<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1998
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 December 10, 1998
---------------------------- -----------------
Common stock, $.01 par value 13,812,704 shares
<PAGE>
FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
January 31, 1998 and October 31, 1998
Consolidated Statements of Income -
Three and Nine Months Ended October 31, 1997 and 1998
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31, October 31,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,667,119 $ 4,319,411
Accounts receivable, net 53,412,248 107,695,535
Inventories 90,425,910 153,481,195
Advances on inventory purchases 6,978,285 6,800,836
Prepaid expenses and other assets 3,936,529 4,417,234
------------ ------------
Total current assets 162,420,091 276,714,211
------------ ------------
Property and equipment, net 19,501,742 18,835,275
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 42,776,017 40,316,651
Senior note offering costs, net 3,756,911 4,629,302
Deferred income taxes, net 838,633 838,633
Other intangibles and other assets 3,359,891 10,139,751
------------ ------------
Total other assets 50,731,452 55,924,337
------------ ------------
Total assets $232,653,285 $351,473,823
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 35,594,734
Accounts payable - trade 24,393,878 51,585,158
Other payables and accrued expenses 12,454,835 16,404,674
Current portion of long-term liabilities 3,100,108 3,424,988
Due to affiliates, net 294,136 --
------------ ------------
Total current liabilities 40,242,957 107,009,554
------------ ------------
Long-term liabilities:
Senior notes, net 115,000,000 157,502,617
Subordinated debentures, net 7,131,873 8,316,450
Convertible subordinated debentures 4,960,633 4,778,643
Mortgage note 5,682,041 5,576,125
Capital lease 1,010,000 --
------------ ------------
Total liabilities 174,027,504 283,183,389
------------ ------------<PAGE>
Commitments and contingencies (Note 6)
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000
shares authorized; 279,877 and 271,596
shares issued and outstanding, respectively 2,799 2,716
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429
shares authorized; 525,490 and 511,355
shares issued and outstanding, respectively 5,255 5,114
Common stock, $.01 par value, 50,000,000
shares authorized; 13,623,734 and 13,812,704
shares issued and outstanding, respectively 136,238 138,127
Additional paid-in capital 30,786,503 31,633,413
Retained earnings 27,694,986 36,511,064
------------ ------------
Total shareholders' equity 58,625,781 68,290,434
------------ ------------
Total liabilities and shareholders' equity $232,653,285 $351,473,823
============ ============
See Notes to Consolidated Financial Statements
/TABLE
<PAGE>
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
1997 1998 1997 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $89,389,852 $112,506,135 $160,127,122 $220,952,111
Cost of Sales 61,457,574 78,900,821 108,660,426 155,611,654
----------- ----------- ------------ ------------
Gross Profit 27,932,278 33,605,314 51,466,696 65,340,457
----------- ----------- ------------ ------------
Operating Expenses
Warehouse and shipping 2,302,631 3,537,255 5,050,395 7,639,311
Selling, general and
administrative 8,714,735 11,507,284 19,392,164 23,996,070
Depreciation and
amortization 1,182,963 1,816,208 3,445,765 5,247,466
----------- ----------- ------------ ------------
Total operating
expenses 12,200,329 16,860,747 27,888,324 36,882,847
----------- ----------- ------------ ------------
Income from Operations 15,731,949 16,744,567 23,578,372 28,457,610
Other Income (Expense)
Interest expense, net (3,756,256) (5,111,060) (8,575,198) (13,611,657)
Litigation settlement
expense -- (1,500,000) -- (1,500,000)
Income from sale of
contract and
intangible rights -- 932,763 -- 932,763
Other income (expense) 25,673 93,007 228,122 180,682
----------- ----------- ------------ ------------
Other income
(expense), net (3,730,583) (5,585,290) (8,347,076) (13,998,212)
----------- ----------- ------------ ------------
Income Before Equity
in Earnings of
Unconsolidated Affiliate
and Provisions for
Income Taxes 12,001,366 11,159,277 15,231,296 14,459,398
Equity in Earnings of
Unconsolidated Affiliate,
50% Owned -- -- 134,508 --
----------- ----------- ------------ ------------
<PAGE>
Income Before Income
Taxes 12,001,366 11,159,277 15,365,804 14,459,398
Provision for Income
Taxes 4,516,058 4,357,417 5,767,461 5,643,320
----------- ----------- ------------ ------------
Net Income $ 7,485,308 $ 6,801,860 $ 9,598,343 $ 8,816,078
=========== =========== ============ ============
Earnings per common
share:
Basic $0.56 $0.49 $0.72 $0.64
===== ===== ===== =====
Diluted $0.45 $0.42 $0.60 $0.52
===== ===== ===== =====
Weighted average number
of common shares:
Basic 13,447,685 13,812,704 13,327,253 13,762,423
========== ========== ========== ==========
Diluted 16,672,723 16,485,419 16,421,379 17,284,781
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
/TABLE
<PAGE>
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
October 31,
1997 1998
------------ ------------
<S> <C> <C>
Cash Flow From Operating Activities
Net Income $ 9,598,343 $ 8,816,078
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation and amortization 3,445,765 5,247,466
Amortization of senior note offering
costs 180,232 408,073
Equity in earnings of unconsolidated
affiliate (134,508) --
Change in assets and liabilities, net of
effects from the acquisitions:
Increase in accounts receivable (48,881,421) (57,706,806)
Increase in inventories (23,280,123) (52,494,708)
(Increase) decrease in advances on
inventory purchases (3,789,677) 177,449
Increase in prepaid expenses and
other current assets (2,651,282) (1,073,325)
(Decrease) increase in accounts payable (537,040) 16,630,701
Increase in other payables and
accrued expenses 4,553,106 6,962,524
Decrease in due to affiliate, net (14,507) --
------------ ------------
Net cash used in operating activities (61,511,112) (73,032,548)
------------ ------------
Cash Flows From Investing Activities
Cash portion of purchase of
intangible assets -- (5,150,000)
Cash payment for acquisition of unconsolidated
affiliate, net of cash acquired (1,745,768) --
Receipt of restricted cash for capital
improvements 1,314,602 --
Additions to property and equipment,
net of disposals (5,627,389) (1,742,711)
------------ ------------
Net cash used in investing activities (6,058,555) (6,892,711)
------------ ------------
<PAGE>
Cash Flows From Financing Activities
Proceeds from the exercise of
employee stock options -- 117,480
Proceeds from the exercise of
stock purchase warrants -- 275,000
Proceeds from the issuance of
senior notes, net 111,550,000 41,500,000
Payments to retire subordinated debentures (14,394,475) (500,000)
Proceeds from conversion of preferred stock 949,761 268,778
Advances from unconsolidated affiliate, net 798,894 --
Payments on term loans (4,333,333) (530,972)
Net (payments on) proceeds from short-term debt (24,186,962) 35,594,734
Payments on capital lease and installment loans (111,144) (50,000)
Payments on facility mortgage note (98,901) (97,469)
------------ ------------
Net cash provided by financing activities 70,173,840 76,577,551
------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 2,604,173 (3,347,708)
Cash And Cash Equivalents at
Beginning of Period 855,969 7,667,119
------------ ------------
Cash And Cash Equivalents at
End of Period $ 3,460,142 $ 4,319,411
============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the period $ 3,106,996 $ 7,549,782
============ ============
Income taxes paid during the period $ 7,987,622 $ 7,134,031
============ ============
See Notes to Consolidated Financial Statements
/TABLE
<PAGE>
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, 1998, filed with the Commission.
