SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MAY 31, 1996
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 1-6370 59-0914138
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
14100 N.W. 60TH AVENUE
MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 620-9090
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(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
On March 20, 1996, French Fragrances, Inc. (the "Company")
acquired certain assets relating to the Halston fragrance brands (the
"Halston Brands"), including the trademarks and other intellectual property,
inventory, tangible assets and contract rights (the "Halston Acquisition")
from Halston Borghese International Limited and its subsidiaries (the
"Halston Entities"). For additional information relating to the Halston
Acquisition, see the Company's Form 8-K dated March 20, 1996 which was filed
with the Securities and Exchange Commission on April 4, 1996. Certain
financial data relating to the Halston Brands and pro forma financial data
for the Company to give effect to the Halston Acquisition are attached
hereto as follows:
(1) The Halston Fragrance Brands of Halston Borghese International Limited.
(a) Report of Independent Accountants.
(b) Statements of Net Assets Sold as of December 31, 1995 and 1994.
(c) Statement of Net Sales, Cost of Sales and Direct Operating
Expenses for the Years Ended December 31, 1995 and 1994.
(d) Notes to Financial Statements.
(2) Pro Forma Financial Data.
(a) Pro Forma Condensed Balance Sheet as of January 31, 1996.
(b) Pro Forma Condensed Income Statement for the Year Ended
January 31, 1996.
(c) Pro Forma Condensed Income Statement for the Twelve Months
Ended January 31, 1995.
(d) Notes to Pro Forma Condensed Financial Statements.
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(1)(a) REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Halston Borghese International Limited:
We have audited the accompanying statement of net assets sold of the Halston
Fragrance brands of Halston Borghese International Limited as of December
31, 1995 and 1994, and the related statement of net sales, cost of sales and
direct operating expenses for each of the two years in the period ended
December 31, 1995. These financial statements are the responsibility of
Halston Borghese International Limited management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements were prepared to present the net
assets sold of the Halston Fragrance brands, pursuant to the purchase
agreement described in Note 1, and the net sales, cost of sales and direct
operating expenses of the Halston Fragrance brands and are not intended to
be a complete presentation of the Halston Fragrance brands' financial
position, results of operations and cash flows.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the net assets sold of the Halston Fragrance
brands, pursuant to the purchase agreement referred to in Note 1, as of
December 31, 1995 and 1994, and the net sales, cost of sales and direct
operating expenses for each of the two years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
May 3, 1996.
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THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
(1)(b) STATEMENT OF NET ASSETS SOLD (NOTE 1)
AS OF DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
ASSETS: 1995 1994
-------- -------
Current assets:
Inventory (Note 3) ................... $3,370 $6,936
Prepaid expenses and other current assets......... 97 412
-------- -------
Total current assets ................... 3,467 7,348
Fixed assets:
Tools, dies and molds ................... 2,911 2,683
Less, accumulated depreciation.................... 2,087 1,574
------ ------
................... 824 1,109
------- ------
Total assets ................... 4,291 8,457
------ ------
LIABILITIES:
Current liabilities:
Accounts payable ................... 636 1,872
------- ------
Net assets sold ................... $3,655 $6,585
===== =====
The accompanying notes are an integral part of these financial statements.
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THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
(1)(c) STATEMENT OF NET SALES, COST OF SALES AND DIRECT OPERATING EXPENSES
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1995 1994
-------- -------
Net sales $28,521 $33,978
Cost of sales 12,838 15,767
------- -------
Gross margin 15,683 18,211
Direct operating expenses 9,914 11,806
-------- -------
Excess of net sales over cost of sales
and direct operating expenses $5,769 $6,405
===== =====
The accompanying notes are an integral part of these financial statements.
