<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Commission file number: 33-87280
RENAISSANCE COSMETICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1396287
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
635 MADISON AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 751-3700
(Registrant's telephone number, including area code).
Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No (_)
As of September 30, 1997, there were outstanding 826,336 shares
of the registrant's common stock, $.01 par value per share.
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INDEX
PAGE
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .1
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and March 31, 1997. . . . . . . . . . . . . . .2
Consolidated Statements of Operations for the three and six
months ended September 30, 1997
(unaudited) and 1996 (unaudited, as restated) . . . . . . .4
Consolidated Statements of Cash Flows for the six months
ended September 30, 1997 (unaudited)
and 1996 (unaudited, as restated) . . . . . . . . . . . . .5
Notes to Unaudited Consolidated Financial Statements . . . . . .7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 10
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 21
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-Q and any documents incorporated herein by reference constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. These statements are typically identified by their inclusion of
phrases such as "the Company anticipates," "the Company believes" and other
phrases of similar meaning. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that 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 generally and the fragrance and cosmetics
industries specifically; 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; changes in, or
the failure to comply with, governmental regulations (especially
environmental laws and regulations); and other factors referenced in this
Form 10-Q. 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.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Information called for by this item is set forth in the financial
statements contained on the immediately following eight (8) pages.
PAGE
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .7
1
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, 1997 MARCH 31, 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,975 $ 719
Marketable securities 8,982 14,331
Accounts receivable - net 64,653 48,837
Inventories 69,947 55,554
Prepaid expenses and other current assets 10,388 7,827
-------- --------
Total Current Assets $158,945 $127,268
PROPERTY, PLANT AND EQUIPMENT - Net 28,760 26,581
DEFERRED FINANCING COSTS - Net 11,893 12,748
MARKETABLE SECURITIES 4,297 8,468
OTHER ASSETS - Net 12,002 12,141
INTANGIBLE ASSETS - Net 173,636 174,177
-------- --------
TOTAL ASSETS $389,533 $361,383
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,469 $ 21,612
Accrued expenses and other current liabilities 35,793 40,322
-------- --------
Total Current Liabilities 58,262 61,934
LONG-TERM LIABILITIES:
Long-term debt 248,775 203,877
Minimum royalty obligation and other long
term liabilities 3,876 3,926
-------- --------
Total Long-Term Liabilities 252,651 207,803
TOTAL LIABILITIES $310,913 $269,737
COMMITMENTS AND CONTINGENCIES
SENIOR REDEEMABLE PREFERRED STOCK 96,115 86,660
REDEEMABLE PREFERRED STOCK 13,970 13,167
2
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COMMON STOCKHOLDERS' DEFICIT:
Common stock 8 8
Notes receivable from sale of common stock (518) (518)
Additional paid-in capital 69,403 69,403
Treasury stock, at cost (164) (210)
Deficit (98,336) (75,450)
Unrealized losses on marketable securities (88) -
Cumulative translation adjustment (1,770) (1,414)
-------- --------
Total common stockholders' deficit (31,465) (8,181)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $389,533 $361,383
-------- --------
-------- --------
See notes to unaudited consolidated financial statements.
3
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
(AS RESTATED) (AS RESTATED)
NET SALES $ 61,810 $47,508 $102,695 $77,710
COST OF GOODS SOLD 24,451 17,774 41,200 29,290
--------- ------- -------- -------
GROSS PROFIT 37,359 29,734 61,495 48,420
--------- ------- -------- -------
OPERATING EXPENSES:
Selling 25,914 19,065 40,798 30,224
General and administrative 7,496 4,040 14,417 9,711
Restructuring costs 601 123 1,117 253
Amortization of intangible and
other assets 3,196 1,754 5,952 3,122
--------- ------- -------- -------
Total operating expenses 37,207 24,982 62,284 43,310
--------- ------- -------- -------
OPERATING INCOME (LOSS) 152 4,752 (789) 5,110
OTHER EXPENSE (INCOME):
Interest Expense 7,577 5,637 14,579 10,838
Interest income (501) (448) (823) (538)
Other expense (income)-net 565 (117) (2,829) (197)
--------- ------- -------- -------
Total other expense-net 7,641 5,072 10,927 10,103
LOSS BEFORE INCOME TAX
PROVISION (7,489) (320) (11,716) (4,993)
INCOME TAX PROVISION 707 464 911 308
--------- ------- -------- -------
NET LOSS (8,196) (784) (12,627) (5,301)
PREFERRED STOCK DIVIDENDS 5,223 4,572 10,259 5,060
--------- ------- -------- -------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (13,419) $(5,356) $(22,886) $(10,361)
--------- ------- -------- -------
--------- ------- -------- -------
NET LOSS PER COMMON SHARE $ (16.26) $ (7.14) $ (27.73) $ (14.08)
--------- ------- -------- -------
--------- ------- -------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING 825,290 749,971 825,188 735,648
--------- ------- -------- -------
--------- ------- -------- -------
See notes to unaudited consolidated financial statements.
4
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
(AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,627) $(5,301)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3,189 1,679
Amortization of intangible assets 4,156 1,559
Amortization of minimum royalty and other assets 1,796 1,563
Amortization of deferred financing costs 1,007 1,605
Other non-cash interest expense 575 657
Non-cash interest income (479) -
Changes in operating assets and liabilities, net of
effects of acquisitions and investments:
Accounts receivable (15,685) (10,609)
Inventories (14,230) (8,170)
Prepaid expenses and other assets (3,747) (1,188)
Accounts payable 584 (6,687)
Accrued expenses and other current liabilities (5,471) (1,812)
Other (351) (930)
-------- --------
Net cash used in operating activities (41,283) (27,634)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,366) (1,635)
Acquisition of business, net of cash acquired - (15,380)
Investment in joint venture, net of cash acquired (1,308) -
Sale (purchase) of marketable securities 9,848 (68)
Other investing activities (461) -
-------- --------
Net cash provided by (used in)
investing activities 2,713 (17,083)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of New Revolving Credit Facility 44,800 -
Payment of minimum royalty obligations (1,868) (257)
Proceeds of issuance of Series A preferred stock - 18,955
Redemption of Series A preferred stock - (20,434)
Net proceeds of issuance of Series B preferred stock - 108,321
Net proceeds from issuance of common stock - 9,750
Net repayment of Old Credit Facility - (2,800)
5
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Proceeds from sale of treasury stock 46 -
Payment of financing costs (152) (726)
-------- --------
Net cash provided by financing
activities 42,826 112,809
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,256 68,092
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 719 1,432
-------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD 4,975 69,524
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $13,074 $8,189
-------- --------
-------- --------
Income taxes $372 $995
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
TRANSACTIONS:
Accrued dividends and accretion on redeemable
preferred stocks $10,259 $5,060
-------- --------
-------- --------
See notes to unaudited consolidated financial statements.