The consolidated balance sheet of the Company as of
January 31, 1998 is audited. The other consolidated financial
statements are unaudited, but in the opinion of management
contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated balance
sheet of the Company as of October 31, 1998, the consolidated
statements of income of the Company for the three and nine months
ended October 31, 1998 and 1997, and the consolidated statements
of cash flow for the nine months ended October 31, 1998 and 1997.
Operating results for the three and nine months ended October
31, 1998 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 for the nine months
ended October 31, 1997 and 1998 have been calculated in
accordance with Statement of Financial Accounting Standards No.
128 Earnings per Share ("SFAS 128"). SFAS 128, which was adopted
by the Company in the fourth quarter of fiscal 1998 and
requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement.
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 potential common stock
such as stock options, warrants and convertible securities. In
addition, for the diluted earnings per share calculation, the
interest incurred on the convertible securities, net of tax, must
be added back to net income. Such amounts were $63,984 and
$50,458 for the three months ended October 31, 1997 and 1998,
respectively, and $191,953 and $163,932 for the nine months ended
October 31, 1997 and 1998, respectively.
Segments of an Enterprise - In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
changes the way public companies report information about
segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports issued to shareholders. SFAS No. 131 also
requires entity wide disclosures about the products and services
an entity provides, the foreign countries in which it holds
assets and reports revenues, and its major customers. SFAS 131
is effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS 131 for the Company's fiscal year ended
January 31, 1999 is not expected to have a material impact on the
Company's consolidated financial statement presentation.
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING
In March 1998, the Company consummated the acquisition (the
"JPF Acquisition") of certain assets of J.P. Fragrances, Inc.
("JPF"), a distributor of prestige fragrance products, including
inventory, returns, contract rights, accounts receivable, books
and records, fixed assets (including furniture and warehouse
materials and equipment), claims, intangible rights (including
non-compete agreements) and goodwill (collectively, the "Acquired
Assets"). The Company also assumed approximately $10.6 million
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING -
Continued
of certain trade and other payables of JPF. In addition to the
assumption of the payables, the purchase price for the Acquired
Assets consisted of approximately $37.3 million in cash and a
subordinated debenture of $3.0 million (the "Debenture"). The
cash portion of the purchase price was financed from available
cash from operations and the Company's revolving credit facility
(the "Credit Facility") with Fleet National Bank ("Fleet"). The
Debenture is non-interest bearing, with the principal amount
being payable in three equal annual installments if, and only
if, certain conditions relating to the fragrance business of JPF
(the "JPF Business") are achieved by the Company, including
achieving certain gross profit thresholds from the JPF Business.
The Debenture has been recorded net of its discount of $485,528
calculated using an effective rate of 9.38%. The discount will
be amortized using the effective rate over the life of the
Debenture. As a result of the JPF Acquisition, the Company
acquired approximately $30.4 million of inventory, $12.1 million
of accounts receivable and $263,000 of fixed assets (consisting
primarily of office and warehouse furniture and equipment).
Other intangibles and other assets at October 31, 1998 includes
approximately $7.2 million of contract rights, intangible
rights (including non-compete agreements) and goodwill acquired
as part of the JPF Acquisition.
In April 1998, the Company consummated the private placement
under Rule 144A (the "Note Offering") pursuant to the Securities
Act of 1933, as amended (the "Act"), of $40.0 million principal
amount of 10-3/8% Senior Notes due 2007, Series C (the "Series C
Senior Notes"). The Series C Senior Notes were sold at 106.5% of
their principal amount and had substantially similar terms to the
Company's existing 10-3/8% Senior Notes due 2007, Series B (the
"Series B Senior Notes"), which the Company issued in July 1997.
The notes are recorded net of a premium of $2.6 million. The
premium is being amortized over the life of the notes using the
effective interest method. During the three and nine months
ended October 31, 1998, the Company amortized $48,034 and
$97,383, respectively, of premium against interest expense. The
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING -
Continued
net proceeds of approximately $41.4 million from the sale of the
notes were used to repay outstanding borrowings under the
Credit Facility and other indebtedness to Fleet, which was used
for the JPF Acquisition, as well as for working capital purposes.
In August 1998, the Series C Senior Notes were exchanged for an
equivalent principal amount of 10-3/8% Senior Notes due 2007,
Series D (the "Series D Senior Notes") containing identical terms
to the Series C Senior Notes, but which have been registered
under the Act.
The Indenture pursuant to which the Series D Senior Notes
were issued (the "Indenture") provides that such notes will be
senior unsecured obligations of the Company and will rank senior
in payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all
existing and future senior indebtedness of the Company, including
indebtedness under the Credit Facility and the Series B Senior
Notes. The Indenture generally limits the ability of the Company
to (i) incur additional indebtedness other than through the
Credit Facility, (ii) pay any dividend or make any distribution
on account of its capital stock or other equity interest, (iii)
purchase or redeem any capital stock or equity interest of the
Company, (iv) make any principal payment, purchase or redeem
subordinated indebtedness except at scheduled maturities, or (v)
make certain investments; in each case subject to the
satisfaction of a fixed charge coverage ratio and, in certain
cases, also a net income test. In addition, the Indenture
generally limits the ability of the Company to create liens,
merge or transfer or sell assets. The Indenture also provides
that the holders of the Series D Senior Notes have the option to
require the Company to repurchase their notes in the event there
is a change of control in the Company (as defined in the
Indenture).
The following unaudited information presents the Company's
pro forma operating data for the nine months ended October 31,
1998 and 1997 as if the JPF Acquisition and the Note Offering had
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING -
Continued
been consummated at 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 the net assets of JPF, the payment of the
purchase price and the increased amortization of intangible
assets as a result of the JPF Acquisition and the related
issuance of Series C Senior Notes by the Company to finance the
purchase price for the JPF Acquisition. The unaudited pro forma
financial data are not indicative of the results of operations
that would have been achieved had the JPF Acquisition and the
Note Offering been consummated prior to the periods in which they
were completed, or that might be attained in the future.
