<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, 1998
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 14, 1998 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.
<PAGE>
COTY US INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997............................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997................................... 5
Notes to Unaudited Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
Part II. Other Information............................................... 10
Signature....................................................... 11
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, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents.............................. $ 131 $ 17,678
Trade accounts receivable, less allowance for doubtful
accounts of $5,894 and $5,344, respectively........ 43,539 70,901
Inventories............................................ 109,607 83,495
Due from affiliates, net............................... 4,457 1,590
Deferred income taxes.................................. 31,145 31,480
Prepaid expenses and other current assets.............. 15,264 14,072
-------- --------
Total current assets............................. 204,143 219,216
Property, plant and equipment, net.......................... 29,516 28,583
Goodwill and other intangibles, net......................... 305,947 310,827
-------- --------
Total assets..................................... $539,606 $558,626
======== ========
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable....................................... $ 40,693 $ 41,701
Income and other taxes payable......................... 10,836 19,791
Accrued liabilities.................................... 93,687 133,641
-------- --------
Total current liabilities........................ 145,216 195,133
Long-term bank debt......................................... 35,167 --
Senior subordinated notes................................... 132,055 131,951
Deferred income taxes ...................................... 21,359 21,098
Other long-term liabilities................................. 31,404 31,248
-------- --------
Total liabilities................................ 365,201 379,430
-------- --------
Preferred stocks of subsidiary held by affiliate............ 97,164 95,825
-------- --------
Stockholder's equity
Common stock, $1 par, 100 shares authorized, issued
and outstanding.................................... -- --
Additional paid-in capital............................. 36,809 36,809
Retained earnings...................................... 40,432 46,562
-------- --------
Total stockholder's equity....................... 77,241 83,371
-------- --------
Total liabilities and stockholder's equity....... $539,606 $558,626
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
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COTY US INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales............................................. $ 62,050 $ 54,484
Cost of sales......................................... 21,933 17,890
---------- ---------
Gross profit............................... 40,117 36,594
Selling, general and administrative................... 44,825 41,301
Amortization of intangibles........................... 4,883 4,882
---------- ---------
Operating loss............................. (9,591) (9,589)
Interest expense...................................... 4,252 4,420
Other income, net..................................... (790) (614)
Minority interest in preferred stocks................. 1,339 1,339
---------- ---------
Loss before income taxes................... (14,392) (14,734)
Income tax benefit.................................... 8,261 7,986
---------- ---------
Net loss................................... $ (6,131) $ (6,748)
=========== ==========
</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,
---------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................................ $ (6,131) $ (6,748)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................. 6,259 5,996
Minority interest in preferred stocks..................... 1,339 1,339
Deferred income taxes..................................... 596 706
Provision for post-retirement benefits.................... 406 642
Provision for bad debts................................... 540 402
Changes in operating assets and liabilities:
Decrease in accounts receivable........................... 26,822 41,061
Increase in inventories................................... (26,112) (21,794)
(Increase) decrease in prepaid expenses and other current
assets.................................................... (1,195) 369
Decrease in accounts payable.............................. (1,008) (9,454)
Decrease in accrued liabilities and other................. (49,316) (62,120)
--------- ----------
Net cash used in operating activities................................ (47,800) (49,601)
--------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment................ (2,047) (776)
--------- ----------
Net cash used in investing activities................................ (2,047) (776)
--------- ----------
Cash flows from financing activities
Net proceeds from long-term bank debt..................... 35,167 42,654
(Increase) decrease in due from affiliates, net........... (2,867) 569
--------- ----------
Net cash provided by financing activities............................ 32,300 43,223
--------- ----------
Net decrease in cash and cash equivalents............................ (17,547) (7,154)
Cash and cash equivalents, beginning of period....................... 17,678 7,199
--------- ----------
Cash and cash equivalents, end of period............................. $ 131 $ 45
========= ==========
Cash paid for:
Interest............................................................. $ 134 $ 264
========= ==========
Income taxes......................................................... $ 97 $ 3,014
========= ==========
</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 US") and its subsidiaries
(collectively, the "Company") after elimination of all material
intercompany balances and transactions. Coty US is a wholly owned
subsidiary of Coty Inc., which is a subsidiary of Joh. A Benckiser
GmbH. 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. The Company will change its fiscal year-end from
December 31 to June 30, effective for the period ending June 30, 1998.
(2) Recent Accounting Pronouncements
During fiscal 1997, the Financial Accounting Standards Board issued
the following accounting standards: Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131), and
Statement of Financial Accounting Standards No. 132, "Employers
Disclosures about Pension and other Postretirement Benefit Plans" (SFAS
No. 132). During the quarter ended March 31, 1998, the Company does not
have any items that would be reportable as a component of comprehensive
income other than its loss from operations, which is reported as a
component of stockholder's equity. The Company does not expect any
material effect from the adoption of SFAS No. 131 and 132.
