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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1999
[ ] 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices)
(305) 818-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of April 27, 1999 was approximately $89.3 million based on the
$9.03 per share average of the bid and ask prices for the Common Stock on
the Nasdaq National Market on such date and determined by subtracting from the
number of shares outstanding on that date the number of shares held by the
registrant's directors, executive officers and holders of at least 10% of the
outstanding shares of Common Stock.
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As of April 27, 1999, the registrant had 13,812,704 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's Proxy Statement relating to the 1999
Annual Meeting of Shareholders to be held on June 23, 1999.
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French Fragrances, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . . 24
Item 8. Financial Statements and Supplementary Data. . . . . . . 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . 46
Part III
Item 10. Directors and Executive Officers of the Registrant . . . 46
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 46
Item 13. Certain Relationships and Related Transactions . . . . . 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 46
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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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 IN
THIS ANNUAL REPORT ON FORM 10-K. 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 MAY INVOLVE ESTIMATES 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 SUPPLIERS AND THE
COMPANY'S ABILITY TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH CUSTOMERS AND
SUPPLIERS; THE SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS OF THE
COMPANY; THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES
OR NEW BRANDS INTO THE COMPANY; THE IMPACT OF COMPETITIVE PRODUCTS AND
PRICING; SUPPLY CONSTRAINTS OR DIFFICULTIES; CHANGES IN THE RETAIL AND
FRAGRANCE INDUSTRIES; THE RETENTION AND AVAILABILITY OF KEY PERSONNEL; AND
GENERAL ECONOMIC AND BUSINESS CONDITIONS. THE COMPANY CAUTIONS THAT THE
FACTORS DESCRIBED HEREIN COULD CAUSE ACTUAL RESULTS 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
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES. NEW FACTORS EMERGE FROM
TIME TO TIME, AND IT IS NOT POSSIBLE FOR THE COMPANY TO PREDICT ALL OF SUCH
FACTORS. FURTHER, THE COMPANY CANNOT ASSESS THE IMPACT OF EACH SUCH FACTOR ON
THE COMPANY'S RESULTS OF OPERATIONS 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.
PART I
ITEM 1. BUSINESS
GENERAL
French Fragrances, Inc. (the "Company") is a manufacturer, distributor
and marketer of prestige fragrances and related cosmetic products
predominantly in the United States and principally to mass-market retailers.
The Company has established itself as a distribution source of approximately
230 fragrance brands through brand ownership and exclusive distribution
arrangements, as well as through nonexclusive direct purchase relationships
and other sources. The brands distributed by the Company include
approximately 65 brands for which it has exclusive marketing and distribution
rights, including the Geoffrey Beene brands Grey Flannel, Eau de Grey
Flannel and Bowling Green, the Halston brands Halston, Sheer Halston,
Catalyst, Z-14, Halston Z and 1-12, the Paul Sebastian brands PS Fine Cologne
for Men, Design for Women, Design for Men, Casual for Women and Casual for
Men, the Nautica brands Nautica for Men, Nautica for Women and Competition,
and the brands Wings by Giorgio Beverly Hills, Cigar Aficionado, Colors of
Benetton, Hot and Cold, Ombre Rose, Lapidus, Faconnable, Salvador Dali,
Dalissime, Laguna, Cafe and Watt (collectively, the "Controlled Brands") and
over 165 other brands that are distributed by the Company on a non-exclusive
basis (the "Distributed Brands"). The Company distributes its products to
more than 35,000 separate retail locations in the United States, including
department stores such as JCPenney, Sears, Kohl's, Macy's, Dayton Hudson,
Robinsons-May, Proffitt's and Nordstrom, mass merchants such as Wal-Mart,
Target, T.J. Maxx and Kmart,
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drug stores such as CVS, Eckerd Drug, Walgreens, Rite Aid and American Stores
and independent fragrance, cosmetic and other stores. In fiscal 1999, sales
to mass merchants, drug stores, independent fragrance, cosmetic and other
stores (collectively, "mass-market retailers") constituted approximately 80%
of the Company's net sales, sales to department stores constituted
approximately 19% of net sales and the balance of the Company's sales was
comprised of international sales.
Over the past six years, the Company (including FFI (as defined below)
prior to the Merger (as defined below)) has emerged as a leading prestige
fragrance marketer by (i) providing retailers a wide selection and reliable
source of prestige products, (ii) increasing and diversifying the Company's
market penetration by growing its distribution base to more than 35,000
separate retail locations, (iii) consummating several acquisitions of
Controlled Brands, (iv) enhancing the overall performance of its Controlled
Brands through the Company's marketing and distribution expertise, and (v)
expanding the selection and distribution of the Distributed Brands through new
manufacturer relationships and other sources. As a result, the Company's net
sales have grown to approximately $309.6 million for fiscal 1999 from
approximately $33.9 million for fiscal 1993. Over the same period, the
Company's EBITDA (as defined in Item 6 "Selected Financial Data") increased to
approximately $46.2 million from approximately $2.0 million.
The Company was incorporated in Florida in 1960 and was known as Suave
Shoe Corporation until the November 30, 1995 merger of a privately-held
Florida corporation named French Fragrances, Inc. ("FFI") with and into the
Company (the "Merger"). See Note 2 to the Notes to Consolidated Financial
Statements. FFI was organized in 1992 and had been a distributor of prestige
fragrances and related cosmetic products to the United States mass market
since its inception. FFI experienced rapid growth and in 1995 was searching
for a large facility to accommodate its growing operations. Through the
Merger with the Company in November 1995, management of FFI was able
to acquire the Company's Miami Lakes facility (the "Miami Lakes Facility") and
have FFI become a publicly-traded company. Following the Merger, the Company,
as the surviving corporation in the Merger, changed its name to "French
Fragrances, Inc." FFI's management became the management of the Company and
its business operations consisted entirely of the business previously
conducted by FFI.
BUSINESS STRATEGY
The Company's primary objective is to maintain and enhance its position
as a leading marketer of prestige fragrances and related cosmetic products.
The Company's strategy to achieve this objective includes the following:
Acquire Control of Additional Prestige Brands. The Company continues to
focus on acquiring ownership of, or exclusive distribution rights to, classic
prestige fragrance brands that enjoy established consumer loyalty. These
exclusive control positions allow the Company to actively manage the brand so
as to enhance the brand's prestige value in the market and at the same time
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implement strategies intended to increase the brand's overall long-term profit
contribution. In fiscal 1996, the Company acquired from Sanofi Beaute, Inc.
("Sanofi"), a long-term license to manufacture and distribute worldwide the
Geoffrey Beene fragrance brands, including Grey Flannel and Bowling Green (the
"Geoffrey Beene Acquisition"), and obtained the exclusive United States
distribution rights for the Galenic Elancyl skin care products and the
Benetton fragrance and cosmetic brands, including Colors of Benetton and
Tribu. In fiscal 1997, the Company completed the purchase of the Halston
fragrance brands, including Halston, Catalyst, Z-14 and 1-12 (the "Halston
Acquisition") and acquired certain assets of Fragrance Marketing Group, Inc.
("FMG"), including exclusive United States distribution rights to Ombre Rose,
Faconnable, Balenciaga, Lapidus and several other brands (the "FMG
Acquisition"). In fiscal 1998, the Company acquired the remaining 50.01% of
the common stock of Fine Fragrances, Inc. ("Fine Fragrances") that it did not
already own (the "Fine Fragrances Acquisition"). Fine Fragrances had been the
exclusive distributor in North America of fragrances manufactured by COFCI,
S.A. ("COFCI"), including Salvador Dali, Salvador, Laguna, Dalissime, Dalimix,
Cafe, Taxi and Watt. After the Fine Fragrances Acquisition, the Company
became the distributor of these brands under new ten-year exclusive
distribution agreements with COFCI. In November 1998, the Company acquired
from an affiliate of the Procter & Gamble Company an exclusive five-year
license to manufacture and distribute in the United States Wings by Giorgio
Beverly Hills. In January 1999, the Company acquired (the "PSI Acquisition")
certain assets of Paul Sebastian, Inc. ("PSI"), including trademarks or
licenses to manufacture the fragrance brands PS Fine Cologne for Men, Design
for Women, Design for Men, Casual for
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Women, Casual for Men, Nautica for Men, Nautica for Women, Competition and
Cigar Aficionado (the "PSI Brands"). Management believes that the Company's
strong market position and reputation in the prestige fragrance industry have
assisted the Company in acquiring ownership or control of prestige fragrance
brands. See Notes 2 and 6 to the Notes to Consolidated Financial Statements.
Management also believes that its investment in a sales and marketing
infrastructure to service the department store customers of the PSI Brands
should better position the Company to acquire additional prestige fragrance
brands. Although the Company is currently exploring additional acquisition
opportunities for prestige fragrance brands, the Company has no current
agreements or commitments for any additional acquisitions of Controlled
Brands, and there is, accordingly, no assurance that the Company will be able
to complete any future acquisitions of Controlled Brands.
Further Expand Direct Distribution. The Company intends to continue to
expand its distribution business and increase its sales to retailers by: (i)
increasing the number of prestige brands it distributes; (ii) increasing the
number of manufacturers for which it serves as a direct distributor; (iii)
expanding its customer base to include additional retailers not presently
served by the Company; and (iv) developing and implementing innovative
marketing and merchandising programs targeted to improve the sell-through of
its customers. Management believes that the Company's ability to further
expand its distribution business is enhanced by the competitive position it
has already achieved. In particular, the Company's broad selection of
prestige fragrances, its market presence as an established distributor to a
large number of retailers and its value-added service capabilities, combined
with management's long-standing relationships with a number of leading
manufacturers and retailers, are considered by management to be important to
the Company's continued success and growth. The Company also believes that,
as a direct distributor of many classic prestige fragrances, it has the
ability to offer mass-market retailers a more predictable and reliable
source of supply of products than can be offered by other secondary sources
for such fragrances with which the Company competes. In fiscal 1999, the
Company acquired certain assets of J.P. Fragrances, Inc. ("JPF"), including
inventory, returns, contract rights, accounts receivable, fixed assets
(including furniture and warehouse materials and equipment), intangible rights
(including non-compete agreements) and goodwill (the "JPF Acquisition"). The
JPF Acquisition increased the number of manufacturers for which the Company
serves as a direct distributor and the selection of Distributed Brands the
Company offers to its retail customers, as well as its market share of
prestige fragrance products with its retailers. In addition, the Company is
the process of initiating a business-to-business internet commerce site for
use by independent gift stores and other specialty retailers. The Company
does not, however, currently intend to open retail stores or otherwise engage
in direct retail sales.
Improve Brand Performance Through Focused Marketing. The Company seeks
to utilize its marketing expertise and its extensive distribution network to
successfully position, or reposition, its brands in the market place to
enhance their value. Such strategies typically include managing sales
volumes, channels of distribution, pricing, advertising and promotions,
packaging and gift set design, international marketing and other factors in a
manner intended to best position the brand in each of its different
distribution channels. The Company also implements a policy of product
differentiation among distribution channels to enhance the brand's prestige
image.
Strengthen and Expand Relationships with Retailers by Providing Value
Added Services. The Company continues to strive to increase the number of
retail locations to which it distributes its products and currently serves
more than 35,000 separate retail locations. The Company attributes its
growing distribution network to its ability to provide retailers with a
consistent supply of product, as well as its ability to provide retailers,
especially mass-market retailers, with a level of service typically not
provided by its competitors. For example, in many cases, the Company's sales
and marketing professionals work closely with major retailers to act as
category managers by, among other things, providing the following services
("Category Management Services"): (i) the development of merchandising
programs that are designed to improve sales and profitability and that are
specific to the customers' business and marketing strategies; (ii) the
creation of regularly planned promotional campaigns and in-store displays
designed to increase sales; (iii) the design of model stock assortments and
planograms for the effective layout of customers' fragrance and cosmetics
departments; and (iv) comprehensive sales analysis and active management of
the prestige fragrance category for retailers. The Company believes that the
provision of Category Management Services both creates a partnership between
the Company and the retailer and increases the amount of the Company's
products ultimately sold through such retailers.