Nine months Ended
October 31,
1997 1998
------------ ------------
Net Sales $216,708,088 $234,547,046
Net Income $ 9,421,099 $ 8,534,501
Net Income per Basic Share $0.71 $0.62
Net Income per Diluted Share $0.59 $0.50
NOTE 4. SHORT-TERM DEBT
At October 31, 1998, the Credit Facility with Fleet provided
for borrowings on a revolving basis of up to $40 million, with a
$3 million sublimit for letters of credit. Borrowings under the
Credit Facility are limited to eligible accounts receivable and
inventories and are secured by a first priority lien on all of
the Company's accounts receivable and inventory. The Company's
obligations under the Credit Facility rank pari passu in right of
payment with the Series B Senior Notes and the Series D Senior
Notes. The 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 Credit Facility also includes
a prohibition on the payment of dividends and other distributions
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SHORT-TERM DEBT
to shareholders and restrictions on the incurrence of additional
non-trade indebtedness. At October 31, 1998, the outstanding
balance under the Credit Facility was $35.6 million and there was
approximately $420,000 in outstanding letters of credit. In
November 1998, the borrowing limit under the Credit Facility was
increased to $50 million in contemplation of an acquisition.
NOTE 5. SUBORDINATED DEBENTURES
The subordinated debentures as of January 31, 1998 represent
the 8.5% Subordinated Debentures due May 2004 issued in
connection with the May 1996 acquisition of the assets of
Fragrance Marketing Group, Inc. (the "8.5% Debentures"). The
subordinated debentures as of October 31, 1998 represent the
8.5% Debentures and the Debenture issued as part of the JPF
Acquisition. See Note 3.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In May 1998, the Company entered into a lease with an
unaffiliated third party for approximately 48,000 square feet of
a warehouse facility to accommodate the additional inventory
requirements associated primarily with the promotional sets which
will arrive in anticipation of the peak business season. The
lease has an initial term of 30 months with the Company having an
option to extend for an additional term of 30 months. The
minimum lease payments for the fiscal years ended January 31,
1999, 2000 and 2001 are approximately $206,000, $280,000, and
$216,000, respectively.
In August 1998, National Trading Manufacturing, Inc., a
company which is wholly-owned by the Chairman of the Company
("National Trading"), sold to an unaffiliated third party the
facility at 15595 N.W. 15th Avenue, Miami (the "National Trading
Facility"), which National Trading was leasing to the Company.
In connection with this transaction, National Trading agreed to
cancel the $294,000 in advances, which was reflected in the
Company's Consolidated Balance Sheet at January 31, 1998 as Due
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES - Continued
to affiliates, net (plus accrued interest) as part of the
consideration for the Company's termination of the lease and its
option to purchase the National Trading Facility (collectively,
the "Contract Rights"). Accordingly, the Company's capital lease
obligations of approximately $1.1 million relating to the
National Trading Facility have been terminated and $1.4 million,
consisting of the related land and building, net of accumulated
depreciation, has been removed from the fixed assets. The other
consideration for the Contract Rights were a cash payment of
approximately $416,000 and the issuance by National Trading to
the Company of a promissory note payable upon demand in the
principal amount of $300,000 bearing interest at 8.5% per annum.
At October 31, 1998, the principal amount of the demand note due
to the Company was $100,000 and is reflected in the Company's
Consolidated Balance Sheet at October 31, 1998 in
Prepaid expenses and other assets. Approximately $632,000,
representing the income resulting from the Contract Rights less
the difference between the consideration received for the
Contract Rights and the fixed asset, is reflected in Income from
sale of contract and intangible rights for the three and nine
months ended October 31, 1998. The other $300,000 of Income from
sale of contract and intangible rights for the three and nine
months ended October 31, 1998 consists of income from the October
1998 sale of an intangible right acquired in connection with the
Company's acquisition of the Halston brands from Halston
Borghese, Inc. ("HBI") and its affiliates in May 1996 (the
"Halston Acquisition").
The Company is currently in the process of arbitrating a
dispute with the successor to HBI relating to the Halston
Acquisition. HBI's successor is seeking payment on a promissory
note in the principal amount of $2 million (the "HBI Note") plus
accrued interest, which it alleges is due it as part of the
consideration for the Halston Acquisition. The Company is
seeking damages in excess of the amount of the HBI Note for HBI's
breach of the asset purchase agreement, and, as permitted by the
asset purchase agreement, has set off a portion of its damages
against amounts due under the HBI Note. The HBI Note is
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES - Continued
reflected in Current portion of long-term liabilities of the
Company's Consolidated Balance Sheet as of October 31, 1998. The
Company does not anticipate that the outcome of this arbitration
will have a material adverse effect on its financial statements.
In October 1998, the Company paid $1.5 million to settle a
lawsuit filed against the Company in the U.S. Bankruptcy Court
by the trustee of the Model Imperial Liquidating Trust (the
"Trust"). The lawsuit sought to recover the value of certain
unspecified sales of products by Model Imperial, Inc. ("Model")
to the Company during 1994 and 1995 which the Trust alleged
resulted in Model obtaining financing under Model's credit
facility to which Model was not entitled. The litigation
settlement is reflected in Litigation settlement expense for the
three and nine months ended October 31, 1998.
NOTE 7. 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 during the nine months ended October 31, 1998 is as
follows:
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SHAREHOLDERS' EQUITY - Continued
<TABLE>
<CAPTION>
Preferred Stock Additional
Series B Series C Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
---------------- ---------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1998 279,877 $2,799 525,490 $5,255 13,623,734 $136,238 $30,786,503
Issuance of common
stock upon exercise
of stock options 35,600 356 117,124
Issuance of common
stock upon exercise
of warrants 54,258 543 274,457
Issuance of common
stock upon conversion
of 7.5% convertible
debentures 26,016 260 187,055
Issuance of common
stock upon conversion
of Series B
convertible
preferred stock (8,281) (83) 58,961 589 194,065
Issuance of common
stock upon conversion
of Series C
convertible
preferred stock (14,135) (141) 14,135 141 74,209
------- ------ ------- ------ ---------- -------- -----------
Balance at
October 31, 1998 271,596 $2,716 511,355 $5,114 13,812,704 $138,127 $31,633,413
======= ====== ======= ====== ========== ======== ===========
</TABLE>
NOTE 8. INCOME TAXES
The provision for income taxes for the three and six-month
periods ended October 31, 1998 was calculated based upon the
estimated tax rate of 39% for the full fiscal year ending January
31, 1999.
