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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996.
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.)
955 MASSACHUSETTS AVENUE
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
(617) 497-5584
(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 August 12, 1996, there were outstanding 721,168 shares of the
registrant's common stock, $.01 par value per share.
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INTRODUCTION
The purpose of this filing is to correct certain information
regarding the previously-reported results of operations for the three months
ended June 30, 1996 and June 30, 1995 and the previously-reported balance sheet
data of Renaissance Cosmetics, Inc. (the "Company") as of June 30, 1996, as
presented in "Item 1. Financial Statements" and "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
2
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INDEX
PAGE
PART I - FINANCIAL INFORMATION................................................5
Item 1. Financial Statements..........................................5
Consolidated Balance Sheets as of June 30, 1996
(unaudited) (as restated) and March 31, 1996.............7
Consolidated Statements of Operations for the
three months ended June 30, 1996
and 1995 (unaudited) (as restated).......................9
Consolidated Statements of Cash Flows for the three months
ended June 30, 1996 and 1995 (unaudited) (as restated)..10
Notes to Unaudited Consolidated Financial Statements.........12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................15
3
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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/A, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. 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, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others: general economic and business conditions;
competition; development and operating costs; advertising and promotional
efforts; brand awareness; acceptance of new product offerings; changes in
business strategy or development plans; quality of management; availability,
terms and development of capital; and other factors referenced in this Form
10-Q/A.
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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 nine pages.
5
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
PAGE
ITEM I. FINANCIAL STATEMENTS:
Consolidated Balance Sheets......................................7
Consolidated Statements of Operations............................9
Consolidated Statements of Cash Flows...........................10
Notes to Consolidated Financial Statements......................12
6
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Page 1 of 2 pages)
- ------------------------------------------------------------------------------
June 30, 1996
(As Restated- March 31,
Note 5) 1996
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 7,573,050 $ 1,431,809
Marketable securities..................... 78,452 173,604
Accounts receivable - Net................. 28,306,530 34,557,409
Inventories............................... 32,659,980 30,236,739
Prepaid expenses and other current assets. 13,734,579 6,539,828
-------------- --------------
Total current assets.................. 82,352,591 72,939,389
PROPERTY, PLANT AND EQUIPMENT - Net......... 14,457,830 14,535,363
DEFERRED FINANCING COSTS - Net.............. 7,907,363 8,006,782
OTHER ASSETS - Net.......................... 12,174,123 12,242,090
INTANGIBLE ASSETS - Net..................... 76,087,760 76,895,294
-------------- --------------
TOTAL ASSETS................................ $ 192,979,667 $ 184,618,918
============== ==============
See notes to consolidated financial statements.
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Page 2 of 2 pages)
- ------------------------------------------------------------------------------
June 30, 1996
(As Restated-
Note 5) March 31, 1996
-------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable............................. $ 59,000,000 $ 57,000,000
Accounts payable.......................... 13,613,349 19,462,868
Accrued expenses.......................... 13,544,517 15,157,127
Other current liabilities................. 2,700,000 2,700,000
-------------- --------------
Total current liabilities............. 88,857,866 94,319,995
LONG-TERM LIABILITIES
Long-term debt............................ $ 67,403,749 $ 67,322,944
Minimum royalty obligation................ 4,735,562 4,686,039
Deferred tax liability.................... 140,619 140,619
-------------- --------------
Total long-term liabilities........... 72,279,930 72,149,602
-------------- --------------
TOTAL LIABILITIES........................... 161,137,796 166,469,597
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SENIOR EXCHANGEABLE REDEEMABLE PREFERRED
STOCK - SERIES A:
Par value $.01 - authorized, 100,000
shares; issued 20,000 shares at
June 30, 1996, net of issuance costs.... 19,091,667
REDEEMABLE PREFERRED STOCK:
Par value $.01 - authorized, 40,000
shares; issued 11,594 shares at
June 30, 1996, 10,503 shares at
March 31, 1996.......................... 12,048,897 11,697,624
COMMON STOCKHOLDERS' EQUITY:
Common Stock par value 4.01 - 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 (5,650 shares)..... (210,000) (210,000)
Deficit................................... (24,568,674) (19,563,738)
Cumulative translation adjustment......... (796,410) (50,956)
-------------- --------------
Total common stockholders' equity..... 701,307 6,451,697
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $ 192,979,667 $ 184,618,918
-------------- --------------
See notes to consolidated financial statements.