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Develop Low-Risk Brand Line Extensions. To date, the Company's strategy
has been to opportunistically capitalize on existing brand awareness by
introducing product line extensions, rather than launching new fragrance
brands. Because the costs of developing a product line extension are
generally not material to the Company, the Company's brand extension strategy
can provide a significant increase in profitability to the Company with
limited capital risk. For example, in response to requests from retailers, in
1997 the Company introduced into a limited market Eau de Grey Flannel, as an
extension to the Geoffrey Beene brand Grey Flannel, which is positioned as a
lighter fragrance targeted to a more contemporary market. Based on the
success of Eau de Grey Flannel, the Company introduced in 1998 Sheer Halston
and Halston Z, which are more contemporary version extensions of the Halston
brands Halston Ladies and Z-14, respectively. In addition, the Company is
also in the process of introducing into a limited market a women's fragrance
for the Geoffrey Beene line. There can be no assurance, however, as to the
timing, occurrence or ultimate success of any new product introductions.
Exploit Operating Leverage to Further Enhance Profitability. The Company
completed an upgrade of the Miami Lakes Facility intended to increase
significantly its distribution capacity and enhance operational efficiency.
As a result of this upgrade, the Company believes it will be able to increase
the volume of product distributed without a commensurate increase in operating
costs. Because the Company's sales are characterized by a relatively large
number of orders (approximately 192,000 in fiscal 1999), a relatively
low average order size (approximately $1,375 in fiscal 1999) and a large
number of brands, the Company believes that by increasing the average order
size through the introduction of additional brands or increasing the volume of
existing brands sold to existing customers, the Company can further enhance
its operating margins. In fiscal 1999, the Company also completed the
installation of a new management information system which, among other things,
provides improved forecasting, purchasing and order-entry capabilities, as
well as provides internal Year 2000 compliance.
INDUSTRY OVERVIEW
According to the United States Department of Commerce, fragrance and
related product sales in the United States were in excess of $6 billion
annually. The United States market for fragrances and related products
continues to grow moderately. The growth is generally attributed to new
product introductions appealing to a broader segment of the market, population
growth, new retailing concepts, such as open-sell environments, and product
innovation, such as special sizes and new product formulations.
Fragrance products in the United States are generally distributed through
two channels of distribution: (i) the prestige market, which includes
department stores; and (ii) the mass market, which includes mass-market
retailers, food and drug stores, independent fragrance, cosmetic and other
stores, and direct selling firms, including internet, house-to-house and home
television shopping companies. Management of the Company believes that the
market has experienced a significant shift in the purchasing habits of
consumers away from higher-priced department stores to mass-market retailers.
Management also believes that this trend is indicative of an increasing desire
among U.S. consumers to acquire prestige fragrance products at the best value.
Nevertheless, management believes that successful launching and continued
marketing support of a brand in the prestige distribution channel is essential
to establish and maintain the brand's prestige status and marketability.
Management believes there are a number of significant trends currently
impacting the mass-market segment that it expects should contribute to its
continued growth, including: (i) increasing acceptance of self-service
shopping; (ii) increasing desire by retailers to purchase more efficiently and
to buy more products from fewer vendors; (iii) sustained, and in some
instances, increasing demand for classic prestige fragrances; (iv) more
upscale images communicated by retailers in their advertising; and (v)
internal growth of mass-market retailers.
Manufacturers of prestige fragrances have historically restricted their
direct sales in the United States primarily to prestige department stores and
specialty stores. As a result, mass-market retailers have traditionally
obtained prestige products from secondary sources. Historically, the
secondary sources available to the mass market have been limited to (i) direct
distributors such as the Company, which principally receive products directly
from fragrance manufacturers, and (ii) distributors of prestige products
manufactured by, or distributed to, foreign sources for foreign distribution
which are diverted to the United States market ("Diverted
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Sources"). Under existing court decisions, there are variations in the extent
to which trademark and copyright laws or customs regulations may restrict the
importation of trademarked or copyrighted fragrance products through Diverted
Sources without the consent of the trademark or copyright owner. From time to
time, the Company may take advantage of favorable buying opportunities and
purchase fragrance products from sources which may purchase from Diverted
Sources. There can be no assurance that these sources of product will be
available in the future or that the Company may not become the subject of
legal action arising from its buying activities with respect to these products
To date, the Company has not been the subject of any such legal action.
PRODUCTS
The Company sells prestige fragrances and related cosmetics products,
including perfume, cologne, eau de toilette, body spray, men's after-shave and
gift sets. Each fragrance is distributed in a variety of sizes and packaging
arrangements. In addition, each fragrance line may be complemented by bath
and body products, such as soaps, deodorants, body lotions, gels, cremes and
dusting powders. The Company's products generally retail at prices ranging
from $20 to $100 per item.
The Company currently stocks approximately 115 Halston, Geoffrey Beene
and PSI brand name items which it manufactures and approximately 210
brand name items of other Controlled Brands which it purchases from fragrance
manufacturers. The Company currently stocks, in addition to its Controlled
Brand products, more than 835 different brand name items purchased from
various fragrance manufacturers and other sources. The Company seeks to
continue to expand its base of direct purchase relationships with fragrance
manufacturers.
The Company uses third-party contract manufacturers in the United States
and Europe to obtain substantially all of the raw materials, components and
packaging products and for the manufacture of finished products relating to
the Halston, Geoffrey Beene and PSI fragrance products. The Company currently
obtains its materials for these Controlled Brand products from a limited
number of suppliers. Management of the Company believes that its
relationships with these suppliers are good, and that there are sufficient
alternatives should one or more of these suppliers become unavailable.
Distributed Brand products are delivered to the Company in finished goods form
and are generally acquired directly from major fragrance manufacturers, as
well as from other sources.
Except as to Controlled Brand products, the Company, as is customary in
the industry, generally does not have long-term or exclusive contracts with
manufacturers or suppliers. Purchases from manufacturers or suppliers that do
not have exclusive distribution contracts with the Company are generally made
pursuant to purchase orders. The Company's ten largest manufacturers or
suppliers of Distributed Brands accounted for approximately 80% of the
Company's cost of sales for the fiscal year ended January 31, 1999. The loss
of, or a significant adverse change in, the relationship between the Company
and any of its major suppliers could have a material adverse effect on the
Company's business, financial condition and results of operations.
LICENSING AND EXCLUSIVE DISTRIBUTION AGREEMENTS
Except for its Halston, Geoffrey Beene, PSI and COFCI products,
substantially all of the Company's products are covered by trademarks owned by
others. Management does not believe that its business, other than with
respect to the Halston, Geoffrey Beene, PSI and COFCI fragrance products, is
dependent upon any particular trademark, license or similar property.
Management believes that the Halston trademarks, the Geoffrey Beene license
and trademarks, the PSI trademarks and the COFCI license and trademarks are
important to its business.
Geoffrey Beene. In March 1995, in connection with the Geoffrey Beene
Acquisition, the Company, directly and through its subsidiary, G.B. Parfums,
Inc. ("G.B. Parfums"), acquired certain assets from Sanofi, including an
exclusive worldwide license with Geoffrey Beene, Inc. to manufacture and sell
Geoffrey Beene fragrance and related products, including the Grey Flannel and
Bowling Green brands. The Company and G.B. Parfums have trademark
registrations and applications in the United States and in numerous other
countries for these brands. The license agreement has an initial term of 30
years from February 1995, subject
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to automatic extensions for successive ten-year periods unless earlier
terminated by G.B. Parfums in accordance with the agreement.
Halston. In March 1996, in connection with the Halston Acquisition, the
Company, directly and through its subsidiary Halston Parfums, Inc. ("Halston
Parfums"), acquired from Halston Borghese, Inc. and its affiliates certain
assets, including the trademark registrations in the United States and
trademark registrations and applications in numerous other countries for the
Halston fragrance brands, including Halston, Catalyst, Z-14 and 1-12. See
Note 2 to the Notes to Consolidated Financial Statements.
PSI. In January 1999, in connection with the PSI Acquisition, the
Company acquired from PSI trademarks or licenses to manufacture and distribute
the fragrance brands PS Fine Cologne for Men, Design for Women, Design for
Men, Casual for Women and Casual for Men and Cigar Aficionado. See Note 2 to
the Notes to Consolidated Financial Statements. The license agreement for
Cigar Aficionado expires on December 31, 2002, subject to automatic extensions
for successive five-year periods unless earlier terminated by the Company in
accordance with the agreement.
Wings. In November 1998, the Company entered into an exclusive license
agreement with an affiliate of the Procter & Gamble Company that grants the
Company the right to manufacture and distribute the fragrance brand Wings by
Giorgio Beverly Hills in the United States. The license agreement expires on
December 31, 2003.
COFCI. Since 1990, Fine Fragrances has had agreements with COFCI for the
exclusive distribution in the United States and Canada of fragrances and
related cosmetic products, including the Salvador Dali, Laguna, Salvador,
Dalissime, Dalimix, Cafe, Taxi and Watt brands. In May 1997, in connection
with the Fine Fragrances Acquisition, these agreements were assigned to the
Company. The agreements expire in November 2006, subject to earlier
termination by COFCI if the Company were to fail to purchase certain minimum
levels of product.
Galenic Elancyl. In October 1995, FFI entered into a five-year agreement
(which is automatically renewable for successive three-year terms unless
either party gives written notice prior to the applicable term) with Pierre
Fabre Dermo Cosmetique, a large French skin care manufacturer, pursuant to
which the Company serves as the exclusive distributor in the United States of
the Galenic Elancyl skin care products.
Benetton. In December 1995, the Company entered into an agreement with
S.A.B., USA Corporation, with an initial term through December 1, 2000 (which
is automatically renewable for successive three-year terms unless either party
gives written notice prior to the applicable term), pursuant to which the
Company serves as the exclusive distributor in the United States of the
Benetton fragrance lines, including the Colors of Benetton, Hot and Cold and
Tribu brands.
Faconnable. In May 1996, in connection with the FMG Acquisition, the
Company acquired a distribution agreement with Fairtrade Sarl having an
initial term through June 1999, pursuant to which the Company serves as the
exclusive distributor in the United States of the Faconnable fragrance line,
including the Faconnable and Face a Face brands. See Note 2 to the Notes to
Consolidated Financial Statements. The distribution agreement automatically
renews for up to two successive five-year terms unless the Company terminates
the agreement at the end of the initial term or either party terminates the
agreement after the second five-year term. The Company does not intend to
terminate the agreement at the end of the initial term.
Lapidus. In May 1996, in connection with the FMG Acquisition, the
Company acquired a distribution agreement with Les Parfums Ted Lapidus, S.A.
having an initial term through June 1999, pursuant to which the Company serves
as the exclusive distributor in the United States of the Lapidus, Fantasme and
Creation fragrance lines. The distribution agreement automatically renews for
two successive five-year terms unless the Company terminates the agreement at
the end of the initial term or either party terminates the agreement after the
second five-year term. The Company does not intend to terminate the agreement
at the end of the initial term.
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Ombre Rose. In May 1996, in connection with the FMG Acquisition, the
Company acquired a distribution agreement with Inter Parfums, S.A. with a
minimum term through December 31, 2003, pursuant to which the Company serves
as the exclusive distributor in the United States of the Ombre Rose and Ombre
D'or fragrance lines.
