<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, 1997
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 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.
1
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COTY US INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996.................3
Consolidated Statements of Operations for the three month and
nine month periods ended September 30, 1997 and 1996.......................................4
Consolidated Statements of Cash Flows for the nine months ended September 30, 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
Signature ...............................................................................10
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COTY US INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 314 $ 7,199
Trade accounts receivable, less allowances of $7,288
and $5,270, respectively 115,802 88,072
Inventories 106,492 53,563
Due from affiliates, net 6,214 4,279
Deferred income taxes 34,668 35,094
Prepaid expenses and other current assets 17,020 7,548
-------- --------
Total current assets 280,510 195,755
Property, plant and equipment, net 26,930 24,966
Goodwill and other intangibles, net 315,712 327,358
------- -------
Total assets $623,152 $548,079
======= =======
Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 47,086 $ 41,430
Income and other taxes payable 7,006 22,512
Accrued liabilities 97,240 137,822
-------- -------
Total current liabilities 151,332 201,764
Long-term bank debt 120,501 --
Senior subordinated notes 131,846 131,535
Deferred income taxes 21,518 19,829
Other long-term liabilities................................. 30,836 28,297
-------- --------
Total liabilities 456,033 381,425
Preferred stocks of subsidiary held by affiliate 94,486 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 35,824 39,375
-------- --------
Total stockholder's equity 72,633 76,184
-------- --------
Total liabilities and stockholder's equity $623,152 $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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 129,799 $ 170,005 $ 249,239 $ 300,591
Cost of sales 49,860 59,882 88,364 102,427
--------- --------- --------- ---------
Gross profit 79,939 110,123 160,875 198,164
Selling, general and administrative 48,408 67,237 136,691 154,148
Amortization of intangibles 4,882 4,863 14,647 14,591
Quintessence integration costs -- -- -- 1,500
------ ------ --------- ---------
Operating income 26,649 38,023 9,537 27,925
Interest expense 5,820 6,098 15,313 16,186
Other income, net (568) (563) (1,740) (1,551)
Minority interest in preferred stocks 1,339 1,339 4,016 4,016
--------- --------- --------- ---------
Income (loss) before income taxes 20,058 31,149 (8,052) 9,274
Income tax provision (benefit) 10,735 16,572 (4,501) 4,932
--------- --------- --------- ---------
Net income (loss) $ 9,323 $ 14,577 $ (3,551) $ 4,342
========= ========= ========= =========
</TABLE>
See notes to Unaudited Consolidated Financial Statements.
4
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COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (3,551) $ 4,342
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 18,052 18,226
Minority interest in preferred stocks 4,016 4,016
Provision for post-retirement benefits 2,075 1,919
Provision for bad debts 1,424 1,832
Deferred income taxes 2,115 1,320
Changes in operating assets and liabilities:
Increase in trade accounts receivable (29,154) (68,623)
Increase in inventories (52,929) (28,712)
(Increase) decrease in prepaid expenses and other (9,472) 829
Increase (decrease) in accounts payable 5,656 (5,454)
Decrease in accrued liabilities and other (59,098) (26,352)
-------- ---------
Net cash used in operating activities (120,866) (96,657)
-------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (4,585) (2,284)
------- ---------
Net cash used in investing activities (4,585) (2,284)
------- ---------
Cash flows from financing activities
Net proceeds from long-term bank debt 120,501 106,843
Net increase in due from affiliates (1,935) (7,874)
-------- ---------
Net cash provided by financing activities 118,566 98,969
--------- ---------
Net (decrease) increase in cash and cash equivalents (6,885) 28
Cash and cash equivalents, beginning of period 7,199 445
--------- ---------
Cash and cash equivalents, end of period $ 314 $ 473
========= =========
Cash paid for:
Interest $ 10,008 $ 10,070
========== =========
Income taxes $ 8,938 $ 2,002
========== ==========
</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. and its subsidiaries (the "Company") after
elimination of all material intercompany balances and transactions.
Coty US Inc. is a wholly owned subsidiary of Coty Inc., which is wholly
owned by Joh. A. Benckiser GmbH, a German company. 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. In connection with a credit facility established by
Coty Inc. in October 1997 with several banks, Coty Inc. pledged the
shares of Coty US Inc. as collateral for the facility.
(2) Inventories
Inventories consisted of the following:
September 30, December 31,
1997 1996
---- ----
Raw materials $ 36,558 $15,787
Work-in-process 26,022 10,388
Finished goods 43,912 27,388
------- ------
$106,492 .$53,563
======== =======
(3) 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,
1997 1996
---- ----
Balance Sheet:
Current assets $274,864 $189,802
Non-current assets 307,198 314,273
Current liabilities 150,500 198,605
Non-current liabilities 297,911 172,228
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Statement of Operations:
<S> <C> <C> <C> <C>
Net sales $129,799 $170,005 $249,239 $300,591
Gross profit 79,939 110,123 160,875 198,164
Operating income 27,518 38,908 12,145 32,050
Income (loss) before income taxes 21,294 37,153 (2,490) 20,448
Net income (loss) 12,521 21,846 (1,464) 12,023
</TABLE>
6
<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, 1997 versus nine months and quarter
ended September 30, 1996.