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
(AS RESTATED - NOTE 5)
-------------------------------
1996 1995
-------------- --------------
NET SALES..................................... $ 30,202,275 $ 26,381,018
COST OF GOODS SOLD............................ 11,429,569 9,383,254
-------------- --------------
Gross profit...................... 18,772,706 16,997,764
-------------- --------------
OPERATING EXPENSES:
Selling.................................... 11,249,564 9,125,896
General and administrative................. 5,797,475 3,975,788
Amortization of intangible and other assets 1,367,545 1,189,026
-------------- --------------
Total operating expenses.......... 18,414,584 14,290,710
-------------- --------------
OPERATING INCOME.............................. 358,122 2,707,054
-------------- --------------
INTEREST EXPENSE (INCOME):
Interest expense........................... 5,200,987 4,434,301
Interest income............................ (170,369) (68,234)
-------------- --------------
LOSS BEFORE INCOME TAXES...................... (4,672,496) (1,659,013)
INCOME TAX (BENEFIT) PROVISION................ (155,500) 121,429
-------------- --------------
NET LOSS...................................... (4,516,996) (1,780,442)
PREFERRED STOCK DIVIDENDS..................... 487,940 289,785
-------------- --------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS.................................. $(5,004,936) $(2,070,227)
============== ==============
NET LOSS PER COMMON SHARE..................... $(6.94) $(2.87)
============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING................................... 721,168 720,093
============== ==============
See notes to consolidated financial statements.
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Page 1 of 2 pages)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
(AS RESTATED - NOTE 5)
-------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(4,516,996) $(1,780,442)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation............................... 869,334 524,365
Amortization of intangible assets.......... 807,534 802,436
Amortization of minimum royalty and other
assets.................................... 618,073 386,590
Amortization of deferred financing costs .. 726,187 545,766
Accrued interest on senior notes,
subordinated seller notes and minimum
royalty obligation........................ 314,915 317,454
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable........................ 6,250,879 (5,793,900)
Inventories................................ (2,423,241) (5,605,491)
Prepaid expenses and other assets.......... (7,744,857) (1,542,723)
Accounts payable........................... (5,849,519) (1,858,075)
Accrued expenses........................... (1,612,610) 2,609,435
Other...................................... (745,454) 127,149
----------- -----------
Net cash used in operating activities... (13,305,755) (11,267,436)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities.......... -- (96,868)
Sale of marketable securities.............. 95,152 14,950
Capital expenditures....................... (791,801) (2,173,587)
----------- -----------
Net cash used in investing activities... (696,649) (2,255,505)
----------- -----------
See notes to consolidated financial statements.
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Page 2 of 2 pages)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
(AS RESTATED - NOTE 5)
-----------------------------
1996 1995
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from notes payable............. 2,000,000 8,800,000
Payment of minimum royalty obligation....... (184,587) --
Net proceeds of issuance of redeemable
preferred stock - Series A................. 18,955,000 --
Payment of deferred financing costs......... (626,768) --
------------- -------------
Net cash used in operating activities... 20,143,645 8,800,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................... 6,141,241 (4,722,941)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.................................. 1,431,809 7,001,170
------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD..................................... $ 7,573,050 $ 2,278,229
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest................................ $ 1,806,534 $ 1,168,106
============= =============
Income taxes............................ $ 26,657 $ 458,151
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING TRANSACTIONS:
Accrued dividends and accretion on
redeemable preferred stocks............. $ 487,940 $ 289,785
============= =============
See notes to consolidated financial statements.
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RENAISSANCE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Renaissance Cosmetics, Inc.
(the "Company") include the accounts of the Company and its wholly owned
subsidiaries, Cosmar Corporation ("Cosmar"), Houbigant Ltee, and Dana Perfumes
Corporation ("Dana"). All significant intercompany activity has been eliminated.
The results of operations for the three months ended June 30, 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 state ments 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.
2. INVENTORIES
The components of inventories are as follows:
JUNE 30, 1996 MARCH 31, 1996
Raw materials and advertising supplies $19,072,547 $16,956,874
Work in process 1,594,037 2,860,139
Finished goods 11,993,396 10,419,726
----------- -----------
$32,659,980 $30,236,739
=========== ===========
The above components are shown net of excess and obsolete inventory
reserves of $1,623,000 and $1,540,000 at June 30, 1996 and March 31, 1996,
respectively. At June 30, 1996 and March 31, 1996, approximately 62.9% and
60.7%, respectively, of the Company's inventories are stated at the lower of
LIFO
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cost or market. The excess of current replacement cost over the stated LIFO
value was $0 at June 30, 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) 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. SUBSEQUENT EVENTS
a. Pending Acquisitions
On June 27, 1996, the Company, through it wholly-owned subsidiary
Cosmar, entered into a stock purchase agreement (the "GAC Acquisition") with
Great American Cosmetics, Inc. ("GAC") and Messrs. Larry Pallini and Vincent
Carbone, the sole shareholders of GAC to acquire all of the issued and
outstanding capital stock of GAC which acquisition if consummated is to be
effective on and as of May 1, 1996.
