect on the
financial statements.
Depreciation: For financial accounting purposes, depreciation is provided
on the straight-line basis as follows: buildings and improvements -- 3 to 25
years; machinery and equipment -- 5 to 12 years; furniture and fixtures -- 4 to
10 years. For income tax purposes, the Company generally uses accelerated
depreciation.
Advance royalty payments and license agreements: License agreements and
nonrefundable royalty payments in connection with a licensing agreement are
being amortized as selling expense on a straight-line basis which averages
seventeen years.
Royalty income: Royalty income represents amounts earned by licensing the
English Leather and Tinkerbell trademarks for use by various third parties.
Revenue recognition: Revenues are recorded at the time of shipment of
merchandise.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. These estimates principally include
provisions for sales returns and allowances. Actual results could differ from
those estimates.
NOTE 2. BRITISH STERLING ASSET PURCHASE
On May 20, 1994, the Company acquired certain assets relating to the
British Sterling fragrance line of products from the Speidel Division of
Textron, Inc. for $9,182,000, of which $8,145,000 was for intangibles,
$1,029,000 for inventories and $8,000 for other assets. Other direct costs of
the acquisition were $196,215. The purchase was financed by a term loan of
$7,050,000 and a note for $1,932,000 payable to Textron. The balance of $396,215
was paid from the Company's working capital.
F-57
<PAGE> 176
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 3. CREDIT ARRANGEMENTS AND NOTES PAYABLE
In March, 1993, the Company obtained a three-year secured financing
agreement with a financial institution which provided for a revolving line of
credit of up to $15,000,000 based on eligible collateral, for working capital
purposes. The agreement contains certain covenants generally associated with
this type of financing including the pledging of substantially all assets as
collateral, a prohibition on the payment of dividends and considers a material
adverse change as a potential event of default. Interest on borrowings is at the
Bank of America prime rate (8 1/2% at December 31, 1995) plus 2% and an unused
line fee of 1/4% is payable at various levels of borrowing. Previous to June,
1995, the interest rate had been prime plus 2.5%.
In connection with the acquisition described in Note 2 above, the agreement
was amended in May, 1994 to provide for a five-year term loan of $7,050,000,
extend the maturity of the agreement by two years to April, 1998 and increase
the total permitted borrowings at any time to $17,500,000 (including the
outstanding term loan). During peak seasonal periods, this limit may be
increased to $20,000,000. The term loan was reduced by $2,465,076 in October,
1994 from the collection of a note receivable held by the Company. Principal of
the term loan is payable in equal monthly installments over five years, and
interest is determined on the same basis as the revolving line of credit. The
agreement was amended in June, 1995 to lower the interest rate and extend the
maturity by one year to April, 1999.
Under the terms of the acquisition, the seller received an unsecured note
payable for $1,932,000 at 8% interest. This note is payable in three equal
annual installments which began June 1, 1995.
The Company's Canadian subsidiary has pledged its land and building as
security for a 8.19% note payable which is payable in monthly principal
installments of $3,233 until October, 1998 when the balance is due.
The aggregate payments due on all long-term notes payable during each of
the three years subsequent to December 31, 1996 are: 1997 -- $1,553,990;
1998 -- $1,452,931; 1999 -- $362,892.
The Company's United Kingdom subsidiary has a line of credit of $932,000
for short-term financing at various interest rates, of which $494,935 was
outstanding at December 31, 1995. This line is secured by the subsidiary's
accounts receivable and inventory.
The weighted average interest rate on short-term borrowings outstanding at
December 31, 1995 and 1994 was 10.4% and 11%, respectively.
NOTE 4. INCOME TAXES
At December 31, 1995, the Company had loss carryforwards for U.S. tax
purposes of approximately $9,609,000 of which $679,000 expires in 2006,
$3,834,000 in 2007, $1,703,000 in 2008, $625,000 in 2009 and $2,768,000 in 2010.
The Company also had approximately $1,541,000 of foreign tax loss carryforwards
as of December 31, 1995. Approximately $751,000 of these loss carryforwards will
expire between 1998 and 2002 while the remaining $790,000 can be carried forward
indefinitely. Under the provisions of SFAS No. 109, a valuation allowance is
established if, based on the weight of available evidence, it is more likely
than not that a portion of the deferred asset will not be realized.
