FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number 1-6370
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-0914138
(State of incorporation) (IRS Employer Identification No.)
14100 N.W. 60TH AVENUE, MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (zip code)
(305) 818-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
OUTSTANDING AT
CLASS JUNE 3, 1997
----- --------------
Common stock, $.01 par value 13,258,311 shares
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FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 1997 and April 30, 1997 ...................................3
Consolidated Statements of Income - Three Months
Ended April 30, 1996 and 1997........................................................................4
Consolidated Statements of Cash Flows - Three Months
Ended April 30, 1996 and 1997........................................................................5
Notes to Consolidated Financial Statements...........................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................14
Signatures.....................................................................................................16
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2
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 APRIL 30, 1997
---------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 855,969 $ 2,196,768
Accounts receivable, net 35,021,081 35,000,760
Inventories 67,989,322 63,908,248
Advances on inventory purchases 3,441,020 4,803,363
Prepaid expenses and other assets 909,250 1,136,399
------------- -------------
Total current assets 108,216,642 107,045,538
------------- -------------
Investment in unconsolidated affiliate 2,104,218 2,238,726
------------- -------------
Restricted cash and investments 1,314,602 359,782
------------- -------------
Property and equipment, net 13,817,203 15,039,638
------------- -------------
Other assets:
Exclusive brand licenses and trademarks, net 45,126,465 44,312,343
Deferred income taxes, net 955,805 955,805
Other intangibles and other assets 843,109 1,210,553
------------- -------------
Total other assets 46,925,379 46,478,701
------------- -------------
Total Assets $172,378,044 $171,162,385
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 39,631,301 $ 46,323,348
Accounts payable - trade 37,329,059 28,735,134
Other payables and accrued expenses 10,600,000 10,083,076
Current portion of capital lease, installment loans,
mortgage and term note 1,308,370 1,536,570
Due to affiliates, net 1,613,989 1,897,926
------------- -------------
Total current liabilities 90,482,719 88,576,054
------------- -------------
Long-term liabilities:
Secured subordinated debentures 10,435,035 10,394,476
Subordinated debentures 11,080,000 11,080,000
Convertible subordinated debentures 5,460,000 5,460,000
Mortgage note 5,824,231 5,792,612
Term notes 3,285,915 2,537,650
Capital lease and installment loans 1,130,000 1,100,000
------------- -------------
Total liabilities 127,697,900 124,940,792
------------- -------------
Commitments (Notes 4 and 7)
Shareholders' equity:
Convertible, redeemable preferred stock, Series B, $.01 par value
(liquidation preference of $.01 per share); 350,000 shares authorized;
316,005 and 315,463 shares issued and outstanding, respectively 3,160 3,155
Convertible, redeemable preferred stock, Series C, $.01 par value
(liquidation preference of $.01 per share); 571,429 shares authorized;
571,429 and 566,129 shares issued and outstanding, respectively 5,714 5,661
Common stock, $.01 par value, 50,000,000 shares authorized;
13,249,152 and 13,258,311 shares issued and outstanding, respectively 132,492 132,583
Additional paid-in capital 29,185,161 29,225,687
Retained earnings 15,353,617 16,854,507
------------- -------------
Total shareholders' equity 44,680,144 46,221,593
------------- -------------
Total liabilities and shareholders' equity $172,378,044 $171,162,385
============= =============
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
------------------------------------
1996 1997
------------ ----------
<S> <C> <C>
Net Sales $19,316,493 $35,102,038
Cost of sales 13,455,988 23,598,456
----------- ----------
Gross Profit 5,860,505 11,503,582
----------- ----------
Operating Expenses
Warehouse and shipping 805,511 1,310,038
Selling, general and administration 3,102,334 5,156,653
Depreciation and amortization 532,301 1,107,314
------------ -----------
Total operating expenses 4,440,146 7,574,005
------------ -----------
Income from Operations 1,420,359 3,929,577