On August 6, 1996, the Company, its newly-formed wholly-owned
subsidiary, Renaissance Acquisition, Inc. ("RAI"), and MEM Company, Inc., a New
York corporation ("MEM"), entered into an Agreement and Plan of Merger (the "MEM
Acquisition Agreement") pursuant to which RAI will be merged into MEM and each
outstanding share of MEM common stock (the "MEM Stock"), other than dissenter's
shares, will be converted into the right to receive $7.50 per share in cash (and
each share subject to a stock option will be converted into the right to receive
the difference between $7.50 per share and the per share exercise price of such
option) (the "MEM Acquisition"). The aggregate consideration for the MEM Stock
(including the purchase price for the outstanding MEM stock options that will be
settled in cash in the MEM Acquisition) is approximately $33.8 million,
including repayment of MEM's indebtedness (which estimate is based on the
balance of such indebtedness at June 30, 1996). Such amount of indebtedness is
expected to be higher (and could be materially higher) depending on the date the
MEM Acquisition is closed.
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b. Proposed Series B Preferred Stock Financing
The Company recently entered into a securities purchase agreement
with certain investors pursuant to which the Company will issue to those
investors up to 80,000 Units, each of which consists of one share of the
Company's 14.0% Senior Redeemable Preferred Stock, Series B, par value $0.01 per
share (the "Series B Preferred Stock"), and 2.693 Warrants to purchase 2.693
shares of the Company's Common Stock. The Offering of the Units is expected to
be consummated prior to the closing of the GAC Acquisition and the MEM
Acquisition.
The net proceeds from the sale of the Units will be used to redeem
the outstanding shares of the Company's Series A Preferred Stock, including
accrued dividends thereon, to finance the GAC Acquisition and the MEM
Acquisition and the remaining net proceeds will be used for general corporate
purposes.
5. RESTATEMENT OF OPERATING RESULTS
In January 1997, the Company determined that 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 required restatement. The changes relate to the Company's determination
that it should not have recognized approximately $486,000 of net sales of Dana
(or 1.6% of the Company's previously-reported net sales for the three months
ended June 30, 1996) in June 1996 and approximately $254,000 of net sales (or
1.0% of the Company's previously-reported net sales for the three months ended
June 30, 1995) in June 1995, respectively, because certain products that were
shipped from the Company's facilities to a third-party packer's warehouse prior
to June 30 in each year (based in each case on firm orders from the Company's
customers) were not reshipped by the packer to such customers until after such
date. However, because these products were delivered to the customers in July of
each year and the Company has received payment for substantially all such sales,
the effect of the restatement is limited to changing the timing of the Company's
recognition of these sales and the related earnings (a reduction of EBITDA and
an increase in net loss applicable to common stockholders of approximately
$324,000 and $165,000 for the three months ended June 30, 1996 and 1995,
respectively), which will now be recognized in the second quarter of each fiscal
year. The foregoing revisions resulted in decreases to total assets and total
liabilities and common stockholders' equity as of June 30, 1996 and June 30,
1995 of less than 1%. The restatement of the three-month-period data 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion and analysis relates to the results of operations of
Renaissance Cosmetics, Inc. (the "Company") and its major operating divisions,
Dana (the Company's domestic "Fragrance" business), Cosmar (the Company's
domestic "Cosmetics" business) and International (the Company's "International"
business), resulting from the following acquisitions consummated by the Company
(collectively, the "Acquisitions"), each of which acquisition is discussed in
greater detail in Item 1 of the Form 10-K for the year ended March 31, 1996
under the caption "Acquisitions":
1. The Houbigant Acquisition (July and August 1994), in which the
Company entered into various license agreements pursuant to which it obtained
certain exclusive rights to manufacture and distribute Chantilly, Lutece, Alyssa
Ashley, Raffinee, Demi-Jour, Parfums Parquet French Vanilla, and other mass
market fragrance formerly marketed by Houbigant, Inc. (the "Houbigant
Fragrances").
2. The Cosmar Acquisition (August 1994), in which the Company
acquired its artificial fingernail products and related fingernail care
accessories business.
3. The Dana Acquisition (December 1994), in which the Company
acquired a group of companies engaged in the manufacturing and sale of Tabu,
Ambush, Canoe, Canoe-Sport and certain other mass-market fragrance products.