Others. In May 1996, in connection with the FMG Acquisition, the Company
acquired distribution agreements pursuant to which the Company serves as the
exclusive distributor in the United States of additional prestige fragrance
brands, including Balenciaga Pour Homme, Chevignon, Rumba, Le Dix, Prelude
and One Man Show. These agreements extend through June 1999 and are
automatically renewable for up to two successive five-year terms unless the
Company gives written notice prior to the end of the initial term or either
party terminates the agreements after the second five-year term. The Company
does not intend to terminate the agreements after the initial term.
MARKETING AND SALES
In the United States and Canada, the Company has established its own
sales and marketing staff, and also utilizes independent sales
representatives. As a result of the PSI Acquisition, the Company
significantly increased its sales and marketing force to service the
department store customers of the PSI Brands. As of April 20, 1999, the
Company's sales and marketing force consisted of approximately 420 sales
and marketing full and part-time employees, including 320 market specialists
that focus on the retail sell-through of the Company's brands in specific
retail outlets in the United States and Canada and substantially all of which
are part-time employees, and approximately 30 independent sales
representatives. In general, each sales employee and representative is
assigned sales responsibility for a customer or territory. The Company's
sales and marketing employees and representatives routinely visit retailers to
assist in the merchandising, layout and stocking of selling areas.
The Company's senior sales and marketing personnel support the efforts of
its sales employees and representatives by working with the merchandise
managers, lead buyers and marketing departments of its major retailers to
develop advertising and promotional plans tailored to these customers' retail
needs. The Company's sales and marketing personnel frequently work with
customers to (i) assist in the development of merchandising and promotional
programs and budgets for specific products or selling seasons, (ii) design
model schematic planograms for the budgeting of the customer's fragrance and
cosmetics departments, (iii) identify trends in consumer preferences, (iv)
conduct training programs for the customer's sales personnel, and, in certain
cases, (v) provide comprehensive sales analysis and active management of the
prestige fragrance category.
The Company advertises its Controlled Brand products directly through
print media, radio advertising in key markets and cooperative advertising in
association with major retailers. The Company also promotes products through
the use of gift-with-purchase programs, sales personnel incentive commissions
and purchase-with-purchase programs.
The industry practice for businesses that market fragrances and cosmetics
has been to grant prestige department stores the right to return merchandise.
The Company typically limits return rights to department stores and to certain
promotional items offered in its Halston, Geoffrey Beene and PSI lines. The
Company generally does not offer any other return rights and seeks to limit
sales of such promotional products to each retailer to volumes that can be
sold through to the retailer's customer base. The Company establishes
reserves and provides allowances for returns of such products at the time of
sale. As a percentage of gross sales (net sales plus returns reserves and
allowances), returns were approximately 1.9%, 2.6% and 2.5%, respectively, for
the fiscal years ended January 31, 1997, 1998 and 1999. To date, the
Company's returns have not exceeded its returns reserves and allowances,
though there can be no assurance that such reserves and allowances will be
adequate in the future. In connection with the increased department store
business associated with the acquisition of the PSI Brands, the Company
expects to see an increase in returns as a percentage of gross sales and
expects to increase its returns reserves and allowances as necessary. The
Company has, however, an active market to sell returns and generally recovers
a portion of the gross margin loss on its returns by reselling those returns.
9
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<PAGE>
Marketing and sales activities outside the United States and Canada
relate primarily to Halston, Geoffrey Beene and PSI products and are generally
conducted through arrangements with independent distributors. The Company's
export sales department coordinates the Company's relationship with various
international fragrance distributors and assists them in developing
promotional campaigns and marketing budgets for individual foreign markets.
Revenues related to export sales were not material during any of the last
three fiscal years.
DISTRIBUTION
The Company distributes its products to more than 35,000 separate retail
locations in the United States, including department stores such as JCPenney,
Sears, Kohl's, Macy's, Dayton Hudson, Robinsons-May, Proffitt's and Nordstrom,
mass merchants such as Wal-Mart, Target, T.J. Maxx and Kmart, drug stores such
as CVS, Eckerd Drug, Walgreens, Rite Aid and American Stores and independent
fragrance, cosmetic and other stores. The Company is also in the process of
initiating a business-to-business internet commerce site for use by
independent gift stores and other specialty retailers. In addition, with
respect to the Halston, Geoffrey Beene and PSI fragrance products, the Company
distributes these products worldwide.
A majority of the Company's customers require rapid shipment of products.
Because the Company generally attempts to fill orders within three days from
the receipt of a purchase order, and because all orders are subject to
cancellation without penalty by the customer until shipment, management does
not consider backlog to be a significant indication of future sales
activities. All orders are packaged by the Company and most merchandise is
shipped to customers by common carriers. In addition, to expedite delivery,
the Company addresses its individual customer needs by offering its customers
U.P.C. coding, advance price ticketing, case packing, drop ship programs
(direct to store), shrink-wrap, electronic service/anti-theft tagging
and electronic data interchange ("EDI") capabilities. As an example of the
importance of EDI services to retailers, approximately 84% of the Company's
customer orders in fiscal 1999 were received by EDI.
As is customary in the fragrance industry, the Company does not generally
have long-term or exclusive contracts with any of its customers. Sales to
customers are generally made pursuant to purchase orders. The Company
believes that its continuing relationships with its customers are based upon
its ability to provide a wide selection and reliable source of prestige
fragrance products, as well as its ability to provide value-added services,
including its Category Management Services, to its customers, especially
mass-market retailers. The Company's ten largest customers accounted for
approximately 56% of net sales for the fiscal year ended January 31, 1999.
The only customers of the Company that accounted for more than 10% of its net
sales for the same period were Wal-Mart and JCPenney, which accounted for 14%
and 12%, respectively. The loss of, or a significant adverse change in, the
relationship between the Company and any of its key customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SEASONALITY
The Company generally has significantly higher sales in the second half
of the calendar year as a result of increased demand by retailers in
anticipation of, and during, the holiday season. For example, in fiscal 1999,
approximately 65% of the Company's net sales were made during the second half
of the fiscal year.
MANAGEMENT INFORMATION SYSTEMS
The Company's key management information systems consist of (i) a
fully-integrated accounting, forecasting, purchasing and order-entry software
system; (ii) an EDI system, which allows the Company's customers to order
products electronically from the Company and to be invoiced electronically for
those orders; and (iii) a distribution management system, which assists the
Company in facilitating and managing the shipment of products to its
customers. As a whole, these management information systems provide on-line,
real-time, fully-integrated information for its sales, purchasing, warehouse
and financial departments. The Company's information systems form the basis
for a number of the value-added services that the Company provides to its
customers, including inventory replenishment, customer billing, sales
analysis, product availability and pricing information, and expedited order
processing. To accommodate its rapid
10
<PAGE>
<PAGE>
growth, the Company anticipates adding new features to its existing
distribution management system during the Summer of 1999, which will allow the
Company to better manage the receipt and control of its inventory. At January
31, 1999, the Company had incurred approximately $3.1 million of costs for the
implementation and installation of key management information systems and
associated equipment over a two-year period. The Company intends to continue
to enhance its management information systems on an ongoing basis, to provide
improved service to the Company's customers through quicker response times in
shipments, customer service and sales information, and to provide the
Company's management the ability to identify opportunities for increased
efficiencies, cost savings and sales growth. In particular, the Company
intends to expand its use of internet and intranet technologies to improve
data and information communications between the Company and its customers,
suppliers and field personnel.
COMPETITION
The fragrance industry is highly competitive and, at times, subject to
rapidly changing consumer preferences and industry trends. The Company
competes with other distributors, Diverted Sources, manufacturers of
mass-market fragrances and other manufacturers of prestige fragrances.
Competition is generally a function of assortment and continuity of
merchandise selection, price, timely delivery and level of in-store customer
support. The Company believes that it competes primarily on the basis of (i)
its established relationships with its fragrance manufacturers and, in
particular, its ability to offer retailers a reliable, direct supply of
prestige fragrances and related cosmetic products at competitive prices, and
(ii) its emphasis on providing value-added customer services, including
Category Management Services, to its mass-market retailers. There are products
which are better known and more popular than the products produced for or
distributed by the Company. Many of the Company's competitors are
substantially larger and more diversified, and have substantially greater
financial and marketing resources, than the Company, as well as have greater
name recognition and the ability to develop and market products similar to and
competitive with those distributed by the Company.
EMPLOYEES
The Company has a co-employment agreement with Vincam Human Resources,
Inc. ("Vincam"), pursuant to which Vincam assumes all payroll obligations and
certain employee benefits administration with respect to the personnel of the
Company, while allowing the Company to retain management control of these
persons. As of April 20, 1999, the Company had approximately 315 full-time
employees and 290 part-time employees. None of the Company's
employees are covered by a collective bargaining agreement, and the
Company believes that its relationship with its employees is satisfactory.
The Company also uses the services of independent contractors in various
capacities, including sales and marketing representatives and information
systems personnel. The Company also contracts with temporary personnel
agencies for temporary or seasonal labor. During the peak of the Company's
sales season for fiscal 1999, the Company retained the services of
approximately 150 temporary employees, primarily in distribution, packaging
and shipping functions.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information, as of April 20, 1999, with
respect to each person who is an executive officer of the Company, as
indicated below:
Name Age Position
- ------------------ --- ----------------------------------------------
Rafael Kravec 67 Chairman of the Board
E. Scott Beattie 40 President and Chief Executive Officer
Gretchen Goslin 38 Senior Vice President - Marketing
Paul West 49 Senior Vice President - Sales Management and
Planning
Oscar E. Marina 39 Vice President, General Counsel and Secretary
William J. Mueller 52 Vice President, Chief Financial Officer and
Treasurer
11
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<PAGE>
All executive officers are elected annually by the Board of Directors
(the "Board") of the Company and serve at the discretion of the Board. The
business experience, principal occupations and employment as well as the
periods of service of each of the executive officers of the Company during the
last five years are set forth below.
Rafael Kravec has served as Chairman of the Board since April 1997 and as
a director of the Company since the Merger. Mr. Kravec served as Chief
Executive Officer of the Company from the Merger until April 1997 and served
as President and Chief Executive Officer and a director of FFI from its
formation in July 1992 until the consummation of the Merger. Mr. Kravec has
also served as President and Chief Executive Officer and a director of (i)
G.B. Parfums from March 1995 until June 1998, (ii) Halston Parfums from March
1996 until June 1998, (iii) Fine Fragrances from March 1990 until June 1998,
(iv) FRM Services, Inc. ("FRM"), a wholly-owned subsidiary of the Company,
from December 1996 until June 1998, and (v) National Trading Manufacturing,
Inc. ("National Trading"), a company controlled by Mr. Kravec, since 1981.
E. Scott Beattie has served as President and Chief Executive Officer of
the Company since March 1998 and has been a director of the Company since the
Merger. From April 1997 to March 1998, Mr. Beattie served as President and
Chief Operating Officer of the Company, and from November 1995 until April
1997, Mr. Beattie served as Vice Chairman of the Board and Assistant Secretary
of the Company (positions he held with FFI from January 1995 until the
consummation of the Merger). From September 1989 to September 1997, Mr.
Beattie served as President of E.S.B. Consultants, Inc. ("ESB"), a financial
and management consulting firm that until September 1997 was controlled by Mr.
Beattie. ESB provided consulting services to the Company from 1992 until
1997. Mr. Beattie has also served as Executive Vice President of Bedford
Capital Corporation ("Bedford"), a Toronto, Canada based firm that is engaged
in the business of providing merchant banking services through two private
pools of capital to middle-market companies, since March 1995 and as Vice
President of Bedford from September 1989 to March 1995. Prior to his
employment with Bedford, Mr. Beattie served as a Vice President and Director
of Mergers & Acquisitions of Merrill Lynch, Inc. and as a Manager for
Andersen Consulting, specializing in the implementation of information
systems. Mr. Beattie is a director of Bedford and Janna Systems Inc., a
software company.