6
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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 include the accounts of
the Company and its wholly-owned subsidiaries from the respective dates of
their acquisitions. All significant intercompany activity has been
eliminated. The results of operations for the three and six months ended
September 30, 1997 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 10-K for the year ended March 31, 1997
filed with the Securities and Exchange Commission (the "1996 Form 10-K").
In January 1997, the Company restated its previously reported
results of operations for the three and six months ended September 30, 1996.
Additionally, certain reclassifications were made to the financial statements
for the three and six months ended September 30, 1996 to conform to the
current year's presentation.
2. INVENTORIES
The components of inventories are as follows:
(IN THOUSANDS) SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
Raw materials and components $36,985 $30,453
Work in process 3,537 2,413
Finished goods 29,425 22,688
------------- ---------
$69,947 $55,554
------------- ---------
------------- ---------
7
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3. LONG-TERM DEBT
Long term debt consists of the following:
(In Thousands) September 30, March 31,
1997 1997
------------ ---------
Old and New Notes $200,000 $200,000
New Revolving Credit Facility 44,800 -
Subordinated Seller Notes 3,975 3,877
------------ ---------
Total $248,775 $203,877
------------ ---------
------------ ---------
At September 30, 1997, the Company was not in compliance with certain
covenants in the New Revolving Credit Facility. On November 12, 1997, the
Company and the Lenders amended the agreement retroactive to September 30, 1997,
thus eliminating any covenant violations.
4. OTHER EXPENSE (INCOME)-NET
Other expense (income)-net was $2,829,000 for the six months ended
September 30, 1997. Other expense (income)-net consists primarily of the
proceeds from a key man life insurance policy, on which the Company was the
beneficiary, net of incremental expenses incurred by the Company relating to
the death of Dr. Thomas V. Bonoma, the late Chairman and Chief Executive
Officer of the Company. Other expense (income)-net also includes certain fees.
During the three months ended September 30, 1997, the Company recorded $338,000
of fees to Kidd Kamm Equity Partners. LP., the majority shareholder in the
Company. These fees covered the period from April 1, 1997 through September 30,
1997. At September 30, 1997, approximately $281,000 of such fees had been
paid.
5. PREMIER SALES GROUP LITIGATION
The Company and two of its subsidiaries, Cosmar Corporation
("Cosmar") and Great American Cosmetics, Inc. ("GACI"), are defendants in a
lawsuit filed in the District Court of Jefferson County, Texas in August 1997
by Premier Sales Group, Inc., and David Gosdin (together, "PSG"). The
complaint alleges (i) breach of contract, (ii) unjust enrichment, (iii)
failure to provide accounting, (iv) fraud, (v) interference with business
relations and prospective advantage, (vi) breach of duty of good faith and
fair dealing and (vii) violation of Texas Business and Commerce Code Sections
35.81, et seq. (relating to failure to pay commissions) (the "Claims"), and
seeks actual, statutory, special, punitive and exemplary damages in
unspecified amounts. The claims arise out of the termination of a sales
representative agreement between GACI and PSG. The Company, Cosmar and GACI
filed their joint answer in September 1997. The Company, Cosmar and GACI
believe that they have meritorious defenses to the Claims, and intend to
vigorously defend this lawsuit. Under the terms of the agreement governing
the purchase of all of the stock of GACI, the Company and Cosmar were
indemnified by the sellers
8
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of GACI (the "Sellers") against certain claims and liabilities. The
indemnity covers certain of the Claims, and the Company and Cosmar are
pursuing such claims against the Sellers. The Company believes the outcome of
the claims will not result in a material adverse effect on the financial
statements.
6. EQUITY AND DEBT FINANCING TRANSACTIONS
On April 28, 1997, the Company's offer to exchange the outstanding
shares of Senior Redeemable Preferred Stock, Series B ("Series B Preferred
Stock") for a like number of shares of Senior Redeemable Preferred Stock,
Series C ("Series C Preferred Stock"), with substantially the same terms, was
closed. After the exchange closed, there were 775 shares of Series B
Preferred Stock outstanding and 126,916 shares of Series C Preferred Stock
outstanding. The shares of Series B Preferred Stock and Series C Preferred
Stock are together referred to as Senior Redeemable Preferred Stock on the
Consolidated Balance Sheets at September 30, 1997 and March 31, 1997.
On June 8, 1997, the Company completed the exchange of all of the
outstanding principal amount of 11-3/4% Senior Notes, due 2004, issued
pursuant to the Indenture dated February 7, 1997, for a like principal amount
of its 11-3/4% Senior Notes, due 2004, which were registered under the
Securities Act.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company's fiscal year ending March 31, 1998, is referred to herein as
"Fiscal 1997." The Company's fiscal year ended March 31, 1997, is referred
to herein as "Fiscal 1996."
This discussion and analysis relates to the consolidated results of
operations of Renaissance Cosmetics, Inc. (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, each of which
is discussed in greater detail in Item 1 and Item 7 of the Company's 1996
Form 10-K.
1. The Houbigant Acquisition in July and August 1994, the Cosmar
Acquisition in August 1994, the Dana Acquisition in December 1994 and the ACB
Acquisition in December 1994;
2. The GAC Acquisition in August 1996, the operations of which have
been integrated into Cosmar;
3. The MEM Acquisition in December 1996, the domestic operations of
which have been integrated into Dana; and
4. The P&G Brands Acquisition in December 1996, the domestic operations
of which have been integrated into Dana.
OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 (AS RESTATED)
NET SALES. The Company's net sales were as follows (in 000s):
SIX MONTHS
ENDED SEPTEMBER 30,
1997 1996
------------------------- ---------------------------
DIVISION NET SALES % OF TOTAL NET SALES % OF TOTAL
- ------------- --------- ---------- --------- ----------
Fragrance $47,405 46.2% $34,066 43.8%
Cosmetics 31,503 30.7% 24,019 30.9%
International 23,787 23.1% 19,625 25.3%
-------- ---------- --------- ----------
Total $102,695 100.0% $77,710 100.0%
-------- ------ ------- ------
-------- ------ ------- ------
Total net sales increased by 32.2% to $102,695,000.
10
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Fragrance Division net sales increased 39.2% to $47,405,000. The
increase was due principally to net sales of brands acquired in the MEM and
P&G Brands Acquisitions. Net sales of MEM and P&G Brands were $15,420,000
during the six months ended September 30, 1997. Net sales of the Tinkerbell
(children's cosmetics) products acquired in the MEM Acquisition were
$5,119,000 for the first half of Fiscal 1997. Net sales of the Dana base
brands in the first half of Fiscal 1997 decreased because certain of the
Company's major customers instructed the Company to defer shipment of their
Christmas orders until the third quarter. Christmas orders from those major
customers, that were shipped during the first half of Fiscal 1996, were
approximately $7,500,000.