4. The ACB Acquisition (December 1994), in which the Company
acquired the rights to manufacture and market the Houbigant Fragrances in Canada
and which, when combined with the Houbigant Acquisition, gave the Company the
worldwide rights to manufacture and market the Houbigant Fragrances.
In January 1997, the Company determined that 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 required restatement. The changes relate to the Company's determination
that it should not have recognized approximately $486,000 of net sales of Dana
(or 1.6% of the Company's previously-reported net sales for the three months
ended June 30, 1996) in June 1996 and approximately $254,000 of net sales (or
1.0% of the Company's previously-reported net sales for the three months ended
June 30, 1995) in June 1995, respectively, because certain products that were
shipped from the Company's facilities to a third-party packer's warehouse prior
to June 30 in each year (based in each case on firm orders from the Company's
customers) were not reshipped by the packer to such customers until after such
date. However, because these products were delivered to the customers in July of
each year and the Company has received payment for substantially all such sales,
the effect of the restatement is
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limited to changing the timing of the Company's recognition of these sales and
the related earnings (a reduction of EBITDA and an increase in net loss
applicable to common stockholders of approximately $324,000 and $165,000 for the
three months ended June 30, 1996 and 1995, respectively), which will now be
recognized in the second quarter of each fiscal year. The foregoing revisions
resulted in decreases to total assets and total liabilities and common
stockholders' equity as of June 30, 1996 and June 30, 1995 of less than 1%. The
restatement of the three-month-period data 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.
OPERATIONS FOR THE PERIOD APRIL 1, 1996 THROUGH
JUNE 30, 1996, AND THE PERIOD APRIL 1, 1995
THROUGH JUNE 30, 1995 (AS RESTATED)
Net Sales. The Company's net sales were as follows (in 000s):
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
1996 1995
---------------------------- --------------------------
DIVISION NET SALES % OF TOTAL NET SALES % OF TOTAL
- ------------------- --------- ---------- --------- ----------
Fragrance $10,477 34.7% $12,021 45.6%
Cosmetic 11,751 38.9% 10,233 38.8%
International 7,974 26.4% 4,127 15.6%
--------- ---------- --------- ----------
Total $30,202 100.0% $26,381 100.0%
Total Company sales increased 14.5% of $3,821,000 from $26,381,000
to $30,202,000. Fragrance sales decreased 12.8% from $12,021,000 to $10,477,000
due in large part to lower than expected sales resulting from the basic
Christmas build programs (sales of basic stock to retailers in addition to
Christmas gift sets) in June 1996. Management attributes this decline to a
corresponding significant increase (compared to last year) in commitments from
retailers for the Company's Christmas gift sets which will begin shipping in
August. Cosmetic sales increased by 14.8% from $10,233,000 to $11,751,000.
Contributing to this increase are current year sales of new products such as
Ultra-Gel and Nail Fetish which were launched subsequent to last year's period,
and continued strong sales of the Company's existing products. International
sales increased 93.2% from $4,127,000 to $7,974,000 due to the inclusion of
sales of Dana's Brazil division which was acquired during December 1995, and
from a 5.1% increase in other International sales.
Gross Profit. The Company's gross profits were as follows (in 000s):
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THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
DIVISION GROSS PROFIT % OF NET SALES GROSS PROFIT % OF NET SALES
- --------------- ------------ -------------- ------------ --------------
Fragrance $ 7,103 67.8% $ 8,187 68.1%
Cosmetic 7,011 59.7% 6,464 63.2%
International 4,659 58.4% 2,347 56.9%
------------ -------------- ------------ --------------
Total $18,773 62.2% $16,998 64.4%
Gross profit margin in the Fragrance businesses remained relatively
stable at 67.8% compared with 68.4%. The decrease in gross profit margin in the
Cosmetic business to 59.7% from 63.2% is the result of lower sales of
higher-margin Pro-Ten Nail Lacquer (launched during the first quarter of 1995)
and an increase in lower-margin promotional sales on the Company's base products
done in conjunction with new product launches. The gross profit margin increase
in the International division to 58.4% from 56.9% is attributable to higher
sales and an increase in the proportion of direct international sales (versus
exports) to total international sales.
Selling Expense. The Company's selling expenses in the first
quarters of Fiscal 1996 and Fiscal 1995 were $11,250,000 (37.2% of Net Sales)
and $9,126,000 (34.6% of net sales), respectively. The increase in selling
expenses as a percentage of sales is principally attributable to increased
advertising and promotional spending relating to the Company's strategy of
reinvigoration of existing brand equities and the introduction of complementary
new products.
