SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________.
Commission file number 1-13714
COTY US INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1342491
(State of Incorporation) (IRS Employer Identification No.)
237 Park Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-850-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subjected to such filing
requirements for the past 90 days.
Yes X No __
As of August 9, 1996, there were 100 shares of the Company's common stock
outstanding, all of which were held by Coty Inc. (formerly Benckiser Cosmetics
Holdings, Inc.), a subsidiary of Joh. A. Benckiser GmbH.
Page 1 of 14 Pages
<PAGE>
COTY US INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations for the three month and
six month periods ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except per Share Data)
June 30, December 31,
1996 1995
---- ----
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 758 $ 445
Trade accounts receivable, less allowance
for doubtful accounts of $7,440 and
$6,236, respectively 25,754 76,400
Inventories 100,774 49,370
Due from affiliates, net 3,876 1,318
Deferred income taxes 29,463 29,170
Prepaid expenses and other current assets 10,157 9,544
-------- --------
Total current assets 170,782 166,247
Property, plant and equipment, net 25,651 26,060
Goodwill and other intangibles, net 345,414 355,140
-------- --------
Total assets $541,847 $547,447
======== ========
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term bank debt $ 3,652 $ 7,500
Accounts payable 49,617 46,049
Income and other taxes payable 3,566 16,870
Accrued liabilities 65,902 131,811
-------- --------
Total current liabilities 122,737 202,230
Long-term bank debt 83,237 5,575
Senior subordinated notes 131,326 131,118
Deferred income taxes 27,773 26,265
Other long-term liabilities 25,214 23,141
-------- --------
Total liabilities 390,287 388,329
-------- --------
Preferred stocks of subsidiary held by
affiliate 87,792 85,115
Stockholder's Equity
Common stock, $1 par, 100 shares authorized,
issued and outstanding -- --
Additional paid-in capital 36,809 36,809
Retained earnings 26,959 37,194
-------- --------
Total stockholder's equity 63,768 74,003
-------- --------
Total liabilities and stockholder's equity $541,847 $547,447
======== ========
See notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $66,000 $64,513 $130,586 $124,667
Cost of sales 20,870 21,024 42,545 40,984
------- ------- -------- -------
Gross profit 45,130 43,489 88,041 83,683
Selling, general and administrative 44,198 43,056 86,911 81,781
Amortization of intangibles 4,864 4,865 9,727 9,728
Quintessence integration costs 1,500 -- 1,500 --
------- ------- -------- -------
Operating loss (5,432) (4,432) (10,097) (7,826)
Interest expense 5,317 6,158 10,088 11,780
Other income, net (571) (82) (987) (217)
Minority interest in preferred stocks 1,338 1,338 2,677 2,677
------- ------- -------- -------
Loss before income tax benefit (11,516) (11,846) (21,875) (22,066)
Income tax benefit (6,129) (7,121) (11,640) (13,263)
------- ------- -------- -------
Net loss ($5,387) ($4,725) ($10,235) $(8,803)
======= ======= ======== =======
See notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
1996 1995
---- ----
Cash flows from operating activities
Net loss $(10,235) $ (8,803)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,140 11,739
Minority interest in preferred stocks 2,677 2,677
Provision for post-retirement benefits 1,244 936
Deferred income taxes 1,215 1,063
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 50,646 49,573
Increase in inventories (51,404) (44,981)
Increase in prepaid expenses and other (613) (4,162)
Increase in accounts payable 3,568 6,298
Decrease in accrued liabilities and other (78,384) (62,431)
------- -------
Net cash used in operating activities (69,146) (48,091)
------- -------
Cash flows from investing activities
Purchase of property, plant and equipment (1,486) (340)
------- -------
Net cash used in investing activities (1,486) (340)
------- -------
Cash flows from financing activities
Net repayment of short-term debt -- (719)
Net proceeds from long-term bank debt 73,503 48,459
Net proceeds from senior subordinated notes -- 130,788
Net repayment of debt to affiliates -- (130,000)
Net (increase) decrease in due from affiliates (2,558) 1,324
------- -------
Net cash provided by financing activities 70,945 49,852
------- -------
Net increase in cash and cash equivalents 313 1,421
Cash and cash equivalents, beginning of period 445 380
------- -------
Cash and cash equivalents, end of period $ 758 $ 1,801
======= =======
Cash paid for:
Interest $ 8,482 $ 7,908
======= =======
Income taxes $ 489 $ 3,900
======= =======
See notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
COTY US INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Coty US Inc. (formerly Coty Inc.) and its subsidiaries
(the "Company") after elimination of all material intercompany balances
and transactions. Coty US Inc. is an indirect wholly owned subsidiary
of Joh. A. Benckiser GmbH, a German company ("Benckiser"). These
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto contained in
the Company's annual report on Form 10-K. The interim statements are
unaudited but include all adjustments, which consist of only normal and
recurring accruals, that management considers necessary to fairly
present the results for the interim periods. Results for interim
periods are not indicative of results for a full year due to the
seasonal nature of the Company's business. Certain amounts in the prior
year financial statements have been reclassified to conform with the
1996 presentation.