Cosmetics Division net sales increased 31.2 % to $31,503,000. This
increase is primarily attributable to net sales of the NatRobbins brand
acquired in the GAC Acquisition. Net sales of NatRobbins products during
the six months ended September 30, 1997 were $8,918,000 as compared to sales
of $1,693,000 during the six months ended September 30, 1996.
International Division net sales increased 21.2 % to $23,787,000. The
increase was principally attributable to sales from the UK subsidiary that
opened in December 1996. Net sales from the UK subsidiary, including closeout
sales, during the first half of Fiscal 1997 were $5,342,000. This increase
was offset, in part, by a decrease in export sales resulting from the Company's
decision to re-evaluate its existing agreements with foreign distributors, and
identify new distributors in order to generate future growth in export sales.
GROSS PROFIT. The Company's gross profit was as follows (in 000s):
SIX MONTHS
ENDED SEPTEMBER 30,
1997 1996
---------------------------- ------------------------------
DIVISION GROSS PROFIT % OF NET SALES GROSS PROFIT % OF NET SALES
- -------- ------------ -------------- ------------ --------------
Fragrance $28,707 60.6% $23,374 68.6%
Cosmetics 18,899 60.0% 13,921 58.0%
International 13,889 58.4% 11,125 56.7%
------------ -------------- ------------ --------------
Total $61,495 59.9% $48,420 62.3%
Fragrance Division gross profit margin declined to 60.6% from 68.6% due
to changes in product mix. Gross profits from closeout sales, which
increased in the first half of Fiscal 1997 after the Company hired sales people
to focus specifically on closeout sales of older merchandise, yielded a gross
margin of approximately 21.3% in the first half of Fiscal 1997. Additionally,
gross profits from sales of the Tinkerbell (children's cosmetics) products
acquired in the MEM Acquisition, which generated a gross margin of 46.8%, are
included in the Fragrance Division gross margin for the first half of Fiscal
1997. The gross margin on fragrance products sold through normal channels
declined to 67.3%, which reflected additional depreciation incurred in
connection with the expansion of the Company's Mountain Top, Pennsylvania
facility. Gross profit margins, excluding depreciation, increased slightly to
70.9% as compared to 70.4% in the prior year primarily due to
11
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product mix.
Cosmetics Division gross profit margin remained relatively stable at
60.0% compared to 58.0% during the comparable period in the prior year. The
increase reflects the changes in product mix mentioned above. Gross profit
margin on NatRobbins products was 63.6% during the first half of Fiscal
1997.
International Division gross profit margin increased from 56.7% to 58.4%
reflecting changes in product mix. Gross profits from the UK subsidiary were
approximately 56% consisting of gross profits of 60.4% on regular merchandise
and gross profits of 31.7% on closeout sales.
SELLING EXPENSES. The Company's selling expenses in the first half of
Fiscal 1997 and the first half of Fiscal 1996 were $40,798,000 (39.7% of Net
Sales) and $30,224,000 (38.9% of Net Sales), respectively. The increase in
selling expenses in whole dollars reflects advertising and promotional
programs by the Fragrance and Cosmetics Divisions for the acquired brands.
The increase in selling expenses as a percentage of sales is attributable to
higher advertising for the acquired brands to increase their name recognition.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses in the first half of Fiscal 1997 and the first half of
Fiscal 1996 were $14,417,000 (14.0% of Net Sales) and $9,711,000 (12.5% of Net
Sales), respectively. General and administrative expenses in the first half of
Fiscal 1997 includes discretionary management bonuses of $920,000. Excluding
these bonuses, general and administrative expenses were $13,497,000 (13.1% of
Net Sales). The remaining increase in general and administrative expenses was
attributable to the additional fixed costs for the infrastructure necessary to
run a larger organization as a result of the Acquisitions. The increase in
general and administrative expenses as a percentage of sales reflects the fact
that the Company's sales are significantly higher in the second half of its
fiscal year due to seasonal and other industry factors.
RESTRUCTURING COSTS. Restructuring costs in the first half of Fiscal
1997 and the first half of Fiscal 1996 were $1,117,000 (1.1% of Net Sales)
and $253,000 (.3% of Net Sales). Restructuring costs consist of severance,
relocation costs, and recruiting and outplacement fees. Such costs increased
due to personnel changes made in Fiscal 1997 in order to expand and upgrade
the organization as a result of its increased size and growth opportunities
following consummation of the Acquisitions.
12
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AMORTIZATION OF INTANGIBLES AND OTHER ASSETS. Amortization of
intangibles and other assets during the first half of Fiscal 1997 was
$5,952,000 (5.8% of Net Sales) and $3,122,000 (4.0% of Net Sales) in the
first half of Fiscal 1996. This increase is due to an increase in intangible
assets resulting principally from the GAC, MEM, and P&G Brands Acquisitions.
OPERATING INCOME (LOSS). Operating income (loss) was $(789,000) (.8% of
Net Sales) for the first half of Fiscal 1997 and $5,110,000 (6.6% of Net
Sales) for the first half of Fiscal 1996. Operating income for the first half
of Fiscal 1997 declined due to the deferral of a portion of the Christmas
shipments to the third quarter, combined with the increases in selling and
general and administrative expenses discussed above, offset by incremental
profits on sales of the MEM and P&G Brands. Management believes
that, as an additional measurement, earnings before interest, 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 to net income (loss) as an
indicator of the Company's operating performance or to cash flows as a
measurement of liquidity.
The computation of EBITDA is set forth in the table below (in 000s):
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
------- -------
Operating Income (Loss) $ (789) $ 5,110
Plus: Amortization of Intangibles and Other Assets 5,952 3,122
Plus: Depreciation 3,189 1,679
------- -------
EBITDA $ 8,352 $ 9,911
EBITDA % of Net Sales 8.1% 12.8%
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INTEREST EXPENSE. The Company's total interest expense was $14,579,000
for the first half of Fiscal 1997 and $10,838,000 for the first half of
Fiscal 1996, while cash interest for the periods was $12,997,000 and
$8,576,000, respectively. Interest expense consisted of the following (in
000s):
SIX MONTHS ENDED
SEPTEMBER 30,
CASH INTEREST PAID OR ACCRUED 1997 1996
- ---------------------------------------------- ------- -------
Interest on Old Senior Notes $ -- $ 4,471
Interest on Old and New Notes 11,750 --
Interest on Seller Notes (payable in 2002) 245 220
Interest on Old Credit Facility -- 3,830
Interest on New Revolving Credit Facility 951 --
Other Interest 51 55
------- -------
Total Cash Interest Expense $12,997 $ 8,576
NON-CASH INTEREST EXPENSE
- ---------------------------------------------- ------- -------
Accretion of Old Senior Notes and Seller Notes $ 98 $ 169
Amortization of Deferred Financing Costs 1,007 1,605
Accretion of Interest on Obligations for
Minimum Royalty Payment 477 488
------- -------
Total Non-Cash Interest Expense $ 1,582 $ 2,262
Total Interest Expense $14,579 $10,838
OTHER EXPENSE (INCOME) - NET. Other expense (income)-net was $2,829,000
for the first half of Fiscal 1997. This income consisted primarily of the
proceeds from a key man life insurance policy covering the late Chairman and
Chief Executive Officer, Dr. Thomas V. Bonoma, on which the Company was the
beneficiary, net of incremental expenses incurred by the Company relating to
his death. Other expense (income) also included other fees paid to the
Company's majority shareholder during the first half of Fiscal 1997. No
fees were paid during the first half of Fiscal 1996, because the Company was
prohibited from making such payments pursuant to the indenture for the
then-outstanding Old Senior Notes.