General and Administrative Expense. General and administrative
expenses in the first quarter of Fiscal 1996 and Fiscal 1995 were $5,797,000
(19.2% of Net Sales) and $3,976,000 (15.1% of Net Sales), respectively. The
increase in general and administrative expenses is attributable to higher legal,
audit and other professional fees and to the addition of key personnel by the
Company to both its corporate and operating divisions in anticipation of future
operating needs.
Amortization of Intangibles and Other Assets. Amortization of
intangible and other assets was $1,368,000 (4.5% of Net Sales) and $1,189,000
(4.5% of Net Sales) for the first quarter of Fiscal 1996 and Fiscal 1995,
respectively.
Operating Income. Operating income for the first quarters of Fiscal
1996 and 1995 was $358,000 (1.2% of Net Sales) and $2,707,000 (10.3% of Net
Sales), respectively. Management believes 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 by the reader as an alternative to net
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income (loss) as an indicator of the Company's operating performance or to cash
flows as a measurement of liquidity. EBITDA is detailed in the table below:
(in 000s)
THREE MONTHS ENDED
JUNE 30,
---------------------------------
1996 1995
----------- ----------
Operating Income $ 358 $ 2,707
Plus: Amortization 1,368 1,189
Plus: Depreciation 869 525
----------- ----------
EBITDA $ 2,595 $ 4,421
EBITDA % of Net Sales 8.6% 16.8%
EBITDA declined $2,349,000 in the first quarter of Fiscal 1996
compared to the first quarter of Fiscal 1995 from $4,421,000 to $2,595,000 as a
result of (i) lower EBITDA at the Company's Dana Division in Fiscal 1996
compared to Fiscal 1995 due primarily to lower than expected sales resulting
from the basic Christmas build program, which management believes is due to a
corresponding significant increase in commitments from retailers for the
Company's Christmas gift sets which begin shipping in August, and (ii) an
increase in general and administrative expenses in Fiscal 1996 compared to
Fiscal 1995 due to higher legal, audit and professional fees and from the
addition to key personnel at the Company's corporate and operating divisions in
anticipation of future operating needs.
Interest Expense. The Company's total interest expense for the first
quarters of Fiscal 1996 and 1995 was $5,201,000 and $4,434,000, respectively;
while cash interest for the periods was $4,152,000 and $3,571,000, respectively.
Interest expense consists of:
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(in 000s)
THREE MONTHS
ENDED JUNE 30,
---------------------------
CASH INTEREST PAID OR ACCRUED 1996 1995
- -------------------------------------------------- ------------ ------------
Interest on Senior Notes $ 2,234 $ 2,234
Interest on Seller Notes (payable in 2002) 108 100
Interest on Credit Facility 1,791 1,228
Other Interest 19 9
------------ ------------
Total Cash Interest Expense $ 4,152 $ 3,571
NON-CASH INTEREST EXPENSE
- --------------------------------------------------
Accretion of Senior Notes and Seller Notes $ 81 $ 62
Amortization of Deferred Financing Costs 726 546
Accretion of Interest on Obligations for
Minimum Royalty Payment
242 255
------------ ------------
Total Non-Cash Interest Expense $ 1,049 $ 863
Total Interest Expense $ 5,201 $ 4,434
Income Tax (Benefit)/Expense.
Income tax (benefit)/expense were ($155,500) and $121,429 for the
first quarter of Fiscal 1996 and Fiscal 1995, respectively. The effective tax
rates differ from the United States federal income tax rate of 35% due to state
and foreign income taxes and limitations on utilization of federal income tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. Net cash used by the Company is operating activities for
the three months ended June 30, 1996 was $13,305,755, consisting primarily of a
Net Loss of $4,516,996, less the impact of non-cash items impacting Net Loss of
$3,336,043; an increase in operating assets of inventories and prepaid expenses
and other assets of $2,423,241 and $7,744,857, respectively, and a decrease in
accounts payable and accrued expenses of $5,849,519 and $1,612,610,
respectively, less the impact of decrease in accounts receivable of $6,250,879.
Net cash used in investing activities was $696,649, consisting
primarily of capital expenditures. Net cash provided by financing activities was
$20,143,645, consisting primarily of net proceeds from the Company's credit
facility (the "Existing Credit Facility") ($2,000,000) and the issuance of
Series A Preferred Stock ($18,955,000). The net increase in cash and cash
equivalents was $6,141,241. As of June 30, 1996, the Company had outstanding
institutional indebtedness of $126.4 million including $59.0 million under its
Existing Credit Facility, $29.0 million of
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which is related to the revolving credit portion. On September 8, 1995, the
revolving credit portion of the Company's Existing Credit Facility was amended
to increase the Company's availability to $30.0 million from $20.0 million. Due
to the nature of the fragrance/cosmetics industry, both the Company's need for
working capital and its income stream are seasonal. The most significant
liquidity requirements occur prior to the sales surge in connection with the
production of inventory and shipment to customers in advance of the year-end
holiday sales season and other events such as new launches.