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THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
(1)(d) NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION:
The accompanying financial statements have been prepared for the purpose
of presenting the net assets sold of the Halston Fragrance brands of
Halston Borghese International Limited and its Subsidiaries ("HBIL"),
pursuant to the Asset Purchase Agreement (the "Agreement") dated as of
February 1, 1996, between HBIL and French Fragrances, Inc. (the "Buyer")
and its net sales, cost of sales and direct operating expenses for each
of the two years in the period ended December 31, 1995. The transaction
was consummated on March 20, 1996. Pursuant to the Agreement, HBIL sold
to the Buyer all the assets used with respect to the Halston Fragrance
brands, including all inventory, tools, dies and molds, prepaid assets,
intangible rights and other assets directly related to the Halston
Fragrance brands, in exchange for consideration totaling approximately
$22.0 million. The Buyer assumed certain liabilities including trade
payables related to the Halston Fragrance brands and promotional
obligations which were committed to but incurred subsequent to March 21,
1996. The accompanying statement of net assets sold reflects the trade
accounts payable directly related to the Halston Fragrance brands.
The Halston Fragrance brands are sold and distributed principally in the
United States. These products are also sold and distributed in Canada,
Latin America, Europe and Hong Kong.
Historically, financial statements have not been prepared for the Halston
Fragrance brands. The accompanying financial statements are derived from
the historical accounting records of HBIL and present the net assets sold
of the Halston Fragrance brands, in accordance with the Agreement, as of
December 31, 1995 and 1994, and the statement of net sales, cost of sales
and direct operating expenses for each of the years then ended, and are
not intended to be a complete presentation of the Halston Fragrance
brands' financial position, results of operations and cash flows. The
historical operating results may not be indicative of the results after
the acquisition by the Buyer.
The statement of net sales, cost of sales and direct operating expenses
includes all revenues and expenses directly attributable to the Halston
Fragrance brands. Direct operating expenses consist principally of
marketing, advertising and demonstrator expenses. The statement does not
include selling, general and administrative, research and development,
interest, income tax and amortization of intangible expenses.
HBIL did not maintain the Halston Fragrance brands as a separate business
unit and had never segregated indirect operating cost information
relative to these brands. Accordingly, it is not practical to isolate
indirect operating costs applicable to the Halston Fragrance brands.
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THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales are included in income when goods are shipped to the customer net
of a provision for estimated returns.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
FIXED ASSETS
Fixed assets, consisting of tools, dies and molds, are recorded at cost
and depreciated on a straight-line basis over a four-year estimated
useful life. Depreciation expense was $513 and $1,097 for the years
ended December 31, 1995 and 1994, respectively.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates relate to
inventory obsolescence and depreciable lives. Actual results could differ
from those estimates.
ADVERTISING AND PROMOTIONAL EXPENSES
Advertising and promotional expenses are charged to income during the
periods in which they are incurred. Total advertising and promotional
expense was approximately $8,502 and $10,056 for the years ended December
31, 1995 and 1994, respectively.
3. INVENTORY
Inventory consists of the following at December 31,:
1995 1994
------- ------
Raw material, components and work in process $1,102 $3,080
Finished goods 2,268 3,856
------ ------
$3,370 $6,936
------ ------
4. COMMITMENTS AND CONTINGENCIES
HBIL has various purchase commitments for materials, supplies and other
items incidental to the ordinary course of business. In the aggregate,
such commitments are not at prices in excess of current
market price.
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THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
4. COMMITMENTS AND CONTINGENCIES, CONTINUED
At December 31, 1995, HBIL had certain obligations relating to the
Halston Fragrance brands under Distribution Arrangements with various
distributors.
Pursuant to the Agreement, the Buyer did not assume any product liability
in connection with any service performed or product manufactured prior to
March 20, 1996. In addition, the Buyer is obligated to purchase from HBIL
any product returns which are of saleable quality and delivered to the
Buyer by May 31, 1996.
5. CONCENTRATION OF NET SALES
Three customers accounted for 17%, 13% and 11% of net sales for the year
ended December 31, 1995 and four customers accounted for 14%, 29%, 12%
and 10% for the year ended December 31, 1994.