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK OPTION PLANS
During the nine months ended October 31, 1997, the Company
granted options for 30,000 shares at an exercise price of $8.38
per share and options for 7,500 shares at an exercise price of
$9.38 per share under the Company's 1995 Stock Option Plan (the
"1995 Plan"). During the nine months ended October 31,
1998, the Company granted options for 500,000 shares at an
exercise price of $12.50 per share under the 1995 Plan. During
the nine months ended October 31, 1997 and 1998, the Company
granted options for 30,000 shares at an exercise price of $9.38
per share and 30,000 shares at an exercise price of $16.38 per
share, respectively, under the Company's Non-Employee Director
Stock Option Plan.
NOTE 10. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES
The Company incurred the following non-cash financing and
investing activities for the nine months ended October 31, 1997
and 1998.
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
1997 1998
<S> <C> <C>
Redemption of 8% debentures used to pay
for conversion of preferred stock $ 40,559
==========
Transactions in connection with the acquisition
of interest in Fine Fragrances, Inc.
Note issued to seller $1,000,000
==========
Book value of assets acquired,
excluding inventory $2,296,051
==========
Liabilities assumed $3,156,895
==========
Inventory assumed $2,805,638
==========
Conversion of 7.5% convertible debentures
(including accrued interest) into
Common Stock $ 187,315
===========
Transactions in connection with the JPF Acquisition
(See Note 3):
Issuance of Debenture to seller $ 2,514,472
===========
Assumption of accounts payables $10,560,577
===========
Transactions in connection with the sale of the Contract
Rights for the National Trading Facility (See Note 6):
Disposition of fixed asset in capital
lease, net of accumulated depreciation
and cash received $ 1,024,806
===========
Termination of capital lease and of
note payable to related party $ 1,374,136
===========
Note receivable from related party $ 300,000
===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), the
Company is hereby providing cautionary statements identifying
important factors that could cause the Company's actual results
to differ materially from those projected in forward-looking
statements (as such term is defined in the Reform Act) made
herein. Any statements that express, or involve discussions as
to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the
use of words or phrases such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimated,"
"intends," "plans" and "projection") are not historical facts and
may be forward-looking and, accordingly, such statements involve
estimates, assumptions, and uncertainties which could cause
actual results to differ materially from those expressed in the
forward-looking statements. Accordingly, any such statements are
qualified in their entirety by reference to, and are accompanied
by, the following key factors that have a direct bearing on the
Company's results of operations: the absence of contracts with
customers or certain suppliers; the Company's ability to
successfully integrate acquired businesses or new brands into the
Company; the impact of competitive products and pricing; the
substantial indebtedness and debt service obligations of the
Company; changes in the retail industry; and general economic and
business conditions. The Company cautions that the risk factors
described herein could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements
of the Company and that investors should not place undue reliance
on any such forward-looking statements. Further, any forward-
looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or
to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for management
to predict all of such factors. Further, management cannot
assess the impact of each such factor on the Company's business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements.<PAGE>
GENERAL
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, 1998. 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 October 31, 1998 Compared to the Three Months
Ended October 31, 1997
- ----------------------------------------------------------------
NET SALES. Net sales increased $23.1 million, or 26%, to
$112.5 million for the three months ended October 31, 1998 from
$89.4 million for the three months ended October 31, 1997. The
increase in net sales was primarily attributable to 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"). The proportion of the Company's net sales that relates
to Distributed Brands has increased significantly following the
acquisition of the assets of J.P. Fragrances, Inc. in March 1998
(the "JPF Acquisition"). See Note 3 of Notes to Consolidated
Financial Statements. 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 during the three months ended October 31, 1998,
resulted primarily 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 sale of customized
gift sets.
GROSS PROFIT. Gross profit increased $5.7 million, or 20%,
to $33.6 million for the three months ended October 31, 1998 from
$27.9 million for the three months ended October 31, 1997. The
increase in gross profit was primarily attributable to the
increase in net sales, particularly of the Distributed Brands.
<PAGE>
Gross margins decreased from 31.2% to 29.9% primarily as a result
of the proportionally larger increase in sales of Distributed
Brands, which typically sell at lower margins than the Company's
owned or licensed brands such as the Halston and Geoffrey Beene
brands (collectively, the "Controlled Brands").
WAREHOUSE AND SHIPPING EXPENSE. Warehouse and shipping
expenses increased $1.2 million or 54%, to $3.5 million for the
three months ended October 31, 1998 from $2.3 million for the
three months ended October 31, 1997. The increase resulted
primarily from the increase in freight and labor which were
associated with the increase in net sales and the production of
customized gift sets and an increase in reserve for shrinkage and
obsolescence related to certain promotional inventory.
SG&A. Selling, general and administrative expenses
increased $2.8 million, or 32%, to $11.5 million for the three
months ended October 31, 1998 from $8.7 million for the three
months ended October 31, 1997. Of the increase in selling,
general and administrative expenses, approximately $2.3 million
represented an increase in selling expenses largely as a result
of steps taken by the Company to increase the sell through of its
products through salary support programs with retailers and
market specialists and to shift advertising and promotional
expenses into market and retailer specific advertising and
promotions such as advertising co-op and gift with purchase
programs. General and administrative expenses for the three
months ended October 31, 1998 increased by approximately
$450,000, primarily as a result of the addition of administrative
personnel (including information systems consultants) and an
increase in the Company's reserve for bad debt which is related
to the seasonal increase in net sales. As a percentage of net
sales, SG&A expenses increased from 9.7% for the three months
ended October 31, 1997 to 10.2% for the three months ended
October 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization increased $630,000, or 54%, to $1.8 million for the
three months ended October 31, 1998 from $1.2 million for the
three months ended October 31, 1997. The increase was primarily
attributable to the amortization of intangibles acquired as a
result of the JPF Acquisition, adjustments to intangibles and
other assets acquired in connection with the acquisition of the
<PAGE>
assets of Fragrance Marketing Group in May 1996 (the "FMG
Acquisition"), and increased depreciation from (i) computer
software and equipment relating to the Company's new information
systems, and (ii) capital projects for improvement of warehouse
operations.
INTEREST EXPENSE, NET. Interest expense, net of interest
income, increased $1.4 million, or 36%, to $5.1 million for the
three months ended October 31, 1998 from $3.8 million for the
three months ended October 31, 1997. This increase was primarily
due to the increase in average debt outstanding resulting from
the April 1998 offering (the "1998 Offering") of $40 million
principal amount of 10-3/8% Senior Notes Due 2007 incurred to
finance the JPF Acquisition. See Note 3 of Notes to Consolidated
Financial Statements.
