AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION STATEMENT NO. 333-4588
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FRENCH FRAGRANCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
FLORIDA 5122 59-0914138
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
OSCAR E. MARINA, ESQ.
14100 N.W. 60TH AVENUE 14100 N.W. 60TH AVENUE
MIAMI LAKES, FLORIDA 33014 MIAMI LAKES, FLORIDA 33014
(305) 620-9090 (305) 620-9090
(ADDRESS, INCLUDING ZIP CODE, (NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) OF AGENT FOR SERVICE)
</TABLE>
---------------
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
GEOFFREY K. WALKER
THOMAS R. MCGUIGAN, P.A. MEREDITH STEINFELD
BEATRIZ LLORENS, ESQ. MAYOR, DAY, CALDWELL & KEETON, L.L.P.
STEEL HECTOR & DAVIS LLP 700 LOUISIANA, 19TH FLOOR
200 S. BISCAYNE BLVD., SUITE 4000 HOUSTON, TEXAS 77002
MIAMI, FLORIDA 33131-2398 (713) 225-7023
(305) 577-2850
</TABLE>
---------------
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<S> <C> <C>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ------------------------------ -------------------- ----------------
Common Stock, $.01 par value $1,994,532 $688*
<FN>
- -------------
* Reflects additional filing fee payable pursuant to Rule 457(a) and (c)
based upon the number of additional shares being registered by this
Amendment.
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended. The
registration fee has been calculated based upon the average of the high
and low prices of the Company's Common Stock as reported by the Nasdaq
National Market on June 5, 1996, which was $6.9375.
</FN>
</TABLE>
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
FRENCH FRAGRANCES, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B) OF REGULATION S-K SHOWING THE LOCATION IN
THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges Prospectus Summary; Risk Factors
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Not applicable
7. Selling Security Holders Principal and Selling Shareholders
8. Plan of Distribution Inside and Outside Front Cover Pages; Underwriting
9. Description of Securities Price Range of Common Stock; Dividend Policy;
to be Registered Description of Capital Stock; Underwriting
10. Interests of Named Experts and Counsel Not applicable
11. Information with Respect Outside Front Cover Page; Prospectus Summary; Risk
to the Registrant Factors; Price Range of Common Stock; Dividend
Policy; Capitalization; Pro Forma Financial Data;
Selected Historical Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Principal and Selling Shareholders; Certain
Transactions; Description of Capital Stock; Shares
Eligible for Future Sale; Available Information;
Index to Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Not applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
5,000,000 SHARES
FRENCH FRAGRANCES, INC.
COMMON STOCK
Of the 5,000,000 shares of Common Stock offered hereby, 3,250,000 shares
are being sold by French Fragrances, Inc. (the "Company") and 1,750,000
shares are being sold by selling shareholders (the "Selling Shareholders").
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"FRAG." The last reported sale price of the Common Stock on June 5, 1996 as
reported by the Nasdaq National Market, was $6.75 per share. See "Price Range
of Common Stock."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS"
COMMENCING ON PAGE 7 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY (2) SHAREHOLDERS
Per Share ..... $ $ $ $
Total(3) ...... $ $ $ $
<FN>
- -------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended. The Representatives will
also receive warrants to purchase an aggregate of 162,500 shares of
Common Stock at 120% of the Price to Public for two years beginning one
year after the effective date of the Registration Statement of which this
Prospectus is a part. For additional information with respect to the
arrangements between the Company and the Representatives, see
"Underwriting."
(2) Before deducting offering expenses estimated to be approximately $600,000
payable by the Company.
(3) The Company and the Selling Shareholders have granted to the Underwriters
a 30-day option to purchase up to 750,000 additional shares of Common
Stock, solely to cover over-allotments, if any, on the same terms and
conditions as the shares offered hereby. One half of such over-allotment
shares is to be sold by the Selling Shareholders, on a pro rata basis in
accordance with the number of shares sold by each Selling Shareholder,
respectively. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
</FN>
</TABLE>
--------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right
to reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Rodman & Renshaw, Inc., New York, New
York, on or about , 1996.
--------------------
RODMAN & RENSHAW, INC. SANDERS MORRIS MUNDY
The date of this Prospectus is , 1996
<PAGE>
[PHOTOGRAPHS OF COMPANY PRODUCTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN
UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE
AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITING."
The Company owns registered trademarks for, and has worldwide rights to,
BOWLING GREEN, CATALYST, CHANCE, GREY FLANNEL, HALSTON, 1-12 and Z-14. This
Prospectus also contains trademarks and trade names of other companies. The
Company is the exclusive distributor in the United States of the Benetton
fragrance line and Galenic Elancyl skin care products.
2
<PAGE>
[PHOTOS OF COMPANY PRODUCTS]
THE COMPANY IS THE EXCLUSIVE UNITED STATES DISTRIBUTOR OF COLORS OF BENETTON,
OMBRE ROSE AND TRIBU FRAGRANCE PRODUCTS AND HAS EXCLUSIVE WORLDWIDE RIGHTS TO
OTHER FRAGRANCE PRODUCTS SHOWN ABOVE.
<PAGE>
[PHOTOS OF COMPANY PRODUCTS]
THE COMPANY IS THE EXCLUSIVE UNITED STATES DISTRIBUTOR OF FACONNABLE, LAPIDUS
AND DALISSIME FRAGRANCE PRODUCTS AND GALENIC ELANCYL SKIN CARE PRODUCTS AND HAS
EXCLUSIVE WORLDWIDE RIGHTS TO THE OTHER FRAGRANCE PRODUCTS SHOWN ABOVE.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH
HEREIN ASSUMES A PUBLIC OFFERING PRICE OF $7.00 PER SHARE AND ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ON NOVEMBER 30, 1995,
FRENCH FRAGRANCES, INC. ("FFI"), MERGED WITH AND INTO SUAVE SHOE CORPORATION,
A PUBLICLY HELD COMPANY THAT HAD PREVIOUSLY DISCONTINUED ITS SHOE
MANUFACTURING AND DISTRIBUTION OPERATIONS ("SUAVE"), WITH SUAVE AS THE
SURVIVING CORPORATION (THE "MERGER"). FOLLOWING THE MERGER, SUAVE CHANGED ITS
NAME TO FRENCH FRAGRANCES, INC. AND ITS OPERATIONS CONSIST ENTIRELY OF THE
FRAGRANCE BUSINESS OF FFI, WHICH WAS THE ACQUIROR IN THE MERGER FOR FINANCIAL
REPORTING PURPOSES. IN THIS PROSPECTUS, THE TERM "COMPANY" MEANS FFI PRIOR TO
THE MERGER AND THE SURVIVING CORPORATION NAMED FRENCH FRAGRANCES, INC.
FOLLOWING THE MERGER, AND THEIR RESPECTIVE SUBSIDIARIES (INCLUDING FINE
FRAGRANCES, INC.) AND PREDECESSORS ENGAGED IN THE MANUFACTURING AND
DISTRIBUTION OF FRAGRANCE PRODUCTS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
THE COMPANY
The Company is a manufacturer and distributor of prestige fragrances and
related cosmetic products in the United States, principally to mass-market
retailers. The Company has established itself as a distribution source for
more than 2,000 brand name items through brand ownership and exclusive
distribution arrangements, as well as through nonexclusive direct purchase
relationships. The Company currently markets its products to more than 23,600
separate retail locations including Sears, Eckerd Drugs, Wal-Mart, Walgreens,
Target, Kmart, T.J. Maxx, Marshalls, Marshall Fields, Macy's, Dayton Hudson
and J.C. Penney.
Over the past two years, the Company has emerged as a premier fragrance
distributor by focusing on providing mass-market retailers with a wide
selection and reliable source of prestige products and by pursuing brand
acquisition opportunities. At the same time, the Company has significantly
increased and diversified its customer base while broadening its product mix
and increasing its profitability. Since fiscal 1993, the Company has
experienced a 160% increase in net sales from approximately $33.9 million to
approximately $88.0 million for fiscal 1996. Over the same period, the
Company's EBITDA (as defined herein) increased 390% from approximately $2.0
million to approximately $9.7 million and net income increased 400% from
approximately $0.6 million to approximately $3.0 million.
The Company's strategy is to continue to expand its distribution business
and to acquire or obtain exclusive distribution rights to additional well
established prestige fragrance brands. Management believes that its marketing
and distribution capabilities, particularly within the mass market, enable it
to enhance the overall performance of such brands. During 1995, the Company
acquired from Sanofi Beaute, Inc. a long-term license to manufacture and
distribute worldwide the Geoffrey Beene fragrance brands, including GREY
FLANNEL, BOWLING GREEN and CHANCE (the "Geoffrey Beene Acquisition"), and
obtained the exclusive United States distribution rights for the Galenic
Elancyl skin care products and the Benetton fragrance and cosmetic brands,
including COLORS OF BENETTON and TRIBU. In March 1996, the Company completed
the purchase of the Halston fragrance brands, including HALSTON, CATALYST,
1-12 and Z-14 (the "Halston Acquisition"). In May 1996, the Company acquired
the principal assets of Fragrance Marketing Group, Inc., including exclusive
United States distribution rights to OMBRE ROSE, FACONNABLE, BALENCIAGA,
LAPIDUS, and several other brands (the "FMG Acquisition").
The Company believes that its growth and success have resulted from: (i)
management's established relationships with leading fragrance manufacturers
and retailers; (ii) its wide selection of
3
<PAGE>
highly recognized prestige fragrance and related cosmetic products; and (iii)
its ability to provide consistent supply and value-added services to
mass-market retailers.
The Company's principal executive offices are located at 15595 N.W. 15th
Avenue, Miami, Florida 33169, and its telephone number is (305) 620-9090.
THE OFFERING
Common Stock Offered by the Company ........ 3,250,000 shares
Common Stock Offered by the
Selling Shareholders ....................... 1,750,000 shares
Common Stock to be Outstanding
after the Offering ......................... 12,929,873 shares (1)
Use of Proceeds ............................. To reduce bank indebtedness and
for general corporate and working
capital purposes.
Nasdaq National Market Symbol ............... "FRAG"
- -------------
(1) As of May 31, 1996, excludes: (i) 592,040 shares of Common Stock, $.01
par value, issuable upon exercise of options outstanding under the
Company's stock option plans; (ii) 2,453,417 shares of Common Stock
issuable upon conversion of the Company's Series B Convertible Preferred
Stock, $.01 par value ("Series B Convertible Preferred"); (iii) 571,429
shares of Common Stock issuable upon conversion of the Company's Series C
Convertible Preferred Stock, $.01 par value ("Series C Convertible
Preferred"); (iv) 1,310,000 shares of Common Stock issuable upon the
exercise of outstanding warrants to purchase Common Stock; (v) 650,000
shares of Common Stock issuable upon conversion of the Company's 7.5%
Subordinated Convertible Debentures Due 2006 (the "7.5% Convertible
Debentures"), which will be issued concurrently with this offering in
connection with consummation of the Company's exchange offer (the
"Exchange Offer") for all of the Company's outstanding 12.5% Secured
Subordinated Debentures Due 2002 (the "12.5% Debentures") and all
outstanding shares of Series A Preferred Stock, $.01 par value ("Series A
Preferred"); (vi) 162,500 shares of Common Stock issuable upon exercise
of warrants to be issued to the Representatives in connection with this
offering; and (vii) 74,442 shares of Common Stock issuable in the event
of conversion of the Company's 5.0% Convertible Subordinated Debentures
Due January 1, 1997 (the "5.0% Convertible Debentures"). See "Certain
Transactions" and "Underwriting."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary historical financial data presented have been derived from the
consolidated financial statements of the Company. The summary unaudited pro
forma financial data for the year ended January 31, 1996 and the three months
ended April 30, 1996 give pro forma effect to the Halston Acquisition and FMG
Acquisition and to the FMG Acquisition, respectively, as if they had been
consummated as of the beginning of the periods presented. The pro forma and
as adjusted balance sheet data give effect to the FMG Acquisition as if it
had been consummated on April 30, 1996. The as adjusted balance sheet data
also assume consummation of the Exchange Offer and this offering as of April
30, 1996. The pro forma adjustments are based upon available information and
certain assumptions that management of the Company believes are reasonable.
The pro forma results of operations 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. The unaudited interim
consolidated financial statements of the Company as of and for the three
months ended April 30, 1996 and 1995 reflect all adjustments necessary in the
opinion of the Company's management (consisting only of normal recurring
adjustments) for a fair presentation of such financial data. The following
summary data should be read in conjunction with "Use of Proceeds,"
"Capitalization," "Pro Forma Financial Data," "Selected Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the
Company and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
HISTORICAL (1)
----------------------------------------
TWELVE
FISCAL MONTHS
YEAR ENDED ENDED
JUNE 30, JANUARY 31,
------------------------ --------------
1993 1994 1995
----------- ----------- --------------
<S> <C> <C> <C>
SELECTED STATEMENTS OF INCOME
DATA:
Net sales ...................... $33,854 $46,105 $69,612
Gross profit ................... 5,346 8,152 13,504
Income from operations ......... 1,742 2,898 6,222
Net income (loss) .............. $ 595 $ 1,011 $ 2,862
=========== =========== =============
SELECTED PER SHARE DATA (3):
Earnings per common
share equivalent:
Primary .................... $ .08 $ .14 $ .40
=========== =========== =============
Fully diluted .............. $ .08 $ .14 $ .40
=========== =========== =============
Weighted average number of
common share equivalents:
Primary .................... 7,120 7,120 7,120
Fully diluted .............. 7,120 7,120 7,120
OTHER SELECTED OPERATING DATA:
Gross margin (4) ................ 15.8% 17.7% 19.4%
EBITDA (5) ...................... $ 1,990 $ 3,233 $ 6,562
Cash flows from (used in):
Operating activities ........... $(3,022) $(2,593) $(4,893)
Investing activities ........... (2,414) (374) (247)
Financing activities ........... 5,448 3,231 5,245
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
HISTORICAL(1) PRO FORMA (2)
--------------------------------------- ---------------------------
THREE THREE
FISCAL MONTHS FISCAL MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
JANUARY 31, APRIL 30, JANUARY 31, APRIL 30,
-------------- ------------------------ -------------- -----------
1996 1995 1996 1996 1996
-------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF INCOME
DATA:
Net sales ...................... $87,979 $15,732 $19,316 $130,426 $22,392
Gross profit ................... 21,639 3,042 5,860 44,615 7,352
Income from operations ......... 8,419 847 1,420 13,932 740
Net income (loss) .............. $ 3,007 $ 148 $ 292 $ 4,243 $(1,001)
============== =========== =========== ============== ==========
SELECTED PER SHARE DATA (3):
Earnings per common
share equivalent:
Primary .................... $ .35 $ .02 $ .03 $ .50 $ (.09)
============== =========== =========== ============== ==========
Fully diluted .............. $ .33 $ .02 $ .03 $ .47 $ (.09)
============== =========== =========== ============== ==========
Weighted average number of
common share equivalents:
Primary .................... 8,518 7,120 11,176 8,518 11,176
Fully diluted .............. 9,121 7,120 11,486 9,121 11,486
OTHER SELECTED OPERATING DATA:
Gross margin (4) ................ 24.6% 19.4% 30.3% 34.2% 32.8%
EBITDA (5) ...................... $ 9,738 $ 1,133 $ 1,953 $ 17,452 $ 1,674
Cash flows from (used in):
Operating activities ........... $ 5,179 $ 743 $(7,615) $ 3,672 $(9,122)
Investing activities ........... (17,983) (18,419) (17,602) (51,170) (28,472)
Financing activities ........... 12,282 17,609 26,197 46,976 38,574
</TABLE>
5
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<TABLE>
<CAPTION>
AT APRIL 30, 1996
--------------------------------------------
ACTUAL PRO FORMA (2) AS ADJUSTED (6)
---------- -------------- ---------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital ............ $ 5,070 $ 2,193 $ 17,337
Total assets ............... 100,251 118,782 118,782
Total debt (7) ............. 62,456 77,861 59,417
Redeemable preferred stock 2,000 2,000 --
Shareholders' equity ....... 17,877 17,897 38,341
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
5
<PAGE>
- -----------
(1) Effective January 31, 1995, the Company changed its fiscal year end to
January 31 from June 30 to conform to its business year.
(2) Pro forma financial data give effect to the Halston Acquisition and the
FMG Acquisition as if each had occurred at the beginning of the period
presented. See "Pro Forma Financial Data." The Company expects that, in
the current fiscal year, its net sales of products covered by the
trademarks and brand licenses acquired in the Halston Acquisition and the
FMG Acquisition will be less than the net sales realized by Halston and
FMG in the year ended December 31, 1995. The anticipated decrease
reflects the Company's strategy with respect to both acquisitions, which
is to manage the sales volumes and channels of distribution of the
acquired brands in order to enhance the brands' prestige and long-term
profitability. However, there can be no assurance that this strategy will
be successful. Pro forma results for the three months ended April 30,
1996 reflect the historical results of operations of Halston and FMG
prior to the closing of the Halston Acquisition on March 20, 1996 and the
FMG Acquisition on May 14, 1996. During the negotiation and pending the
closing of the Halston Acquisition, Halston's sales decreased
significantly, to approximately $1.2 million for the first quarter of
1996 compared to approximately $3.6 million for the first quarter of
1995. This decrease was consistent with the Company's strategy in
acquiring the Halston brands. In the case of FMG, first-quarter 1996
results were adversely affected by FMG's lack of liquidity, which
severely limited its ability to acquire products for resale.
(3) Earnings per share and the weighted average number of common share
equivalents are based on the number of the Company's common shares
(7,120,000) received by the shareholders of FFI in the Merger for each
period prior to the fiscal year ended January 31, 1996. For the fiscal
year ended January 31, 1996, earnings per share and the weighted average
number of common share equivalents are based on the 7,120,000 shares
received by the shareholders of FFI in the Merger through the date of the
Merger and thereafter are based on the actual number of common shares and
common share equivalents outstanding.
(4) Gross profit as a percentage of net sales for the period indicated.
(5) "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 its ability to
meet cash needs. The Company believes that EBITDA is a measure commonly
reported and widely used by investors and other interested parties in the
fragrance industry 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.
(6) Adjusted to reflect: (i) the Exchange Offer, in which $5.46 million of
7.5% Convertible Debentures are to be issued concurrently with the
consummation of this offering in exchange for $3.46 million of currently
outstanding 12.5% Debentures and the 20,000 currently outstanding shares
of Series A Preferred; and (ii) the receipt by the Company of estimated
net proceeds from the issuance of 3,250,000 shares of Common Stock and
the application of such net proceeds to reduce debt outstanding under the
Company's bank credit facility. See "Use of Proceeds" and
"Capitalization."
(7) Excludes loans from shareholders and amounts due to affiliates, net.
6
<PAGE>
RISK FACTORS
IN EVALUATING AN INVESTMENT IN THE COMMON STOCK BEING OFFERED HEREBY,
INVESTORS SHOULD CONSIDER CAREFULLY, AMONG OTHER THINGS, THE FOLLOWING RISK
FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
ABSENCE OF CONTRACTS WITH SUPPLIERS AND CUSTOMERS
As is typical in the fragrance industry, the Company does not have
long-term or exclusive contracts with any of its customers. Except for
exclusive distribution contracts for certain products, the Company does not
have long-term or exclusive contracts with its suppliers. Sales to customers
and purchases from suppliers which do not have exclusive distribution
contracts with the Company are generally made pursuant to purchase orders.
The Company's ten largest suppliers accounted for approximately 90% of the
Company's purchases, and its ten largest customers accounted for
approximately 44% of net sales, for the fiscal year ended January 31, 1996.
The loss of, or a significant change in, the relationship between the Company
and any of its key suppliers or customers could have a material adverse
effect on the financial condition and results of operations of the Company.
The Company does not own or operate any manufacturing facilities and is
dependent on third-party manufacturers and suppliers for all of its supply of
Halston and Geoffrey Beene fragrances and related products and packaging
materials. The Company currently obtains its materials for these products
from a limited number of manufacturers and other suppliers. Delays in the
delivery of raw materials, components or finished products from manufacturers
or suppliers could have a material adverse effect on the financial condition
and results of operations of the Company. See "Business--Products" and
"Business--Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the performance
of its management team. The Company's future operations could be materially
adversely affected if the services of any of the Company's senior executives
were to cease to be available to the Company. In particular, the Company is
dependent on Rafael Kravec, its President and Chief Executive Officer, who
has extensive experience in the fragrance distribution business. The Company
has an employment agreement with Mr. Kravec that extends through July 2,
2000. It is an "event of default" under the Company's bank credit facility
(the "Credit Facility") with Fleet National Bank ("Fleet") and Bank of
America Illinois ("Bank of America" and collectively with Fleet, the
"Lenders") if Mr. Kravec ceases to be actively involved in the Company's
management and a replacement satisfactory to the Lenders does not succeed
him. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND INTEGRATION OF ACQUISITIONS
In order for the Company to continue to expand successfully, the Company's
management will be required to anticipate the changing and increasing demands
of the Company's growing operations and to implement appropriate operating
procedures and systems. There can be no assurance that management will
correctly anticipate these demands or successfully implement these procedures
and systems on a timely basis. The Company's success will also depend, in
part, upon its ability to integrate effectively into its operations new key
employees, new brands, and relationships with new suppliers and new
customers, including those associated with recent or future acquisitions. The
Company believes but cannot assure that it will be able to achieve such
integration. The Company is also in the process of refurbishing, and
relocating its executive offices to, its Miami Lakes, Florida distribution
facility (the "Facility"). Refurbishment and relocation are expected to be
completed during the summer of 1996, and the Company expects that it will
incur related capital expenditures of approximately $2 million during the
fiscal year ending January 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The Company will also need to review continually the
adequacy of its management information systems, including its inventory and
distribution systems. Failure to upgrade its information systems or
unexpected difficulties encountered
7
<PAGE>
with these systems during relocation or expansion could have a material
adverse effect on the business, financial condition and results of operations
of the Company.
NO ASSURANCE OF FUTURE GROWTH OR ACQUISITIONS
The Company's strategy is to continue to expand its distribution business
and to obtain exclusive distribution rights to additional well established
prestige fragrance brands. There can be no assurance that the Company will be
successful in maintaining or increasing its distribution business. Currently,
the Company has no agreements or commitments for the acquisition of
additional brands or exclusive distribution arrangements. There can be no
assurance that the Company will be successful in identifying, negotiating and
consummating such acquisitions or arrangements or that the terms of any such
acquisitions or arrangements that may be available will be acceptable to the
Company.
FUTURE CAPITAL REQUIREMENTS; POSSIBLE INABILITY TO OBTAIN ADDITIONAL
FINANCING
The Company's capital requirements have been and will continue to be
significant. To date, the Company has financed its capital requirements
principally through cash flow from operations and bank and other borrowings,
including loans and advances from shareholders and affiliates. There are no
arrangements or commitments for any further loans or advances from
shareholders and affiliates. The Company's future expansion, if any, will be
dependent upon the capital resources available to the Company. Excluding any
additional working capital requirements which may result from the expansion
of the Company's operations, management believes that internally generated
funds, available financing under the Credit Facility and the net proceeds
from this offering will be sufficient to fund the Company's operations for at
least the next twelve months. The Company's future growth and acquisitions of
additional fragrance brands or exclusive distribution rights are dependent on
the Company's ability to obtain future equity or debt financing, and any such
additional debt financing would require the consent of the Lenders under the
Credit Facility. There can be no assurance that the Company will be able to
obtain additional financing for such purposes or that any additional
financing will be available in amounts required or on terms satisfactory to
the Company. See "Use of Proceeds," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SEASONALITY AND FLUCTUATIONS IN QUARTERLY SALES
The Company's business is seasonal, with a majority of its sales and
income from operations generated during the second half of its fiscal year as
a result of increased demand by retailers in anticipation of and during the
holiday season. Any substantial decrease in sales during such period would
have a material adverse effect on the financial condition and results of
operations of the Company. Similarly, the Company's working capital needs are
seasonal. The Company's working capital borrowings under the Credit Facility
generally peak during the third fiscal quarter. In addition, the Company's
sales and profitability may vary from quarter to quarter as a result of a
variety of factors, including the timing of customer orders, additions or
losses of brands or distribution rights and domestic or international
competitive pricing pressures. Although the Company establishes programs and
budgets with certain customers, the Company does not have contractual
commitments for delivery of most of its distributed products. As a result,
substantially all of the Company's sales in each quarter are attributable to
orders received and supplied in that quarter. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Seasonality."
FLUCTUATIONS IN INTEREST RATES
A majority of the Company's indebtedness bears interest at rates related
to the prime interest rate charged by banks, which is subject to adjustment.
As a result, the Company's interest expense is sensitive to fluctuations in
interest rates. A significant increase in the prime rate could have a
material adverse effect on the financial condition, results of operations and
liquidity of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
8
<PAGE>
COMPETITION
The fragrance industry is highly competitive and at times subject to
rapidly changing consumer preferences and industry trends. The Company
competes with a large number of distributors and manufacturers, many of which
have significantly greater financial, marketing, distribution, personnel and
other resources than the Company, thereby permitting such companies to
implement extensive advertising and promotional programs, both generally and
in response to efforts by additional competitors to enter new markets and
introduce new products. The Company's products compete for consumer
recognition and shelf space with fragrance products which have achieved
significant international, national and regional brand name recognition and
consumer loyalty. The Company's products also compete with new products,
which are regularly introduced and accompanied by substantial promotional
campaigns. These factors, as well as demographic trends, international,
national, regional and local economic conditions, discount pricing strategies
by competitors and direct sales by manufacturers to the Company's customers
could result in increased competition for the Company and could have a
material adverse effect on the financial condition and results of operations
of the Company. See "Business--Competition."
CONTROL BY BEDFORD CAPITAL CORPORATION AND ITS AFFILIATES AND RAFAEL KRAVEC
Bedford Capital Corporation ("Bedford"), a wholly-owned subsidiary of
Bedford Capital Financial Corp. ("BCFC"), is a Toronto-based firm which is
engaged in the business of providing investment banking services and equity,
through two private pools of capital, Bedford Fund I and Bedford Fund II
(collectively, the "Bedford Funds"), to middle-market companies. Currently,
Bedford has sole voting power with respect to the shares of the Common Stock
owned by investors in the Bedford Funds, including companies controlled by
J.W. Nevil Thomas, E. Scott Beattie and Richard C.W. Mauran, who are
directors of both Bedford and the Company (the investors in the Bedford Funds
collectively with Bedford, the "Bedford Interests"). By virtue of such voting
power, following the offering and the Exchange Offer, Bedford will
beneficially own 5,490,043 shares (approximately 33.7%) of the Common Stock
(including shares issuable upon the conversion of the Series B Convertible
Preferred, the Series C Convertible Preferred and the 7.5% Convertible
Debentures and shares issuable upon the exercise of then exercisable stock
options by Richard C.W. Mauran). Following the offering and the Exchange
Offer, Rafael Kravec, the Company's President and Chief Executive Officer,
will beneficially own 2,733,818 shares (approximately 20.6%) of the Common
Stock (including shares issuable upon the conversion of the Series B
Convertible Preferred, the Series C Convertible Preferred and the 7.5%
Convertible Debentures and shares issuable upon the exercise of then
exercisable stock options). The aggregate beneficial ownership of Bedford and
Rafael Kravec will permit such persons to control and direct the management
and affairs of the Company without the concurrence of the Company's other
shareholders. Such control will prevent a change in control of the Company
without the consent of Bedford and Rafael Kravec. In addition, nominees of
Bedford constitute 50% of the Company's Board of Directors (the "Board") and,
together with Rafael Kravec, control the Board. See "Management," "Principal
and Selling Shareholders" and "Certain Transactions." In addition, it is an
"event of default" under the Credit Facility if the Bedford Interests, which
include the Bedford affiliates, Rafael Kravec and Fred Berens (a director and
shareholder of the Company), in the aggregate, cease to have control of the
Board and voting control of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
UNCERTAINTY OF PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE
Although the Common Stock has been traded on the Nasdaq National Market
since December 21, 1995, trading has been limited on such market prior to
this offering. There is no assurance that an active trading market will
develop or be sustained after the offering or that any market that may
develop for the Common Stock will provide adequate liquidity to holders of
the Common Stock. The trading price of the Common Stock could be subject to
wide fluctuations in response to factors such as quarterly or cyclical
variations in the Company's financial results, future announcements
concerning the Company or its competitors, perceptions of the Company's
success, or lack thereof, in pursuing its growth strategy,
9
<PAGE>
prevailing interest rates, governmental regulation, developments affecting
the fragrance industry, changes in analysts' recommendations regarding the
Company, other fragrance companies or the fragrance industry generally and
general market conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of additional shares of Common Stock, or the
perception that such sales could occur, may have a material adverse effect on
prevailing market prices for the Common Stock and the Company's ability to
raise additional capital in the financial markets at a time and price
favorable to the Company. Upon completion of this offering and the Exchange
Offer, 12,929,873 shares of Common Stock will be outstanding and an
additional 5,651,328 shares of Common Stock will be reserved for issuance
upon conversion of the Series B Convertible Preferred, the Series C
Convertible Preferred, the 7.5% Convertible Debentures and the 5.0%
Convertible Debentures and upon the exercise of outstanding stock options and
warrants. Approximately 1,800,000 currently outstanding shares, as well as
the shares offered hereby, will not be subject to lock-up agreements with the
Representatives and will be immediately freely tradeable in the public market
without restriction under the Securities Act, except for any shares purchased
by an "affiliate" of the Company (as that term is defined in the rules and
regulations under the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act. In addition, the Company
has entered into registration rights agreements granting certain demand and
piggyback registration rights to the holders of the Series B Convertible
Preferred (which are convertible at $3.30 per share into an aggregate of
2,453,417 shares of Common Stock) and the Series C Convertible Preferred
(which are convertible at $5.25 per share into an aggregate of 571,429 shares
of Common Stock), and to current or former affiliates of the Company. In
connection with this offering, officers, directors and certain shareholders
of the Company, including the Bedford Interests (who will in the aggregate
hold a majority of the outstanding Common Stock and will beneficially own all
shares of Common Stock issuable upon exercise or conversion of other
outstanding securities) will enter into lock-up agreements with the
Representatives of the Underwriters not to sell or otherwise transfer any
Common Stock not included in the offering pursuant to this Prospectus for a
period of 180 days after the later of the effective date of this Prospectus
or the first date on which the shares are bona fide offered to the public,
without the prior written consent of the Representatives. See "Shares
Eligible for Future Sale" and "Underwriting."
ISSUANCE OF ADDITIONAL STOCK; ANTITAKEOVER PROVISIONS
Upon completion of this offering and the Exchange Offer, the authorized,
unissued and unreserved shares of the Company will include (i) a total of
approximately 31,400,000 shares of Common Stock (assuming the exercise of all
outstanding warrants and options and the conversion of the shares of the
Series B Convertible Preferred, the Series C Convertible Preferred, the 7.5%
Convertible Debentures and the 5.0% Convertible Debentures), and (ii) a total
of 4,428,571 shares of Serial Preferred Stock, $.01 par value ("Serial
Preferred"). The Board, without any action by the Company's shareholders, is
authorized to issue additional shares of Common Stock and to designate and
issue shares of Serial Preferred in such series as it deems appropriate and
to establish the rights, preferences and privileges of such Serial Preferred,
including dividend, voting and liquidation rights. The ability of the Board
to issue additional shares of Common Stock and to designate and issue Serial
Preferred having preferential rights could impede or deter an unsolicited
tender offer or other takeover proposal regarding the Company, and the
designation and issuance of additional Serial Preferred having preferential
rights could adversely affect the voting power and the other rights of
holders of the Common Stock. Furthermore, because it is a Florida
corporation, the Company and its shareholders' voting rights are subject to
certain legislation, including the Florida Control Share Act and the Florida
Affiliated Transactions Act, that may deter or frustrate any potential
takeover of the Company. See "Description of Capital Stock."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $20,444,000 (approximately $22,872,000 if the over-allotment
option is exercised in full), after deducting underwriting discounts and
estimated offering expenses payable by the Company. The Company will not
receive any of the proceeds from the sale of the shares offered by the
Selling Shareholders.
The Company intends to use such net proceeds as follows: (i) approximately
$9.3 million will be used to repay the then remaining outstanding balance of
term indebtedness to banks incurred in connection with the Halston
Acquisition, which originally consisted of (a) a $1 million term note due
December 31, 1996, having a current interest rate at 0.75% over the bank's
prime rate (the "Halston Term Note No. 1") and (b) a $9 million term note due
March 14, 1998, having a current interest rate at 1.75% over the bank's prime
rate (the "Halston Term Note No. 2"); and (ii) the balance of the net
proceeds (approximately $11.1 million) will initially be applied to reduce
outstanding borrowings under the Credit Facility. The amount initially
applied to reduce outstanding borrowings under the Credit Facility may
thereafter be reborrowed in accordance with the terms of that facility and,
together with other funds available, will be available for working capital
and other general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"FRAG." From the consummation of the Merger on November 30, 1995 through
December 20, 1995, the Common Stock was traded on the Over-the-Counter
Bulletin Board ("OTC"). The following table sets forth, for the quarters
indicated, the high and low closing bid prices of the securities on the OTC
and the high and low sale prices of the Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
YEAR ENDED JANUARY 31, 1996:
Fourth Quarter (November 30, 1995 through December 20, 1995) ... $5 1/8 $4 1/4
Fourth Quarter (December 21, 1995 through January 31, 1996) .... 6 5/8 4 3/8
FISCAL YEAR ENDING JANUARY 31, 1997:
First Quarter ................................................... $7 7/16 $5 1/8
Second Quarter (through June 5, 1996) ........................... 7 11/16 6 1/2
</TABLE>
OTC quotations reflect interdealer prices, without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions. On June 5, 1996, the last reported sale price for the Common
Stock on the Nasdaq National Market was $6.75. As of May 22, 1996, there were
approximately 567 shareholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and for the
foreseeable future intends to follow a policy of retaining all of its
earnings, if any, to finance the development and continued expansion of its
business. There can be no assurance that dividends will ever be paid by the
Company. In addition, under the terms of the 5.0% Convertible Debentures and
the Credit Facility, the Company is currently restricted from declaring or
paying any cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
11
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at April 30, 1996, on a pro forma basis to reflect the FMG
Acquisition, and as adjusted to reflect the consummation of the Exchange
Offer and the sale of 3,250,000 shares of Common Stock offered by the Company
hereby. The following table should be read in conjunction with the Company's
Consolidated Financial Statements (including the related notes) and the other
historical and pro forma financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT APRIL 30, 1996
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (1)(2) ............................................ $28,817 $33,141(3) $17,997
========== ============= ==============
Long-term liabilities (2):
Secured subordinated debentures .................................. $14,682 $25,762(3) $22,302(4)
Convertible subordinated debentures .............................. -- -- 5,460(4)
Term notes and bridge loan ....................................... 17,543 17,543 12,243
Capital lease and installment loans .............................. 1,227 1,227 1,227
---------- ------------- --------------
Total long-term liabilities ..................................... 33,452 44,532 41,232
---------- ------------- --------------
Redeemable preferred stock, Series A, $.01 par value; stated at
liquidation preference value of $100 per share; 20,000 shares
authorized, issued and outstanding .............................. 2,000 2,000 --(4)
---------- ------------- --------------
Shareholders' equity:
Convertible, redeemable preferred stock:
Series B, $.01 par value (liquidation preference $.01 per
share); 350,000 shares authorized, issued and outstanding ..... 4 4 4
Series C, $.01 par value (liquidation preference $.01 per
share); 571,429 shares authorized, issued and outstanding ..... 5 5 5
---------- ------------- --------------
Total convertible, redeemable preferred stock ................... 9 9 9
Common stock, $.01 par value, 50,000,000 shares authorized;
9,641,290 shares issued and outstanding Actual and Pro Forma,
and 12,891,290 as adjusted ..................................... 96 96 129
Additional paid-in capital ....................................... 10,374 10,394 30,805
Retained earnings ................................................ 7,398 7,398 7,398
---------- ------------- --------------
Total shareholders' equity .................................... 17,877 17,897 38,341
---------- ------------- --------------
Total capitalization .......................................... $53,329 $64,429 $79,573
========== ============= ==============
<FN>
- -----------
(1) Includes current portion of long-term liabilities, excluding $188,000 of
current capital lease and installment loan obligations.
(2) Excludes loans from shareholders and amounts due to affiliates, net.
(3) Reflects the issuance in connection with the FMG Acquisition of $11.1
million aggregate principal amount of 8.5% Subordinated Debentures and
$4.3 million of additional indebtedness funded from the Credit Facility.
(4) In connection with the Exchange Offer, the Series A Preferred will be
exchanged along with the 12.5% Debentures for $5.46 million aggregate
principal amount of 7.5% Convertible Debentures.
</FN>
</TABLE>
12
<PAGE>
PRO FORMA FINANCIAL DATA
On March 20, 1996, the Company completed the Halston Acquisition, which
was accounted for using the purchase method of accounting. On May 14, 1996,
the Company acquired the principal assets of FMG which was accounted for
using the purchase method of accounting. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Business--Licensing and Exclusive Distribution
Agreements" and Note 14 of Notes to the Consolidated Financial Statements of
the Company.
The following unaudited pro forma condensed consolidated statements of
income and other operating data for the three months ended April 30, 1996 and
the fiscal year ended January 31, 1996 assume that the Halston Acquisition
and the FMG Acquisition were consummated as of the beginning of each of the
periods presented and include certain adjustments to the historical
consolidated statements of income of the Company to give effect to the
acquisition of intangible trademarks and associated rights, license and
distribution arrangements and other acquired net assets, the payment of the
purchase prices in such acquisitions, 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
April 30, 1996, reflects the FMG Acquisition, the payment of the purchase
price in such acquisition and the related issuance of additional indebtedness
by the Company, as if such transaction had occurred on April 30, 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 elsewhere in this Prospectus. The unaudited pro forma
financial data 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.
13
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------
HISTORICAL FMG (1) PRO FORMA
------------- -------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets, excluding inventories ...... $ 21,544 $ (60) $ 21,484
Inventories ................................. 30,448 4,614 35,062
Property and equipment, net ................. 12,188 69 12,257
Exclusive brand licenses, net ............... 32,707 13,908 46,615
Other assets ................................ 3,364 -- 3,364
------------- -------------- ------------
Total assets ............................... $100,251 $18,531 $118,782
============= ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Short-term debt ............................. $ 28,817 $ 4,324 $ 33,141
All other current liabilities ............... 18,105 3,107 21,212
Long-term liabilities ....................... 33,452 11,080 44,532
Redeemable preferred stock .................. 2,000 -- 2,000
Shareholders' equity:
Convertible, redeemable preferred stock .... 9 -- 9
Common stock ................................ 96 -- 96
Additional paid-in capital .................. 10,374 20 10,394
Retained earnings ........................... 7,398 -- 7,398
------------- -------------- ------------
Total shareholders' equity ................. 17,877 20 17,897
------------- -------------- ------------
Total liabilities and shareholders' equity $100,251 $18,531 $118,782
============= ============== ============
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
HISTORICAL YEARS ENDED
-------------------------------
COMPANY FMG
-------------- ---------------
HALSTON ACQUISITION
JANUARY 31, DECEMBER 31, (2) PRO FORMA
1996 1995 COMBINED AND ADJUSTMENTS (3)
-------------- --------------- ----------- ---------------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ................. $ 87,979 $19,430 $107,409 $28,521 (2) $130,426
(5,504)(4)
Cost of sales ............. 66,340 12,137 78,477 12,838 (2) 85,811
-------------- --------------- ----------- ---------------------- -------------
(5,504)(4)
Gross profit ............ 21,639 7,293 28,932 15,683 44,615
Operating expenses ........ 13,220 5,403 18,623 9,914 (2) 30,683
-------------- --------------- ----------- ---------------------- -------------
2,146 (5)
Income from operations ... 8,419 1,890 10,309 3,623 13,932
Interest expense, net .... (4,142) (863) (5,005) (2,517)(6) (7,522)
Other income .............. 661 -- 661 -- 661
-------------- --------------- ----------- ---------------------- -------------
Income before income taxes 4,938 1,027 5,965 1,106 7,071
Provision for income taxes 1,931 -- 1,931 897 (7) 2,828
-------------- --------------- ----------- ---------------------- -------------
Net income .............. $ 3,007 $ 1,027 $ 4,034 $ 209 $ 4,243
============== =============== =========== ====================== =============
Earnings per common share
equivalent (8):
Primary ................. $ .35 $ .50
============== =============
Fully diluted ........... $ .33 $ .47
============== =============
Weighted average number of
common share equivalents:
Primary ................. 8,518 8,518
Fully diluted ........... 9,121 9,121
OTHER OPERATING DATA:
Gross margin (9) ......... 24.6% 34.2%
EBITDA (10) .............. $ 9,738 $ 17,452
Cash flows from (used
in):
Operating activities .... $ 5,179 $ 3,672
Investing activities ... (17,983) (51,170)
Financing activities ... 12,282 46,976
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
COMPANY FMG
----------- ----------
THREE THREE
MONTHS MONTHS
ENDED ENDED HALSTON ACQUISITION
APRIL 30, MARCH 31, (2) PRO FORMA
1996 1996 COMBINED AND ADJUSTMENTS (3)
------------ ----------- ----------- ---------------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ....................... $ 19,316 $2,242 $21,558 $1,210 (2) $ 22,392
(376)(4)
Cost of sales ................... 13,456 1,547 15,003 413 (2) 15,040
------------ ----------- ----------- ---------------------- -------------
(376)(4)
Gross profit ................. 5,860 695 6,555 797 7,352
Operating expenses .............. 4,440 916 5,356 855 (2) 6,612
------------ ----------- ----------- ---------------------- -------------
401 (5)
Income from operations .......... 1,420 (221) 1,199 (459) 740
Interest expense, net ........... (1,199) (136) (1,335) (477)(6) (1,812)
Other income .................... 231 231 231
------------ ----------- ----------- ---------------------- -------------
Income before income taxes ..... 452 (357) 95 (936) (841)
Provision for income taxes ..... 160 160 160
------------ ----------- ----------- ---------------------- -------------
Net income ..................... $ 292 $ (357) $ (65) $ (936) $ (1,001)
============ =========== =========== ====================== =============
Earnings per common share
equivalent (8):
Primary ....................... $ .03 $ (.09)
============
Fully diluted ................. $ .03 $ (.09)
============ =============
Weighted average number of
common share equivalents:
Primary ....................... 11,176 11,176
Fully diluted ................. 11,486 11,486
OTHER OPERATING DATA:
Gross margin (9) ............... 30.3% 32.8%
EBITDA (10) .................... $ 1,953 $ 1,674
Cash flows from (used in):
Operating activities .......... $ (7,615) $ (9,122)
Investing activities .......... (17,602) (28,472)
Financing activities .......... 26,197 38,574
</TABLE>
SEE NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the estimated fair value of assets acquired and liabilities
assumed in the FMG Acquisition. The purchase price was $4.3 million in
cash (financed through borrowings under the Credit Facility), assumption
of $3.1 million of liabilities and issuance of $11.1 million of
debentures and Common Stock purchase warrants.
<TABLE>
<CAPTION>
FMG HISTORICAL
DECEMBER 31, FMG HISTORICAL FAIR
1995 MARCH 31, 1996 VALUE
----------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net assets acquired:
Accounts receivable ........ $ 1,119 $ 1,874 $ 575*
Inventories ................ 7,788 6,917 5,523*
Property and equipment, net 160 152 69
Exclusive brand licenses .. -- -- 13,908
Liabilities assumed ........ (4,780) (2,733) (3,107)
----------------- --------------- ----------
Total ..................... $ 4,287 $ 6,210 $16,968
================= =============== ==========
</TABLE>
* Amounts were reduced by $635,000 and $909,000 of accounts receivable and
inventories, respectively, representing additional considerations
provided to FMG.
(2) The Halston fragrance brands acquired were not operated or accounted for
separately by Halston. In addition, Halston had never segregated
indirect operating cost information relative to these brands.
Accordingly, the pro forma adjustments reflect the historical net sales,
cost of sales and direct operating expenses of the Halston Fragrance
brands for the year ended December 31, 1995 and for the period from
January 1, 1996 through March 20, 1996. Direct operating expenses
consist principally of marketing, advertising and demonstrator expenses
and exclude selling, general and administrative, research and
development, interest, income tax and amortization of intangible
expenses. See Note 1 of Notes to Financial Statements of the Halston
Fragrance Brands of Halston Borghese International Limited included
elsewhere herein.
(3) The Company expects that, in the current fiscal year, its net sales of
products covered by the trademarks and brand licenses acquired in the
Halston Acquisition and the FMG Acquisition will be less than the net
sales realized by Halston and FMG in the year ended December 31, 1995.
The anticipated decrease reflects the Company's strategy with respect to
both acquisitions, which is to manage the sales volumes and channels of
distribution of the acquired brands in order to enhance the brands'
prestige and long-term profitability. However, there can be no assurance
that this strategy will be successful. Pro forma results for the three
months ended April 30, 1996 reflect the historical results of operations
of Halston and FMG prior to the closing of the Halston Acquisition on
March 20, 1996 and the FMG Acquisition on May 14, 1996. During the
negotiation and pending the closing of the Halston Acquisition,
Halston's sales decreased significantly, to approximately $1.2 million
for the first quarter of 1996 compared to approximately $3.6 million for
the first quarter of 1995. This decrease was consistent with the
Company's strategy in acquiring the Halston brands. In the case of FMG,
first-quarter 1996 results were adversely affected by FMG's lack of
liquidity, which severely limited its ability to acquire products for
resale.
(4) To eliminate sales by Halston to the Company during the respective
periods.
(5) To record amortization for the exclusive brand licenses acquired in the
Halston Acquisition ($1,219,000 and $169,000 for the year ended January
31, 1996 and the three months ended April 30, 1996, respectively) and in
the FMG Acquisition ($927,000 and $232,000 for the year ended January
31, 1996 and the three months ended April 30, 1996, respectively) over
their estimated useful lives of 15 years.
(6) To record interest expense on the debt incurred in the Halston
Acquisition and incurred in the FMG Acquisition (see Note 1 above).
(7) To record the aggregate tax effect of the Halston Acquisition and the
FMG Acquisition at an assumed rate of 40%.
(8) Per share amounts were determined based on the number of the Company's
common shares outstanding for each period (8,517,760 for the fiscal year
ended January 31, 1996 and 11,175,985 for the three months ended April
30, 1996).
(9) Gross profit as a percentage of net sales for the period presented.
17
<PAGE>
(10) "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 its ability to meet cash needs. The Company believes that EBITDA is a
measure commonly reported and widely used by investors and other
interested parties in the fragrance industry 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 Credit Facility contains certain covenants incorporating
the same definition of EBITDA.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical financial data have been derived from
the audited and unaudited consolidated financial statements of the Company
and certain information available from its predecessor, National Trading
Manufacturing, Inc. ("National Trading"). The unaudited interim consolidated
financial statements of the Company as of and for the three months ended
April 30, 1996 and 1995 reflect all adjustments necessary in the opinion of
the Company's management (consisting only of normal recurring adjustments)
for a fair presentation of such financial data. The following data should be
read in conjunction with such consolidated financial statements and related
notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other historical and pro forma financial
information included elsewhere herein.
Effective January 31, 1995, the Company changed its fiscal year end to
January 31 from June 30. For this reason, the seven months ended January 31,
1995 and 1994 are presented.