On May 29, 1996, the Company entered into a Securities Purchase
Agreement with a Fund, under which the Company issued $20.0 million aggregate
value of Series A Senior Exchangeable Redeemable Preferred Stock (Series A
Preferred). If the Series A Preferred 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. The Series A Preferred has a dividend of 12% per annum
payable quarterly in cash or additional preferred stock at the option of the
Company. The Holders of Series A Preferred may exercise an option to purchase
4.6% of the fully diluted outstanding shares of Common Stock of the Company for
$5.0 million.
In addition to the $20.0 million Series A Preferred, on June 14,
1996, the financial institution with which the Company has its Existing Credit
Facility agreed to increase its availability under the revolving credit facility
from $30.0 million to $40.0 million.
The Existing Credit Facility matures in December 1996. The Company
is seeking to secure a new credit facility (the "New Credit Facility") in order
to refinance the Existing Credit Facility which matures in December 1996 and to
provide capital for acquisitions and general corporate purposes. Although the
Company has not received a commitment letter from any financial institution or
entered into a binding agreement with respect to the New Credit Facility as of
the date of this report, the Company has received proposals from and commenced
discussions with prospective lenders. The Company is seeking to obtain a New
Credit Facility with approximately $100 million in maximum available borrowings.
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. In addition, although management believes
that the Company has made significant progress in improving sales and operating
efficiency, there can be no assurance that the Company's future performance will
not be adversely affected by economic, financial, and business factors not
subject to its control.
Proposed Series B Preferred Stock Financing. The Company recently
entered into a securities purchase agreement (the "Securities Purchase
Agreement") with certain investors pursuant to which the Company will issue to
those investors up
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to 80,000 Units, each of which consists of one share of the Company's 14.0%
Senior Redeemable Preferred Stock, Series B, par value $0.01 per share (the
"Series B Preferred Stock"), and 2.693 Warrants (the "Warrants") to purchase
2.693 shares of the Company's Common Stock. Annual dividends of $140 per share
on the Series B Preferred Stock will be cumulative and payable quarterly in
arrears on February 15, May 15, August 15 and November 15 of each year,
commencing November 15, 1996. Dividends may, at the option of the Company, be
paid in cash or by issuing additional shares of Series B Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends through
August 31, 2002, and in cash thereafter; provided that in the event that the
Company's existing Senior Notes issued pursuant to the Company's existing
Indenture are redeemed, dividends shall be paid in cash on the first dividend
payment date following the earlier of one year from the date of such redemption
or August 31, 2002. The Series B Preferred Stock has a liquidation preference of
$1,000 per share, plus accrued and unpaid dividends thereon.
The net proceeds from the sale of the Units will be used to redeem
the outstanding shares of Series A Preferred Stock, including accrued dividends
thereon, to finance the GAC Acquisition (including repayment of debt and the
payment of fees and expenses related thereto), which acquisition is described
below and is subject to satisfaction of the conditions to closing contained in
the GAC Acquisition Agreement (described below), to consummate the MEM
Acquisition (including the repayment of debt and the payment of fees and
expenses related thereto), which acquisition is described below and is subject
to the satisfaction of the conditions to closing contained in the MEM
Acquisition Agreement (described below) and the Company having entered into the
New Credit Facility, and the remaining net proceeds will be used for general
corporate purposes.
The Offering of the Units is expected to be consummated prior to the
closing of the Acquisitions and the New Credit Facility. There can be no
assurance that the Acquisitions will be completed or that the Company will be
successful in obtaining the New Credit Facility. The GAC Acquisition Agreement
and the MEM Acquisition Agreement are subject to the customary closing
conditions. In addition, the Company does not expect to consummate the MEM
Acquisition until it has entered into the New Credit Facility. In the event that
the New Credit Facility is secured, the Company intends to use borrowings
thereunder to repay all indebtedness outstanding under the Existing Credit
Facility and for general corporate purposes. In the event that the GAC
Acquisition or the MEM Acquisition is not completed, the Company expects to use
the excess net proceeds from the above-described offering of Units that would
have been used to finance the GAC Acquisition or the MEM Acquisition to repay
indebtedness under the Existing Credit Facility and to finance additional
acquisitions that the Company expects to make in the future.