OTHER INCOME AND EXPENSE. During the nine months ended
October 31, 1998, the Company had a one-time litigation
settlement expense of $1.5 million, partially offset by other
income of $932,000 relating to the sale of a purchase option on
the Company's former headquarters and an intangible right. See
Note 6 of Notes to Consolidated Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and
amortization) increased $1.6 million, or 10%, to $18.6 million
for the three months ended October 31, 1998 from $16.9 million
for the three months ended October 31, 1997. The EBITDA margin
decreased to 16.5% for the three months ended October 31, 1998
from 18.9% for the three months ended October 31, 1997. The
increase in EBITDA is primarily attributable to the increase in
gross profit. The decrease in EBITDA margin is primarily
attributable to the decrease in gross margin as a result of the
changing mix of sales following the JPF Acquisition and the
increase in SG&A and warehouse and shipping expenses as a
percentage of net sales.
NET INCOME. Net income decreased $680,000, or 9%, to $6.8
million for the three months ended October 31, 1998 from $7.5
million for the three months ended October 31, 1997, as a result
of the increase in interest expense, the one-time litigation
settlement expense and the decrease in EBITDA margin.
<PAGE>
Nine Months Ended October 31, 1998 Compared to the Nine Months
Ended October 31, 1997
- ---------------------------------------------------------------
NET SALES. Net sales increased $60.8 million, or 38%, to
$220.9 million for the nine months ended October 31, 1998 from
$160.1 million for the nine months ended October 31, 1997. The
increase in net sales was primarily attributable to the increase
in net sales of Distributed Brands. 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 during the nine months
ended October 31, 1998, resulted primarily 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 $13.9 million, or 27%,
to $65.3 million for the nine months ended October 31, 1998 from
$51.5 million for the nine months ended October 31, 1997. The
increase in gross profit was primarily attributable to the
increase in net sales of the Distributed Brands. Gross margins
decreased from 32.1% to 29.6% primarily as a result of the
proportionally larger increase in sales of Distributed Brands,
which typically sell at lower margins than the Controlled Brands.
WAREHOUSE AND SHIPPING EXPENSE. Warehouse and shipping
expenses increased $2.6 million, or 51%, to $7.6 million for the
nine months ended October 31, 1998 from $5.1 million for the nine
months ended October 31, 1997. The increase resulted primarily
from the increase in freight and labor which were associated with
the increase in net sales and the production of customized gift
sets and the seasonal increase in reserve for inventory shrinkage
and obsolescence.
SG&A. Selling, general and administrative expenses
increased $4.6 million, or 24%, to $24.0 million for the nine
months ended October 31, 1998 from $19.4 million for the nine
months ended October 31, 1997. Of the increase in selling,
general and administrative expenses, approximately $2.8 million
represented an increase in selling expenses, primarily as a
result of salary support programs with retailers and the use of
market specialists to increase the sell through of its products,
<PAGE>
the addition of sales and marketing personnel and the increase in
retailer specific advertising and promotions such as advertising
co-op and gift with purchase programs. General and
administrative expenses for the nine months ended October 31,
1998 increased by approximately $1.8 million, primarily as a
result of the addition of administrative personnel (including
information systems consultants) and increased legal and
insurance costs. As a percentage of net sales, SG&A expenses
decreased from 12.1% for the nine months ended October 31, 1997
to 10.9% for the nine months ended October 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization increased $1.8 million, or 52%, to $5.2 million for
the nine months ended October 31, 1998 from $3.4 million for the
nine months ended October 31, 1997. The increase was primarily
attributable to the amortization of intangibles acquired as a
result of the JPF Acquisition, adjustments to intangibles and
other assets acquired in connection with the FMG Acquisition, and
increased depreciation from (i) computer software and equipment
relating to the Company's new information systems, and (ii)
capital projects for improvement of warehouse operations.
INTEREST EXPENSE, NET. Interest expense, net of interest
income, increased $5.0 million, or 59% to $13.6 million for the
nine months ended October 31, 1998 from $8.6 million for the nine
months ended October 31, 1997. This increase was primarily due
to the increase in average debt outstanding resulting from the
offerings in May 1997 and April 1998 of 10-3/8% Senior Notes Due
2007, which were used to provide long-term working capital
financing and to finance the JPF Acquisition. The Company had
interest income of $80,000 for the nine months ended October 31,
1998, compared to interest income of $415,000 for the nine
months ended October 31, 1997.
OTHER INCOME AND EXPENSE. During the nine months ended
October 31, 1998, the Company had a one-time litigation
settlement expense of $1.5 million, partially offset by other
income of $932,000 relating to the sale of a purchase option on
the Company's former headquarters and an intangible right. See
Note 6 of Notes to Consolidated Financial Statements.
<PAGE>
EBITDA. EBITDA (operating income, plus depreciation and
amortization) increased $6.7 million, or 25%, to $33.7 million
for the nine months ended October 31, 1998 from $27.0 million for
the nine months ended October 31, 1997. The EBITDA margin
decreased to 15.3% for the nine months ended October 31, 1998
from 16.9% for the nine months ended October 31, 1997. The
increase in EBITDA is primarily attributable to the increase in
gross profit and the decrease in SG&A expenses as a percentage of
net sales. The decrease in EBITDA margin is primarily
attributable to the decrease in gross margin as a result of the
changing mix of sales following the JPF Acquisition.
NET INCOME. Net income decreased $782,000, or 8%, to $8.8
million for the nine months ended October 31, 1998 from $9.6
million for the nine months ended October 31, 1997, primarily as
a result of the increase in interest expense, the one-time
litigation settlement expense and the decrease in EBITDA margin.
FINANCIAL CONDITION
In March 1998, the Company consummated the JPF Acquisition.
As a result of the JPF Acquisition, the Company acquired
approximately $30.4 million of inventory, $12.1 million of
accounts receivable and $263,000 of fixed assets (consisting
primarily of office and warehouse furniture and equipment). See
Note 3 of Notes to Consolidated Financial Statements. As a
result of the JPF Acquisition, the Company also acquired
approximately $7.7 million of contract rights, intangible
rights (including non-compete agreements) and goodwill, which
account for the increase in other intangibles and other assets at
October 31, 1998. The Company also assumed approximately $10.6
million of certain trade and other payables of JPF in connection
with the JPF Acquisition. In addition to the assumption of the
payables, the purchase price for the assets of JPF consisted of
approximately $37.3 million in cash and a subordinated debenture
of $3 million (the "Debenture"). The cash portion of the
purchase price was financed from available cash from operations
and the Company's revolving credit facility (the "Credit
Facility") with Fleet National Bank ("Fleet"). The Debenture
is non-interest bearing, with the principal amount being payable
in three equal annual installments if, and only if, certain
conditions relating to the fragrance business of JPF (the "JPF
<PAGE>
Business") are achieved by the Company, including achieving
certain gross profit thresholds from the JPF Business.