<TABLE>
<CAPTION>
NATIONAL TRADING (1)
-------------------------------
SEVEN
MONTHS
FISCAL SIX MONTHS FISCAL ENDED
YEAR ENDED ENDED YEAR ENDED JANUARY
DECEMBER 31, JUNE 30, JUNE 30, 31,
------------------ ----------- -------------------- ---------
1990 1991 1992 1993 1994 1994
-------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF
INCOME DATA:
Net sales ........................... $21,317 $28,279 $14,537 $33,854 $46,105 $27,415
Cost of sales ........................ 18,818 23,840 12,230 28,508 37,953 22,692
Gross profit ......................... 2,499 4,439 2,307 5,346 8,152 4,723
Operating expenses ................... -- -- -- 3,604 5,254 2,960
Income from operations ............... -- -- -- 1,742 2,898 1,763
Interest expense, net of interest and
other income ....................... -- -- -- 1,091 1,522 819
Net income ........................... $ -- $ -- $ -- $ 595 $ 1,011 $ 641
======== ========= =========== ========= ========= =========
SELECTED PER SHARE DATA (2):
Earnings per common share equivalent:
Primary ........................... $ -- $ -- $ -- $ .08 $ .14 $ .09
======== ========= =========== ========= ========= =========
Fully diluted ..................... $ -- $ -- $ -- $ .08 $ .14 $ .09
======== ========= =========== ========= ========= =========
Weighted average number of common
share equivalents:
Primary ........................... $ -- $ -- $ -- 7,120 7,120 7,120
======== ========= =========== ========= ========= =========
Fully diluted ..................... $ -- $ -- $ -- 7,120 7,120 7,120
======== ========= =========== ========= ========= =========
OTHER SELECTED OPERATING DATA:
Gross margin (3) ..................... 11.7% 15.7% 15.9% 15.8% 17.7% 17.2%
EBITDA (4) ........................... $ -- $ -- $ -- $ 1,990 $ 3,233 $ 1,964
Cash flows from (used in):
Operating activities ................ $ -- $ -- $ -- $(3,022) $(2,593) $(1,690)
Investing activities ................ -- -- -- (2,414) (374) (240)
Financing activities ................ -- -- -- 5,448 3,231 2,458
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEVEN TWELVE
MONTHS MONTHS
ENDED ENDED FISCAL THREE MONTHS
JANUARY JANUARY YEAR ENDED ENDED
31, 31, JANUARY 31, APRIL 30,
--------- ------------ ----------- -----------------------
1995 1995 1996 1995 1996
--------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF
INCOME DATA:
Net sales ........................... $50,922 $69,612 $87,979 $15,732 $19,316
Cost of sales ........................ 40,822 56,108 66,340 12,690 13,455
Gross profit ......................... 10,100 13,504 21,639 3,042 5,860
Operating expenses ................... 4,940 7,281 13,220 2,195 4,440
Income from operations ............... 5,160 6,222 8,419 847 1,420
Interest expense, net of interest and
other income ....................... 1,362 1,992 3,768 796 1,059
Net income ........................... $ 2,492 $ 2,862 $ 3,007 $ 148 $ 292
========= ============ =========== ========= =========
SELECTED PER SHARE DATA (2):
Earnings per common share equivalent:
Primary ........................... $ .35 $ .40 $ .35 $ .02 $ .03
Fully diluted ..................... $ .35 $ .40 $ .33 $ .02 $ .03
========= =========== =========== ========= =========
Weighted average number of common
share equivalents:
Primary ........................... 7,120 7,120 8,518 7,120 11,176
Fully diluted ..................... 7,120 7,120 9,121 7,120 11,486
OTHER SELECTED OPERATING DATA:
Gross margin (3) ..................... 19.8% 19.4% 24.6% 19.4% 30.3%
EBITDA (4) ........................... $ 5,366 $ 6,562 $ 9,738 $ 1,133 $ 1,953
Cash flows from (used in):
Operating activities ................ $(3,917) $(4,893) $ 5,179 $ 743 $(7,615)
Investing activities ................ (81) (247) (17,983) (18,419) (17,602)
Financing activities ................ 4,368 5,245 12,282 17,609 26,197
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NATIONAL TRADING (1)
-----------------------------
DECEMBER 31, JUNE 30, JUNE 30,
---------------- ----------- ---------
1990 1991 1992 1993
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital ............ $ -- $ -- $ 2,790 $ 3,972
Total assets ............... -- -- 11,502 19,419
Total debt (5) ............. -- -- 7,042 13,860
Redeemable preferred stock -- -- -- 2,000
Shareholders' equity ....... -- -- 3,188(6) 875
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
JUNE 30, JANUARY 31, APRIL 30,
--------- -------------------- ------------
1994 1995 1996 1996
--------- -------------------- ------------
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital ............ $ 4,747 $ 6,874 $ 8,022 $ 5,070
Total assets ............... 30,589 38,378 71,384 100,251
Total debt (5) ............. 16,263 21,153 34,800 62,456
Redeemable preferred stock 2,000 2,000 2,000 2,000
Shareholders' equity ....... 1,887 4,379 17,539 17,877
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
19
<PAGE>
(1) On July 1, 1992, the Company was formed for the purpose of acquiring the
net assets of the fragrance and cosmetic business of National Trading.
National Trading did not maintain separate financial statements for the
acquired business. Accordingly, the partial information presented above
is the only available data.
(2) Earnings per common share equivalent and the weighted average number of
common share equivalents is determined based on the number of the
Company's common shares (7,120,000) received by the shareholders of FFI
in connection with the Merger for each period prior to the fiscal year
ended January 31, 1996. For the fiscal year ended January 31, 1996,
earnings per common share equivalent and the weighted average number of
common share equivalents are based on the 7,120,000 received by the
shareholders of FFI in the Merger through the date of the Merger and
thereafter are based on the actual number of common shares and common
share equivalents outstanding.
(3) Gross profit as a percentage of net sales for the period indicated.
(4) "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 its ability to
meet cash needs. The Company believes that EBITDA is a measure commonly
reported and widely used by investors and other interested parties in the
fragrance industry 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 Credit Facility contains
certain covenants incorporating the same definition of EBITDA.
(5) Excludes loans to shareholders and amounts due to affiliates, net.
(6) Represents the net assets sold to the Company by National Trading.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's business is (i) the manufacturing, distribution and
marketing of prestige fragrances and related cosmetic products which it owns
or controls ("brand marketing operations") and (ii) the distribution and
marketing of products that it purchases from other manufacturers. The
Company's brand marketing operations currently consist of the manufacturing,
distribution and marketing of the Halston and Geoffrey Beene fragrance
brands. In March 1995, the Company completed the Geoffrey Beene Acquisition,
pursuant to which it acquired an exclusive worldwide license and certain
trademarks which permit the Company to manufacture and distribute the
Geoffrey Beene fragrance brands, including GREY FLANNEL, BOWLING GREEN and
CHANCE. In March 1996, the Company completed the Halston Acquisition,
pursuant to which it acquired certain assets, including the trademarks which
permit the Company to manufacture and distribute the Halston fragrance
brands, including HALSTON, CATALYST, 1-12 and Z-14. The Company sells the
Halston and Geoffrey Beene products to both prestige and mass-market
retailers in the United States and through international distributors
worldwide. See "Business."
In addition to its brand marketing operations, the Company is a direct
distributor of products generally purchased from major international
fragrance manufacturers and sold both on an exclusive and a nonexclusive
basis in the United States to a wide range of retailers, including both
prestige and mass-market retailers. The Company is the exclusive United
States distributor of several fragrance products, including, among others,
COLORS OF BENETTON, TRIBU, OMBRE ROSE, OMBRE D'OR, OMBRE BLEUE, FACONNABLE,
BALENCIAGA, TALISMAN, RUMBA, LE DIX, LAPIDUS, CREATION, FANTASME, BOGART,
WITNESS, ONE MAN SHOW, CHEVIGNON and NIKI DE SAINT PHALLE, and of the Galenic
Elancyl skin care products. The Company also has a 49.99% ownership interest
in Fine Fragrances, Inc. ("Fine Fragrances"), which distributes on an
exclusive basis in North America, fragrances manufactured by Cofci, S.A.
("Cofci"), including the SALVADOR DALI, LAGUNA, DALISSIME, CAFE, TAXI and
WATT brands. The Company accounts for its investment in Fine Fragrances under
the equity method of accounting, whereby its initial investment is recorded
at cost, adjusted by its share of Fine Fragrances' operating results and
reduced by distributions received.
The Halston and Geoffrey Beene brand marketing operations have somewhat
different financial characteristics than the Company's traditional
distribution business. As a percentage of net sales, brand marketing
operations tend to have higher gross margins, as well as higher marketing and
selling, general and administrative expenses, than the Company's traditional
distribution operations. The higher gross profits have been greater than the
higher marketing and selling, general and administrative expenses associated
with the Company's brand marketing operations. In addition, the inventory
requirements of the brand marketing operations tend to be higher than its
traditional distribution operations. As a result of the Halston Acquisition
and the Geoffrey Beene Acquisition, the Company expects its brand marketing
business to represent a larger percentage of its overall sales and operating
profit in the fiscal year ending January 31, 1997 and thereafter than in
prior periods. Accordingly, the Company's overall gross margins and selling,
general and administrative expenses as a percentage of net sales and
inventory levels are expected to vary in the future from historical levels.
In addition, the acquisition of the licenses and trademarks associated with
the Halston Acquisition, Geoffrey Beene Acquisition and the FMG Acquisition
will increase amortization expense. These intangible assets are amortized
over a 15-year period.
For the fiscal year ended January 31, 1996, net sales of Geoffrey Beene
fragrance products, the only fragrance products sold in the Company's brand
marketing operations during such period, amounted to approximately $10.1
million, or 11% of the Company's net sales for the period. For the quarter
ended April 30, 1996, net sales of Geoffrey Beene fragrance products and
Halston fragrance products sold in the Company's brand marketing operations
during such period amounted to approximately $4.6 million, or 24% of the
Company's net sales.
21
<PAGE>
Effective with the period ended January 31, 1995, the Company changed its
fiscal year end to January 31 from June 30 to conform to its business year.
The following discussion of the Company's results of operations is presented
for the three months ended April 30, 1996 and 1995, the fiscal year ended
January 31, 1996 and the twelve months ended January 31, 1995, the seven
months ended January 31, 1995 and 1994, and the fiscal years ended June 30,
1994 and 1993.
RESULTS OF OPERATIONS
The following table sets forth, for each of the periods indicated, certain
information relating to the Company's operations expressed as percentages of
net sales for the period:
<TABLE>
<CAPTION>
FISCAL YEAR SEVEN MONTHS
ENDED JUNE 30, JANUARY 31,
------------------- -------------------
1993 1994 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 84.2 82.3 82.8 80.2
--------- --------- --------- ---------
Gross margin ........................ 15.8 17.7 17.2 19.8
Warehouse and shipping expense ...... 2.4 3.0 2.6 2.8
Selling, general and administrative
expenses ............................ 7.5 7.7 7.4 6.5
Depreciation and amortization ....... 0.7 0.7 0.7 0.4
--------- --------- --------- ---------
Income from operations .............. 5.1 6.3 6.4 10.1
Interest expense, net of interest and
other income ........................ 3.2 3.3 3.0 2.7
--------- --------- --------- ---------
Income before equity in earnings of
unconsolidated affiliate and income
taxes .............................. 1.9 3.0 3.4 7.5
Equity in earnings of unconsolidated
affiliate ........................... 0.5 0.4 0.2 0.4
--------- --------- --------- ---------
Income before income taxes .......... 2.4 3.3 3.6 7.8
Provision for income taxes .......... 0.7 1.2 1.3 2.9
--------- --------- --------- ---------
Net income .......................... 1.8% 2.2% 2.3% 4.9%
========= ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TWELVE
MONTHS FISCAL YEAR THREE MONTHS
ENDED ENDED ENDED
JANUARY 31, JANUARY 31, APRIL 30,
-------------- -------------- -------------------
1995 1996 1995 1996
-------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 80.6 75.4 80.7 69.7
-------------- -------------- --------- ---------
Gross margin ........................ 19.4 24.6 19.3 30.3
Warehouse and shipping expense ...... 2.9 3.1 3.4 4.2
Selling, general and administrative
expenses ............................ 7.0 10.5 8.8 16.1
Depreciation and amortization ....... 0.5 1.5 1.8 2.8
-------------- -------------- --------- ---------
Income from operations .............. 9.0 9.6 5.3 7.4
Interest expense, net of interest and
other income ........................ 2.9 4.3 5.1 5.5
-------------- -------------- --------- ---------
Income before equity in earnings of
unconsolidated affiliate and income
taxes .............................. 6.1 5.3 0.3 1.9
Equity in earnings of unconsolidated
affiliate ........................... 0.4 0.3 0.8 0.5
-------------- -------------- --------- ---------
Income before income taxes .......... 6.5 5.6 1.1 2.2
Provision for income taxes .......... 2.4 2.2 0.2 0.8
-------------- -------------- --------- ---------
Net income .......................... 4.1% 3.4% 0.9% 1.5%
============== ============== ========= =========
<FN>
- -----------
* May not add due to rounding.
</FN>
</TABLE>
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THE THREE MONTHS ENDED APRIL
30, 1995
Net sales increased $3.6 million, or 23%, to $19.3 million for the three
months ended April 30, 1996 from $15.7 million for the three months ended
April 30, 1995. The increase in net sales was primarily attributable to the
acquisition of the Geoffrey Beene fragrance brands in March 1995 and the
Company's engagement to serve as the exclusive United States distributor of
the Galenic Elancyl skin care products in October 1995 and the Benetton
22
<PAGE>
fragrance brands in December 1995, as well as the Company's focus on
specially designed products for the mass market. International sales of the
Geoffrey Beene products increased to over $1.0 million in the three months
ended April 30, 1996, compared to less than $100,000 for the three months
ended April 30, 1995. Management believes that increased sales to existing
customers and sales to new customers have resulted from the Company's ability
to provide these accounts with a continuous, direct supply of product, a
larger selection of products and the development and growth of certain
product categories.
Gross profit increased $2.8 million, or 93%, to $5.9 million for the three
months ended April 30, 1996 from $3.0 million for the three months ended
April 30, 1995. The increase in gross profit and in gross margin (from 19.3%
to 30.3%) were primarily attributable to an increase in the sale on a
wholesale
22
<PAGE>
basis of certain product categories with higher gross margins, such as custom
packaged products, and the addition of Geoffrey Beene, Halston, Galenic
Elancyl and Benetton product sales which were also at higher gross margins.
Warehouse and shipping expenses increased $277,000, or 53%, to $806,000
for the three months ended April 30, 1996 from $528,000 for the three months
ended April 30, 1995. The increase resulted from higher net sales and higher
customer service expenses.
Selling, general and administrative expenses increased $1.7 million, or
125%, to $3.1 million for the three months ended April 30, 1996 from $1.4
million for the three months ended April 30, 1995. The increase in selling,
general and administrative expenses was primarily a result of a 900% increase
in advertising and promotional expenses, associated with national advertising
campaigns for the Geoffrey Beene and Halston brands, as well as higher
administrative expenses resulting from the higher level of sales. The Company
expects its advertising and promotional expenses to continue to grow as a
result of the acquisition of the Halston and Geoffrey Beene brands and
exclusive United States distribution arrangements for other fragrance brands.
Depreciation and amortization increased $246,000, or 86%, to $532,000 for
the three months ended April 30, 1996 from $286,000 for the three months
ended April 30, 1995. The increase was attributable to increased amortization
of intangibles arising from the acquisition of the Geoffrey Beene license in
March 1995 and the increase in depreciation incurred for the Facility
acquired in the Merger.
Interest expense, net of interest and other income increased 33% to $1.1
million for the three months ended April 30, 1996 from $796,000 for the three
months ended April 30, 1995. This increase was primarily due to the increase
in average debt outstanding resulting from the acquisition of the Geoffrey
Beene brands in which the Company issued $8.225 million aggregate principal
amount of subordinated debentures and a $7.0 million promissory term note
under the Credit Facility. The increase in interest expense also reflects
increased borrowings under the revolving portion of the Credit Facility to
accommodate increased working capital requirements, including the increased
wholesale inventory levels needed to support higher net sales.
Net income increased $144,000, or 97%, to $292,000 for the three months
ended April 30, 1996, compared to net income of $148,000 for the three months
ended April 30, 1995, primarily as a result of the increase in net sales and
gross profit which were partially offset by higher sales, marketing and
interest expense.
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO TWELVE MONTHS ENDED JANUARY
31, 1995
Net sales increased $18.4 million, or 26%, to $88.0 million for the fiscal
year ended January 31, 1996 from $69.6 million for the twelve months ended
January 31, 1995. Management estimates that approximately $9.6 million of the
increase in net sales was attributable to new customers and approximately
$8.8 million to increased sales to existing customers. Approximately $4.3
million of the net sales increase represented an increase in net sales of
Geoffrey Beene products over the prior year due to the Company's acquisition
of that brand in March 1995. Management believes that increased sales to
existing customers and sales to new customers resulted from both the
Company's ability to provide these accounts with a continuous, direct supply
of product and a larger selection of products.
Gross profit increased $8.1 million, or 60%, to $21.6 million for the
fiscal year ended January 31, 1996 from $13.5 million for the twelve months
ended January 31, 1995. The increases in gross profit and gross margin (from
19.4% to 24.6%) were primarily attributable to an increase in the sale of
certain products with higher gross margins such as custom packaged products,
and additional Geoffrey Beene product sales which were also at higher gross
margins.
Warehouse and shipping expenses increased $673,000, or 33%, to $2.7
million for the fiscal year ended January 31, 1996, from $2.0 million for the
twelve months ended January 31, 1995. The increase resulted from the increase
in net sales.
23
<PAGE>
Selling, general and administrative expenses increased $4.3 million, or
87%, to $9.2 million for the fiscal year ended January 31, 1996 from $4.9
million for the twelve months ended January 31, 1995. The increase in
selling, general and administrative expenses was primarily a result of
increases in sales and marketing costs attributable to the higher level of
sales, the Geoffrey Beene Acquisition and higher marketing expenses
(including approximately $1.3 million of national media advertising related
to Geoffrey Beene products and approximately $2.3 million of additional sales
and marketing expenses resulting from increased sales volumes).
Depreciation and amortization increased $980,000, or 289%, to $1.3 million
for the fiscal year ended January 31, 1996 from $340,000 for the twelve
months ended January 31, 1995. The increase was attributable to increased
amortization of intangibles arising from the acquisition of the Geoffrey
Beene license in March 1995.
Interest expense, net of interest and other income increased 89% to $3.8
million for the fiscal year ended January 31, 1996 from $2.0 million for the
twelve months ended January 31, 1995. This increase was primarily due to the
increase in average debt outstanding as a result of the Geoffrey Beene
Acquisition in which the Company issued $8.225 million aggregate principal
amount of subordinated debentures and a $7.0 million term note under the
Credit Facility. The increase in interest expense also reflected higher
interest rates in 1996 and increased borrowings under the revolving portion
of the Credit Facility to accommodate increased working capital requirements,
including the increased wholesale inventory levels needed to support higher
net sales. See "Liquidity and Capital Resources."
Equity in earnings of affiliate decreased $16,000, or 5%, to $288,000 for
the fiscal year ended January 31, 1996 from $303,000 for the twelve months
ended January 31, 1995, as a result of increases in sales and marketing
expenses incurred by Fine Fragrances relating to products manufactured by
Cofci.
Net income increased $145,000, or 5%, to $3.0 million for the fiscal year
ended January 31, 1996, compared to net income of $2.9 million for the twelve
months ended January 31, 1995, primarily as a result of the increase in net
sales and gross profit which were partially offset by higher sales,
marketing, interest and amortization expenses.
SEVEN MONTHS ENDED JANUARY 31, 1995 COMPARED TO SEVEN MONTHS ENDED JANUARY
31, 1994
Net sales increased $23.5 million, or 86%, to $50.9 million for the seven
months ended January 31, 1995 from $27.4 million for the seven months ended
January 31, 1994, as a result of additional distribution sales. Management
believes that the increase in distribution sales resulted primarily from
significant increases in sales to certain mass-market customers due to the
Company's ability to provide these accounts with continuous, direct supply of
product, and the ongoing development and growth of certain product categories
such as custom packaged products. Management also believes that sales levels
were aided by an increased emphasis on marketing activities to mass-market
customers.
Gross profit increased $5.4 million, or 114%, to $10.1 million for the
seven months ended January 31, 1995 from $4.7 million for the seven months
ended January 31, 1994. The increases in gross profit and in gross margin
(from 17.2% to 19.8%) were primarily attributable to favorable product
purchases during the seven months ended January 31, 1995, as well as an
increase in sales of certain product categories, such as custom packaged
products, with higher gross margins.
Warehouse and shipping expenses increased $681,000, or 94%, to $1.4
million for the seven months ended January 31, 1995 from $723,000 for the
seven months ended January 31, 1994. The increase resulted from an increase
in sales.
Selling, general and administrative expenses increased $1.3 million, or
64%, to $3.3 million for the seven months ended January 31, 1995 from $2.0
million for the seven months ended January 31, 1994. The increase in selling,
general and administrative expenses was primarily a result of increases in
sales and marketing costs, including sales commissions resulting from higher
net sales, increases in sales and
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marketing personnel, as well as increases in administrative costs resulting
from management bonuses, increased audit costs due to the change in the
Company's fiscal year end and increases in credit insurance expenses due to
the increase in net sales and accounts receivable.
Interest expense, net of interest and other income increased 66% to $1.4
million for the seven months ended January 31, 1995 as compared to $820,000
for the seven months ended January 31, 1994. This increase was primarily
attributable to increased short-term debt to accommodate the Company's
working capital needs, including the increased inventory levels needed to
support higher net sales.
Equity in earnings of affiliates increased $137,000, or 300%, to $183,000
for the seven months ended January 31, 1995 from $46,000 for the seven months
ended January 31, 1994 as a result of increases in net sales by Fine
Fragrances of products manufactured by Cofci.
Net income for the seven months ended January 31, 1995 was $2.5 million
compared to $641,000 for the seven months ended January 31, 1994, primarily
as a result of higher net sales.
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993
Net sales increased $12.3 million, or 36%, to $46.1 million for the fiscal
year ended June 30, 1994 from $33.9 million for the fiscal year ended June
30, 1993. This increase was attributable to additional distribution sales,
which resulted primarily from increases in sales to certain mass-market
customers commencing in the second calendar quarter of 1994 as a result of
the Company's ability to offer these accounts a continuous, direct supply of
product. Management believes that sales levels were aided by an increased
emphasis on marketing activities with mass-market customers.
Gross profit increased $2.8 million, or 52%, to $8.2 million for the
fiscal year ended June 30, 1994 from $5.3 million for the fiscal year ended
June 30, 1993. The increases in gross profit and in gross margin (from 15.8%
to 17.7%) were primarily attributable to the Company's elimination of certain
low margin products and slow turning inventory items through a significant
reduction in the number of fragrance and cosmetic brand items from
approximately 3,500 to 1,200.
Selling, general and administrative expenses increased $1.0 million, or
40%, to $3.5 million for the fiscal year ended June 30, 1994 from $2.5
million for the fiscal year ended June 30, 1993. The increase in selling,
general and administrative expenses was primarily a result of increases in
sales and marketing costs, including sales commissions resulting from higher
net sales, advertising costs and increases in sales and marketing personnel,
as well as increases in administrative costs resulting from increases in
management salaries and the leasing of an additional warehouse facility.
Interest expense, net of interest and other income increased 40% to $1.5
million for the fiscal year ended June 30, 1994 as compared to $1.1 million
for the fiscal year ended June 30, 1993. This increase was primarily
attributable to the increase in short-term debt to accommodate working
capital needs, including the increased wholesale inventory levels needed to
support higher net sales.
Equity in earnings of unconsolidated affiliate decreased $10,000, or 6%,
to $166,000 for the fiscal year ended June 30, 1994 from $176,000 for the
year ended June 30, 1993.
Net income for the fiscal year ended June 30, 1994 was $1.0 million
compared to $595,000 for the fiscal year ended June 30, 1993, primarily as a
result of higher net sales.
SEASONALITY
The fragrance operations of the Company have historically been seasonal,
with higher sales generally occurring in the second half of the fiscal year
as a result of increased demand by retailers in anticipation of and during
the holiday season. In addition, due to the size and timing of certain orders
from its customers, sales and results of operations can vary significantly
between quarters of the same and different years. As a result, the Company
expects to experience variability in net sales and net income on a quarterly
basis.
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The Company's working capital borrowings are also seasonal, normally
peaking in the months of September and October. During the fourth fiscal
quarter ending January 31, significant cash is normally generated as customer
payments on holiday orders are received.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its internal growth and acquisitions, and expects to
continue to finance its growth, primarily through the Credit Facility,
external financing and internally generated funds. The Company's principal
future uses of funds are for working capital requirements, debt service and
additional brand acquisitions or product distribution arrangements. The
Company has funded its working capital needs through its credit facility,
short-term loans from shareholders and affiliates and internally generated
funds.
The Credit Facility provides for borrowings on a revolving basis of up to
$30 million (which is increased to $40 million from July 1 to December 31 to
accommodate increased working capital requirements in anticipation of and
during the holiday season), including up to $2 million in commercial letters
of credit. Amounts borrowed on the revolving portion of the Credit Facility
mature on May 31, 1998. The Credit Facility also includes the remaining
balance ($5.8 million at April 30, 1996) of the $7 million term loan (the
"Geoffrey Beene Term Note") which was used to finance a portion of the
purchase price for the Geoffrey Beene Acquisition. Principal and interest
payments on the Geoffrey Beene Term Note are due on a monthly basis, and
principal payments are due: $1.83 million during the fiscal year ending
January 31, 1997, $2 million during the fiscal year ending January 31, 1998,
and the balance during the fiscal year ending January 31, 1999. The Credit
Facility also includes the $9 million Halston Term Note No. 2 which was used
to finance a portion of the purchase price for the Halston Acquisition.
Principal and interest payments on the Halston Term Note No. 2 are due on a
monthly basis, and principal payments are due: $2.50 million during the
fiscal year ending January 31, 1997, $3 million during the fiscal year ending
January 31, 1998, and $3.50 million during the fiscal year ending January 31,
1999. The Credit Facility also includes the $1 million Halston Term Note No.
1, which was also used to finance the Halston Acquisition and matures on
December 31, 1996. At April 30, 1996, the Company had outstanding borrowings
under the Credit Facility (including the Geoffrey Beene Term Note, the
Halston Term Note No. 1 and the Halston Term Note No. 2) of approximately
$37.8 million. Loans under the revolving credit portion of the Credit
Facility bear interest at a floating rate (currently 1% over Fleet's prime
rate), while the term loans (other than the Halston Term Note No. 1) bear
interest at a floating rate (currently 1.75% over Fleet's prime rate). The
Company's borrowing availability under the revolving credit portion of the
Credit Facility is limited to the sum of between 80 to 85% of eligible
accounts receivable and, subject to certain limitations, 50% (60% from July 1
through October 31 of each year) of eligible inventory.
The Credit Facility is secured by a first priority lien on all of the
Company's assets, other than its Facility in Miami Lakes, Florida (see
"Business--Properties"), as well as by a security interest in the assets and
the capital stock of its wholly-owned subsidiaries and its stock of Fine
Fragrances and by collateral assignment of brand licenses and trademarks. The
Credit Facility restricts the Company's ability to incur additional debt or
other obligations, limits its ability to enter into certain acquisitions,
mergers, investments and affiliated transactions, prohibits the declaration
or payment of dividends on, or the redemption of, the Company's capital
stock, prohibits certain payments on subordinated debt and prohibits the sale
of the Company's interest in Fine Fragrances, GB Parfums, Inc. and Halston
Parfums, Inc. The Credit Facility also contains covenants requiring the
Company to maintain a minimum shareholders' equity, a maximum leverage ratio,
and minimum debt service and interest coverage ratios. In addition, it is an
event of default under the Credit Facility if (i) Rafael Kravec, the
Company's President and Chief Executive Officer, ceases to be actively
involved in the Company's management and a replacement satisfactory to the
Lenders does not succeed him or (ii) Rafael Kravec, Fred Berens, a director
of the Company, and the Bedford Interests cease to have control of the
Company's Board of Directors and voting control of the Company. Management
believes that the Company is currently in
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compliance with the covenants in the Credit Facility. As long as the Credit
Facility is outstanding, the Company will need the consent of the Lenders to
enter into future acquisition or debt financing activities.
In connection with the Halston Acquisition in March 1996, Fleet provided
the Company with a $6 million term loan which the Company repaid in June 1996
using the proceeds of a new $6 million mortgage on the Facility. The mortgage
note provides for interest at 8.84%, a 20-year amortization schedule and a
maturity date eight years from issuance. In connection with the related
modification and expansion of the Credit Facility resulting from the Halston
Acquisition, the Company issued to the Lenders warrants to purchase an
aggregate of 75,000 shares of Common Stock exercisable at $5.50 per share for
two years, provided that warrants to purchase 25,000 shares of Common Stock
are exercisable only after March 1997, and only to the extent that the
Company has not completed a public offering of its equity securities in which
the Company has obtained at least $5 million of net proceeds.
Also in connection with the Halston Acquisition, the Company issued to
Halston Borghese a $2 million term note (the "Halston Note") which is to be
repaid on a quarterly basis in an amount equal to 5% of the net sales
revenues derived from the sales of Halston brand products, provided that no
payments are due until October 15, 1997 and that the accrued amount bears
interest at 8% per annum. The Halston Note matures March 20, 2000. The
Company also assumed $1 million in trade payables from Halston Borghese.
Also, in connection with the Halston Acquisition, the Company issued
approximately $3 million aggregate principal amount of 8.0% Secured
Subordinated Debentures Series II Due 2005 (the "8.0% Series II Debentures")
to the Bedford Interests. The Company also has outstanding $8.225 million
aggregate principal amount of 8.0% Secured Subordinated Debentures Series I
Due 2005 (the "8.0% Series I Debentures"), which the Company had issued to
the Bedford Interests in connection with the Geoffrey Beene Acquisition in
March 1995. The 8.0% Series I Debentures and 8.0% Series II Debentures are
secured by a lien on all of the personal property assets of the Company
junior to the lien of the Lenders under the Credit Facility. The 8.0% Series
I Debentures and 8.0% Series II Debentures require aggregate mandatory annual
principal payments of $2,245,000 commencing January 31, 2001, with the final
payment due January 31, 2005.
The Company also has outstanding $3.46 million aggregate principal amount
of 12.5% Secured Subordinated Debentures Due 2002 which were issued by FFI in
July 1992 in connection with its acquisition of the fragrance and cosmetic
assets of National Trading. The Bedford Interests hold $1.73 million
aggregate principal amount of 12.5% Secured Subordinated Debentures Series I
Due 2002 (the "12.5% Series I Debentures"), and National Trading and Mr.
Berens hold $1.73 million aggregate principal amount of 12.5% Secured
Subordinated Debentures Series II Due 2002 (the "12.5% Series II
Debentures"). Both the 12.5% Series I Debentures and the 12.5% Series II
Debentures are secured by a lien on all of the personal property assets of
the Company junior to the lien of the Lenders under the Credit Facility and
junior to the lien of the holders of the 8.0% Series I Debentures. The 12.5%
Series I Debentures and the 12.5% Series II Debentures require aggregate
mandatory principal payments of $346,000 in each of 1988 and 1999, $692,000
in each of 2000 and 2001, and $1,384,000 on June 30, 2002.
The Company has outstanding 20,000 shares of Series A Preferred. The
Series A Preferred is mandatorily redeemable by the Company at a redemption
price of $100 per share in annual increments of 4,000 shares, commencing upon
the earlier to occur of (i) January 1, 2001 or (ii) the repayment of 50% of
the 12.5% Series I Debentures and 12.5% Series II Debentures and accumulation
by the Company of $2 million in retained earnings.
Pursuant to the terms of the Exchange Offer and effective with the
consummation of this offering, the 12.5% Debentures and the outstanding
shares of Series A Preferred will be exchanged for $5.46 million aggregate
principal amount of 7.5% Convertible Debentures. The 7.5% Convertible
Debentures will be convertible at any time at 120% of the public offering
price of the Common Stock in the offering (the "Conversion Price") into
shares of Common Stock, and will be redeemable at par at any time commencing
three years from the date of the Exchange Offer at the option of the Company,
but only in the event the Common Stock, at the time a redemption notice is
delivered by the Company, has been
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trading at least at 200% of the Conversion Price for 20 consecutive trading
days. The 7.5% Convertible Debentures will be due ten years from the date of
consummation of the Exchange Offer and will require interest-only payments
payable semi-annually until maturity at which time the entire unpaid
principal amount and any unpaid accrued interest will be due and payable.
The Company has outstanding certain loans and advances from its
shareholders and affiliates. At April 30, 1996, the Company had outstanding
balances from National Trading, Fine Fragrances and the Bedford Interests in
the principal amounts of approximately $1,394,000, $918,000, and $410,000,
respectively. These loans or advances generally bear interest at the prime
rate and are short-term in nature.
The purchase price for the assets acquired in the FMG Acquisition
included, among other things, approximately $4.3 million in cash, assumption
of approximately $3.1 million of current liabilities and $11.1 million
aggregate principal amount of 8.5% Subordinated Debentures Due 2004 (the
"8.5% Debentures"). The Company also issued to FMG (for assignment to its
shareholders and senior management) warrants for an aggregate of 1,075,000
shares of Common Stock, exercisable at $7.50 per share from July 1997 to
January 2002. The cash portion of the purchase price was financed from the
Credit Facility. The 8.5% Debentures consist of: (i) a $4 million 8.5%
Debenture which requires mandatory principal payments of $2 million in May
2000 and 2001 (such payments are subject to acceleration to May 1998 and 1999
if the Company raises a minimum of $10 million of net capital from a public
offering of equity securities (the "Financing Condition"); provided that if
the Financing Condition is satisfied after May 1998, payment of the entire
balance will be due on the later to occur of May 1999, or 30 days after the
Financing Condition is satisfied); (ii) a $7 million 8.5% Debenture which
requires mandatory annual principal repayments of $2.33 million commencing
May 2002, with the remaining balance due May 2004; and (iii) a $100,000 8.5%
Debenture which requires mandatory annual principal repayments of $33,000
commencing May 2002, with the remaining balance due May 2004.
The Company's future liquidity will continue to be dependent upon its
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally short-term debt, accrued
expenses and accounts payable). Additional inventory requirements and
accounts receivable can have a significant impact on the Company's liquidity,
particularly during expansion. To date, the Company has not experienced any
material adverse problems with the collection of accounts receivable relating
to its fragrance operations. A portion of the Company's accounts receivable
relating to its fragrance operations is insured by a third party to cover the
risk of uncollectibility. However, there can be no assurance that refusals to
pay or delays in payment would not have a material adverse effect on the
Company's liquidity, results of operations and general financial condition in
the future. In addition, as a result of increased sales to department stores
of products subject to return rights, the Company expects that it may incur
higher levels of returns. The Company establishes reserves and provides
allowances for returns at the time of sale, but there can be no assurance
that such reserves and allowances will be adequate.
Further expansion of the Company's operations, including through
additional brand acquisitions or the acquisition of exclusive distribution
rights to additional fragrance brands, will require increased investment in
inventories and accounts receivable, which may negatively impact the
Company's cash flow from operations. The Company has discussions from time to
time with manufacturers of prestige fragrance brands and with other
wholesalers that hold exclusive distribution rights regarding possible
acquisitions by the Company of additional exclusive manufacturing and/or
distribution rights. The Company currently has no agreements or commitments
with respect to any such acquisition, although it periodically executes
routine agreements to maintain the confidentiality of information obtained
during the course of discussions with such persons. There is no assurance
that the Company will be able to negotiate successfully for any such future
acquisitions or that it will be able to obtain acquisition financing or
additional working capital financing on satisfactory terms for further
expansion of its operations. Excluding any additional working capital
requirements which may result from expansion of the Company's operations,
management of the Company believes that internally generated funds, available
financing under the Credit Facility and the net proceeds from this offering
will be sufficient to cover the Company's working capital and debt service
requirements for at least the next twelve months.
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The characteristics of the Company's business do not generally require it
to make significant ongoing capital expenditures. In connection with the
renovation of the Facility located in Miami Lakes, Florida, which was
acquired in the Merger (see "Business--Properties"), the Company expects to
incur construction and renovation costs estimated at $2.0 million. The
Company also has a lease on a facility, including a 59,000 square foot
building, in Miami, Florida, which it used for its fragrance operations prior
to the Merger (the "National Trading Facility"). The lessor of the National
Trading Facility is National Trading, and the property has been mortgaged by
National Trading as security for its obligations for Industrial Development
Revenue Bonds issued through Dade County, Florida which mature on December 1,
2011. The principal balance of these bonds was approximately $2.2 million at
January 31, 1996. Future lease obligations of the Company through 2011 under
this lease are approximately $2.5 million, including interest. Pending
completion of the renovation of the Facility, the Company is continuing to
occupy the National Trading Facility as its corporate headquarters.
Subsequent to relocation of the corporate headquarters, the Company and
National Trading will pursue a potential sale or lease of the National
Trading Facility to a third party that would discharge the Company from the
lease obligation. There is no assurance that any such sale or lease will be
consummated.
IMPACT OF INFLATION AND FOREIGN EXCHANGE FLUCTUATIONS
Although the Company believes that inflation has not had a material impact
on its results of operations, inflation would likely increase the interest
rates that the Company pays on its indebtedness. Although large fluctuations
in foreign exchange rates could have a material effect on the prices the
Company pays for certain products it purchases from outside of the United
States, the prices obtainable for sales denominated in foreign currencies and
wholesale sales to foreign customers, such fluctuations have not been
material to the Company's results of operations to date.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") 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"
("SFAS No. 121"). SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles, held
and used by an entity, be reviewed for impairment whenever events or changes
in circumstance indicate that the carrying amounts of an asset may not be
recoverable. SFAS No. 121 will apply to the Company for the year ended
January 31, 1997. The adoption of SFAS No. 121 has not had, and is not
expected to have, a material impact on the Company's financial statements.
The Company reviews the carrying value of intangible assets on an ongoing
basis. If such review indicates that these values may not be recoverable, the
carrying value will be reduced to estimated fair value.
The FASB has also issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This
statement defines a fair value based method of accounting for employee stock
options. This statement also permits a company to continue to measure
compensation costs for their stock option plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
requires disclosure of the pro forma net income and earnings per share that
would be recorded if the fair value method was utilized. The Company plans to
continue to utilize the provisions of APB Opinion No. 25 to account for such
compensation costs, and will provide the pro forma disclosures required by
SFAS No. 123 in fiscal year 1997 financial statements.
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BUSINESS
GENERAL
The Company is a manufacturer and distributor of prestige fragrances and
related cosmetic products in the United States, principally to mass-market
retailers. The Company has established itself as a distribution source for
more than 2,000 brand name items through brand ownership and exclusive
distribution arrangements, as well as through nonexclusive direct purchase
relationships. The Company currently markets its products to more than 23,600
separate retail locations including Sears, Eckerd Drugs, Wal-Mart, Walgreens,
Target, Kmart, T.J. Maxx, Marshalls, Marshall Fields, Macy's, Dayton Hudson
and J.C. Penney.
Over the past two years, the Company has emerged as a premier fragrance
distributor by focusing on providing mass-market retailers with a wide
selection and reliable source of prestige products and by pursuing brand
acquisition opportunities. At the same time, the Company has significantly
increased and diversified its customer base while broadening its product mix
and increasing its profitability.
The Company believes that its growth and success have resulted from: (i)
management's established relationships with leading fragrance manufacturers
and retailers; (ii) its wide selection of highly recognized prestige
fragrance and related cosmetic products; and (iii) its ability to provide
consistent supply and value-added services to mass-market retailers.
INDUSTRY OVERVIEW
According to the U.S. Department of Commerce, fragrance and related
product sales in the United States were approximately $5 billion in 1995. The
United States market for fragrances and related products continues to grow
moderately. The growth is generally attributed to new product introductions
appealing to a broader segment of the market, population growth, increasing
numbers of middle aged consumers and product innovation such as special sizes
and new product formulations.
Fragrance products are generally distributed through two channels of
distribution: (i) the prestige market, which includes department stores and
specialty retailers; and (ii) the mass market, which includes mass-market
retailers, food and drug stores and direct selling firms including
house-to-house and home television shopping companies. In recent years, the
market has experienced a significant shift in the purchasing habits of
consumers away from higher priced department stores to mass-market retailers.
The Company believes that this trend is indicative of an increasing desire
among U.S. consumers to acquire prestige fragrance products at the best
value. Nevertheless, the Company believes that successful launching and
continued marketing support of a brand in the prestige distribution channel
is essential to establish and maintain the brand's prestige status and
marketability in the mass market.
Manufacturers of prestige fragrances have historically restricted direct
sales of their products in the United States primarily to prestige department
stores and specialty stores. As a result, mass merchandisers have
traditionally obtained prestige products from secondary sources.
Historically, the secondary sources available to the mass market have been
limited to (i) direct distributors such as the Company, which receive
products directly from perfume manufacturers, and (ii) distributors of
prestige products manufactured by, or distributed to, foreign sources for
foreign distribution, which are diverted to the United States ("Diverted
Sources"). Courts are currently divided as to the extent to which trademark,
copyright or other laws, regulations or decisions may restrict the
importation of trademarked or copyrighted fragrance products through Diverted
Sources without the consent of the trademark or copyright owner.
The Company believes there are a number of significant trends currently
impacting the mass-market segment that it expects will contribute to its
continued growth, including: (i) increasing acceptance of self-service
shopping; (ii) lessening of the historical distinctions between prestige and
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mass-market lines, as mass-market manufacturers upgrade their products and
packaging and prestige manufacturers target new buyers with lower priced or
specially targeted products; (iii) an increasing desire by retailers to
purchase more efficiently and to buy more products from fewer vendors; (iv)
sustained and, in some instances, increasing demand for classic, prestige
fragrances; and (v) more upscale images communicated by mass merchandisers in
their advertising.
STRATEGY
The Company's objective is to maintain and enhance its position as a
manufacturer and distributor of prestige fragrance and related cosmetic
products. In order to achieve this objective, the Company's strategy includes
the following:
ACQUIRE CONTROL OF ADDITIONAL FRAGRANCE BRANDS. The Company is focused on
acquiring ownership of or exclusive distribution rights to highly recognized
prestige fragrance brands. The Company has acquired control of several
prestige fragrance brands, including Geoffrey Beene and Halston. The Company
believes that it enhances its product offerings and increases its sales and
profit margins by acquiring direct control, through ownership or through
exclusive license arrangements, of the distribution of prestige fragrance
brands that have established consumer loyalty. Brand ownership or (depending
upon the terms of the license) exclusive distribution allows the Company to
manage the brand so as to preserve and enhance the brand's prestige value in
the market and at the same time implement strategies intended to increase the
brand's overall long-term profit contribution. Such strategies typically
include managing sales volumes, pricing, advertising and promotions,
packaging and gift set design, international marketing and other factors in a
manner intended to best position the brand in each of its different market
segments. Management believes that the Company's position and reputation have
assisted the Company in acquiring ownership of or exclusive distribution
rights to prestige fragrance brands, particularly when, as with Geoffrey
Beene and Halston, the Company has already served as a direct distributor of
the brand. The Company has no current agreements or commitments for any
additional acquisitions, and there is accordingly no assurance that the
Company will be able to complete any future acquisitions.
FURTHER EXPAND DIRECT DISTRIBUTION. The Company intends to continue to
expand its distribution business and increase its sales to the mass market
by: (i) increasing the number of prestige brands it distributes, (ii)
increasing the number of manufacturers for which it serves as a direct
distributor; (iii) expanding its customer base to include additional
mass-market retailers not presently served by the Company; and (iv)
developing and implementing innovative marketing and merchandizing programs
targeted to address the requirements of its retailer customers, especially
within the mass market. Management believes that the Company's ability to
further expand its distribution business is enhanced by the competitive
position it has already achieved. In particular, the Company's broad
selection of prestige fragrances, its market presence as an established
distributor to a large number of mass-market stores and its value-added
service capabilities, combined with management's long-standing relationships
with a number of leading manufacturers and retailers, are considered by
management to be important to the Company's continued success and growth. The
Company also believes that, as a direct distributor, it has the ability to
offer mass-market retailers a more predictable and reliable source of supply
of quality-assured products than can be offered by Diverted Sources with
which the Company competes.
PROVIDE VALUE-ADDED SERVICES. The Company believes that its success and
growth have been and will continue to be enhanced by its ability to add value
as a distributor for its retail customers beyond the mere provision of
product. The Company's sales and marketing personnel work closely with major
retailers to, among other things: (i) develop merchandising programs that are
designed to improve sales and profitability and that are specific to the
customer's business and marketing strategy; (ii) create regularly planned
promotional campaigns and in-store displays designed to maximize sales during
peak selling periods; and (iii) design model stock assortments and planograms
for the effective layout of the customer's fragrance and cosmetics
departments. Many of these services are particularly attractive to
mass-market retailers, which traditionally have not received such services
from other suppliers. The Company also works with major manufacturers and
retailers to offer innovative packaging of fragrance
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and cosmetic products with differentiated gift sets designed for different
distribution channels, including department stores and the mass market. In
addition, the Company's information systems allow it to assist its customers
in formulating assortment plans on a store-by-store basis, for individual
brands and within the prestige fragrance category as a whole. The Company
also offers innovative services designed to provide operational benefits to
its retailer customers, such as U.P.C. coding, processing of orders on a
"paperless" basis through electronic data interchange ("EDI") and electronic
source/anti-theft tagging ("EAS").
Management believes that its expertise, and the Company's competitive
strengths, are concentrated in the business of distributing and managing
prestige fragrance and related cosmetic brands that have well established
consumer loyalty. The Company does not engage, and has no plans to engage, in
Diverted Source activities and does not intend to open stores or otherwise
engage in retail sales.
COMPANY HISTORY
French Fragrances, Inc. was formed as a privately held Florida corporation
on June 26, 1992 by Rafael Kravec and a group of investors represented by
Bedford in order to acquire the fragrance-related net assets of National
Trading. National Trading, a privately held Florida corporation controlled by
Rafael Kravec, the Company's President and Chief Executive Officer, had been
engaged in the manufacture and distribution of gold jewelry and other gift
items and, beginning in 1981, had also been engaged in the purchase and
United States mass-market distribution of prestige perfumes and other
fragrance products. National Trading's fragrance-related net sales grew
rapidly, and, in 1989, National Trading became an authorized, nonexclusive
distributor of the Geoffrey Beene fragrance and related cosmetic brands in
the United States. In 1992, Rafael Kravec determined to acquire the interests
of National Trading's three other shareholders, to wind down National
Trading's jewelry and gift items business and, with the financial investment
and managerial support of the Bedford Interests, to concentrate on expanding
the fragrance distribution business, which was acquired by French Fragrances,
Inc. on July 2, 1992.
The Company continued to experience rapid growth as a distributor of
prestige fragrances to the United States mass market. To further enhance its
distribution relationships, profitability and industry position, the Company
began acquiring ownership or exclusive United States distribution rights to a
selection of prestige fragrance and cosmetic brands. As a result of its
growth, the Company determined that its existing physical facilities had
become inadequate and on November 30, 1995, it acquired its Facility in Miami
Lakes, Florida and became a publicly held company through the merger of FFI
with and into Suave.
PRODUCTS
The Company sells prestige fragrances and related cosmetic products,
including perfume, cologne, eau de toilette, body spray, men's cologne and
after-shave, and gift sets. Each fragrance is distributed in a variety of
sizes and packaging arrangements. In addition, each fragrance line may be
complemented by body products, such as soaps, deodorants, body lotions,
cremes and dusting powders. The Company's products generally retail at prices
ranging from $12 to $100 per item.
The Company uses third-party contract manufacturers in the United States
and Europe to obtain substantially all raw materials, components and
packaging products and for the manufacture of finished products relating to
the Halston and Geoffrey Beene fragrance products. The Company currently
obtains its materials for these products from a limited number of
manufacturers and other suppliers. Management believes that the Company's
relationships with these manufacturers are good and that there are sufficient
alternatives should one or more of these manufacturers become unavailable.
Delays in the delivery of products due to the unavailability of an existing
manufacturer could, however, have a material adverse effect on the Company's
financial position and results of operations.
Products purchased for distribution by the Company are supplied to the
Company in finished goods form and are generally acquired directly from major
international fragrance manufacturers. The
32
<PAGE>
Company currently purchases more than 1,700 different brand name items from
various fragrance manufacturers and continues to seek to expand its base of
fragrance manufacturers. As of May 31, 1996, the percentages of the Company's
total brand name items attributable to (i) products in the Halston and
Geoffrey Beene fragrance lines, (ii) products provided by manufacturers or
suppliers under exclusive distribution contracts and (iii) products provided
by manufacturers or suppliers under nonexclusive distribution arrangements
were 15.2%, 40.1% and 44.7%, respectively.