------------ -----------
Other income (expense):
Interest expense, net (1,198,829) (1,742,440)
Other income 139,546 37,668
------------ -----------
Other income (expense), net (1,059,283) (1,704,772)
------------ -----------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 361,076 2,224,805
Equity in earnings of unconsolidated
affiliate, 50% owned 91,469 134,508
------------ -----------
Income before income taxes 452,545 2,359,313
Provision for income taxes 160,200 858,423
------------ -----------
Net Income $ 292,345 $1,500,890
============ ===========
Earnings per common share equivalent:
Primary $0.03 $0.10
============ ===========
Fully diluted $0.03 $0.10
============ ===========
Weighted average number of common share equivalents:
Primary 11,175,985 15,626,868
============ ===========
Fully diluted 11,485,697 15,698,966
============ ===========
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
---------------------------------
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net Income $ 292,345 $ 1,500,890
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 532,301 1,107,314
Equity in earnings of unconsolidated affiliate (91,469) (134,508)
Change in assets and liabilities net of effects from acquisitions:
(Increase) decrease in accounts receivable (5,101,435) 20,321
(Increase) decrease in inventories (3,537,743) 4,081,073
Increase in advances on inventory purchases (127,446) (1,362,343)
Decrease (increase) in prepaid expenses and other assets 1,147,720 (620,068)
Increase (decrease) in accounts payable 1,556,804 (8,593,925)
Decrease in other payables and accrued expenses (726,940) (516,923)
Decrease in due to affiliate, net (163,184) (514,657)
------------ -----------
Net cash used in operating activities (6,219,047) (5,032,826)
------------ -----------
Cash flows from investing activities:
Purchase of exclusive brand licenses and trademarks (18,431,324) ---
Additions to property and equipment, net of disposals (277,511) (1,490,151)
Receipts of restricted cash --- 954,820
------------ -----------
Net cash used in investing activities (18,708,835) (535,331)
------------ -----------
Cash flows from financing activities:
Proceeds from the grant of stock purchase warrants 40,000 ---
Proceeds from the issuance of preferred stock 5,714 ---
Proceeds from the issuance of secured subordinated debentures 3,000,035 ---
Advances from (payments to) unconsolidated affiliate 206,091 798,594
Proceeds from term loan 8,960,000 ---
Payments on term loans (583,333) (500,000)
Net proceeds from short-term debt 8,337,000 6,692,047
Payments on capital lease and installment loans (57,269) (42,937)
Payments on commercial mortgage --- (38,748)
Proceeds from bridge loan 6,000,000 ---
------------ -----------
Net cash provided by financing activities 25,908,238 6,908,956
------------ -----------
Net increase in cash and cash equivalents 980,356 1,340,799
Cash and cash equivalents at beginning of period 123,960 855,969
------------ -----------
Cash and cash equivalents at end of period $ 1,104,316 $ 2,196,768
============ ===========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 781,997 $ 1,562,049
============ ===========
Income taxes paid during the period $ 393,000 $ 1,351,700
============ ===========
Supplemental schedule of noncash financing and investing activities:
Issuance of note to seller in connection with Halston acquisition $ 2,000,000
============
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
French Fragrances, Inc. (the "Company") is a manufacturer, distributor
and marketer of prestige designer fragrances and related cosmetic products,
primarily to mass-market retailers in the United States.
The consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "Commission") for interim financial information. As
such financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements, they should be read in conjunction with the financial statements and
related footnotes included in the Company's Annual Report on Form 10-K for the
year ended January 31, 1997, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 1997 is
audited. The other consolidated financial statements are unaudited, but in the
opinion of management contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the consolidated balance sheet of the
Company as of April 30, 1997, the consolidated statements of income of the
Company for the three months ended April 30, 1997 and 1996, and the consolidated
statements of cash flow for the three months ended April 30, 1997 and 1996.