(2) Accounting Policies
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". This Statement had no impact on the Company's result of
operations or financial position upon adoption in January 1996.
(3) Inventories
Inventories consisted of the following:
June 30, December 31,
1996 1995
---- ----
Raw materials $ 31,316 $ 18,248
Work-in-process 27,521 11,810
Finished goods 41,937 19,312
-------- --------
$100,774 $ 49,370
======== ========
(4) Lancaster US Inc.
Effective February 1, 1996, pursuant to the Master Intercompany
Agreement, the Company began providing various management and
administrative services to Lancaster US Inc. (formerly Lancaster Group
(USA) Inc.), an indirect wholly owned subsidiary of Benckiser
("Lancaster US"). In addition, the Company will provide certain
manufacturing services for Lancaster US promotional products such as
gifts sets. The Company will charge Lancaster US a fee of not less than
108% (subject to adjustment
6
<PAGE>
COTY US INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
for certain tax events) of the actual costs incurred (which costs shall
include a reasonable allocation of overhead and general administrative
expenses) by the Company in providing such services. The Company
provided such services for an initial term that ended June 30, 1996.
The term was extended to June 30, 1997 and will renew automatically for
successive one year terms unless terminated by either the Company or
Lancaster US with six months notice. For the three month and six month
periods ended June 30, 1996, other income, net includes fees from
Lancaster US of $545 and $909, respectively.
(5) Quintessence Integration Costs
Quintessence Inc., an indirect wholly owned subsidiary of Coty US Inc.
("Quintessence"), currently leases office space in Chicago, Illinois, a
portion of which has been sublet. The remaining space, which was
vacated by the Company in connection with the relocation of
Quintessence's headquarters to New York, is vacant. The Company decided
in 1994 to sublet the facility and at that time recorded an accrual
equal to the present value of the minimum lease payments, less
anticipated future sub-rental income. In the second quarter of 1996,
the Company recorded an additional provision of $1,500 for the idle
lease space based upon management's latest estimate of future
sub-rental income. The accrual for idle lease space requires management
to make certain estimates and assumptions regarding, among other
things, its ability to locate a tenant and the strength of the local
real estate market. Actual results may differ from these estimates.
7
<PAGE>
COTY US INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(6) Parent Only Financial Information
Coty US Inc.'s subsidiaries, QHIG and Quintessence, are guarantors of
the Company's Senior Subordinated Notes due 2005 (the "Notes").
Substantially all operations, assets and liabilities of the Company are
those of Coty US Inc. Summarized unconsolidated financial information
of Coty US Inc., exclusive of intercompany balances between Coty US
Inc. and its subsidiaries, is as follows:
June 30, December 31,
1996 1995
---- ----
Balance Sheet:
Current assets $166,423 $163,221
Non-current assets 322,948 331,345
Current liabilities 119,547 215,765
Non-current liabilities 263,892 173,693
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Statement of Operations:
Net sales $ 66,000 $ 64,513 $130,586 $124,667
Gross profit 45,130 43,489 88,041 83,683
Operating loss (3,808) (3,562) (7,604) (6,087)
Loss before income tax benefit (8,525) (9,115) (16,705) (17,109)
Net loss (5,013) (5,223) (9,823) (9,923)
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations
Six months and quarter ended June 30, 1996 versus six months and
quarter ended June 30, 1995.
Net sales increased by $5,919, or 4.7%, to $130,586 for the six months
ended June 30, 1996 from $124,667 for the six months ended June 30,
1995 and increased by $1,487, or 2.3%, to $66,000 for the quarter ended
June 30, 1996 from $64,513 for the quarter ended June 30, 1995. The
increase is primarily due to recently launched fragrance brands. Ghost
myst and ici, which were launched in the third quarter of 1995, had
total net sales of $10,485 for the six months ended June 30, 1996 and
$2,957 for the quarter ended June 30, 1996. In addition, Exclamation
Blush and Raw Vanilla, launched in the second quarter of 1996, had
total net sales of $2,029 for the period. Partially offsetting the
increase was a decline in net sales for certain continuing brands for
the six month and three month periods ended June 30, 1996 as compared
to the similar 1995 periods. The Company believes that certain of its
continuing brands will experience net sales decreases as such brands
progress through their life cycles. However, the Company's portfolio of
brands has increased its total net sales volume over the past five
years through new brand introductions and extensions of existing
brands.