Except as to fragrance products provided by manufacturers or suppliers
under exclusive distribution contracts, the Company, as is customary in its
industry, does not have long-term or exclusive contracts with manufacturers
or suppliers. Purchases from manufacturers or suppliers which do not have
exclusive distribution contracts with the Company are generally made pursuant
to purchase orders. The Company's ten largest suppliers accounted for
approximately 90% of the Company's purchases during the fiscal year ended
January 31, 1996. The loss of, or a significant adverse change in, the
relationship between the Company and any of its major suppliers could have a
material adverse effect on the Company's financial condition and results of
operations.
LICENSING AND EXCLUSIVE DISTRIBUTION AGREEMENTS
Except for its Halston and Geoffrey Beene products, substantially all of
the Company's products are covered by trademarks owned by others. Management
does not believe that its business, other than with respect to the Halston
and Geoffrey Beene fragrance products, is dependent upon any particular
trademark, license or similar property. Management believes that the Halston
trademarks and the Geoffrey Beene license and trademarks are important to its
business.
HALSTON. In March 1996, the Company, directly and through its subsidiary
Halston Parfums, Inc. ("Halston Parfums"), acquired from Halston Borghese,
Inc. and its affiliates certain assets, including trademark registrations in
the United States and trademark registrations and applications in numerous
other countries for the Halston and related product brands, including
HALSTON, CATALYST, 1-12 and Z-14. The Company had been a direct distributor
of the Halston brands in the United States, which has been the primary market
for the Halston fragrance products. The Company also has patent registrations
in the United States for bottle designs associated with certain of the
Halston fragrance products.
GEOFFREY BEENE. The Company, through its subsidiary GB Parfums, Inc. ("GB
Parfums"), acquired in March 1995 certain assets from Sanofi Beaute, Inc.
("Sanofi"), including an exclusive worldwide license from Geoffrey Beene,
Inc. to manufacture and sell Geoffrey Beene fragrance and related products,
including the GREY FLANNEL, BOWLING GREEN and CHANCE brands. The Company had
been a direct distributor of the Geoffrey Beene brands in the United States,
which has been the primary market for the Geoffrey Beene brand products. GB
Parfums has trademark registrations and applications in the United States and
in numerous other countries for these brands. The license agreement has an
initial term of 30 years from February 1995, subject to automatic extensions
for successive ten-year periods unless earlier terminated by GB Parfums in
accordance with the agreement. In addition to certain consulting and other
payments required to be made by GB Parfums, GB Parfums is obligated to pay
royalties based on 3% of net sales of Geoffrey Beene fragrance products,
which royalty payments decrease if Mr. Geoffrey Beene ceases to design
apparel in the field of high fashion using his own name.
COFCI. Since 1990, Fine Fragrances, in which the Company has a 49.99%
equity interest, has had an agreement with Cofci for the exclusive North
American distribution of fragrances and related products, including the
SALVADOR DALI, LAGUNA, DALISSIME, CAFE, TAXI and WATT brands. The agreement
expires in July 1997, subject to earlier termination by Cofci if Fine
Fragrances were to cease to purchase certain minimum levels of product.
GALENIC ELANCYL. In October 1995, the Company entered into a five-year
agreement (which is automatically renewable for successive three-year terms
unless either party gives written notice prior to the applicable term) with
Pierre Fabre, a large French skin care manufacturer, pursuant to which the
Company serves as the exclusive distributor in the United States of Galenic
Elancyl skin care products.
33
<PAGE>
BENETTON. In December 1995, the Company entered into an agreement with
Benetton S.A.B., USA, with an initial term through December 31, 2000 (which
is automatically renewable for successive five-year terms unless either party
gives written notice prior to the applicable term) pursuant to which the
Company serves as the exclusive distributor in the United States of the
Benetton fragrance lines, including the COLORS OF BENETTON and TRIBU brands.
FACONNABLE. In May 1996, the Company acquired from FMG a distribution
agreement with Fairtrade Sarl having an initial term through June 1999,
pursuant to which the Company serves as the exclusive distributor in the
United States of the FACONNABLE fragrance lines. The distribution agreement
automatically renews for two successive five-year terms unless the Company
terminates the agreement at the end of the initial term.
LAPIDUS. In May 1996, the Company acquired from FMG a distribution
agreement with Les Parfums Ted Lapidus, S.A. having an initial term through
June 1999, pursuant to which the Company serves as the exclusive distributor
in the United States of the LAPIDUS, FANTASME and CREATION fragrance lines.
The distribution agreement automatically renews for two successive five-year
terms unless the Company terminates the agreement at the end of the initial
term.
OMBRE ROSE. In May 1996, the Company acquired from FMG a distribution
agreement with Inter Parfums, S.A. with a minimum term through December 31,
2003, pursuant to which the Company serves as the exclusive distributor in
the United States of the OMBRE ROSE, OMBRE D'OR and OMBRE BLEUE fragrance
lines.
OTHERS. In May 1996, the Company acquired from FMG a number of exclusive
distribution agreements pursuant to which the Company serves as the exclusive
distributor in the United States for a number of additional prestige
fragrance brands, including BALENCIAGA POUR HOMME, CHEVIGNON, TALISMAN,
WITNESS, NIKI DE SAINT PHALLE, BOGART, RUMBA, LE DIX, PRELUDE and ONE MAN
SHOW. These agreements generally extend through 1998 or 1999 and are
generally automatically renewable for successive five-year terms unless
either party gives written notice prior to the end of the applicable term.
MARKETING AND SALES
In the United States and Canada, the Company has established its own sales
and marketing staff and also utilizes independent sales representatives. As a
result of the Halston Acquisition and FMG Acquisition, the Company
significantly increased its sales and marketing force. At May 31, 1996, the
Company's sales and marketing force consisted of 18 sales and marketing
employees and approximately 100 independent sales representatives. In
general, each sales employee and representative is assigned sales
responsibility for a customer or territory. The Company's sales and marketing
employees and representatives routinely visit retailers to assist in the
merchandising, layout and stocking of selling areas.
The Company's senior sales and marketing personnel support the efforts of
its sales employees and representatives by working with the merchandise
managers, lead buyers and marketing departments of its major retailer
customers to develop advertising and promotional plans tailored to these
customers' retail needs. The Company's sales and marketing personnel
frequently work with customers to (i) assist in the development of
merchandising and promotional programs and budgets for specific products or
selling seasons, (ii) design model schematic planograms for the budgeting of
the customer's fragrance and cosmetics departments, (iii) identify trends in
consumer preferences and (iv) conduct training programs for the retailers'
sales personnel.
The Company nationally advertises its Halston, Geoffrey Beene and Galenic
Elancyl products both directly in leading men's and women's magazines and
through cooperative advertising in association with major retailers. The
Company also promotes the sale of its products through the use of
gift-with-purchase programs, sales personnel incentive commissions and
purchase-with-purchase programs.
34
<PAGE>
It has been an industry practice for businesses that market fragrances and
cosmetics to prestige department stores to provide the department stores with
rights to return merchandise. The Company limits return rights to certain
promotional items offered in its Halston, Geoffrey Beene and Galenic Elancyl
lines to prestige department stores. The Company does not offer any other
return rights and seeks to limit sales of such promotional products to each
retailer to volumes that the Company believes can be sold through the
retailer's customer base. The Company establishes reserves and provides
allowances for returns of such products at the time of sale. To date, the
Company's returns have not exceeded its reserves and allowances, although
there can be no assurance that such reserves and allowances will be adequate
in the future. As a percentage of gross sales (net sales plus returns,
reserves and allowances), returns were approximately 2.6%, 1.4%, 1.8% and
1.9%, respectively, for the fiscal year ended June 30, 1994, the seven-month
fiscal year ended January 31, 1995, the fiscal year ended January 31, 1996
and the three months ended April 30, 1996.
Marketing and sales activities outside the United States and Canada relate
primarily to Geoffrey Beene and Halston products and are conducted through
arrangements with independent distributors. The Company's export sales
department in Miami, Florida coordinates the Company's relationship with
various international fragrance distributors and assists them in developing
promotional campaigns and marketing budgets for individual foreign markets.
Revenues related to export sales were not material during the Company's last
three fiscal years.
A portion of the Company's accounts receivable are insured from risk of
uncollectibility by Heller Intercredit Company, a division of Heller
Financial, Inc. See Note 1 of Notes to Consolidated Financial Statements of
the Company.
DISTRIBUTION
The Company concentrates its distribution efforts in the United States and
Canada in department stores and mass-market retail locations, such as
Walgreens, Target, Eckerd Drugs, Wal-Mart, Kmart, Ross, T.J. Maxx and
Marshalls. With respect to the Halston, Geoffrey Beene, Galenic Elancyl and
certain other fragrance products, the Company also sells to prestige
department stores such as Macy's, Marshall Fields, Dayton Hudson, Sears and
J.C. Penney, as well as perfumeries, duty-free stores and specialty stores.
In addition, with respect to the Halston and Geoffrey Beene fragrance
products, the Company intends to expand the distribution of these products
worldwide.
As is customary in the fragrance industry, the Company does not have
long-term or exclusive contracts with its retailer customers. Sales to
customers are generally made pursuant to purchase orders. The Company
believes that its continuing relationships with its customers are based upon
its prior performance. The Company's ten largest customers accounted for
approximately 44% of net sales for the fiscal year ended January 31, 1996. No
single customer accounted for more than 10% of net sales for the same period.
The loss of, or a significant adverse change in, the relationship between the
Company and any of its key customers could have a material adverse effect on
the Company's financial condition and results of operations.
A majority of the Company's customers require rapid shipment of products.
The Company generally attempts to fill orders within two days from the
receipt of a purchase order, and all orders are subject to cancellation
without penalty by the customer until shipment. Accordingly, management does
not consider backlog to be a significant indication of future sales
activities. All orders are packaged by Company employees and most merchandise
is shipped to customers by common carriers. In addition to expedient
delivery, the Company addresses its individual customer needs by offering its
customers U.P.C. coding, advance price ticketing, case packing, drop ship
programs (direct to store), shrink-wrap, EAS and EDI capabilities.
SEASONALITY
The Company generally has higher sales in the second half of its fiscal
year as a result of increased demand by retailers in anticipation of, and
during, the holiday season.
35
<PAGE>
MANAGEMENT INFORMATION SYSTEM
The Company's management information system provides on-line, real-time,
fully integrated information for its sales, purchasing, warehouse and
financial departments. The order entry portion of the system is designed
around EDI to provide enhanced turnaround and reduced opportunity for errors
in orders and invoicing for both the Company and its customers. The system
forms the basis for a number of the value-added services that the Company
provides to its customers, including inventory replenishment, customer
billing, sales analysis, product availability and pricing information, and
expedited order processing. This system has been, and will continue to be,
enhanced on an ongoing basis to provide improved service to the Company's
customers through quicker response times in shipments, customer service, and
sales information and to provide the Company's management the ability to
identify opportunities for increased efficiencies and cost savings.
COMPETITION
The fragrance industry is highly competitive and at times subject to
rapidly changing consumer preferences and industry trends. The Company
competes with other distributors, Diverted Sources, manufacturers of
mass-market fragrances and other manufacturers of prestige fragrances.
Competition is generally a function of assortment and continuity of
merchandise selection, price, timely delivery and level of in-store customer
support. The Company believes that it competes primarily on the basis of (i)
its established relationships with its fragrance manufacturer suppliers and,
in particular, its ability to offer mass-market retail accounts a reliable,
direct supply of prestige fragrances and related cosmetic products at
competitive prices, and (ii) its emphasis on providing value-added customer
services to its mass-market retail customers. There are products which are
better known than the products produced for or distributed by the Company.
Many of the Company's competitors are substantially larger and more
diversified, and have substantially greater financial and marketing
resources, than the Company, as well as greater name recognition and the
ability to develop and market products similar to and competitive with those
distributed by the Company.
EMPLOYEES
At May 31, 1996, the Company employed 139 full-time and part-time persons.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees
is satisfactory. The Company also uses the services of independent
contractors in various capacities, including sales representatives and
information systems personnel.
PROPERTIES
The Company's distribution Facility is located at 14100 N.W. 60th Avenue,
Miami Lakes, Florida 33014 in a building owned by the Company on a tract of
land comprising approximately thirteen acres. The Company has issued a
mortgage on the Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Facility contains approximately 205,000 square feet of
assembly, distribution, shipping and storage space and approximately 25,000
square feet of office space. The Company is renovating the Facility, and
management expects to complete the renovation and to relocate its executive
offices to the Facility during the summer of 1996. The Company also leases
from National Trading the National Trading Facility, which had housed the
Company's distribution facilities prior to the Merger and which presently
houses the executive offices of the Company. Pending completion of the
renovation of the Facility, the Company is continuing to occupy the National
Trading Facility as its corporate headquarters. Subsequent to relocation of
the corporate headquarters, the Company and National Trading will pursue a
potential sale or lease of the National Trading Facility to a third party
that would discharge the Company from the lease obligation. There is no
assurance that any such sale or lease will be consummated.
LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings that are
believed by management to be material to the Company's business, financial
condition or results of operations.
36
<PAGE>
MANAGEMENT
The following table sets forth information regarding the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------------
<S> <C> <C>
J.W. Nevil Thomas .. 58 Chairman of the Board
E. Scott Beattie ... 37 Vice Chairman and Assistant Secretary
Rafael Kravec ....... 64 President, Chief Executive Officer and Director
Gretchen Cuzydlo ... 35 Vice President--Marketing
Joseph M. Gilfarb .. 46 Vice President--Sales
Saul Kravec ......... 33 Vice President--Sales
Oscar E. Marina .... 36 Vice President, General Counsel and Secretary
William J. Mueller . 49 Vice President--Operations, Chief Financial Officer
and Treasurer
Fred Berens ......... 53 Director
Richard C.W. Mauran 62 Director
George Dooley ....... 63 Director
</TABLE>
The business experience, principal occupations and employment as well as
the periods of service of each of the directors and executive officers of the
Company during the last five years are set forth below.
J.W. NEVIL THOMAS has served as Chairman of the Board of the Company since
its formation in July 1992. Since 1970, Mr. Thomas has served as President of
Nevcorp Inc. ("Nevcorp"), a financial and management consulting firm which is
controlled by Mr. Thomas and has a monitoring agreement with the Company. Mr.
Thomas is Chairman of the Board of Bedford and a director of BCFC, Pet Valu,
Inc. and PMC International Inc.
E. SCOTT BEATTIE has served as Vice Chairman of the Board and Assistant
Secretary of the Company since January 1995. Since September 1989, Mr.
Beattie has served as President of ESB Consultants, Inc. ("ESB"), a financial
and management consulting firm which is controlled by Mr. Beattie and has a
monitoring agreement with the Company. Mr. Beattie has also served as
Executive Vice President of Bedford since March 1995 and as Vice President of
Bedford from September 1989 to March 1995. Mr. Beattie is a director of
Bedford, Microbix Biosystems, Inc. and Janna Systems Inc.
RAFAEL KRAVEC has served as President and Chief Executive Officer and as a
director of the Company since its formation in July 1992. Mr. Kravec has also
served as President and Chief Executive Officer and as a director of (i) GB
Parfums since its formation in March 1995, (ii) Halston Parfums since its
formation in March 1996, (iii) Fine Fragrances since March 1990 and (iv)
National Trading, a company controlled by Mr. Kravec, since 1981. Rafael
Kravec is the father of Saul Kravec.
GRETCHEN CUZYDLO has served as Vice President--Marketing of the Company
since May 1993. Ms. Cuzydlo has also served as Vice President--Marketing of
Fine Fragrances since May 1993. From August 1991 to May 1993, Ms. Cuzydlo was
Vice President--Marketing of Cosmyl Corporation, a cosmetics company. From
1988 until August 1991, Ms. Cuzydlo was Marketing Manager for Cosmar
Corporation, a manufacturer of nail care and cosmetic items.
JOSEPH M. GILFARB has served as Vice President--Sales of the Company since
December 1992. Mr. Gilfarb started with the Company as a sales representative
in April 1991 and was promoted to Sales Manager in May 1992 before serving as
Vice President--Sales. From April 1990 to April 1991, Mr. Gilfarb worked as a
sales representative for S.T.C. Trading, a division of Quality King
Distributors, Inc., a fragrance distributor. Prior to that time, Mr. Gilfarb
worked for Perfumania Holding Corporation as a sales manager.
37
<PAGE>
SAUL KRAVEC has served as Vice President--Sales of the Company since March
11, 1996. Prior to that time, he had served as Vice President, General
Counsel and Secretary of the Company since its formation in July 1992. From
October 1989 until July 1992, Mr. Kravec served as General Counsel and Sales
Manager of National Trading, working primarily in the perfume division which
was acquired by the Company in July 1992. Saul Kravec is the son of Rafael
Kravec.
OSCAR E. MARINA has served as Vice President, General Counsel and
Secretary of the Company since March 1996. Mr. Marina has also served as
Secretary of GB Parfums and Halston Parfums since March 1996. From October
1988 until March 1996, Mr. Marina was an attorney with the law firm of Steel
Hector & Davis LLP in Miami, becoming a partner of the firm in January 1995.
WILLIAM J. MUELLER has served as Vice President--Operations, Chief
Financial Officer and Treasurer of the Company since April 1993. Mr. Mueller
has also served as Vice President--Finance and Chief Financial Officer of
Fine Fragrances since April 1993 and Treasurer of GB Parfums and Halston
Parfums since March 1996. From May 1991 to August 1992, Mr. Mueller was Vice
President, Chief Financial Officer and Treasurer of Homeowners Group, a real
estate marketing company. From February 1986 to December 1990, Mr. Mueller
was Vice President, Controller and Chief Accounting Officer of Square D
Company, an electrical equipment manufacturer. Mr. Mueller is a certified
public accountant.
FRED BERENS has served as a director of the Company since its formation in
July 1992. Mr. Berens has served as Senior Vice President Investments of
Prudential Securities, Inc., an investment banking firm, since March 1965.
Mr. Berens previously served as a director of Suave until December 1994. Mr.
Berens will receive a finder's fee from the Underwriters equal to 2% of the
underwriting discount. See "Underwriting."
RICHARD C.W. MAURAN has served as a director of the Company since its
formation in July 1992. Mr. Mauran is a private investor and serves as
Chairman and Chief Executive Officer of BCFC and as a director of Bedford,
Microbix Biosystems, Inc., Pet Valu, Inc., Premdor, Inc., Cara Operations
Ltd. and US Physical Therapy, Inc.
GEORGE DOOLEY has served as a director of the Company since March 1996.
Mr. Dooley has served as President and Chief Executive Officer of (i)
Community Television Foundation of South Florida, Inc., a not-for-profit
corporation supporting, and a licensee of, public television station WPBT
Channel 2, since 1955, (ii) WPBT Communications Foundation, Inc., a
not-for-profit corporation supporting public television station WPBT Channel
2, since 1981 and (iii) Comtel, Inc., a company providing television
facilities to television producers, since 1981.
All directors of the Company are elected annually and serve until the next
annual meeting of the shareholders or until their successors have been duly
elected and qualified. Officers are elected annually by the Board and serve
at the discretion of the Board.
COMMITTEES OF THE BOARD
The Board has a Compensation Committee consisting of Messrs. Berens and
Dooley to determine the compensation of the Company's executive officers and
to administer the Company's Stock Option Plans. See "Stock Option Plans" and
"Certain Transactions." In addition, the Company has an Audit Committee
consisting of Messrs. Thomas, Berens and Dooley to oversee the procedures,
scope and results of the annual audit and review the services provided by the
Company's independent public accountants.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid by the Company for the fiscal year ended January 31, 1996, the seven
months ended January 31, 1995 and the fiscal years ended June 30, 1994 and
1993, respectively, to the Company's Chief Executive Officer and the four
other executive officers of the Company whose compensation exceeded $100,000
(the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------
NAME AND FISCAL
PRINCIPAL POSITION PERIOD (1) SALARY BONUS (2)
- ------------------- ------------- ----------- ---------
<S> <C> <C> <C>
Rafael Kravec 1/31/96 $250,000 $ 90,000
President and 1/31/95 $134,692 $125,000
Chief Executive 6/30/94 $174,308 $ 35,000
Officer 6/30/93 $182,292 --
Joseph M. Gilfarb 1/31/96 $130,000 $ 25,000
Vice President-- 1/31/95 $ 52,500 $ 97,746
Sales 6/30/94 $ 90,000 $ 69,130
6/30/93 $ 4,988 $ 44,389
Saul Kravec 1/31/96 $130,000 $ 40,000
Vice President-- 1/31/95 $ 77,500 $ 40,000
Sales 6/30/94 $ 99,462 $ 20,000
6/30/93 $ 79,385 --
William J. Mueller 1/31/96 $130,000 $ 40,000
Vice President-- 1/31/95 $ 76,060 $ 40,000
Operations and 6/30/94 $113,173 $ 25,000
Chief Financial 6/30/93(4) $ 23,846 --
Officer
Gretchen Cuzydlo 1/31/96 $123,077 $ 40,000
Vice President-- 1/31/95 $ 52,500 $ 20,000
Marketing 6/30/94 $ 58,327 $ 5,000
6/30/93(5) $ 5,192 --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------- ----------------------
STOCK
NAME AND OTHER ANNUAL OPTIONS LTIP ALL OTHER
PRINCIPAL POSITION COMPENSATION(3) AWARDS(#) PAYOUTS($) COMPENSATION($)
<S> <C> <C> <C> <C>
Rafael Kravec -- -- -- --
President and -- 106,800 -- --
Chief Executive -- -- -- --
Officer -- -- -- --
Joseph M. Gilfarb -- -- -- --
Vice President-- -- 53,400 -- --
Sales -- -- -- --
-- -- -- --
Saul Kravec -- -- -- --
Vice President-- -- 53,400 -- --
Sales -- -- -- --
-- -- -- --
William J. Mueller -- -- -- --
Vice President-- -- 53,400 -- --
Operations and -- -- -- --
Chief Financial -- -- -- --
Officer
Gretchen Cuzydlo -- -- -- --
Vice President-- -- 53,400 -- --
Marketing -- -- -- --
-- -- -- --
<FN>
- -----------
(1) The amounts shown for "1/31/95" are for the seven months ended January
31, 1995; the amounts shown for "1/31/96," "6/30/94" and "6/30/93" are
for the fiscal years ended January 31, 1996, June 30, 1994 and June 30,
1993, respectively. Effective January 31, 1995, the Company changed its
fiscal year end from June 30 to January 31.
(2) Pursuant to the terms of Rafael Kravec's employment agreement with the
Company, the Company creates an annual bonus pool for Mr. Kravec and the
other members of senior management equal to 6% of the pre-tax profit of
the Company (the "6% Bonus Pool"). On an annual basis, the Compensation
Committee approves the allocation of the 6% Bonus Pool among Mr. Kravec
and the other members of the Company's senior management. For Mr.
Gilfarb, the amounts set forth under the "Bonus" column for the 1/31/95,
6/30/94, and 6/30/93 periods represent sales commissions.
(3) The amounts reflected in the above table do not include any amounts for
perquisites and other personal benefits. The aggregate amount of such
compensation for each named executive did not exceed 10% of the total
39
<PAGE>
annual salary and bonus of such named executive and, accordingly, has
been omitted from the table as permitted by the rules of the Securities
and Exchange Commission.
(4) Represents salary from April 5, 1993 through June 30, 1993.
(5) Represents salary from May 26, 1993 through June 30, 1993.
</FN>
</TABLE>
39
<PAGE>
AGGREGATED FISCAL YEAR END OPTION VALUE TABLE.
The following table sets forth certain information concerning unexercised
stock options held by the Named Executives at January 31, 1996. There were no
exercises of stock options by the Named Executives during the fiscal year
ended January 31, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT JANUARY 31, 1996(#) JANUARY 31, 1996($)
NAME ------------------------------ ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Rafael Kravec ...... 53,400 53,400 $177,555 $177,555
Joseph M. Gilfarb . 35,600 17,800 $118,370 $ 59,185
William J. Mueller 35,600 17,800 $118,370 $ 59,185
Saul Kravec ........ 35,600 17,800 $118,370 $ 59,185
Gretchen Cuzydlo .. 35,600 17,800 $118,370 $ 59,185
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are employees of the Company or officers or employees of
Bedford do not receive any compensation for serving on the Board or any of
its committees. Directors who are not employees of the Company and are not
employees or officers of Bedford receive an annual retainer of $3,000 and a
fee of $500 for each meeting of the Board or a committee of the Board
attended. The Board also reimburses all directors for all expenses incurred
in connection with their activities as directors. Non-employee directors
receive stock options under the Directors' Plan (as defined below). For
information on agreements and transactions which the Company has entered into
with Bedford and companies affiliated with Messrs. Thomas and Beattie, see
"Certain Transactions."
EMPLOYMENT AGREEMENT
The Company has an employment agreement (the "Employment Agreement") with
Rafael Kravec, its President and Chief Executive Officer, whereby he agrees
to devote a majority of his business time and energies to the business and
affairs of the Company and Fine Fragrances. The term of the Employment
Agreement extends to July 2, 2000. The Employment Agreement is automatically
renewable for successive one-year periods unless either party gives written
notice at least 180 days prior to the end of a term of his or its intention
not to renew. The Employment Agreement provides for a base annual salary to
be determined by the Board, but in no event less than $120,000. In addition,
the Employment Agreement requires the Company to implement the 6% Bonus Pool.
See footnote (2) to "Summary Compensation Table." Mr. Kravec is also entitled
to participate in the Company's other employee benefits. The total amount of
base salary and bonus compensation which Mr. Kravec is entitled to receive
may not exceed $500,000 per year. The Employment Agreement provides that Mr.
Kravec shall not engage or have an interest in any business competitive with
or similar to that engaged by the Company during the term of the agreement
and for a period of five years after its termination in the State of Florida
or any other geographic area where the Company does business or in which its
products are marketed. The Company has no other employment agreements.
STOCK OPTION PLANS
1995 STOCK OPTION PLAN. In January 1995, the Company's Board of Directors
adopted and its shareholders approved the Company's 1995 Stock Option Plan
(the "1995 Plan") under which 541,120 shares of Common Stock are currently
reserved for issuance upon exercise of stock options. As of May 31, 1996,
there were outstanding under the 1995 Plan options to purchase an aggregate
of 527,040 shares of Common Stock at exercise prices ranging from $3.30 to
$5.25 per share. Such options became
40
<PAGE>
exercisable in varying amounts beginning in July 1995 and generally expire
five years from their respective grant dates. The 1995 Plan provides for the
grant of both incentive stock options intended to qualify as such under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified stock options to key employees, officers, directors and
other persons who provide services for the Company or its subsidiaries. The
exercise price per share for incentive stock options may not be less than the
fair market value of the Common Stock at the time the option is granted (as
defined in the 1995 Plan) and, for nonqualified stock options, the exercise
price may not be less than the par value of the Common Stock. The 1995 Plan
will expire on, and no options may be granted thereunder after, January 26,
2005, subject to the right of the Board to terminate the 1995 Plan earlier.
Subject to the approval of the Company's shareholders at its upcoming annual
meeting to be held in June 1996, the Board has amended the 1995 Plan to
increase the number of shares of Common Stock available for issuance under
the 1995 Plan from 541,120 to 1,500,000. In May 1996, the Compensation
Committee granted options to purchase 92,500 shares of Common Stock, subject
to shareholder approval of the proposed amendment to the 1995 Plan. These
options, which are not treated as outstanding pending such approval, become
exercisable at $6.50 per share in three equal installments if and when the
Common Stock next trades at $8.00, $11.00 and $15.00, respectively, but no
earlier than six months from the date of grant.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. Directors who are not employees
of the Company are eligible to participate in the Non-Employee Director Stock
Option Plan (the "Directors' Plan"). Currently Messrs. Thomas, Beattie,
Berens, Mauran and Dooley are eligible for the grant of stock options under
the Directors' Plan. Under the Directors' Plan, each eligible director
elected to the Board will be granted an option to purchase 1,000 shares of
Common Stock. In addition, each year on the date of the annual meeting of
shareholders, if such person has continued to serve as a director until that
date, there will automatically be granted to each eligible director who is
reelected to the Board an option to purchase 500 shares of Common Stock
exercisable at the next annual meeting date. The Board has adopted, subject
to approval by the Company's shareholders at its annual meeting to be held in
June 1996, an amendment to the Directors' Plan to (i) increase the number of
shares of Common Stock available for issuance under the Directors' Plan from
35,600 to 200,000, (ii) increase the number of shares purchasable upon the
exercise of the option granted to a director upon election to the Board from
1,000 to 7,000 and (iii) increase the number of shares purchasable upon the
exercise of the option granted to a director upon reelection to the Board
from 500 to 7,500. The exercise price is based on the fair market value of
the Common Stock at the time the option is granted. George Dooley has been
granted an option under the Directors' Plan for 7,000 shares of Common Stock
exercisable at $6.00 per share, subject to shareholder approval of the
Directors' Plan amendment. Pending such approval, this option is not treated
as outstanding. No other options have been granted under the Directors' Plan.
OTHER PLANS. The Company also has two stock option plans, the 1981
Employee Stock Option and Stock Appreciation Plan (the "1981 Plan") and the
1993 Stock Option Plan (the "1993 Plan"), which were established by Suave
prior to the Merger. As of May 31, 1996, 795,000 shares of Common Stock were
available for issuance under such plans and options to purchase 20,000 shares
of Common Stock at $5.25 per share and 45,000 shares at $6.50 per share were
outstanding. The Company intends to terminate each of these plans in
connection with the approval of the amendments to the 1995 Plan and the
Directors' Plan discussed above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Thomas and Beattie, the Chairman and Vice Chairman of the Board of
the Company, respectively, served as members of the Compensation Committee of
the Board for the fiscal year ended January 31, 1996. Messrs. Thomas and
Beattie are directors and executive officers of Bedford and are the
controlling shareholders of Nevcorp, and ESB, respectively. The Company has
monitoring agreements with each of Bedford, Nevcorp and ESB, pursuant to
which such entities provide financial advisory services to the Company in
exchange for a monitoring fee. See "Certain Transactions--Monitoring
Agreements." In addition, from time to time, the Company has borrowed funds
from Bedford, and at January 31, 1996, the Company owed Bedford Interests
$410,000. During the fiscal year
41
<PAGE>
ended January 31, 1996, the Board authorized the payment of a management
services fee to Bedford in connection with services performed with respect to
the Merger and the acquisition of the Halston fragrance brands. See "Certain
Transactions--Management Fees" and "Certain Transactions--Borrowings from
Affiliates." BCFC, Bedford's parent company, and other investors in the
Bedford Funds have provided financing to the Company in connection with
certain acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." For
information on the voting power of Bedford relating to the Common Stock, see
"Risk Factors--Control by Bedford Capital Corporation and its Affiliates and
Rafael Kravec."
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of May 31, 1996: (i) the ownership of
Common Stock by all persons known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock; and (ii) the beneficial
ownership of Common Stock, Series A Preferred, Series B Convertible Preferred
and Series C Convertible Preferred, by (a) directors and nominees (listed by
name) of the Company, (b) the Company's chief executive officer and its four
other most highly compensated executive officers for the fiscal year ended
January 31, 1996, and (c) all directors and executive officers of the Company
as a group, without naming them.
<TABLE>
<CAPTION>
SERIES A
PREFERRED
COMMON STOCK STOCK
----------------------------- -------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT BENEFICIAL
OF BENEFICIAL OWNER (1) OWNERSHIP (2) OF CLASS (2) OWNERSHIP
- ----------------------- --------------- ------------ -------------
<S> <C> <C> <C>
Bedford Capital
Corporation(3)(4)......... 6,440,042 50.6
Bedford Capital Financial
Corp.(3)(5) .............. 938,747 9.2
J.W. Nevil Thomas(3)(6) ... 101,301 1.0 --
E. Scott Beattie(3)(7) .... 201,428 2.1 31
Rafael Kravec(8) ........... 2,948,818 30.1 8,000
Fred Berens(9) ............. 728,614 7.5 2,000
Richard C.W. Mauran
(3)(10) .................. 1,752,722 16.8 2,926
George Dooley(11) .......... 9,000 * --
Joseph M. Gilfarb(12) ..... 35,600 * --
Saul Kravec(12) ............ 35,600 * --
William J. Mueller(12) .... 35,600 * --
Gretchen Cuzydlo(12) ....... 35,600 * --
Estate of Eugene Ramos .... 1,203,390 12.4
All directors and executive
officers as a group
(11 persons)(13) ......... 5,884,283 53.8 12,957
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SERIES A
PREFERRED SERIES B CONVERTIBLE SERIES C CONVERTIBLE
STOCK PREFERRED STOCK PREFERRED STOCK
------------ ------------------------- --------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS PERCENT BENEFICIAL PERCENT BENEFICIAL PERCENT
OF BNEFICIAL OWNER (1) OF CLASS OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- ---------------------- ------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Bedford Capital
Corporation(3)(4)........
Bedford Capital Financial
Corp.(3)(5) .............
J.W. Nevil Thomas(3)(6) ... -- 7,587 2.2 11,682 2.0
E. Scott Beattie(3)(7) .... * 5,961 1.7 9,185 1.6
Rafael Kravec(8) ........... 40.0 5,419 1.6 8,835 1.5
Fred Berens(9) ............. 10.0 -- -- -- --
Richard C.W. Mauran
(3)(10) .................. 14.6 84,232 24.4 131,518 23.0
George Dooley(11) .......... -- -- -- -- --
Joseph M. Gilfarb(12) ..... -- -- -- -- --
Saul Kravec(12) ............ -- -- -- -- --
William J. Mueller(12) .... -- -- -- -- --
Gretchen Cuzydlo(12) ....... -- -- -- -- --
Estate of Eugene Ramos ....
All directors and executive
officers as a group
(11 persons)(13).......... 64.8 103,199 29.9 161,228 28.2
</TABLE>
- -----------
* Less than one percent of the class.
(1) The address of each of the persons shown in the above table other than
Bedford, BCFC and Messrs. Thomas, Beattie and Mauran is c/o French
Fragrances, Inc., 14100 NW 60th Avenue, Miami Lakes, Florida 33014. The
address of BCFC is Charlotte House, Second Floor, Shirley Street, P.O.
Box N964, Nassau, Bahamas. The address of Bedford and Messrs. Thomas,
Beattie and Mauran is Scotia Plaza, Suite 4712, Toronto, Canada M5H 3Y2.
(2) Includes shares of Common Stock issuable upon the conversion of Series B
Convertible Preferred and the Series C Convertible Preferred, and upon
the exercise of options to acquire Common Stock ("Options"), held by
such persons which may be converted or exercised within 60 days after
May 31, 1996. A total of 7.12 shares of Common Stock are issuable upon
conversion of one share of Series B Convertible Preferred. One share of
43
<PAGE>
Common Stock is issuable upon conversion of one share of Series C
Convertible Preferred.
(3) The information relating to the Common Stock is based on a Schedule 13D,
dated May 15, 1996, which was filed by Bedford, BCFC and Mr. Mauran. See
footnote 4.
(4) The shares of Common Stock shown above represent shares of Common Stock
owned by the Bedford Interests (including BCFC and Mr. Mauran). See
"Risk Factors--Control by Bedford Capital Corporation and its Affiliates
and Rafael Kravec." Such persons or entities have granted Bedford an
irrevocable power of attorney to vote any shares of Common Stock, Series
A
43
<PAGE>
Preferred, Series B Convertible Preferred and Series C Convertible
Preferred (to the extent the Series A Preferred, the Series B
Convertible Preferred or Series C Convertible Preferred is entitled to
vote on any matter) which they own or may own in the future.
Accordingly, Bedford has sole voting power over all of the shares of
Common Stock, Series A Preferred, Series B Convertible Preferred and
Series C Convertible Preferred (to the extent the Series A Preferred,
Series B Convertible Preferred or Series C Convertible Preferred is
entitled to vote on any matter), including the Common Stock issuable
upon the conversion of the Series B Convertible Preferred and the Series
C Convertible Preferred, but no investment power. The Common Stock
includes (i) 3,398,583 shares of Common Stock, (ii) 2,453,417 shares of
Common Stock issuable upon the conversion of the Series B Convertible
Preferred, (iii) 571,429 shares of Common Stock issuable upon the
conversion of the Series C Convertible Preferred and (iv) 16,614 shares
of Common Stock issuable upon the exercise of Options held by Mr.
Mauran.
(5) The Common Stock includes (i) 417,801 shares of Common Stock, as to
which BCFC has investment power but no voting power, (ii) 419,602 shares
of Common Stock issuable upon the conversion of Series B Convertible
Preferred, as to which BCFC has investment power but no voting power and
(iii) 101,344 shares of Common Stock issuable upon the conversion of
Series C Convertible Preferred, as to which BCFC has investment power
but no voting power. BCFC has investment power, but no voting power with
respect to the Series B Convertible Preferred and the Series C
Convertible Preferred (to the extent the Series B Convertible Preferred
or the Series C Convertible Preferred is entitled to vote on any
matter). The beneficial ownership of BCFC is also attributed to Bedford,
and these shares appear twice in the above table. See footnote 4.
(6) The Common Stock includes (i) 35,600 shares of Common Stock issuable
upon the exercise of Options held by Mr. Thomas, as to which Mr. Thomas
has voting and investment power, (ii) 54,019 shares of Common Stock
issuable upon the conversion of Series B Convertible Preferred owned by
Nevcorp, as to which Mr. Thomas has investment power but no voting power
and (iii) 11,682 shares of Common Stock issuable upon the conversion of
Series C Convertible Preferred owned by Nevcorp, as to which BCFC has
investment power but no voting power. Mr. Thomas has investment power,
but no voting power with respect to the Series B Convertible Preferred
and the Series C Convertible Preferred (to the extent the Series B
Convertible Preferred or Series C Convertible Preferred is entitled to
vote on any matter). The beneficial ownership of Mr. Thomas (other than
with respect to the shares of Common Stock issuable upon the exercise of
Options held by Mr. Thomas) is also attributed to Bedford and these
shares appear twice in the above table. See footnote 4.
(7) The Common Stock includes (i) 85,600 shares of Common Stock issuable
upon the exercise of Options held by Mr. Beattie, as to which Mr.
Beattie has investment and voting power, (ii) 64,201 shares of Common
Stock beneficially owned by ESB, as to which Mr. Beattie has investment
power but no voting power, (iii) 42,442 shares of Common Stock issuable
upon the conversion of Series B Convertible Preferred owned by ESB, as
to which Mr. Beattie has investment power but no voting power and (iv)
9,185 shares of Common Stock issuable upon the conversion of Series C
Convertible Preferred owned by ESB, as to which Mr. Beattie has
investment power but no voting power. The Series A Preferred are owned
by ESB. Mr. Beattie has investment power but no voting power with
respect to the Series A Preferred, the Series B Convertible Preferred
and the Series C Convertible Preferred (to the extent the Series A
Preferred, the Series B Convertible Preferred or Series C Convertible
Preferred is entitled to vote on any matter). The beneficial ownership
of Mr. Beattie (other than with respect to the shares of Common Stock
issuable upon the exercise of Options held by Mr. Beattie) is also
attributed to Bedford, and these shares appear twice in the above table.
See footnote 4.
(8) The information relating to the Common Stock is based on a Schedule 13D,
dated April 16, 1996, which was filed by Mr. Kravec. The Common Stock
includes (i) 2,848,000 shares of Common Stock beneficially owned by Mr.
Kravec, as to which Mr. Kravec has investment power and voting power,
(ii) 38,583 shares of Common Stock issuable upon the conversion of
Series B Convertible Preferred owned by National Trading, as to which
Mr. Kravec has sole investment power but no
44
<PAGE>
voting power, (iii) 8,835 shares of Common Stock issuable upon the
conversion of Series C Convertible Preferred owned by National Trading,
as to which Mr. Kravec has sole investment power but no voting power and
(iv) 53,400 shares of Common Stock issuable upon the exercise of Options
held by Mr. Kravec, as to which Mr. Kravec has investment and voting
power. Of the Series A Preferred shares, 4,950 are owned by Mr. Kravec
directly and 3,050 are owned by National Trading. Mr. Kravec has sole
investment and voting power over the Series A Preferred (to the extent
the Series A Preferred is entitled to vote on any matter). Mr. Kravec
has investment power but no voting power with respect to the Series B
Convertible Preferred and the Series C Convertible Preferred (to the
extent the Series B Convertible Preferred or the Series C Convertible
Preferred is entitled to vote on any matter). The beneficial ownership
of Series B Convertible Preferred, Series C Convertible Preferred and
the Common Stock issued upon the conversion thereof is also attributed
to Bedford, and these shares appear twice in the above table. See
footnote 4.
(9) The information relating to the Common Stock is based on a Schedule 13D,
dated April 16, 1996, which was filed by Mr. Berens. The Common Stock
includes (i) 712,000 shares of Common Stock beneficially owned by Mr.
Berens, as to which Mr. Berens has sole voting and investment power and
(ii) 16,614 shares of Common Stock issuable upon the exercise of Options
held by Mr. Berens, as to which Mr. Berens has sole voting and
investment power.
(10) The Common Stock includes (i) 893,446 shares of Common Stock, as to
which Mr. Mauran has investment power but no voting power, (ii) 111,413
shares of Common Stock beneficially owned by Devonshire Trust
("Devonshire"), a trust of which Mr. Mauran is a trustee, as to which
Mr. Mauran has investment power but no voting power, (iii) 110,680
shares of Common Stock issuable upon the conversion of Series B
Convertible Preferred owned by Devonshire, as to which Mr. Mauran has
investment power but no voting power, (iv) 489,051 shares of Common
Stock issuable upon the conversion of Series B Convertible Preferred
beneficially owned by Euro Credit Investments Limited ("Euro Credit"), a
company controlled by Mr. Mauran, as to which Mr. Mauran has investment
power but no voting power, (v) 108,254 shares of Common Stock issuable
upon the conversion of Series C Convertible Preferred, (vi) 23,264
shares of Common Stock issuable upon the conversion of Series C
Convertible Preferred owned by Devonshire, as to which Mr. Mauran has
investment power but no voting power and (vii) 16,614 shares of Common
Stock issuable upon the exercise of Options held by Mr. Mauran, as to
which Mr. Mauran has investment power but no voting power. Mr. Mauran
has investment power but no voting power with respect to the Series A
Preferred, the Series B Convertible Preferred and the Series C
Convertible Preferred (to the extent the Series A Preferred, Series B
Convertible Preferred or the Series C Convertible Preferred is entitled
to vote on any matter). The beneficial ownership of Mr. Mauran is also
attributed to Bedford, and these shares appear twice in the above table.
See footnote 4.
(11) Owned together with his spouse as joint tenants with right of
survivorship.
(12) Represents shares of Common Stock issuable upon the exercise of options.
(13) The Common Stock includes (i) 734,775 shares of Common Stock issuable
upon the conversion of Series B Convertible Preferred, (ii) 161,228
shares of Common Stock issuable upon the conversion of Series C
Convertible Preferred and (iii) 350,228 shares of Common Stock issuable
upon the exercise of Options.
45
<PAGE>
SELLING SHAREHOLDERS
The Selling Shareholders listed in the table below have indicated their
intentions to sell the numbers of shares of Common Stock set forth opposite
their respective names. The table sets forth information with respect to the
beneficial ownership of Common Stock by each Selling Shareholder as of May
31, 1996 and as adjusted to reflect the sale of 3,250,000 shares of Common
Stock by the Company and 1,750,000 shares of Common Stock by the Selling
Shareholders in this offering. All information with respect to stock
ownership of the Selling Shareholders has been furnished by the respective
Selling Shareholders. To the knowledge of the Company, other than as set
forth in the footnotes to the following table, there is no position, office
or other material relationship between any of the Selling Shareholders and
the Company, nor have any such material relationships existed within the past
three years.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
NUMBER OF SHARES BENEFICIALLY OWNED
OF COMMON STOCK NUMBER OF SHARES AFTER THIS OFFERING (2)
NAME AND RELATIONSHIP BENEFICIALLY OWNED OF COMMON STOCK ------------------------
WITH COMPANY OR AFFILIATES, IF ANY (1) PRIOR TO THIS OFFERING BEING OFFERED FOR SALE NUMBER OF CLASS
- -------------------------------------- ---------------------- ---------------------- --------- ---------
<S> <C> <C> <C> <C>
Rafael Kravec (3) .................. 2,948,818 475,000 2,733,818 20.6
The Manufacturers Life
Insurance Company .................. 508,854 200,000 340,554 2.6
Merchant Private Ltd. .............. 271,750 200,000 103,450 *
Douglas McCutcheon ................. 207,008 100,000 112,817 *
Imperial Life Assurance Company
of Canada ........................ 203,818 120,000 107,602 *
Canmerge Consultants Limited ...... 202,590 10,000 195,557 1.5
First Marathon Capital Corp. ...... 183,296 100,000 99,151 *
Gray Capital Corporation ........... 183,296 100,000 99,151 *
B No. 1 Inc. ....................... 135,878 100,000 51,733 *
Cairn Capital Inc. ................. 135,878 100,000 51,733 *
Dr. Joseph Peller .................. 135,878 85,000 66,733 *
Patsy Rosart ....................... 135,878 100,000 51,733 *
Gerald Connor ...................... 115,362 40,000 83,289 *
Fred Ward .......................... 33,969 20,000 17,933 *
<FN>
- -----------
* Less than one percent of class.
(1) All persons, other than Rafael Kravec, are investors in the Bedford
Funds. National Trading, a company controlled by Rafael Kravec, is an
investor in Bedford Fund II.
(2) The table gives effect to shares of Common Stock that would be
beneficially owned assuming completion of the Exchange Offer.
(3) Rafael Kravec is the President, Chief Executive Officer and largest
shareholder of the Company.
</FN>
</TABLE>
46
<PAGE>
CERTAIN TRANSACTIONS
The Company has, and will continue to be, engaged in transactions with
affiliated persons, principally its directors, officers and major
shareholders. The policy of the Company with regard to transactions with
affiliates is to require that such transactions be on terms no less favorable
to the Company than reasonably available from unrelated third parties.
SHAREHOLDERS AGREEMENT
The Company is a party to a shareholders agreement dated as of July 2,
1992, between Bedford and Rafael Kravec, which was amended as of December 2,
1992, February 14, 1995 (which also made the Company a party), November 30,
1995 and April 16, 1996 (as amended, the "Shareholders Agreement"). Pursuant
to the Shareholders Agreement, the Company must obtain and maintain two key
man life insurance policies insuring the life of Rafael Kravec, one in the
amount of at least $3.6 million (the "First Policy") and the other in the
amount of at least $8.225 million (the "Second Policy"). The proceeds of the
First Policy are to be applied by the Company first to redeem the 12.5%
Series I Debentures and the 12.5% Series II Debentures and then to redeem the
shares of Series A Preferred held by Bedford and investors in the Bedford
Funds and Fred Berens. The proceeds of the Second Policy will be applied by
the Company first to redeem the 8.0% Series I Debentures and 8.0% Series II
Debentures and then for working capital purposes. Unless earlier terminated
by agreement of Bedford and Rafael Kravec, the Shareholders Agreement will be
terminated on the earlier to occur of (i) the written agreement of Bedford
and Rafael Kravec, (ii) the death of Rafael Kravec or (iii) January 31, 2005. >
REGISTRATION RIGHTS AGREEMENT
Following the Merger on November 30, 1995, the Company entered into a
registration rights agreement with Bedford, for itself and on behalf of the
investors in the Bedford Funds holding shares of Series B Convertible
Preferred and Common Stock, Rafael Kravec, Eugene Ramos (who was the
President of Suave prior to the Merger) and Fred Berens pursuant to which the
Company granted certain demand and piggyback registration rights to such
persons with respect to the Common Stock owned by them (including Common
Stock issuable upon the conversion of the Series B Convertible Preferred),
provided that a demand can only be made for at least an aggregate of
1,000,000 shares of Common Stock and no earlier than April 15, 1996. Demand
registration rights terminate November 30, 2000, and piggyback registration
rights terminate on November 30, 2002. On March 20, 1996, the Agreement was
amended to grant registration rights to the investors in the Bedford Funds
holding shares of the Series C Convertible Preferred with respect to the
Common Stock issuable upon the conversion thereof.