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(2) PRO FORMA FINANCIAL DATA
On March 21, 1996, the Company completed the Halston Acquisition, which
was accounted for using the purchase method of accounting. The following
unaudited pro forma condensed consolidated income statements and other operating
data for the year ended January 31, 1996 and the twelve months ended January 31,
1995 assume that the Halston Acquisition was consummated as of the beginning of
each of the periods presented and include certain adjustments to the historical
consolidated income statements of the Company to give effect to the acquisition
of trademarks, other intangible assets and other acquired net assets, the
payment of the purchase price in such acquisition, the related issuances of
additional indebtedness by the Company, and increased amortization of intangible
assets. The following unaudited pro forma condensed consolidated balance sheet
as of January 31, 1996, reflects the Halston Acquisition, the payment of the
purchase price in such acquisition and the related issuances of additional
indebtedness by the Company, as if such transaction had occurred on January 31,
1996.
The unaudited pro forma financial data should be read in conjunction with the
notes thereto and the historical Consolidated Financial Statements of the
Company (including the notes thereto) and the other historical financial
information included in the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1996. The pro forma adjustments are based upon available
information and certain assumptions that management of the Company believes area
reasonable. The pro forma results of operations for the year ended January 31,
1996 and the twelve months ended January 31, 1995 are not necessarily indicative
of the results of operations that would have been achieved had the transactions
reflected therein been consummated prior to the periods in which they were
completed, or that might be attained in the future.
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<TABLE>
<CAPTION>
(2)(a) PRO FORMA CONDENSED BALANCE SHEET
JANUARY 31, 1996
(IN THOUSANDS)
HISTORICAL ADJUSTMENTS (1) PRO FORMA
---------- --------------- ----------
<S> <C> <C> <C>
Current assets other than inventories....................... $16,731 $ (399) $ 16,332
Inventories................................................. 25,851 3,187 29,038
Property and equipment, net................................. 11,099 927 12,026
Exclusive brand license, net................................ 14,672 18,283 32,955
Other assets................................................ 3,031 -- 3,031
------- ------- --------
Total assets....................................... $71,384 $21,998 $93,382
====== ====== ======
Short-term debt............................................. $16,713 $1,000 $17,713
All other current liabilities............................... 17,846 992 18,838
Long-term liabilities....................................... 17,285 19,960 37,245
Redeemable preferred stock.................................. 2,000 -- 2,000
Convertible redeemable preferred stock...................... 4 6 10
Common stock................................................ 96 --- 96
Additional paid-in capital.................................. 10,334 40 10,374
Retained earnings........................................... 7,106 -- 7,106
-------- -------- --------
Total liabilities and shareholders' equity......... $71,384 $21,998 $93,382
====== ====== ======
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
(2)(b) PRO FORMA CONDENSED INCOME STATEMENT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL YEARS ENDED
-------------------------------
COMPANY HALSTON(1)
------- ----------
JANUARY 31, DECEMBER 31
1996 1995 (2) COMBINED ADJUSTMENTS PRO FORMA
-------------------------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................. $87,979 $28,521 $116,500 $(5,504)(3) $110,996
Cost of sales......................... 66,340 12,838 79,178 (5,504)(3) 73,674
------- ------- -------- ------ --------
Gross profit.......................... 21,639 15,683 37,322 -- 37,322
Operating expenses.................... 13,220 9,914 23,134 1,219 (4) 24,353
------- -------- -------- ------ --------
Income from operations................ 8,419 5,769 14,188 (1,219) 12,969
Interest expense, net................. (4,142) -- (4,142) (1,573)(5) (5,715)
Other income.......................... 661 -- 661 -- 661
-------- -------- --------- ------- ---------
Income before taxes................... 4,938 5,769 10,707 (2,792) 7,915
Income taxes.......................... 1,931 -- 1,931 1,235 (6) 3,166
------- -------- -------- ------ --------
Net income............................ $ 3,007 $ 5,769 $ 8,776 $(4,027) $ 4,749
======= ======= ======== ====== ========
Earnings per share (primary)(7)....... $ .35 $ .56
======== ========
OTHER OPERATING DATA:
EBITDA(8)............................. $ 9,738 $ 15,507
======== =======
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