Gretchen Goslin has served as Senior Vice President - Marketing of the
Company since June 1998 and as Vice President - Marketing of the Company since
the Merger. Ms. Goslin served as Vice President - Marketing of FFI from May
1993 until the consummation of the Merger. From August 1991 to May 1993, Ms.
Goslin was Vice President - Marketing of Cosmyl Corporation, a cosmetics
company.
Paul West has served as Senior Vice President - Sales Management and
Planning of the Company since joining the Company in April 1998 following the
JPF Acquisition. Mr. West served as the President of JPF from August 1997
until April 1998. From January 1997 through June 1997, Mr. West served as a
Vice President of Renaissance Solutions, Inc., a consulting company. Mr. West
served as the Project Director of Unilever N.V., an international consumer
products company, from May 1996 through December 1996. From September 1989
through May 1996, Mr. West served as the Chief Financial Officer of Elizabeth
Arden Company, an international marketer and manufacturer of prestige
cosmetics and fragrances.
Oscar E. Marina has served as Vice President, General Counsel and
Secretary of the Company and Fine Fragrances since March 1996. Mr. Marina has
also served as Vice President, General Counsel and Secretary of G.B. Parfums
and Halston Parfums since March 1997 and Secretary of G.B. Parfums and
Halston Parfums since March 1996. Mr. Marina has served as a director and
Assistant Secretary of FRM since December 1996. From October 1988 until March
1996, Mr. Marina was an attorney with the law firm of Steel Hector & Davis LLP
in Miami, becoming a partner of the firm in January 1995.
William J. Mueller has served as Vice President, Chief Financial Officer
and Treasurer of the Company since the Merger. Mr. Mueller served as Vice
President - Operations, Chief Financial Officer and Treasurer of FFI from
April 1993 until the consummation of the Merger. Mr. Mueller has also served
as Vice President - Finance and Chief Financial Officer of Fine Fragrances
since April 1993 and Treasurer of G.B. Parfums and Halston Parfums since March
1996. Mr. Mueller is a certified public accountant.
12
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ITEM 2. PROPERTIES
The Company's corporate headquarters and distribution center is at the
Miami Lakes Facility located at 14100 N.W. 60th Avenue, Miami Lakes, Florida
33014 in a building owned by the Company on a tract of land comprising
approximately 13 acres. The Miami Lakes Facility contains approximately
200,000 square feet of distribution and warehouse space and approximately
30,000 square feet of office space. In 1996, the Company issued a mortgage on
the Miami Lakes Facility in the amount of $6 million. In anticipation of the
sale of the 59,000 square foot facility formerly leased by the Company as its
main warehouse and office facility (the "National Trading Facility"), in May
1998 the Company entered into a lease with an unaffiliated third party for
approximately 48,000 square feet of a warehouse facility (the "Miami Lakes
Annex") to accommodate additional inventory requirements associated primarily
with its promotional set business. The lease on the Miami Lakes Annex has an
initial term of 30 months, with the Company having an option to extend for an
additional term of 30 months. In order to improve operational efficiencies
and to reduce warehouse and shipping expenses, the Company is presently
evaluating the retention of an unaffiliated third party to lease and operate a
facility in the Northeast United States nearer to the Company's set packaging
vendors. Under this arrangement, the Company would reimburse the third party
contractor's operational costs and pay the contractor a fee for shipping
promotional gift sets and receiving and processing product returns. If the
Company elects to contract for these services, the new facility is expected to
be operational by the Fall 1999. If the Company does not contract for these
services, the shipping of promotional gift sets and processing of product
returns would be performed out of the Company's existing facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of pending legal actions, proceedings
or claims. While any action, proceeding or claim contains an element of
uncertainty, management of the Company believes that the outcome of such
actions, proceedings or claims likely will not have a material adverse effect
on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended January 31, 1999.
13
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market information. The Company's common stock, $.01 par value ("Common
Stock") has been traded on the Nasdaq National Market (the "National Market")
under the symbol "FRAG" since December 21, 1995. The following table sets
forth the high and low closing prices for the Common Stock, as reported on
the National Market for each of the Company's fiscal quarters from February 1,
1997 through January 31, 1999. Over-the-counter quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
High Low
------- ------
Quarter Ended 4/30/97 $9 3/16 $6 3/4
Quarter Ended 7/31/97 $10 1/2 $7 1/8
Quarter Ended 10/31/97 $12 1/2 $8 1/4
Quarter Ended 1/31/98 $11 3/4 $8 5/8
Quarter Ended 4/30/98 $20 $10 1/2
Quarter Ended 7/31/98 $18 1/2 $14
Quarter Ended 10/31/98 $14 1/4 $5 1/4
Quarter Ended 1/31/99 $8 5/8 $5 3/8
Holders. As of April 20, 1999, there were approximately 530 record
holders of the Common Stock.
Dividends. The Company has not declared any cash dividends in its two
most recent fiscal years and currently has no plans to declare dividends in
the foreseeable future. Any future determination by the Company's Board to
pay dividends will be made only after consideration of the Company's financial
condition, results of operations, capital requirements and other relevant
factors. Additionally, the Company's credit facility (the "Credit Facility")
with Fleet National Bank ("Fleet") prohibits the payment of cash dividends by
the Company and the Indentures relating to the Company's 10 3/8% Series B
Senior Notes due 2007 (the "Series B Senior Notes") and the Company's 10 3/8%
Series D Senior Notes due 2007 (the "Series D Senior Notes") condition the
Company's ability to pay cash dividends on the satisfaction of certain
financial and other covenants.
14
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except earnings per share
data)
The following selected financial data represents the selected financial
data of FFI until the Merger and the selected financial data of the Company
following the Merger. The information has been derived from the audited and
unaudited consolidated financial statements of the Company and FFI for the
relevant periods. Effective January 31, 1995, FFI changed its fiscal year end
to January 31 from June 30. For this reason, the seven months ended
January 31, 1995 and 1994 are presented. The following data should be read in
conjunction with the Financial Statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
Seven Months Twelve Months
Ended Ended Fiscal Years Ended
January 31, January 31, January 31,
------------------- ------------- -------------------------------------
1994 1995 1995 1996 1997 1998 1999
(Unaudited) (Unaudited)
SELECTED INCOME
STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $27,415 $50,922 $69,612 $87,979 $140,482 $215,487 $309,615
Gross profit 4,723 10,100 13,504 21,639 46,078 69,978 88,493
Income from
operations 1,763 5,160 6,222 8,419 18,222 31,457 38,684
------- ------- ------- ------- -------- -------- --------
Net income $ 641 $ 2,492 $ 2,862 $ 3,007 $ 8,248 $ 12,341 $ 12,006
======= ======= ======= ======= ======== ======== ========
<CAPTION>
SELECTED PER
SHARE DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per
common share<FN1> $ 0.09 $ 0.35 $ 0.40 $ 0.40 $ 0.71 $ 0.92 $ 0.87
======= ======= ======= ======= ======== ======== ========
Weighted average
common shares
outstanding<FN1> 7,120 7,120 7,120 7,548 11,647 13,394 13,775
OTHER DATA:
EBITDA<FN2> $ 1,964 $ 5,366 $ 6,562 $ 9,738 $ 21,885 $ 36,195 $ 46,179
<CAPTION>
As of January 31,
----------------------------------------------------
1995 1996 1997 1998 1999
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Inventories $21,829 $25,851 $67,989 $90,426 $133,306
Working capital 6,874 8,022 17,734 122,177 $157,457
Total assets 38,378 71,384 172,378 232,653 $294,708
Short-term debt 16,000 16,713 37,631 -- 5,639
Long-term debt, net 4,932 17,285 37,215 133,785 176,159
Redeemable preferred stock 2,000 2,000 -- -- --
Shareholders' equity 4,379 17,539 44,680 58,626 71,480
<FN>
<FN1> Earnings per share and the weighted average number of shares outstanding are determined
based on the number of shares of the Company's Common Stock (7,120,000) received by the
shareholders of FFI in the Merger for each period prior to the year ended January 31,
1996. For the year ended January 31, 1996, earnings per share and the weighted average
number of shares outstanding are based on the 7,120,000 shares received by the
shareholders of FFI in the Merger through the date of the Merger and thereafter are based
on the actual number of shares of Common Stock outstanding. Earnings per share of Common
Stock for all periods reflect "basic" earnings per share in accordance with Statement of
Financial Accounting Standards No. 128. See Note 1 to the Notes to Consolidated
Financial Statements.
<FN2> EBITDA is defined as income from operations, plus depreciation and amortization. EBITDA
should not be considered as an alternative to operating income (loss) or net income
(loss) (as determined in accordance with generally accepted accounting principles) as a
measure of the Company's operating performance or to net cash provided by operating,
investing and financing activities (as determined in accordance with generally accepted
accounting principles) as a measure of its ability to meet cash needs. The Company
believes that EBITDA is a measure commonly reported and widely used by investors and
other interested parties in the fragrance industry as a measure of a fragrance company's
operating performance and debt servicing ability because it assists in comparing
performance on a consistent basis without regard to depreciation and amortization, which
can vary significantly depending upon accounting methods (particularly when acquisitions
are involved) or nonoperating factors (such as historical cost). Accordingly, this
information has been disclosed herein to permit a more complete comparative analysis of
the Company's operating performance relative to other companies in the fragrance industry
and of the Company's debt servicing ability. EBITDA, may not, however, be comparable in
all instances to other similar types of measures used in the fragrance industry.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's business is the manufacturing, distribution and marketing
of prestige fragrances and related cosmetic products. The Company distributes
and markets on an exclusive basis in the United States to both department
stores and mass-market retailers the Controlled Brands, including, the
Geoffrey Beene brands Grey Flannel, Eau de Grey Flannel and Bowling Green, the
Halston brands Halston, Sheer Halston, Catalyst, Z-14, Halston Z and 1-12, the
PSI brands PS Fine Cologne for Men, Design for Women, Design for Men, Casual
for Women and Casual for Men and several other brands including Nautica for
Men, Nautica for Women, Competition, Wings by Giorgio Beverly Hills, Cigar
Aficionado, Colors of Benetton, Hot and Cold, Tribu, Ombre Rose, Ombre D'or,
Faconnable, Salvador Dali, Salvador, Laguna, Dalissime, Dalimix, Cafe, Taxi,
Watt, Balenciaga, Rumba, Lapidus, Creation, Fantasme and Chevignon, as well as
the Galenic Elancyl skin care products. In the case of the Halston, Geoffrey
Beene and PSI fragrance brands, the Company also controls the manufacturing
and exclusive worldwide distribution of such brands. In addition to the
Controlled Brand business, the Company also distributes, primarily to
mass-market retailers, Distributed Brands it obtains from manufacturers and
other sources.
The Controlled Brand business has certain different financial
characteristics than the Distributed Brand business. As a percentage of net
sales, the Controlled Brand business tends to have higher gross margins, as
well as higher marketing and selling, general and administrative expenses,
than the Distributed Brand business. The higher gross margins have been
greater than the higher marketing and selling, general and administrative
expenses associated with the Controlled Brand business. The acquisition of
the licenses and trademarks associated with the Controlled Brand business also
increases amortization expense. Overall, brand contribution margin (operating
income after amortization of acquisition costs and amortization of exclusive
brand licenses, as a percentage of net sales) of Controlled Brands is greater
than that of Distributed Brands. The JPF Acquisition, which closed in March
1998, increased the proportion of the Company's sales mix which consists of
Distributed Brands for the fiscal year ended January 31, 1999. The PSI
Acquisition, which closed in January 1999 is, however, anticipated to increase
the proportion of the Company's business in Controlled Brands.