Gross profit was 67.4% and 67.1%, respectively, of net sales for the
six months ended June 30, 1996 and 1995 and 68.4% and 67.4%,
respectively, of net sales for the quarters ended June 30, 1996 and
1995. The improved gross profit percentage for the six months and
quarter ended June 30, 1996 as compared to the similar 1995 periods is
due mainly to improved profit margins for certain brands attained
through continued efforts to reduce product costs. Gross profit
percentage for the quarter ended June 30, 1996 was also favorably
impacted by the decrease in sales to the Company's intercompany
affiliates as these sales are at a markup lower than sales to the
Company's third party retailers as the affiliates incur their own
promotional expenses.
Selling, general and administrative expenses increased by $5,130 or
6.3%, to $86,911, or 66.6% of net sales, for the six months ended June
30, 1996 from $81,781, or 65.6% of net sales, for the six months ended
June 30, 1995 and by $1,142, or 2.7%, to $44,198, or 67.0% of net
sales, for the quarter ended June 30, 1996 from $43,056, or 66.7% of
net sales, for the quarter ended June 30, 1995. The increase as a
percentage of net sales for the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995 resulted from higher
advertising and promotional spending, as well as higher general and
administrative expenses as a percentage of net sales. The slight
increase as a percentage of net sales for the quarter ended June 30,
1996 as compared to the similar 1995 period resulted from higher
general and administrative expenses as a percentage of net sales. The
increase in general and administrative expenses for the six months and
quarter ended June 30, 1996 as a percentage of net sales is mainly the
result of the timing of expenses. The Company spent approximately
$51,831, or 39.7% of net sales, for six months ended
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
June 30, 1996 and $26,780, or 40.6% of net sales, for the quarter ended
June 30, 1996 for advertising and promotional purposes compared to
$48,935, or 39.3% of net sales, for the six months ended June 30, 1995
and of $27,483, or 42.6% of net sales, for the quarter ended June 30,
1995.
Quintessence currently leases office space in Chicago, Illinois, a
portion of which has been sublet. The remaining space, which was
vacated by the Company in connection with the relocation of
Quintessence's headquarters to New York, is vacant. The Company decided
in 1994 to sublet the facility and at that time recorded an accrual
equal to the present value of the minimum lease payments, less
anticipated future sub-rental income. In the second quarter of 1996,
the Company recorded an additional provision of $1,500 for the idle
lease space based upon management's latest estimate of future
sub-rental income. The accrual for idle lease space requires management
to make certain estimates and assumptions regarding, among other
things, its ability to locate a tenant and the strength of the local
real estate market. Actual results may differ from these estimates.
Interest expense decreased by $1,692, or 14.4%, to $10,088 for the six
months ended June 30, 1996 from $11,780 for the six months ended June
30, 1995 and by $841, or 13.7%, to $5,317 for the quarter ended June
30, 1996 from $6,158 for the quarter ended June 30, 1995. The decrease
is primarily due to lower average borrowings during the six months and
quarter ended June 30, 1996 as compared to the similar 1995 periods, as
well as lower average interest rates.
Other income, net increased by $770 to $987 for the six months ended
June 30, 1996 from $217 for the six months ended June 30, 1995 and by
$489 to $571 for the quarter ended June 30, 1996 from $82 for the
quarter ended June 30, 1995. The increase is primarily due to fees from
Lancaster US of $909 and $545, respectively, recorded by the Company in
the six month and three month periods ended June 30, 1996 in return for
providing various management, administrative and manufacturing
services.
Income tax benefit was $11,640 and $6,129 for the six months and
quarter ended June 30, 1996, respectively, representing an effective
tax benefit rate of 53.2%, and $13,263 and $7,121 for the six months
and quarter ended June 30, 1995, respectively, representing an
effective tax benefit rate of 60.1%. The effective tax benefit rates
are based upon the Company's estimated annual effective tax rates and
differ from the United States statutory federal income tax rate of 35%
due to state income taxes, net of federal benefit, non-deductible
preferred stock dividends and amortization of certain intangibles. The
effective tax rate was lower for the six months and quarter ended June
30, 1996 than the similar 1995 periods primarily due to anticipated
proportionately lower permanent differences in relation to pretax
income.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Financial Condition, Liquidity and Capital Resources
The Company's business is seasonal in nature. During the first and
second quarters of the year working capital borrowings generally
increase as payments are made for the prior Christmas season's
advertising and promotional costs, credits are given on returns and
inventory purchases are made. These borrowing requirements are partly
offset by significant cash collections related to prior year Christmas
season sales. Borrowings generally continue to increase during the
third quarter, primarily to finance the build up of accounts receivable
related to the back-to-school and Christmas selling seasons. During the
fourth quarter, significant cash is generated as customer payments on
Christmas sales are received.