Operating results for the three months ended April 30, 1997 are not necessarily
indicative of the results for the full fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE - Earnings per share is based on the weighted
average number of common shares outstanding as calculated under the treasury
stock method 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,
including the assumed conversion of the convertible subordinated debentures with
corresponding adjustments for interest expense, net of tax.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128 "Earnings per Share"
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per share
is computed by dividing the net income available to common shareholders by the
weighted average shares of outstanding common stock. The calculation of diluted
earnings per share is similar to basic earnings per share except that the
denominator includes dilutive common stock equivalents such as stock options and
warrants. The statement is effective for financial statements for periods ending
after December 31, 1997. The Company will adopt SFAS 128 in the fourth quarter
of fiscal 1998, as early adoption is not permitted. The pro forma basic earnings
per share and diluted earnings per share calculated in accordance with SFAS 128
for the three months ended April 30, 1996 and 1997, are as follows:
THREE MONTHS ENDED APRIL 30,
---------------------------
1996 1997
---- ----
Pro forma basic earnings per share $0.03 $0.11
Pro forma diluted earnings per share $0.03 $0.10
6
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents financial information of Fine Fragrances, Inc.
("Fine Fragrances"), a fragrance distribution company which, at April 30, 1997,
was 49.99% owned by the Company and distributes on an exclusive basis in the
Unites States and Canada the SALVADOR DALI, TAXI, CAFE and WATT brands
manufactured by COFCI, S.A. ("COFCI"). For the periods presented, the Company's
investment in Fine Fragrances is accounted for under the equity method:
JANUARY 31, 1997 APRIL 30, 1997
---------------- --------------
Current assets $ 4,327,313 $ 5,274,062
Other assets 1,386,694 2,111,500
------------ ------------
Total assets $ 5,714,007 $ 7,385,562
============ ============
Current liabilities $ 1,717,091 $ 3,082,298
Shareholders' equity 3,996,916 4,303,264
------------ ------------
Total liabilities and shareholder's equity $ 5,714,007 $ 7,385,562
============ ============
THREE MONTHS ENDED APRIL 30,
-----------------------------
1996 1997
---------- ----------
Net Sales $1,474,123 $1,949,787
========== ==========
Net Income $ 220,273 $ 306,348
========== ==========
The Company'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
the term of the agreements.
The reconciliation of the investment in unconsolidated affiliate is as
follows:
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JANUARY 31, 1997 APRIL 30, 1997
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Equity interest at 50% $ 1,998,440 $ 2,151,615
Unamortized exclusive distribution agreements 105,778 87,111
----------- -----------
Carrying value $ 2,104,218 $ 2,238,726
=========== ===========
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Current liabilities primarily relate to a $3,000,000 secured line of
credit from a bank. The interest rate was prime rate plus 2.5% (prime rate was
8.5% at April 30, 1997). The line was secured by receivables and inventories of
Fine Fragrances. Amounts outstanding were $952,000 and $1,735,795 at January 31,
1997 and April 30, 1997, respectively. There were no other material commitments
or contingencies for Fine Fragrances other than the management fees owed to the
Company (see Note 7).
In May 1997, the Company used approximately $4,226,000 of the net
proceeds from a private placement (the "Offering") of $115,000,000 principal
amount of 10-3/8% Senior Notes Due 2007 (the "Senior Notes") to acquire the
50.01% interest of Fine Fragrances that the Company did not own (the "Fine
Fragrances Interest") from an unaffiliated third party and to repay Fine
Fragrances' credit line (see Note 10). The purchase price for the Fine
Fragrances Interest was $2,000,000, plus an additional $1,000,000 which is to be
paid over time based on 5% of the net sales of COFCI products sold by Fine
Fragrances or the Company, with any unpaid balance due 30 days after the third
anniversary of the consummation of the transaction. As a result of this
acquisition, Fine Fragrances became a wholly-owned subsidiary of the Company and
the operations of Fine Fragrances will be consolidated with those of the
Company.