(3) Inventories
Inventories consisted of the following:
March 31, December 31,
1998 1997
---- ----
Raw materials................. $ 37,755 $ 29,652
Work-in-process............... 27,873 17,786
Finished goods................ 43,979 36,057
--------- ---------
$ 109,607 $ 83,495
========= =========
6
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COTY US INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(4) Parent Only Financial Information
Coty US'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. Summarized unconsolidated financial information of Coty
US, exclusive of intercompany balances between Coty US and its
subsidiaries, is as follows:
March 31, December 31,
1998 1997
---- ----
Balance Sheets:
Current assets..................... $ 200,530 $ 215,428
Non-current assets................. 300,889 304,838
Current liabilities................ 142,057 191,974
Non-current liabilities............ 215,523 179,588
Three Months Ended March 31,
1998 1997
---- ----
Statements of Operations:
Net sales.......................... $ 62,050 $ 54,484
Gross profit....................... 40,117 36,594
Operating loss..................... (8,722) (8,720)
Loss before income taxes........... (12,105) (12,118)
Net loss........................... (7,118) (7,123)
7
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations
Net sales increased by $7,566, or 13.9%, to $62,050 for the three
months ended March 31, 1998 from $54,484 for the three months ended March 31,
1997. The increase is primarily due to strong first quarter results for Calgon
bath and body products and The Healing Garden aromatherapy product line. The
Company launched its line of Calgon body mists in first quarter 1997 and The
Healing Garden line late in the third quarter of 1997. During the first quarter
of 1998, the Company has introduced Calgon body lotions and shower gels to
complement its body mist fragrances and continues to expand the distribution of
The Healing Garden line to additional mass-market stores. Partly offsetting this
increase was lower Mother's Day promotional sales.
Gross profit was 64.7% and 67.2%, respectively, of net sales for the
three months ended March 31, 1998 and 1997. Gross profit percentage for the
three months ended March 31, 1998 decreased as a result of a change in product
mix. The Healing Garden and Calgon product lines have relatively lower profit
margins as compared to the Company's other fragrances. Additionally, more
expensive packaging for Mother's Day promotional products contributed to a lower
profit margin.
Selling, general and administrative expenses increased by $3,524, or
8.5%, to $44,825 for the three months ended March 31, 1998 from $41,301 for the
three months ended March 31, 1997. As a percentage of net sales, selling,
general and administrative expenses decreased to 72.2% for the three months
ended March 31, 1998 from 75.8% for the three months ended March 31, 1997 due to
higher net sales. The Company spent approximately $25,069 or 40.4% of net sales,
for advertising and promotional purposes for the three months ended March 31,
1998 compared to $22,503, or 41.3% of net sales, for the three months ended
March 31, 1997.
Interest expense decreased by $168, or 3.8%, to $4,252 for the three
months ended March 31, 1998 from $4,420 for the three months ended March 31,
1997. The decrease was due to lower average borrowings and was partly offset by
higher interest rates.
Other income, net increased by $176 to $790 for the three months ended
March 31, 1998 from $614 for the three months ended March 31, 1997. The increase
is primarily due to fees from Lancaster Group US LLC, an affiliate, recorded by
the Company in return for providing various administrative, manufacturing and
distribution 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
8
<PAGE>
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 which has been repaid 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 March 31, 1998, borrowings under the Revolving Loan Facility
amounted to $35,167. There were no outstanding borrowings under the Revolving
Loan Facility as of December 31, 1997. Unamortized debt issuance costs related
to the Credit Facility amounted to $1,103 and $1,260 at March 31, 1998 and
December 31, 1997, respectively.
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.
In April 1995, the Company consummated a public offering for
$135,000 of aggregate principal amount 10.25% Notes, maturing on May 1, 2005.
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; the timing of investments in
research and development; and the Company's ability and its suppliers' and
customers' ability to replace, modify, or upgrade computer programs in ways that
adequately address the Year 2000 issue. 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.
9
<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: None
(b) Reports on Form 8-K: None
10
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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: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 1998, Statement of Operations and
Statement of Cash Flows for the period ended March 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 131
<SECURITIES> 0
<RECEIVABLES> 49,433
<ALLOWANCES> 5,894
<INVENTORY> 109,607
<CURRENT-ASSETS> 204,143
<PP&E> 50,307
<DEPRECIATION> 20,791
<TOTAL-ASSETS> 539,606
<CURRENT-LIABILITIES> 145,216
<BONDS> 132,055
0
97,164
<COMMON> 0
<OTHER-SE> 77,241
<TOTAL-LIABILITY-AND-EQUITY> 539,606
<SALES> 62,050
<TOTAL-REVENUES> 62,050
<CGS> 21,933
<TOTAL-COSTS> 21,933
<OTHER-EXPENSES> 49,708
<LOSS-PROVISION> 540
<INTEREST-EXPENSE> 4,252
<INCOME-PRETAX> (14,392)
<INCOME-TAX> 8,261
<INCOME-CONTINUING> (6,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,131)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
