<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 March 31, 1997
OR
__ TRANSITION REPORT UNDER 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 May 1, 1997 there were 100 shares of the Company's common stock
outstanding, all of which were held by Coty Inc., a subsidiary of Joh. A.
Benckiser GmbH.
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COTY US INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996.....................3
Consolidated Statements of Operations for the three months ended March 31, 1997
and 1996...................................................................................4
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996...................................................................................5
Notes to Unaudited Consolidated Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................7
Part II. Other Information..........................................................................9
Signatures ...............................................................................10
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 45 $ 7,199
Trade accounts receivable, less allowance for doubtful
accounts of $5,745 and $5,270 respectively 46,609 88,072
Inventories 75,357 53,563
Due from affiliates, net 3,710 4,279
Deferred income taxes 34,951 35,094
Prepaid expenses and other current assets 7,179 7,548
-------- --------
Total current assets 167,851 195,755
Property, plant and equipment, net 24,732 24,966
Goodwill and other intangibles, net 325,477 327,358
-------- --------
Total assets $518,060 $548,079
======== ========
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 31,976 $ 41,430
Income and other taxes payable 10,807 22,512
Accrued liabilities 89,495 137,822
-------- --------
Total current liabilities 132,278 201,764
Long-term bank debt 42,654 --
Senior subordinated notes 131,638 131,535
Deferred income taxes 20,392 19,829
Other long-term liabilities 29,853 28,297
-------- --------
Total liabilities 356,815 381,425
Preferred stocks of subsidiary held by affiliate 91,809 90,470
Stockholder's equity
Common stock, $1 par, 100 shares authorized, issued
and outstanding -- --
Additional paid-in capital 36,809 36,809
Retained earnings 32,627 39,375
-------- --------
Total stockholder's equity 69,436 76,184
-------- --------
Total liabilities and stockholder's equity $518,060 $548,079
======== ========
</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 March 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Net sales $54,484 $64,586
Cost of sales 17,890 21,675
------- -------
Gross profit 36,594 42,911
Selling, general and administrative 41,301 42,713
Amortization of intangibles 4,882 4,863
------- -------
Operating loss (9,589) (4,665)
Interest expense 4,420 4,771
Other income, net (614) (416)
Minority interest in preferred stocks 1,339 1,339
------- -------
Loss before income taxes (14,734) (10,359)
Income tax benefit (7,986) (5,511)
------- -------
Net loss $(6,748) $(4,848)
======= =======
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (6,748) $ (4,848)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 5,996 6,045
Minority interest in preferred stocks 1,339 1,339
Deferred income taxes 706 608
Provision for post-retirement benefits 642 593
Provision for bad debts 402 651
Changes in operating assets and liabilities
Decrease in accounts receivable 41,061 44,782
Increase in inventories (21,794) (16,736)
Decrease in prepaid expenses and other
current assets 369 2,279
Decrease in accounts payable (9,454) (17,081)
Decrease in accrued liabilities and other (62,120) (50,000)
--------- --------
Net cash used in operating activities (49,601) (32,368)
--------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (776) (806)
--------- --------
Net cash used in investing activities (776) (806)
--------- --------
Cash flows from financing activities
Net proceeds from long-term bank debt 42,654 34,787
(Increase) decrease in due from affiliates, net 569 (1,729)
--------- --------
Net cash provided by financing activities 43,223 33,058
--------- --------
Net decrease in cash and cash equivalents (7,154) (116)
Cash and cash equivalents, beginning of period 7,199 445
--------- --------
Cash and cash equivalents, end of period $ 45 $ 329
========= ========
Cash paid for:
Interest $ 264 $ 402
========== ========
Income Taxes $ 3,014 $ 272
========== ========
</TABLE>
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. ("Coty") and its subsidiaries
(collectively, the "Company") after elimination of all material
intercompany balances and transactions. Coty is an indirect
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.