7
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SHORT-TERM DEBT
In March 1997, the Company amended its credit facility to provide for
an increase in the borrowing limit of the revolving portion of the credit
facility from $30,000,000 to $45,000,000 from March 31, 1997 through June 30,
1997. At April 30, 1997, amounts outstanding under the credit facility were
$48,156,681 (including $3,833,000 which remained outstanding under a term loan
(the "Beene Loan") issued in connection with the acquisition of a long-term
license for the Geoffrey Beene fragrance brands in March 1995 (the "Geoffrey
Beene Acquisition")).
In May 1997, the Company used approximately $48,595,000 of the net
proceeds from the Offering to repay all amounts outstanding under its credit
facility (including the Beene Loan) and terminated such facility. Concurrently
with the closing of the Offering, the Company entered into a new stand-by credit
facility (the "New Credit Facility") with the same lender which provides for
borrowings on a revolving basis of up to $40,000,000, with a $3,000,000 sublimit
for letters of credit. Borrowings under the New Credit Facility are limited to
eligible accounts receivable and inventories. Borrowings under the New Credit
Facility will be secured by a first priority lien on all of the Company's
accounts receivable and inventory. The Company's obligations under the new
credit facility will rank PARI PASSU in right of payment with the Senior Notes.
The New Credit Facility contains several covenants, the more significant of
which are that the Company maintain a minimum level of equity and meet certain
debt-to-equity, interest coverage and liquidity ratios. The New Credit Facility
also includes a prohibition on the payment of dividends and other distributions
to shareholders and restrictions on the incurrence of additional non-trade
indebtedness.
NOTE 5. SUBORDINATED DEBENTURES
In May 1997, the Company used approximately $10,428,000 of the net
proceeds from the Offering to redeem its outstanding 8% Secured Subordinated
Debentures Due 2005 Series I and Series II which were issued in connection with
the Geoffrey Beene Acquisition and the March 1996 acquisition of the Halston
brands. The Company also used approximately $3,982,000 of the net proceeds from
such offering to repurchase, at a discount, an 8.5% Subordinated Debenture Due
1999 in the principal amount of $4,000,0000 which was issued in connection with
the acquisition of the assets of Fragrance Marketing Group, Inc. in May 1996.
NOTE 6. INCOME TAXES
The provision for income taxes for the three month period ended April 30,
1997 was calculated based upon the estimated tax rate of 39% for the full fiscal
year ending January 31, 1998.
NOTE 7. RELATED PARTY TRANSACTIONS
In the normal course of business or from time-to-time, the Company and
its affiliates, Fine Fragrances and National Trading Manufacturing, Inc., a
company which is wholly-owned by the Chairman of the Company ("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, 1997,
such transactions are summarized as follows:
8
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS (Continued)
ADVANCES FINE FRAGRANCES DUE TO (FROM) DUE TO (FROM) TOTAL DUE TO
FROM FINE MANAGEMENT FINE FRAGRANCES, NATIONAL TRADING, (FROM) AFFILIATES,
FRAGRANCES FEES AND OTHER NET NET NET
---------- --------------- ---------------- ----------------- ------------------
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Balance at January 31, 1997 $3,172,070 ($2,076,725) $1,095,345 $ 518,644 $1,613,989
Advances, net 1,172,151 1,172,151 1,172,151
Management fee (12%) (242,227) (242,227) (242,227)
Interest 39,174 39,174 39,174
Repayments (170,504) (170,504) (514,657) (685,161)
------------ ----------- ------------ ------------ ---------------
Balance at April 30, 1997 $4,212,891 $(2,318,952) $1,893,939 $ 3,987 $1,897,926
============ =========== ============ ============ ===============
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In connection with the acquisition of the Fine Fragrances Interest, the
management agreement with Fine Fragrances was terminated effective May 1, 1997.
In addition, all advances from Fine Fragrances were canceled.
In April 1997, the Company terminated various monitoring agreements it
had with affiliates of the Company. Pursuant to these agreements, the affiliates
provided financial advisory services to the Company for annual fees totaling
$275,000. These agreements were replaced by a one-year consulting agreement with
E.S.B. Consultants, Inc. ("ESB"), pursuant to which ESB provides financial
advisory and management services for a fee of $300,000.