Pending Acquisition of Great American Cosmetics, Inc. On June 27,
1996, the Company, through its wholly-owned subsidiary Cosmar, entered into a
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stock purchase agreement (the "GAC Acquisition Agreement") with Great American
Cosmetics, Inc. ("GAC"), and Messrs. Larry Pallini and Vincent Carbone, the sole
shareholders of GAC (the "Sellers"), to acquire all of the issued and
outstanding capital stock of GAC (the "GAC Acquisition), which acquisition if
consummated is to be effective on and as of May 1, 1996.
GAC is a privately-owned company formed in 1990 that outsources,
markets, distributes, advertises, promotes and merchandises mid-priced,
mass-marketed lipsticks, eye make-up, nail polish products and related
accessories sold under the Nat Robbins trademark. According to GAC's audited
financial statements, GAC has revenues of approximately $7.8 million and net
income of approximately $1.1 million for the year ended December 31, 1995.
The purchase price for the GAC Acquisition is $15.25 million in
cash, $14.25 million of which is payable to the Sellers at the closing and the
remaining $1.0 million of which is payable into escrow to secure the Sellers'
post-closing obligation to indemnify Cosmar for breaches of the Sellers'
representations, warranties and covenants contained in the GAC Acquisition
Agreement. The Company has deposited $600,000 with an escrow agent (the
"Deposit"), which may be applied in full toward the purchase price at the
closing of the GAC Acquisition. If the GAC Acquisition is not consummated on or
before August 31, 1996, the GAC Acquisition Agreement will be terminated and the
Deposit will be returned to the Company unless the failure to complete the GAC
Acquisition by such date was as a result of the Company's failure to obtain
financing for the transaction, in which case the Sellers shall be entitled to
retain the Deposit as liquidated damages. In connection with the closing of the
GAC Acquisition, the Company will repay approximately $1.6 million of GAC
indebtedness (the "GAC Bank Debt") (which estimate is based on indebtedness at
March 31, 1996). Such amount of indebtedness is expected to be lower on the
closing date of such acquisition. Also, in connection with the closing, GAC will
repay to the Sellers the amount outstanding under certain shareholder loans,
which were $181,500 at March 31, 1996.
The GAC Acquisition Agreement contains certain conditions to
closing, including the delivery of legal opinions, the absence of any orders,
decrees or injunctions preventing or delaying the closing, the execution of the
consulting agreements referred to below and the Company having obtained
financing on terms acceptable to it. Although the Company expects such
conditions will be satisfied, there can be no assurance that the GAC Acquisition
will be completed. The Company is entitled to indemnification under the GAC
Acquisition for losses suffered as a result of any breach by the Sellers of any
representation, warranty, covenant or agreement contained in the GAC Acquisition
Agreement. The Company may not seek indemnification until it has claims
exceeding 1% of the purchase price at which point the Sellers shall be
responsible for all amounts in excess of $50,000. Neither Seller is liable for
indemnification in an amount in excess of the amount of consideration received
by him.
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Cosmar has agreed to retain Messrs. Pallini and Carbone as
consultants to Cosmar and its affiliates upon consummation of the GAC
Acquisition. Mr. Pallini's consulting agreement is for a terms of three (3)
years with annual compensation of $200,000 per year, payable in thirty-six (36)
equal monthly installments. Mr. Carbone's consulting agreement is for a term of
one (1) year with annual compensation of $150,000 payable in twelve (12) equal
monthly installments.
Pending Acquisition of MEM Company, Inc. On August 6, 1996, the
Company, its newly-formed wholly owned subsidiary, Renaissance Acquisition, Inc.
("RAI"), and MEM Company, Inc.. ("MEM"), entered into an agreement and plan of
merger (the "MEM Acquisition Agreement") pursuant to which RAI will be merged
into MEM and each outstanding share of MEM common stock (the "MEM Stock"), other
than dissenter's shares, will be converted into the right to receive $7.50 per
share in cash (and each share subject to a stock option will be converted into
the right to receive the difference between $7.50 per share and the pers hare
exercise price of such option) (the "MEM Acquisition"). The aggregate
consideration for the MEM Stock (including the purchase price for the
outstanding MEM stock options that will be cashed out in the MEM Acquisition) is
approximately $33.8 million, including repayment of MEM's indebtedness (which
estimate is based on the balance of such indebtedness at June 30, 1996). Such
amount of indebtedness is expected to be higher (and could be materially higher)
on the date the MEM Acquisition is closed.