Consequently, at December 31, 1995, the Company has established a valuation
allowance against a portion of the above loss carryforwards.
F-58
<PAGE> 177
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.......................................... $(2,892,596) $(1,151,029) $(1,974,147)
Foreign........................................... (89,381) (177,248) (595,759)
----------- ----------- -----------
$(2,981,977) $(1,328,277) $(2,569,906)
=========== =========== ===========
</TABLE>
The components of the net deferred tax asset and liability as of December
31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment................................. $ 419,000 $ 443,000
----------- -----------
Total deferred tax liability.................................. $ 419,000 $ 443,000
=========== ===========
Deferred tax assets:
Net operating loss carryforwards.............................. $ 4,460,000 $ 3,360,000
Valuation allowance for deferred tax assets................... (4,041,000) (2,917,000)
----------- -----------
Net deferred tax asset.......................................... 419,000 443,000
----------- -----------
Net deferred tax liability...................................... $ -- $ --
=========== ===========
</TABLE>
The reconciliation of the (benefit) for federal income tax in the financial
statements and the (benefit) computed at the statutory rates are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
(Benefit) at statutory rate.......................... $(1,013,872) $(451,614) $(873,768)
Limitation on utilization of domestic losses......... 937,583 347,150 632,110
Limitation on utilization of foreign losses.......... 30,389 60,264 202,558
Other -- Net......................................... 45,900 44,200 39,100
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
</TABLE>
NOTE 5. LEASES
The Company rents warehouse and office space under a lease which expires in
2003. The Company is also responsible for the payment of insurance, taxes and
maintenance of the property. The future minimum rental commitment for this lease
is as follows: 1996 -- $62,000; 1997 -- $62,000; 1998 -- $62,000;
1999 -- $62,000; 2000 -- $62,000; thereafter -- $186,000. Rental expense
amounted to $305,000 in 1995, $351,000 in 1994 and $342,000 in 1993.
NOTE 6. STOCK OPTIONS
Under the 1987 Non-Qualified Stock Option Plan, 240,000 shares were
authorized for issuance. No options have been granted under the Plan.
Under the 1991 Stock Incentive Plan, 200,000 shares of common stock were
authorized for issuance to key employees at an option price which is the fair
market value on the date of the grant. Awards made under the Plan may be options
or contingent options. Contingent options will become exercisable in whole or in
part based upon an evaluation of the employee's performance during the year in
which the option is granted.
F-59
<PAGE> 178
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Under the 1993 Non-Employee Stock Incentive Plan, 50,000 shares of common
stock were authorized for issuance to nonemployee members of the Board of
Directors and certain individuals who provide consulting services to the Company
at an option price which is the fair market value on the date of grant.
Options issued under the Plans to date are exercisable in various
installments, and are exercisable in full after two years from grant.
Information with respect to options is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF SHARES PER SHARE
---------------- -------------
<S> <C> <C>
Outstanding -- December 31, 1992........................... 43,375 $5.00
Granted.................................................... 35,750 $4.13 -- $5.00
Exercised.................................................. (500) $5.00
Cancelled.................................................. (7,000) $5.00
----------------
Outstanding -- December 31, 1993........................... 71,625 $4.13 -- $5.00
Granted.................................................... 20,700 $4.13
Cancelled.................................................. (10,000) $4.13 -- $5.00
----------------
Outstanding -- December 31, 1994........................... 82,325 $4.13 -- $5.00
Granted.................................................... 31,000 $3.50 -- $3.88
Cancelled.................................................. (4,000) $3.50 -- $5.00
----------------
Outstanding -- December 31, 1995........................... 109,325 $3.50 -- $5.00
================
</TABLE>
Options on 74,275 shares were exercisable at December 31, 1995.