NOTE 8. STOCK OPTION PLANS
During the three months ended April 30, 1997, The Company granted
options for 30,000 shares at an exercise price of $8.38 per share under the 1995
Stock Option Plan.
NOTE 9. SHAREHOLDERS' EQUITY
A schedule of the transactions in the common stock and the
preferred stock of the Company and the additional paid-in capital accounts is as
follows:
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PREFERRED STOCK
---------------------------------------
SERIES B SERIES C COMMON STOCK ADDITIONAL
----------------- ----------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997 316,005 $3,160 571,429 $5,714 13,249,152 $132,492 $29,185,161
Issuance of Common Stock
upon conversion of Series
B and Series C convertible
preferred stock (542) (5) (5300) (53) 9,159 91 40,526
------- ------- -------- ------- ---------- -------- -----------
Balance at April 30, 1997 315,463 $3,155 566,129 $5,661 13,258,311 $132,583 $29,225,687
======= ======= ======== ======= ========== ======== ===========
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9
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FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUBSEQUENT EVENTS
In May 1997, the Company, consummated the private placement of
$115,000,000 principal amount of 10-3/8% Senior Notes, due 2007. Approximately
$48,595,000 of the net proceeds from the sale of the Senior Notes was used to
repay all of the outstanding indebtedness under the Company's credit facility
and approximately $14,410,000 of the net proceeds was used to repay subordinated
debentures of the Company (see Notes 4 and 5). In addition, the Company applied
approximately $4,226,000 to the acquisition of the Fine Fragrances Interest and
the repayment of all of the outstanding indebtedness under Fine Fragrances'
credit facility (see Note 3). The balance of the net proceeds from the Offering
will be used to provide the Company with additional working capital support, as
well as increased operational and financial flexibility to take advantage of
expansion opportunities, through acquisitions or new product distribution
arrangements. The Senior Notes have not been registered under the Act and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Senior Notes are expected to be
exchanged for new notes containing identical terms which will be registered
under the Act.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Notes to
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in the
Company's Form 10-K for the year ended January 31, 1997. The results of
operations for an interim period may not give a true indication of results for
the year. In the following discussions, all comparisons are with the
corresponding items in the prior year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1997 COMPARED TO THE THREE MONTHS ENDED APRIL 30,
1996
NET SALES. Net sales increased $15.8 million, or 82%, to $35.1 million
for the three months ended April 30, 1997 from $19.3 million for the three
months ended April 30, 1996. The increase in net sales was primarily
attributable to (i) the increased selection of prestige fragrance brands that
are distributed by the Company on a non-exclusive basis through direct purchase
relationships with manufacturers or other sources ("Distributed Brands"), (ii)
the acquisition of the Halston fragrance brands in March 1996 (the "Halston
Acquisition"), and (iii) the acquisition of exclusive distribution agreements
for the fragrance brands formerly distributed by Fragrance Marketing Group, Inc.
("FMG") in May 1996 (the "FMG Acquisition"). The increase in net sales
represents both an increase in the volume of products sold to existing
customers, as well as sales to new customers. Management believes that increased
sales have resulted from the Company's ability to provide its customers with a
larger selection of products and a continuous, direct supply of products, and
the growth in sales of customized gift sets.
GROSS PROFIT. Gross profit increased $5.6 million, or 96%, to $11.5
million for the three months ended April 30, 1997 from $5.9 million for the
three months ended April 30, 1996. The increase in gross profit and the increase
in gross margin (from 30.3% to 32.8%) were primarily attributable to the product
sales from the Halston brands, as well as the brands formerly distributed by FMG
(all of which were at higher gross margins) and an increase in the sale of
certain product categories with higher gross margins such as gift sets. The
increase in gross margin was partially offset by an increase in sales of certain
Distributed Brands which typically sell at lower margins.