The following discussion of the Company's results of operations is
presented for the fiscal years ended January 31, 1997, 1998 and 1999.
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RESULTS OF OPERATIONS
GENERAL
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as percentages of
net sales for the period (percentages may not add due to rounding):
<TABLE>
<CAPTION>
Years Ended January 31,
--------------------------
1997 1998 1999
<S> <C> <C> <C>
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 67.2 68.0 71.4
----- ----- -----
Gross profit 32.8 32.0 28.6
Warehouse and shipping expenses 3.2 3.3 3.8
Selling, general and administrative expenses 14.0 11.9 9.8
Depreciation and amortization 2.6 2.2 2.4
----- ----- -----
Operating income 13.0 14.6 12.6
Interest expense, net of interest and
other income 4.1 5.5 5.6
Litigation settlement expense -- -- 0.5
----- ----- -----
Income before equity in earnings
of unconsolidated affiliate and income taxes 8.9 9.1 6.5
Equity in earnings of unconsolidated affiliate 0.3 0.1 0.0
----- ----- -----
Income before income taxes 9.2 9.2 6.5
Provision for income taxes 3.3 3.4 2.5
----- ----- -----
Net income 5.9% 5.8% 4.0%
===== ===== =====
Other Data:
EBITDA margin (1) 15.6% 16.8% 14.9%
(1) EBITDA margin represents EBITDA (as defined in Note 2 under Item 6.
"Selected Financial Data") divided by net sales.
</TABLE>
Fiscal Year Ended January 31, 1999 Compared to the Fiscal Year Ended
January 31, 1998
- --------------------------------------------------------------------
Net Sales. Net sales increased $94.1 million, or 44%, to $309.6 million
for the fiscal year ended January 31, 1999, from $215.5 million for the fiscal
year ended January 31, 1998. The increase in net sales was primarily
attributable to an increase in net sales of Distributed Brands. The
proportion of the Company's net sales that relates to Distributed Brands
increased significantly as a result of the JPF Acquisition. The increase in
net sales represents both an increase in the volume of products sold to
existing customers (including through increased sell through of existing
products and sales of new products), as well as sales to new customers.
Management believes that increased sales during the fiscal year ended
January 31, 1999 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 $19.5 million, or 28%, to $88.5
million for the fiscal year ended January 31, 1999, from $69.0 million for the
fiscal year ended January 31, 1998. The increase in gross profit was
primarily attributable to the increase in net sales of the Distributed Brands.
Gross margins decreased from 32.0% to 28.6%, primarily as a result of a
proportionally larger increase in sales of Distributed Brands, which typically
sell at lower margins than Controlled Brands.
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Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $4.6 million, or 63.5%, to $11.8 million for the fiscal year ended
January 31, 1999, from $7.2 million for the fiscal year ended January 31,
1998. The increase resulted primarily from an increase in freight and labor
costs, which were associated with the increase in net sales and the production
of customized gift sets, and an increase in the provision for shrinkage and
obsolescence related to certain promotional inventory.
SG&A. Selling, general and administrative ("SG&A") expenses increased
$4.9 million, or 19.3%, to $30.5 million for the fiscal year ended January 31,
1999, from $25.6 million for the fiscal year ended January 31, 1998. Of the
increase in SG&A expenses, approximately $3.2 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 co-op and gift-with-
purchase programs. General and administrative expenses for the fiscal year
ended January 31, 1999 increased by approximately $1.7 million primarily as a
result of the addition of administrative personnel (including information
systems consultants) and increased legal costs. As a percentage of net sales,
SG&A expenses decreased from 11.9% in fiscal 1998 to 9.8% in fiscal 1999.
Depreciation and Amortization. Depreciation and amortization increased
$2.8 million, or 58.2%, to $7.5 million for the fiscal year ended January 31,
1999, from $4.7 million for the fiscal year ended January 31, 1998. The
increase was primarily attributable to the amortization of intangibles
acquired in connection with the JPF Acquisition and of additional intangibles
and other assets acquired from FMG, 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 $6.3 million, or 50.8%, to $18.7 million for the fiscal year ended
January 31, 1999, from $12.4 million for the fiscal year ended January 31,
1998. This increase was primarily due to an increase in average debt
outstanding resulting from the April 1998 offering (the "April 1998 Note
Offering") of $40 million principal amount of 10 3/8% Series C Senior Notes
(the "Series C Senior Notes"), which were used to provide long-term working
capital financing and to finance the JPF Acquisition. See Notes 2 and 10 to
the Notes to the Consolidated Financial Statements. The Company had interest
income of approximately $91,000 for fiscal 1999, compared to approximately
$424,000 for fiscal 1998.
Other Income and Expense. During the fiscal year ended January 31, 1999,
the Company had a one-time litigation settlement expense of $1.5 million,
partially offsetby other income of $932,000 relating to the sale of a purchase
option on the National Trading Facility and an intangible right acquired in
connectin with the Halston Acquisition. See Notes 9 and 12 of the Notes to
the Consolidated Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $10.0 million, or 28%, to $46.2 million for the fiscal year ended
January 31, 1999, from $36.2 million for the fiscal year ended January 31,
1998. EBITDA margin decreased to 14.9% for the fiscal year ended January 31,
1999, from 16.8% for the fiscal year ended January 31, 1998. The increase in
EBITDA was primarily the result of an increase in gross profit and a decrease
in SG&A expenses as a percentage of net sales. The decrease in EBITDA margin
was primarily attributable to a decrease in gross margin resulting from the
changing mix of sales following the JPF Acquisition and an increase in
warehouse and shipping expenses.
Net Income. Net income decreased $0.3 million, or 2.7%, to $12.0 million
for the fiscal year ended January 31, 1999, from $12.3 million for the fiscal
year ended January 31, 1998, primarily as a result of the increase in interest
expense, the one-time litigation settlement expense and the decrease in EBITDA
margin, partially offset by an increase in net sales.
18
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<PAGE>
Fiscal Year Ended January 31, 1998 Compared to the Fiscal Year Ended
January 31, 1997
- --------------------------------------------------------------------
Net Sales. Net sales increased $75.0 million, or 53.4%, to $215.5
million for the fiscal year ended January 31, 1998, from $140.5 million for
the fiscal year ended January 31, 1997. Of the increase in net sales (i)
approximately $18.3 million was attributable to an increase in sales of
Controlled Brands, resulting primarily from the increased sales of the
Halston, Geoffrey Beene and Benetton brands (including through the launch
of the Hot and Cold product line) and the addition of the net sales of COFCI
fragrance products following the Fine Fragrances Acquisition (which were
previously accounted for under the equity in earnings of unconsolidated
affiliate, 50% owned), and (ii) the balance was attributable to an increase in
sales of Distributed Brands, including specially designed products, for the
mass market. The increase in net sales represents both an increase in the
volume of products sold to existing customers (including through increased
sell through of existing products and sales of new products), as well as sales
to new customers. Management believes that the increased sales resulted
primarily from the Company's ability to provide its customers with a larger
selection of products and a continuous, direct supply of product, and the
growth in sales of customized gift sets.
Gross Profit. Gross profit increased $22.9 million, or 49.7%, to $69.0
million for the fiscal year ended January 31, 1998, from $46.1 million for the
fiscal year ended January 31, 1997. The increase in gross profit was
primarily attributable to the increase in product sales of both the Controlled
Brands and the Distributed Brands, including an increase in the sale of
holiday fragrance sets. Gross margins decreased slightly from 32.8% to 32.0%
primarily as a result of a 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 $2.7 million, or 59.6%, to $7.2 million for the fiscal year ended
January 31, 1998, from $4.5 million for the fiscal year ended January 31,
1997. The increase resulted from both an increase in labor, warehouse,
shipping materials and freight costs, all of which were associated with the
increase in net sales, and an increase in inventory reserve for shrinkage and
obsolescence.
SG&A. SG&A expenses increased $5.9 million, or 30.0%, to $25.6 million
for the fiscal year ended January 31, 1998, from $19.7 million for the fiscal
year ended January 31, 1997. As a percentage of net sales, SG&A expenses
decreased from 14.0% in fiscal 1997 to 11.9% in fiscal 1998. Of the increase
in SG&A expenses, approximately $2.8 million represented an increase in
selling expenses, primarily as a result of increased advertising and
promotional expenses, the addition of sales and marketing personnel and salary
support programs with retailers, partially offset by the decrease in sales
commissions and national media advertising costs. General and administrative
expenses increased $3.1 million primarily as a result of the addition of
administrative personnel, the termination of the management fees derived from
Fine Fragrances following the Fine Fragrances Acquisition (which had reduced
general and administrative expenses in the prior year's period), the increased
reserve for management incentive compensation (which is based on the pre-tax
income of the Company) and an increase in the provision for bad debt.
Depreciation and Amortization. Depreciation and amortization increased
$1.1 million, or 29.3%, to $4.7 million for the fiscal year ended January 31,
1998, from $3.7 million for the fiscal year ended January 31, 1997. The
increase was primarily attributable to the depreciation of costs related to
(i) improvements to the Miami Lakes facility, (ii) new machinery and equipment
(including equipment for the new pick/sortation system and computer equipment
associated with the Company's new management information system), and (iii)
tools and molds used in connection with the manufacture of products, including
gift sets; and to the amortization of trademarks and licenses from the Halston
Acquisition, the FMG Acquisition and the Fine Fragrances Acquisition.
Interest Expense, Net. Interest expense, net of interest income,
increased $5.6 million, or 81.5%, to $12.4 million for the fiscal year ended
January 31, 1998, from $6.8 million for the fiscal year ended January 31,
1997. This increase was due to the increase in average debt outstanding
resulting from the May 1997 Note Offering of $115 million principal amount of
10 3/8% Series A Senior Notes (the "May 1997 Note Offering"). During the
fiscal year ended January 31, 1998, interest income increased by approximately
$398,000 resulting from the investment of the excess proceeds from the May
1997 Note Offering.
19
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<PAGE>
Other Income. Other income decreased during the fiscal year ended
January 31, 1998 by approximately $0.5 million, from the fiscal year ended
January 31, 1997, primarily as a result of the receipt of $0.5 million from
the September 1996 sale of the common stock of a company engaged in an
unrelated business which the Company held since 1984.
EBITDA. EBITDA increased $14.3 million, or 65.4%, to $36.2 million for
the fiscal year ended January 31, 1998, from $21.9 million for the fiscal year
ended January 31, 1997. The EBITDA margin increased to 16.8% for the fiscal
year ended January 31, 1998 from 15.6% for the fiscal year ended January 31,
1997. The increases in EBITDA and EBITDA margin were primarily attributable
to the decrease in SG&A expenses as a percentage of net sales.
Net Income. Net income increased $4.1 million, or 49.6%, to $12.3
million for the fiscal year ended January 31, 1998, from $8.2 million for the
fiscal year ended January 31, 1997, primarily as a result of the increase in
net sales, which were partially offset by higher interest and SG&A expenses.
SEASONALITY
The fragrance operations of the Company have historically been seasonal,
with higher sales generally occurring in the second half of the fiscal year as
a result of increased demand by retailers in anticipation of and during the
holiday season. For example, in fiscal 1999, 65% of the Company's net sales
were made during the second half of the fiscal year. Due to the size and
timing of certain orders from its customers, sales and results of operations
can vary significantly between quarters of the same and different years. As a
result, the Company expects to experience variability in net sales and net
income on a quarterly basis.