NOTE 7. POSTRETIREMENT BENEFITS
The Company does not provide any postretirement health care, life insurance
or other welfare benefit programs to current or former employees except that the
Company maintains a defined benefit pension plan for employees who meet certain
eligibility requirements. Benefits under the plan are based on salary and years
of service. For the past three years, no contributions have been required.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the period........ $ 190,300 $ 182,915 $ 226,383
Interest cost on projected benefit obligation......... 291,383 291,992 308,755
Investment return on plan assets...................... (929,056) 204,838 (471,152)
Other................................................. 452,161 (710,709) (31,352)
--------- --------- ---------
Net pension cost (benefit)............................ $ 4,788 $ (30,964) $ 32,634
========= ========= =========
Assumptions:
Discount rate....................................... 8% 8% 8%
Compensation increases.............................. 5% 5% 5%
Rate of return on assets............................ 8% 8% 8%
</TABLE>
F-60
<PAGE> 179
MEM COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
A reconciliation between the plan's funded status and the pension asset as
recorded in the Company's balance sheet is presented below:
<TABLE>
<S> <C> <C> <C>
Plan's assets at fair value, primarily stocks and
bonds........................................... $ 5,115,894 $ 4,295,427 $ 5,121,274
Plan's projected benefit obligation............... (3,676,167) (3,699,488) (3,898,265)
----------- ----------- -----------
Funded status..................................... 1,439,727 595,939 1,223,009
Unrecognized net asset to be amortized over 13
years........................................... (565,624) (676,531) (787,438)
Unrecognized prior service cost................... 85,093 95,864 106,635
Unrecognized asset (gain) over expected return.... (947,985) 727 (557,171)
----------- ----------- -----------
Prepaid (accrued) pension cost.................... $ 11,211 $ 15,999 $ (14,965)
=========== =========== ===========
Actuarial present value of accumulated benefit
obligation:
Vested.......................................... $ 2,557,886 $ 2,636,587 $ 2,532,562
Not yet vested.................................. 160,700 148,055 175,622
----------- ----------- -----------
Accumulated benefit obligation.................... $ 2,718,586 $ 2,784,642 $ 2,708,184
=========== =========== ===========
</TABLE>
NOTE 8. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a schedule of key financial data by quarter for the years 1995
and 1994.
<TABLE>
<CAPTION>
AVERAGE SHARES
NET SALES GROSS PROFIT NET INCOME NET INCOME OUTSTANDING
QUARTERS ENDED (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) PER SHARE (DOLLARS IN THOUSANDS)
- ----------------- ---------------------- ---------------------- ---------------------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
03/31/94......... $ 5,241 $ 2,159 $ (1,087) $ (.42) 2,573
06/30/94......... $ 5,647 $ 1,870 $ (2,129) $ (.83) 2,573
09/30/94......... $ 19,057 $ 9,797 $ 1,162 $ .45 2,575
12/31/94......... $ 23,149 $ 10,727 $ 726 $ .28 2,576
03/31/95......... $ 6,282 $ 2,813 $ (994) $ (.39) 2,580
06/30/95......... $ 4,704 $ 1,970 $ (2,202) $ (.85) 2,580
09/30/95......... $ 16,699 $ 7,804 $ 554 $ .22 2,580
12/31/95......... $ 17,140 $ 6,620 $ (340) $ (.14) 2,581
</TABLE>
Since the Company's business is seasonal in nature, comparisons among
quarters of the year are not necessarily indicative of a trend in the results of
operations, but principally reflect this seasonality.
*****
F-61
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Management of
The Procter & Gamble Company:
We have audited the accompanying statement of direct revenues and direct
expenses of the Mass Fragrances Business of The Procter & Gamble Company
("Procter & Gamble") for the year ended June 30, 1996. This statement is the
responsibility of Procter & Gamble's management. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement referred to above is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement referred to above. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement referred to above. We believe that our audit provides a reasonable
basis for our opinion.
The operations covered by the statement referred to above are a part of The
Procter & Gamble Company and have no separate legal status or existence. As
described in Note 1 to the statement, the statement referred to above has been
prepared from Procter & Gamble's consolidated financial records and allocations
of certain Procter & Gamble expenses have been made. These allocations are not
necessarily indicative of the expenses that would have been incurred by the Mass
Fragrances Business on a stand-alone basis.