WAREHOUSE AND SHIPPING EXPENSE. Warehouse and shipping expenses
increased $505,000, or 63%, to $1,310,000 for the three months ended April 30,
1997 from $805,000 for the three months ended April 30, 1996. The increase
resulted from the increase in net sales and higher customer service expenses.
SG&A. Selling, general and administrative expenses increased $2.1
million, or 66%, to $5.2 million for the three months ended April 30, 1997 from
$3.1 million for the three months ended April 30, 1996. The increase in selling,
general and administrative expenses was primarily a result of an increase in
advertising and promotional expenses for the Halston and Geoffrey Beene brands,
an increase in sales commissions associated with the increase in net sales and
the addition of sales, marketing and administrative personnel since the FMG
Acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$575,000, or 108%, to $1,107,000 for the three months ended April 30, 1997 from
$532,000 for the three months ended April 30, 1996. The increase was primarily
attributable to increased amortization of trademarks and exclusive license
agreements resulting from the Halston Acquisition and the FMG Acquisition.
11
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INTEREST EXPENSE, NET. Interest expense, net of interest income,
increased $544,000, or 45% to $1,742,000 for the three months ended April 30,
1997 from $1,199,000 for the three months ended April 30, 1996. This increase
was primarily due to the increase in average debt outstanding resulting from the
Halston Acquisition and the FMG Acquisition and increased borrowings under the
revolving portion of the Company's bank credit facility to accommodate increased
working capital requirements, including the increased inventory levels needed to
support higher net sales.
NET INCOME. Net income increased $1,209,000, or 413%, to $1,501,000 for
the three months ended April 30, 1997 from $292,000 for the three months ended
April 30, 1996, primarily as a result of the increase in net sales and gross
profit which were partially offset by higher selling, interest and amortization
expenses.
NET INCOME PER SHARE. Net income per share increased to $0.10 for the
three months ended April 30, 1997, compared to $0.03 per share for the three
months ended April 30, 1996, primarily as a result of the increase in net
income, which was partially offset by the increased number of outstanding shares
to give effect to the Company's public offering of 3,364,000 shares of common
stock in July 1996.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $3,084,000, or 158%, to $5,037,000 for the three months ended April
30, 1997 from $1,953,000 for the three months ended April 30, 1996. The EBITDA
margin increased to 14.3% for the three months ended April 30, 1997 from 10.1%
for the three months ended April 30, 1996. The increases in EBITDA and EBITDA
margin were primarily attributable to the increase in gross profit discussed
above, partially offset by the increase in selling, general and administrative
expenses.
FINANCIAL CONDITION
In March and May 1996, the Company completed the Halston Acquisition
and the FMG Acquisition, respectively. These acquisitions, along with the
Company's increased selection of Distributed Brands, have resulted in a
significant increase in net sales and net income of the Company during the
quarter ended April 30, 1997. The decrease in inventory and trade payables at
April 30, 1997 resulted from the increase in net sales, as well as reduced
purchases of certain Distributed Brand products as to which the Company had made
opportunity purchases on favorable pricing and credit terms during the fourth
quarter of fiscal year 1996. The Company funded its working capital requirements
during the three months ended April 30, 1997 primarily with short-term debt from
the revolving portion of its bank credit facility and with vendor credit, and
the increase in short-term debt at April 30, 1997 primarily reflects the
increased working capital requirements during the quarter ended April 30, 1997.
See Note 4 to the Notes to Consolidated Financial Statements.
In May 1997, the Company consummated the private placement of
$115,000,000 principal amount of 10-3/8% Senior Notes Due 2005 (the "Senior
Notes"). See Note 10 to Notes to Consolidated Financial Statements.
