<PAGE>
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 September 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 November 11, 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>
COTY US INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations for the three month and
nine month periods ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine months ended
September 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)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 473 $ 445
Trade accounts receivable, less allowance for doubtful
accounts of $9,170 and $6,236, respectively 143,191 76,400
Inventories 78,082 49,370
Due from affiliates, net 9,192 1,318
Deferred income taxes 29,608 29,170
Prepaid expenses and other current assets 8,715 9,544
-------- --------
Total current assets 269,261 166,247
Property, plant and equipment, net 25,493 26,060
Goodwill and other intangibles, net 340,550 355,140
-------- --------
Total assets $635,304 $547,447
======== ========
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term bank debt $ 3,652 $ 7,500
Accounts payable 40,595 46,049
Income and other taxes payable 18,563 16,870
Accrued liabilities 103,259 131,811
-------- --------
Total current liabilities 166,069 202,230
Long-term bank debt 116,739 5,575
Senior subordinated notes 131,430 131,118
Deferred income taxes 28,023 26,265
Other long-term liabilities 25,567 23,141
-------- --------
Total liabilities 467,828 388,329
-------- --------
Preferred stocks of subsidiary held by affiliate 89,131 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 41,536 37,194
-------- --------
Total stockholder's equity 78,345 74,003
-------- --------
Total liabilities and stockholder's equity $635,304 $547,447
======== ========
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 170,005 $ 171,326 $ 300,591 $ 295,993
Cost of sales 59,882 60,025 102,427 101,009
--------- --------- --------- ---------
Gross profit 110,123 111,301 198,164 194,984
Selling, general and administrative 67,237 67,882 154,148 149,663
Amortization of intangibles 4,863 4,863 14,591 14,591
Quintessence integration costs -- -- 1,500 --
--------- --------- --------- ---------
Operating income 38,023 38,556 27,925 30,730
Interest expense 6,098 6,763 16,186 18,543
Other income, net (563) (39) (1,551) (256)
Minority interest in preferred stocks 1,339 1,339 4,016 4,016
--------- --------- --------- ---------
Income before income taxes 31,149 30,493 9,274 8,427
Provision for income taxes 16,572 18,326 4,932 5,063
--------- --------- --------- ---------
Net income $ 14,577 $ 12,167 $ 4,342 $ 3,364
========= ========= ========= =========
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---- ----
Cash flows from operating activities
Net income $ 4,342 $ 3,364
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 18,226 17,908
Minority interest in preferred stocks 4,016 4,016
Provision for post-retirement benefits 1,919 1,447
Deferred income taxes 1,320 1,403
Changes in operating assets and liabilities:
Increase in trade accounts receivable (66,791) (76,191)
Increase in inventories (28,712) (26,134)
Decrease (increase) in prepaids and other 829 (4,096)
(Decrease) increase in accounts payable (5,454) 10,827
Decrease in accrued liabilities and other (26,352) (14,630)
--------- ---------
Net cash used in operating activities (96,657) (82,086)
--------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (2,284) (816)
--------- ---------
Net cash used in investing activities (2,284) (816)
--------- ---------
Cash flows from financing activities
Net repayment of short-term debt -- (719)
Net proceeds from long-term bank debt 106,843 87,721
Net proceeds from senior subordinated notes -- 130,788
Net repayment of debt to affiliates -- (130,000)
Net (increase) decrease in due from affiliates (7,874) 434
--------- ---------
Net cash provided by financing activities 98,969 88,224
--------- ---------
Net increase in cash and cash equivalents 28 5,322
Cash and cash equivalents, beginning of period 445 380
--------- ---------
Cash and cash equivalents, end of period $ 473 $ 5,702
========= =========
Cash paid for:
Interest $ 10,070 $ 9,394
========= =========
Income taxes $ 2,002 $ 16,163
========= =========
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 Standards 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:
September 30, December 31,
1996 1995
---- ----
Raw materials $20,662 $18,248
Work-in-process 19,234 11,810
Finished goods 38,186 19,312
------- -------
$78,082 $49,370
======= =======
6
<PAGE>
COTY US INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(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 provides 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 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 nine
month periods ended September 30, 1996, other income, net includes fees from
Lancaster US of $546 and $1,455, 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:
September 30, December 31,
1996 1995
---- ----
Balance Sheet:
Current assets $265,079 $163,221
Non-current assets 318,795 331,345
Current liabilities 165,236 215,765
Non-current liabilities 298,381 173,693
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Statement of Operations:
Net sales $170,005 $171,326 $300,591 $295,993
Gross profit 110,123 111,301 198,164 194,984
Operating income 38,908 39,425 32,050 33,338
Income before income taxes 37,153 32,956 20,448 15,847
Net income 21,846 19,241 12,023 9,318
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations
Nine months and quarter ended September 30, 1996 versus nine months and quarter
ended September 30, 1995.