The Company's principal future uses of funds are expected to be for
operating expenses, working capital requirements, debt service, income
taxes and, subject to limitations under the Company's debt instruments,
dividend payments to parent. In December 1994, the Company entered into
an unsecured credit facility (the "Credit Facility") which provided the
Company with (i) a term loan (the "Term Loan") of $70,000 and (ii) a
revolving loan facility (the "Revolving Loan Facility") of up to
$160,000. Up to $10,000 of the Revolving Loan Facility may be used to
issue standby and/or commercial letters of credit. As of June 30, 1996,
borrowings under the Term Loan and the Revolving Loan Facility amounted
to $14,000 and $75,099, respectively. Unamortized debt issuance costs
relating to the Credit Facility amounted to $2,210 at June 30, 1996.
Subject to certain exceptions, the Credit Facility restricts the
Company's ability to pay dividends on the preferred stocks other than
in-kind. The Credit Facility also contains certain covenants that place
restrictions (subject to certain exceptions) on the Company (and its
subsidiaries) with respect to guarantees, sale of certain assets,
consolidations and mergers, loans and advances, indebtedness, issuance
of stock and change of control.
The Notes contain certain covenants including provisions that place
restrictions (subject to certain exceptions) on the Company with
respect to guarantees, loans and advances, indebtedness, sale of
certain assets, mergers and consolidations, issuance and sale of
subsidiary stock and certain transactions with affiliates, including
capital stock dividend payments.
The Company's primary sources of funds are expected to be cash from
operations and borrowings under the Revolving Loan Facility. Management
believes that the Company's cash on hand, anticipated funds from
operations and borrowings under the Revolving Loan Facility will be
sufficient to cover the Company's working capital, debt service and
capital expenditure requirements for a period of at least twelve
months.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the
Securities and Exchange Commission (including the Company's Annual
Report on Form 10-K and this Form 10-Q) may contain statements which
are not historical facts, so-called "forward-looking statements," which
involve risks and uncertainties. In particular, statements in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to the sufficiency of capital to meet
working capital and capital expenditure requirements may be
forward-looking statements. The Company's actual future results may
differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are
not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in the Company's filings with
the Securities and Exchange Commission which are deemed incorporated by
reference herein.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues
and profitability, including: competitive pressures on selling prices;
the timing and cancellation of customer orders; the loss of a
significant customer; excessive returns from certain retailers; changes
in product mix; the Company's ability to introduce new products on a
timely basis; introduction of products by the Company's competitors;
market acceptance of the Company's and its competitors' products; the
level of orders received which can be shipped in a quarter; the
Company's success in its marketing efforts; and the timing of
investments in research and development. As a result of the foregoing
and other factors, the Company may experience material fluctuations in
future operating results on a quarterly or annual basis which could
materially and adversely affect its business, financial condition and
operating results.
12
<PAGE>
PART 11. OTHER INFORMATION
Item 1 Legal Proceedings - The Company is involved in various routine legal
proceedings arising in the ordinary course of its
business. The Company believes that the outcome
of all pending legal proceedings in the aggregate
will not have a material adverse effect on the
financial condition or results of the Company.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
(1) A report on Form 8-K was filed on June 4, 1996 reporting
the change in the Company's corporate name from Coty Inc. to Coty US Inc.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
COTY US INC.
/s/ Michael J. McNamara
--------------------------
Michael J. McNamara
Vice President, Finance
(Principal Financial and
Accounting Officer)
Dated: August 13, 1996
14
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 758
<SECURITIES> 0
<RECEIVABLES> 33,194
<ALLOWANCES> 7,440
<INVENTORY> 100,774
<CURRENT-ASSETS> 170,782
<PP&E> 25,651
<DEPRECIATION> 0
<TOTAL-ASSETS> 541,847
<CURRENT-LIABILITIES> 122,737
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 63,768
<TOTAL-LIABILITY-AND-EQUITY> 541,847
<SALES> 130,586
<TOTAL-REVENUES> 130,586
<CGS> 42,545
<TOTAL-COSTS> 86,911
<OTHER-EXPENSES> 11,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,088
<INCOME-PRETAX> (21,875)
<INCOME-TAX> (11,640)
<INCOME-CONTINUING> (10,235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,235)
<EPS-PRIMARY> 0.000
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