Approximately $48,595,000 of the net proceeds from the sale of the Senior Notes
was used to repay all of the outstanding indebtedness under the Company's credit
facility (including amounts outstanding under a term loan issued in connection
with the acquisition of a long-term license for the Geoffrey Beene fragrance
brands in March 1995 (the "Geoffrey Beene Acquisition") and such credit facility
was terminated. Approximately $10,428,000 of the net proceeds was used to repay
the Company's 8% Secured Subordinated Debentures Series I and II which were
issued in connection with the Geoffrey Beene Acquisition and the Halston
Acquisition. In addition, approximately $4,226,000 of the net proceeds was used
to acquire the 50.01% interest in Fine Fragrances, Inc. ("Fine Fragrances") that
the Company did not own from an unaffiliated third party and to repay Fine
Fragrances' bank credit line. The balance of the net proceeds from the offering
of the Senior Notes will be used to provide the Company with additional working
capital
12
<PAGE>
support, as well as increased operational and financial flexibility to take
advantage of expansion opportunities, through acquisitions or new product
distribution arrangements. The Senior Notes have not been registered under the
Act and may not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The Senior Notes are
expected to be exchanged for new notes containing identical terms which will be
registered under the Act. The exchange offer will be made only by means of a
prospectus.
Concurrently with the closing of the Senior Note offering, the Company
entered into a new stand-by credit facility (the "New Credit Facility") with
Fleet National Bank ("Fleet") which provides for borrowings on a revolving basis
of up to $40 million (including up to $3 million in commercial letters of
credit) for general corporate purposes, including working capital needs and
acquisitions, subject to certain borrowing base limitations. Amounts borrowed on
the revolving portion of the New Credit Facility mature on May 31, 1999. Loans
under the revolving credit portion of the Credit Facility will bear interest,
payable monthly, at a floating rate ranging from, at the option of the Company,
either (i) 1.75% over LIBOR to 2.25% over LIBOR or (ii) the prime rate as quoted
by Fleet to 0.5% over such prime rate, and combinations thereof, in each case
depending on the ratio of the Company's total funded debt to its shareholders
equity base. The Company's borrowing availability under the New Credit Facility
is limited to the sum of between 80 to 85% of eligible accounts receivable and
50% of eligible inventory (up to a maximum of $20 million). The Company's
obligations under the New Credit Facility will rank PARI PASSU in right of
payment with the Senior Notes and senior in right of payment to all existing and
future subordinated indebtedness of the Company. In addition, borrowings under
the New Credit Facility are secured by a first priority lien on all of the
Company's accounts receivable and inventory.
The New Credit Facility: restricts the Company's ability to incur
additional non-trade debt (with certain exceptions, including indebtedness not
exceeding $50 million for a fiscal year issued in connection with certain asset
purchases), and to enter into certain acquisitions, mergers, investments and
affiliated transactions; and prohibits the declaration or payment of dividends
on, or the redemption of, the Company's capital stock, certain payments on the
subordinated debt and the sale of the Company's interest in its subsidiaries.
The New 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.
13
<PAGE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of May 19, 1995, by
and between the Company and FFI (incorporated herein by
reference to Exhibit 2.1 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 Amendment dated September 19, 1996 to the Amended and
Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 4.4 filed as part of the
Company's Form 10-Q for the quarter ended October 31, 1996
(Commission File No. 1- 6370)).
3.3 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 Indenture, dated as of May 13, 1997, between the Company
and Marine Midland Bank, as trustee (incorporated herein by
reference to Exhibit 4.1 filed as a part of the Company's Form
8-K dated May 13, 1997 (Commission File No. 1-6370)).
4.2 Registration Rights Agreement, dated May 13, 1997, among
the Company, Donaldson, Lufkin & Jenrette Securities
Corporation and TD Securities (USA) Inc. (incorporated herein
by reference to Exhibit 4.2 filed as a part of the Company's
Form 8-K dated May 13, 1997 (Commission File No. 1-6370))
4.3 Credit Agreement, dated as of May 13, 1997, between the
Company and Fleet National Bank (incorporated herein by
reference to Exhibit 4.3 filed as a part of the Company's Form
8-K dated May 13, 1997 (Commission File No. 1-6370)).