In our opinion, the statement referred to above presents fairly, in all
material respects, the direct revenues and direct expenses of the Mass
Fragrances Business of The Procter & Gamble Company for the year ended June 30,
1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Cincinnati, Ohio
January 17, 1997
F-62
<PAGE> 181
THE MASS FRAGRANCES BUSINESS OF
THE PROCTER & GAMBLE COMPANY
STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES
FOR THE YEAR ENDED JUNE 30, 1996 AND
THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, 1996 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
DIRECT REVENUES............................................. $56,777 $11,379
COST OF PRODUCTS SOLD....................................... 22,787 4,320
------ ------
GROSS MARGIN................................................ 33,990 7,059
OTHER DIRECT EXPENSES:
Marketing and promotional expenses..................... 24,374 3,549
Selling, administrative, and other..................... 2,199 412
------ ------
Total............................................. 26,573 3,961
------ ------
EXCESS OF DIRECT REVENUES OVER DIRECT EXPENSES.............. $ 7,417 $ 3,098
====== ======
</TABLE>
See accompanying notes.
F-63
<PAGE> 182
THE MASS FRAGRANCES BUSINESS OF
THE PROCTER & GAMBLE COMPANY
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION
On December 6, 1996, The Procter & Gamble Company (Procter & Gamble) sold
various mass fragrance trademarks and select related assets (the "Mass
Fragrances Business") to Dana Perfumes Corp. The accompanying statement presents
the direct revenues, cost of products sold, gross margin and other direct
expenses for the year ended June 30, 1996 and the three-month period ended
September 30, 1996 for the Mass Fragrances Business.
Procter & Gamble did not account for this business as a separate entity.
Accordingly, the information included in the accompanying statement of direct
revenues and direct expenses has been obtained from Procter & Gamble's
consolidated financial records. The statement includes allocations of certain
Procter & Gamble corporate expenses which are directly attributable to the mass
fragrance activities. Procter & Gamble management believes the allocations are
reasonable; however, these allocated expenses are not necessarily indicative of
expenses that would have been incurred by the mass fragrance business on a
stand-alone basis, since certain selling and administrative expenses are
provided to the Mass Fragrances Business that are not directly allocable.
Direct revenues and direct expenses are presented in the accompanying
statement in accordance with generally accepted accounting principles. The
unaudited information for the three months ended September 30, 1996 contains all
adjustments, consisting only of normal recurring accruals, necessary for a
consistent presentation of the direct revenues and direct expenses for the
three-month period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- Revenue from the sale of products is recognized at
the time the products are shipped.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying disclosures. Although these estimates are based on
management's best knowledge of current events and actions Procter & Gamble may
undertake in the future, actual results ultimately may differ from the
estimates.
Costs of Products Sold -- Inventories are valued at cost, which is not in
excess of current market. Cost is primarily determined by the average cost
method.
Other Direct Expenses -- Certain other direct expenses are allocated using
procedures deemed appropriate for the nature of the expenses involved, primarily
on an estimate of time and effort spent. The expenses included in the statement
include those charges that are directly attributable to the Mass Fragrances
Business.
F-64
<PAGE> 183
(This page intentionally left blank)
<PAGE> 184
===============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE EXCHANGE
OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information........................ 1
Incorporation of Certain Documents by
Reference.................................. 1
Special Note Regarding Forward-Looking
Information................................ 2
Prospectus Summary........................... 3
Risk Factors................................. 13
Recent Developments.......................... 20
Use of Proceeds.............................. 22
Capitalization............................... 23
Selected Historical Financial Data........... 25
Unaudited Pro Forma Consolidated
Financial Data............................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 35
The Exchange Offer........................... 42
Business of the Company...................... 49
Business of the Guarantor.................... 68
Management................................... 69
Security Ownership of Certain Beneficial
Owners and Management...................... 77
Certain Relationships and Related
Transactions............................... 78
Description of the Notes..................... 80
Description of Certain Other Indebtedness.... 105
Description of Outstanding Capital Stock..... 106
Certain Federal Income Tax Considerations.... 113
ERISA Considerations......................... 114
Plan of Distribution......................... 115
Legal Matters................................ 115
Experts...................................... 116
Index to Financial Statements................ F-1
</TABLE>
===============================================================
===============================================================
LOGO
OFFER TO EXCHANGE $200,000,000
OF ITS 11 3/4% SENIOR NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR $200,000,000
OF ITS OUTSTANDING 11 3/4% SENIOR NOTES DUE 2004
-------------------------------------
PROSPECTUS
-------------------------------------
MAY 8, 1997
===============================================================