The Company's working capital borrowings are also seasonal, and are
normally highest in the months of September, October and November. During the
fourth fiscal quarter ending January 31, significant cash is normally
generated as customer payments on holiday season orders are received.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $36.9 million of net cash in operations
during the fiscal year ended January 31, 1999, compared to $40.7 million of
net cash used in operations during the fiscal year ended January 31, 1998,
primarily as a result of a significant decrease in accounts receivable,
partially offset by a significant increase in inventories associated with the
JPF Acquisition. The Company used net cash in investing activities of
approximately $11.1 million during the fiscal year ended January 31, 1999,
compared to approximately $7.4 million during the fiscal year ended
January 31, 1998, primarily as a result of the cash used for purchases of
brand licenses, trademarks and intangibles in connection with the PSI
Acquisition and the JPF Acquisition during fiscal 1999 and significant
additions to property and equipment for the Miami Lakes Facility. During the
fiscal year ended January 31, 1999, the Company received approximately $46.5
million of net cash from financing activities, which primarily related to the
proceeds from the April 1998 Note Offering of $40.0 million principal amount
of 10 3/8% Series C Senior Notes, compared to receiving approximately $54.9
million of net cash from financing activities during the fiscal year ended
January 31, 1998. The net cash received from financing activities
during the fiscal year ended January 31, 1998 primarily resulted from the May
1997 Note Offering of $115.0 million principal amount of 10 3/8% Series D
Senior Notes, less the use of proceeds from such offering to reduce
outstanding indebtedness of the Company.
20
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<PAGE>
Set forth in the table below is an analysis of the sources and uses of
the Company's net cash flows during the fiscal year ended January 31, 1999
(i) exclusive of the cash flows to give effect to the JPF Acquisition and the
PSI Acquisition ("Operations Cash Flows"), (ii) to give effect to the assets
acquired and cash consideration paid in connection with these acquisitions
("Acquisitions Cash Flows"), and (iii) of the Company's entire business
("Total Cash Flows"):
<TABLE>
<CAPTION>
SOURCES AND USES OF NET CASH FLOWS
(In millions)
-------------
Operations Acquisitions Total
Cash Flows Cash Flows Cash Flows
---------------------------------------
<S> <C> <C> <C>
Net cash flows (EBITDA) $ 46.2 $ -- $ 46.2
Working capital
Net increase in inventories (5.0) (27.9) (32.9)
Net decrease (increase) in
accounts receivable 10.0 (10.2) (0.2)
Net decrease in accounts
payable - trade (16.2) (16.2)
Increase in property and equipment (2.6) (0.7) (3.3)
Increase in licenses, trademarks
and intangibles -- (7.9) (7.9)
Debt (payments) borrowings (0.2) 46.7 <FN1> 46.5
Interest payments (16.8) -- (16.8)
Tax payments (12.4) -- (12.4)
Other payments, net (4.5) -- (4.5)
------ ------ ------
Net decrease in cash $ (1.5) $ -- $ (1.5)
====== ====== ======
<FN>
<FN1> Includes borrowings used for acquisition payables.
</FN>
</TABLE>
In connection with the PSI Acquisition, the Company paid approximately
$9.7 million in cash and issued a subordinated debenture of $500,000 (the "PSI
Debenture"). The cash portion of the purchase price was financed from
available cash from operations. The PSI Debenture is non-interest bearing,
with the principal amount being payable within 18 months of the date of
closing of the PSI Acquisition, and is being held by the Company as security
for PSI's indemnification obligations under the asset purchase agreement
between the Company and PSI. See Note 2 to the Notes to Consolidated
Financial Statements.
In fiscal 1999, the Company financed approximately $37 million of the
purchase price (not including approximately $10.6 million of accounts payable
assumed) for the JPF Acquisition with available cash from operations, the
Company's Credit Facility and a $3 million debenture (the "JPF Debenture").
Amounts borrowed under the Credit Facility for the JPF Acquisition were repaid
from the proceeds of the April 1998 Note Offering. The JPF Debenture is
non-interest bearing, with the principal amount being payable in three equal
annual installments only if certain conditions relating to JPF's business are
achieved by the Company, including achieving certain gross profit thresholds.
See Note 2 to the Notes to Consolidated Financial Statements.
The Company has historically financed, and expects to continue to
finance, its internal growth and acquisitions primarily through internally
generated funds, its Credit Facility and external financing. The Company's
principal future uses of funds are for working capital requirements, debt
service and additional brand acquisitions or product distribution
arrangements. As a result of several acquisitions during the past four years,
including the Geoffrey Beene Acquisition, the Halston Acquisition, the FMG
Acquisition, the JPF Acquisition and the PSI Acquisition, the growth in direct
distribution relationships for additional fragrance brands and certain
favorable product buying opportunities, the Company's working capital needs
have increased significantly. Nevertheless, management of the Company
believes that internally generated funds and available financing under the
Credit Facility will be sufficient to cover the Company's working capital and
21
<PAGE>
<PAGE>
debt service requirements for at least the next twelve months, other than any
additional working capital requirements which may result from further
expansion of the Company's operations through acquisitions of brands or new
product distribution arrangements.
The Company's future liquidity will continue to be dependent upon its
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally short-term debt, accrued
expenses and accounts payable). Additional inventory requirements and
accounts receivable can have a significant impact on the Company's liquidity,
particularly during expansion. To date, the Company generally has not
experienced any material adverse problems with the collection of accounts
receivable relating to its fragrance operations. There can be no assurance
that refusals to pay or delays in payment would not have a material adverse
effect on the Company's liquidity, results of operations and general
financial condition in the future. The Company establishes reserves and
provides allowances for returns at the time of sale, but there can be no
assurance that such reserves and allowances will be adequate. In connection
with the increased department store business associated with the PSI
Acquisition, the Company expects to see an increase in reserves as a
percentage of gross sales and expects to increase its reserves and allowances
as necessary.
Further expansion of the Company's operations, including through
additional brand acquisitions or the acquisition of exclusive distribution
rights to additional fragrance brands, will require increased investment
in accounts receivable and inventories, which may negatively impact the
Company's cash flow from operations. The Company has discussions from time to
time with manufacturers of prestige fragrance brands and with distributors
that hold exclusive distribution rights regarding possible acquisitions by the
Company of additional exclusive manufacturing and/or distribution rights. The
Company currently has no agreements or commitments with respect to any such
acquisition, although it periodically executes routine agreements to maintain
the confidentiality of information obtained during the course of discussions
with manufacturers and distributors. There is no assurance that the Company
will be able to negotiate successfully for any such future acquisitions or
that it will be able to obtain acquisition financing or additional working
capital financing on satisfactory terms for further expansion of its
operations.
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% Series C Senior Notes due 2007. The
Series C Senior Notes were sold at 106.5% of their principal amount and had
substantially similar terms to the $115 million principal amount of the
Company's 10 3/8% Series B Senior Notes which were issued in May 1997. The
net proceeds of the April 1998 Note Offering from the sales of the Series C
Senior Notes of approximately $41.4 million were used to repay outstanding
borrowings under the Credit Facility, which were used for the JPF Acquisition,
as well as for working capital purposes. See Note 2 to the Notes to
Consolidated Financial Statements. In August 1998, the Series C Senior Notes
were exchanged for an equivalent principal amount of 10 3/8% Series D Senior
Notes containing identical terms to the Series C Senior Notes, but which have
been registered under the Act. The Indentures pursuant to which the Series B
Senior Notes and the Series D Senior Notes were issued (the "Indentures")
generally permit the Company (subject to the satisfaction of a fixed charge
covenant ratio and, in certain cases, also a net income test) to incur
additional indebtedness, pay dividends, purchase or redeem capital stock of
the Company, or redeem subordinated indebtedness. See Note 10 to the Notes to
the Consolidated Financial Statements. In addition, the Indentures do not
limit the amounts which can be borrowed by the Company under any credit
facility.
The Company presently has a Credit Facility with Fleet which provides for
borrowings on a revolving basis of up to $50 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 under the Credit Facility currently mature
on May 31, 1999. The Company expects to renew the Credit Facility with Fleet
for three years effective June 1999. Loans under the revolving credit portion
of the Credit Facility bear interest, payable monthly, at a floating rate
ranging from, at the option of the Company, either (i) 1.75% over the London
InterBank Offered Rate ("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
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 $25
million). These limitations do not, however,
22
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<PAGE>
currently affect the Company's ability to utilize the full amount of the
Credit Facility. Borrowings under the Credit Facility are secured by a first
priority lien on all of the Company's accounts receivable and inventory. The
Company's existing collateral base is more than adequate to cover the
collateral requirements of the Credit Facility and management believes, based
on discussions with its lender, that, if necessary, the excess collateral
could be used to increase the borrowing availability under the Credit Facility
to fund acquisitions or for additional working capital requirements. See Note
7 to the Notes to the Consolidated Financial Statements.
The 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 payment of dividends on, or the
redemption of, the Company's capital stock, certain payments on its
subordinated debt, and the sale of the Company's interest in its subsidiaries.
At January 31, 1999, the Company had approximately $44.4 million of
availability under the Credit Facility to use for additional working capital
support and general corporate purposes, including acquisitions. At April 23,
1999, the Company had no amounts borrowed under the Credit Facility and, thus,
had $50 million of availability. The Company pays quarterly in arrears a fee
of 0.375% per annum on the unused portion of the Credit Facility and a letter
of credit fee of 1.0% per annum on the face amount of trade letters of credit
and 2.0% per annum on the face amount of stand-by letters of credit issued and
outstanding.
At January 31, 1999, the Company had outstanding approximately $4.8
million aggregate principal amount of 7.5% Convertible Subordinated
Debentures due 2006 (the "7.5% Convertible Debentures"). See Note 4 to the
Notes to Consolidated Financial Statements. The 7.5% Convertible Debentures
are convertible at any time at $7.20 per share into shares of Common Stock,
and are redeemable at par at any time commencing July 22, 1999 at the option
of the Company, but only in the event the Common Stock, at the time a
redemption notice is delivered by the Company, has been trading at not less
than $14.40 for 20 consecutive trading days. The 7.5% Convertible Debentures
are due June 30, 2006 and require interest-only payments payable semi-annually
until maturity, at which time the entire unpaid principal amount and any
unpaid accrued interest is due and payable. The Company also has outstanding
approximately $6.5 million aggregate principal amount of 8.5% Subordinated
Debentures (the "8.5% Debentures"). See Note 8 to Notes to Consolidated
Financial Statements. The 8.5% Debentures require mandatory annual principal
repayments in the aggregate amount of $2.17 million on May 2002, 2003 and
2004.
The characteristics of the Company's business do not generally require it
to make significant ongoing capital expenditures. During the fiscal year
ended January 31, 1999, the Company incurred approximately $2.6 million in
capital expenditures (excluding fixed assets acquired in connection with the
PSI Acquisition), primarily relating to computer software and hardware costs,
the purchase of warehouse and manufacturing equipment and the expansion of the
warehouse racking area. During fiscal 2000, the Company is planning to add
new features to its distribution management system during the Summer of 1999
and to make other capital expenditures to improve its production and delivery
capabilities. The Company anticipates that its capital expenditures for the
fiscal year ended January 31, 2000 will be approximately $2.5 million.
Year 2000
The Company has evaluated both its information technology ("IT") systems
and technologies which include embedded ("Non-IT") systems for Year 2000
compliance. The Company believes that its IT and Non-IT systems are Year 2000
compliant. The primary IT systems of the Company are: (1) a fully-integrated
accounting, forecasting, purchasing and order-entry software system; (2) an
EDI system, which allows customers of the Company to order products
electronically from the Company and to be invoiced electronically for those
orders; and (3) a distribution management system, which assists the Company in
facilitating and managing the shipment of products to its customers. The
software companies that developed those systems all have represented to the
Company that their systems are Year 2000 compliant. In fact, all three
systems are relatively new, having been installed at the Company over the last
eighteen months. The Company anticipates adding new features to its existing
distribution management system during the Summer of 1999, which will allow the
Company to better manage the receipt and control of its inventory. The
software developer of the distribution management system has represented that
the new features of the system will be Year 2000 compliant. Other IT systems
include the Company's personal computers, servers and associated software, all
of which the Company believes are Year 2000 compliant. The Company's Non-IT
23
<PAGE>
<PAGE>
systems, which are generally embedded in its equipment and machinery, have
been evaluated for Year 2000 compliance. The Company believes that all of its
Non-IT systems are Year 2000 compliant.