Net sales increased by $4,598, or 1.6%, to $300,591 for the nine months ended
September 30, 1996 from $295,993 for the nine months ended September 30, 1995
and decreased by $1,321, or 0.8%, to $170,005 for the quarter ended September
30, 1996 from $171,326 for the quarter ended September 30, 1995. The increase
for the nine months ended September 30, 1996 is primarily due to recent
fragrance launches. Celebrate, Exclamation Blush and Raw Vanilla, launched in
the second quarter of 1996, had total net sales of $26,348 for the nine months
ended September 30, 1996. Offsetting the increase was a decline in net sales for
certain continuing brands for the nine months ended September 30, 1996 as
compared to the same period in 1995. The decrease in net sales for the quarter
ended September 30, 1996 results from a decline in net sales for certain
continuing brands as compared to the same period in 1995, offset partly by the
aforementioned 1996 new product launches. 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 65.9% of net sales for the nine months ended September 30, 1996
and 1995 and 64.8% and 65.0%, respectively, of net sales for the quarters ended
September 30, 1996 and 1995. The gross profit percentage for the quarter ended
September 30, 1996 as compared to the quarter ended September 30, 1995 was
unfavorably impacted by an increase in sales to the Company's intercompany
affiliates. Such 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 $4,485, or 3.0%, to
$154,148, or 51.3% of net sales, for the nine months ended September 30, 1996
from $149,663, or 50.6% of net sales, for the nine months ended September 30,
1995 and decreased by $645, or 1.0%, to $67,237, or 39.6% of net sales, for the
quarter ended September 30, 1996 from $67,882, or 39.6% of net sales, for the
quarter ended September 30, 1995. The increase as a percentage of net sales for
the nine months ended September 30,1996 as compared to the nine months ended
September 30, 1995 primarily resulted from higher advertising and promotional
spending as a percentage of net sales as well as timing of incurring certain
other expenses. The Company spent approximately $103,950, or 34.6% of net sales,
for the nine months ended September 30, 1996 compared to $101,560, or 34.3% of
net sales, for the nine months ended
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
September 30, 1995 for advertising and promotional purposes. The slight decrease
in selling, general and administrative expenses for the quarter ended September
30, 1996 is primarily due to lower advertising and promotional spending as
compared to the similar 1995 period. The Company spent approximately $52,119, or
30.7% of net sales, for the quarter ended September 30, 1996 compared to
$52,625, or 30.7% of net sales, for the quarter ended September 30, 1995 for
advertising and promotional purposes.
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 of operations may
differ from these estimates.
Interest expense decreased by $2,357, or 12.7%, to $16,186 for the nine months
ended September 30, 1996 from $18,543 for the nine months ended September 30,
1995 and by $665, or 9.8%, to $6,098 for the quarter ended September 30, 1996
from $6,763 for the quarter ended September 30, 1995. The decrease is primarily
due to lower average borrowings during the nine months and quarter ended
September 30, 1996 as compared to the similar 1995 periods, as well as lower
average interest rates.
Other income, net increased by $1,295 to $1,551 for the nine months ended
September 30,1996 from $256 for the nine months ended September 30, 1995 and by
$524 to $563 for the quarter ended September 30, 1996 from $39 for the quarter
ended September 30, 1995. The increase is primarily due to fees from an
affiliated company, Lancaster US, of $1,455 recorded by the Company in 1996 in
return for providing various management, administrative and manufacturing
services.
Provision for income taxes was $4,932 and $16,572 for the nine months and
quarter ended September 30, 1996, respectively, representing an effective tax
rate of 53.2%, and $5,063 and $18,326 for the nine months and quarter ended
September 30, 1995, respectively, representing an effective tax rate of 60.1%.
The effective tax 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 nine months and quarter ended September 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 September
30, 1996, borrowings under the Term Loan and the Revolving Loan Facility
amounted to $12,000 and $110,439, respectively. Unamortized debt issuance costs
relating to the Credit Facility amounted to $2,048 at September 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 operations of the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
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: November 13, 1996
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 473
<SECURITIES> 0
<RECEIVABLES> 152,361
<ALLOWANCES> 9,170
<INVENTORY> 78,082
<CURRENT-ASSETS> 269,261
<PP&E> 25,493
<DEPRECIATION> 2,853
<TOTAL-ASSETS> 635,304
<CURRENT-LIABILITIES> 166,069
<BONDS> 0
0
89,131
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 635,304
<SALES> 300,591
<TOTAL-REVENUES> 300,591
<CGS> 102,427
<TOTAL-COSTS> 102,427
<OTHER-EXPENSES> 170,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,186
<INCOME-PRETAX> 9,274
<INCOME-TAX> 4,932
<INCOME-CONTINUING> 4,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,342
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