In April 1998, the Company consummated the private placement
under Rule 144A pursuant to the Securities Act of 1933, as
amended (the "Act"), of $40 million principal amount of 10-3/8%
Senior Notes due 2007, Series C (the "Series C Senior Notes").
The Series C Senior Notes were sold at 106.5% of their
principal amount and had substantially similar terms to the
Company's existing 10-3/8% Senior Notes due 2007, Series B (the
"Series B Senior Notes"), which the Company issued in July 1997.
The net proceeds of approximately $41.4 million from the sale of
the Notes were used to repay outstanding borrowings under the
Credit Facility to Fleet, which were used for the JPF
Acquisition, as well as for working capital purposes. In
August 1998, the Series C Senior Notes were exchanged for an
equivalent principal amount of 10-3/8% Senior Notes due 2007,
Series D (the "Series D Senior Notes") containing identical terms
to the Series C Senior Notes, but which have been registered
under the Act.
The Indenture pursuant to which the Series D Senior Notes
were issued (the "Indenture") provides that such notes will be
senior unsecured obligations of the Company and will rank senior
in payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all
existing and future senior indebtedness of the Company, including
indebtedness under the Credit Facility and the Series B Senior
Notes. The Indenture generally limits the ability of the
Company to (i) incur additional indebtedness other than through
the Credit Facility, (ii) pay any dividend or make any
distribution on account of its capital stock or other equity
interest, (iii) purchase or redeem any capital stock or equity
interest of the Company, (iv) make any principal payment,
purchase or redeem subordinated indebtedness except at
scheduled maturities, or (v) make certain investments; in each
case subject to the satisfaction of a fixed charge coverage ratio
and, in certain cases, also a net income test. In addition, the
Indenture generally limits the ability of the Company to create
liens, merge or transfer or sell assets. The Indenture also
provides that the holders of the Series D Senior Notes have the
option to require the Company to repurchase their notes in the
event there is a change of control in the Company (as defined in
the Indenture).
<PAGE>
During the nine months ended October 31, 1998, the Company's
accounts receivable increased significantly as a result of the
increase in net sales for the holiday season. During the same
period, the Company's inventories increased significantly as a
result of a shortfall in the projected sales for the third
quarter and planned purchases the Company had with its suppliers.
The increase in trade payables is associated with this increase
in inventory. At October 31, 1998, the Company had available
$4 million under the Credit Facility for general corporate
purposes, including working capital needs. In November 1998, the
borrowing limit under the Credit Facility was increased to
$50 million in contemplation of an acquisition. The Company
expects to pay down its borrowings under the Credit Facility by
the fiscal year end of January 31, 1999.
Year 2000
The Company has evaluated both its information technology
("IT") systems and technologies which include embedded ("Non-IT")
systems for Year 2000 readiness. The Company has determined that
both systems are in compliance; however, the Company is aware
that third parties with whom the Company has a material
relationship may not be in full compliance yet. As part of the
Year 2000 project, the Company has identified relationships with
third parties, including customers, suppliers and service
providers which the Company believes are material to its business
and operations. The Company is in the process of communicating
with these third parties through questionnaires, letters and
interviews in an effort to determine the extent to which they are
addressing their Year 2000 compliance issues. The Company is
also testing its electronic data interchange transmissions with
material customers to determine Year 2000 compliance. The
Company will continue to assess and monitor the progress of its
material third party customers, suppliers and service providers
in resolving Year 2000 issues.
Because the Year 2000 compliance features of its IT and
Non-IT systems were an integral part of systems the Company
procured recently, no specific costs were attributed to the Year
2000 compliance of its internal systems. Although the Company
has incurred and expects to incur labor and material costs
associated with the assessment, testing and monitoring of Year
2000 compliance of its material third party customers, suppliers
and third party service providers, these costs are not expected
to be material to the Company's results of operations or
financial position.
The Company anticipates minimal disruptions in its business
and operations as a result of system failures related to Year
2000 issues. If the Company or a key third party experiences a
systems failure due to the century change, the Company believes
the most significant adverse impact would be inability to process
customer transactions or to ensure timely delivery of inventory.
The Company cannot assure that there will not be an adverse
impact on the Company if key third parties do not appropriately
address their Year 2000 issues in a timely manner.
Although the Company does not believe that the actual impact
of Year 2000 failures will be material, the Company is currently
developing a contingency plan for possible Year 2000 issues
involving the delivery of inventory and the processing of
customer transactions. The Company will continue to develop
these plans based on tests with third parties and its assessment
of other outside risks. The Company will continually refine its
contingency plan throughout 1999 as additional information
becomes available.
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
(a) Reference is made to Item 1. Business - Licensing and
Exclusive Distribution Agreements in the Company's
Annual Report on Form 10-K for the year ended
January 31, 1998.
In November 1998, the Company entered into a License,
Manufacturing and Distribution Agreement with an
affiliate of The Procter & Gamble Company, with an
initial term through December 31, 2003, pursuant to
which the Company will serve as the exclusive
manufacturer and distributor in the United States of the
Wings for Men and Wings for Ladies fragrance brands.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- -----------------------------------------------------------------
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)).
Exhibit
Number Description
- ------- ------------------------------------------------------
4.2 Indenture dated as of April 27, 1998, 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 April 27,
1998 (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)).
4.4 First Amendment to Credit Agreement and Other
Transaction Documents dated as of December 31, 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 10-K for the fiscal
year ended January 31, 1998 (Commission File No.
1-6370)).
4.5 Letter Agreement dated as of March 23, 1998, between
the Company and Fleet National Bank (incorporated
herein by reference to Exhibit 4.4 filed as a part of
the Company's Form 10-K for the fiscal year ended
January 31, 1998 (Commission File No. 1-6370)).
4.6 Second Amendment to Credit Agreement and Other
Transaction Documents dated as of November 13, 1998,
between the Company and Fleet National Bank.
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)).
<PAGE>
Exhibit
Number Description
- ------- ------------------------------------------------------
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 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 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)).
10.6 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)).
10.7 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)).
<PAGE>
Exhibit
Number Description
- ------- ------------------------------------------------------
10.8 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)).
10.9 Asset Purchase Agreement dated as of February 25, 1998,
by and between the Company, J.P. Fragrances, Inc.,
Joseph A. Pappalardo and Gloria Pappalardo
(incorporated herein by reference to Exhibit 2.1 filed
as a part of the Company's Form 8-K dated March 31,
1998 (Commission File No. 1-6370)).
10.10 Amendment to Asset Purchase Agreement dated as of
March 30, 1998, by and between the Company, J.P.
Fragrances, Inc., Joseph A. Pappalardo and Gloria
Pappalardo (incorporated herein by reference to Exhibit
2.2 filed as a part of the Company's Form 8-K dated
March 31, 1998 (Commission File No. 1-6370)).