MEM, a publicly-traded American Stock Exchange company, 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(R), British Sterling(R), Heaven Sent(R), LOVE's(R),
Tinkerbell(R), Acqua di Selva(R), Timberline(R), Love's Frenzy(R) and Love's
Clean & Natural product lines. Tom Fields, Ltd. ("Tom Fields"), a division of
MEM, manufacturers and markets a line of children's cosmetics and accessories
principally under the trademark Tinkerbell(R). A subsidiary, Tom Fields (U.K.)
ltd., markets this line of children's products in the United Kingdom and
elsewhere in Europe. The principal market for MEM's products is the United
States. According to MEM's audited financial statements, 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. According to MEM's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, one national customer accounted for 13%
of net sales in 1995 and 14% of net sales in 1994 and the loss of such customer
would have a material adverse effect. According to MEM's Form 10-Q for the
quarter ended June 30, 1996, net sales declined to $9.2 million during the six
months ended June 30, 1996 from $11.0 million during the prior year's comparable
period and the net loss for the period increased to $4.4 million from $3.2
million in the prior year's comparable period.
The MEM Acquisition Agreement does not provide for indemnification
of the Company for losses suffered as a result of breaches of representations,
warranties, covenants and agreements, and no escrow has been set aside for such
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indemnification. The MEM Acquisition Agreement contains standard representations
and warranties for a transaction of this type, all of which will terminate upon
the effectiveness of the MEM Acquisition. Under the terms of the MEM Acquisition
Agreement, at or prior to the closing, the Company is required to establish a
stay bonus program for selected employees of MEM. Also, prior to the closing,
MEM may establish its own stay bonus program, and if the MEM Acquisition
Agreement is terminated by MEM as a result of the Company's breach of its
obligations thereunder or the MEM Acquisition does not close because the Company
fails to obtain financing, the Company has agreed to reimburse MEM for such stay
bonus program up to an aggregate amount of $500,000. The consummation of the MEM
Acquisition will be subject to customary closing conditions, including the
approval of the stockholders of MEM, the receipt of requisite regulatory and
third party consents and approvals, the absence of an order, decree or
injunction preventing the transaction, the receipt of a fairness opinion from
MEM's independent investment banking firm, the accuracy of all representations
and warranties, the performance of all covenants and agreements, the receipt of
legal opinions, the absence of material adverse changes and the obtaining by the
Company of financing to complete the MEM Acquisition on terms acceptable to it.
The MEM Acquisition Agreement may be terminated by MEM if the MEM
Acquisition is not completed by November 30, 1996 or at any time (i) if required
by MEM's board of directors in the exercise of it fiduciary duties or (ii) if
the Company has defaulted in the performance of the MEM Acquisition Agreement
and such default remains uncured for 30 days after notice thereof.
If the MEM Acquisition is not consummated because MEM terminates the
MEM Acquisition Agreement as a result of exercising its fiduciary out at a time
when the Company and RAI are in compliance with all of their representations,
warranties, covenants and agreements contained therein and within 12 months from
the date of the MEM Acquisition Agreement, MEM consummates or enters into an
agreement or other arrangement to consummate an acquisition transaction with any
party other than the Company, MEM will be obligated to pay to the Company the
sum of $1.0 million.
If the MEM Acquisition is not consummated because the Company or RAI
terminates the MEM Acquisition Agreement as a result of the failure to close the
financing for the MEM Acquisition, the Company will be obligated to pay MEM the
sum of $1.0 million.
The Company does not intend to effect the MEM Acquisition unless and
until it obtains the New Credit Facility. In addition, consummation of the MEM
Acquisition may require the consent of holders of a majority of the principal
amount of the Senior Notes.
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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 in inadequate and grossly unfair and that the defendants
violated their fiduciary duties by not seeking additional potential purchasers
for MEM. The action seeks, among other things, a court order requiring the
defendants to seek other purchasers, or, if the MEM Acquisition is consummated,
damages. MEM has advised the Company that MEM believes that this action is
without merit and that it intends to vigorously defend such action.
Also on August 6, 1996, the Company entered into a definitive
employment agreement with Gay Mayer, the current Chairman, Chief Executive
Officer and President of MEM, pursuant to which the Company will retain Mr.
Mayer as an officer of the Company following the effective time of the MEM
Acquisition. Mr. Mayer's employment agreement will be for a term of 30 months at
an annual salary of $250,000, payable in equal semi-monthly payments. The
company has agreed to grant an option to Mr. Mayer to acquire 5,000 shares of
the Company's common stock upon the closing of the MEM Acquisition. The per
share exercise price of the option will be equal to $104.00.
There can be no assurance that the Company will complete either the
GAC Acquisition or the MEM Acquisition.
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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: January 22, 1996 By: /S/ THOMAS T.S. KAUNG
------------------------------------
Thomas T.S. Kaung
Group Vice-President, Finance
and Chief Financial Officer
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