INCOME TAX PROVISION. Income tax provision was $911,000 for the first
half of Fiscal 1997 and $308,000 for the first half of Fiscal 1996. The
effective tax rates differ from the United States federal income tax rate due
to state and foreign income taxes and limitations on utilization of federal
income tax benefits. The increase in income taxes during the first half of
Fiscal 1997 is due to higher pre-tax income in foreign jurisdictions.
14
<PAGE>
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 (AS RESTATED)
NET SALES. The Company's net sales were as follows (in 000s):
THREE MONTHS
ENDED SEPTEMBER 30,
1997 1996
------------------------- -------------------------
DIVISION NET SALES % OF TOTAL NET SALES % OF TOTAL
- -------- --------- ---------- --------- ----------
Fragrance $31,361 50.8% $23,589 49.7%
Cosmetics 16,839 27.2% 12,268 25.8%
International 13,610 22.0% 11,651 24.5%
--------- ---------- --------- ----------
Total $61,810 100.0% $47,508 100.0%
Total net sales increased by 30.1% to $61,810,000.
Fragrance Division net sales increased 32.9% to $31,361,000. The
increase was due principally to net sales of brands acquired in the MEM and
P&G Brands Acquisitions. Net sales of MEM and P&G Brands were $9,810,000
during the second quarter of Fiscal 1997. Net sales of the Tinkerbell
(children's cosmetics) products acquired in the MEM Acquisition were $3,903,000
for the second quarter of Fiscal 1997. Net sales of the Dana base brands in
the second quarter of Fiscal 1997 decreased since certain of the Company's
major customers instructed the Company to defer shipment of their Christmas
orders until the third quarter. Christmas orders from those major customers,
that were shipped during the second quarter of Fiscal 1996, were approximately
$7,500,000.
Cosmetics Division net sales increased 37.3% to $16,839,000. This
increase is primarily attributable to net sales of the NatRobbins brand
acquired in the GAC Acquisition. Net sales of NatRobbins products during the
second quarter of Fiscal 1997 were $4,904,000 as compared to $1,693,000
during the second quarter of Fiscal 1996.
International Division net sales increased 16.8% to $13,610,000. The
increase was principally attributable to sales from the UK subsidiary that
opened in December 1996. Net sales from the UK subsidiary during the second
quarter of Fiscal 1997 were $2,688,000. This increase was offset, in part,
by a decrease in export sales resulting from the Company's decision to
re-evaluate its existing agreements with distributors, and identify new
distributors in order to generate future growth in export sales.
15
<PAGE>
GROSS PROFIT. The Company's gross profit was as follows (in 000s):
THREE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---------------------------- ------------------------------
DIVISION GROSS PROFIT % OF NET SALES GROSS PROFIT % OF NET SALES
- -------- ------------ -------------- ------------ --------------
Fragrance $19,075 60.8% $16,358 69.3%
Cosmetics 10,163 60.4% 7,057 57.5%
International 8,121 59.7% 6,319 54.2%
------------ -------------- ------------ --------------
Total $37,359 60.4% $29,734 62.6%
Fragrance Division gross profit margin declined to 60.8% from 69.3% due
to changes in product mix. Included in the gross margin is gross profit from
closeout sales, which increased in Fiscal 1997 after the Company hired sales
people to focus specifically on closeout sales of older merchandise. Gross
profit from closeout sales yielded a gross margin of approximately 25.4%.
Additionally, sales of the Tinkerbell (children's cosmetics) products
acquired in the MEM Acquisition generated an overall gross margin of 47.2%.
Gross margin on regular fragrance products sold through normal channels
declined to 66.2%, reflecting additional depreciation incurred in connection
with the Company's expansion of its Mountain Top Pennsylvania facility. Gross
margins excluding depreciation remained relatively stable as compared to the
prior year.
Cosmetics Division gross profit margin increased to 60.4% compared to
57.5% during the comparable period in the prior year. The increase reflects
the changes in product mix. Gross profit margins on NatRobbins products were
62.5% during the second quarter of Fiscal 1997.
International Division gross profit margin increased from 54.2% to 59.7%
reflecting changes in product mix. Gross profits from the UK subsidiary were
approximately 60.5% consisting of regular merchandise only, since all
closeout sales occurred only in the first quarter.
SELLING EXPENSES. The Company's selling expenses in the second quarter
of Fiscal 1997 and the second quarter of Fiscal 1996 were $25,914,000 (41.9%
of Net Sales) and $19,065,000 (40.1% of Net Sales), respectively. The
increase in selling expenses in whole dollars reflects advertising and
promotional programs by the Fragrance and Cosmetics Divisions for the
acquired brands. The increase in selling expenses as a percentage of sales is
attributable to higher advertising for the acquired brands to increase their
name recognition.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses in the second quarter of Fiscal 1997 and the second
quarter of Fiscal 1996 were $7,496,000 (12.1% of Net Sales) and $4,040,000
(8.5% of Net Sales), respectively. General and administrative expenses in the
second quarter of Fiscal 1997 includes discretionary management bonuses of
$920,000.
16
<PAGE>
Excluding these bonuses, general and administrative expenses were $6,576,000
(10.6% of Net Sales). The remaining increase in general and administrative
expenses was attributable to the additional fixed costs for the infrastructure
necessary to run a larger organization as a result of the Acquisitions. The
increase in general and administrative expenses as a percentage of sales
reflects the fact that the Company's sales are significantly higher in the
second half of its fiscal year due to seasonal and other industry factors.
RESTRUCTURING COSTS. Restructuring costs in the second quarter of Fiscal
1997 and the second quarter of Fiscal 1996 were $601,000 (1.0% of Net Sales)
and $123,000 (.3% of Net Sales). Restructuring costs consist of severance,
relocation costs, and recruiting and outplacement fees. Such costs increased
due to personnel changes made in Fiscal 1997 in order to expand and upgrade
the organization as a result of its increased size and growth opportunities
following consummation of the Acquisitions.