10.11 Lease Agreement dated as of May 4,1998, between the
Company and Mac Papers, Inc. (incorporated by reference
to Exhibit 10.13 filed as a part of the Company's Form
10-Q for the quarter ended April 30, 1998 (Commission
File No. 1-6370)).
27.1 Financial Data Schedule.
- --------------
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.
<PAGE>
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: December 10, 1998 /s/ E. Scott Beattie
----------------- -----------------------------
E. Scott Beattie
President and Chief Executive
Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: December 10, 1998 /s/ William J. Mueller
----------------- -----------------------------
William J. Mueller
Vice President-Operations,
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 4,319,411
<SECURITIES> 0
<RECEIVABLES> 108,986,444
<ALLOWANCES> 1,290,909
<INVENTORY> 153,481,195
<CURRENT-ASSETS> 276,714,211
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</TABLE>
SECOND AMENDMENT TO CREDIT AGREEMENT
AND OTHER TRANSACTION DOCUMENTS
This Second Amendment to Credit Agreement and Other
Transaction Documents (the "Agreement"), made as of the 13th day
of November, 1998, by and between FLEET NATIONAL BANK, a national
banking association with its principal office at 111 Westminster
Street, Providence, Rhode Island 02903, in its capacity as agent
and as lender ("Lender") (sometimes hereinafter referred to as
"Agent" or "Lender", as appropriate depending on responsibility)
and FRENCH FRAGRANCES, INC., a Florida corporation with its
principal place of business at 14100 N.W. 60th Avenue, Miami
Lakes, Florida 33014 ("Borrower").
W I T N E S S E T H:
WHEREAS, pursuant to the terms and conditions of that
certain Credit Agreement dated May 13, 1997 between Borrower and
Lender, as amended by a First Amendment to Credit Agreement and
Other Transaction Documents dated as of December 31, 1997 (as
amended, the "Credit Agreement"), Lender agreed to make a
revolving credit loan available to Borrower, subject to the terms
and conditions of the Credit Agreement; and
WHEREAS, Borrower has requested and Lender has agreed to
increase Borrower's availability under the revolving credit loan;
and
WHEREAS, Lender is willing to amend the Credit Agreement
subject to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants set forth herein, and for good and valuable
other consideration, receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Defined Terms.
All capitalized terms not defined herein shall have the same
meaning ascribed to such terms as provided in the Credit
Agreement.
Section 2. Representations and Warranties.
Borrower hereby represents and warrants to Lender that:
<PAGE>
(a) Borrower is duly organized, validly existing and in
good standing as a corporation in the state of its incorporation,
and is in good standing and is qualified to do business as a
foreign corporation in all other jurisdictions where it is
required to be so qualified, except such jurisdictions, if any,
in which the failure to be so qualified will not have a material
adverse effect on the financial condition, business, assets,
operations or properties of Borrower. Borrower has all requisite
power and authority to own and lease its assets and properties
and to conduct its business in the manner presently conducted by
it.
(b) Borrower has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement
and the execution, delivery and performance by Borrower of this
Agreement has been duly authorized by all requisite action. This
Agreement has been duly executed and delivered by Borrower, and
is the valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its respective terms.
(c) The execution, delivery and performance by Borrower of
this Agreement will not violate or contravene (i) the articles of
incorporation or by-laws of Borrower, (ii) any provision of any
law, rule or regulation applicable to Borrower, (iii) any order,
writ, judgment, injunction, decree, determination or award of any
court or other agency of government to which Borrower is bound,
or (iv) any other agreement, lease, indenture or instrument to
which Borrower is a party or by which Borrower is bound, or be in
conflict with, result in a breach of, or constitute (with due
notice or lapse of time or both) a default under, or result in
the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever, upon any properties or assets of Borrower
pursuant to any such other agreement, lease, indenture or
instrument.
(d) There is no action, suit or proceeding at law or in
equity or by or before any court, governmental instrumentality or
other agency pending, or to Borrower's knowledge, threatened
against, or in any way affecting Borrower which, if adversely
determined, would have a material adverse effect on the business,
operations, properties, assets or condition, financial or
otherwise, of Borrower.
(e) No consent, approval or authorization from, or filing
of any declaration or statement with, any court, governmental
instrumentality or other agency is required in connection with or
as a condition to the execution, delivery or performance of this
Agreement, by Borrower.
<PAGE>
(f) Except as set forth in Schedule I attached hereto,
Borrower hereby reaffirms and restates, as of the date hereof,
all of the representations and warranties made by it in the
Credit Agreement, as amended by this Agreement, except to the
extent altered by actions permitted pursuant to the terms thereof
or expressly contemplated pursuant to the terms hereof, or to the
extent Lender has been advised in writing of any inaccuracy with
respect to such representations or warranties and have waived the
same in writing.
(g) No Event of Default exists under the Credit Agreement,
or any event which, with the giving of notice or passage of time
or both, would constitute such an Event of Default, has occurred
which has not been waived in writing by Lender or which will not
be cured upon the execution and delivery by Borrower of this
Agreement.
Section 3. Amendments to Credit Agreement.
The Credit Agreement is hereby amended, effective as of the
date hereof, as follows:
Section 3.01. Amendments to Definitions.
The definitions of "Borrowing Base", "Public Debt",
"Revolving Credit Facility", "Revolving Credit Note" and
"Subordinated Debentures" set forth in Section 1.01 of the Credit
Agreement are hereby amended to read in their entirety as
follows:
"Borrowing Base" shall mean, as of any date, the sum of,
without duplication, (i) eighty-five percent (85%) of Insured
Eligible Accounts Receivable determined as of such date, plus
(ii) eighty-five percent (85%) of Approved Eligible Accounts
Receivable determined as of such date, plus, (iii) eighty percent
(80%) of Eligible Accounts Receivable (other than Insured
Eligible Accounts Receivable or Approved Eligible Accounts
Receivable) determined as of such date, plus (iv) fifty percent
(50%) of Eligible In-House Inventory; provided that the portion
of the Borrowing Base derived from clause (iv) shall be capped at
Twenty-Five Million Dollars ($25,000,000), and provided further
there shall be a reserve against total Eligible In-House
Inventory of One Million Two Hundred Thousand Dollars
($1,200,000). The foregoing definition of "Borrowing Base",
including the respective percentages set forth therein, may be
amended from time to time by the execution and delivery of an
Amendment Letter or other written instrument executed by Borrower
and Lenders.
<PAGE>
"Public Debt" shall mean those certain $115,000,000 10-3/8%
Senior Notes Due 2007 of the Borrower issued on May 13, 1997,
including any and all Subsidiary guarantees issued from time to
time and those certain $40,000,000 10-3/8% Senior Notes Due 2007
of the Borrower issued on April 27, 1998.