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 contacting these third parties
through questionnaires, letters or interviews in an effort to determine the
status of their Year 2000 readiness. The Company has already received
responses from many of those third parties and will follow up with them until
it is satisfied with the reported status of their Year 2000 compliance
efforts. The Company expects to complete its third-party compliance review
process by August 1999. Additionally, the Company has been testing and will
continue to test EDI transmissions to its customers to determine Year 2000
compliance. For the remainder of 1999 and into 2000, 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 the Company's IT systems
were an integral part of its recently-procured management information systems,
no specific costs have been attributed by the Company to the Year 2000
compliance of its systems. Additionally, to date, the Company has not
determined that any of its non-IT systems need to be fixed or replaced due to
Year 2000 issues. Although, the Company has incurred and expects to continue
to incur labor and material costs associated with the assessment, testing
and monitoring of the Year 2000 compliance of its own systems and those of its
material third party customers, suppliers and service providers, these costs
are not anticipated to be material to the Company's business, results of
operations or financial position. The Company has not determined the actual
Year 2000 compliance costs it has incurred to date, because such costs have
not been considered material.
The Company anticipates minimal disruptions to its business and
operations as a result of system failures related to Year 2000 issues.
Nevertheless, if the Company or a key third party customer, supplier or
service provider experiences a systems failure due to a Year 2000 problem, the
Company's business, results of operations or financial position could be
materially adversely affected. The Company believes that the most
significant impact would be an inability to process customer transactions, to
collect its accounts receivable or to ensure timely delivery of inventory.
Although the Company does not believe that the actual impact of Year 2000
issues will be material, the Company is currently developing contingency plans
to respond to potential Year 2000 issues. In particular, the Company is
developing contingency plans to receive product requirements and to receive
and fulfill customer orders in the event that the delivery of products and the
processing of customer transactions are affected by Year 2000 issues. The
Company will continue to develop and refine its contingency plans based on
tests with third parties and its assessment of other internal and outside
risks. The Company anticipates completing the vast majority of its
contingency planning by August 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it is materially at risk relating to
interest rate, foreign currency exchange rate or commodity price risks
fluctuations. The only debt instrument of the Company that is subject to
interest rate fluctuations is its $50 million Credit Facility. While
inflation likely would increase the interest rates that the Company pays on
its Credit Facility, based on the amounts and projected utilization of the
Credit Facility, the Company does not anticipate that any such increase would
be material to its results of operations. Further, all of the Company's
purchases of fragrances and related cosmetic products from foreign suppliers
are in U.S. dollars, which avoids foreign currency exchange rate risks.
Moreover, while the Company's international sales may be subject to foreign
currency fluctuation risks, such sales, and any currency fluctuations relating
to those sales, have not been and are not expected to be material to the
Company's results of operations.
24
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of January 31, 1998 and 1999. . . . . .
Consolidated Statements of Income for the Years Ended January 31,
1997, 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders' Equity for the Years Ended
January 31, 1997, 1998 and 1999 . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flow for the Years Ended January 31,
1997, 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .
25
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
French Fragrances, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of French
Fragrances, Inc. and subsidiaries (the "Company") as of January 31, 1998 and
1999, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended January 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 31,
1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
April 16, 1999
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,667,119 $ 6,111,603
Accounts receivable, net 53,412,248 51,796,247
Inventories 90,425,910 133,305,803
Advances on inventory purchases 6,978,285 7,553,560
Prepaid expenses and other assets 3,936,529 5,758,399
------------ ------------
Total current assets 162,420,091 204,525,613
------------ ------------
Property and equipment, net 19,501,742 19,020,630
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 42,776,017 55,658,151
Senior note offering costs, net 3,756,911 4,491,073
Deferred income taxes, net 838,633 1,208,153
Other intangibles and other assets 3,359,891 9,804,560
------------ ------------
Total other assets 50,731,452 71,161,937
------------ ------------
Total assets $232,653,285 $294,708,179
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 5,639,369
Accounts payable - trade 24,393,878 21,698,507
Other payables and accrued expenses 12,454,835 15,869,405
Current portion of long-term liabilities 3,100,108 3,861,767
Due to affiliates, net 294,136 --
------------ ------------
Total current liabilities 40,242,957 47,069,047
------------ ------------
Long-term liabilities:
Senior notes, net 115,000,000 157,453,466
Subordinated debentures, net 7,131,873 8,375,383
Convertible subordinated debentures 4,960,633 4,778,643
Mortgage note 5,682,041 5,551,264
Capital lease 1,010,000 --
------------ ------------
Total liabilities 174,027,504 223,227,803
------------ ------------
Commitments and contingencies (See Note 9)
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
<PAGE>
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 39,701,006
------------ ------------
Total shareholders' equity 58,625,781 71,480,376
------------ ------------
Total liabilities and shareholders' equity $232,653,285 $294,708,179
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
------------------------------------------
<S> <C> <C> <C>
Net sales $140,482,299 $215,487,487 $309,614,611
Cost of sales 94,404,288 146,509,086 221,121,582
------------ ------------ ------------
Gross profit 46,078,011 68,978,401 88,493,029
------------ ------------ ------------
Operating expenses:
Warehouse and shipping 4,528,022 7,225,319 11,816,762
Selling, general and
administrative 19,664,857 25,557,962 30,497,592
Depreciation and amortization 3,663,261 4,738,077 7,494,607
------------ ------------ ------------
Total operating expenses 27,856,140 37,521,358 49,808,961
------------ ------------ ------------
Income from operations 18,221,871 31,457,043 38,684,068
------------ ------------ ------------
Other income (expense):
Interest expense, net (6,826,248) (12,390,622) (18,689,595)
Litigation settlement expense -- -- (1,500,000)
Income from sale of contract and
intangible rights -- -- 932,763
Other income 1,108,489 562,866 265,655
------------ ------------ ------------
Other income (expense), net (5,717,759) (11,827,756) (18,991,177)
------------ ------------ ------------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 12,504,112 19,629,287 19,692,891
Equity in earnings of unconsolidated
affiliate, 50% owned 395,983 134,508 --
------------ ------------ ------------
Income before income taxes 12,900,095 19,763,795 19,692,891
Provision for income taxes 4,652,336 7,422,426 7,686,871
------------ ------------ ------------
Net income $ 8,247,759 $ 12,341,369 $ 12,006,020
============ ============ ============
Earnings per common share:
Basic $0.71 $0.92 $0.87
===== ===== =====
Diluted $0.60 $0.76 $0.73
===== ===== =====
Weighted average number of common
shares:
Basic 11,646,937 13,394,385 13,774,993
========== ========== ==========
Diluted 13,830,510 16,492,041 16,728,798
========== ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
28
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Additional Total
Series B Series C Common Stock Paid-in Retained Shareholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Equity
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1996 350,000 $3,500 -- -- 9,641,290 $ 96,413 $10,333,539 $ 7,105,858 $17,539,310
Issuance of
Common Stock
upon conversion
of Series B
convertible
preferred stock (33,995) (340) -- -- 242,041 2,421 796,655 -- 798,736
Issuance of
Common Stock
upon conversion
of 5% convertible
subordinated
debentures -- -- -- -- 1,815 18 13,982 -- 14,000
Issuance of
Common Stock in
public offering -- -- -- -- 3,364,000 33,640 17,979,361 -- 18,013,001
Issuance of warrants -- -- -- -- -- -- 61,624 -- 61,624
Issuance of
Series C convertible
preferred stock -- -- 571,429 $5,714 -- -- -- -- 5,714
Net income
for the year -- -- -- -- -- -- -- 8,247,759 8,247,759
------------------------------------------------------------------------------------------------------
Balance at
January 31, 1997 316,005 3,160 571,429 5,714 13,249,146 132,492 29,185,161 15,353,617 44,680,144
------------------------------------------------------------------------------------------------------
Issuance of
Common Stock
upon conversion
of Series B
convertible
preferred stock (36,128) (361) -- -- 257,230 2,572 846,660 -- 848,871
Issuance of
Common Stock
upon conversion
of Series C
convertible
preferred stock -- -- (45,939) (459) 45,939 459 241,179 -- 241,179
Issuance of
Common Stock
upon conversion
of 7.5%
subordinated
convertible
debentures -- -- -- -- 71,419 715 513,503 -- 514,218
Net income
for the year -- -- -- -- -- -- 12,341,369 12,341,369
------------------------------------------------------------------------------------------------------
Balance at
January 31, 1998 279,877 2,799 525,490 5,255 13,623,734 136,238 30,786,503 27,694,986 58,625,781
------------------------------------------------------------------------------------------------------
Issuance of
Common Stock
upon conversion
of Series B
convertible
preferred stock (8,281) (83) -- -- 58,961 589 194,065 -- 194,571
Issuance of
Common Stock
upon conversion
of Series C
convertible
preferred stock -- -- (14,135) (141) 14,135 141 74,209 -- 74,209
Issuance of
Common Stock
upon conversion
of 7.5%
subordinated
convertible
debentures -- -- -- -- 26,016 260 187,055 -- 187,315
Issuance of
Common Stock
upon exercise
of stock options -- -- -- -- 35,600 356 117,124 -- 117,480
Issuance of
Common Stock
upon exercise
of warrants -- -- -- -- 54,258 543 274,457 -- 275,000
Net income
for the year -- -- -- -- -- -- -- 12,006,020 12,006,020
------------------------------------------------------------------------------------------------------
Balance at
January 31, 1999 271,596 $2,716 511,355 $5,114 13,812,704 $138,127 $31,633,413 $39,701,006 $71,480,376
======= ====== ======= ====== ========== ======== =========== =========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
29
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
-----------------------------------------
<S> <C> <C> <C>
Cash flows from Operating Activities:
Net income $ 8,247,759 $ 12,341,369 $ 12,006,020
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 3,663,261 4,738,077 7,494,607
Amortization of senior note offering costs -- 286,301 556,084
Equity in earnings of unconsolidated affiliate (395,983) (134,508) --
Deferred tax (benefit) provision (194,463) 117,172 (369,520)
Change in assets and liabilities, net of effects
from the acquisitions:
Increase in accounts receivable (20,784,755) (18,887,502) (249,999)
Increase in inventories and advances
on inventory purchases (44,216,341) (19,630,950) (32,894,592)
Decrease (increase) in prepaid expenses and
other assets 990,242 (7,249,730) (2,288,307)
Increase (decrease) in accounts payable 26,213,395 (13,452,678) (16,171,948)
Increase (decrease) in other payables and
accrued expenses 4,294,542 1,157,859 (5,030,105)
Decrease in due to affiliate, net (1,038,451) (14,508) --
------------ ------------ ------------
Net cash used in operating activities (23,220,794) (40,729,098) (36,947,760)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of exclusive brand licenses and
trademarks (19,315,291) -- (2,732,381)
Additions to property and equipment, net
of disposal (2,486,960) (6,960,899) (3,259,481)
Receipts of restricted cash for capital
improvements 685,398 1,314,602 --
Net cash portion of purchase of
intangible asset -- -- (5,150,000)
Net cash portion of unconsolidated
affiliate purchase -- (1,745,768) --
------------ ------------ ------------
Net cash used in investing activities (21,116,853) (7,392,065) (11,141,862)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from the issuance of preferred
stock 5,714 -- --
Proceeds from the conversion of preferred
stock -- 1,049,487 268,780
Proceeds from stock offering 18,013,001 -- --
Proceeds from the issuance of subordinated
debentures 3,000,035 -- --
Payments to retire subordinated debentures (600,000) (14,494,512) (500,000)
Net proceeds from the issuance of senior
notes, net -- 111,550,000 41,500,000
Advances from unconsolidated affiliate, net 383,621 798,894 --
Proceeds from term loan 8,960,000 -- --
Payments on term loans (10,833,332) (4,333,333) (596,535)
<PAGE>
Net proceeds from (payments on) short-term
debt 22,751,300 (39,367,096) 5,639,369
Payments on capital lease and installment loans (200,346) (141,144) (50,000)
Payments on loans from shareholders and officer (410,000) -- --
Proceeds from the exercise of stock purchase
warrants 41,624 -- 275,000
Proceeds from facility mortgage note 4,000,000 -- --
Payments on facility mortgage note (55,961) (129,983) (119,988)
Proceeds from conversion of subordinated
debentures 14,000 -- --
Proceeds from the exercise of employee stock
options -- -- 117,480
------------ ------------ ------------
Net cash provided by financing activities 45,069,656 54,932,313 46,534,106
------------ ------------ ------------
Net Increase (decrease) in Cash and
Cash Equivalents 732,009 6,811,150 (1,555,516)
Cash and Cash Equivalents at Beginning of Year 123,960 855,969 7,667,119
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 855,969 $ 7,667,119 $ 6,111,603
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year $ 6,014,871 $ 9,990,420 $ 16,766,085
============ ============ ============
Income taxes paid during the year $ 2,113,441 $ 8,064,127 $ 12,430,731
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
30
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity. French Fragrances, Inc. (the
"Company") is a manufacturer, distributor and marketer of prestige designer
fragrances and related cosmetic products, primarily to retailers in the United
States.