AMORTIZATION OF INTANGIBLES AND OTHER ASSETS. Amortization of
intangibles and other assets was $3,196,000 (5.2% of Net Sales) in the
second quarter of Fiscal 1997 and $1,754,000 (3.7% of Net Sales) in the
second quarter of Fiscal 1996. This increase is due to an increase in
intangible assets resulting principally from the GAC, MEM and P&G Brands
Acquisitions.
OPERATING INCOME. Operating income was $152,000 (.2% of Net Sales) for
the second quarter of Fiscal 1997 and $4,752,000 (10.0% of Net Sales) for the
second quarter of Fiscal 1996. Operating income for the second quarter of
Fiscal 1997 declined due to the deferral of a portion of the Christmas
shipments to the third quarter, combined with the increases in selling and
general and administrative expenses discussed above, offset by incremental
profits on sales of the MEM and P&G Brands. Management believes
that, as an additional measurement, earnings before interest, 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 to net income (loss) as an
indicator of the Company's operating performance or to cash flows as a
measurement of liquidity.
17
<PAGE>
The computation of EBITDA is set forth in the table below (in 000s):
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------ -------
Operating Income $ 152 $ 4,752
Plus: Amortization of Intangibles and Other Assets 3,196 1,754
Plus: Depreciation 1,677 810
------ -------
EBITDA $5,025 $ 7,316
EBITDA % of Net Sales 8.1% 15.4%
INTEREST EXPENSE. The Company's total interest expense was $7,577,000
for the second quarter of Fiscal 1997 and $5,637,000 for the second quarter
of Fiscal 1996, while cash interest for the same periods was $6,786,000 and
$4,424,000, respectively. Interest expense consisted of the following (in
000s):
THREE MONTHS ENDED
SEPTEMBER 30,
CASH INTEREST PAID OR ACCRUED 1997 1996
- ---------------------------------------------- --------- --------
Interest on Old Senior Notes $ -- $ 2,237
Interest on Old and New Notes 5,875 --
Interest on Seller Notes (payable in 2002) 128 112
Interest on Old Credit Facility ---- 2,039
Interest on New Revolving Credit Facility 754 --
Other Interest 29 36
--------- --------
Total Cash Interest Expense $ 6,786 $ 4,424
NON-CASH INTEREST EXPENSE
- ---------------------------------------------- --------- --------
Accretion of Old Senior Notes and Seller Notes $ 49 $ 88
Amortization of Deferred Financing Costs 503 879
Accretion of Interest on Obligations for
Minimum Royalty Payment 239 246
--------- --------
Total Non-Cash Interest Expense $ 791 $ 1,213
Total Interest Expense $ 7,577 $ 5,637
18
<PAGE>
INCOME TAX PROVISION. Income tax provision was $707,000 for the second
quarter of Fiscal 1997 and $464,000 for the second quarter of Fiscal 1996.
The effective tax rates differ from the United States federal income tax rate
due to state and foreign income taxes and limitations on utilization of
federal income tax benefits. The increase in income taxes is due to higher
pre-tax income during the second quarter of Fiscal 1997 in foreign
jurisdictions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") and SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 131 establishes standards for
reporting financial and descriptive information for reportable segments on
the same basis which is used internally for evaluating segment performance
and the allocation of resources to segments. SFAS 130 establishes standards
for presenting items that are not related to shareholders, that are excluded
from net income and reported as components of stockholders' equity, such as
foreign currency translation. These statements are effective for fiscal
years beginning after December 15, 1997. The adoption of these statements is
not expected to have a material effect on the Company's results of operations
or financial position.
OTHER
The Company has evaluated the potential impact of the situation commonly
known as the Year 2000 problem. The Year 2000 problem, which is common to
most corporations, concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information related to the Year 2000. The Company's assessment indicates
that the Company and its subsidiaries will each have "Year 2000 Compliant"
software no later than the first quarter of Fiscal 1998. Many systems are
currently "Year 2000 Compliant". The Company is in the process of determining
the effect of this problem on its vendors' and customers' systems.
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 six
months ended September 30, 1997 was $41,283,000, consisting primarily of a
net loss of $12,627,000 less (i) non-cash items impacting net loss of
$10,244,000, (ii) increases in accounts receivable, inventories and prepaid
expenses and other assets of $15,685,000, $14,230,000 and $3,747,000,
respectively, (iii) decreases in accrued expenses of $5,471,000, (iv)
decreases in other of $351,000; offset by increases in accounts payable of
$584,000.
19
<PAGE>
Net cash provided by investing activities was $2,713,000, consisting
primarily of net proceeds from the sale of marketable securities of
$9,848,000, offset by capital expenditures of $5,366,000, other investing
activities of $461,000, and an investment in the joint venture in China of
$1,308,000, net of cash acquired.
Net cash provided by financing activities was $42,826,000, consisting
primarily of borrowings on the revolving credit facility with General
Electric Capital Corporation and other lenders ("New Revolving Credit
Facility") of $44,800,000 and the proceeds from the sale of treasury stock of
$46,000 offset by the payment of minimum royalty obligations of $1,868,000
and financing fees of $152,000.
OUTSTANDING INDEBTEDNESS AND LIQUIDITY REQUIREMENTS. As of September 30,
1997, the Company had total outstanding indebtedness of $248,775,000,
consisting of (1) $200,000,000 of New Notes, (2) $3,975,000 of Seller Notes
and (3) $44,800,000 under the New Revolving Credit Facility. At September 30,
1997, the Company had $30,200,000 available on the New Revolving Credit
Facility.
Because of the nature of the fragrance/cosmetics industry, both the
Company's need for working capital and its income streams are seasonal.
During the first and second quarters of the year, working capital borrowings
generally increase as payments are made to finance the build-up of accounts
receivable and inventory in preparation for the Christmas selling season.
During the third quarter, cash is generated as a portion of customer payments
on Christmas orders are received, which is offset by cash requirements for
advertising and the building of inventories in preparation for new launches,
which occur in the fourth quarter. During the fourth quarter, the remaining
portion of customer payments on Christmas orders are received which reduces
working capital borrowings. During the first quarter of Fiscal 1997, the
Company implemented a working capital management program, coupled with
management incentives to manage working capital.
The Company believes that the New Revolving Credit Facility, together
with the Company's working capital management program, should be sufficient
to fund existing operations for at least the next twelve months.
20
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PREMIER SALES GROUP LITIGATION. The Company and two of its
subsidiaries, Cosmar Corporation ("Cosmar") and Great American Cosmetics,
Inc. ("GACI"), are defendants in a lawsuit filed in the District Court of
Jefferson County, Texas in August 1997 by Premier Sales Group, Inc., and
David Gosdin (together, "PSG"). The complaint alleges (i) breach of
contract, (ii) unjust enrichment, (iii) failure to provide accounting, (iv)
fraud, (v) interference with business relations and prospective advantage,
(vi) breach of duty of good faith and fair dealing and (vii) violation of
Texas Business and Commerce Code Sections 35.81, et seq. (relating to failure
to pay commissions) (the "Claims"), and seeks actual, statutory, special,
punitive and exemplary damages in unspecified amounts. The claims arise out
of the termination of a sales representative agreement between GACI and PSG.