(2) Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials................................... $ 34,747 $ 15,787
Work-in-process................................. 16,852 10,388
Finished goods.................................. 23,758 27,388
--------- ---------
$ 75,357 $ 53,563
========= =========
</TABLE>
(3) Parent Only Financial Information
Coty'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. Summarized unconsolidated financial information of
Coty, exclusive of intercompany balances between Coty and its
subsidiaries, is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Balance Sheet:
Current assets.................................. $162,015 $189,802
Non-current assets.............................. 313,027 314,273
Current liabilities............................. 129,119 198,605
Non-current liabilities......................... 217,253 172,228
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Statement of Operations:
Net sales....................................... $ 54,484 $ 64,586
Gross profit.................................... 36,594 42,911
Operating loss.................................. (8,720) (3,796)
Loss before income taxes........................ (12,118) (8,180)
Net loss........................................ (7,123) (4,810)
</TABLE>
6
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations
Net sales decreased by $10,102, or 15.6%, to $54,484 for the three
months ended March 31, 1997 from $64,586 for the three months ended March 31,
1996. The decrease is primarily due to the timing of shipment for certain
promotional orders. Mother's Day promotional shipments were approximately $7,600
lower in the first quarter of 1997 as compared to the similar period in 1996,
due primarily to retailers requesting later delivery dates this year as well as
efforts to reduce returns. In addition, trial size promotional sales decreased
by $5,700 compared to the corresponding period in 1996. Sales of basic goods
have declined by approximately $3,300 primarily as a result of stricter
inventory management initiated by certain large retailers in the quarter.
Partially offsetting the decrease in net sales was the launch of Nokomis and
Calgon Body Mists in the first quarter of 1997 with net sales totaling $7,377.
Gross profit was 67.2% and 66.4%, respectively, of net sales for the
three months ended March 31, 1997 and 1996. Gross profit percentage for the
three months ended March 31, 1997 was favorably impacted by product mix.
Promotional Mother's Day and trial size shipments represented a lower proportion
of total net sales volume in 1997 than 1996. These promotional products
generally have a lower profit margin than basic goods sold on an every-day
basis.
Selling, general and administrative expenses decreased by $1,412 or
3.3%, to $41,301, or 75.8% of net sales, for the three months ended March 31,
1997 from $42,713, or 66.1% of net sales, for the three months ended March 31,
1996. The increase as a percentage of net sales for the three months ended March
31, 1997 as compared to the three months ended March 31, 1996 was primarily the
result of lower net sales. The Company spent approximately $22,503, or 41.3% of
net sales, for advertising and promotional purposes for the three months ended
March 31, 1997 compared to $25,051, or 38.8% of net sales, for the three months
ended March 31, 1996.
Interest expense decreased by $351, or 7.4%, to $4,420 for the three
months ended March 31, 1997 from $4,771 for the three months ended March 31,
1996. The decrease was due to lower average borrowings as well as lower interest
rates.
Other income, net increased by $198, to $614 for the three months
ended March 31, 1997 from $416 for the three months ended March 31, 1996. The
increase is primarily due to fees from Lancaster Group US LLC, an affiliate,
recorded by the Company in return for providing various management,
administrative and manufacturing services.
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 for 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 orders 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 its parent. In December 1994, the Company entered into an
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands)
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. The Term Loan was fully repaid as of December 31, 1996. As of March
31, 1997, borrowings under the Revolving Loan Facility amounted to $42,654.
Unamortized debt issuance costs related to the Credit Facility amounted to
$1,418 at March 31, 1997.
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 (and its
subsidiaries) 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.
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 funds 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; 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.
8
<PAGE>
PART II. 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: Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
COTY US INC.
/s/ Daniel J. Finnegan
Daniel J. Finnegan
Vice President, Finance
(Principal Financial and
Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997, STATEMENT OF INCOME AND
STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 52,534
<ALLOWANCES> 5,745
<INVENTORY> 75,357
<CURRENT-ASSETS> 167,851
<PP&E> 44,457
<DEPRECIATION> 19,725
<TOTAL-ASSETS> 518,060
<CURRENT-LIABILITIES> 132,278
<BONDS> 174,292
0
91,809
<COMMON> 0
<OTHER-SE> 69,436
<TOTAL-LIABILITY-AND-EQUITY> 518,060
<SALES> 54,484
<TOTAL-REVENUES> 54,484
<CGS> 17,890
<TOTAL-COSTS> 17,890
<OTHER-EXPENSES> 41,301
<LOSS-PROVISION> 402
<INTEREST-EXPENSE> 4,882
<INCOME-PRETAX> (14,734)
<INCOME-TAX> (7,986)
<INCOME-CONTINUING> (6,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,748)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