10.1 Registration Rights Agreement dated as of November 30,
1995, among the Company, Bedford Capital Corporation
("Bedford"), Fred Berens, Rafael Kravec and Eugene Ramos
(incorporated herein by reference to Exhibit 10.1 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)).
14
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.3 Second Amendment dated as of July 22, 1996 to
Registration Rights Agreement dated as of November 30, 1995,
among the Company, Bedford, Fred Berens, Rafael Kravec and the
Estate of Eugene Ramos (incorporated by reference to Exhibit
10.3 filed as part of the Company's Form 10-Q for the quarter
ended July 31, 1996 (Commission File No. 1-6370)).
10.4 Employment Agreement dated as of April 1, 1997, between
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, 1997
(Commission File No. 1-6370)).
10.5 Chief Operating Officer Compensation Agreement dated as
of April 1, 1997, between the Company and E.S.B. Consultants,
Inc. (incorporated herein by reference to Exhibit 10.5 filed
as a part of the Company's Form 10-K for the fiscal year ended
January 31, 1997 (Commission File No. 1-6370)).
10.6 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 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 Exhibit 10.5 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 Lease Agreement, dated as of July 2,1992, between FFI and
National Trading (incorporated herein by reference to Exhibit
10.13 filed as a part of the Company's Form 10-K for the
fiscal year ended September 30, 1995 (Commission File No.
1-6370)).
10.9 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 Exhibit
10.14 filed as a part of the Company's Form 10-K for the
fiscal year ended September 30, 1995 (Commission File No.
1-6370)).
10.10 Amended and Restated Exclusive Trademark License
Agreement, dated February 29, 1980, between Geoffrey Beene,
Inc., and Epocha Distributors, Inc. (now known as Sanofi
Beaute, Inc.) as amended July 29, 1992 and February 13, 1995
(incorporated herein by reference to Exhibit 10.15 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 Asset Purchase Agreement dated as of February 1, 1996,
by and between the Company and Halston-Borghese, Inc. and its
affiliates (incorporated herein by reference to Exhibit 2.1
filed as a part of the Company's Form 8-K dated March 20, 1996
(Commission File No. 1- 6370)).
10.12 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 (incorporated
herein by reference to Exhibit 10.21(a) filed as a part of the
Company's Registration Statement on Form S-1 dated May 3, 1996
(Registration Statement No. 333-4588)).
15
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------
10.13 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)).
10.14 Amendment to Asset Purchase Agreement dated as of July
1, 1996, by and between the Company and Fragrance Marketing
Group, Inc. and Rene Garcia and Jose Miguel Norona
(incorporated by reference to Exhibit 4.4 filed as part of the
Company's Form 10-Q for the quarter ended October 31, 1996
(Commission File No. 1-6370)).
27.1 Financial Data Schedule.
</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) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRENCH FRAGRANCES, INC.
Date: JUNE 6, 1997 /S/ RAFAEL KRAVEC
-----------------------------------
Rafael Kravec
Chairman and Chief Executive
Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: JUNE 6, 1997 /S/ WILLIAM J. MUELLER
-----------------------------------
William J. Mueller
Vice President-Operations and
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> APR-30-1997
<CASH> 2,196,768
<SECURITIES> 0
<RECEIVABLES> 35,770,855
<ALLOWANCES> 770,095
<INVENTORY> 63,908,248
<CURRENT-ASSETS> 107,045,538
<PP&E> 16,815,628
<DEPRECIATION> 1,775,990
<TOTAL-ASSETS> 171,162,385
<CURRENT-LIABILITIES> 88,576,054
<BONDS> 36,364,738
0
8,816
<COMMON> 132,583
<OTHER-SE> 46,080,194
<TOTAL-LIABILITY-AND-EQUITY> 171,162,385
<SALES> 35,102,038
<TOTAL-REVENUES> 35,102,038
<CGS> 23,598,456
<TOTAL-COSTS> 31,172,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 1,742,440
<INCOME-PRETAX> 2,224,805
<INCOME-TAX> 858,423
<INCOME-CONTINUING> 1,500,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,500,890
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