The Company, Cosmar and GACI filed their joint answer in September 1997.
The Company, Cosmar and GACI believe that they have meritorious defenses to
the Claims, and intend to vigorously defend this lawsuit. Under the terms of
the agreement governing the purchase of all of the stock of GACI, the Company
and Cosmar were indemnified by the sellers of GACI (the "Sellers") against
certain claims and liabilities. The indemnity covers certain of the Claims,
and the Company and Cosmar are pursuing such indemnity claims against the
Sellers.
See Item 3 of the Company's Fiscal 1996 Form 10-K for a discussion of
additional legal proceedings.
ITEM 5. OTHER INFORMATION
(a) During September 1997, Terry Theodore, a board member since the Company's
inception in 1994, was elected as acting Chairman of the Board of Directors.
(b) On October 1, 1997, Robert Corso became Group Vice President and Chief
Financial Officer of the Company, succeeding Thomas T.S. Kaung.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See the Exhibit Index on pages 22 through 24 hereof.
(b) REPORTS ON FORM 8-K
None
21
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
2.1 (1) Stock Purchase Agreement among Cosmar Corporation, a Delaware
corporation ("Cosmar Corporation"), Larry Pallini, Vincent
Carbone and Great American Cosmetics, Inc., a New York
corporation ("GAC"), entered into on June 27, 1996, providing
for the acquisition by Cosmar Corporation of all of the capital
stock of GAC.
2.2 (1) Agreement and Plan of Merger, among Renaissance Cosmetics,
Inc., a Delaware corporation ("RCI" or the "Company"),
Renaissance Acquisition, Inc., a New York corporation ("RAI")
and MEM Company, Inc., a New York corporation ("MEM"), dated as
of August 6, 1996.
2.3 (2) Asset Sale and Purchase by and among the Procter & Gamble
Company (as Seller) and Dana Perfumes Corp. ("Dana") (as Buyer)
and solely for purposes of Sections 4.6, 6.6 and 6.12 hereof of
Renaissance Cosmetics, Inc. and Cosmar Corporation dated as of
October 25, 1996.
2.4 (2) Form of Asset Sale and Purchase Agreement among P&G foreign
affiliate sellers and Dana, dated as of October 29, 1996.
3.1 (3) Restated certificate of incorporation of RCI filed with the
Secretary of State of the State of Delaware on August 17, 1994.
3.1.2 (4) Certificate of Designation of Preferences and Rights of Senior
Exchangeable Redeemable Preferred stock, Series A, of RCI,
filed with the Secretary of State of the State of Delaware on
May 29, 1996.
3.1.3 (5) Certificate of Designation of Preferences and Rights of Senior
Redeemable Preferred Stock, Series B, of RCI, filed with the
Secretary of State of the State of Delaware on August 15, 1996.
3.1.4 (6) Certificate of Increase of Certificate of Designation of
Preferences and Rights of Senior Redeemable Preferred Stock,
Series B, of RCI, filed with the Secretary of State of the
State of Delaware on September 27, 1996.
3.1.5 (6) Certificate of Designation of Preferences and Rights of Senior
Redeemable Preferred Stock, Series C, par value $.01 per share,
of RCI, filed with the Secretary of State of the State of
Delaware on August 15, 1996.
3.1.6 (6) Certificate of Increase of Certificate of Designation of
Preferences and Rights of Senior Redeemable Preferred Stock,
Series C, of RCI, filed with the Secretary of State of the
State of Delaware on September 27, 1996.
3.2 (7) Amended and Restated By-laws of RCI
3.3 (8) Certificate of Incorporation of Renaissance Guarantor, Inc.
("RGI") filed with the Secretary of State of the State of
Delaware on February 6, 1997.
3.4 (8) By-laws of RGI.
22
<PAGE>
4.1 (9) Indenture, dated February 7, 1997, among RCI, as issuer, RGI,
as guarantor, and United States Trust Company of New York, as
trustee.
4.2 (9) Escrow and Disbursement Agreement, dated February 7, 1997,
among RCI, as issuer, RGI, as guarantor, United States Trust
Company of New York, as trustee, and United States Trust
Company of New York, as escrow agent.
4.3 (9) Notes Registration Rights Agreement, dated February 7, 1997,
between RCI, as issuer, and CIBC Wood Gundy Securities Corp.,
as initial purchaser.
10.1 Consent and Amendment, dated September 3, 1997, among RCI
China, Inc., Dana Perfumes Corp., as Borrower, the other Credit
Parties to the Credit Agreement, General Electric Capital
Corporation as agent and lender and the other Lenders party to
the Credit Agreement.
10.2 Pledge Amendment, dated September 3, 1997, executed by Dana
Perfumes Corp. and RCI China, Inc., in favor of General
Electric Capital Corporation, as Agent.
10.3 (10) Letter Agreement, dated as of July 25, 1997, among Dana
Perfumes Corp., as borrower, General Electric Capital
Corporation, as agent and lender, and the other lenders party
to the Credit Agreement.
27.1 Financial Data Schedule.
- -----------------------
NOTES TO EXHIBIT INDEX:
(1) Filed with RCI's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1996, filed with the SEC on August 14, 1996, and incorporated
herein by reference thereto.
(2) Filed with RCI's Form 8-K filed with the SEC on December 20, 1996, and
incorporated herein by reference thereto.
(3) Filed with RCI's Registration Statement on Form S-4 filed with the SEC on
December 12, 1994, Registration No.33-87280, and incorporated herein by
reference thereto.
(4) Filed with RCI's Annual Report on Form 10-K filed with the SEC for the
fiscal year ended March 31, 1996, and incorporated herein by reference
thereto.
(5) Filed with RCI's Form 8-K filed with the SEC on August 8, 1996, and
incorporated herein by reference thereto.
(6) Filed with Amendment No. 1 to RCI's Registration Statement on Form S-4
filed with the SEC on January 31, 1997, Registration No. 33-13171, and
incorporated herein by reference thereto.
23
<PAGE>
(7) Filed with RCI's Annual Report on Form 10-K filed with the SEC for the
fiscal year ended March 31, 1997, and incorporated herein by reference
thereto.
(8) Filed with RCI's Registration Statement on Form S-4 filed with the SEC on
March 24, 1997, Registration No. 33-23847, and with Amendment No. 1
thereto, as filed with the SEC on May 2, 1997, and incorporated herein by
reference thereto.
(9) Filed with RCI's Form 8-K filed with the SEC on February 20, 1997, and
incorporated herein by reference thereto.