Net sales decreased by $51,352, or 17.1%, to $249,239 for the nine months ended
September 30, 1997 from $300,591 for the nine months ended September 30, 1996
and decreased by $40,206, or 23.6%, to $129,799 for the quarter ended September
30, 1997 from $170,005 for the quarter ended September 30, 1996. The decrease is
due to lower shipments and increased returns as compared to the prior year
caused by the overall weakness in the mass fragrance market. In addition, the
net sales for the nine month and three month periods ended September 30, 1997
are lower than comparable prior year periods due in part to the timing of
shipment of certain Christmas orders. The Company expects that the weakness in
the mass fragrance market will continue during fourth quarter 1997; therefore,
it is anticipated that for full year 1997, net sales will be lower than full
year 1996. The Company is taking steps in response to the current market
conditions. These steps include improving the attractiveness of its promotional
gift products in order to increase retail sales and introducing in 1997
"non-traditional" fragrance items such as Calgon Body Mists and Healing Garden
aromachology products. The Company expects to expand the range and distribution
of these product lines in 1998.
Gross profit was 64.5% and 65.9% of net sales for the nine months ended
September 30, 1997 and 1996, respectively, and 61.6% and 64.8%, respectively, of
net sales for the quarters ended September 30, 1997 and 1996. Gross profit
percentage for the nine months and quarter ended September 30, 1997 was lower
than the similar prior year periods due primarily to improved packaging for
Christmas 1997 promotional products as well as increased returns.
Selling, general and administrative expenses decreased by $17,457 or 11.3%, to
$136,691, or 54.8% of net sales, for the nine months ended September 30, 1997
from $154,148, or 51.3% of net sales, for the nine months ended September 30,
1996 and by $18,829, or 28.0%, to $48,408, or 37.3% of net sales, for the
quarter ended September 30, 1997 from $67,237, or 39.6% of net sales, for the
quarter ended September 30, 1996. The increase as a percentage of net sales for
the nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996 was primarily the result of lower net sales. Management
expects that on a full year basis, selling, general and administrative expenses
as a percentage of net sales will be consistent with 1996. The Company spent
approximately $83,313, or 33.4% of net sales, for the nine months ended
September 30, 1997 and $32,683, or 25.2% of net sales, for the quarter ended
September 30, 1997 for advertising and promotional purposes compared to
$103,950, or 34.6% of net sales, for the nine months ended September 30, 1996
and $52,119, or 30.7% of net sales, for the quarter ended September 30, 1996.
Interest expense decreased by $873, or 5.4%, to $15,313 for the nine months
ended September 30, 1997 from $16,186 for the nine months ended September 30,
1996 and by $278, or 4.6%, to $5,820 for the quarter ended September 30, 1997
from $6,098 for the quarter ended September 30, 1996. The decrease is primarily
due to lower average borrowings during the nine months and quarter ended
September 30, 1997 as compared to the similar 1996 periods.
Other income, net increased by $189 to $1,740 for the nine months ended
September 30, 1997 from $1,551 for the nine months ended September 30, 1996 and
slightly increased to $568 for the quarter ended September 30, 1997 from $563
for the quarter ended September 30, 1996. The net increase for the nine months
ended September 30, 1997 as compared to the nine months ended September 30, 1996
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 on returns and inventory purchases are made. These borrowing
requirements are partly
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
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. Cash
used in operating activities for the nine months ended September 30, 1997 has
increased versus prior year primarily due to lower net sales.
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 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 September 30, 1997, borrowings under
the Revolving Loan Facility amounted to $120,501. Unamortized debt issuance
costs relating to the Credit Facility amounted to $1,418 at September 30, 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 anticipated shipments, the
performance of the mass fragrance market and 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 ts 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
9
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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)
.
Dated: November 13, 1997
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1997, Statement of Operations and
Statement of Cash Flows for the period ended September 30, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 314
<SECURITIES> 0
<RECEIVABLES> 123,090
<ALLOWANCES> 7,288
<INVENTORY> 106,492
<CURRENT-ASSETS> 280,510
<PP&E> 48,265
<DEPRECIATION> 21,335
<TOTAL-ASSETS> 623,152
<CURRENT-LIABILITIES> 151,332
<BONDS> 131,742
0
94,486
<COMMON> 0
<OTHER-SE> 72,633
<TOTAL-LIABILITY-AND-EQUITY> 623,152
<SALES> 249,239
<TOTAL-REVENUES> 249,239
<CGS> 88,364
<TOTAL-COSTS> 88,364
<OTHER-EXPENSES> 151,338
<LOSS-PROVISION> 2,018
<INTEREST-EXPENSE> 15,313
<INCOME-PRETAX> (8,052)
<INCOME-TAX> (4,501)
<INCOME-CONTINUING> (3,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,551)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