MONITORING AGREEMENTS
The Company is a party to a monitoring agreement dated as of July 2, 1992
with Bedford, pursuant to which Bedford provides financial advisory services
to the Company. In consideration of the services provided, Bedford receives
an annual fee of $37,000 which is payable in quarterly installments in
advance. In addition, the Company reimburses Bedford for pre-approved travel
expenses. The agreement terminates on the later to occur of (i) the
redemption of the 12.5% Series I Debentures, 12.5% Series II Debentures and
Series A Preferred or (ii) the date as of which members of the "Bedford
Group" (defined to include all investors in the Bedford Funds) cease to own
an aggregate of 10% or more, on a fully diluted basis, of the outstanding
Common Stock. The agreement also may be terminated by Bedford upon giving the
Company 60 days' prior written notice. Messrs. Thomas, Beattie and Mauran,
directors of the Company, are affiliates of Bedford.
The Company is a party to a separate monitoring agreement dated as of
February 14, 1995 with Bedford, pursuant to which Bedford provides financial
advisory services to the Company. In consideration of the services provided,
Bedford receives an annual fee of $95,000 which is payable in
47
<PAGE>
quarterly installments in advance. In addition, the Company reimburses
Bedford for pre-approved travel expenses. The agreement terminates on the
later to occur of (i) the redemption of the 8.0% Series I Debentures or (ii)
the date as of which members of the Bedford Group cease to own an aggregate
of 10% or more, on a fully diluted basis, of the outstanding Common Stock.
The agreement may also be terminated by Bedford upon giving the Company 60
days' prior written notice.
The Company is a party to separate monitoring agreements dated as of July
2, 1992, with Nevcorp and ESB pursuant to which Nevcorp and ESB provide
financial advisory services to the Company. J.W. Nevil Thomas, Chairman of
the Board of the Company, is President and the controlling shareholder of
Nevcorp, and E. Scott Beattie, the Vice Chairman and Assistant Secretary of
the Company, is the President and the controlling shareholder of ESB. In
consideration of the services provided, Nevcorp and ESB receive annual fees
of $22,000 and $16,000, respectively, payable in quarterly installments in
advance. In addition, the Company reimburses Nevcorp and ESB for pre-approved
travel expenses. The agreements terminate on the later to occur of (i) the
redemption of the 12.5% Series I Debentures, 12.5% Series II Debentures and
Series A Preferred or (ii) the date as of which members of the Bedford Group
cease to own an aggregate of 10% or more, on a fully diluted basis, of the
outstanding Common Stock. The agreements may be terminated by Nevcorp and ESB
upon giving the Company 60 days' prior written notice.
The Company is a party to separate monitoring agreements dated as of
February 14, 1995, with Nevcorp and ESB pursuant to which Nevcorp and ESB
provide financial advisory services to the Company. In consideration of the
services provided, Nevcorp and ESB receive an annual fee of $25,000 and
$80,000, respectively, which is payable in quarterly installments in advance.
In addition, the Company reimburses Nevcorp and ESB for pre-approved travel
expenses. The agreements terminate on the later to occur of (i) the
redemption of the 8.0% Series I Debentures or (ii) the date as of which
members of the Bedford Group cease to own an aggregate of 10% or more, on a
fully diluted basis, of the outstanding Common Stock. The agreements may also
be terminated by Nevcorp and ESB upon giving the Company 60 days' prior
written notice.
MANAGEMENT FEES
In connection with certain management and financial advisory services
performed by Bedford over several months on behalf of the Company with
respect to the Merger, the Board authorized payment to Bedford of a
management services fee of $200,000. In addition, in connection with certain
management and financial advisory services performed by Bedford over several
months on behalf of the Company with respect to the Halston Acquisition, the
Board authorized payment to Bedford of a management services fee of $200,000.
BORROWINGS FROM AFFILIATES
The Company has outstanding $8.225 million aggregate principal amount of
the 8.0% Series I Debentures which were issued to the Bedford Interests as
part of the financing for the Geoffrey Beene Acquisition in March 1995. The
Company also has outstanding $3.46 million aggregate principal amount of
12.5% Series I Debentures and 12.5% Series II Debentures which the Company
issued in connection with the acquisition in July 1992 of the fragrance and
cosmetic assets of National Trading, a company which is wholly-owned by
Rafael Kravec. The Bedford Interests hold $1.73 million aggregate principal
12.5% of Series I Debentures. National Trading and Fred Berens, a director of
the Company, hold $1.384 million and $346,000 principal amount of 12.5%
Series II Debentures, respectively. Pursuant to the terms of the Exchange
Offer, the 12.5% Debentures and the outstanding shares of Series A Preferred
will be exchanged for $5.46 million aggregate principal amount of 7.5%
Convertible Debentures. In March 1996, the Company issued to the Bedford
Interests approximately $3 million aggregate principal amount of 8.0% Series
II Debentures as part of the financing for the Halston Acquisition.
The Company has outstanding certain loans and advances from shareholders
and affiliates of the Company. At April 30, 1996, the Company had outstanding
balances from National Trading, Fine
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Fragrances and the Bedford Interests in the principal amounts of $1,394,000,
$918,000 and $410,000, respectively. Since June 30, 1993, the highest amount
outstanding at any one time was as follows: National Trading, $2,088,000,
Fine Fragrances, $1,900,000, the Bedford Interests, $410,000, and Rafael
Kravec, $235,000. These loans or advances generally bear interest at the
prime rate and are short-term in nature. See Note 10 of Notes to Consolidated
Financial Statements of the Company.
NATIONAL TRADING
On July 2, 1992, the Company acquired the net assets of the fragrance and
cosmetics distribution business of National Trading, a company wholly-owned
by Rafael Kravec, the President and Chief Executive Officer and a director of
the Company. The Company acquired National Trading's net assets for $4.4
million, payable $2.2 million in cash, $1.73 million in 12.5% Series II
Debentures and through the issuance of 5,050 shares of Series A Preferred.
The asset purchase agreement between the Company and National Trading
provided for an adjustment of the purchase price if the "net asset value" was
less than $3,960,000. The "net asset value" was determined to be $3,188,000
as of June 30, 1992, and National Trading issued a term promissory note in
the amount of $772,000 for the difference. The note was non-interest bearing
and was repaid in December 1992.
The Company is a party to a lease agreement dated as of July 2, 1992, with
National Trading, pursuant to which the Company is leasing the National
Trading Facility. The property is subject to a mortgage by National Trading
to secure its obligation for industrial development revenue bonds issued
through the Dade County Industrial Development Authority in the original
amount of $3 million. The outstanding principal balance of the bonds was
approximately $2.2 million at April 30, 1996. The terms of the lease run
through December 1, 2011. Future minimum lease payments for the building and
land range from $266,000 for the year ending January 31, 1996, declining to
$235,000 for the year ending January 31, 2000, with an aggregate of
$1,520,000 due for all periods thereafter. Pursuant to the lease, the Company
is required to maintain a maximum leverage ratio, a minimum tangible capital
base, a minimum current ratio and a minimum interest coverage ratio, and is
subject to limits on capital expenditures. In addition, the Company agreed
not to assign the lease without the prior written consent of the Industrial
Development Authority and the trustee under the Bond Indenture. Under the
terms of the lease, the Company has an option to purchase the leased property
on or before the end of the lease term at a price of $1.8 million less the
amount equal to the product of $10,000 multiplied by the number of months for
which the Company has paid rent pursuant to the lease. Subsequent to the
Company's future relocation of its corporate headquarters, the Company and
National Trading will pursue a sale or lease of the National Trading Facility
to a third party that would discharge the Company from the lease obligation.
There is no assurance that any such sale or lease will be consummated.
In the normal course of business or from time to time, the Company, Fine
Fragrances and National Trading have entered into transactions which are
reflected on the consolidated balance sheets of the Company as due to
affiliates, net. See Note 10 of Notes to the Consolidated Financial
Statements of the Company.
FINE FRAGRANCES
The Company is a party to a management agreement dated as of May 14, 1990
(the "Management Agreement") with Fine Fragrances, which the Company assumed
in connection with its acquisition of the assets of the fragrance and
cosmetics distribution business of National Trading in July 1992. Under the
terms of the Management Agreement, the Company provides office space and
equipment, warehousing and delivery facilities and certain managerial,
accounting and legal services to Fine Fragrances, a corporation which is
49.99% owned by the Company and of which Rafael Kravec, the Company's
President and Chief Executive Officer, serves as President and Chief
Executive Officer, in return for a management fee of 8% of the gross sales of
Fine Fragrances payable on a monthly basis. In addition, the Company is
reimbursed for certain business expenses incurred by the Company in
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connection with the performance of the services under the Management
Agreement. The Company received management fees under the Management
Agreement totaling $408,000, $371,000, $254,000, $376,000 and $119,000 during
the fiscal years ended June 30, 1994 and 1993, the seven month fiscal year
ended January 31, 1995, the fiscal year ended January 31, 1996 and the three
months ended April 30, 1996.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 50,000,000 shares
of Common Stock, $.01 par value, of which 9,679,873 shares are issued and
outstanding (assuming no exercise of options or warrants to purchase Common
Stock and no conversion into Common Stock of any shares of Series B
Convertible Preferred and Series C Convertible Preferred or of 5.0%
Convertible Debentures), (ii) 20,000 shares of Series A Preferred, $.01 par
value, all of which are issued and outstanding, (iii) 344,581 shares of
Series B Convertible Preferred, $.01 par value, all of which are issued and
outstanding, (iv) 571,429 shares of Series C Convertible Preferred, $.01 par
value, all of which are issued and outstanding and (v) 4,428,571 shares of
Serial Preferred, $.01 par value, none of which are issued and outstanding.
COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of shareholders. The holders of Common Stock are entitled
to receive dividends when, as and if declared by the Board of Directors, in
its discretion, from funds legally available therefor. The indenture relating
to the Company's 5.0% Convertible Debentures and the Credit Facility
prohibits the payment of cash dividends by the Company. See "Dividend
Policy." Upon liquidation or dissolution of the Company, the holders of the
Common Stock will be entitled to share ratably in the assets of the Company,
if any, legally available for distribution to shareholders, after the payment
of the liquidation preferences of the Series A Preferred, the Series B
Convertible Preferred, the Series C Convertible Preferred and any outstanding
Serial Preferred. The Common Stock has no preemptive rights and no
subscription, redemption or conversion privileges. The Common Stock does not
have cumulative voting rights, which means that the holders of a majority of
the outstanding Common Stock voting for the election of directors will be
able to elect all members of the Board of Directors. A majority vote will
also be sufficient for other actions requiring a vote of the Common Stock.
SERIES A PREFERRED
The Series A Preferred has no voting rights on matters submitted to a vote
of the Company's shareholders, except as required by law. The holders of the
Series A Preferred are entitled to receive dividends, when, as and if
declared by the Company's Board of Directors, in its discretion, from funds
legally available therefor. Subject to limitations imposed by the Florida
Business Corporation Act (the "FBCA Limitations") and any credit agreements
and loan arrangements between the Company and any financial institution
("Credit Agreement Restrictions"), upon the earlier to occur of (i) January
1, 2001 or (ii) the (a) repayment of 50% of the 12.5% Series I Debentures and
the 12.5% Series II Debentures (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 11 of Notes to Consolidated Financial Statements of the
Company) and (b) accumulation by the Company of $2,000,000 in retained
earnings, the Company will be required to redeem the outstanding Series A
Preferred at a redemption price of $100 per share, in annual increments of
20% of the number of shares of Series A Preferred originally issued (i.e.,
4,000 shares), pro rata from the holders of the Series A Preferred; provided,
that the Company will be required to redeem the Series A Preferred only to
the extent that the aggregate redemption price paid for shares redeemed in
any calendar year does not exceed the Company's retained earnings for the
previous year (the "Retained Earnings Limitation"); and provided further,
that to the extent the Company is unable to redeem 20% of the Series A
Preferred in any calendar year due to the FBCA
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Limitations, the Credit Agreement Restrictions or the Retained Earnings
Limitation, such unredeemed portion of the 20% increment of the Series A
Preferred may be redeemed in the following year in addition to the 20% of the
Series A Preferred required to be redeemed in such following year, if any,
subject to the FBCA Limitations, the Credit Agreement Restrictions and the
Retained Earnings Limitation. Upon liquidation or dissolution of the Company,
the holders of the outstanding Series A Preferred will be entitled to receive
out of the assets of the Company, if any, legally available for distribution
to shareholders, $100 per share of Series A Preferred, and no more, before
payment or distribution of assets to the holders of the Common Stock or any
other stock of the Company ranking as to distribution of assets on
liquidation junior to the Series A Preferred, the Series B Convertible
Preferred and the Series C Convertible Preferred. If the assets of the
Company available for distribution to shareholders upon a liquidation are
insufficient to pay in full the liquidation preference of the Series A
Preferred, the Series B Convertible Preferred and the Series C Convertible
Preferred, then such assets will be distributed ratably among the holders of
the Series A Preferred, the Series B Convertible Preferred and the Series C
Convertible Preferred in proportion to the amounts to which they are
entitled. The shares of Series A Preferred are not subject to the operation
of any purchase, retirement or sinking fund.
In connection with the Exchange Offer, the outstanding Shares of Series A
Preferred and the outstanding 12.5% Series I Debentures and 12.5% Series II
Debentures are being exchanged for $5.46 million aggregate principal amount
of 7.5% Convertible Debentures. The 7.5% Convertible Debentures are
convertible at the Conversion Price at any time at the option of the holder
and are to be redeemable at par at any time commencing three years from the
date of the Exchange Offer at the option of the Company, but only in the
event the Common Stock, at the time a redemption notice is delivered by the
Company, has been trading at least at 200% of the Conversion Price for twenty
consecutive business days.
SERIES B CONVERTIBLE PREFERRED
The Series B Convertible Preferred has no voting rights on matters
submitted to a vote of the Company's shareholders, except as required by law.
The holders of the Series B Convertible Preferred are entitled to receive
dividends, when, as and if declared by the Board of Directors, in its
discretion, from funds legally available therefor. At any time after the
termination of the Shareholders Agreement (see "Certain Transactions"), the
Company may, at its option, redeem all (but not part) of the outstanding
Series B Convertible Preferred at a redemption price of $.01 per share, upon
giving the holders thereof written notice of its intention to do so at least
60 days in advance of the date fixed for redemption. At any time prior to
5:00 p.m., Miami time, on January 31, 2005, each share of Series B
Convertible Preferred is convertible, at the option of the holder thereof or
Bedford, on behalf of the holder, into 7.12 fully paid and nonassessable
shares of Common Stock upon payment of $3.30 per share of Common Stock (the
"Series B Conversion Price"). The Series B Conversion Price is payable in
cash, by surrender to the Company of all or a portion of the holder's 8.0%
Series I Debentures (with such portion of the unpaid principal balance
thereof and accrued but unpaid interest thereon as is specified by the holder
thereof being credited to the aggregate Series B Conversion Price of the
shares being converted), or a combination thereof. The Series B Conversion
Price and the number of shares of Common Stock or other securities issuable
upon conversion of the Series B Convertible Preferred are subject to
adjustment upon the occurrence of certain events, including the issuance of
Common Stock without consideration or for consideration less than the Series
B Conversion Price then in effect, stock dividends, stock splits, capital
reorganizations or reclassifications, the consolidation or merger of the
Company with another corporation or the sale of all or substantially all of
the assets of the Company to another corporation. Upon liquidation or
dissolution of the Company, the holders of the outstanding Series B
Convertible Preferred will be entitled to receive out of the assets of the
Company, if any, legally available for distribution to shareholders, $.01 per
share of Series B Convertible Preferred, and no more, before payment or
distribution of assets to the holders of the Common Stock or any other stock
of the Company ranking as to distribution of assets on liquidation junior to
the Series A Preferred, Series B Convertible Preferred and Series C
Convertible Preferred. If the assets of the Company available for
distribution to shareholders upon a liquidation are insufficient to pay in
full the
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liquidation preference of the Series A Preferred, Series B Convertible
Preferred and Series C Convertible Preferred, then such assets will be
distributed ratably among the holders of the Series A Preferred, Series B
Convertible Preferred and Series C Convertible Preferred in proportion to the
amounts to which they are entitled. The shares of Series B Convertible
Preferred are not subject to the operation of any purchase, retirement or
sinking fund.
SERIES C CONVERTIBLE PREFERRED
The Series C Convertible Preferred has no voting rights on matters
submitted to a vote of the Company's shareholders, except as required by law.
The holders of the Series C Convertible Preferred are entitled to receive
dividends, when, as and if declared by the Board of Directors, in its
discretion, from funds legally available therefor. At any time after the
termination of the Shareholders Agreement, the Company may, at its option,
redeem all (but not part) of the outstanding Series C Convertible Preferred
at a redemption price of $.01 per share, upon giving the holders thereof
written notice of its intention to do so at least 60 days in advance of the
date fixed for redemption. At any time prior to 5:00 p.m., Miami time, on
January 31, 2005, each share of Series C Convertible Preferred is
convertible, at the option of the holder thereof or Bedford, on behalf of the
holder, into one fully paid and nonassessable share of Common Stock upon
payment of $5.25 per share of Common Stock (the "Series C Conversion Price").
The Series C Conversion Price is payable in cash, by surrender to the Company
of all or a portion of the holder's 8.0% Series II Debentures (with such
portion of the unpaid principal balance thereof and accrued but unpaid
interest thereon as is specified by the holder thereof being credited to the
aggregate Series C Conversion Price of the shares being converted), or a
combination thereof. The Series C Conversion Price and the number of shares
of Common Stock or other securities issuable upon conversion of the Series C
Convertible Preferred are subject to adjustment upon the occurrence of
certain events, including the issuance of Common Stock without consideration
or for consideration less than the Series C Conversion Price then in effect,
stock dividends, stock splits, capital reorganizations or reclassifications,
the consolidation or merger of the Company with another corporation or the
sale of all or substantially all of the assets of the Company to another
corporation. Upon liquidation or dissolution of the Company, the holders of
the outstanding Series C Convertible Preferred will be entitled to receive
out of the assets of the Company, if any, legally available for distribution
to shareholders, $.01 per share of Series C Convertible Preferred, and no
more, before payment or distribution of assets to the holders of the Common
Stock or any other stock of the Company ranking as to distribution of assets
on liquidation junior to the Series A Preferred, the Series B Convertible
Preferred and the Series C Convertible Preferred. If the assets of the
Company available for distribution to shareholders upon a liquidation are
insufficient to pay in full the liquidation preference of the Series A
Preferred, the Series B Convertible Preferred and the Series C Convertible
Preferred, then such assets will be distributed ratably among the holders of
the Series A Preferred, the Series B Convertible Preferred and the Series C
Convertible Preferred in proportion to the amounts to which they are
entitled. The shares of Series C Convertible Preferred are not subject to the
operation of any purchase, retirement or sinking fund.
SERIAL PREFERRED
No shares of Serial Preferred are currently issued or outstanding. The
Board of Directors of the Company will have the authority, without the
necessity of further action or authorization by the shareholders, to cause
the Company to issue Serial Preferred from time to time in one or more
series, and to fix by resolution the relative rights and preferences of each
series. The Board of Directors will be authorized to determine, among other
things, with respect to each series of Serial Preferred which may be issued:
(i) the distinctive designation of such series and the number of shares
constituting such series, (ii) the rate and nature of dividends, (iii)
whether the shares can be redeemed and, if so, the price at and the terms and
conditions on which shares may be redeemed, (iv) the amount payable upon
shares in the event of voluntary or involuntary liquidation, (v) purchase,
retirement or sinking fund provisions, if any, for the redemption or purchase
of shares, (vi) the terms and conditions, if any, on which shares may be
converted and (vii) whether or not shares have voting rights and the extent
of such voting rights, if any. The ability of the Board to designate and
issue Serial Preferred having preferential rights
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could impede or deter an unsolicited tender offer or takeover proposal
regarding the Company, and the designation and issuance of additional Serial
Preferred having preferential rights could adversely affect the voting power
and the other rights of holders of the Common Stock. There are no agreements
or understandings for issuance of Serial Preferred, and the Board has no
present intention to issue Serial Preferred.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess
any voting rights unless such voting rights are approved by a majority vote
of a corporation's disinterested shareholders. This Act could affect the
voting rights afforded the Common Stock acquired in the future by any present
or future holder of at least 20% of the outstanding Common Stock, so long as
the Company does not opt out of the provisions of such Act. The Florida
Affiliated Transactions Act generally requires supermajority approval by
disinterested shareholders or a majority of "disinterested directors" (as
defined in such Act) of certain specified transactions ("Affiliated
Transactions") between a public corporation and holders of more than 10% of
the outstanding voting shares of the corporation (or their affiliates).
Affiliated Transactions between the Company and the holders of 10% or more of
the outstanding shares of the Company (or their affiliates) may be approved
by a majority vote of the current directors of the Board of Directors since
such persons are deemed disinterested directors for purposes of the Florida
Affiliated Transactions Act.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with Bedford,
for itself and on behalf of the holders of the Series B Convertible Preferred
and Series C Convertible Preferred and certain holders of Common Stock who
are investors in the Bedford Funds, Rafael Kravec, Eugene Ramos (who was the
President of Suave prior to the Merger) and Fred Berens pursuant to which the
Company granted certain demand and piggyback registration rights to such
persons. See "Certain Transactions--Registration Rights Agreement." The
Company has also granted certain demand and piggyback registration rights to
the holders of the warrants issued in connection with the FMG Acquisition.
The holders of the Representatives' Warrants will also be entitled to certain
demand and piggyback registration rights. See "Underwriting."
TRANSFER AGENT
The transfer agent for the Common Stock is Chemical Mellon Shareholder
Services, Pittsburgh, Pennsylvania.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the Exchange Offer and assuming no
conversion of outstanding convertible securities and no exercise of
outstanding options or warrants, 12,929,873 shares of Common Stock will be
outstanding and an additional 5,651,328 shares of Common Stock will be
reserved for issuance upon conversion of outstanding convertible securities
and upon the exercise of outstanding stock options and warrants. Of the
outstanding shares, the 5,000,000 shares sold in this offering (5,750,000
shares if the over-allotment option is exercised in full) and, assuming no
conversion of outstanding convertible securities and no exercise of
outstanding options or warrants, approximately 1,800,000 additional shares
(3,588,630 shares after the expiration of the lock up period discussed below)
will be immediately freely tradeable in the public market without restriction
under the Securities Act, except for any shares owned by an "affiliate" of
the Company (as that term is defined under the rules and regulations of the
Securities Act), which will be subject to the resale limitations of Rule 144
or Rule 145, or as otherwise permitted, under the Securities Act. Upon
completion of this offering and the
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<PAGE>
Exchange Offer and assuming no conversion of outstanding convertible
securities and no exercise of outstanding options or warrants, approximately
4,600,000 of the outstanding shares of Common Stock will be held by persons
who may be deemed to be affiliates of the Company (the "Restricted Holders").
In addition, (i) substantially all outstanding options to purchase shares of
Common Stock (350,228 of which will be exercisable) will be held by
Restricted Holders, (ii) 344,581 shares of the Series B Convertible
Preferred, convertible into 2,453,417 shares of Common Stock, will be
outstanding, of which approximately 1,154,000 shares of Common Stock would be
held by Restricted Holders if all shares of Series B Convertible Preferred
were converted and (iii) 571,429 shares of the Series C Convertible
Preferred, convertible into the same number of shares of Common Stock, will
be outstanding, of which approximately 263,000 shares of Common Stock would
be held by Restricted Holders if all shares of Series C Convertible Preferred
were converted. The Restricted Holders and the other investors in the Bedford
Funds are subject to lock-up agreements with the Representatives which expire
180 days after the date of this Prospectus, pursuant to which the
shareholders owning such shares have agreed not to sell, transfer or
otherwise dispose of any beneficial interest in their shares of Common Stock,
other than certain intra-family transfers to persons who become bound by the
lock-up agreement provisions, without the prior written consent of the
Representatives. The existence of these shares held by affiliates may have a
depressive effect on the market price of the Common Stock.
Substantially all of the shares of Common Stock held by the Restricted
Holders were received in connection with the Merger and may be resold under
Rule 145. In general, under Rule 145 as currently in effect, a person (or
persons whose shares are aggregated) including an affiliate is entitled to
sell in the open market within any three-month period a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of the
Common Stock (approximately 126,799 shares immediately after the offering,
assuming no conversion into Common Stock of any Series B Convertible
Preferred or Series C Convertible Preferred and no exercise of outstanding
stock options or warrants) or (ii) the average weekly trading volume during
the four calendar weeks preceding such sale. Sales under Rule 145 are also
subject to certain limitations on the manner of sale, notice requirements and
availability of current public information about the Company. Restricted
shares properly sold in reliance upon Rule 145 are thereafter freely
tradeable without restrictions or registration under the Act, unless
thereafter held by an "affiliate" of the Company.
In addition to the outstanding stock options and warrants, the Company
will also have reserved an aggregate of approximately 845,000 shares of
Common Stock (approximately 1,080,000 if the 1995 Plan and the Directors'
Plan are amended and the 1981 Plan and 1993 Plan are terminated; see
"Management--Stock Option Plans") for issuance pursuant to the Company's
existing stock option plans. The distribution of such shares will be
registered under the Securities Act. Subject to restrictions imposed pursuant
to the stock option plans, shares of Common Stock issued pursuant to the
stock option plans which are registered under the Securities Act are
available for sale in the public market without restriction to the extent
they are held by persons who are not affiliates of the Company, and by
affiliates pursuant to provisions of Rule 144. Accordingly, sales of Common
Stock by Restricted Holders are subject to the volume limitations and other
requirements of Rule 144, which are the same as those imposed by Rule 145 and
described in the preceding paragraph.
The Company has entered into a registration rights agreement granting to
the Restricted Holders and the holders of the Series B Convertible Preferred
and Series C Convertible Preferred certain demand and piggyback registration
rights. See "Certain Transactions--Registration Rights Agreement." The
Company has also granted certain demand and piggyback registration rights in
connection with the FMG acquisition and will grant such rights to the holders
of the Representatives' Warrants. See "Underwriting."
The Company is unable to predict the effect, if any, that sales of shares
under Rule 144 or Rule 145 (or the potential for such sales), sales pursuant
to future registration statements or other sales or potential sales may have
on the market prices of the Common Stock prevailing from time to time. Future
sales of substantial numbers of additional shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock.
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UNDERWRITING
The Underwriters below, for whom Rodman & Renshaw, Inc. and Sanders Morris
Mundy are acting as Representatives, have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------
<S> <C>
Rodman & Renshaw, Inc.
Sanders Morris Mundy .
------------
Total ............... 5,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that the Underwriters are committed to purchase and pay
for all of the above shares of Common Stock if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share;
and that such dealers may reallow a concession of $ per share to certain
other dealers. After the public offering, the offering price and other
selling terms may be changed by the Underwriters. The Common Stock is
included for quotation on the Nasdaq National Market.
The Company and the Selling Shareholders have granted the Underwriters a
30-day over-allotment option to purchase up to an aggregate of 750,000
additional shares of Common Stock, exercisable at the public offering price
less the underwriting discount. The over-allotment option has been granted by
the Company as to 375,000 shares, and by the Selling Shareholders as to
375,000 shares on a pro rata basis in accordance with the number of shares of
Common Stock being sold by each Selling Shareholder, respectively. If the
Underwriters exercise such over-allotment option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of the number of shares purchased
pursuant to such exercise as the number of shares of Common Stock to be
purchased by it, as shown in the above table, bears to the 5,000,000 shares
of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares
of Common Stock offered hereby.
The Company, its directors and executive officers, the Selling
Shareholders and certain other shareholders have agreed that they will not
sell or dispose of any shares of Common Stock of the Company for a period of
180 days after the later of the date on which the Registration Statement is
declared effective by the Commission or the first date on which the shares
are bona fide offered to the public, without the prior written consent of the
Representatives.
In connection with this offering, the Company has agreed to pay to the
Representatives a financial advisory fee of $50,000. The Company and the
Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities, losses and expenses, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Mr. Fred Berens, a director of the Company and a Senior Vice
President--Investments of Prudential Securities, Inc., will receive a
finder's fee from the Underwriters equal to 2% of the underwriting discount.
In connection with the offering made hereby, the Company has agreed to
sell to the Representatives, for nominal consideration, the Representatives'
Warrants to purchase from the
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<PAGE>
Company up to 162,500 shares of Common Stock. The Representatives' Warrants
are exercisable, in whole or in part, at an exercise price if 120% of the
price to public at any time during the two-year period commencing one year
after the effective date of the Registration Statement of which this
Prospectus is a part. The Representatives' Warrants contain provisions
providing for adjustment of the exercise price and the number and type of
securities issuable upon exercise of the Representatives' Warrants should any
one or more of certain specified events occur. The Representatives' Warrants
grant to the holders thereof certain rights of registration for the
securities issuable upon exercise of the Representatives' Warrants.
Sanders Morris Mundy acted as financial advisor to Suave in connection
with the Merger consummated November 30, 1995 and received a financial
advisory fee of $125,000.
In connection with the offering made hereby, certain Underwriters and
selling group members (if any) or their respective affiliates who are
qualified registered market makers on the Nasdaq National Market may engage
in passive market making transactions in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during a specified period
before commencement of offers or sales of the Common Stock. The passive
market making transactions must comply with applicable volume and price
limits and be identified as such. In general, a passive market maker may
display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Steel Hector & Davis LLP,
Miami, Florida.
Certain legal matters relating to the shares of Common Stock offered
hereby will be passed upon for the Underwriters by Mayor, Day, Caldwell &
Keeton, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of January 31,
1996 and 1995, and for the year ended January 31, 1996, the seven months
ended January 31, 1995, and the years ended June 30, 1994 and 1993, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The statement of net assets sold of the Halston Fragrance Brands of
Halston Borghese International Limited as of December 31, 1995 and 1994, and
the statement of net sales, cost of sales and direct operating expenses for
each of the two years in the period ended December 31, 1995, included on
pages F-30 to F-33 in this Prospectus, have been included herein in reliance
on the report of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
The financial statements of FMG as of December 31, 1995 and 1994, and for
the years then ended, included in this Prospectus have been audited by
Sanson, Kline, Jacomino & Company, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange
56
<PAGE>
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Room 1024, Washington,
D.C. 20549; and by the Commission's Regional Officers at 500 West Madison,
14th Floor, Chicago, Illinois 60661-2511, and at 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, upon the payment of prescribed fees. In
addition, copies of such information may also be inspected and copied at the
library of the Nasdaq National Market, 1735 K Street, 4th Floor, Washington,
D.C. 20006, upon which the Company's Common Stock is authorized for trading.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act with respect to shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement and the documents
incorporated herein by reference, which may be examined without charge at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies thereof may be obtained
from the Commission upon payment of the prescribed fees. The Commission
maintains an Internet site on the World Wide Web at "http://www.sec.gov"
which contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission.
Statements contained in this Prospectus relating to the contents of any
contract or other document referred to herein are not necessarily complete,
and reference is made to the copy of such contract or other documents filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company distributes to its shareholders annual reports containing
audited financial statements and furnishes to its shareholders proxy
materials for its annual meetings complying with the proxy requirements of
the Exchange Act.
57
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES:*
Independent Auditors' Report ................................................. F-2
Consolidated Balance Sheets as of January 31, 1995 and 1996 .................. F-3
Consolidated Statements of Income for the Years Ended June 30, 1993 and 1994,
the Seven Months Ended January 31, 1994 and 1995, the Twelve Months Ended
January 31, 1995,
and the Year Ended January 31, 1996 ........................................ F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June 30,
1993 and 1994, the Seven Months Ended January 31, 1995, the Year Ended Janu-
ary 31, 1996 ............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993 and
1994, the Seven Months Ended January 31, 1994 and 1995, the Twelve Months
Ended January 31, 1995,
and the Year Ended January 31, 1996 ........................................ F-6
Notes to Consolidated Financial Statements ................................... F-7
Condensed Consolidated Balance Sheets as of January 31, 1996 (Unaudited)
and April 30, 1996 ......................................................... F-21
Condensed Consolidated Statements of Income for the Three Months Ended April
30, 1995 and 1996 (Unaudited) .............................................. F-22
Condensed Consolidated Statement of Shareholders' Equity for the Three Months
Ended April 30, 1996 (Unaudited) ........................................... F-23
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
April 30, 1995 and 1996 (Unaudited) ........................................ F-24
Notes to Condensed Consolidated Financial Statements (Unaudited) ............. F-25
HALSTON FRAGRANCE BRANDS OF HALSTON BORGHESE INTERNATIONAL LIMITED:
Report of Independent Accountants ............................................ F-29
Statement of Net Assets Sold as of December 31, 1995 and 1994 ................ F-30
Statement of Net Sales, Cost of Sales and Direct Operating Expenses for the
Years Ended December 31, 1995 and 1994 ..................................... F-31
Notes to Financial Statements ................................................ F-32
FRAGRANCE MARKETING GROUP, INC.:
Report of Independent Certified Public Accountants ........................... F-34
Balance Sheets as of December 31, 1995 and 1996 .............................. F-35
Statements of Income and Retained Earnings for the Years ended December 31,
1995 and 1994 .............................................................. F-36
Statements of Cash Flows for the Years Ended December 31, 1995 and 1994 ...... F-37
Notes to Financial Statements ................................................ F-38
<FN>
- -----------
* The consolidated financial statements of French Fragrances, Inc. and
Subsidiary (the "Consolidated Financial Statements of the Company")
represent the financial statements of French Fragrances, Inc. from July 1,
1992 through November 30, 1995, when French Fragrances, Inc. merged into
Suave Shoe Corporation (the "Merger"), and of the surviving corporation in
the Merger from and after the date of the Merger. Suave Shoe Corporation
was the surviving corporation in the Merger but changed its name to French
Fragrances, Inc., and French Fragrances, Inc. was considered to have
acquired Suave Shoe Corporation for financial reporting purposes. Effective
January 31, 1995, the Company changed its fiscal year end to January 31
from June 30. For this reason, the audited financial statements as of
January 31, 1995 consisted of seven months.
</FN>
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
French Fragrances, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of French
Fragrances, Inc. and subsidiary ("FFI") as of January 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the year ended January 31, 1996, for the seven months ended January
31, 1995 and for the years ended June 30, 1994 and 1993. These consolidated
financial statements are the responsibility of FFI's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted audited
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of FFI as of January 31, 1996
and 1995, and the results of its operations and its cash flows for the year
ended January 31, 1996, for the seven months ended January 31, 1995 and for
the years ended June 30, 1994 and 1993, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida,
April 26, 1996.
F-2
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................................. $ 646,149 $ 123,960
Accounts receivable, net ............................................... 11,043,614 14,236,326
Inventories ............................................................ 21,829,171 25,850,669
Equipment held for sale ................................................ 1,000,000
Prepaid expenses and other assets ...................................... 421,983 1,370,777
--------------- ---------------
Total current assets ................................................. 33,940,917 42,581,732
--------------- ---------------
INVESTMENT IN UNCONSOLIDATED AFFILIATE .................................. 1,420,681 1,708,235
--------------- ---------------
PROPERTY AND EQUIPMENT, NET ............................................. 2,521,598 11,099,492
--------------- ---------------
OTHER ASSETS
Exclusive brand license, net ........................................... 14,671,875
Deferred income taxes, net ............................................. 257,131 761,342
Other intangibles and other assets ..................................... 237,461 561,138
--------------- ---------------
Total other assets ................................................... 494,592 15,994,355
--------------- ---------------
TOTAL ASSETS ............................................................ $38,377,788 $71,383,814
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ........................................................ $ 16,000,000 $ 16,713,333
Accounts payable--trade ................................................ 7,863,156 11,115,664
Other payables and accrued expenses .................................... 1,579,661 3,250,365
Current portion of capital lease and installment loans ................. 220,750 201,630
Loans from shareholders ................................................ 160,000 410,000
Convertible subordinated debentures .................................... 600,000
Due to affiliates, net ................................................. 1,243,135 2,268,819
--------------- ---------------
Total current liabilities ............................................ 27,066,702 34,559,811
LONG-TERM LIABILITIES
Secured subordinated debentures ........................................ 3,460,000 11,681,500
Capital lease and installment loans .................................... 1,472,346 1,269,860
Term loan .............................................................. 4,333,333
--------------- ---------------
Total liabilities .................................................... 31,999,048 51,844,504
--------------- ---------------
COMMITMENTS
REDEEMABLE PREFERRED STOCK
Series A, $.01 par value; stated at liquidation preference value of
$100 per share; 20,000 shares authorized, issued and outstanding ..... 2,000,000 2,000,000
--------------- ---------------
SHAREHOLDERS' EQUITY
Convertible, redeemable preferred stock, Series B, $.01 par value
(liquidation preference of $.01 per share); 350,000 shares authorized,
issued and outstanding ............................................... 3,500
Common stock, $.01 par value, 50,000,000 shares authorized;
7,120,000 and 9,641,290 shares issued and outstanding, respectively .. 71,200 96,413
Additional paid-in capital ............................................. 208,800 10,333,539
Retained earnings ...................................................... 4,098,740 7,105,858
--------------- ---------------
Total shareholders' equity ........................................... 4,378,740 17,539,310
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $38,377,788 $71,383,814
=============== ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEARS ENDED JUNE 30, JANUARY 31,
------------------------------ --------------
1993 1994 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES ..................... $33,853,733 $46,104,536 $27,415,158
COST OF SALES ................. 28,507,945 37,952,555 22,692,581
-------------- -------------- --------------
Gross profit ................ 5,345,788 8,151,981 4,722,577
-------------- -------------- --------------
OPERATING EXPENSES
Warehouse and shipping ...... 822,998 1,375,110 722,642
Selling ...................... 1,288,980 2,335,560 1,285,686
General and administration .. 1,243,787 1,207,876 749,942
Depreciation and amortization 247,786 335,052 201,431
-------------- -------------- --------------
Total operating expenses ... 3,603,551 5,253,598 2,959,701
-------------- -------------- --------------
INCOME FROM OPERATIONS ........ 1,742,237 2,898,383 1,762,876
-------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest income .............. 24,009 8,425 7,695
Interest expense ............. (1,142,646) (1,546,240) (834,722)
Other income ................. 27,903 15,410 8,519
-------------- -------------- --------------
Other income (expense), net (1,090,734) (1,522,405) (818,508)
-------------- -------------- --------------
INCOME BEFORE EQUITY IN
EARNINGS OF UNCONSOLIDATED
AFFILIATE AND PROVISIONS FOR
INCOME TAXES ................ 651,503 1,375,978 944,368
EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATE, 50%
OWNED ....................... 175,705 165,899 45,778
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES ... 827,208 1,541,877 990,146
PROVISION FOR INCOME TAXES ... 231,730 530,510 349,089
-------------- -------------- --------------
NET INCOME .................... $ 595,478 $ 1,011,367 $ 641,057
============== ============== ==============
Earnings per common share
equivalent:
Primary .................... $ 0.08 $ 0.14 $ 0.09
============== ============== ==============
Fully diluted ............... $ 0.08 $ 0.14 $ 0.09
============== ============== ==============
Weighted average number of
common share equivalents:
Primary .................... 7,120,000 7,120,000 7,120,000
Fully diluted ............... 7,120,000 7,120,000 7,120,000
</TABLE>
F-4
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TWELVE
SEVEN MONTHS MONTHS
ENDED ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
-------------- -------------- --------------
1995 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES ..................... $50,922,407 $69,611,785 $87,978,695
COST OF SALES ................. 40,822,023 56,108,042 66,339,698
-------------- -------------- --------------
Gross profit ................ 10,100,384 13,503,743 21,638,997
-------------- -------------- --------------
OPERATING EXPENSES
Warehouse and shipping ...... 1,403,280 2,034,271 2,706,782
Selling ...................... 1,938,075 2,987,950 6,813,272
General and administration .. 1,392,730 1,919,404 2,380,657
Depreciation and amortization 206,010 339,632 1,319,675
-------------- -------------- --------------
Total operating expenses ... 4,940,095 7,281,257 13,220,386
-------------- -------------- --------------
INCOME FROM OPERATIONS ........ 5,160,289 6,222,486 8,418,611
-------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest income .............. 5,221 5,952 15,101
Interest expense ............. (1,413,636) (2,125,153) (4,157,576)
Other income ................. 46,909 127,126 374,120
-------------- -------------- --------------
Other income (expense), net (1,361,506) (1,992,075) (3,768,355)
-------------- -------------- --------------
INCOME BEFORE EQUITY IN
EARNINGS OF UNCONSOLIDATED
AFFILIATE AND PROVISIONS FOR
INCOME TAXES ................ 3,798,783 4,230,411 4,650,256
EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATE, 50%
OWNED ....................... 183,231 303,353 287,553
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES ... 3,982,014 4,533,764 4,937,809
PROVISION FOR INCOME TAXES ... 1,490,119 1,671,537 1,930,691
-------------- -------------- --------------
NET INCOME .................... $2,491,895 $2,862,227 $3,007,118
============== ============== ==============
Earnings per common share
equivalent:
Primary .................... $ 0.35 $ 0.40 $ 0.35
============== ============== ==============
Fully diluted ............... $ 0.35 $ 0.40 $ 0.33
============== ============== ==============
Weighted average number of
common share equivalents:
Primary .................... 7,120,000 7,120,000 8,517,760
Fully diluted ............... 7,120,000 7,120,000 9,121,091
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Shares issued in July 1992
inception ............... -- -- 7,120,000 $71,200
Net income for the year . -- -- -- --
---------- --------- ------------- ----------
Balance at June 30, 1993 . 7,120,000 71,200
Net income for the year . -- -- -- --
---------- --------- ------------- ----------
Balance at June 30, 1994 . 7,120,000 71,200
Net income for the seven
months ................. -- -- -- --
---------- --------- ------------- ----------
Balance at
January 31, 1995 ........ 7,120,000 71,200
Series B convertible
preferred shares issued 350,000 $3,500 -- --
Value of shares issued
in Merger .............. 2,521,290 25,213
Net income for the year . -- -- -- --
---------- --------- ------------ ----------
Balance at
January 31, 1996 ........ 350,000 $3,500 9,641,290 $96,413
========== ========= ============ ==========
</TABLE>
F-5
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
-------------- ------------- ----------------
<S> <C> <C> <C>
Shares issued in July 1992
inception ............... $ 208,800 -- $ 280,000
Net income for the year . -- $ 595,478 595,478
-------------- ------------- ----------------
Balance at June 30, 1993 . 208,800 595,478 875,478
Net income for the year . -- 1,011,367 1,011,367
-------------- ------------- ----------------
Balance at June 30, 1994 . 208,800 1,606,845 1,886,845
Net income for the seven
months ................. -- 2,491,895 2,491,895
-------------- ------------- ----------------
Balance at
January 31, 1995 ........ 208,800 4,098,740 4,378,740
Series B convertible
preferred shares issued -- -- 3,500
Value of shares issued
in Merger .............. 10,124,739 -- 10,149,952
Net income for the year . -- 3,007,118 3,007,118
-------------- ------------- ---------------
Balance at
January 31, 1996 ........ $10,333,539 $7,105,858 $17,539,310
============== ============= ===============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
YEARS ENDED ENDED
JUNE 30, JANUARY 31,
------------------------------ ---------------
1993 1994 1994
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ............................................ $ 595,478 $ 1,011,367 $ 641,057
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ........................ 247,786 335,052 201,431
Equity in earnings of unconsolidated affiliate ....... (175,705) (165,899) (45,778)
Deferred tax benefit ..................................
Change in assets and liabilities net of effects from
the acquisitions:
(Increase) in accounts receivable .................... (1,731,014) (3,146,558) (1,457,130)
(Increase) decrease in inventories .................... (3,478,940) (6,470,448) (16,493,423)
(Increase) decrease in prepaid expenses and
other assets ........................................ (110,275) (224,093) (182,416)
Increase (decrease) in accounts payable ............... 967,348 4,616,011 14,633,049
Increase (decrease) in other payables and accruals ... 486,231 1,105,100 864,259
Increase (decrease) in due to affiliates, net ........ 177,398 346,603 149,251
-------------- -------------- ---------------
Net cash (used in) provided by operating activities . (3,021,693) (2,592,865) (1,689,700)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of assets and liabilities assumed in
acquisition, net of cash acquired ................... (1,898,944)
Investment in unconsolidated affiliate ................. (400,846)
Purchase of exclusive brand license ....................
Additions to property and equipment,
net of disposals ..................................... (114,001) (373,731) (239,867)
Net cash acquired in Merger ............................
-------------- -------------- ---------------
Net cash used in investing activities ................ (2,413,791) (373,731) (239,867)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock ......... 1,000,000
Proceeds from the issuance of common stock ............. 280,000
Proceeds from the issuance of secured subordinated
debentures ........................................... 1,730,000
Advances from (payments to) unconsolidated affiliate .. 430,151 695,991 (228,022)
Proceeds from term loan ................................ 1,700,000 1,700,000
Payments on term loans ................................. (840,000) (140,000)
Net proceeds from short-term debt ...................... 1,797,652 1,580,000 1,034,478
Proceeds from installment loans ........................ 185,202 185,206
Payments on capital lease and installment loans ....... (120,000) (155,332) (93,973)
Loans from shareholders ................................ 330,000 150,000
Payments on loans from shareholders and officer ....... (85,000)
Payments on convertible subordinated debentures .......
-------------- -------------- ---------------
Net cash provided by financing activities ........... 5,447,803 3,230,861 2,457,689
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... 12,319 264,265 528,122
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 12,319 12,319
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ............................................. $ 12,319 $ 276,584 $ 540,441
============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period ....................... $ 971,653 $ 1,241,794 $ 806,792
============== ============== ===============
Income taxes paid during the period .................... $ 262,000 $ 235,000 $ 215,000
============== ============== ===============
</TABLE>
F-6
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEVEN MONTHS TWELVE
ENDED MONTHS
JANUARY 31, ENDED YEAR ENDED
-------------- JANUARY 31, JANUARY 31,
1995 1995 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ............................................ $ 2,491,895 $ 2,862,227 $ 3,007,118
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ........................ 206,010 339,632 1,319,675
Equity in earnings of unconsolidated affiliate ....... (183,231) (303,353) (287,553)
Deferred tax benefit .................................. (257,852) (257,852) (504,211)
Change in assets and liabilities net of effects from
the acquisitions:
(Increase) in accounts receivable .................... (1,678,019) (3,367,448) (3,192,712)
(Increase) decrease in inventories .................... (5,280,552) 4,742,423 (4,021,498)
(Increase) decrease in prepaid expenses and
other assets ........................................ (41,200) 157,639 1,005,334
Increase (decrease) in accounts payable ............... 1,050,077 (9,052,244) 2,991,835
Increase (decrease) in other payables and accruals ... (32,549) (19,290) 3,417,215
Increase (decrease) in due to affiliates, net ........ (192,059) 5,281 1,444,160
-------------- -------------- ---------------
Net cash (used in) provided by operating activities . (3,917,480) (4,892,985) 5,179,363
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of assets and liabilities assumed in
acquisition, net of cash acquired ...................
Investment in unconsolidated affiliate .............
Purchase of exclusive brand license ................ (18,370,655)
Additions to property and equipment,
net of disposals ..................................... (80,921) (246,763) (149,394)
Net cash acquired in Merger ............................ 536,913
-------------- -------------- ---------------
Net cash used in investing activities ................ (80,921) (246,763) (17,983,136)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock ......... 3,500
Proceeds from the issuance of common stock .............