(10) Filed with RCI's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997, filed with the SEC on August 14, 1997, and incorporated
herein by reference thereto.
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RENAISSANCE COSMETICS, INC.
Dated: November 14, 1997 By: /S/ ROBERT CORSO
-----------------------------------
Robert Corso
Group Vice President, Finance
and Chief Financial Officer
25
<PAGE>
Exhibit 10.1
CONSENT AND AMENDMENT
CONSENT AND AMENDMENT, dated as of September 3, 1997, among RCI China,
Inc., a Delaware corporation and wholly-owned subsidiary of Renaissance
Cosmetics, Inc., Dana Perfumes Corp. ("BORROWER"), the other Credit Parties
to the Credit Agreement referred to below, General Electric Capital
Corporation, for itself, as lender, and as Agent for Lenders, and the other
Lenders party to the Credit Agreement.
W I T N E S S E T H:
WHEREAS, Borrower, Credit Parties, Agent and Lenders are parties to that
certain Credit Agreement dated as of March 12, 1997 (as from time to time
amended, restated, supplemented or otherwise modified, the "CREDIT
AGREEMENT", and unless the context otherwise requires or unless otherwise
defined herein, capitalized terms used herein shall have the meanings
assigned to them in the Credit Agreement); and
WHEREAS, Borrower (for and on behalf of itself and the other Credit
Parties), Agent and Lenders are parties to that certain letter agreement,
dated June 27, 1997, as amended on July 25, 1997 and August 20, 1997; and
WHEREAS, Borrower has requested that Agent and Lenders consent to certain
transactions that have heretofore occurred and to amend the Loan Documents to
add RCI China, Inc. as a Credit party as hereinafter set forth;
WHEREAS, Agent and Lenders have agreed to consent to such transactions
and to amend the Loan Documents to add RCI China, Inc. as a Credit Party as
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto hereby agree as follows:
SECTION 1. CONSENTS.
(a) MERGERS OF INACTIVE SUBSIDIARIES. Effective as of the
Effective Date (as defined herein) and notwithstanding Section 6.1 of the
Credit Agreement, Agent and Lenders hereby consent to the following completed
transactions:
(1) the merger of Rosemint Cosmetics, Inc. (an inactive
Subsidiary) with and into MEM Company, Inc. ("MEM")
(a Credit Party), with MEM as the surviving corporation.
<PAGE>
(2) the merger of MEM International, Inc. (an inactive
Subsidiary) with and into MEM, with MEM as the surviving
corporation.
(3) the merger of Victor of Milano, Ltd. (an inactive Subsidiary)
with and into MEM, with MEM as the surviving corporation.
(4) the merger of St. Thomas Holdings, Inc. (an inactive
Subsidiary) with and into MEM, with MEM as the surviving
corporation.
(b) TRANSFER OF UK ASSETS. Effective as of the Effective Date
and notwithstanding Sections 6.2, 6.4(a) and 6.8 of the Credit Agreement,
Agent and Lenders hereby consent to the following completed transactions:
(1) the contribution by Borrower of all of the United Kingdom
inventory and molds acquired by Borrower from Proctor &
Gamble and in existence on and as of December 31, 1996 (the
"UK Assets"), which were valued at approximately $4.4 million,
to the capital of Dana U.K. Limited, a wholly-owned subsidiary
of Borrower ("Dana UK") (the "UK Assets Transfer").
(2) the delivery by Dana UK of its own promissory note in the
principal amount of $1 million to Borrower as partial payment
for the UK Assets (the "Dana UK Note").
(c) CHINA JOINT VENTURE. Effective as of the Effective Date
and notwithstanding Sections 6.1(a) and 6.2 of the Credit Agreement, Agent
and Lenders hereby consent to the following completed transactions:
(1) the formation of RCI China, Inc., a Delaware corporation and
newly-formed, wholly-owned subsidiary of Parent ("RCI China").
(2) the contribution by (i) Parent to RCI China, of $1,093,000 in
cash and (ii) Borrower, Cosmar Corporation, MEM, English
Leather, Inc. and Great American Cosmetics, Inc. of the non-
exclusive right to use the brands and products listed on
SCHEDULE 1 hereto.
SECTION 2. AMENDMENTS. Effective as of the Effective Date, (i) the
Credit Agreement is hereby amended to add RCI China as a Credit Party, (ii)
the Security Agreement is hereby amended to add RCI China as a Grantor, (iii)
the Guaranty is hereby amended to add RCI China as a Guarantor, and (iv) the
Pledge Agreement is hereby amended to add RCI China as a Pledgor, in each
case, as though RCI China had been an original signatory thereto.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES AND RCI
CHINA. The Credit Parties and RCI China represent and warrant to Agent and
each Lender as follows:
2
<PAGE>
(a) The execution, delivery and performance by each Credit Party
and RCI China of this Consent and Amendment (and each of the financing
statements and other documents to be executed by such Person pursuant hereto)
and the creation of all Liens provided for herein: (1) are within such
Person's corporate power; (2) have been duly authorized by all necessary or
proper corporate and shareholder action; (3) do not contravene any provision
of such Person's charter or bylaws; (4) do not violate any law or regulation,
or any order or decree of any Governmental Authority; (5) do not conflict
with or result in the breach or termination of, constitute a default under or
accelerate or permit the acceleration of any performance required by, any
indenture, mortgage, deed of trust, lease, agreement or other instrument to
which such Person is a party or by which such Person or any of its property
is bound; (6) do not result in the creation or imposition of any Lien upon
any of the property of such Person other than those in favor of Agent, on
behalf of itself and Lenders, pursuant to the Loan Documents; and (7) do not
require the consent or approval of any Governmental Authority or any other
Person.
(b) This Consent and Amendment and the financing statements and
other documents to be executed and delivered by the Credit Parties and RCI
China have been duly executed and delivered by each Credit Party and RCI
China and constitute legal, valid and binding obligations of such Credit
Party and RCI China enforceable against it in accordance with their terms.
(c) After giving effect to the consents and amendments contained in
this Consent and Amendment, each of the representations and warranties of the
Credit Parties (including RCI China) contained in the Credit Agreement and
each of the other Loan Documents shall be true and correct on and as of the
Effective Date as if made on such date, except to the extent any such
representation or warranty expressly relates to an earlier date and except
for changes therein expressly permitted or expressly contemplated by such
agreements.
(d) After giving effect to the consents and amendments contained in
this Consent and Amendment, no Default or Event of Default shall be
continuing.
(e) Upon the Effective Date, RCI China shall be a Credit Party,
Grantor, Guarantor and Pledgor under the Credit Agreement, Security
Agreement, Guaranty and Pledge Agreement, respectively.