(2)(c) PRO FORMA CONDENSED INCOME STATEMENT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL YEARS ENDED
-------------------------------
COMPANY HALSTON(1)
------- ----------
JANUARY 31, DECEMBER 31
1995 1994 (2) COMBINED ADJUSTMENTS PRO FORMA
-------------------------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................. $69,612 $33,978 $103,590 $(8,579)(3) $95,011
Cost of sales......................... 56,108 15,767 71,875 (8,579)(3) 63,296
------- ------- -------- ------- ------
Gross profit.......................... 13,504 18,211 31,715 -- 31,715
Operating expenses.................... 7,281 11,806 19,087 1,219 (4) 20,306
-------- ------- -------- ------ -------
Income from operations................ 6,223 6,405 12,628 (1,219) 11,409
Interest expense, net................. (2,119) -- (2,119) (1,573)(5) (3,692)
Other income.......................... 430 -- 430 -- 430
-------- --------- --------- ------- --------
Income before taxes................... 4,534 6,405 10,939 (2,792) 8,147
Income taxes.......................... 1,672 -- 1,672 1,587 (6) 3,259
------- -------- -------- ------ ------
Net income............................ $ 2,862 $ 6,405 $ 9,267 $(4,379) $ 4,888
======= ======= ======== ====== ======
Earnings per share (primary)(7)....... $ .40 $ .69
======== ======
OTHER OPERATING DATA:
EBITDA (8)............................ $ 6,562 $12,967
======= ======
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
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(2)(d) NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) To record the fair value of assets acquired and liabilities assumed in the
Halston Acquisition. The purchase price of approximately $22 million
included $19 million in cash (financed through borrowings of $16 million
from, and the issuance of Common Stock purchase warrants to, the Company's
bank lenders and the issuance of $3 million principal amount of the
Company's 8% Secured Subordinated Debentures), $2 million note to the
seller and assumption of trade payables of approximately $1 million.
(2) The Halston fragrance brands acquired from the Halston Entities were not
operated or accounted for separately by the Halston Entities. Accordingly
the partial information presented above is the only information available.
(3) To eliminate sales by the Halston Entities to the Company during the
respective periods.
(4) To record amortization for the trademarks and other intellectual property
acquired in the Halston Acquisition ($1,219,000 annually) over their
estimated useful lives of fifteen years.
(5) To record interest expense on the debt incurred in the Halston Acquisition.
(See Note 1 above).
(6) To record the aggregate tax effect of the Halston Acquisition at an assumed
rate of 40%.
(7) Per share amounts were determined based on the number of the Company's
common shares outstanding for each period (8,518,000 for the year ended
January 31, 1996 and 7,120,000 for the twelve months ended January 31,
1995) as if the Halston Acquisition was consummated as of the beginning of
each period. Common shares issuable upon the exercise of warrants or
conversion of the Company's Series C Convertible Preferred issued in the
acquisition were excluded from the computations for the applicable periods
because their effect would not have been dilutive.
(8) "EBITDA" is defined as operating income, plus depreciation and
amortization. EBITDA should not be considered as an alternative to
operating income (loss) or net income (loss) (as determined in accordance
with generally accepted accounting principles) as a measure of the
Company's operating performance or to net cash provided by operating,
investing and financing activities (as determined in accordance with
generally accepted accounting principles) as a measure of liquidity or
ability to meet cash needs. The Company believes that EBITDA is a measure
commonly reported and widely used by analysts, investors and other
interested parties as a measure of a fragrance Company's operating
performance and debt servicing ability because it assists in comparing
performance on a consistent basis without regard to depreciation and
amortization, which can vary significantly depending upon accounting
methods (particularly when acquisitions are involved) or nonoperating
factors (such as historical cost). Accordingly, this information has been
disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in the
fragrance industry and of the Company's debt servicing ability. However,
EBITDA may not be comparable in all instances to other similar types of
measures used in the fragrance industry. The Company's bank credit facility
contains certain covenants incorporating the same definition of EBITDA.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FRENCH FRAGRANCES, INC.
/S/ WILLIAM J. MUELLER
-------------------------------
Date: May 31, 1996 William J. Mueller
Vice President - Operations and
Chief Financial Officer
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