"Revolving Credit Facility" shall mean the Fifty Million
Dollar ($50,000,000) revolving credit facility available to the
Borrower pursuant to the provisions of Article II hereof and
subject to the other terms and conditions of this Agreement.
"Revolving Credit Note" or "Revolving Credit Notes" shall
mean the secured revolving credit notes of Borrower issued to
Lenders in the aggregate principal amount not to exceed Fifty
Million Dollars ($50,000,000) and substantially in the form
attached hereto as Exhibit D-Amended, which promissory notes
evidence the obligations of Borrower to repay Lenders the
Advances made by Lenders under the Revolving Credit Facility,
which notes are hereby incorporated herein by reference and made
a part hereof, as such Revolving Credit Notes may be amended,
extended or renewed from time to time by the execution and
delivery of an Amendment Letter or other written instrument
executed and delivered by Lenders hereunder.
"Subordinated Debentures" shall mean the FMG Subordinated
Debentures, the 7.5% Convertible Debentures and the JPF
Debentures.
Section 3.02. Additional Definitions.
The following new definition is hereby added to Section
1.01 of the Credit Agreement:
"JPF Debentures" shall mean the $3,000,000 Junior
Subordinated Debentures issued by Borrower to J.P. Fragrances,
Inc.
Section 3.03. Amendment to Section 2.02.
Section 2.02 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"The Advances made by Lender pursuant to Section 2.01 hereof
shall be evidenced by the Revolving Credit Note issued by
Borrower to the order of Lender in an original principal amount
of Fifty Million Dollars ($50,000,000)."
<PAGE>
Section 3.04. Amendment to Section 2.03.
Section 2.03 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"Section 2.03. The Revolving Credit Commitment.
(a) The Revolving Credit Commitment shall be equal to the
lesser of:
(i) the Borrowing Base as in effect from time to time,
or
(ii) Fifty Million Dollars ($50,000,000).
Section 3.05. Amendment to Section 8.01.
Section 8.01(f) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"(f) Indebtedness to Subordinated Creditors evidenced
by the Subordinated Debentures in an aggregate principal amount
not to exceed at any time outstanding $14,300,000 only so long as
such Indebtedness is subordinated to Indebtedness of Borrower to
Lenders;"
Section 3.06. Amended Exhibit.
Exhibit A attached hereto is hereby intended to replace
Exhibit D to the Credit Agreement and is hereby intended to read
as Exhibit D - Amended.
Section 4. Security Documents.
(a) Borrower and Lender each hereby confirm that all
references to the "Credit Agreement" or the "Agreement" in any of
the Security Documents shall be deemed to be references to the
Credit Agreement as amended hereby; that the obligations of
Borrower under the Credit Agreement, as amended hereby, and fees
and expenses in connection therewith constitute additional
indebtedness, liabilities and obligations of Borrower to Lender,
all of which are secured by the Security Documents, and that all
references to "indebtedness" and/or "obligations" secured by such
instruments shall be deemed amended to include all obligations of
Borrower in respect of the Credit Agreement as amended hereby.
(b) Borrower hereby ratifies and reaffirms its grant and
conveyance to Agent for the ratable benefit of the Lenders of a
security interest in and lien upon all collateral covered by any
of the Security Documents.
<PAGE>
(c) Borrower and Lender each hereby confirm that nothing
contained herein or done pursuant hereto shall limit or be
construed to limit the security interest or lien previously
granted by Borrower to Agent for the ratable benefit of the
Lender under any of the Security Documents, or the priority
thereof over other liens, encumbrances and security interests.
Except as amended hereby, the Security Documents shall remain in
full force and effect and Borrower hereby ratifies and confirms
the Security Documents in all other respects, including, without
limitation, the continuing grant of a lien on and interest in the
collateral covered thereby.
Section 5. Conditions Precedent to Second Amendment.
The effectiveness of the transactions described herein shall
be subject to the following conditions:
(a) This Agreement shall have been executed and delivered
by Borrower and Lender.
(b) The fees and disbursements of Lender and Lender's
counsel shall be paid in full on the Effective Date.
(c) Borrower shall have executed and/or delivered to Agent
the following:
(i) Certificate of the Secretary or Assistant
Secretary of Borrower certifying as to the due authorization,
execution and delivery by Borrower of this Agreement; and
(ii) Certificate of the Secretary or Assistant
Secretary of Borrower certifying as to the names of the officers
of Borrower authorized to sign this Agreement, and any other
documents or certificates to be delivered pursuant to this
Agreement, together with the true signatures of such officers.
Lender may conclusively rely on such certificates until Agent
shall receive a further certificate of the Secretary or an
Assistant Secretary of Borrower canceling or amending the prior
certificate and submitting the signatures of the officers named
in such further certificate.
(d) All legal matters relating to this Agreement shall be
satisfactory to Lender and its counsel.
Section 6. Ratification.
Borrower hereby ratifies and confirms all of its
obligations, covenants, duties and agreements set forth in the
<PAGE>
Credit Agreement, as amended by the terms hereof. All references
to the "Credit Agreement" or the "Agreement" contained in the
Credit Agreement, the Notes, the Security Documents and all other
documents and instruments evidencing obligations of 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.
Section 7. Expenses.
All costs and expenses, including reasonable attorneys'
fees, relating to the negotiation, preparation, execution and
delivery of this Agreement and all instruments, agreements and
documents contemplated hereby shall be the responsibility of
Borrower.
Section 8. Miscellaneous.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Rhode Island applicable
to contracts made and to be performed within such State. This
Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together
shall constitute one and the same instrument. The headings of
the Articles and Sections of this Agreement are inserted for
convenience only and shall not constitute a part hereof.
Section 9. No Defenses.
Borrower hereby acknowledges and agrees that the Credit
Agreement, as amended by the terms hereof, and the other
Transaction Documents are not subject as of the date hereof to
any defenses, rights of setoff, claims or counterclaims that
might limit the enforceability thereof.
Section 10. Facility Fee.
In consideration of Lender's commitment to enter into this
Agreement, Borrower hereby agrees to pay to Lender a facility fee
equal to Twenty-Five Thousand Dollars ($25,000).
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed by their respective officers hereunto duly
authorized, all as of the day and year first above written.
LENDER:
FLEET NATIONAL BANK
By /s/Douglas Scala
------------------------------
Douglas Scala
Senior Vice President
AGENT:
FLEET NATIONAL BANK
By /s/Douglas Scala
------------------------------
Douglas Scala
Senior Vice President
BORROWER:
FRENCH FRAGRANCES, INC.
By /s/Saul Kravec
------------------------------
Saul Kravec
Vice President