Proceeds from the issuance of secured subordinated
debentures ........................................... 8,221,500
Advances from (payments to) unconsolidated affiliate .. 4,058 928,070 (418,476)
Proceeds from term loan ................................ 7,000,000
Payments on term loans ................................. (860,000) (1,560,000) (833,333)
Net proceeds from short-term debt ...................... 5,580,004 6,125,522 (1,120,001)
Proceeds from installment loans ........................ 106,009
Payments on capital lease and installment loans ....... (121,096) (184,145) (221,606)
Loans from shareholders ................................ 150,000 250,000
Payments on loans from shareholders and officer ....... (235,000) (320,000)
Payments on convertible subordinated debentures ....... (600,000)
-------------- -------------- ---------------
Net cash provided by financing activities ........... 4,367,966 5,245,456 12,281,584
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... 369,565 105,708 (522,189)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 276,584 540,441 646,149
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ............................................. $ 646,149 $ 646,149 $ 123,960
============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period ....................... $ 1,152,461 $ 1,813,516 $ 4,082,339
============== ============== ===============
Income taxes paid during the period .................... $ 1,740,000 $ 1,760,000 $ 2,245,000
============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY--French Fragrances, Inc. ("FFI") is a
manufacturer, distributor and marketer of prestige designer fragrances and
related cosmetic products, primarily to mass retailers in the United States.
FFI was formed in 1992 to acquire the net assets of the fragrance and
cosmetics distribution business of National Trading Manufacturing, Inc.
("National Trading"). FFI acquired the net assets of National Trading's
fragrance and cosmetics business ("Net Assets") on July 2, 1992 for
$4,400,000, payable as follows: $2,200,000 in cash; $1,730,000 in 12.5%
Secured Subordinated Debentures Due 2002, Series II; and 5,050 shares of
Series A Preferred Stock, par value $.01 per share ("FFI Series A
Preferred"), with each preferred share carrying a liquidation preference of
$100. In addition, FFI incurred $508,000 in acquisition costs in connection
with this transaction.
The Asset Purchase Agreement (the "Agreement") entered into by FFI and
National Trading contained a section for the adjustment of the purchase
price, wherein if the Net Asset value was less than $3,960,000 then the
purchase price would be adjusted. As a result of the Net Asset value
amounting to $3,188,044 as of June 30, 1992, FFI and National Trading agreed
to cover the differential in the amount of $771,956 by the issuance of a term
promissory note by National Trading in favor of FFI. The note was
non-interest bearing and was repaid in December 1992 in accordance with the
terms of the Agreement.
The acquisition of the Net Assets was accounted for using the purchase
method. Accordingly, the adjusted purchase price, including the acquisition
costs, has been allocated to the assets acquired and liabilities assumed
based on their respective fair values, determined based on estimates by
management, as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets (including $2,100 of cash) ................ $11,083,470
Property and equipment ................................... 589,585
Intangible assets--customer list ......................... 526,000
Other assets ............................................. 250,657
Liabilities assumed ...................................... (8,313,668)
--------------
Total adjusted purchase price, including acquisition
costs .................................................... $ 4,136,044
==============
</TABLE>
In connection with the acquisition of the Net Assets of National Trading,
FFI purchased 50% of Fine Fragrances, Inc. ("Fine Fragrances"), a company
which distributes fragrances manufactured in France by Cofci, S.A. ("Cofci").
FFI paid approximately $896,000 for the common stock acquired, twice its net
book value. The excess of $448,000 between the purchase price and the net
book value of Fine Fragrances represents the value received from exclusive
distribution agreements with Cofci. The $448,000 excess amount is reflected
in the balance sheets under Investment in Unconsolidated Affiliate (see Note
4).
Effective January 31, 1995, FFI changed its year end to January 31 from
June 30 to conform to its business year.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of FFI's wholly-owned subsidiary GB Parfums, Inc. (see Note 2). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION--All references to FFI in these consolidated
financial statements and notes refer to the company organized in 1992 until
the November 30, 1995 Merger and to the surviving
F-7
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
corporation following the Merger (see Note 2). The unaudited financial
statements for the twelve months ended January 31, 1995 and for the seven
months ended January 31, 1994 have been prepared on the same basis as the
audited financial statements included herein. In the opinion of management,
such unaudited financial statements include all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the results for
such periods.
USE OF ESTIMATES--The preparation of the consolidated 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 and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION--Sales are recognized upon shipment. During the year
ended January 31, 1996, the seven months ended January 31, 1995 and the year
ended June 30, 1994, no customer accounted for more than 10% of total sales.
During the year ended June 30, 1993, one customer accounted for 13% of total
sales.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
ACCOUNTS RECEIVABLE--A portion of FFI's accounts receivable are insured
from risk of uncollectibility by an independent party (currently Heller
Intercredit Company, a division of Heller Financial, Inc.), which received
service charge fees of approximately $117,000, $170,000, $129,000 and $87,000
for the year ended January 31, 1996, the seven months ended January 31, 1995
and the years ended June 30, 1994, and 1993, respectively. Receivables are
not factored. A provision has been made and an allowance established for
potential losses from uninsured receivables and estimated sales returns in
the normal course of business. Since these allowances are based on estimates,
there is no assurance that such reserves and allowances will be sufficient to
cover unforeseen losses or returns. The activity for these allowance accounts
are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1994 JANUARY 31, 1995 JANUARY 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Allowance for doubtful
accounts:
Beginning balance ............. $ 43,570 $ 72,526 $ 112,094
Provision ..................... 113,000 70,000 180,000
Write offs, net of recoveries (84,044) (30,432) (1,449)
---------------- ----------------- -----------------
Ending balance ................ $ 72,526 $ 112,094 $ 290,645
================ ================= =================
Allowance for sales returns:
Beginning balance ............. $ 0 $ 0 $ 56,000
Provision ..................... 1,211,929 700,486 1,650,602
Actual returns ................ (1,211,929) (644,486) (1,360,102)
---------------- ----------------- -----------------
Ending balance ................ $ 0 $ 56,000 $ 346,500
================ ================= =================
</TABLE>
INVENTORIES--Inventories are stated at the lower of cost or market. Cost
is determined on the weighted-average method. Inventory balances at January
31, 1996 include approximately $2,417,000 in raw materials. There was no work
in process at January 31, 1996. FFI had no work in process or raw materials
at January 31, 1995.
F-8
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
EQUIPMENT HELD FOR SALE--Certain equipment acquired in connection with the
Merger was designated as equipment held for sale (see Note 2). Equipment held
for sale is stated at its estimated net realizable value and will be disposed
of in the fiscal year ended January 31, 1997.
INVESTMENT IN UNCONSOLIDATED AFFILIATE--FFI's investment in Fine
Fragrances is accounted for under the equity method (see Note 4).
PROPERTY AND EQUIPMENT, AND DEPRECIATION--Property and equipment are
stated at cost. Expenditures for major betterments and additions are recorded
to the asset accounts while replacements, maintenance, and repairs which do
not improve or extend the lives of the respective assets are charged to
expense. Depreciation is provided over the estimated useful lives of the
assets using the straight-line method, as follows:
<TABLE>
<CAPTION>
CATEGORY YEARS
- ---------------------------- ----------
<S> <C>
Building ................... 20
Furniture and fixtures .... 8
Machinery and equipment ... 3 - 8
Vehicles ................... 3
Leasehold improvements .... 15
</TABLE>
CAPITAL LEASE--FFI has entered into a lease for the building and the land
which are presently used for its business offices, (the "National Trading
Facility") that transfers substantially all benefits and risks of ownership
to FFI. The lessor of this property is National Trading, which is owned by a
shareholder of FFI. This property is mortgaged by National Trading to secure
its obligation under Industrial Development Revenue Bonds (Series 1985) (the
"Bonds") issued through Metropolitan Dade County, Florida which mature on
December 1, 2011. The outstanding principal balance of the Bonds was
approximately $2,220,000 and $2,340,000 at January 31, 1996 and January 31,
1995, respectively.
This lease is accounted for as the acquisition of assets and incurrence of
obligations under the capital lease standards issued by the Financial
Accounting Standards Board (see Note 8). Accordingly, the capitalized leased
assets are recorded as property at the fair value of the property, which is
the present value of the minimum lease payments. Depreciation of the building
is computed using the term of the lease and is included in depreciation
expense.
INCOME TAXES--The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. FFI provides for deferred taxes under
the liability method. Under such method, deferred taxes are adjusted for tax
rate changes as they occur. Deferred income tax assets and liabilities are
computed annually for differences between the financial statements and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are recorded when necessary to reduce deferred tax
assets to the amount expected to be realized.
F-9
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
EXCLUSIVE BRAND LICENSE, CUSTOMER LISTS AND AMORTIZATION--These intangible
assets are being amortized using the straight-line method, as follows at
January 31:
<TABLE>
<CAPTION>
ACCUMULATED
AMORTIZATION
----------------------
CATEGORY YEARS COST 1995 1996
- ------------------------------------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Exclusive brand license ............. 15 $15,580,752 $ -- $908,877
Customer lists and other intangibles 3 and 5 546,131 340,362 439,874
</TABLE>
On an ongoing basis, FFI reviews the carrying value of intangible assets
using the net present value of cash flows and if such review indicates that
these values may not be recoverable, FFI's carrying value will be reduced to
its estimated fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS--FFI's financial instruments include
accounts receivable, accounts payable, short-term debt, loans from
shareholders, convertible subordinated debentures, secured subordinated
debentures, capital lease, installment loans, term loan and redeemable
preferred stock. The fair value of such financial instruments have been
determined using available market information and interest rates as of
January 31, 1996.
At January 31, 1996, the fair value of the 8.0% Secured Subordinated
Debentures Due 2005 was approximately $6,580,000 compared to the carrying
value of $8,221,500. The fair value of all other financial instruments was
not materially different than their carrying value.
EARNINGS PER SHARE--Earnings per share is based on the weighted average
number of common shares outstanding and includes the effect of the issuance
of shares in connection with the assumed exercise of dilutive stock options
and the assumed conversion of dilutive convertible preferred stock. Fully
diluted earnings per share reflects additional dilution due to the use of the
market price at the end of the period when higher than the average market
price for the period, and does not assume the conversion of the convertible
subordinated debentures with corresponding adjustments for interest expense,
net of tax, since the effect of such conversion is anti-dilutive. Earnings
per share for the twelve months ended January 31, 1995, seven months ended
January 31, 1995 and 1994 and for the years ended June 30, 1994 and 1993 were
computed using the number of common shares received by the shareholders of
FFI in connection with the Merger (see Note 2). Earnings per share for the
year ended January 31, 1996 is based on the number of shares received by the
shareholders of FFI in the Merger through the date of the Merger and
thereafter is based on the actual number of common shares and common share
equivalents outstanding.
NEW ACCOUNTING PRONOUNCEMENTS--In March 1995, the Financial Accounting
Standards Board ("FASB") 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" ("SFAS No. 121"). SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles, held and used by an entity, be reviewed for
impairment whenever events or changes in circumstance indicate that the
carrying amounts of an asset may not be recoverable. SFAS No. 121 will apply
to FFI for the year ended January 31, 1997. The adoption of SFAS No. 121 is
not expected to have a material impact on FFI's financial statements. FFI
reviews the carrying value of intangible assets on an ongoing basis. If such
review indicates that these values may not be reasonable, FFI's carrying
value will be reduced to its estimated fair value.
F-10
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
The FASB has also issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This
statement defines a fair value based method of accounting for employee stock
options. This statement also permits a company to continue to measure
compensation costs for their stock option plan using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
requires disclosure of the pro forma net income and earnings per share that
would be recorded if the fair value method was utilized. FFI plans to
continue to utilize the provisions of APB No. 25 to account for such
compensation costs, and will provide the pro forma disclosures required by
SFAS No. 123 in the fiscal year 1997 financial statements.
RECLASSIFICATIONS--Certain amounts in the prior period financial
statements have been reclassified to conform with the fiscal 1996
presentations.
2. MERGERS AND ACQUISITIONS
MERGER--On November 30, 1995, FFI merged with Suave Shoe Corporation
("Suave") in a reverse acquisition ("Merger"). Following the Merger, Suave,
as the surviving corporation, changed its name to "French Fragrances, Inc."
The principal business operations following the Merger consist of the
business previously conducted by FFI, which is the manufacture, distribution
and marketing of prestige fragrances and cosmetic products. Pursuant to the
terms of the Merger, (i) each outstanding share of FFI common stock, $.01 par
value per share ("FFI Common Stock"), was converted into the right to receive
7.12 shares of common stock, $.01 par value per share ("Common Stock"), of
the surviving corporation, (ii) each outstanding share of FFI Series A
Preferred was converted into the right to receive one share of Series A
Preferred Stock, $.01 par value per share ("Series A Preferred"), (iii) each
outstanding share of FFI Series B Convertible Preferred, $.01 par value ("FFI
Series B Convertible Preferred"), was converted into one share of Series B
Convertible Preferred Stock, $.01 par value per share ("Series B Convertible
Preferred"), and (iv) each outstanding option to purchase one share of FFI
Common Stock (an "Option") was adjusted to be exercisable for 7.12 shares of
Common Stock. In connection with the Merger, the surviving corporation issued
to FFI shareholders 7,120,000 shares of Common Stock, 20,000 shares of Series
A Preferred and 350,000 shares of Series B Convertible Preferred. In
connection with the Merger, FFI relocated its distribution facilities to the
larger facility formerly occupied by Suave in Miami Lakes, Florida.
In connection with the Merger, the shareholders of Suave adopted
amendments to Suave's Articles of Incorporation to (i) change the name of
Suave to "French Fragrances, Inc.," (ii) increase the number of authorized
shares of Common Stock from 10,000,000 to 50,000,000, (iii) authorize 20,000
shares of Series A Preferred and 350,000 shares of Series B Convertible
Preferred issued pursuant to the Merger, and (iv) authorize 5,000,000 shares
of undesignated preferred stock.
The Merger was treated as a recapitalization of FFI, with FFI as the
accounting acquiror (i.e., a "reverse acquisition") and has been accounted
for under the "purchase" method of accounting, in accordance with generally
accepted accounting principles. In connection therewith, FFI acquired net
assets with a fair value of approximately $10,100,000, consisting of
$9,500,000 in property and equipment and $3,200,000 in current assets, offset
by $2,600,000 in assumed liabilities. Because Suave had discontinued its
operations prior to the Merger, pro forma results are not presented.
GEOFFREY BEENE ACQUISITION--On March 2, 1995, FFI acquired, through its
wholly-owned subsidiary GB Parfums, Inc., the worldwide license to the
Geoffrey Beene fragrance and cosmetic lines, which
F-11
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. MERGERS AND ACQUISITIONS--(CONTINUED)
include the brands Grey Flannel, Bowling Green and Chance. The subsidiary
operates under the name Geoffrey Beene Parfums selling to both prestige
national department stores and specialty stores and mass-market retailers.
The license agreement extends for thirty years (subject to renewal by GB
Parfums) and requires royalty payments of 3% of related sales and other fees
to the licensor. The purchase price approximated $18,000,000 and included the
distribution rights and exclusive license and trademarks for the use of the
brands for $15,000,000 and inventories in the amount of approximately
$3,000,000.
In connection with the financing of this acquisition, FFI received
$8,225,000 from a group of shareholders of FFI and issued an equivalent
principal amount of 8.0% Secured Subordinated Debentures Series I Due 2005
("8.0% Series I Debentures") and 350,000 shares of FFI Series B Convertible
Preferred. Each share of FFI Series B Convertible Preferred was convertible
prior to January 31, 2005 into one share of FFI Common Stock upon payment by
the holder of $23.50 per share. Pursuant to the Merger, each of these shares
was exchanged for one newly issued Series B Convertible Preferred share which
is convertible into 7.12 fully paid non assessable shares of Common Stock
upon the payment of $3.30 per share. The amount received was allocated based
on estimated fair value and accounted for by allocating $3,500 to Series B
Convertible Preferred and $8,221,500 to the 8.0% Series I Debentures.
Interest expense on these debentures totaled approximately $594,000 for the
year ended January 31, 1996. Principal payments for these debentures begin in
fiscal year 2001 and are payable at the rate of $1,645,000 per year through
2005.
FFI funded the balance of the purchase price through borrowings under its
bank credit facility, including a new $7,000,000 term loan facility. The term
loan is repayable monthly, commencing April 1995, and bears interest at prime
plus 1.75%. The monthly payments are $83,333 for the first twelve months,
increasing to $166,667 for the remaining months. The final payment of all
principal and interest outstanding is due in full on December 31, 1998.
Interest expense for this term loan approximated $620,000 for the year ended
January 31, 1996.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1996
----------------- -----------------
<S> <C> <C>
Land (includes $576,000 under capital lease) ...... $ 576,000 $ 3,447,000
Building (includes $1,224,000 under capital lease) 1,224,000 6,743,452
Furniture and fixtures ............................. 454,124 491,540
Machinery and equipment ............................ 648,843 1,079,810
Other .............................................. 87,122 81,210
----------------- -----------------
2,990,089 11,843,012
Less accumulated depreciation ...................... (468,491) (743,520)
----------------- -----------------
Property and equipment, net ........................ $2,521,598 $11,099,492
================= =================
</TABLE>
F-12
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information of Fine
Fragrances:
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1996
----------------- -----------------
<S> <C> <C>
Current assets ............................. $2,292,462 $3,284,066
Other assets ............................... 1,191,693 742,265
----------------- -----------------
Total assets ............................... $3,484,155 $4,026,331
================= =================
Current liabilities ........................ $1,153,016 $ 970,716
Shareholders' equity ....................... 2,331,139 3,055,615
----------------- -----------------
Total liabilities and shareholders' equity $3,484,155 $4,026,331
================= =================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEVEN MONTHS ENDED TWELVE MONTHS YEAR ENDED
JUNE 30, JANUARY 31, ENDED JANUARY 31 JANUARY 31
---------------------------- ---------------------------- ----------------- -------------
1993 1994 1994 1995 1995 1996
------------- ------------- ------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .. $4,677,808 $3,742,342 $2,048,794 $3,004,644 $4,698,192 $4,746,765
============= ============= ============= ============= ================ =============
Net income . $ 500,744 $ 481,129 $ 178,343 $ 453,574 $ 756,360 $ 724,438
============= ============= ============= ============= ================ =============
</TABLE>
FFI's equity in the net income of Fine Fragrances as reflected in the
accompanying statements of income has been reduced for the amortization of
the exclusive distribution agreements (see Note 1). The exclusive
distribution agreements are being amortized using the straight-line method
over six years, the term of the agreements. Amortization expense on these
exclusive distribution agreements was approximately $75,000 for the year
ended January 31, 1996, $44,000 for the seven months ended January 31, 1995,
and $75,000 for each of the years ended June 30, 1994 and 1993.
The reconciliation of the investment in unconsolidated affiliate is as
follows:
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1996
----------------- -----------------
<S> <C> <C>
Equity interest at 50% ........................ $1,165,570 $1,527,800
Unamortized exclusive distribution agreements $ 255,111 $ 180,435
----------------- -----------------
Carrying value ................................ $1,420,681 $1,708,235
================= =================
</TABLE>
Current liabilities primarily relate to a $2,000,000 secured line of
credit from a bank. The interest rate is prime rate plus 2.5% (prime rate was
8.5% at January 31, 1996). The line is secured by receivables and
inventories. The line is subject to annual review and renewal by the bank in
April. Amounts outstanding were $912,000 and $762,000 at January 31, 1996 and
1995, respectively. There are no other material commitments or contingencies
for Fine Fragrances.
F-13
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT-TERM DEBT
During the year ended January 31, 1996, FFI increased its credit facility
with a bank to allow for borrowings up to $18,000,000 from the previous limit
of $16,000,000 (at January 31, 1995) at an interest rate not to exceed 1%
over the prime rate (8.5% at January 31, 1996). In addition, the credit
facility includes a $7,000,000 term loan (see Note 2). Borrowings are limited
to eligible accounts receivable and inventories. Borrowings are also
collateralized by FFI's shares of common stock in its subsidiaries and in
Fine Fragrances and all other assets other than the building acquired in the
Merger (the "Suave Facility"), including accounts receivable and inventories.
The credit facility contains several covenants, the more significant of which
are that FFI maintain a minimum level of equity and meet certain
debt-to-equity, interest coverage and liquidity ratios. FFI was in compliance
with these covenants as of January 31, 1996. The credit facility also
includes a prohibition on the payment of dividends and other distributions to
shareholders and restrictions on the incurrence of additional indebtedness.
The outstanding balance under the credit facility (excluding the term loan
incurred in connection with the Geoffrey Beene acquisition) was $14,880,000
and $16,000,000 at January 31, 1996 and 1995, respectively. Interest expense
under the credit facility totaled approximately $1,910,000 and $1,130,000 for
the year ended January 31, 1996 and the twelve months ended January 31, 1995,
respectively; $855,000 and $383,000 for the seven months ended January 31,
1995 and 1994, respectively; and $716,000 and $537,000 for the years ended
June 30, 1994 and 1993, respectively.
6. CONVERTIBLE SUBORDINATED DEBENTURES
The convertible subordinated debentures represent 5.0% Convertible
Subordinated Debentures Due 1997 which are convertible into Common Stock. The
conversion price at January 31, 1996 was $8.26 per share. The balance of
these debentures is due January 1, 1997.
7. SECURED SUBORDINATED DEBENTURES
Secured subordinated debentures include (1) $1,730,000 of 12.5% Secured
Subordinated Debentures Due 2002, Series I ("12.5% Series I Debentures") and
(2) $1,730,000 of 12.5% Secured Subordinated Debentures Due 2002, Series II
("12.5% Series II Debentures"), which were issued on July 2, 1992. The 12.5%
Series I Debentures are secured by a lien on all of the assets of FFI other
than the Suave Facility, junior to the lien of the banks; the 12.5% Series II
Debentures are subordinated to the 12.5% Series I Debentures. Interest
expense on both series totaled approximately $432,500 for the year ended
January 31, 1996 and for the twelve months ended January 31, 1995,
respectively; $252,300 for the seven months ended January 31, 1995 and 1994,
respectively; and $443,000 for the years ended June 30, 1994 and 1993,
respectively. Principal payments for both Series are due as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- -------------- ------------
<S> <C>
1999 ......... $ 346,000
2000 ......... 346,000
2001 ......... 692,000
2002 ......... 692,000
2003 ......... 1,384,000
------------
Total ........ $3,460,000
============
</TABLE>
Secured subordinated debentures also include the 8.0% Series I Debentures
which were issued in connection with the Geoffrey Beene acquisition (see Note
2).
F-14
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL LEASE AND INSTALLMENT LOANS
As of January 31, 1996, the future minimum lease payments for the National
Trading Facility under capital lease (see Note 1) and payments due on
installment loans are as follows:
<TABLE>
<CAPTION>
CAPITAL INSTALLMENT
JANUARY 31, TOTAL LEASE LOANS
- ----------- -------------- -------------- --------------
<S> <C> <C> <C>
1997 ................................ $ 339,743 $ 258,113 $ 81,630
1998 ................................ 270,322 250,462 19,860
1999 ................................ 242,813 242,813
2000 ................................ 235,163 235,163
2001 and thereafter ................. 1,519,976 1,519,976
-------------- -------------- --------------
Total ............................... 2,608,017 2,506,527 101,490
Less amount representing interest .. (1,136,527) (1,136,527)
-------------- -------------- --------------
Present value of net future payments 1,471,490 1,370,000 101,490
Less current portion ................ (201,630) (120,000) (81,630)
-------------- -------------- --------------
Balance at January 31, 1996 ......... $ 1,269,860 $ 1,250,000 $ 19,860
============== ============== ==============
</TABLE>
9. INCOME TAXES
The components of the provision for income taxes for the year ended
January 31, 1996 and the seven months ended January 31, 1995 and the years
ended June 30, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
YEARS ENDED JUNE 30, ENDED JANUARY 31, JANUARY 31,
------------------------- ------------------ --------------
1993 1994 1995 1996
------------ ----------- ------------------ --------------
<S> <C> <C> <C> <C>
Current income taxes:
Federal ........................... $ 285,784 $450,374 $1,579,491 $2,082,263
State ............................. 48,629 79,415 168,480 352,639
------------ ----------- ------------------ --------------
Total current .................... 334,413 529,789 1,747,971 2,434,902
------------ ----------- ------------------ --------------
Deferred income taxes:
Federal ........................... (87,675) 610 (233,117) (455,642)
State ............................. (15,008) 111 (24,735) (48,569)
------------ ----------- ------------------ --------------
Total deferred ................... (102,683) 721 (257,852) (504,211)
------------ ----------- ------------------ --------------
Total provision for income taxes $ 231,730 $530,510 $1,490,119 $1,930,691
============ =========== ================== ==============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes and operating loss
carryforwards. The tax effects of significant items comprising FFI's net
deferred tax asset are as follows:
F-15
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1996
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment ............................ $ 37,192 $2,387,274
Management incentive arrangement .................. 119,304
Deferred income ................................... 21,670
-------------- --------------
Gross deferred tax liabilities ................... 58,862 2,506,578
-------------- --------------
Deferred tax assets:
Excess of book bad debts reserve over tax reserve 33,473 523,684
Customer lists and distribution rights ............ 1,905 43,303
Investment in unconsolidated subsidiary .......... 18,569 18,569
Management incentive arrangement .................. 102,303
Amortizable brand license ......................... 188,649
Net operating loss carryforwards .................. 2,793,417
Accrued expenses .................................. 50,924
Inventories related ............................... 159,743 449,841
-------------- --------------
Gross deferred tax assets ........................ 315,993 4,068,387
-------------- --------------
Net deferred tax asset ............................. 257,131 1,561,809
Valuation allowance for deferred tax assets ....... 0 (800,467)
-------------- --------------
Net deferred tax asset ............................. $257,131 $ 761,342
============== ==============
</TABLE>
At January 31, 1996, the valuation allowance relates to the net operating
loss carryforwards available in connection with the Merger discussed in Note
2 which expire through 2009.
The total income tax provision differs from the amount obtained by
applying the statutory federal income tax rate to pretax income for the
following reasons.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1993 1994
---------------------- ---------------------
AMOUNT RATE AMOUNT RATE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Income tax at statutory rates ...... $281,251 34.00% $524,239 34.00%
Florida tax, net of federal benefit 25,005 2.84 51,724 3.35
Undistributed earnings in affiliate (85,125) (9.57) (65,434) (4,24)
Other ............................... 10,600 0.84 19,981 1.30
----------- --------- ---------- ---------
Total income taxes ................. $231,730 28.01% $530,510 34.41%
=========== ========= ========== =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
JANUARY 31, 1995 JANUARY 31, 1996
------------------------ -----------------------
AMOUNT RATE AMOUNT RATE
------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Income tax at statutory rates ...... $1,291,586 34.00% $1,672,126 34.00%
Florida tax, net of federal benefit 154,177 4.06 232,742 4.71
Undistributed earnings in affiliate (61,686) (1.62) (116,426) (2.36)
Other ............................... 106,042 2.79 142,249 2.88
------------- --------- ------------ ---------
Total income taxes ................. $1,490,119 39.23% $1,930,691 39.25%
============= ========== ============ =========
</TABLE>
10. RELATED PARTY TRANSACTIONS
At January 31, 1996 and 1995, FFI had $410,000 and $160,000, respectively,
outstanding in loans from shareholders. These loans, which bear interest at
7% and 9%, have an original maturity date of December 31, 1996, but may be
extended at the request of FFI. Interest expense on these loans total
approximately $28,100 and $18,400 for the year ended January 31, 1996 and the
twelve months ended January 31, 1995, respectively; $9,800 and $13,500 for
the seven months ended January 31, 1995 and 1994, respectively; and $22,000
and $15,000 for the years ended June 30, 1994 and 1993, respectively.
In the normal course of business or from time-to-time, FFI and its
affiliate, Fine Fragrances, and National Trading, have entered into
transactions which are reflected on the balance sheet as due to
F-16
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS--(CONTINUED)
affiliates, net. During the year ended January 31, 1996, the seven months
ended January 31, 1995, and for the year ended June 30, 1994, such
transactions are summarized as follows:
<TABLE>
<CAPTION>
ADVANCES DUE TO DUE TO
FROM MANAGEMENT (FROM) (FROM) TOTAL DUE
FINE FEE AND FINE NATIONAL TO (FROM)
FRAGRANCES OTHER FRAGRANCES, NET TRADING, NET AFFILIATES, NET
-------------- --------------- -------------- - -------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 ... $ 550,000 $ (119,849) $ 430,151 $ (41,609) $ 388,542
Advances, net ............... 930,000 930,000 350,000 1,280,000
Management fee (8.0%) ....... (371,000) (371,000) (371,000)
Miscellaneous ............... (3,397) (3,397)
Interest (7.25%) ............ 136,991 136,991 12,000 148,991
Repayments .................. (12,000) (12,000)
-------------- --------------- ---------------- --------------- ----------------
Balance at June 30, 1994 ... 1,616,991 (490,849) 1,126,142 304,994 1,431,136
Advances, net ............... 430,000 430,000 87,941 517,941
Management fee (8.0%) ....... (254,000) (254,000) (254,000)
Miscellaneous ............... (31,011) (31,011) (31,011)
Interest (8.5%) ............. 74,433 74,433 7,000 81,433
Repayments .................. (215,364) (215,364) (287,000) (502,364)
-------------- --------------- ---------------- --------------- ----------------
Balance at January 31, 1995 1,906,060 (775,860) 1,130,200 112,935 1,243,135
Advances, net ............... 873,000 873,000 1,444,160 2,317,160
Management fee (8.0%) ....... (375,576) (375,576) (375,576)
Interest (10.0%) ............ 236,788 236,788 236,788
Repayments .................. (1,152,688) (1,152,688) (1,152,688)
-------------- --------------- ---------------- --------------- ----------------
Balance at January 31, 1996 $ 1,863,160 $(1,151,436) $ 711,724 $1,557,095 $ 2,268,819
============== =============== ================ =============== ================
</TABLE>
FFI has various monitoring agreements with affiliates of FFI pursuant to
which such affiliates provide financial advisory services to FFI. In
consideration of the services provided, such affiliates receive annual fees
totaling $275,000 which are payable in quarterly installments.
During July 1992, FFI entered into a three-year employment agreement with
its President and Chief Executive Officer (the "President"), whereby the
President agreed to devote a majority of his business time and energies to
the business and affairs of FFI and its unconsolidated affiliate, Fine
Fragrances. The agreement provides for a base annual salary to be determined
by FFI's board, but in no event to be less than $120,000 and the creation of
an annual bonus pool for the President and other members of FFI's senior
management equal to six percent of the pre-tax profit of FFI. Effective July
2, 1995, the agreement was amended to extend the term to July 1997
(subsequently extended to the year 2000). The agreement is automatically
renewable for successive one-year periods and contains a non-compete clause
during the term of the agreement and for a period of five years after its
termination.
11. REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock represents the Series A Preferred, which has a
liquidation preference of $100 and is mandatorily redeemable by FFI upon the
earlier to occur of (i) January 1, 2001, or (ii) the repayment of 50% of the
12.5% Series I Debentures and the 12.5% Series II Debentures and the
accumulation by FFI of $2,000,000 in retained earnings. The Series A
Preferred was issued in exchange for the FFI Series A Preferred in the
Merger. The FFI Series A Preferred was originally issued in July 1992 in
connection with the following transactions:
F-17
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. REDEEMABLE PREFERRED STOCK--(CONTINUED)
<TABLE>
<CAPTION>
SHARES CARRYING VALUE
--------- ---------------
<S> <C> <C>
Initial capitalization of FFI ....................................... 10,000 $1,000,000
Acquisition of the net assets of the fragrance and cosmetics
business from National Trading .................................... 5,050 505,000
Acquisition of 50% interest in Fine Fragrances ...................... 4,950 495,000
--------- ---------------
Total ............................................................. 20,000 $2,000,000
========= ===============
</TABLE>
12. SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1993 JANUARY 31, 1996
---------------- -----------------
<S> <C> <C>
Property acquired through capital lease ....................... $1,800,000
Acquisition of net assets of the fragrance and cosmetics
business from National Trading through the issuance of
preferred stock and subordinated debentures ................. 2,235,000
Acquisition of 50% interest in Fine Fragrances through
issuance of preferred stock ................................. 495,000
Reverse acquisition of Suave Shoe Corporation:
Fair value of non cash assets acquired ..................... $12,267,430
Liabilities assumed .......................................... (2,654,391)
</TABLE>
13. STOCK OPTION PLANS
On January 26, 1995, FFI's Board of Directors (the "Board") adopted two
stock option plans, one for the benefit of non-employee directors (the
"Non-Employee Director's Plan") and another for directors, officers and
employees (the "1995 Stock Option Plan") of FFI. Both the 1995 Stock Option
Plan and the Non-Employee Director's Plan were assumed in the Merger and the
outstanding options were adjusted for the Merger (see Note 2).
The stock options awarded under the Non-Employee Director's Plan are
generally exercisable within a year after grant provided the grantee remains
a director of FFI. The options granted under the Non-Employee Director's Plan
shall be non-qualified. The option exercise price cannot be less than the
fair value of the underlying common stock as of the date of the option grant,
and the maximum option term cannot exceed ten years. The number of shares of
common stock authorized under the Non-Employee Director's Plan is 35,600. No
stock options have been granted under the Non-Employee Director's Plan to
date.
The stock options awarded under the 1995 Stock Option Plan are exercisable
at any time or in any installments as determined by the Compensation
Committee of the Board at the time of grant, provided that no stock options
shall be exercisable prior to six months from the date of grant. The options
granted under the 1995 Stock Option Plan may be either incentive and/or
nonqualified stock options as determined by the Compensation Committee. The
aggregate fair value (determined at the grant date) of Common Stock with
respect to which incentive options are exercisable for the first time by a
participant of the plan during any calendar year shall not exceed $100,000.
The number of shares of Common Stock authorized under the 1995 Stock Option
Plan is 541,120. On January 26, 1995, options for 527,040 shares were granted
to directors, officers and employees. Options for 477,040 shares are
exercisable at $3.30 per share and options for 50,000 are exercisable at
$5.25. There were no options exercisable at January 31, 1995 and options for
300,326 shares were exercisable at January 31, 1996. There also exist two
stock option plans, which were established by Suave prior to the Merger, the
1981
F-18
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. STOCK OPTION PLANS--(CONTINUED)
Employee Stock Option and Stock Appreciation Plan (the "1981 Employee Plan")
and the 1993 Stock Option Plan (the "1993 Plan"). A total of 360,000 shares
are available for issuance under the 1981 Employee Plan and 500,000 shares
are available for issuance under the 1993 Plan. At January 31, 1996, no
options under these plans were outstanding or exercisable.
14. SUBSEQUENT EVENTS (UNAUDITED)
On March 20, 1996, FFI completed its acquisition of certain assets
including the trademarks for the Halston fragrance brands, and certain
inventory and tangible assets from Halston Borghese, Inc. ("HBI") and its
affiliates. The purchase price was approximately $22,000,000 and was paid as
follows: (i) $19,000,000 in cash; and (ii) $2,000,000 note issued to HBI
maturing March 20, 2000 which is to be repaid on a quarterly basis in an
amount equal to 5% of the net sales revenues of FFI from the sale of the
Halston brands, provided that no payments are due until October 15, 1997 and
that the accrued amount bears interest at 8.0% per annum. FFI also assumed
approximately $1,000,000 in trade payables. The cash portion of the purchase
price was financed as follows: (a) $3,000,000 from the issuance of 8.0%
Secured Subordinated Debentures Due 2005, Series II and 571,429 shares of
Series C Convertible Preferred Stock, $.01 par value ("Series C Convertible
Preferred"); and (b) $16,000,000 in term loans from the two banks which are
parties to FFI's credit facility. The term loans consist of the following:
(1) $1,000,000 term loan from one of the banks due December 31, 1996, bearing
interest at 0.75% over prime; (2) $9,000,000 term loan from both banks on the
credit facility due December 31, 1998, bearing interest at 1.75% over prime
with principal payments due on a monthly basis aggregating approximately
$2,380,000, $3,000,000 and $3,620,000 during the years ended January 31,
1997, 1998, 1999; and (3) $6,000,000 term loan bearing interest at 2% over
prime from one of the banks due June 14, 1996 (the "Bridge Loan"). FFI issued
a first mortgage on the Suave Facility to repay the Bridge Loan.
On March 14, 1996, FFI entered into a new credit facility with two banks
to replace the existing credit facility, as described in Note 5. The new
credit facility provides for borrowings on a revolving basis of up to
$30,000,000 (which is increased to $40,000,000 from July 1 to December 31 as
an over line for the holiday season). The new credit facility also includes
the term loan issued in connection with the Geoffrey Beene acquisition and
the $10,000,000 aggregate principal amount of term loans issued in connection
with the Halston acquisition. Borrowings are collateralized by FFI's shares
of common stock in its subsidiaries and Fine Fragrances and all other assets
other than the Suave Facility. The material terms of the credit facility
relating to maximum interest rates, covenants and restrictions on the payment
of dividends, distributions to shareholders and incurrence of additional
indebtedness remain in effect (see Note 5).
In connection with the new credit facility, FFI issued to the banks
warrants to purchase 75,000 shares of Common Stock exercisable at $5.50 per
share, provided that warrants for 25,000 shares of Common Stock are
exercisable only after March 14, 1997, and only to the extent FFI has not
completed an equity offering of its securities in which FFI has obtained at
least $5,000,000 of net proceeds.
On May 14, 1996, FFI completed the acquisition of certain assets of
Fragrance Marketing Group, Inc. ("FMG"), including contract rights under
certain license and exclusive distribution agreements in the United States
for the Ombre Rose, Lapidus, Faconnable, Balenciaga, Bogart, Chevignon and
Niki de Saint Phalle fragrance brands, inventory, accounts receivable and
tangible assets. In addition, FFI assumed approximately $3.1 million of
certain trade and other payables of FMG and discharged approximately $600,000
of accounts receivable from FMG. In addition to the payables and write-off of
the receivable, the consideration for the assets included approximately $4.3
million in cash, $11.1 million aggregate principal amount of 8.5%
Subordinated Debentures (the "8.5% Debentures") and $900,000 in
F-19
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
14. SUBSEQUENT EVENTS (UNAUDITED)--(CONTINUED)
Company inventory delivered to FMG. The Company also issued to FMG (for
assignment to its shareholders and senior management) warrants for an
aggregate of 1,075,000 shares of the Company's Common Stock, which will be
exercisable at $7.50 per share from July 1997 to January 2002. The cash
portion of the purchase price was financed from FFI's revolving credit
facility. The 8.5% Debentures consist of: (i) a $4 million 8.5% Debenture
which requires mandatory principal payments of $2 million in May 2000 and
2001 (such payments are subject to acceleration to May 1998 and 1999 if the
Company raises a minimum of $10 million of net capital from a public offering
of equity securities (the "Financing Condition"); provided that if the
Financing Condition is satisfied after May 1998, payment of the entire
balance will be due on the later to occur of May 1999, or 30 days after the
Financing Condition is satisfied); (ii) a $7 million 8.5% Debenture which
requires mandatory annual principal repayments of $2.33 million commencing
May 2002, with the remaining balance due May 2004; and (iii) a $100,000 8.5%
Debenture which requires mandatory annual principal repayments of $33,000
commencing May 2002, with the remaining balance due May 2004.
F-20
<PAGE>
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1996 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................................... $ 123,960 $ 1,104,316
Accounts receivable, net of allowance for doubtful accounts of $630,339 and
$637,145, respectively .......................................................... 14,236,326 19,337,762
Inventories ....................................................................... 25,850,669 30,447,722
Equipment held for sale ........................................................... 1,000,000 141,135
Prepaid expenses and other assets ................................................. 1,370,777 960,946
-------------- ---------------
Total current assets ............................................................ 42,581,732 51,991,881
INVESTMENT IN UNCONSOLIDATED AFFILIATE ............................................. 1,708,235 1,799,705
-------------- ---------------
PROPERTY AND EQUIPMENT, NET ........................................................ 11,099,492 12,188,378
-------------- ---------------
OTHER ASSETS
Exclusive brand license, net ...................................................... 14,671,875 32,707,025
Deferred income taxes, net ........................................................ 761,342 761,342
Other intangibles and other assets ................................................ 561,138 802,744
-------------- ---------------
Total other assets .............................................................. 15,994,355 34,271,111
-------------- ---------------
TOTAL ASSETS ....................................................................... $71,383,814 $100,251,075
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ................................................................... $16,713,333 $ 28,217,000
Accounts payable--trade ........................................................... 11,115,664 12,672,467
Other payables and accrued expenses ............................................... 3,250,365 2,523,424
Current portion of capital lease and installment loans ............................ 201,630 187,531
Loans from shareholders ........................................................... 410,000 410,000
Convertible subordinated debentures ............................................... 600,000 600,000
Due to affiliates, net ............................................................ 2,268,819 2,311,726
-------------- ---------------
Total current liabilities ...................................................... 34,559,811 46,922,148
LONG-TERM LIABILITIES
Secured subordinated debentures ................................................... 11,681,500 14,681,535
Capital lease and installment loans ............................................... 1,269,860 1,226,690
Term loans and bridge loan ........................................................ 4,333,333 17,543,333
-------------- ---------------
Total liabilities ............................................................... 51,844,504 80,373,706
-------------- ---------------
COMMITMENTS
REDEEMABLE PREFERRED STOCK
Series A, $.01 par value; stated at liquidation preference value of $100 per
share; 20,000 shares authorized and outstanding ................................. 2,000,000 2,000,000
SHAREHOLDERS' EQUITY
Convertible, redeemable preferred stock, Series B, $.01 par value
(liquidation preference of $.01 per share); 350,000 shares authorized,
issued and outstanding .......................................................... 3,500 3,500
Convertible, redeemable preferred stock, Series C, $.01 par value
(liquidation preference of $.01 per share); 571,429 shares authorized,
issued and outstanding .......................................................... -- 5,714
Common stock, $.01 par value, 50,000,000 shares authorized; 9,641,290 shares
issued and outstanding, respectively ............................................ 96,413 96,413
Additional paid-in capital ........................................................ 10,333,539 10,373,539
Retained earnings ................................................................. 7,105,858 7,398,203
-------------- ---------------
Total shareholders' equity ...................................................... 17,539,310 17,877,369
------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $71,383,814 $100,251,075
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE>
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
NET SALES .......................................... $15,732,117 $19,316,493
COST OF SALES ...................................... 12,690,538 13,455,988
-------------- --------------
Gross profit ...................................... 3,041,579 5,860,505
OPERATING EXPENSES
Warehouse and shipping ............................ 528,131 805,511
Selling ........................................... 997,258 2,399,163
General and administration ........................ 383,629 703,171
Depreciation and amortization ..................... 285,907 532,301
-------------- --------------
Total operating expenses ......................... 2,194,924 4,440,146
-------------- --------------
INCOME FROM OPERATIONS ............................. 846,655 1,420,359
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income ................................... 5,897 2,629
Interest expense .................................. (795,265) (1,201,458)
Other income ...................................... (6,467) 139,546
-------------- --------------
Other income (expense), net ...................... (795,835) 1,059,283
-------------- --------------
INCOME BEFORE EQUITY IN EARNINGS OF UNCONSOLIDATED
AFFILIATE AND PROVISIONS FOR INCOME TAXES ........ 50,819 361,076
-------------- --------------
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATE, 50%
OWNED .............................................. 129,878 91,469
-------------- --------------
INCOME BEFORE INCOME TAXES ......................... 180,697 452,545
PROVISION FOR INCOME TAXES ......................... 32,641 160,200
-------------- --------------
NET INCOME ......................................... $ 148,056 $ 292,345
============== ==============
Earnings per common share equivalent:
Primary ........................................... $ 0.02 $ 0.03
============== ==============
Fully diluted ..................................... $ 0.02 $ 0.03
============== ==============
Weighted average number of common share
equivalents:
Primary ........................................... 7,120,000 11,175,985
============== ==============
Fully diluted ..................................... 7,120,000 11,485,697
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B SERIES C COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
--------------------- --------------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 350,000 $3,500 9,641,290
Series C Convertible
Preferred Shares issued .. 571,429 5,714
Grant of stock purchase
warrants .................
Net income for the three
months ended .............
---------- --------- ---------- --------- ------------
Balance at April 30, 1996 . 350,000 $3,500 571,429 $5,714 9,641,290
========== ========= ========== ========= ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED SHAREHOLDERS'
AMOUNT CAPITAL EARNINGS EQUITY
---------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 31, 1996 $96,413 $10,333,539 $7,105,858 $17,539,310
Series C Convertible
Preferred Shares issued .. 5,714
Grant of stock purchase
warrants ................. 40,000 40,000
Net income for the three
months ended ............. 292,345 292,345
---------- -------------- ------------- ----------------
Balance at April 30, 1996 . $96,413 $10,373,539 $7,398,203 $17,877,369
========== ============== ============= ================
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
--------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ........................................................... $ 148,056 $ 292,345
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 285,907 532,301
Equity in earnings of unconsolidated affiliate ...................... (129,878) (91,469)
Change in assets and liabilities net of effects from the
acquisitions:
(Increase) in accounts receivable .................................. (2,831,407) (5,101,435)
(Increase) decrease in inventories .................................. 5,852,276 (4,738,189)
Decrease (increase) in prepaid expenses and other assets ........... (281,435) 1,114,155
Increase (decrease) in accounts payable ............................. (2,948,151) 1,556,804
Increase (decrease) in other payables and accruals .................. 358,874 (726,940)
Increase (decrease) in due to affiliate, net ........................ 288,369 (452,093)
--------------- ---------------
Net cash provided by (used in) operating activities .............. 742,612 (7,614,522)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of exclusive brand license .................................. (18,370,655) (17,324,759)
Additions to property and equipment, net of disposals ................ (48,578) (277,511)
--------------- ---------------
Net cash used in investing activities ............................. (18,419,233) (17,602,270)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the grant of stock purchase warrants ................... 40,000
Proceeds from the issuance of preferred stock ........................ 3,500 5,714
Proceeds from the issuance of secured subordinated debentures ....... 8,221,500 3,000,035
Advances from unconsolidated affiliate ............................... 1,025,000 495,000
Proceeds from term loan .............................................. 7,000,000 8,960,000
Payments on term loans ............................................... (83,334) (583,333)
Net proceeds from short-term debt .................................... 1,247,025 8,337,000
Payments on capital lease and installment loans ...................... (54,424) (57,269)
Loans from shareholders .............................................. 250,000
Proceeds from bridge loan ............................................ 6,000,000
--------------- ---------------
Net cash provided by financing activities ......................... 17,609,267 26,197,147
--------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................. (67,354) 980,356
--------------- ---------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 646,148 123,960
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 578,794 $ 1,104,316
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period ...................................... $ 544,313 $ 781,997
=============== ===============
Income taxes paid during the period .................................. $ 0 $ 393,000
=============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Issuance of note to seller in connection with Halston Acquisition ... $ 2,000,000
===============
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LONG LIVED ASSETS--FFI adopted the provisions of SFAS No. 121 effective
for the three months ended April 30, 1996. Long lived assets are reviewed on
an ongoing basis for impairment. Estimated fair value is calculated using
discounted cash flow methods and other valuation techniques, such as
appraisals.
EARNINGS PER SHARE--Earnings per share is based on the weighted average
number of common shares outstanding and includes the effect of the issuance
of shares in connection with the assumed exercise of dilutive stock options
and warrants and the assumed conversion of dilutive convertible preferred
stock. Fully diluted earnings per share reflects additional dilution due to
the use of the market price at the end of the period when higher than the
average market price for the period, and does not assume the conversion of
the convertible subordinated debentures with corresponding adjustments for
interest expense, net of tax, since the effect of such conversion is
anti-dilutive. Earnings per share for the three months ended April 30, 1995
were computed using the number of common shares received by the shareholders
of FFI in connection with the Merger. Earnings per share for the three months
ended April 30, 1996 are calculated based on the actual number of common
shares and common share equivalents outstanding.