SECTION 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS CONSENT AND
AMENDMENT. This Consent and Amendment shall become effective as of the first
date on which each of the following conditions shall have been satisfied or
provided for in a manner satisfactory to Agent, or waived by Agent and
Requisite Lenders (such date is referred to herein as the "Effective Date"):
(a) Agent shall have executed this Consent and Amendment.
3
<PAGE>
(b) Agent shall have received, in form and substance satisfactory
to Agent, this Consent and Amendment, duly executed and delivered by RCI
China, Borrower, the other Credit Parties and Requisite Lenders.
(c) Agent shall have received, in form and substance satisfactory
to Agent, financing statements on Form UCC-1 in proper form for filing, duly
executed and delivered by RCI China.
(d) Agent shall have received, in form and substance satisfactory
to Agent, a Pledge Amendment, duly executed and delivered by Borrower,
pledging the Dana UK Note, along with the original Dana UK Note and a duly
executed instrument of transfer in blank in form and substance satisfactory
to Agent.
SECTION 5. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS.
(a) On and after the Effective Date, each reference in the Loan
Documents to "this Agreement", "herein", "hereof", "hereunder" or words of
similar import, shall mean and be a reference to such Loan Document as
amended hereby and after giving effect to the consents provided herein.
(b) Except as specifically amended above, the Credit Agreement, the
Notes and all other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Consent and
Amendment shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of Lenders under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 6. FEES AND EXPENSES. Borrower agrees to reimburse Agent for
all reasonable out-of-pocket fees, costs and expenses, including the
reasonable fees, costs and expenses of counsel or other advisors in
connection with the preparation, execution and delivery of this Consent and
Amendment.
SECTION 7. GOVERNING LAW. THIS CONSENT AND AMENDMENT AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THAT STATE AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.
SECTION 8. SECTION TITLES. Section titles contained in this Consent and
Amendment are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
4
<PAGE>
SECTION 9. COUNTERPARTS. This Consent and Amendment may be executed in
any number of separate counterparts, each of which shall collectively and
separately constitute one agreement.
IN WITNESS WHEREOF, this Consent and Amendment has been duly executed as
of the date first written above.
RCI CHINA, INC.
By: /s/ John R. Jackson
-----------------------------------
Name: John R. Jackson
Title: VP
DANA PERFUMES CORP.
By: /s/ John R. Jackson
-----------------------------------
Name: John R. Jackson
Title: VP
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent and Lender
By: /s/ Peggy Erlenkotter
-----------------------------------
Name: Peggy Erlenkotter
Title: Duly Authorized Signatory
NATIONAL CITY COMMERCIAL FINANCE,
INC., as Lender
By: /s/ Christina M. Lucas
-----------------------------------
Name: Christina M. Lucas
Title: Vice President
PNC BANK, N.A., as Lender
By: /s/ Frank Phillips
-----------------------------------
Name: Frank Phillips
Title: VP
5
<PAGE>
Other Credit Parties:
RENAISSANCE COSMETICS, INC.
COSMAR CORPORATION
GREAT AMERICAN COSMETICS, INC.
HOUBIGANT (1995) LIMITED
MEM COMPANY, INC.
TINKERBELL, INC. (F/K/A MARTON FRERES, INC.)
MEM COMPANY (CANADA) LIMITED
By: /s/ John R. Jackson
-----------------------------------
Name: John R. Jackson
Title: VP
6
<PAGE>
SCHEDULE 1
Chantilly Insignia
White Chantilly California for Men
Tabu le Jardin
DREAMS BY TABU LaJoie
Lutece PRO10
Raffinee Press & Go
Demi-Jour Petite Press & Go
Monsieur Musk Sport Press & Go
French Garden Flowers Quik Fit
English Waterlilys Sculpture Quik
French Vanilla by Dana Sculpture Quik II
Ambush UltraGel
Canoe Nail Fetish
Canoe-Sport Wrap Quik
Herbissimo Quikfile
Navigator Quikshine
English Leather Filepro
British Sterling Nat Robbins
Love's Lip Lacquer
Heaven Sent Ever Sheer
NaVy Color Intense 24
Toujours Moi
NaVy for Men
7
<PAGE>
Exhibit 10.2
PLEDGE AMENDMENT
This Pledge Amendment, dated September 3, 1997, is delivered
pursuant to SECTION 6(d) of the Pledge Agreement referred to below. The
undersigned hereby certifies that the representations and warranties in
SECTION 5 of the Pledge Agreement are and continue to be true and correct,
both as to the Pledged Collateral pledged prior to this Pledge Amendment and
as to the Pledged Collateral pledged pursuant to this Pledge Amendment. The
undersigned further agrees that this Pledge Amendment may be attached to that
certain Pledge Agreement, dated March 12, 1997 (the "Pledge Agreement"),
between the undersigned, as Pledgor, the other Persons named therein as
Pledgors, and General Electric Corporation, as Agent, and that the Pledged
Collateral listed on this Pledge Amendment shall be and become part of the
Pledged Collateral referred to in said Pledge Agreement and shall secure all
Secured Obligations referred to in said Pledge Agreement. The undersigned
acknowledges that any shares not included in the Pledged Shares at the
discretion of Agent may not otherwise be pledged or otherwise used as
security by Pledgor.
DANA PERFUMES CORP.
By: /s/ John R. Jackson
-----------------------------------
Name: John R. Jackson
Title: VP
RCI CHINA, INC.
By: /s/ John R. Jackson
----------------------------------
Name: John R. Jackson
Title: VP
===============================================================================
Initial
Principal Maturity Interest
Pledgor Issuer Amount Issue Date Date Rate
- -------------------------------------------------------------------------------
Dana Dana U.K. $1,000,000 Dec. 31, 1996 11.75%
Perfumes Limited
Corp.
- -------------------------------------------------------------------------------
RCI China, Dana Sept. 3, 1997
Inc. Perfumes
Corp.
- -------------------------------------------------------------------------------
Dana RCI China, Sept. 3, 1997
Perfumes Inc.
Corp.
===============================================================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAISSANCE COSMETICS INC. FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,975
<SECURITIES> 8,982
<RECEIVABLES> 64,653
<ALLOWANCES> 0
<INVENTORY> 69,947
<CURRENT-ASSETS> 158,945
<PP&E> 40,476
<DEPRECIATION> (11,716)
<TOTAL-ASSETS> 389,533
<CURRENT-LIABILITIES> 58,262
<BONDS> 248,775
110,085
0
<COMMON> 8
<OTHER-SE> (31,465)
<TOTAL-LIABILITY-AND-EQUITY> 389,533
<SALES> 102,695
<TOTAL-REVENUES> 102,695
<CGS> 41,200
<TOTAL-COSTS> 41,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,579
<INCOME-PRETAX> (11,716)
<INCOME-TAX> 911
<INCOME-CONTINUING> (12,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,627)
<EPS-PRIMARY> (27.73)
<EPS-DILUTED> (27.73)
</TABLE>