NOTE 2. HALSTON ACQUISITION
On March 20, 1996, FFI completed its acquisition (the "Halston
Acquisition") from Halston Borghese, Inc. ("HBI") and its affiliates of
certain assets relating to the Halston fragrance brands including the
trademarks and certain inventory and tangible assets. The purchase price was
approximately $22,000,000 and was paid as follows: (i) $19,000,000 in cash;
and (ii) $2,000,000 note issued to HBI maturing March 20, 2000 (the "Seller
Note"),which is to be repaid on a quarterly basis in an amount equal to 5% of
the net sales revenues of FFI from the sale of the Halston brands, provided
that no payments are due until October 15, 1997 and that the accrued amount
bears interest at 8.0% per annum. FFI also assumed approximately $1,000,000
in trade payables. The cash portion of the purchase price was financed as
follows: (a) $3,000,000 from the issuance of 8.0% Secured Subordinated
Debentures Due 2005, Series II (the "8.0% Series II Debentures"), and 571,429
shares of Series C Convertible Preferred Stock, $.01 par value ("Series C
Convertible Preferred"); and (b) $16,000,000 in term loans from the two banks
which are parties to FFI's credit facility. The term loans consist of the
following: (1) $1,000,000 term loan from one of the banks due December 31,
1996, bearing interest at 0.75% over prime (the "Halston Term Loan 1" ); (2)
$9,000,000 term loan from both banks on the credit facility due December 31,
1998, bearing interest at 1.75% over prime with principal payments due on a
monthly basis aggregating approximately $2,380,000, $3,000,000, and
$3,620,000 during the years ended January 31, 1997, 1998, 1999 (the "Halston
Term Loan 2"); and (3) $6,000,000 term loan bearing interest at 2% over prime
from one of the banks due June 14, 1996 (the "Bridge Loan"). FFI issued a
first mortgage on the building acquired in the Merger to repay the Bridge
Loan.
The following information presents the pro forma results of operations for
the year ended January 31, 1996 and the three months ended April 30, 1996 of
FFI as if the acquisition had occurred at the beginning of each period:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
JANUARY 31, ENDED
1996 APRIL 30, 1996
---------------- ------------------
<S> <C> <C>
Net sales .................................. $110,996 $20,150
---------------- ------------------
Net income and brand contribution (deficit) $ 4,749 $ (464)
---------------- ------------------
</TABLE>
F-25
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information of Fine
Fragrances, Inc. ("Fine Fragrances"), a fragrance distribution company which
is 50% owned by FFI; FFI's investment in Fine Fragrances is accounted for
under the equity method:
<TABLE>
<CAPTION>
JANUARY 31, 1996 APRIL 30, 1996
----------------- ---------------
<S> <C> <C>
Current assets ............................... $ 3,284,066 $ 3,553,656
Other assets ................................. 742,265 1,148,149
----------------- ---------------
Total assets ............................... $4,026,331 $4,701,805
================= ===============
Current Liabilities .......................... $ 970,716 $ 1,425,917
Shareholders' equity ......................... 3,055,615 3,275,888
----------------- ---------------
Total liabilities and shareholder's equity $4,026,331 $4,701,805
================= ===============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Net Sales .... $1,658,538 $1,474,123
============= =============
Net Income .. $ 290,837 $ 220,273
============= =============
</TABLE>
FFI's equity in the net income of Fine Fragrances as reflected in the
accompanying statements of income has been reduced for the amortization of
the exclusive distribution agreements of Fine Fragrances. The exclusive
distribution agreements are being amortized using the straight-line method
over six years, the term of the agreements.
The reconciliation of the investment in unconsolidated affiliate is as
follows:
<TABLE>
<CAPTION>
JANUARY 31, 1996 APRIL 30, 1996
----------------- ---------------
<S> <C> <C>
Equity interest at 50% ........................ $1,527,800 $ 1,637,944
Unamortized exclusive distribution agreements 180,435 161,761
----------------- ---------------
Carrying value ................................ $1,708,235 $1,799,705
================= ===============
</TABLE>
Current liabilities primarily relate to a $2,000,000 secured line of
credit from a bank. The interest rate is prime rate plus 2.5% (prime rate was
8.5% at April 30, 1996). The line is secured by receivables and inventories.
The line is subject to annual review and renewal by the bank in April.
Amounts outstanding were $912,000 and $663,000 at January 31, 1996 and April
30, 1996, respectively. There are no other material commitments or
contingencies for Fine Fragrances.
NOTE 4. SHORT-TERM DEBT
On March 14, 1996, FFI entered into a new credit facility with two banks
to replace the existing credit facility. The new credit facility provides for
borrowings on a revolving basis of up to $30,000,000 (which is increased to
$40,000,000 from July 1 to December 31 as an over line for the holiday
season). Borrowings are limited to eligible accounts receivable and
inventories. Borrowings are also collateralized by FFI's shares of common
stock in its subsidiaries and in Fine Fragrances and all other assets other
than the Suave Facility, including accounts receivable and inventories. The
credit facility contains several covenants, the more significant of which are
that FFI maintain a minimum level of equity and meet certain debt-to-equity,
interest coverage and liquidity ratios. The credit facility also includes a
prohibition on the payment of dividends and other distributions to
shareholders and restrictions on the incurrence of additional indebtedness.
The new credit facility also includes the term loan issued in connection with
the Geoffrey Beene acquisition in March 1995 and the $10,000,000 aggregate
principal amount of the Halston Term Loan 1 and Halston Term Loan 2 issued in
connection
F-26
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
with the Halston Acquisition. In connection with the Halston Acquisition, FFI
also issued to one of the banks in the credit facility the Bridge Loan in the
principal amount of $6,000,000. See Note 2. In connection with the new credit
facility, FFI issued to the banks warrants to purchase 75,000 shares of
Common Stock exercisable at $5.50 per share, provided that warrants for
25,000 shares of Common Stock are exercisable only after March 14, 1997, and
only to the extent FFI has not completed an equity offering of its securities
in which FFI has obtained at least $5,000,000 of net proceeds.
NOTE 5. RELATED PARTY TRANSACTIONS
FFI has various monitoring agreements with affiliates of FFI pursuant to
which such affiliates provide financial advisory services to FFI. In
consideration of the services provided, such affiliates receive annual fees
totaling $275,000 which are payable in quarterly installments. In connection
with the Halston Acquisition, FFI agreed to pay one of its affiliates a
one-time management services fee for management and financial advisory
services performed in connection with such acquisition.
In the normal course of business or from time-to-time, FFI and its
affiliates, Fine Fragrances and National Trading, have entered into
transactions which are reflected on the balance sheet as Due to Affiliates,
net. During the three months ended April 30, 1996, such transactions are
summarized as follows:
<TABLE>
<CAPTION>
DUE TO DUE TO
ADVANCES FINE FRAGRANCES (FROM) (FROM) TOTAL DUE
FROM FINE MANAGEMENT FEES FINE NATIONAL TO (FROM)
FRAGRANCES AND OTHER FRAGRANCES, NET TRADING, NET AFFILIATES, NET
------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 $1,863,160 $(1,151,436) $ 711,724 $1,557,095 $2,268,819
Advances, net ............... 495,000 495,000 (163,184) 331,816
Management fee (8.0%) ....... (119,318) (119,318) (119,318)
Interest (10%) .............. 75,906 75,906 75,906
Repayments .................. (245,497) (245,497) (245,497)
------------- ---------------- ---------------- --------------- ----------------
Balance at April 30, 1996 .. $2,188,569 $(1,270,754) $ 917,815 $ 1,393,911 $ 2,311,726
============= ================ ================ =============== ================
</TABLE>
NOTE 6. INCOME TAXES
The provision for income taxes for the three month period ended April 30,
1996 ws calculated based upon the estimated tax rate of 39% for the full
fiscal year ending January 31, 1997.
NOTE 7. STOCK OPTION PLANS
During the three months ended April 30, 1996, the Company granted options
for 20,000 shares exercisable at $5.25 per share under the 1981 Employee
Stock Option and Stock Appreciation Plan. On May 2, 1996, the Company granted
additional options for 45,000 shares at an exercise price of $6.50 per share
under the same plan.
NOTE 8. SUBSEQUENT EVENTS
On May 14, 1996, FFI completed the acquisition of certain assets of
Fragrance Marketing Group, Inc. ("FMG"), including contract rights under
certain license and exclusive distribution agreements in the United States
for the Ombre Rose, Lapidus, Faconnable, Balenciaga, Bogart, Chevignon and
Niki de Saint Phalle fragrance brands, inventory, accounts receivable and
tangible assets. In addition, FFI assumed approximately $3.1 million of
certain trade and other payables of FMG and discharged approximately $600,000
of accounts receivable from FMG. In addition to the payables and write-off of
F-27
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 8. SUBSEQUENT EVENTS--(CONTINUED)
the receivable, the consideration for the assets included approximately $4.3
million in cash, $11.1 million aggregate principal amount of 8.5%
Subordinated Debentures (the "8.5% Debentures") and $900,000 in Company
inventory delivered to FMG. The Company also issued to FMG (for assignment to
its shareholders and senior management) warrants for an aggregate of
1,075,000 shares of the Company's Common Stock, which will be exercisable at
$7.50 per share from July 1997 to January 2002. The cash portion of the
purchase price was financed from FFI's revolving credit facility. The 8.5%
Debentures consist of: (i) a $4 million 8.5% Debenture which requires
mandatory principal payments of $2 million in May 2000 and 2001 (such
payments are subject to acceleration to May 1998 and 1999 if the Company
raises a minimum of $10 million of net capital from a public offering of
equity securities (the "Financing Condition"); provided that if the Financing
Condition is satisfied after May 1998, payment of the entire balance will be
due on the later to occur of May 1999, or 30 days after the Financing
Condition is satisfied); (ii) a $7 million 8.5% Debenture which requires
mandatory annual principal repayments of $2.33 million commencing May 2002,
with the remaining balance due May 2004; and (iii) a $100,000 8.5% Debenture
which requires mandatory annual principal repayments of $33,000 commencing
May 2002, with the remaining balance due May 2004.
F-28
<PAGE>
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 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.
F-29
<PAGE>
THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
STATEMENT OF NET ASSETS SOLD (NOTE 1)
AS OF DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
ASSETS:
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
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
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)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net sales ............................................................. $28,521 $33,978
Cost of sales ......................................................... 12,838 15,767
---------- ----------
Gross profit ........................................................ 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
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
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 20, 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.
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.
F-32
<PAGE>
THE HALSTON FRAGRANCE BRANDS OF
HALSTON BORGHESE INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(CONTINUED)
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,:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Raw material, components and work in process $1,102 $3,080
Finished goods ............................... 2,268 3,856
--------- ---------
$3,370 $6,936
========= =========
</TABLE>
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. In addition,
HBIL has commitments, in the normal course of business, with various
distributors relating to the Halston fragrance brands.
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.
F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
Fragrance Marketing Group, Inc.
We have audited the balance sheets of Fragrance Marketing Group, Inc. (a
Florida corporation), as of December 31, 1995 and 1994 and the related
statements of income and retained earnings, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fragrance Marketing
Group, Inc., as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company subsequent to December 31, 1995, sold a
significant portion of its assets and operations and terminated its line of
credit arrangement. In addition, at December 31, 1995 the Company has a
deficit in stockholders' equity of approximately $500,000. Those conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include adjustments that might be
necessary should the Company be unable to continue in existence.
SANSON, KLINE, JACOMINO & COMPANY
Miami, Florida
May 3, 1996 (except for Notes B,
D and G for which the date is
May 14, 1996)
F-34
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
ASSETS (Notes D and G)
CURRENT ASSETS
Cash ................................................................. $ 70,816 $ 12,255
Accounts receivable -trade, net of allowance for doubtful accounts
and sales returns (Notes A-1, A-6) ................................. 1,118,674 3,598,810
Accounts receivable--affiliates (Note C) ............................. -- 3,461,493
Due from insurance claims ............................................ 224,419 222,221
Inventories (Notes A-2 and D) ........................................ 7,788,318 8,317,328
Prepaid expenses ..................................................... -- 7,300
------------- --------------
Total current assets ............................................... 9,202,227 15,619,407
EQUIPMENT--AT COST, less accumulated depreciation of $35,966 in 1995
and $10,828 in 1994 (Note A-3 and E) ................................. 160,495 44,208
OTHER ASSETS
Deposits ............................................................. 1,075 12,600
Unamortized contract rights (Note A-4) ............................... 148,816 178,576
------------- --------------
149,891 191,176
------------- --------------
$9,512,613 $15,854,791
============= ==============
LIABILITIES
CURRENT LIABILITIES
Note payable--bank (Note D) .......................................... $5,135,933 $ 7,375,957
Current maturities of long-term debt (Note E) ........................ 18,603 --
Accounts payable and accrued liabilities ............................. 4,779,971 7,286,699
------------- --------------
Total current liabilities .......................................... 9,934,507 14,662,656
LONG-TERM DEBT, less current maturities (Note E) ....................... 81,972 --
COMMITMENTS AND CONTINGENCIES (Notes A-6, F and G) ..................... -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock--authorized 25,000,000 shares, issued and outstanding
100 shares of $.01 par value ....................................... 1 1
Retained earnings .................................................... 359,291 1,192,134
------------- --------------
359,292 1,192,135
Less accounts receivable-trade associated with affiliates (Note C) .. (863,158) --
------------- --------------
(503,866) 1,192,135
------------- --------------
$9,512,613 $15,854,791
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
NET SALES (Notes A-6 and C) ........... $19,429,834 $13,245,821
COST OF SALES ......................... 12,136,747 8,197,540
-------------- --------------
Gross profit ...................... 7,293,087 5,048,281
OPERATING EXPENSES
Warehouse and shipping .............. 446,119 159,936
Selling ............................. 1,637,919 1,179,300
General and administration (Note C) 3,333,935 2,250,280
Depreciation and amortization ...... 54,897 47,256
-------------- --------------
Total operating expenses .......... 5,472,870 3,636,772
-------------- --------------
Income from operations ............ 1,820,217 1,411,509
-------------- --------------
OTHER INCOME (EXPENSE)
Interest expense .................... (863,131) (301,904)
Commission income (Note C) .......... 69,740 --
-------------- --------------
(793,391) (301,904)
-------------- --------------
NET INCOME (Note A-5) ............. 1,026,826 1,109,605
Retained earnings at January 1, ...... 1,192,134 82,529
Distribution to stockholders .......... (1,859,669) --
-------------- --------------
Retained earnings at December 31, .... $ 359,291 $ 1,192,134
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 1,026,826 $ 1,109,605
Adjustments to reconcile net income to net cash provided by (used
in) operating activities
Depreciation .................................................. 25,138 8,567
Provision for losses on accounts receivable ....................... 129,865 152,574
Contract rights amortization ...................................... 29,760 38,688
Change in assets and liabilities
Increase in due from insurance claims ..................... (2,198) (222,221)
Decrease (increase) in accounts receivable-trade ................ 1,487,113 (2,422,089)
Decrease (increase) in inventories .............................. 529,010 (6,230,436)
Decrease in prepaid expenses .................................... 7,300 1,150
Decrease (increase) in deposits ................................. 11,525 (12,000)
(Decrease) increase in accounts payable and accrued liabilities (2,506,728) 5,287,345
-------------- --------------
Net cash provided by (used in) operating activities .......... 737,611 (2,288,817)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment ............................................ (29,137) (13,571)
(Increase) decrease in accounts receivable-affiliates .............. 1,881,824 (3,233,253)
-------------- --------------
Net cash provided by (used in) investing activities .......... 1,852,687 (3,246,824)
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings under line of credit ...................... (2,240,024) 5,537,030
Principal payments of long-term debt ................................ (11,713) --
Distributions to stockholders ....................................... (280,000) --
-------------- --------------
Net cash provided by (used in) financing activities .......... (2,531,737) 5,537,030
-------------- --------------
INCREASE IN CASH .............................................. 58,561 1,389
CASH AT JANUARY 1, .................................................... 12,255 10,866
-------------- --------------
CASH AT DECEMBER 31, .................................................. $ 70,816 $ 12,255
============== ==============
CASH PAID DURING THE YEAR FOR:
Interest ............................................................ $ 863,131 $ 301,904
============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired equipment under equipment installment loan
obligations of $112,288 in 1995.
The Company distributed non-cash assets (accounts
receivable-affiliates) of $1,579,669 to its stockholders in
1995.
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A--GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated in the State of Florida in May 1992. Its main
activity consists of the exclusive representation and distribution of several
fragrances and related products throughout the United States, Canada, Puerto
Rico and the Caribbean. Since the fragrance business is seasonal, a
significant portion of sales occur in the last two quarters of the calendar
year.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows:
1. ACCOUNTS RECEIVABLE
A provision has been made and an allowance established for potential
losses from receivables and estimated sales returns in the normal course of
business. Since these allowances are based on estimates, there is no
assurance that such allowances will be sufficient to cover unforeseen losses
or returns. The activity for these allowance accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
<S> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Beginning balance ............. $ 50,000 $ 5,000
Provision ..................... 129,865 152,574
Write-offs, net of recoveries (79,865) (107,574)
------------------ ------------------
Ending balance ................ $ 100,000 $ 50,000
================== ==================
ALLOWANCE FOR SALES RETURNS
Beginning balance ............. $ 35,856 $ --
Provision ..................... 2,583,652 1,132,397
Actual returns ................ (2,557,270) (1,096,541)
------------------ ------------------
Ending balance ................ $ 62,238 $ 35,856
================== ==================
</TABLE>
2. INVENTORIES
Inventories consist of fragrances and related products and are carried at
the lower of cost or market, cost being determined on a moving average basis.
3. EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Expenditures for major betterments and
additions are recorded to the asset accounts while replacements, maintenance
and repairs which do not improve or extend the lives of the respective assets
are charged to expense. Depreciation is provided over the estimated useful
lives of the assets using the straight-line method, as follows:
<TABLE>
<CAPTION>
CATEGORY YEARS
- ---------------------------- ----------
<S> <C>
Furniture and fixtures ..... 7
Machinery and equipment .... 5
Vehicles .................... 5
</TABLE>
4. UNAMORTIZED CONTRACT RIGHTS
In February 1993, the Company acquired certain contractual rights for the
exclusive distributorship of a fragrance brand. The cost of these rights was
$250,000 which is being amortized over the life of the contract which is
seven (7) years.
F-38
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE A--GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
5. INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under these provisions the Company does not pay
federal corporate income taxes on its taxable income. Instead, the
shareholders are liable for individual income taxes on their respective share
of the Company's taxable income.
6. REVENUE RECOGNITION
Sales are recognized upon shipment. Sales to one major customer
represented 9% and 15% of the total sales for the year ended December 31,
1995 and 1994, respectively. Accounts receivable from this major customer
represented 8.0% and 6% of the total accounts receivable trade at December
31, 1995 and 1994, respectively.
7. NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS -In March 1995, the Financial Accounting
Standards Board ("FASB") 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" ("SFAS No. 121").
SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles held and used by an entity, be reviewed for
impairment whenever events or changes in circumstance indicate that the
carrying amounts of an asset may not be recoverable. SFAS No. 121 will apply
to the Company for the year ended December 31, 1996. The Company has not
assessed the impact of adopting this pronouncement.
NOTE B--GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The following conditions raise
substantial doubt about the Company's ability to continue as a going concern:
/bullet/ Sale of a significant portion of the Company's assets and
operations, including contract rights under license and exclusive
distribution agreements in the United States for certain prestige
fragrance brands, subsequent to December 31, 1995 (see Note G).
/bullet/ Termination of line of credit arrangement subsequent to December
31, 1995 (see Note D).
/bullet/ Deficit in stockholders' equity of approximately $500,000 at
December 31, 1995 (see Note C).
The financial statements do not include adjustments that might be
necessary should the Company be unable to continue in existence.
NOTE C--RELATED PARTY TRANSACTIONS
The Company is related to four corporations through common management and
ownership. During the years ended December 31, 1995 and 1994, the Company had
the following transactions with these affiliates:
F-39
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE C--RELATED PARTY TRANSACTIONS--(CONTINUED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
/bullet/ Purchases of merchandise ............................ $165,543 --
/bullet/ Sales ............................................... $539,822 $162,562
/bullet/ Management fee expense, which includes the use of
the
warehouse facilities (the affiliate waived the
management
fee expense in 1995) $ -- $402,292
/bullet/ Commissions income .................................. $ 69,740 --
</TABLE>
During the year ended December 31, 1995, the Company distributed
$1,579,699 in accounts receivable-affiliates to its stockholders.
At December 31, 1995 approximately $863,000 of the Company's accounts
receivable-trade have not been collected due to balances that the affiliates
owe these trade customers. The Company has recorded the accounts
receivable-trade associated with affiliates as a reduction of the
stockholders' equity resulting in a deficit in stockholders' equity of
approximately $500,000 at December 31, 1995.
NOTE D--NOTE PAYABLE-BANK
The Company, jointly with an affiliate, has available a line of credit
totaling $25,000,000. Borrowings under the line of credit are collateralized
by substantially all the assets of the Company and personally guaranteed by
the Company's stockholders. At December 31, 1995 and 1994, the agreement
allowed borrowing up to 85% of the outstanding eligible accounts receivable
and 60% of eligible inventory at an interest rate of 1.25% over the bank's
prime rate. The unused line of credit at December 31, 1995 was $27,403.
The note is subject to the provisions of the loan agreement. Covenants of
this agreement provide, among other things, for requirements as to working
capital levels and for the subordination of amounts due to affiliates and
stockholders.
On May 14, 1996, the Company and the affiliate reached an agreement with
the bank terminating the $25,000,000 line of credit arrangement. As a result
of the agreement, the bank agreed to release all UCC financing statements
held by the bank against the Company in consideration of approximately $4.3
million in cash and $4 million in 8.5% subordinated debentures of French
Fragrance, Inc. (See Note G).
NOTE E--LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of installment notes payable
in monthly installments of $2,825, including interest ranging from 11.5% to
17.5% per year through November 2000. The maturities of long-term debt at
December 31, 1995 are as follows:
F-40
<PAGE>
FRAGRANCE MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE E--LONG-TERM DEB--(CONTINUED)
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------- -----------
<S> <C>
1996 ... $ 18,603
1997 ... 21,963
1998 ... 25,939
1999 ... 30,645
2000 ... 3,425
-----------
$100,575
===========
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES
1. The Company is committed to a minimum annual royalty fee of $250,000
according to one of its distributorship agreements. These distribution
rights were not included in the sale of assets described in Note G.
2. The Company is engaged as a defendant in litigation involving an
alleged breach of an exclusive distribution contract. The plaintiff has
alleged damages in excess of $1,500,000. Management expects to obtain a
favorable judgment in the litigation. However, the ultimate outcome of
the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been
made in the Company's financial statements.
3. The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. These actions, when finally concluded and determined, will
not, in the opinion of Management, have a material adverse effect upon
the financial position of the Company.
NOTE G--SUBSEQUENT EVENT
On May 14, 1996, the Company consummated the sale of certain assets with a
cost of approximately $6.1 million to French Fragrances, Inc. ("FFI"). These
assets included accounts receivable-trade, inventory, equipment and contract
rights under certain license and exclusive distribution agreements in the
United States for the Ombre Rose, Faconnable, Balenciaga, Lapidus, Bogart,
Chevignon and Niki de Saint Phalle fragrance brands. The consideration for
the assets sold consisted of the following:
/bullet/ Assumption of approximately $3.1 million of the Company's
accounts payable and accrued liabilities.
/bullet/ Forgiveness of approximately $600,000 payable to FFI by an
affiliate of the Company.
/bullet/ Cash of approximately $4.3 million used by the Company in
settlement of the line of credit outstanding balance and
commitment (see Note D).
/bullet/ FFI 8.5% secured subordinated debentures totaling $11.1 million,
$4 million used by the Company in the settlement of the line of
credit outstanding balance and commitment (see Note D) and $7
million used by the Company to settle outstanding bank debt of
its affiliates.
/bullet/ Warrants to purchase 1,075,000 shares of FFI common stock at
$7.50 per share from July 1997 to January 2002.
/bullet/ Inventory of FFI valued by FMG at approximately $1,000,000.
F-41
<PAGE>
[PHOTOS OF COMPANY PRODUCTS]
THE COMPANY IS THE EXCLUSIVE UNITED STATES DISTRIBUTOR OF BALENCIAGA, CHEVIGNON,
NINI DE SAINT PHALLE, OMBRE D'OR, SALVADOR DALI AND WITNESS FRAGRANCE PRODUCTS
AND GALENIC ELANCYL SKIN CARE PRODUCTS AND HAS EXCLUSIVE WORLDWIDE RIGHTS TO
HALSTON FRAGRANCE PRODUCTS.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 7
Use of Proceeds ............................ 11
Price Range of Common Stock ................ 11
Dividend Policy ............................ 11
Capitalization ............................. 12
Pro Forma Financial Data ................... 13
Selected Historical Financial Data ........ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 21
Business ................................... 30
Management ................................. 37
Principal and Selling Shareholders ........ 43
Certain Transactions ....................... 47
Description of Capital Stock ............... 50
Shares Eligible for Future Sale ............ 53
Underwriting ............................... 55
Legal Matters .............................. 56
Experts .................................... 56
Available Information ...................... 56
Index to Financial Statements .............. F-1
</TABLE>
<PAGE>
[LOGO]
5,000,000 SHARES
COMMON STOCK
----------------
PROSPECTUS
----------------
RODMAN & RENSHAW, INC.
SANDERS MORRIS MUNDY
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses in connection with the offering of the
Common Stock described in this Registration Statement (other than
underwriting discounts and commissions and the Representatives'
non-accountable expense allowance) will be as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration
Fee ............................................ $ 13,285
NASD filing fee ................................... 4,354
Nasdaq National Market fee ........................ 17,500
Printing and engraving expenses ................... 125,000
Accounting fees and expenses ...................... 250,000
Legal fees and expenses ........................... 125,000
Blue Sky qualification fees and expenses ......... 15,000
Transfer agent's fees and expenses ................ 5,000
Miscellaneous ..................................... 44,861
----------
Total ........................................... $600,000
==========
</TABLE>
The Company will bear all of the foregoing expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Section 607.0850 of the Florida Business
Corporation Act (the "FBCA") to indemnify its directors and officers to the
extent provided for in such statute. The Company's Amended and Restated
Articles of Incorporation provide that, to the fullest extent permitted by
applicable law, as amended from time to time, the Company will indemnify any
person who was or is a director or officer of the Company, or serves or
served in such capacity or with any other enterprise at the request of the
Company, against all fines, liabilities, settlements, costs and expenses
asserted against or incurred by such person in his capacity or arising out of
his status as such officer or director. The Company may also indemnify
employees or agents of the Company if the Company's Board so approves. This
indemnification includes the right to advancement of expenses when allowed
pursuant to applicable law.
The provisions of the FBCA authorize a corporation to indemnify its
officers and directors in connection with actions, suits and proceedings
brought against them if the person acted in good faith and in a manner which
the person reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal actions, had
no reasonable cause to believe the person's conduct was unlawful. Unless
pursuant to a determination by a court, the determination of whether a
director, officer or employee has acted in accordance with the applicable
standard of conduct must be made by (i) a majority vote of directors who were
not parties to the proceeding or a committee consisting solely of two or more
directors not parties to the proceedings, (ii) independent legal counsel
selected by a majority vote of the directors who were not parties to the
proceeding or committee of directors (or selected by the full board if a
quorum or committee can not be obtained), or (iii) the affirmative vote of
the majority of the corporation's shareholders who were not parties to the
proceeding.
The FBCA further provides that a corporation may make any other or further
indemnity by resolution, bylaw, agreement, vote of shareholders disinterested
directors or otherwise, except with respect to certain enumerated acts or
omissions of such persons. Florida law prohibits indemnification or
advancement of expenses if a judgment or other final adjudication establishes
that the actions of a director, officer or employee constitute (i) a
violation of criminal law, unless the person had reasonable cause to believe
his conduct was not unlawful, (ii) a transaction from which such person
derived an improper personal benefit, (iii) willful misconduct or conscious
disregard for the best interests of the
II-1
<PAGE>
corporation in the case of a derivative action by a shareholder, or (iv) in
the case of a director, a circumstance under which a director would be liable
for improper distributions under Section 607.0834 of the FBCA. The FBCA does
not affect a director's responsibilities under any other law, such as federal
securities laws.
At present, there is no pending litigation or other proceeding involving a
director or officer of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Company maintains directors' and officers' liability insurance for its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 15, 1995, the Company issued and sold to investors in the
Bedford Fund II (the "Investors"), a private pool of capital established by
Bedford Capital Corporation and consisting of approximately 40 Canadian
investors and National Trading Manufacturing, Inc. ("National Trading"), a
corporation controlled by Rafael Kravec, the President and Chief Executive
Officer and largest individual shareholder of the Company, approximately
$8,225,000 aggregate principal amount of 8% Debentures Series I Due 2005 (the
"8% Series I Debentures") and 350,000 shares of Series B Convertible
Preferred Stock ("Series B Convertible Preferred"). Each share of Series B
Convertible Preferred is convertible upon the payment of a conversion price
of $3.30 per share into 7.12 shares of Common Stock of the Company. For each
$25.21 principal amount of funds provided by an investor, the Company issued
the equivalent principal amount of 8% Series I Debentures and one share of
Series B Convertible Preferred Stock. The amount purchased by National
Trading corresponded to $159,193 principal amount of 8% Series I Debentures
and 5,419 shares of Series B Convertible Preferred. The net proceeds of the
offering were approximately $8,225,000. Neither the Company nor Bedford
engaged in any form of general solicitation or general advertising. The
Company obtained representations that each purchaser was an accredited
investor as defined under the Securities Act, acquired the securities for
investment purposes and not with a view to distribution, understood that
their investment involved a high degree of risk and that such securities
could only be resold pursuant to an effective registration statement or an
available exemption from registration under the Securities Act, obtained all
information as it deemed appropriate with respect to the Company and had
opportunities to ask questions relating to the Company and the investment.
The 8% Series I Debentures and the Series B Convertible Preferred
certificates bear restrictive legends indicating that the securities may not
be freely transferable. Based on the foregoing, the Company believes that the
foregoing transactions were exempt from the registration provision of the
Securities Act under Section 4(2) of the Securities Act, by reason of such
transactions being by an issuer not involving a public offering, and
Regulation D promulgated under the Securities Act.
On March 20, 1996, the Company issued and sold to the Investors
approximately $3,000,000 aggregate principal amount of 8% Debentures Series
II Due 2005 (the "8% Series II Debentures") and 571,429 shares of Series C
Convertible Preferred Stock ("Series C Convertible Preferred"). Each share of
Series C Convertible Preferred is convertible upon the payment of a
conversion price of $5.25 per share into one share of Common Stock of the
Company. For each $6.56 principal amount of funds provided by an investor,
the Company issued the equivalent principal amount of 8% Series II Debentures
and one share of Series C Convertible Preferred. The amount purchased by
National Trading corresponded to $57,978 principal amount of 8% Series II
Debentures and 8,835 shares of Series C Convertible Preferred Stock. The net
proceeds of the offering were approximately $3,000,000. Neither the Company
nor Bedford engaged in any form of general solicitation or general
advertising. The Company obtained representations that each purchaser was an
accredited investor as defined under the Securities Act, acquired the
securities for investment purposes and not with a view to distribution,
understood that their investment involved a high degree of risk and that such
securities could only be resold pursuant to an effective registration
statement or an available exemption from registration under the Securities
Act, obtained all information as it deemed appropriate with respect to the
Company and had opportunities to ask questions relating to the Company and
the investment. The 8% Series II
II-2
<PAGE>
Debentures and the Series C Convertible Preferred certificates bear
restrictive legends indicating that the securities may not be freely
transferable. Based on the foregoing, the Company believes that the foregoing
transactions were exempt from the registration provision of the Securities
Act under Section 4(2) of the Securities Act, by reason of such transactions
being by an issuer not involving a public offering, and Regulation D
promulgated under the Securities Act.
On May 14, 1996, the Company completed the acquisition (the "FMG
Acquisition") of the principal assets of Fragrance Marketing Group, Inc.
("FMG"). The purchase price for the assets acquired in the FMG Acquisition
included $11.1 million aggregate principal amount of 8.5% Junior Subordinated
Debentures due 2004 (the "8.5% Debentures") and the assumption of $3.1
million of liabilities. The Company also issued to FMG (for assignment to its
shareholders and senior management) and to five key employees of FMG warrants
to purchase an aggregate of 1,235,000 shares of Common Stock, exercisable at
$7.50 per share from July 1997 to January 2002. The Company obtained
representations that the securities issued by the Company in the FMG
Acquisition were acquired for investment purposes and not with a view to
distribution and that such securities could only be resold pursuant to an
effective registration statement or an available exemption from registration
under the Securities Act The 8.5% Debentures and the warrants which were
issued bear restrictive legends indicating that the securities may not be
freely transferred. Based on the foregoing, the Company believes that the
foregoing transactions were exempt from the registration provision of the
Securities Act under Section 4(2) of the Securities Act, by reason of such
transactions being by an issuer not involving a public offering, and
Regulation D promulgated under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of May 19, 1995, by and between the Company and French Fragrances,
Inc. (incorporated herein by reference to the exhibit filed as a part of the Company's Form 8-K dated
November 30, 1995 (Commission File No. 1-6370)).
3.1 Amended and Restated Articles of Incorporation of the Company dated March 6, 1996 (incorporated herein
by reference to Exhibit 3.1 filed as a part of the Company's Form 10-K for the fiscal year ended January
31, 1996 (Commission File No. 1-6370)).
3.2 By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 filed as a part of the Company's
Form 10-K for the fiscal year ended January 31, 1996 (Commission File No. 1-6370)).
4.1 Form of Common Stock Certificate of the Company.*
4.2 Indenture, dated as of January 19, 1972, between the Company and The First National Bank of Miami (incorporated
herein by reference to the exhibit filed as a part of the Company's Registration Statement (Registration
No. 2-42643)).
4.3 Form of Representatives' Warrant.
4.4(a) Credit Agreement, dated as of March 14, 1996, among the Company, Fleet National Bank and Bank of America
Illinois (incorporated herein by reference to the exhibit filed as a part of the Company's Form 8-K dated
March 20, 1996 (Commission File No. 1-6370)).
4.4(b) First Amendment, dated as of May 10, 1996, to Credit Agreement dated as of March 14, 1996, among the
Company, Fleet National Bank and Bank of America Illinois (incorporated herein by reference to Exhibit
4.1 filed as a part of the Company's Form 8-K dated May 14, 1996 (Commission File No. 1-6370)).
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.4(c) Letter Agreement, dated May 29, 1996, regarding the Credit Agreement dated as of March 14, 1996, as amended,
among the Company, Fleet National Bank and Bank of America Illinois.
4.5 Form of 8% Secured Subordinated Debenture Due 2005 Series I (incorporated herein by reference to Exhibit
4.3 filed as a part of the Company's Form 10-K for the fiscal year ended January 31, 1996 (Commission
File No. 1-6370)).
4.6 Warrant dated as of March 14, 1996 issued to Fleet for 52,500 shares of Common Stock (incorporated herein
by reference to the exhibit filed as a part of the Company's Form 8-K dated March 20, 1996 (Commission
File No. 1-6370)).
4.7 Warrant dated as of March 14, 1996 issued to Bank of America Illinois for 22,500 shares of Common Stock
(incorporated herein by reference to the exhibit filed as a part of the Company's Form 8-K dated March
20, 1996 (Commission File No. 1-6370)).
5.1 Opinion of Steel Hector & Davis LLP.*
10.1 Registration Rights Agreement dated as of November 30, 1995, among the Company, Bedford, Fred Berens,
Rafael Kravec and Eugene Ramos (incorporated herein by reference to the exhibit filed as a part of the
Company's Form 10-K for the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration Rights Agreement dated as of November 30, 1995,
among the Company, Bedford, Fred Berens, Rafael Kravec and Eugene Ramos (incorporated herein by reference
to Exhibit 10.2 filed as a part of the Company's Form 10-K for the year ended January 31, 1996) (Commission
File No. 1-6370)).
10.3 Shareholders Agreement, dated July 2, 1992, between Bedford, FFI and Rafael Kravec, as amended on December
2, 1992, February 14, 1995 and November 30, 1995 (incorporated herein by reference to the exhibit filed
as a part of the Company's Form 8-K dated November 30, 1995 (Commission File No. 1-6370)).
10.4 Amendment dated as of April 16, 1996 to Shareholders Agreement, dated July 2, 1992, between Bedford,
the Company and Rafael Kravec (incorporated herein by reference to Exhibit 10.4 filed as a part of the
Company's Form 10-K for the fiscal year ended January 31, 1996 (Commission File No. 1-6370)).
10.5 Employment Agreement dated as of July 2, 1992, between FFI and Rafael Kravec, as amended on July 2, 1995
(incorporated herein by reference to the exhibit filed as a part of the Company's Form 10-K for the fiscal
year ended September 30, 1995 (Commission File No. 1-6370)).
10.6 Nonemployee Director Stock Option Plan (incorporated herein by reference to the exhibit filed as a part
of the Company's Form 10-K for the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.7 1995 Stock Option Plan (incorporated herein by reference to the exhibit filed as a part of the Company's
Form 10-K for the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.8 1981 Employee Stock Option and Stock Appreciation Rights Plan, as amended (incorporated herein by reference
to the exhibit filed as a part of the Company's Registration Statement (Registration No. 2-79252)).
10.9 1993 Stock Option Plan (incorporated herein by reference to Exhibit 10.9 filed as a part of the Company's
Form 10-K for the fiscal year ended January 31, 1996 (Commission File No. 1-6370)).
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Monitoring Agreement dated as of July 2, 1992, between FFI and Bedford, as amended as of February 14,
1995 (incorporated herein by reference to the exhibit filed as a part of the Company's Form 10-K for
the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.11 Monitoring Agreement dated as of February 14, 1995, between FFI and Bedford (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.12 Monitoring Agreement dated as of July 2, 1992, between FFI and Nevcorp, as amended as of February 14,
1995 (incorporated herein by reference to the exhibit filed as a part of the Company's Form 10-K for
the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.13 Monitoring Agreement dated as of July 2, 1992, between FFI and ESB, as amended as of February 14, 1995
(incorporated herein by reference to the exhibit filed as a part of the Company's Form 10-K for the fiscal
year ended September 30, 1995 (Commission File No. 1-6370)).
10.14 Monitoring Agreement dated as of February 14, 1995, between FFI and Nevcorp (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.15 Monitoring Agreement dated as of February 14, 1995, between FFI and ESB (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.16 Lease Agreement, dated as of July 2, 1992, between FFI and National Trading (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.17 Option Agreement, dated July 2, 1992, between FFI and National Trading and Memorandum of Lease and Option
Agreement related thereto (incorporated herein by reference to the exhibit filed as a part of the Company's
Form 10-K for the fiscal year ended September 30, 1995 (Commission File No. 1-6370)).
10.18 Amended and Restated Exclusive Trademark License Agreement, dated February 29, 1980, between Geoffrey
Beene, Inc. (formerly Geoffrey Beene Interim Corp.), a New York corporation, and Epocha Distributors,
Inc. (now known as Sanofi), as amended July 29, 1992 and February 13, 1995 (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.19 Asset Purchase Agreement dated as of February 13, 1995, by and between Sanofi Beaute, Inc. and Bedford
Capital Financial Corporation, as assigned to and assumed by the Company (incorporated herein by reference
to Exhibit 10.19 filed as part of the Company's Form 10-K for the fiscal year ended January 31, 1996
(Commission File No. 1-6370)).
10.20 Asset Purchase Agreement dated as of February 1, 1996, by and between the Company and Halston-Borghese
(incorporated herein by reference to the exhibit filed as a part of the Company's Form 8-K dated March
20, 1996 (Commission File No. 1-6370)).
10.21(a) Asset Purchase Agreement dated as of April 17, 1996, by and between the Company and Fragrance Marketing
Group, Inc. and Rene Garcia and Jose Miguel Norona, including the forms of Debentures and Seller's Warrant
related thereto.*
10.21(b) Amendment to Asset Purchase Agreement dated as of May 14, 1996, by and between the Company and Fragrance
Marketing Group, Inc. and Rene Garcia and Jose Miguel Norona (incorporated herein by reference to Exhibit
2.2 filed as a part of the Company's Form 8-K dated May 14, 1996 (Commission File No. 1-6370)).
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.22 Amendment to Employment Agreement dated as of May 2, 1996, between the Company and Rafael Kravec.*
10.23 Form of 7.5% Subordinated Convertible Debenture Due 2006 to be issued by the Company in connection with
the Exchange Offer.
11.1 Computation of Earnings per Common Share Equivalent.
16.1 Letter from Arthur Andersen LLP regarding Change in Certifying Accountant (incorporated herein by reference
to the exhibit filed as a part of the Company's Form 8-K dated February 22, 1996 (Commission File No.
1-6370)).
21.1 Subsidiaries of the Company (incorporated herein by reference to Exhibit 21.1 filed as a part of the
Company's Form 10-K for the fiscal year ended January 31, 1996 (Commission File No. 1-6370)).
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Sanson, Kline, Jacomino & Company
23.4 Consent of Steel Hector & Davis LLP (contained in the opinion filed as Exhibit 5.1).*
24.1 Power of Attorney (included on the signature page of the Registration Statement).*
99.1 Agreement Among Bedford Interests, dated February 14, 1995 (incorporated herein by reference to the exhibit
filed as a part of the Company's Form 8-K dated November 30, 1995 (Commission File No. 1-6370)).
99.2 Amendment dated as of February 23, 1996 to Agreement Among Bedford Interests, dated February 14, 1995
(incorporated herein by reference to Exhibit 99.2 filed as a part of the Company's Form 10-K for the
fiscal year ended January 31, 1996 (Commission File No. 1-6370)).
99.3 Second Shareholders Agreement, dated July 2, 1992, among Bedford and certain members of the Bedford Group,
as amended (incorporated herein by reference to the exhibit filed as a part of the Company's Form 8-K
dated November 30, 1995 (Commission File No. 1-6370)).
<FN>
- -----------
* Previously filed as part of this Registration Statement.
</FN>
</TABLE>
The foregoing list omits instruments defining the rights of holders of
long term debt of the Company where the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Company. The
Company hereby agrees to furnish a copy of each such instrument or agreement
to the Commission upon request.
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Commission are either not required under the related
instructions, are not applicable (and therefore have been omitted), or the
required disclosures are contained in the financial statements included
herein.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or
II-6
<PAGE>
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, Florida on June 6, 1996.
FRENCH FRAGRANCES, INC.
By: /s/ WILLIAM J. MUELLER
------------------------------------
William J. Mueller
Vice President--Operations
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Chief Executive Officer June 6, 1996
- ---------------------------- (Principal Executive Officer and
Rafael Kravec Director)
/s/ WILLIAM J. MUELLER Vice President--Operations and June 6, 1996
- ---------------------------- Chief Financial Officer (Principal
William J. Mueller Financial and Accounting Officer)
* Chairman of the Board June 6, 1996
- ----------------------------
J.W. Nevil Thomas
* Vice Chairman of the Board June 6, 1996
- ----------------------------
E. Scott Beattie
* Director June 6, 1996
- ----------------------------
Fred Berens
* Director June 6, 1996
- ----------------------------
George Dooley
* Director June 6, 1996
- ----------------------------
Richard C.W. Mauran
* /s/ WILLIAM J. MUELLER
---------------------------
William J. Mueller
Attorney-in-Fact
</TABLE>
II-8
Exhibit 1.1
DRAFT DATED
JUNE 7, 1996
5,000,000 Shares
FRENCH FRAGRANCES, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1996
---------------------
Rodman & Renshaw, Inc.
Sanders Morris Mundy Inc.
c/o Rodman & Renshaw, Inc.
One Liberty Plaza 165 Broadway
New York, New York 10006
On behalf of the Several
Underwriters named in
SCHEDULE I attached hereto.
Ladies and Gentlemen:
French Fragrances, Inc., a Florida corporation (the "COMPANY"), and
certain shareholders of the Company set forth on SCHEDULE II attached hereto
(the "SELLING SHAREHOLDERS"), propose to sell to you and the other underwriters
named in SCHEDULE I attached hereto (collectively, the "UNDERWRITERS"), for
whom you are acting as the representatives (the "REPRESENTATIVES"), an aggregate
of 5,000,000 shares (the "FIRM SHARES") of the Company's common stock, par value
$.01 per share (the "COMMON STOCK"), of which 3,250,000 shares (the "COMPANY
SHARES") are to be issued and sold by the Company and 1,750,000 shares (the
"SELLING SHAREHOLDER SHARES") are to be sold by the Selling Shareholders in the
respective amounts set forth opposite such Selling Shareholders' names on
SCHEDULE II. In addition, the Company and the Selling Shareholders propose to
grant to the Underwriters options to purchase up to an additional 750,000 shares
(the "OPTION SHARES") of Common Stock for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. The Firm Shares
and the Option Shares are together called the "SHARES."
<PAGE>
1. SALE AND PURCHASE OF THE SHARES. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Underwriting Agreement (the "AGREEMENT"):
(a) The Company agrees to issue and sell the Company Shares
and the Selling Shareholders agree to sell the Selling Shareholder
Shares, severally and not jointly, to the several Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase
at the purchase price per share of Common Stock of $___________ (the
"INITIAL PRICE"), the aggregate number of Firm Shares set forth
opposite such Underwriter's name in SCHEDULE I attached hereto. The
Underwriters agree to offer the Firm Shares to the public as set forth
in the Prospectus (as defined in SECTION 4 below).
(b) The Company and the Selling Shareholders severally grant
to the several Underwriters options to purchase up to an aggregate of
an additional 750,000 shares at the Initial Price. The number of Option
Shares to be purchased by each Underwriter shall be the same percentage
(adjusted by the Representatives to eliminate fractions) of the total
number of Option Shares to be purchased by the Underwriters as the
percentage of the total number of Firm Shares being purchased by such
Underwriter. The number of Option Shares to be sold by the Company
shall be one half of the Option Shares, and the number of Option Shares
to be sold by the Selling Shareholders shall in the aggregate be one
half of the Option Shares, with the number of Option Shares to be sold
by each of the Selling Shareholders, respectively, being determined pro
rata in proportion to the numbers of Firm Shares sold by each (adjusted
by the Representatives to eliminate fractions). Such options may be
exercised only to cover over-allotments in the sales of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any
time on or before 12:00 noon, New York City time, on the business day
before the Firm Shares Closing Date (as defined below), and from time
to time thereafter within 30 days after the date of this Agreement,
upon written or telegraphic notice, or verbal or telephonic notice
confirmed by written or telegraphic notice, by the Representatives to
the Company no later than 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date or at least two
business days before any Option Shares Closing Date (as defined below),
as the case may be, setting forth the number of Option Shares to be
purchased from the Company and each Selling Shareholder, respectively,
and the time and date (if other than the Firm Shares Closing Date) of
such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company and the Selling
Shareholders of the Firm Shares to the Representatives for the respective
accounts of the Underwriters, and payment of the purchase price by certified or
official bank check or checks payable in New York Clearing House (next day)
funds to the Company and the Selling Shareholders, shall take place at the
offices of Rodman & Renshaw, Inc., at One Liberty Plaza, 165 Broadway, New York,
New York, 10006, at 10:00 am., New York City time, on the third business day
following the date on which the public offering of the Shares commences (unless
such date is postponed in accordance with the provisions of SECTION 10(B)
below), or at such time and place on such other date, not later than 10 business
days after the date of this Agreement, as shall be agreed upon by the Company,
the Selling Shareholders and the Representatives (such time and date of delivery
and payment are called the "FIRM SHARES CLOSING DATE"). The public offering of
the Shares shall be deemed to have commenced at the time, which is the earlier
of (a) the time, after the Registration Statement (as defined in SECTION 4
below) becomes effective, of the release by you for publication of the first
newspaper advertisement which is subsequently published relating to the Shares
or (b) the time, after the Registration Statement becomes effective, when the
Shares are first released by you for offering by the Underwriters or dealers by
letter, facsimile transmission or telegram.
2
<PAGE>
In the event the options with respect to the Option Shares are
exercised, delivery by the Company and the Selling Shareholders of the Option
Shares to the Representatives for the respective accounts of the Underwriters
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (next day) funds to the Company shall take
place in respect of each such exercise at the offices of Rodman & Renshaw, Inc.
specified above at the time and on the date (which may be the same date as, but
in no event shall be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in SECTION 1(B) (such time and date of delivery and
payment is called an "OPTION SHARES CLOSING DATE"). The Firm Shares Closing Date
and all Option Shares Closing Dates are called, individually, a "CLOSING DATE"
and, together, the "CLOSING DATES."
Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representatives shall request at least
two full business days before the Firm Shares Closing Date or an Option Shares
Closing Date, as the case may be, and shall be made available to the
Representatives for checking and packaging, at such place as is designated by
the Representatives, at least one full business day before the Firm Shares
Closing Date or the Option Shares Closing Date, as the case may be.
3. PUBLIC OFFERING. The Company and the Selling Shareholders
understand that the Underwriters propose to make a public offering of the
Shares, as set forth in and pursuant to the Prospectus, as soon after the
effective date of the Registration Statement and the date of this Agreement as
the Representatives deem advisable. The Company and the Selling Shareholders
hereby confirm that the Underwriters and dealers have been authorized to
distribute or cause to be distributed each preliminary prospectus and are
authorized to distribute the Prospectus (as from time to time amended or
supplemented if the Company furnishes amendments or supplements thereto to the
Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to, and agrees
with, the several Underwriters that:
(i) The Company has filed with the Securities and
Exchange Commission (the "COMMISSION") a registration
statement, and may have filed one or more amendments thereto,
on Form S-1 (Registration No. 333-_____), including in such
registration statement and each such amendment a related
preliminary prospectus (each a "PRELIMINARY PROSPECTUS"), for
the registration of the Shares and the Option Shares, in
conformity with the requirements of the Securities Act of
1933, as amended (the "ACT"). In addition, the Company has
filed or will promptly file a further amendment to such
registration statement, in the form heretofore delivered to
you. As used in this Agreement, the term "REGISTRATION
STATEMENT" means such registration statement, as amended, on
file with the Commission at the time such registration
statement becomes effective (including the prospectus,
financial statements, exhibits, and all other documents filed
as a part thereof or incorporated by reference directly or
indirectly therein), provided that such Registration
Statement, at the time it becomes effective, may omit such
information as is permitted to be omitted from the
Registration Statement when it becomes effective pursuant to
Rule 430A of the General Rules and Regulations promulgated
under the Act (the "REGULATIONS"), which information ("RULE
430A INFORMATION") shall be deemed to be included in such
Registration Statement when a final prospectus is filed with
the Commission in accordance with Rules 430A and 424(b)(1) or
(4) of the Regulations; the term "PRELIMINARY PROSPECTUS"
means each prospectus included in the Registration Statement,
or any amendments
3
<PAGE>
thereto, before it becomes effective under the Act, the form
of prospectus omitting Rule 430A Information included in such
registration statement when it becomes effective (if
applicable, the "RULE 430A PROSPECTUS"), and any prospectus
filed by the Company with your consent pursuant to Rule
424(a) of the Regulations; and the term "Prospectus" means
the final prospectus included as part of the Registration
Statement, except that if the prospectus relating to the
securities covered by the Registration Statement in the form
first filed on behalf of the Company with the Commission
pursuant to Rule 424(b) of the Regulations shall differ from
such final prospectus, the term "Prospectus" shall mean the
prospectus as filed pursuant to Rule 424(b) from and after
the date on which it shall have first been used.
(ii) When the Registration Statement becomes
effective, and at all times subsequent thereto to and
including the Closing Dates, and during such longer period as
the Prospectus may be required to be delivered in connection
with sales by the Underwriters or a dealer, and during such
longer period until any post-effective amendment thereto shall
become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed
with the Commission any amendment or supplement to the
Registration Statement or the Prospectus) will contain all
statements which are required to be stated therein in
accordance with the Act and the Regulations, will comply with
the Act and the Regulations, and will not contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading, and no event will have
occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus
which has not then been set forth in such an amendment or
supplement; if a Rule 430A Prospectus is included in the
Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4)
will contain all Rule 430A Information; and each Preliminary
Prospectus, as of the date filed with the Commission, did not
include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
except that no representation or warranty is made in this
SECTION 4(A)(II) with respect to statements or omissions made
in reliance upon and in conformity with written information
furnished to the Company as stated in SECTION 7(B) with
respect to any Underwriter by or on behalf of such Underwriter
through the Representatives expressly for inclusion in any
Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto.
(iii) Neither the Commission nor the "blue sky" or
securities authority of any jurisdiction has issued an order
(a "STOP ORDER") suspending the effectiveness of the
Registration Statement, preventing or suspending the use of
any Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing to
permit the effectiveness of the Registration Statement, or
suspending the registration or qualification of the Firm
Shares or the Option Shares, nor has any of such authorities
instituted or, to the knowledge of the Company, threatened to
institute any proceedings with respect to a Stop Order.
(iv) Any contract, agreement, instrument, lease,
trademark registration or license required to be described in
the Registration Statement or the Prospectus has been properly
described therein. Any contract, agreement, instrument, lease,
trademark registration or license required to be filed as an
exhibit to the Registration Statement has been filed with the
4
<PAGE>
Commission as an exhibit to or has been incorporated as an
exhibit by reference into the Registration Statement.
(v) The Company has no subsidiary or subsidiaries and
does not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business
organization, except for those set forth on EXHIBIT 21.1 to
the Registration Statement (each such organization singly a
"SUBSIDIARY" and all such organizations collectively the
"SUBSIDIARIES"). The Company and each Subsidiary is a
corporation duly organized, validly existing, and in good
standing under the laws of the state of its incorporation,
with full corporate power and authority, and all necessary
consents, authorizations, approvals, orders, licenses,
certificates, and permits of and from, and declarations and
filings with, all federal, state, local, and other
governmental authorities and all courts and other tribunals,
to own, lease, license, and use its properties and assets and
to carry on its business as now being conducted and in the
manner described in the Prospectus, except where such failure
would not have a material adverse effect on the Company and
the Subsidiaries. Each of the Company and each Subsidiary has
been duly qualified to do business and is in good standing in
each jurisdiction in which its respective ownership, leasing,
licensing, or character, location or use of property and
assets or the conduct of its respective business makes such
qualification necessary except where the failure to so qualify
would not have a material adverse effect on the Company and
the Subsidiaries taken as a whole.
(vi) The authorized capital stock of the Company
consists of: (i) 50,000,000 shares of Common Stock, of which
9,641,290 shares are issued and outstanding; (ii) 20,000
shares of Series A Preferred Stock, $.01 par value per share,
all of which are issued and outstanding; (iii) 350,000 shares
of Series B Convertible Preferred Stock, $.01 par value per
share, all of which are issued and outstanding; (iv) 571,429
shares of Series B Convertible Preferred Stock, $.01 par value
per share, all of which are issued and outstanding; and (v)
4,428,571 shares of Serial Preferred Stock, $.01 par value per
share, none of which are issued and outstanding (the preferred
stock referred to in clauses (ii) through (v) being
collectively referred to as the "Preferred Stock"). Each
outstanding share of Common Stock and Preferred Stock has been
duly and validly authorized and issued, and is fully paid and
nonassessable, without any personal liability attaching to the
ownership thereof, and has not been issued and is not owned or
held in violation of any preemptive rights of shareholders,
optionholders, warrantholders or other persons. The Company
owns all of the shares of capital stock of the Subsidiaries,
free and clear of all liens, claims, security interests,
restrictions, stockholders' agreements, voting trusts and any
other encumbrances whatsoever, except as set forth on EXHIBIT
to the Registration Statement. There is no commitment, plan,
preemptive right or arrangement to issue, and no outstanding
option, warrant, or other right calling for the issuance of,
shares of capital stock of the Company or any of the
Subsidiaries or any security or other instrument which by its
terms is convertible into, exercisable for, or exchangeable
for capital stock of the Company or any of the Subsidiaries,
except as disclosed and properly described in the Prospectus.
There is outstanding no security or other instrument which by
its terms is convertible into or exchangeable for capital
stock of the Company or any of the Subsidiaries, except as
disclosed and properly described in the Prospectus.
(vii) The financial statements included in the
Registration Statement and the Prospectus fairly present in
all material respects the financial position, the results of
operations, and the other information purported to be shown
therein at the respective dates and for the
5
<PAGE>
respective periods to which they apply. Such financial
statements have been prepared in accordance with generally
accepted accounting principles (except to the extent that
certain footnote disclosures regarding any stub period may
have been omitted in accordance with the applicable rules of
the Commission under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT")) consistently applied throughout
the periods involved, are correct and complete, and are in
accordance with the books and records of the Company or other
relevant entity. The accountants whose reports on the audited
financial statements are filed with the Commission as a part
of the Registration Statement are, and during the periods
covered by their reports included in the Registration
Statement and the Prospectus were, independent certified
public accountants with respect to the Company or other
relevant entity within the meaning of the Act and the
Regulations. No other financial statements are required by
Form S-1 or otherwise to be included in the Registration
Statement or the Prospectus. There has at no time been a
material adverse change in the financial condition, results
of operations, business, properties, assets, liabilities, or
future prospects of the Company or any of the Subsidiaries
taken as a whole from the latest information set forth in the
Registration Statement or the Prospectus, except as may be
properly described in the Prospectus.
(viii) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or
investigation before any court or before any public body or
board pending, or, to the knowledge of the Company, threatened
or in prospect (or any basis therefor) with respect to the
Company or any of the Subsidiaries, or any of their respective
operations, business, properties, or assets, except as may be
properly described in the Prospectus or such as individually
or in the aggregate do not now have and could not reasonably
be expected in the future to have a material adverse effect
upon the operations, business, properties, assets or financial
condition of the Company and the Subsidiaries taken as a
whole. Neither the Company nor any of the Subsidiaries is
involved in any labor dispute, nor, to the knowledge of the
Company, is such dispute threatened, which dispute could
reasonably be expected to have a material adverse effect upon
the operations, business, properties, assets or financial
condition of the Company and the Subsidiaries taken as a
whole. Neither the Company nor any of the Subsidiaries is in
violation of, or in default with respect to, any law, rule,
regulation, order, judgment, or decree which could reasonably
be expected to have a material adverse effect on the Company
and the Subsidiaries taken as a whole; nor is the Company or
any of the Subsidiaries required to take any action in order
to avoid any such violation or default with respect thereto.
(ix) The Company and each of the Subsidiaries has
good and marketable title in fee simple absolute to all real
properties and good title to all other properties and assets
which the Prospectus indicates are owned by them, and has
valid and enforceable leasehold interests in each of such
items, free and clear of all liens, security interests,
pledges, charges, encumbrances, and mortgages (except (i) as
may be properly described in the Prospectus and (ii) [TO
COME]). No real property owned, leased, licensed or used by
the Company or any of the Subsidiaries lies in an area which
is, or to the knowledge of the Company will be, subject to
zoning, use or building code restrictions which would
prohibit, and no state of facts relating to the actions or
inaction of another person or entity or his or its ownership,
leasing, licensing or use of any real or personal property
exists or will exist which would prevent, the continued
effective ownership, leasing, licensing or use of such real
property in the business of the Company or any of the
Subsidiaries as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be
properly described in the Prospectus).
6
<PAGE>
(x) The Company and each of the Subsidiaries, and to
the knowledge of the Company, any other party, is not now and
is not expected by the Company to be in violation or breach
of, or in default with respect to complying with, any term,
obligation or provision of any contract, agreement,
instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding which is material to
the Company or any of the Subsidiaries and no event has
occurred which with notice or lapse of time or both would
constitute such a default, and each such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding is in full force and
is the legal, valid and binding obligation of the parties
thereto and is enforceable as to the Company each of the
Subsidiaries and, to the knowledge of the Company, each other
party thereto, in accordance with its terms, subject to
applicable bankruptcy, insolvency, and other laws affecting
the enforceability of creditor's rights generally and the
effects of general principles of equity. The Company and each
of the Subsidiaries enjoys peaceful and undisturbed possession
under all property leases and licenses under which it is
operating. Neither the Company nor any of the Subsidiaries is
in violation or breach of, or in default with respect to, any
term of its certificate of incorporation (or other charter
document) or by-laws or of any franchise, license, permit,
judgment, decree, order, statute, rule or regulation, which
breach or default of such franchise, license, permit,
judgment, decree, order, statute, rule or regulation could
reasonably be expected to have a material adverse effect on
the Company and the Subsidiaries.
(xi) The Company and the Subsidiaries have filed all
federal, state, local and foreign tax returns which are
required to be filed through the date hereof, or have received
extensions thereof, and have paid all taxes shown on such
returns and all assessments received by them to the extent
that the same are material and have become due.
(xii) Each of the trademarks, service marks and
copyrights that the Company owns or holds or uses under any
license or other agreement as described in the Registration
Statement (the "TRADEMARKS") is in good standing and
uncontested. There is no other intellectual property right
under any patents, patent applications, trademarks, trademark
applications, tradenames, service marks, copyrights, copyright
applications, franchises or other intangible properties
(collectively, "INTANGIBLES") necessary to the business of the
Company and the Subsidiaries as presently conducted or as the
Prospectus indicates the Company contemplates conducting
(except as may be so described in the Prospectus). To the
knowledge of the Company, neither the Company nor any of the
Subsidiaries have infringed, is infringing, or have received
any notice of infringement with respect to the asserted
Intangibles of others. To the knowledge of the Company, there
is no infringement by others of the Trademarks of the Company
which has had or may in the future have a materially adverse
effect on the financial condition, results of operations,
business, properties, assets, liabilities or future prospects
of the Company and the Subsidiaries.
(xiii) Neither the Company, nor any Subsidiary, any
director, officer, agent, employee or other person associated
with or acting on behalf of or for the intended benefit of the
Company and the Subsidiaries has, directly or indirectly: used
any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate,
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payoff, influence payment, kickback, or other unlawful
payment. No transaction has occurred between or among the
Company, the Subsidiaries or the Selling Shareholders and any
of its or their officers or directors or any affiliates or
affiliates of any such officer or director, except as
described in the Prospectus.
(xiv) The Company and the Subsidiaries have all
requisite corporate power and authority to execute, deliver
and perform this Agreement. All necessary corporate
proceedings of the Company and the Subsidiaries have been duly
taken to authorize the execution, delivery and performance of
this Agreement. This Agreement has been duly authorized,
executed, and delivered by the Company, is the legal, valid
and binding obligation of the Company, and is enforceable as
to the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, and other laws affecting
the enforceability of creditor's rights generally and the
effects of general principles of equity. No consent,
authorization, approval, order, license, certificate or permit
of or from, or declaration or filing with, any federal, state,
local or other governmental authority or any court or other
tribunal is required by the Company or the Subsidiaries for
the execution, delivery or performance by the Company of this
Agreement (except filings under the Act which have been or
will be made before the applicable Closing Date and such
consents consisting only of consents under "blue sky" or
securities laws which have been obtained at or prior to the
date of this Agreement). No consent of any party to any
contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement or understanding to
which the Company or the Subsidiaries is a party, or to which
any of their respective properties or assets are subject, is
required for the execution, delivery or performance of this
Agreement, and the execution, delivery and performance of this
Agreement, will not violate, result in a breach of, conflict
with, accelerate the due date of any payments under, or (with
or without the giving of notice or the passage of time or
both) entitle any party to terminate or call a default under
any such contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement, or
understanding, or violate or result in a breach of any term of
the certificate of incorporation (or other charter document)
or by-laws of the Company, or violate, result in a breach of,
or conflict with any law, rule, regulation, order, judgment or
decree binding on the Company or any of the Subsidiaries or to
which any of their respective operations, business, properties
or assets are subject.
(xv) All of the Shares are validly authorized. The
Shares to be sold by the Selling Shareholders have been duly
and validly issued. The Shares to be sold by the Company, when
issued and delivered in accordance with this Agreement, will
be duly and validly issued. All of the Shares, when delivered
in accordance with this Agreement, will be fully paid, and
nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders, optionholders,
warrantholders and any other persons and the Underwriters will
receive good title to all of the Shares purchased by them,
respectively, free and clear of all preemptive rights, liens,
security interests, pledges, charges, encumbrances,
shareholders' agreements, voting agreements and voting trusts.
(xvi) The Common Stock, the Preferred Stock, the Firm
Shares and the Option Shares conform to all statements
relating thereto contained in the Registration Statement or
the Prospectus.
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(xvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as may otherwise be properly described
therein: there has not been any material adverse change in the
assets or properties, business or results of operations or
financial condition of the Company or the Subsidiaries, taken
as a whole, whether or not arising from transactions in the
ordinary course of business; neither the Company nor the
Subsidiaries, taken as a whole, have sustained any material
loss or interference with its respective business or
properties from fire, explosion, earthquake, flood or other
calamity, whether or not covered by insurance; since the date
of the latest balance sheet included in the Registration
Statement and the Prospectus, except as reflected in the
Registration Statement, neither the Company nor the
Subsidiaries, have incurred any material liability or
obligation, direct or contingent, except for liabilities or
obligations undertaken in the ordinary course of business; and
neither the Company nor the Subsidiaries, taken as a whole,
have (A) issued any securities or incurred any liability or
obligation, primary or contingent, for borrowed money, (B)
entered into any transaction not in the ordinary course of
business, or (C) declared or paid any dividend or made any
distribution on any of its capital stock or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase
or otherwise acquire any shares of its capital stock.
(xviii) Neither the Company nor its Subsidiaries nor
any of their respective officers, directors or affiliates (as
defined in the Regulations), have taken or will take, directly
or indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed
to stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in
the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the
Firm Shares or the Option Shares.
(xix) The Company has obtained from the Company, the
Selling Shareholders and each of the Company's executive
officers and directors and other principal shareholders,
enforceable written agreements, in form and substance
satisfactory to the Representatives, that for a period of 180
days from the date on which the public offering of the Shares
commences they will not, without the prior written consent of
the Representatives, offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or other
securities of the Company (or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of
the Company, including, without limitation, any shares of
Common Stock issuable under any warrants, convertible
securities or stock options) beneficially owned by them,
except for sales of the Shares hereunder;
(xx) The Company is not, and upon consummation of the
sale of the Shares hereunder will not be, and does not intend
to conduct its business in a manner in which it would be, an
"investment company" as defined in SECTION 3(A) of the
Investment Company Act of 1940 (the "INVESTMENT COMPANY ACT").
(xxi) No person or entity has the right to require
registration of shares of Common Stock or other securities of
the Company because of the filing or effectiveness of the
Registration Statement, except such person or entities from
whom effective written waivers of such rights have been
received and furnished to the Representatives prior to the
date hereof.
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<PAGE>
(xxii) Except as may be set forth in the Prospectus,
the Company has not incurred any liability for a fee,
commission or other compensation on account of the employment
of a broker or finder in connection with the transactions
contemplated by this Agreement.
(xxiii) No transaction has occurred between or among
the Company, the Subsidiaries or any of their officers or
directors or any affiliates of any such officers or directors,
that is required to be described in and is not described in
the Registration Statement and the Prospectus.
(xxiv) The Common Stock, including the Shares, are
authorized for quotation on the Nasdaq Stock Market.
(xxv) Neither the Company nor any of the Subsidiaries
nor any of their respective affiliates is presently doing
business with the government of Cuba or with any person or
affiliate located in Cuba. If, at any time after the date that
the Registration Statement is declared effective with the
Commission or with the Florida Department of Banking and
Finance (the "FLORIDA DEPARTMENT"), whichever date is later,
and prior to the end of the period referred to in the first
clause of SECTION 4(A)(II) hereof, the Company commences
engaging in business with the government of Cuba or with any
person or affiliate located in Cuba, the Company will so
inform the Florida Department within ninety days after such
commencement of business in Cuba, and during the period
referred to in SECTION 4(A)(II) hereof will inform the Florida
Department within ninety days after any change occurs with
respect to previously reported information.
(b) Each of the Selling Shareholders, severally and not
jointly, represents and warrants to, and agrees with, the several
Underwriters that:
(i) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or
investigation before any court or beneficiary, public body or
board pending, or to the knowledge of the Company, threatened
or in prospect (or any basis therefor known to such Selling
Shareholder) with respect to such Selling Shareholder or any
of such Selling Shareholder's business, properties or assets
which would prohibit the execution, delivery or performance of
this Agreement by such Selling Shareholder. Such Selling
Shareholder is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree
which would prohibit the execution, delivery or performance of
this Agreement by such Selling Shareholder; nor is such
Selling Shareholder required to take any action in order to
avoid such violation or default.
(ii) Such Selling Shareholder has all requisite power and
authority to execute, deliver, and perform this Agreement and
the Power of Attorney and Custody Agreement executed by such
Selling Shareholder, a copy of which has been furnished to the
Representatives (including such Stock Power delivered
therewith, the "POWER OF ATTORNEY"). Each of this Agreement
and the Power of Attorney has been duly executed and delivered
by or on behalf of such Selling Shareholder, is the legal,
valid and binding obligation of such Selling Shareholder, and
is enforceable as to such Selling Shareholder in accordance
with its terms, subject to applicable bankruptcy, insolvency,
and other laws affecting the enforceability of creditor's
rights generally and the effects of general principles of
equity. No consent, authorization, approval,
10
<PAGE>
order, license, certificate, or permit of or from, or
declaration or filing with, any federal, state, local or other
governmental authority or any court or other tribunal is
required by such Selling Shareholder for the execution,
delivery or performance of this Agreement or the Power of
Attorney (except filings under the Act which have been made
before the applicable Closing Date and such consents
consisting only of consents under "blue sky" or securities
laws which have been obtained at or prior to the date of this
Agreement) by such Selling Shareholder. No consent of any
party to any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or
understanding to which such Selling Shareholder is a party, or
to which any of such Selling Shareholder's properties or
assets are subject, is required for the execution, delivery or
performance of this Agreement or the Power of Attorney; and
the execution, delivery and performance of this Agreement will
not violate, result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time or both)
entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or
understanding, or violate, result in a breach of, or conflict
with, any law, rule, regulation, order, judgment or decree
binding on such Selling Shareholder or to which any of such
Selling Shareholder's operations, business, properties, or
assets are subject which would prohibit the execution,
delivery or performance of this Agreement or the Power of
Attorney by such Selling Shareholder.
(iii) Such Selling Shareholder (a) acquired all such
Selling Shareholder's Shares and other Company securities from
the Company in a transaction or transactions that did not
violate or require registration under the Act and (b) has good
title to the Selling Shareholder Shares, to be sold by such
Selling Shareholder pursuant to this Agreement, free and clear
of all liens, security interests, pledges, charges,
encumbrances, shareholders' agreements, voting agreements and
voting trusts and when delivered in accordance with this
Agreement, the Underwriters will receive good title to the
Selling Shareholder Shares purchased by them, respectively,
from such Selling Shareholder, free and clear of all
preemptive rights, liens, security interests, pledges,
charges, encumbrances, shareholders' agreements and voting
trusts.
(iv) Neither such Selling Shareholder nor any of such
Selling Shareholder's affiliates (as defined in the
Regulations) has taken or will take, directly or indirectly,
prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in
the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the
Shares.
(v) All information furnished or to be furnished to
the Company by or on behalf of such Selling Shareholder for
use in connection with the preparation of the Registration
Statement and the Prospectus is true in all material respects
and does not and will not include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading.
(vi) Except as may be set forth in the Prospectus,
such Selling Shareholder has not incurred any liability for a
fee, commission or other compensation on account of the
employment of a broker or finder in connection with the
transactions contemplated by this Agreement.
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<PAGE>
(vii) Such Selling Shareholder has no knowledge that,
and does not believe that, any representation or warranty of
the Company in SECTION 4(A) is incorrect.
(viii) Such Selling Shareholder has not, directly or
indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful
expenses relating to political activity; made any unlawful
payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment.
(ix) Except as described in the Registration
Statement or the Prospectus, no transaction has occurred
between such Selling Shareholder or any affiliate or relative
of such Selling Shareholder and the Company that is required
to be described in the Registration Statement or the
Prospectus.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are subject
to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with SECTION 6(A)(I) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be in
effect and no order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall
be pending before or threatened by the Commission, and any requests for
additional information on the part of the Commission (to be included in
the Registration Statement or the Prospectus or otherwise) shall have
been complied with to the satisfaction of the Representatives.
(c) The representations and warranties of the Company and the
Selling Shareholders contained in this Agreement and in the
certificates delivered pursuant to SECTION 5(D) shall be true and
correct when made and on and as of each Closing Date as if made on such
date and the Company and the Selling Shareholders shall have performed
all covenants and agreements and satisfied all the conditions contained
in this Agreement required to be performed or satisfied by it or them
at or before such Closing Date.
(d) The Representatives shall have received on each Closing
Date (i) a certificate, addressed to the Representatives and dated such
Closing Date, of the chief executive officer and the chief financial
officer of the Company to the effect that the persons executing such
certificate have carefully examined the Registration Statement, the
Prospectus and this Agreement and that the representations and
warranties of the Company in this Agreement are true and correct on and
as of such Closing Date with the same effect as if made on such Closing
Date and that the Company has performed all covenants and agreements
and satisfied all conditions contained in this Agreement required to be
performed or satisfied by it at or prior to such Closing Date and (ii)
certificates, addressed to the Representatives and dated such Closing
Date, of each of the Selling Shareholders to the effect that the
representations and warranties of each of such Selling Shareholders are
true and correct on and as of such Closing Date and that such Selling
Shareholders have performed all covenants and agreements and satisfied
all conditions
12
<PAGE>
contained in this Agreement required to be performed or satisfied by
such Selling Shareholders at or prior to such Closing Date.
(e) The Representatives shall have received at the time this
Agreement is executed and on each Closing Date, signed letters from
Deloitte & Touche LLP and each other firm of accountants whose report
is included in the Registration Statement, addressed to the
Representatives and dated, respectively, the date of this Agreement and
each such Closing Date, in the form and scope reasonably satisfactory
to the Representatives, with reproduced copies or signed counterparts
thereof for each of the Underwriters, confirming that they are
independent accountants within the meaning of the Act and the
Regulations, that the response to ITEM 10 of the Form S-1 Registration
Statement is correct in so far as it relates to them and stating in
effect:
(i) that in their opinion the audited financial
statements and financial statement schedules included or
incorporated by reference in the Registration Statement and
the Prospectus and reported on by them comply as to form in
all material respects with the applicable accounting
requirements of the Act, the Exchange Act and the related
published rules and regulations thereunder;
(ii) in the case of Deloitte & Touche LLP only, that,
on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings
"Summary Historical and Pro Forma Financial Data,"
"Capitalization," "Selected Historical Financial Data" and
"Pro Forma Financial Data" which would not necessarily reveal
matters of significance with respect to the comments set forth
in such letter, a reading of the minutes of the meetings of
the shareholders and directors of the Company, and inquiries
of certain officials of the Company who have responsibility
for financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
consolidated financial statements or summaries thereof
included in the Registration Statement, except as disclosed in
the Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL DATA," "CAPITALIZATION,"
"SELECTED HISTORICAL FINANCIAL DATA" and "PRO FORMA
FINANCIAL DATA" included in the Registration
Statement and the Prospectus do not agree with the
corresponding amounts in the financial statements
from which such amounts were derived; or
(B) with respect to the Company, there were,
at a specified date not more than five business days
prior to the date of the letter, any decreases in net
sales, income before income taxes and net income or
any increases in long-term debt of the Company or any
decreases in the capital stock, working capital or
the shareholders' equity in the Company, as compared
with the amounts shown on the most recent
consolidated balance sheet and consolidated income
statement of the Company included in the Registration
Statement; and
(iii) in the case of Deloitte & Touche LLP only, that
they have performed certain other procedures as a result of
which they determined that information of an accounting,
financial or statistical nature (which is limited to
accounting, financial or statistical information
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<PAGE>
derived from the general accounting records of the Company)
set forth in the Registration Statement and the Prospectus
and reasonably specified by the Representatives agrees with
the accounting records of the Company.
References to the Registration Statement and the Prospectus in
this PARAGRAPH (E) are to such documents as amended and supplemented at
the date of such letter.
(f) The Representatives shall have received on each Closing
Date from Steel Hector & Davis LLP, counsel for the Company, an
opinion, addressed to the Representatives and dated such Closing Date,
and in form and scope satisfactory to the Representatives, with
reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) The Company and each of the Subsidiaries is a
corporation duly organized, validly existing, and in good
standing under the laws of the state of its incorporation,
with full corporate power and authority to own, lease, license
and use its properties and assets and to conduct its business
in the manner described in the Prospectus. To the knowledge of
such counsel, the Company and each of the Subsidiaries have
all necessary consents, authorizations, approvals, orders,
certificates and permits of and from, and declarations and
filings with, all federal, state, local and other governmental
authorities and all courts and other tribunals, to own, lease,
license and use its properties and assets and to conduct its
business in the manner described in the Prospectus. To the
knowledge of such counsel, the Company has no subsidiary or
subsidiaries and does not control, directly or indirectly, any
corporation, partnership, joint venture, association or other
business organization, except for those set forth on EXHIBIT
21.1 to the Registration Statement.
(ii) The Company has authorized, issued and
outstanding capital stock as set forth under the caption
"Capitalization" in the Prospectus. The certificates
evidencing the shares are in due and proper legal form. Each
outstanding share of Common Stock has been duly and validly
authorized and issued, and is fully paid, and nonassessable,
without any personal liability attaching to the ownership
thereof, and has not been issued and is not owned or held in
violation of any preemptive right of shareholders. Except as
otherwise properly described in the Prospectus, the Company
owns all of the shares of capital stock of the Subsidiaries,
and to the knowledge of such counsel, all such shares owned by
the Company are owned free and clear of all liens, claims,
security interests, restrictions, shareholders' agreements,
voting agreements, voting trusts and any other encumbrances
whatsoever. To the knowledge of such counsel, there is no
commitment, plan, or arrangement to issue, and no outstanding
option, warrant, or other right calling for the issuance of,
any share of capital stock of the Company or any security or
other instrument which by its terms is convertible into,
exercisable for, or exchangeable for capital stock of the
Company, except as otherwise properly described in the
Prospectus. To the knowledge of such counsel, there is
outstanding no security or other instrument which by its terms
is convertible into, exercisable for or exchangeable for
capital stock of the Company or any of the Subsidiaries,
except as otherwise properly described in the Prospectus.
(iii) To the knowledge of such counsel, there is no
litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation before any
court or before any public body or board pending, threatened,
or in prospect (or any basis therefor) with respect to the
Company, any of the Subsidiaries, any of the Selling
Shareholders or any of their
14
<PAGE>
respective operations, business, properties, assets, or
financial condition except as may be properly described in
the Prospectus or such as individually or in the aggregate do
not now have and could not reasonably be expected in the
future to have a material adverse effect upon the operations,
business, properties, assets, or financial condition of the
Company and the Subsidiaries taken as a whole
(iv) To the knowledge of such counsel, neither the
Company, nor any of the Subsidiaries nor any other party is
now or is expected by the Company or any of the Selling
Shareholders to be in violation or breach of, or in default
with respect to, complying with any term, obligation or
provision of any contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement
or understanding which is material to the Company and known to
such counsel, and to the knowledge of such counsel, no event
has occurred which with notice or lapse of time or both would
constitute such a default.
(v) Neither the Company nor any of the
Subsidiaries is in violation or breach of, or in default with
respect to, any term of its certificate of incorporation (or
other charter document) or by-laws.
(vi) Each of the Company and, to the knowledge of
such counsel, the Selling Shareholders has all requisite power
and authority to execute, deliver and perform this Agreement
and to issue and sell the Shares. All necessary corporate
proceedings of the Company have been taken to authorize the
execution, delivery and performance by the Company of this
Agreement. This Agreement has been duly authorized, executed
and delivered by each of the Company and, to the knowledge of
such counsel, the Selling Shareholders, is the legal, valid
and binding obligation of each of the Company and, to the
knowledge of such counsel, of the Selling Shareholders, and
(subject to applicable bankruptcy, insolvency, and other laws
affecting the enforceability of creditor's rights generally
and the effects of general principles of equity) is
enforceable as to the Company and, to the knowledge of such
counsel, as to each of the Selling Shareholders in accordance
with its terms, except that such counsel need not express an
opinion with respect to the enforceability of the provisions
of SECTIONS 7 AND 8 of this Agreement. No consent,
authorization, approval, order, license, certificate or permit
of or from, nor declaration or filing with, any federal state,
local or other governmental authority or any court or other
tribunal is required by the Company or, to the knowledge of
such counsel, any of the Selling Shareholders, for the
execution, delivery or performance by the Company or any of
the Selling Shareholders of this Agreement (except filings
under the Act which have been made prior to the Closing Date
and consents consisting only of consents under "blue sky" or
securities laws). To the knowledge of such counsel, no consent
of any party to any contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement
or understanding to which the Company, the Subsidiaries or any
of the Selling Shareholders is a party, or to which any of
their respective properties or assets are subject, is required
for the execution, delivery or performance of this Agreement;
and the execution, delivery and performance of this Agreement
will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default
under any such contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement
or understanding, in each case known to such counsel, or
violate or result in a breach of any term of the certificate
of incorporation (or other charter document) or by-laws of the
Company, or violate, result in a breach of, or conflict with
any law, rule,
15
<PAGE>
regulation, order, judgment, or decree binding on the
Company, the Subsidiaries or, to the knowledge of such
counsel, any of the Selling Shareholders or to which any of
their respective operations, business, properties or assets
are subject.
(vii) The Shares are duly and validly authorized.
Such opinion delivered at each of the Closing Dates shall
state that all of the Shares delivered on that date are duly
and validly issued, fully paid, and nonassessable, with no
personal liability attaching to the ownership thereof, and is
not issued in violation of any preemptive rights of
shareholders, and that the Underwriters have received good
title to the Shares purchased by them, respectively, from the
Company and the Selling Shareholders, as applicable, for the
consideration contemplated herein, assuming the Underwriters
are bona-fide purchasers as defined in Section 8-302 of the
Uniform Commercial Code as in effect in the State of New York,
free of any adverse claim as such term is used in Section
8-302. The Common Stock, the Preferred Stock and the Shares
conform to all statements relating thereto contained in the
Registration Statement or the Prospectus.
(viii) To the knowledge of such counsel, any
contract, agreement, instrument, lease or license required to
be described in the Registration Statement or the Prospectus
has been properly described therein. To the knowledge of such
counsel, any contract, agreement, instrument, lease or license
required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to
or has been incorporated as an exhibit by reference into the
Registration Statement.
(ix) Insofar as statements in the Prospectus purport
to summarize the status of litigation or the provisions of
laws, rules, regulations, orders, judgments, decrees,
contracts, agreements, instruments, leases or licenses, such
statements have been prepared or reviewed by such counsel and
to the knowledge of such counsel accurately reflect the status
of such litigation and provisions purported to be summarized
and are correct in all material respects.
(x) The Company is not, either prior to or upon
issuance of the Shares, an "investment company" as defined in
Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Prospectus, will not
become an "investment company" and will not be required to be
registered under the Investment Company Act.
(xi) To the knowledge of such counsel, no person or
entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement except
such persons or entities from whom written waivers of such
rights have been received and delivered to the Representatives
prior to the Closing Date.
(xii) The Registration Statement has become effective
under the Act. To the knowledge of such counsel, no Stop Order
has been issued and no proceedings for that purpose have been
instituted or are threatened, pending or contemplated.
(xiii) The Registration Statement, any Rule 430A
Prospectus, and the Prospectus, and any amendment or
supplement thereto (other than financial statements and other
financial data and schedules which are or should be contained
in any thereof, as to which such counsel need express no
opinion), comply as to form in all material respects with the
requirements of
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the Act and the Regulations. To the knowledge of such
counsel, the conditions for the use of Form S-1 have been
satisfied with respect to the Registration Statement.
(xiv) To the knowledge of such counsel, since the
effective date of the Registration Statement, no event has
occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus
which has not been set forth in such an amendment or
supplement.
In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and the
Prospectus and in conferences with officers and other representatives
of the Company, representatives of the Representatives and
representatives of the independent accountants of the Company, at which
conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such
counsel has not independently verified and is not passing upon and does
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
the Prospectus (except as specified in the foregoing opinion), on the
basis of the foregoing and relying as to materiality upon the
representations of executive officers of the Company after conferring
with such executive officers, no facts have come to the attention of
such counsel which lead such counsel to believe that the Registration
Statement at the time it became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus, except for the
financial statements and other financial and statistical data included
therein as to which counsel need express no opinion, as amended or
supplemented on the date thereof contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering their opinion as aforesaid, counsel may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel
retained by the Company as to laws of any jurisdiction other than the
Federal laws of the United States and the General Corporate Law of the
state of Florida, provided that (A) each such local counsel is
reasonably acceptable to the Representatives and (B) such reliance is
expressly authorized by each opinion so relied upon and a copy of each
such opinion is addressed to the Representatives and is in form and
substance reasonably satisfactory to them and their counsel. In
addition, such counsel may, in the absence of knowledge that such
assumption is unwarranted, assume the legal capacity and competency of
each individual that is a Selling Shareholder and may rely, as to
matters of fact, to the extent such counsel deems proper, on the
representations made in this Agreement and certificates of responsible
officers of the Company, provided that executed copies of such
certificates are provided to the Representatives.
(g) At the Firm Shares Closing Date, the Company shall have
executed and entered into a Warrant Agreement in substantially the form
filed as an exhibit to the Registration Statement granting and issuing
to each of the Representatives, respectively, warrants to purchase
pursuant to such Warrant Agreement a number of shares of Common Stock
equal to two and one- half percent (2 1/2%) of the aggregate number of
Shares being sold to the several Underwriters by the Company on the
Firm Shares Closing Date. Additionally, the Company shall have complied
with all undertakings, agreements and covenants set forth in the letter
agreement between the Company and Sanders Morris Mundy Inc. dated April
12, 1996.
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(h) All proceedings taken in connection with the sale of the
Firm Shares and the Option Shares as herein contemplated shall be
satisfactory in form and substance to the Representatives and to
counsel for the Underwriters.
6. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees as follows:
(i) The Company shall use its best efforts to cause
the Registration Statement to become effective as promptly as
possible. If the Registration Statement has become or becomes
effective with a form of prospectus omitting Rule 430A
information, or filing of the Prospectus is otherwise required
under Rule 424(b), the Company will file the Prospectus,
properly completed, pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to
you of such timely filing. The Company shall notify you
immediately, and confirm such notice in writing, (A) when the
Registration Statement and any post-effective amendment
thereto become effective, (B) of the receipt of any comments
from the Commission or the "blue sky" or securities authority
of any jurisdiction regarding the Registration Statement, any
post-effective amendment thereto, the Prospectus, or any
amendment or supplement thereto, and (C) of the receipt of any
notification with respect to a Stop Order. The Company shall
not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished
the Representatives a copy for their review prior to filing
and shall not file any such proposed amendment or supplement
to which the Representatives reasonably object. The Company
shall use its best efforts to prevent the issuance of any Stop
Order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) During the time when a prospectus relating to
the Shares is required to be delivered hereunder or under the
Act or the Regulations, the Company shall comply so far as it
is able with all requirements imposed upon it by the Act, as
now existing and as hereafter amended, and by the Regulations,
as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Shares in
accordance with the provisions hereof and the Prospectus. If,
at any time when a prospectus relating to the Shares is
required to be delivered under the Act and the Regulations,
any event as a result of which the Prospectus as then amended
or supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to
make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply with
the Act or the Regulations, the Company promptly shall prepare
and file with the Commission, subject to the third sentence of
PARAGRAPH (I) of this SECTION 6(A), an amendment or supplement
which shall correct such statement or omission or an amendment
which shall effect such compliance.
(iii) The Company shall make generally available to
its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12-month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs, an
earnings statement (which need not be audited) of the Company,
covering such 12-month period, which shall satisfy the
provisions of Section 11(a) of the Act or Rule 158 of the
Regulations.
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(iv) The Company shall furnish, without charge, to
the Representatives and counsel for the Underwriters signed
copies of the Registration Statement (including all exhibits
and amendments thereto) and to each other Underwriter a copy
of the Registration Statement (without exhibits thereto) and
all amendments thereof and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the
Act or the Regulations, as many copies of any preliminary
prospectus and the Prospectus and any amendments thereof and
supplements thereto as the Representatives may reasonably
request.
(v) The Company shall cooperate with the
Representatives and counsel to the Underwriters in endeavoring
to qualify the Shares for offer and sale under the laws of
such jurisdictions as the Representatives may designate and
shall maintain such qualifications in effect so long as
required for the distribution of the Shares; PROVIDED,
HOWEVER, that the Company shall not be required in connection
therewith, as a condition thereof, to qualify as a foreign
corporation or to execute a general consent to service of
process in any jurisdiction or subject itself to taxation as
doing business in any jurisdiction.
(vi) For a period of five years after the date of
this Agreement, the Company shall supply to the
Representatives, and to each other Underwriter who may so
request in writing, copies of such financial statements and
other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class
of its capital stock and to furnish to the Representatives a
copy of each annual or other report it shall be required to
file with the Commission.
(vii) Without the prior written consent of the
Representatives, for a period of 180 days from the date on
which a public offering of the Shares commences, the Company
shall not issue, sell or register with the Commission or
otherwise dispose of, directly or indirectly, any securities
of the Company (or any securities convertible into or
exercisable or exchangeable for securities of the Company),
except for the issuance of the Shares pursuant to the
Registration Statement or shares issuable upon exercise of
currently outstanding options and warrants issued by the
Company as of the date of this Agreement.
(viii) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq Stock Market.
(ix) Prior to each Closing Date and for a period of
25 days thereafter, you shall be given reasonable written
prior notice of any press release or other direct or indirect
communication and of any press conference with respect to the
Company, the financial conditions, results of operations,
business, properties, assets, liabilities of the Company, or
this offering.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and expenses
relating to the registration and public offering of the Shares
including those relating to: (i) the preparation, printing, filing and
distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
any documents required to be delivered with any Preliminary Prospectus
or the Prospectus, and the printing, filing and distribution of the
Agreement Among
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Underwriters, this Agreement and related documents; (ii) the
preparation and delivery to the Underwriters of certificates for the
Shares; (iii) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the various
jurisdictions referred to in SECTION 6(A)(V), including the fees and
disbursements of counsel for the Underwriters in connection with such
registration and qualification and the preparation, printing,
distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of
each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by
this Section to be so furnished, as may be reasonably requested for use
in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the filing
fees of the National Association of Securities Dealers, Inc. in
connection with its review of the terms of the public offering; (vi)
the furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of all reports and
information required by SECTION 6(A)(VI); (vii) inclusion of the Shares
for quotation on the NASDAQ Stock Market System; and (viii) all
transfer taxes, if any, with respect to the sale and delivery of the
Shares by the Company and the Selling Shareholders to the Underwriters.
Except as otherwise contemplated by SECTION 9 hereof, the Underwriters
will pay their own counsel fees and expenses to the extent not
otherwise covered by clause (iii) above, and their own travel and
travel-related expenses in connection with the distribution of the
Shares. Without limiting the Company's obligations set forth above,
each of the Selling Shareholders agrees to pay all of their other costs
and expenses incident to the performance of their obligations under
this Agreement and the sale of the Shares by them hereunder.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or state law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto, or arise out of or are
based upon any omission or alleged omission to state therein such fact
required to be stated therein or necessary to make such statements
therein not misleading. Each of the Selling Shareholders agrees,
severally and not jointly, to indemnify each Underwriter and each
person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages and liabilities, joint or several
(including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or
any of them, may become subject under the Act, the Exchange Act or
other Federal or state law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact with respect to such Selling Shareholder contained in any
preliminary prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto (which amendments or
supplements are furnished to such Selling Shareholder), or which arise
out of or are based upon any omission or alleged omission to state
therein such fact required to be stated therein or necessary to make
such statements therein not misleading, but
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only with reference to information relating to such Selling
Shareholder. Such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account of
any losses, claims, damages or liabilities arising from the sale of the
Shares to any person by such Underwriter if such untrue statement or
omission or alleged untrue statement or omission was made in such
preliminary prospectus, the Registration Statement or the Prospectus,
or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein. The obligations of each of the Selling Shareholders, pursuant
to this SECTION 7(A) and SECTION 8, shall be limited to an amount not
exceeding the product of the Per Share Price to Public of the Shares as
set forth on the cover page of the Prospectus and the number of Shares
being sold by such Selling Shareholder. In no event shall the
indemnification agreement contained in this SECTION 7(A) inure to the
benefit of any Underwriter on account of any losses, claims, damages,
liabilities or actions arising from the sale of the Shares upon the
public offering to any person by such Underwriter if such losses,
claims, damages, liabilities or actions arise out of, or are based
upon, a statement or omission or alleged omission in a preliminary
prospectus and if, in respect of such statement, omission or alleged
omission, the Prospectus differs in a material respect from such
preliminary prospectus and a copy of the Prospectus has not been sent
or given to such person at or prior to the confirmation of such sale to
such person. This indemnity agreement will be in addition to any
liability which the Company and the Selling Shareholders may otherwise
have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, each director of the Company, and each
officer of the Company who signs the Registration Statement and each
Selling Shareholder, to the same extent as the foregoing indemnity from
the Company and the Selling Shareholders to each Underwriter, but only
insofar as such losses, claims, damages or liabilities arise out of or
are based upon any untrue statement or omission or alleged untrue
statement or omission which was made in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement or the Prospectus, or
any amendment thereof or supplement thereto, and which was made in
reliance upon and in conformity with information furnished in writing
to the Company by the Representatives on behalf of any Underwriter for
specific use therein; PROVIDED, HOWEVER, that the obligation of each
Underwriter to indemnify the Company (including any controlling person,
director or officer thereof) and the Selling Shareholders shall be
limited to the net proceeds received by the Company and the Selling
Shareholders, respectively, from such Underwriter. For all purposes of
this Agreement, the amounts of the selling concession and reallowance
set forth in the Prospectus constitute the only information furnished
in writing by or on behalf of any Underwriter expressly for inclusion
in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement
thereto.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of
all papers served. No indemnification provided for in SECTIONS 7(A) OR
(B) shall be available to any party who shall fail to give notice as
provided in this SECTION 7(C) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related
and to the extent that such party is found by final judgment of a court
of competent jurisdiction to have been actually prejudiced by the
failure to give such notice; but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not
relieve it from any liability that it may have to any
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indemnified party for contribution or otherwise than under this SECTION
7. In case any such action, suit or proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval
by the indemnified party of such counsel, the indemnifying party shall
not be liable to such indemnified party for any legal or other
expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in
connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the
indemnified party in the conduct of the defense of such action (in
which case the indemnifying parties shall not have the right to direct
the defense of such action on behalf of the indemnified party), or
(iii) the indemnifying parties shall not have employed counsel to
assume the defense of such action within a reasonable time after notice
of the commencement thereof, in each of which cases the reasonable fees
and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnifying party shall not be liable for any settlement
of any action, suit, proceeding or claim effected without its written
consent.
8. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
SECTIONS 7(A) AND (B) is due in accordance with its terms but for any reason is
held to be unavailable from the Company, the Selling Shareholders or the
Underwriters, the Company, the Selling Shareholders and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, such as the Selling
Shareholders, persons who control the Company within the meaning of the Act,
officers of the Company who signed the Registration Statement and directors of
the Company, who may also be liable for contribution) to which the Company and
the Selling Shareholders and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Shareholders on the one hand and the Underwriters on
the other from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in SECTION 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the Offering (net of underwriting
discounts but before deducting expenses) received by the Company or the Selling
Shareholders from the sale of the Shares, as set forth in the table on the cover
page of the Prospectus (but not taking into account the use of the proceeds of
such sale of Shares by the Company), bear to (y) the underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, the Selling Shareholders and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to information
supplied by the Company, the Selling Shareholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The
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Company, the Selling Shareholders and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this SECTION 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this SECTION 8, (i) in no case shall any Underwriter (except as
may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, (ii) in no case shall any of the
Selling Shareholders be liable or responsible for any amount in excess of the
product of the Per Share Price to Public of the Shares as set forth on the cover
page of the Prospectus and the number of Shares being sold by each of them
subject to the limitation expressed in SECTION 7(a), and (iii) the Company shall
be liable and responsible for any amount in excess of the underwriting discount
and the amount referred to in clause (ii); PROVIDED, HOWEVER, that no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution in respect thereof from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
SECTION 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i), (ii)
and (iii) in the immediately preceding sentence of this SECTION 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or otherwise than
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its written consent. The
Underwriters' obligations to contribute pursuant to this SECTION 8 are several
in proportion to their respective underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated with respect
to the Shares to be purchased on any Closing Date by the Representatives by
notifying the Company at any time prior to the purchase of the Shares:
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any domestic
or international event or act or occurrence has materially disrupted,
or in the opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the Representatives,
inadvisable to proceed with the Offering; (iii) if there shall be such
a material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States such as to make it, in the judgment of the
Representatives, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission or
trading generally on the New York Stock Exchange, Inc., the American
Stock Exchange, Inc. or the Nasdaq Stock Market System has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or
any other governmental or regulatory authority; or (v) if a banking
moratorium has been declared by any state or federal authority, or
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(b) at or before any Closing Date, if any of the conditions
specified in SECTION 5 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions,
neither the Company nor the Selling Shareholders shall be under any liability to
any Underwriter, and no Underwriter shall be under any liability to the Company
or the Selling Shareholders, except that (y) if this Agreement is terminated by
the Representatives or the Underwriters because of any failure, refusal or
inability on the part of the Company or the Selling Shareholders or all of them
to comply with the terms or to fulfill any of the conditions of this Agreement,
the Company and the Selling Shareholders will reimburse the Underwriters for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
incurred by them in connection with the proposed purchase and sale of the Shares
or in contemplation of performing their obligations hereunder and (z) no
Underwriter who shall have failed or refused to purchase the Shares agreed to be
purchased by it under this Agreement, without some reason sufficient hereunder
to justify cancellation or termination of its obligations under this Agreement,
shall be relieved of liability to the Company and the Selling Shareholders or to
the other Underwriters for damages occasioned by its failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under SECTION 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date:
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated to
purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided, that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to SECTION 1 be increased pursuant to this SECTION 10
by more than one-ninth of such number of Shares without the written
consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to an additional business day within
which it may, but is not obligated to, find one or more substitute
underwriters reasonably satisfactory to the Representatives to purchase
such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have
the right to postpone the applicable Closing Date for a period of not more than
five business days in order that necessary changes and arrangements (including
any necessary amendments or supplements to the Registration Statement or
Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares
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to be purchased on such Closing Date without liability on the part of any
nondefaulting Underwriter to the Company and the Selling Shareholders and
without liability on the part of the Company and the Selling Shareholders,
except in both cases as provided in SECTIONS 6(B), 7, 8 AND 9. The provisions of
this SECTION 10 shall not in any way affect the liability of any defaulting
Underwriter to the Company or the Selling Shareholders or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers, of
the Selling Shareholders and of the Underwriters set forth in or made pursuant
to this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or the
Selling Shareholders or any of the officers, directors or controlling persons
referred to in SECTIONS 7 AND 8 hereof, and shall survive delivery of and
payment for the Shares. The provisions of SECTIONS 6(B), 7, 8, 9, 10 AND 11
shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors and assigns and, to the extent expressed herein, for the benefit of
persons controlling any of the Underwriters, or the Company, and directors and
officers of the Company, and their respective successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser of
Shares from any Underwriter merely because of such purchase.
All notices and communications hereunder shall be in writing and mailed
or delivered, or by telefax or telegraph if subsequently confirmed by letter,
(a) if to the Representatives, to Rodman & Renshaw, Inc. and Sanders Morris
Mundy Inc., c/o Rodman & Renshaw, Inc., One Liberty Plaza, 165 Broadway, New
York, New York 10006, Attention: Julia S. Heckman, Managing Director, telecopy:
(212) 346-5099 with a copy to Mayor, Day, Caldwell & Keeton, L.L.P., 19th Floor,
700 Louisiana, Houston, Texas 77002, Attention: Geoffrey K. Walker, telecopy:
(713) 225-7047, (b) if to the Company, to the Company's agent for service as
such agent's address appears on the cover page of the Registration Statement,
and (c) if to the Selling Shareholders, to each such Selling Shareholder at the
respective address of such Selling Shareholder appearing in SCHEDULE II.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflicts of
laws.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, or neuter, singular or plural, as the identity of the
person or persons or entity or entities require.
All section headings herein are for convenience of reference only and
are not part of this Agreement, and no construction or inference shall be
derived therefrom.
25
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
THE COMPANY:
FRENCH FRAGRANCES, INC.
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
THE SELLING SHAREHOLDERS:
Each of the Selling Shareholders Named
in SCHEDULE II Annexed Hereto:
By:
--------------------------
Name:
--------------------------
Title: Attorney-in-Fact
By:
--------------------------
Name:
--------------------------
Title: Attorney-in-Fact
26
<PAGE>
Confirmed on Behalf of Themselves, Severally, as Underwriters and as the
Representatives of the Several Underwriters Named in SCHEDULE I Annexed Hereto:
RODMAN & RENSHAW, INC.
By:-----------------------------
Name: Julia S. Heckman
Title: Managing Director
SANDERS MORRIS MUNDY, INC.
By:-----------------------------
Name: Michael S. Chadwick
Title: Managing Director
27
<PAGE>
SCHEDULE I
NUMBER OF FIRM
SHARES TO BE
NAME OF UNDERWRITER PURCHASED
- ------------------- --------------
Rodman & Renshaw, Inc............................... ____________
Sanders Morris Mundy Inc............................ ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
______________________.............................. ____________
Total .................................. ____________
28
<PAGE>
SCHEDULE II
NUMBER OF
FIRM SHARES
NAME AND ADDRESS OF SELLING SHAREHOLDER TO BE SOLD
[Name] ........................................ __________
c/o French Fragrances, Inc.
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
[Name] ........................................ __________
c/o French Fragrances, Inc.
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
[Name] ........................................ __________
c/o French Fragrances, Inc.
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
[Name] ........................................ __________
French Fragrances, Inc.
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
Total................................... __________
29
Exhibit 4.3
Draft Dated
JUNE 7, 1996
WARRANT FOR COMMON STOCK
WITH CASHLESS EXERCISE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN
Warrant for the Purchase of Shares of Common Stock,
par value $.01 per Share
Effective Date: , 1996
----
No. 1 [__________] Shares
THIS CERTIFIES that, for receipt in hand of [$__________], $0.01 per
share of underlying Common Stock, and other value received [______________]
(the "HOLDER"), is entitled to subscribe for and purchase from French
Fragrances, Inc., a Florida corporation (the "COMPANY"), upon the terms and
conditions set forth herein, at any time or from time to time after the first
anniversary of the effective date of the Company's Registration Statement on
Form S-1, Registration No. 333-4588 (as set forth above, the "EFFECTIVE DATE"),
and before 5:00 P.M. on the third anniversary of the Effective Date, New York
time (the "EXERCISE PERIOD"), [__________] shares of the Company's Common Stock,
par value $.01 per share ("COMMON STOCK"), at a price of $__________ per Share
(the "EXERCISE PRICE"). This Warrant is one of the warrants (collectively,
including any warrants issued upon the exercise or transfer of such warrants in
whole or in part, the "WARRANTS") issued pursuant to the Underwriting Agreement,
dated __________, between Rodman & Renshaw, Inc. and Sanders Morris Mundy Inc.,
as representatives of the several Underwriters named therein, and the Company.
As used herein the term "THIS WARRANT" shall mean and include this Warrant and
any Warrant or Warrants hereafter issued as a consequence of the exercise or
transfer of this Warrant in whole or in part, and the term the "HOLDER" as used
herein shall include any transferee to whom this Warrant has been transferred in
accordance with the applicable requirements of this Warrant.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "WARRANT SHARES") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company at
its office at 14100 N.W. 60th Avenue, Miami Lakes, Florida 33014, or at such
other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order
<PAGE>
of the Company in an amount equal to the Exercise Price multiplied by the number
of Warrant Shares for which this Warrant is being exercised (the "STOCK PURCHASE
PRICE").
2. (a) In lieu of the payment of the Stock Purchase Price, the
Holder shall have the right (but not the obligation), to require the Company to
convert this Warrant, in whole or in part, into shares of Common Stock (the
"CONVERSION RIGHT") as provided for in this SECTION 2. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any of the Stock Purchase Price) that number of shares of Common
Stock (the "CONVERSION SHARES") equal to the quotient obtained by dividing (x)
the value of this Warrant (or portion thereof as to which the Conversion Right
is being exercised in part) at the time the Conversion Right is exercised
(determined by subtracting the aggregate Stock Purchase Price of the shares of
Common Stock as to which the Conversion Right is being exercised in effect
immediately prior to the exercise of the Conversion Right from the aggregate
Current Market Price (as defined in SECTION 6(D) hereof) of the shares of Common
Stock as to which the Conversion Right is being exercised) by (y) the Current
Market Price of one share of Common Stock immediately prior to the exercise of
the Conversion Right.
(b) The Conversion Rights provided under this SECTION 2 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Warrant with the
Notice of Conversion at the end hereof duly executed. The presentation and
surrender shall be deemed a waiver of the Holder's obligation to pay all or any
portion of the aggregate purchase price payable for the shares of Common Stock
as to which such Conversion Right is being exercised. This Warrant (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the foregoing
provisions.
3. Upon each exercise of the Holder's rights to purchase Warrant
Shares or Conversion Shares, the Holder shall be deemed to be the holder of
record of the Warrant Shares or Conversion Shares issuable upon such exercise or
conversion, notwithstanding that the transfer books of the Company shall then be
closed or certificates representing such Warrant Shares or Conversion Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise or conversion of this Warrant, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
registered in the name of the Holder or its designee. If this Warrant should be
exercised or converted in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
4. Any Warrants issued upon the transfer or exercise or
conversion in part of this Warrant shall be numbered and shall be registered in
a Warrant Register as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim or interest in such Warrant on the part of any other person, and
shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company
2
<PAGE>
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer would violate the
provisions of the Securities Act of 1933, as amended (the "ACT"), and the rules
and regulations thereunder.
5. The Company shall at all times reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares and/or Conversion
Shares granted pursuant to the Warrants, such number of shares of Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Warrant, upon receipt
by the Company of the full Exercise Price therefor, and all shares of Common
Stock issuable upon conversion of this Warrant, shall be validly issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive rights
of stockholders, optionholders, warrantholders and any other persons and the
Holders will receive good title to the securities purchased by them,
respectively, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts.
6. (a) In case the Company shall at any time after the date the
Warrants were first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number and kind of securities
issuable upon exercise or conversion of this Warrant, in effect at the time of
the record date for such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so that the
Holder after such time shall be entitled to receive the aggregate number and
kind of shares which, if such Warrant had been exercised or converted
immediately prior to such time, he would have owned upon such exercise or
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for
the issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock on
such record date, then, in each case, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such record date plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so to be offered (or the aggregate initial conversion or exchange price of the
convertible or exchangeable securities so to be offered) would purchase at such
Current Market Price and the denominator of which shall be the number of shares
of Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible or exchangeable securities so to be offered are initially
convertible or exchangeable). Such adjustment shall become effective at the
close of business on such record date; PROVIDED, HOWEVER, that, to the extent
the shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) are not delivered, the Exercise Price shall be
readjusted after
3
<PAGE>
the expiration of such rights, options, or warrants (but only with respect to
Warrants exercised after such expiration), to the Exercise Price which would
then be in effect had the adjustments made upon the issuance of such rights,
options, or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) actually issued. In case any subscription price may be
paid in a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed one percent (1%) of
the Current Market Price at the record date for such distribution) or assets
(other than distributions and dividends payable in shares of Common Stock), or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for shares of Common Stock
(excluding those with respect to the issuance of which an adjustment of the
Exercise Price is provided pursuant to SECTION 6(B) hereof), then, in each case,
the Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the Current Market Price per share of Common Stock on such record date,
less the fair market value (as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error) of the portion of the evidences of indebtedness or assets so to
be distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, or the amount of such cash, applicable to one share,
and the denominator of which shall be such Current Market Price per share of
Common Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the record date for the determination of
stockholders entitled to receive such distribution.
(d) For the purpose of any computation made under this SECTION
6, the Current Market Price per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price of
each day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, the NASDAQ National Market System) on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported bid price
for the Common Stock as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer
reporting such information. If on any such date the Common Stock is not listed
or admitted to trading on any national securities exchange and is not quoted by
NASDAQ or any similar organization, the fair value of a share of Common Stock on
such date, as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error, shall be used.
(e) No adjustment in the Exercise Price shall be required if
such adjustment is less than $.05; PROVIDED, HOWEVER, that any adjustment which
by reason of this SECTION 6 are not required by to made shall be carried forward
and taken into account if any subsequent adjustment. All calculations under this
SECTION 6 shall be made to the nearest cent or to the nearest one-thousandth of
a shares, as the case may be.
4
<PAGE>
(f) In any case in which this SECTION 6 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised or converted this Warrant
after such record date, the shares of Common Stock, if any, issuable upon such
exercise or conversion over and above the shares of Common Stock, if any,
issuable upon such exercise or conversion on the basis of the Exercise Price in
effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(g) Upon each adjustment of the Exercise Price as a result of
the calculations made in SECTIONS 6(B) or 6(C) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise, Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing (i)
the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price, by (ii) the
Exercise Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided in this
SECTION 6, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(i) The Company shall not be required to issue fractions of
shares of Common Stock or other capital stock of the Company upon the exercise
or conversion of this Warrant. If any fraction of a share would be issuable on
the exercise or conversion of this Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such share of Common Stock on the date
of exercise or conversion of this Warrant.
7. (a) In case of any consolidation with or merger of the
Company with or into any other corporation (other than a merger or consolidation
in which the Company is the surviving or continuing corporation), or in case of
any sale, lease, or conveyance to another corporation of the property and assets
of any nature of the Company as an entirety or substantially as an entirety,
such successor, leasing, or purchasing corporation, as the case may be, shall
(i) execute with the Holder an agreement providing that the Holder shall have
the right thereafter to receive upon exercise or conversion of this Warrant
solely the kind and amount of shares of stock and other securities, property,
cash, or any combination thereof receivable upon such consolidation, merger,
sale, lease or conveyance by a holder of the number of shares of Common Stock
for which this Warrant might have been exercised or converted immediately prior
to such consolidation, merger, sale, lease, or conveyance, and (ii) make
effective provision in its certificate of incorporation or otherwise, if
necessary, to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in SECTION 6.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise or conversion of this Warrant (other than a
change in par value or from no par value to a specified par value, or a result
of a subdivision or combination, but including any change in the shares into two
or more classes or series of shares), or in case of any consolidation or merger
of another corporation into the Company in which
5
<PAGE>
the Company is the continuing corporation and in which there is a
reclassification or change (including a change to the right to receive cash or
other property) of the shares of Common Stock (other than a change in par value,
or from no par value to a specified par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), the Holder shall have the right thereafter to receive upon
exercise or conversion of this Warrant solely the kind and amount of shares of
stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation, or merger by a
holder of the number of shares of Common Stock for which this Warrant might have
been exercised or converted immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in SECTION 6.
(c) The above provisions of this SECTION 7 shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
8. In case at any time the Company shall propose
(a) to pay any dividend or to make any distribution on shares
of Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common Stock;
or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation, merger, sale, lease,
or conveyance of property, described in SECTION 7; or
(d) to effect any liquidation, dissolution, winding-up
of the Company; or
(e) to take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
9. The issuance of any shares or other securities upon the exercise or
conversion of this Warrant, and the deliver of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue
6
<PAGE>
or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
10. (a) If, at any time during the five-year period commencing
upon completion of the Company's initial public offering (the "REGISTRATION
PERIOD"), the Company shall file a registration statement (other than on Form
S-4, Form S-8, or any successor form) with the Securities and Exchange
Commission (the "COMMISSION") while any Underwriters' Securities (as hereinafter
defined) are outstanding, the Company shall give all the then holders of any
Underwriters' Securities (the "ELIGIBLE HOLDERS") at least 45 days prior written
notice of the filing of such registration statement. If requested by any
Eligible Holder in writing within 30 days after receipt of any such notice, the
Company shall, at the Company's sole expense (other than the fees and
disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Underwriters' Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Underwriters' Securities of any Eligible Holders who
shall have made such request, concurrently with the registration of such other
securities, all to the extent requisite to permit the public offering and sale
of the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over- the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such offering
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Underwriters' Securities requested to be included in the
registration concurrently with the securities being registered by the Company
would materially adversely affect the distribution of such securities by the
Company for its own account, then any Eligible Holder who shall have requested
registration of his or its Underwriters' Securities shall delay the offering and
sale of such Underwriters' Securities (or the portions thereof so designated by
such managing underwriter for such period, not to exceed 90 days (the "DELAY
PERIOD"), as the managing underwriter shall request, provided that no such delay
shall be required as to any Underwriters' Securities if any securities of the
Company are included in such registration statement and eligible for sale during
the Delay Period for the account of any person other than the Company and any
Eligible Holder unless the securities included in such registration statement
and eligible for sale during the Delay Period for such other person shall have
been reduced at least pro rata to the reduction of the Underwriters' Securities
which were requested to be included and eligible for sale during the Delay
Period in such registration. As used herein, "UNDERWRITERS' SECURITIES" shall
mean the Warrants and the Warrant Shares and the Conversion Shares which, in
each case, have not been previously sold pursuant to a registration statement or
Rule 144 promulgated under the Act.
(b) If, at any time during the Registration Period, the
Company shall receive a written request, from Eligible Holders who in the
aggregate own (or upon exercise of all Warrants then outstanding would own) a
majority of the total number of shares of Common Stock then included (or upon
such exercise would be included) in the Underwriters' Securities (the "MAJORITY
HOLDERS"), to register the sale or all or part of such Underwriters' Securities,
the Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public offering and
sale of the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable; PROVIDED,
HOWEVER, that the Company shall only be obligated to file one such registration
statement for which all expenses incurred in connection with such registration
(other than the fees and disbursements of counsel for the Eligible Holders and
underwriting discounts, if any, payable in respect of the Underwriters'
Securities sold by the Eligible Holders) shall be borne by the Company and one
additional such registration statement for which all such expenses shall be paid
by the Eligible Holders. Within three business
7
<PAGE>
days after receiving any request contemplated by this SECTION 10(B), the Company
shall give written notice to all the other Eligible Holders, advising each of
them that the Company is proceeding with such registration and offering to
include therein all or any portion of any such other Eligible Holder's
Underwriters' Securities, provided that the Company receives a written request
to do so from such Eligible Holder within 30 days after receipt by him or it of
the Company's notice.
(c) In the event of a registration pursuant to the provisions
of this SECTION 10, the Company shall use its best efforts to cause the
Underwriters' Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; PROVIDED, HOWEVER, that the Company shall
not be required to qualify to do business in any state by reason of this SECTION
10(C) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this SECTION 10 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, communication for such period of time
as shall be required to permit the Eligible Holders to complete the offer and
sale of the Underwriters' Securities covered thereby. The Company shall in no
event be required to keep any such registration or qualification in effect for a
period in excess of nine months from the date on which the Eligible Holders are
first free to sell such Underwriter's Securities; PROVIDED, HOWEVER, that, if
the Company is required to keep any such registration or qualification in effect
with respect to securities other than the Underwriters' Securities beyond such
period, the Company shall keep such registration or qualification in effect as
it relates to the Underwriters' Securities for so long as such registration or
qualification remains or is required to remain in effect in respect of such
other securities.
(e) In the event of a registration pursuant to the provisions
of this SECTION 10, the Company shall furnish to each Eligible Holder such
number of copies of the registration statement and of each amendment and
supplement thereto (in each case, including all exhibits), such reasonable
number of copies of each prospectus contained in such registration statement and
each supplement or amendment thereto (including each preliminary prospectus),
all of which shall conform to the requirements of the Act and the rules and
regulations thereunder, and such other documents, as any Eligible Holder may
reasonably request to facilitate the disposition of the Underwriters' Securities
included in such registration.
(f) In the event of a registration pursuant to the provisions
of this SECTION 10, the Company shall furnish each Eligible Holder of any
Underwriters' Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) to the effect that (i) the
registration statement has become effective under the Act and no order
suspending the effectiveness of the registration statement, preventing or
suspending the use of the registration statement, any preliminary prospectus,
any final prospectus, or any amendment or supplement thereto has been issued,
nor has the Commission or any securities or blue sky authority of any
jurisdiction instituted or threatened to institute any proceedings with respect
to such an order, (ii) the registration statement and each prospectus forming a
part thereof (including each preliminary prospectus), and any amendment or
supplement thereto, complies as to form with the Act and the rules and
regulations thereunder, and (iii) such counsel has no knowledge of any material
misstatement or omission in such registration statement or any prospectus, as
amended or supplemented. Such opinion shall also state the jurisdictions in
which the Underwriters' Securities have been registered or qualified for sale
pursuant to the provisions of SECTION 10(C).
(g) In the event of a registration pursuant to the provisions
of this SECTION 10, the Company shall enter into a cross-indemnity agreement and
a contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
8
<PAGE>
representations, warranties, allocation of expenses, and customary closing
conditions, including, but no limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriters'
Securities.
(h) The Company agrees that until all the Underwriters'
Securities have been sold under a registration statement or pursuant to Rule 144
under the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Underwriters' Securities to sell such securities under Rule 144.
(i) Except for rights granted to holders of the Warrants and
such other persons or entities disclosed in the registration statement for the
Offering, the Company will not, without the written consent of the Majority
Holders, grant to any persons the right to request the Company to register any
securities of the Company, provided that the Company may grant such registration
rights to other persons so long as such rights are subordinate to the rights of
the Eligible Holders.
11. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Eligible Holder, its officers,
directors, partners, employees, agents, and counsel, and each person, if any,
who controls any such person within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all loss, liability, charge, claim, damage, and
expense whatsoever (which shall include, for all purposes of this SECTION 11,
but not be limited to, attorneys' fees and any and all reasonable expenses
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, relating to
the sale of any of the Underwriters' Securities, or (B) in any application or
other document or communication (in this SECTION 11 collectively called an
"APPLICATION") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Underwriters' Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
such Eligible Holder by or on behalf of such person expressly for inclusion in
any registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "INDEMNIFIED PARTY") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability pursuant to this SECTION 11(A) and the Company shall
promptly assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) and payment of
expenses. Such indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the
9
<PAGE>
expense of such indemnified party or parties unless the employment of such
counsel shall have been authorized in writing by the Company in connection with
the defense of such action or the Company shall not have promptly employed
counsel reasonably satisfactory to such indemnified party or parties to have
charge of the defense of such action or such indemnified party or parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this SECTION 11 to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Company shall not, without the prior written consent of each indemnified
party that is not released as described in this sentence, settle or compromise
any action, or permit a default or consent to the entry of judgment in or
otherwise seek to terminate any pending or threatened action, in respect of
which indemnity may be sought hereunder (whether or not any indemnified party is
a party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Eligible
Holders of the commencement of any litigation or proceedings against the Company
or any of its officers or directors in connection with the sale of any
Underwriters' Securities or any preliminary prospectus, prospectus, registration
statement, or amendment or supplement thereto, or any application relating to
any sale of any Underwriters' Securities.
(b) The Holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Underwriters' Securities held by
the Holder, each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Holder in SECTION 11(A), but only with respect to statements
or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this SECTION 11(B), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of SECTION
11(A).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to SECTION 11(A) or
11(B) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriters' Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims,
10
<PAGE>
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission, or
alleged omission relates to information supplied by the Company or by such
Eligible Holders, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Holder agree that
it would be unjust and inequitable if the respective obligations of the Company
and the Eligible Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Holder and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this SECTION 11(C). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of shares of Common Stock owned (or which would be owned upon
exercise of all Underwriters' Securities) by it and included in such
registration as compared to the number of shares of Common Stock owned (or which
would be owned upon exercise of all Underwriters' Securities) by all Eligible
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this SECTION 11(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company: subject in each case to the provisions of this SECTION 11(C).
Anything in this SECTION 11(C) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This SECTION 11(C) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
12. Unless registered pursuant to the provisions of SECTION 10 hereof,
the Warrant Shares or Conversion Shares issued upon exercise or conversion of
the Warrants shall be subject to a stop transfer order and the certificate or
certificates evidencing such Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND, UNLESS SO
REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS."
13. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor, and denomination.
14. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
11
<PAGE>
15. This Warrant shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
Dated: , 1996
--------------
FRENCH FRAGRANCES, INC.
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
[Seal]
Attest:
By:
--------------------------
Name:
--------------------------
Title: Secretary
12
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _________________________________ hereby
sells, assigns, and transfers unto _________________ a Warrant to purchase
__________ shares of Common Stock, par value $.01 per share, of French
Fragrances, Inc. (the "COMPANY"), together with all right, title, and interest
therein, and does hereby irrevocably constitute and appoint ____________
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated: _____________________
Signature
----------------------------------
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Warrant in every particular, without alteration
or enlargement or any change whatsoever.
13
<PAGE>
To:
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Name
------------------------- -------------------------
(Print)
Address:
-------------------------------------------
----------------------------------------
(Signature)
14
<PAGE>
To:
CASHLESS EXERCISE FORM
(To be executed upon conversion of the attached Warrant)
The undersigned hereby irrevocably elects to surrender its Warrant for
the number of shares of Common Stock as shall be issuable pursuant to the
cashless exercise provisions of the within Warrant, in respect of _____ shares
of Common Stock underlying the within Warrant, and requests that certificates
for such securities be issued in the name of and delivered to:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the undersigned at the addressed stated below.
Dated: Name
----------------------- -----------------------------
(Print)
Address:
----------------------------------------------------------------------
----------------------------------
(Signature)
15
Exhibit 4.4(c)
May 29, 1996
French Fragrances
14100 N.W. 60th Avenue
Miami Lakes, FL 33014
Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
March 14, 1996 among French Fragrances, Inc., Fleet National Bank, as agent and
as a lender, and Bank of America Illinois, as a lender, as amended by a First
Amendment to Credit Agreement dated May 10, 1996 (as amended, the "Credit
Agreement"). Capitalized terms used herein and not otherwise defined shall have
the meaning given to such terms in the Credit Agreement.
The Lenders hereby agree to amend on a temporary basis the defined term
"Borrowing Base" by deleting (iv)(B) of the definition in its entirety and
replacing it with the folllowing:
"(B) one hundred sixty percent (160%) of Accounts Receivable
Availability from January 1 through May 28, 1996 and for each fiscal year
thereafter for the period from January 1 through June 30 of each year,
two hundred twenty percent (220%) of Accounts Receivable Availability
from May 29, 1996 through August 31, 1996 and for each year and one
hundred twenty percent (120%) of Accounts Receivable Availability from
September 1 through December 31 of each year, and provided further there
shall be a reserve against total Eligible In-House Inventory of Five
Hundred Thousand Dollars ($500,000)."
Borrower hereby ratifies and confirms all of its obligations,
covenants, duties and agreements set forth in the Credit Agreement, as amended
by the terms hereof. All references to the "Credit Agreement" or the "Agreement"
contained in the Credit Agreemment, the Notes, the Security Documents and all
other documents and instruments evidencing obligations of
<PAGE>
Borrower under or in connection with the Credit Agreement, the Notes or the
Security Documents, shall be deemed to be amended to refer to the Credit
Agreement, as amended by the terms hereof.
Very truly yours,
FLEET NATIONAL BANK, as Agent
By: /s/ Robert T.P. Storer
-------------------------------
Robert T.P. Storer
Vice President
By: /s/ Frank O'Connor
-------------------------------
Frank O'Connor
Vice President
BANK OF AMERICA ILLINOIS, as Lender
By: /s/ Randolph T. Kohler
-------------------------------
Randolph T.Kohler
Senior Vice President
FLEET NATIONAL BANK, as Lender
By: /s/ Robert T.P. Storer
-------------------------------
Robert T.P. Storer
Vice President
By: /s/ Frank O'Connor
-------------------------------
Frank O'Connor
Vice President
FLEET NATIONAL BANK, as Lender
By: /s/ William J. Mueller
-------------------------------
William J. Mueller
Vice President - Operations and
Chief Financial Officer
THIS SUBORDINATED CONVERTIBLE DEBENTURE IS SUBJECT TO A SUBORDINATION AGREEMENT,
DATED AS OF JUNE , 1996 BY AND AMONG FRENCH FRAGRANCES, INC., ________________,
FLEET NATIONAL BANK, AS AGENT, FLEET NATIONAL BANK, AS LENDER AND BANK OF
AMERICA ILLINOIS, AS LENDER.
THIS SUBORDINATED CONVERTIBLE DEBENTURE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE NEGOTIATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND EXCEPT
IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS.
7.5% SUBORDINATED CONVERTIBLE DEBENTURE DUE 2006
$ June , 1996
------------------------- ----
French Fragrances, Inc., a Florida corporation (the "Company"), for
value received, hereby promises to pay to [___________________________________ ]
(the "Holder"), the principal amount of [_______________________________] and
No/100 Dollars (US$_______________________________________) on May 31, 2006, or
on such earlier date on which such amount is required to be paid as set forth
herein, with interest on the unpaid balance of such principal amount at the rate
of seven and one-half of one percent (7.5%) per annum from the date hereof,
payable on May 31 and November 30 of each year, commencing November 30, 1996, or
on any accelerated maturity date hereof, until the principal hereof shall have
been paid. Interest on this Debenture shall be computed on the basis of a 360-
day year consisting of twelve 30-day months.
Unless sooner paid, the outstanding principal balance of this
Debenture, together with all accrued and unpaid interest hereon, shall be due
and payable in full on May 31, 2006.
This Debenture is redeemable at the option of the Company at par in
whole at any time from and after June _____, 1999 and in part at any time and
from time to time at any time from and after June _____, 1999, upon notice to
the Holder, provided that in each such case the closing bid quotation of the
Common Stock on all twenty (20) trading days ending on the third day prior to
the day on which the Company gives notice has been at least $ _________________
[200% OF THE CONVERSION PRICE (AS DEFINED BELOW)].
For the purposes hereof, "Common Stock" means the Company's Common
Stock, $.01 par value per share.
The Holder shall have the option at any time and from time to time to
convert the accrued and unpaid interest on and the outstanding principal balance
of this Debenture into Common Stock at a conversion price equal to $___________
[120% OF THE OFFERING PRICE] per share (the "Conversion Price"). To effect a
conversion pursuant to the preceding sentence, the Holder shall provide written
notice of conversion to the Company and shall surrender the original Debenture
to the Company at its principal office, accompanied by proper endorsement to the
Company. The date any such notice is received by the Company shall be deemed the
"Conversion Date." After the Conversion Date, the Company will issue to the
Holder, or its registered nominee or its assign(s), certificate(s) for the
number of shares of Common Stock into which this Debenture, or portion hereof,
is to be converted, rounded upward or downward to the nearest whole share. The
conversion of this
<PAGE>
Debenture shall be deemed to have been effected prior to the close of business
on the Conversion Date, and at such time the rights of the Holder shall
terminate as to the converted portion of the principal and interest on this
Debenture, expressly conditioned on the surrender and cancellation of this
Debenture. The Company shall as promptly thereafter as possible issue a new
Debenture, for any portion of the outstanding principal balance and accrued and
unpaid interest evidenced by this Debenture which remains outstanding after
giving effect to any such conversion.
This Debenture is not negotiable, and is transferable only on the books
of the Company by the registered Holder hereof or his duly authorized agent or
attorney.
ARTICLE ONE
PRIORITIES
Section 1.1 SUBORDINATION TO OTHER INDEBTEDNESS OF THE COMPANY.
The payment of the principal of, and interest on, this Debenture is
subordinated, to the extent and in the manner provided in this Debenture, to the
prior payment in full of all Senior Indebtedness.
"SENIOR INDEBTEDNESS" means (a) any indebtedness of the Company for
money borrowed, whether outstanding on the date of execution of this Debenture
or thereafter created, assumed, or incurred (except the Parity Obligations and
obligations evidenced by the Subordinated Debentures (as such terms are
hereinafter defined)), and (b) any deferrals, renewals or extensions of any such
Senior Indebtedness. Without limiting the generality of the foregoing, "Senior
Indebtedness" shall include any and all obligations and indebtedness of the
Company under:
(i) any bank credit agreement whether outstanding at the date of
original execution of this Debenture or thereafter incurred,
created or assumed,
(ii) the Lease between National Trading Manufacturing, Inc., and the
Company dated July 2, 1992, and
(iii) the Company's Promissory Note, dated June _____, 1996, made by
the Company payable to the order of [___________________] in the
original principal amount of $[____________________________]
[FIRST MORTGAGE].
This Article One shall constitute a continuing offer to all persons
who, in reliance upon such provisions, become holders of, or continue to hold,
Senior Indebtedness, and such provisions are made for the benefit of the holders
of Senior Indebtedness, and such holders or each of them may enforce such
provisions.
Section 1.2 COMPANY NOT TO MAKE PAYMENTS WITH RESPECT TO THIS DEBENTURE IN
CERTAIN CIRCUMSTANCES.
(a) Upon the maturity of the principal of the Senior Indebtedness, or
any portion thereof, by acceleration or otherwise, all principal thereof and
interest thereon shall first be paid in full, or such payment duly provided for
in cash in a manner satisfactory to the holders of such Senior
2
<PAGE>
Indebtedness before any payment is made on account of the principal or interest
on this Debenture or to acquire this Debenture.
(b) Upon the occurrence of an event of default (or if an event of
default would result upon any payment with respect to this Debenture) with
respect to any portion of the Senior Indebtedness, as such event of default is
defined in the instrument under which any such Senior Indebtedness is
outstanding, permitting the holders to accelerate the maturity thereof, and, if
the default is other than a default in payment of any principal or interest due
on such Senior Indebtedness, upon written notice thereof given to the Company by
the holders of such Senior Indebtedness or their representative, unless and
until such event of default shall have been cured or waived or shall have ceased
to exist, no payment shall be made by the Company with respect to the principal
or interest on this Debenture or to acquire this Debenture.
(c) If, notwithstanding the provisions of this Section 1.2, the Company
shall make any payment to the Holder on account of the principal or interest on
this Debenture after the occurrence of a default in payment of any principal or
interest due on any Senior Indebtedness or after receipt by the Company of
written notice as provided in this Section 1.2 of an event of default with
respect to any Senior Indebtedness, then, unless and until such default or event
of default shall have been cured or waived or shall have ceased to exist, such
payment shall be held by the Holder in trust for the benefit of, and shall be
paid over and delivered to, the holders of the Senior Indebtedness or their
representative for application to the payment of the Senior Indebtedness
remaining unpaid to the extent necessary to pay the Senior Indebtedness in full
in accordance with its terms, after giving effect to any concurrent payment or
distribution or provision therefor to the holders of the Senior Indebtedness.
The Company shall give prompt written notice to the Holder as soon as it
receives written notice of any default under any of the Senior Indebtedness.
Section 1.3 THIS DEBENTURE SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF
COMPANY.
Upon any distribution of assets of the Company in connection with any
dissolution, winding up, liquidation or reorganization of the Company (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise) tending towards liquidation of the
business and assets of the Company:
(a) the holders of all Senior Indebtedness shall first be entitled to
receive payment in full of all principal and interest due thereunder before the
Holder is entitled to receive any payment of principal or interest on this
Debenture;
(b) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holder would be
entitled but for the provisions of this Article One, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of Senior Indebtedness or their representative to the
extent necessary to make payment in full of all Senior Indebtedness remaining
unpaid, after giving effect to any concurrent payment or distribution or
provision therefor to the holders of such Senior Indebtedness; and
(c) if, notwithstanding the foregoing provisions of this Section 1.3,
the Holder shall receive any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities, on account of
principal or interest on this Debenture before all Senior
3
<PAGE>
Indebtedness is paid in full, or effective provision made for its payment, then
such payment or distribution shall be received and held in trust for and shall
be paid over to the holders of the Senior Indebtedness remaining unpaid or
unprovided for or their representative, or to the trustee under any indenture
under which such Senior Indebtedness may have been issued, for application to
the payment of such Senior Indebtedness until all such Senior Indebtedness shall
have been paid in full, after giving effect to any concurrent payment or
distribution or provision therefor to the holders of such Senior Indebtedness.
The Company shall give prompt written notice to the Holder of any
dissolution, winding up, liquidation or reorganization of the Company.
Section 1.4 THE HOLDER TO BE SUBROGATED TO RIGHTS OF HOLDERS OF THE SENIOR
INDEBTEDNESS.
Subject to the payment in full of the Senior Indebtedness, the Holder
shall be subrogated (on a parity basis with the holders of the other Parity
Obligations) to the rights of the holders of the Senior Indebtedness to receive
payments or distributions of assets of the Company applicable to the Senior
Indebtedness until all amounts owing on this Debenture shall be paid in full,
and for the purpose of such subrogation no payments or distributions to the
holders of the Senior Indebtedness by or on behalf of the Company or by or on
behalf of the Holder by virtue of this Article One which otherwise would have
been made to the Holder shall, as between the Company and the Holder, be deemed
to be payment by the Company to or on account of the Debenture, it being
understood that the provisions of this Article One are intended solely for the
purpose of defining the relative rights of the Holder, on the one hand, and the
holders of the Senior Indebtedness, on the other hand.
Section 1.5 OBLIGATION OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Article One or elsewhere in this Debenture is
intended to or shall impair, as between the Company and the Holder, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holder the principal and interest on this Debenture as and when the same shall
become due and payable in accordance with its terms, or is intended to or shall
affect the relative rights of the Holder and creditors of the Company other than
the holders of the Senior Indebtedness, nor shall anything herein or therein
prevent the Holder from exercising all remedies otherwise permitted by
applicable law upon default under this Debenture, subject to the rights, if any,
under this Article One of the holders of the Senior Indebtedness in respect of
property, cash or securities of the Company received upon the exercise of any
such remedy.
Section 1.6 SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY
OR HOLDERS OF THE SENIOR INDEBTEDNESS.
No right of any present or future holders of any of the Senior
Indebtedness to enforce subordination as provided herein shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms of this Debenture
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with.
Section 1.7 ARTICLE ONE NOT TO PREVENT EVENTS OF DEFAULT.
4
<PAGE>
The failure to make a payment on account of principal or interest by
reason of any provision of this Article One shall not be construed as preventing
the occurrence of an Event of Default under Section 2.1.
Section 1.8 OBLIGATIONS UNDER THIS DEBENTURE RANK PARI PASSU WITH THE PARITY
OBLIGATIONS.
The payment of the principal of, and interest on, this Debenture is,
and shall be, PARI PASSU to the obligations and indebtedness of the Company
under:
(i) the Company's 8.0% Secured Subordinated Debentures due 2005, Series I,
(ii) the Company's 8.0% Secured Subordinated Debentures due 2005, Series II,
and
(iii) the Company's Promissory Note, dated March 20, 1996, made by the
Company payable to the order of Halston Borghese, Inc. in the original
principal amount of $2,000,000.00
(the foregoing obligations and indebtedness being referred to herein as the
"Parity Obligations").
Section 1.9 OBLIGATIONS UNDER THIS DEBENTURE RANK SENIOR TO THE SUBORDINATED
DEBENTURES.
The payment of the principal of, and interest on, this Debenture is,
and shall be, superior to the obligations and indebtedness of the Company under
the Company's 8.5% Junior Subordinated Debenture, Due 2001, dated as of May 10,
1996, made by the Company payable to the order of Fragrance Marketing Group,
Inc., a Florida corporation ("FMG") in the original principal amount of
$4,000,000.00, the Company's 8.5% Junior Subordinated Debenture, Due 2004, dated
as of May 10, 1996, made by the Company payable to the order of FMG in the
original principal amount of $7,000,000.00, and the Company's 8.5% Junior
Subordinated Debenture, Due 2004, dated as of May 10, 1996, made by the Company
payable to the order of FMG in the original principal amount of $100,034.00
(collectively, the "Subordinated Debentures").
ARTICLE TWO
DEFAULT AND REMEDY
Section 2.1 EVENTS OR DEFAULT.
(1) the Company fails to pay any interest on this Debenture when the
same becomes due and payable and such failure continues for a period of 120
days;
(2) the Company fails to pay any installment of principal of this
Debenture when the same becomes due and payable, whether at maturity or
otherwise;
(3) the Company fails to observe or perform any of its covenants and
agreements under this Debenture other than as set forth in clauses (1) and (2)
above, and such failure continues for a period of 30 days;
5
<PAGE>
(4) there occurs an event of default under any Senior Indebtedness
or under the terms of any of the Parity Obligations of the Company;
(5) the Company shall (a) make an assignment for the benefit of
creditors, file a petition in bankruptcy, petition or apply to any tribunal for
the appointment of a custodian, receiver or trustee, or commence any proceeding
under any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, whether now or
hereafter in effect, or any such petition or application shall have been filed,
or (b) any such proceeding shall have been commenced against the Company in
which an order for relief is entered or which remains undismissed for a period
of thirty (30) days or more;
(6) the Company shall generally not pay its debts as such debts
become due or admit in writing its inability to pay its debts as they become
due; or
(7) any substantial property of the Company is taken possession of
or seized at the instance of any governmental authority.
Section 2.2 ACCELERATION.
If an Event of Default under Section 2.1 occurs, the entire outstanding
principal balance of, and all accrued and unpaid interest on, this Debenture
shall immediately become due and payable.
Section 2.3 NOTICE.
The Company shall promptly give notice to the Holder of the occurrence
of an Event of Default.
ARTICLE THREE
MISCELLANEOUS
Section 3.1 LIMITATION ON OBLIGATION OF COMPANY.
Anything herein to the contrary notwithstanding, the obligations of the
Company under this Debenture shall be subject to the limitation that payments of
interest to the Holder shall not be required to the extent that receipt of any
such payment by such Holder would be contrary to provisions of law applicable to
such Holder (if any) which limit the maximum rate of interest which may be
charged or collected by such Holder. In the event that the Company makes any
payment of interest, fees, or other charges, however denominated, which payment
results in interest paid by the Company exceeding the maximum rate of interest
permitted by applicable law, any excess over such maximum shall be applied in
reduction of the principal balance owed to the Holder as of the date of such
payment, or if such excess exceeds the amount of principal owed to the Holder as
of the date of such payment, the difference shall be paid by the Holder to the
Company.
Section 3.2 COST OF ENFORCEMENT.
The Company shall pay all costs incurred by any holder of this
Debenture, including reasonable attorney's fees (including those for appellate
proceedings), in connection with the
6
collection or attempted collection or enforcement of this Debenture, whether or
not legal proceedings may have been instituted.
Section 3.3 WAIVER BY COMPANY.
The Company waives presentment for payment, demand, protest, notice of
dishonor, notice of acceleration of maturity, and all defenses on the ground of
extension of time for payment hereof, and agrees to continue and remain bound
for the payment of principal, interest, and all other sums payable hereunder,
notwithstanding any change or changes by way of release, surrender, exchange, or
substitution of any security for this Debenture or by way of any extension or
extensions of time for payment of principal and interest; and the Company waives
all and every kind of notice of such change or changes and agrees that the same
may be made without notice to or consent of the Company.
Section 3.4 NO WAIVER BY HOLDER.
No course of dealing between the Company and the Holder and no delay or
omission on the part of such Holder in exercising any rights under this
Debenture shall operate as a waiver of the rights of the Holder. No failure to
insist upon the strict provisions of any covenant, term, condition or other
provision of this Debenture or to exercise any right or remedy thereunder shall
constitute a waiver by the Holder of any such covenant, term, condition or other
provision or of any default or Event of Default in connection therewith. The
waiver of any covenant, term, condition or other provision hereof or default or
Event of Default hereunder on one occasion shall not be construed as a bar to or
a waiver of any right or remedy on any future occasion and shall not affect or
alter this Debenture except to the extent specifically provided in the
instruments setting forth such waiver, and every covenant, term, condition and
other provision of this Debenture shall, in such event, continue in full force
and effect.
Section 3.5 CUMULATIVE REMEDIES.
The rights and remedies of the Holder as provided herein shall be
cumulative and concurrent and may be pursued singularly, successively or
together at the sole discretion of the Holder, and may be exercised as often as
occasion therefor shall occur, and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release of the same.
Section 3.6 GOVERNING LAW.
This Debenture shall be governed by the laws of the State of Florida,
without regard to its conflict of law doctrine.
FRENCH FRAGRANCES, INC., a
Florida corporation
By:
----------------------------
Rafael Kravec
President
7
<PAGE>
STATE of )
)
COUNTY of )
The foregoing instrument was acknowledged before me this ______ day of
____________ , 1996 by _________________________, the _______________________of
FRENCH FRAGRANCES, INC., a Florida corporation, on behalf of the corporation.
He/she is personally known to me or has produced ____________________________ as
identification.
--------------------------------------------
Notary Public
My Commission Expires:
8
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE EQUIVALENT
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
YEAR ENDED JUNE 30, JANUARY 31,
-------------------------- ------------
1994 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
PRIMARY
Net Earnings .............. $ 595,478 $1,011,367 $ 641,057
============ ============= ============
Shares
Weighted average number
of shares outstanding .. 7,120,000 7,120,000 7,120,000
Additional shares
assuming conversion of:
Convertible redeemable
preferred stock ....
Stock options and
warrants ..............
------------ ------------- ------------
Weighted average number
of common share
equivalents ............ 7,120,000 7,120,000 7,120,000
============ ============= ============
Primary earnings per
common share equivalent . $ .08 $ .14 $ .09
============ ============= ============
FULLY DILUTED
Net Earnings .............. $ 595,478 $1,011,367 $ 641,057
============ ============= ============
Shares
Weighted average number
of shares outstanding .. 7,120,000 7,120,000 7,120,000
Additional shares
assuming conversion of:
Convertible redeemable
preferred stock ....
Stock options and
warrants ..............
------------ ------------- ------------
Weighted average number
of common share
equivalents ............ 7,120,000 7,120,000 7,120,000
============ ============= ============
Fully diluted earnings per
common share equivalent . $ .08 $ .14 $ .09
============ ============= ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEVEN MONTHS TWELVE MONTHS
ENDED ENDED YEAR ENDED THREE MONTHS ENDED
JANUARY 31, JANUARY 31, JANUARY 31, APRIL 30,
------------- -------------- -------------- --------------------------
1995 1995 1996 1995 1996
------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PRIMARY
Net Earnings .............. $2,491,895 $2,862,227 $3,007,118 $ 148,056 $ 292,345
============= ============== ============== ============ ============
Shares
Weighted average number
of shares outstanding .. 7,120,000 7,120,000 7,548,278 7,120,000 9,641,290
Additional shares
assuming conversion of:
Convertible redeemable
preferred stock .... 813,714 1,285,573
Stock options and
warrants .............. 155,768 249,122
------------- -------------- -------------- ------------ -------------
Weighted average number
of common share
equivalents ............ 7,120,000 7,120,000 8,517,760 7,120,000 11,175,985
============= ============== ============== ============ =============
Primary earnings per
common share equivalent . $ .35 $ .40 $ .35 $ .02 $ .03
============= ============== ============== ============ =============
FULLY DILUTED
Net Earnings .............. $2,491,895 $2,862,227 $3,007,118 $ 148,056 $ 292,345
============= ============== ============== ============ =============
Shares
Weighted average number
of shares outstanding .. 7,120,000 7,120,000 7,548,278 7,120,000 9,641,290
Additional shares
assuming conversion of:
Convertible redeemable
preferred stock .... 1,310,957 1,541,585
Stock options and
warrants .............. 261,855 302,822
------------- -------------- -------------- ------------ -------------
Weighted average number
of common share
equivalents ............ 7,120,000 7,120,000 9,121,090 7,120,000 11,485,697
============= ============== ============== ============ =============
Fully diluted earnings per
common share equivalent . $ .35 $ .40 $ .33 $ .02 $ .03
============= ============== ============== ============ =============
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-4588 of French Fragrances, Inc. on Form S-1 of our report dated April
26, 1996, appearing in the Prospectus, which is part of such Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Miami, Florida
June 6, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-4588) of our report dated May 3, 1996, on our audits of the
statement of net assets sold of the Halston Fragrance brands of Halston
Borghese International Limited as of December 31, 1995 and 1994, and the
statement of net sales, cost of sales and direct operating expenses for each
of the two years in the period ended December 31, 1995. We also consent to
the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
New York, New York
June 4, 1996
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-4588 of French Fragrances, Inc. on Form S-1 of our report on the
financial statements of Fragrance Marketing Group, Inc., dated May 3, 1996,
appearing in the Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Sanson, Kline, Jacomino & Company
Miami, Florida
June 6, 1996