Basis of Consolidation. The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries G.B. Parfums, Inc.,
Halston Parfums, Inc., Fine Fragrances, Inc. ("Fine Fragrances") and FRM
Services, Inc. See Note 2. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition. Sales are recognized upon shipment. During the
fiscal years ended January 31, 1997 and 1998, no customer accounted for more
than 10% of total sales. During the fiscal year ended January 31, 1999, two
customers accounted for 14% and 12%, respectively, of the Company's net sales.
The Company generally limits return rights to department stores and to certain
promotional items offered in the brands it manufactures. The Company
generally does not offer any other return rights.
Cash and Cash Equivalents. Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
Inventories. Inventories are stated at the lower of cost or market.
Cost is determined on the weighted-average method. Inventory balances at
January 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
January 31,
1998 1999
-----------------------------
<S> <C> <C>
Finished $82,208,665 $116,071,991
Work in progress 1,841,706 7,927,388
Raw materials 6,375,539 9,306,424
----------- ------------
$90,425,910 $133,305,803
=========== ============
</TABLE>
Investment in Unconsolidated Affiliate. Prior to May 1997, the Company
owned 50% of the common stock of Fine Fragrances and its investment was
accounted for under the equity method. See Note 6.
Accounts Receivable. A provision has been made and an allowance
established for potential losses from receivables and estimated sales returns
in the normal course of business. Because these allowances are based on
estimates, there is no assurance that such reserves and allowances will be
sufficient to cover losses or returns. The activity for these allowance
accounts are as follows:
31
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(Continued)
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
---------------------------------------
<S> <C> <C> <C>
Allowance for Bad Debt:
Beginning balance $ 290,645 $ 489,937 $ 676,387
Provision 205,000 570,000 401,626
Write offs, net of recoveries (5,708) (383,550) (544,317)
----------- ---------- -----------
Ending balance $ 489,937 $ 676,387 $ 533,696
=========== ========== ===========
Allowance for Sales Returns:
Beginning balance $ 346,500 $ 366,608 $ 558,651
Provision 2,726,143 6,014,283 7,630,810
Actual returns (2,706,035) (5,822,240) (7,634,216)
----------- ---------- -----------
Ending balance $ 366,608 $ 558,651 $ 555,245
=========== ========== ===========
</TABLE>
Property and Equipment, and Depreciation. Property and equipment are
stated at cost. Expenditures for major improvements and additions are recorded
to the asset accounts while replacements, maintenance, and repairs which do
not improve or extend the lives of the respective assets are charged to
expense. Depreciation is provided over the estimated useful lives of the
assets using the straight-line method, as follows:
Category Years
----------------------------------------
Building 40
Building improvements 20-40
Furniture and fixtures 8
Machinery, equipment and vehicles 3-8
Computer equipment and software 3-5
Tools and molds 1-3
Capital Lease. Prior to August 1998, the Company leased from National
Trading Manufacturing, Inc. ("National Trading"), a company which is
wholly-owned by the Chairman of the Company, a 59,000 square foot facility
(the "National Trading Facility"), which had housed the Company's offices
prior to May 1997. In connection with the August 1998 sale by National
Trading of the National Trading Facility, the Company agreed to terminate the
lease. See Note 12. 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 Property and equipment, net
in the Consolidated Balance Sheet at January 31, 1999.
Prior to its termination, this lease was accounted for as the acquisition
of assets and incurrence of obligations under the capital lease standards
issued by the Financial Accounting Standards Board ("FASB"). Accordingly, the
capitalized leased assets were recorded as property at the fair value of the
property, which was the present value of the minimum lease payments.
Depreciation of the building was computed using the term of the lease and is
included in depreciation expense.
32
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(Continued)
Income Taxes. The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred taxes
under the liability method. Under such method, deferred taxes are adjusted
for tax rate changes as they occur. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are recorded when necessary to reduce
deferred tax assets to the amount expected to be realized.
Exclusive Brand Licenses and Trademarks, Customer Lists and Amortization.
These intangible assets are being amortized using the straight-line method, as
follows at January 31:
<TABLE>
<CAPTION>
Accumulated Amortization
Category Years Cost 1998 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exclusive brand licenses
and trademarks 5 and 15 $66,349,518 $7,043,477 $10,691,367
Contract rights and
other intangibles 3 and 5 11,179,593 634,656 2,395,020
</TABLE>
The Company reviews its intangible assets periodically for events or
changes in circumstances that may indicate that the carrying amount is not
recoverable on an undiscounted cash flow basis in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed 0f. If the
estimated future cash flows are projected to be less than the carrying value,
an impairment write-down would be recorded. No write-downs have been
recorded during the fiscal years ended January 31, 1997, 1998 and 1999.
Senior Note Offering Costs. Debt issuance costs and transaction fees
which are associated with the issuance of senior notes are being amortized
(and charged to interest expense) over the term of the related notes on a
method which approximates the level yield method. See Note 10.
Fair Value of Financial Instruments. The Company's financial instruments
include accounts receivable, accounts payable, short-term debt, convertible
subordinated debentures, subordinated debentures, senior notes and convertible
redeemable preferred stock. The fair value of such financial instruments has
been determined using available market information and interest rates as of
January 31, 1998 and 1999.
At January 31, 1998 and 1999, the estimated fair value of the Company's
subordinated debentures and senior notes was as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Subordinated debentures $ 6,979,000 $ 9,875,000
Convertible subordinated debentures 7,578,000 5,289,000
Senior notes 121,900,000 158,875,000
</TABLE>
The fair value of all other financial instruments was not materially
different than their carrying value.
Reclassifications. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform with fiscal 1999
presentations.
33
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(Continued)
Earnings per Share. 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 dilutive earnings per share
calculation, the interest incurred on the convertible securities, net of tax,
is added back to net income. The following table represents the computation
of earnings per share:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
---------------------------------------
<S> <C> <C> <C>
Basic
Net income $ 8,247,759 $12,341,369 $12,006,024
=========== =========== ===========
Weighted average shares
outstanding 11,646,937 13,394,385 13,774,993
=========== =========== ===========
Net income per basic share $ 0.71 $ 0.92 $ 0.87
=========== =========== ===========
Diluted
Net income $8,247,759 $12,341,369 $12,006,020
Add: 7.5% Convertible
subordinated debentures'
interest - net of tax $135,635 $250,086 163,933
Add: 5% Convertible
subordinated debentures'
interest - net of tax 12,288 -- --
----------- ----------- -----------
Net income as adjusted $ 8,395,682 $12,591,455 $12,169,953
=========== =========== ===========
Weighted average shares
outstanding 11,646,937 13,394,385 13,774,993
Potential common shares -
treasury method 1,762,848 2,350,430 2,448,181
Assumed conversion of 7.5%
convertible subordinated
debentures 384,361 747,226 505,624
Assumed conversion of 5%
convertible subordinated
debentures 36,364 -- --
----------- ----------- -----------
Weighted average shares and
potential dilutive shares 13,830,510 16,492,041 16,728,798
=========== =========== ===========
Net income per diluted share $ 0.61 $ 0.76 $ 0.73
=========== =========== ===========
</TABLE>
Stock-Based Compensation. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee and non-employee members of the
Board of Directors of the Company (the "Board") compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation to employees and non-employee members of the Board using the
intrinsic value method as prescribed by Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options issued
to employees and non-employee members of the Board are measured as the excess,
if any, of the fair value of the Company's stock at the date of grant over the
amount an employee or non-employee member of the Board must pay for the stock.
See Note 14.
Segments of an Enterprise. In June 1997, the FASB 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
34
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(Continued)
requires entitywide 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 No. 131 is effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 131 did not have a material
impact on the Company's consolidated financial statements presentation because
the Company does not have different operating segments as defined in SFAS No.
131.
2. MERGER AND ACQUISITIONS
Merger. In November 1995, French Fragrances, Inc. ("FFI") merged with
and into Suave Shoe Corporation ("Suave") in a reverse acquisition ("Merger").
Following the Merger, Suave, as the surviving corporation, changed its name to
"French Fragrances, Inc." The principal business operations following the
Merger consist of the business previously conducted by FFI, which is the
manufacture, distribution and marketing of prestige fragrances and related
cosmetic products. Pursuant to the terms of the Merger: (i) each outstanding
share of FFI common stock, $.01 par value per share ("FFI Common Stock"), was
converted into the right to receive 7.12 shares of common stock, $.01 par
value per share ("Common Stock"), of the surviving corporation; (ii) each
outstanding share of FFI Series A Preferred was converted into the right to
receive one share of Series A Preferred Stock, $.01 par value per share
("Series A Preferred"), of the surviving corporation; (iii) each outstanding
share of FFI Series B Convertible Preferred, $.01 par value, was converted
into one share of Series B Convertible Preferred Stock, $.01 par value per
share ("Series B Convertible Preferred"), of the surviving corporation; and
(iv) each outstanding option to purchase one share of FFI Common Stock was
adjusted to be exercisable into 7.12 shares of Common Stock. In connection
with the Merger, the surviving corporation issued to FFI shareholders
7,120,000 shares of Common Stock, 20,000 shares of Series A Preferred and
350,000 shares of Series B Convertible Preferred and the fragrance
distribution operations were relocated from the National Trading Facility to
the larger facility formerly occupied by Suave in Miami Lakes, Florida (the
"Miami Lakes Facility").
In connection with the Merger, the shareholders of Suave adopted
amendments to Suave's Articles of Incorporation to: (i) change the name of
Suave to "French Fragrances, Inc.;" (ii) increase the number of authorized
shares of Common Stock, from 10,000,000 to 50,000,000; (iii) authorize 20,000
shares of Series A Preferred and 350,000 shares of Series B Convertible
Preferred issued pursuant to the Merger; and (iv) authorize 5,000,000 shares
of undesignated preferred stock. The Merger was treated as a recapitalization
of the Company, with FFI as the accounting acquiror (i.e., a reverse
acquisition) and has been accounted for under the purchase method of
accounting.
Halston Acquisition. In March 1996, the Company completed the
acquisition (the "Halston Acquisition") from Halston Borghese, Inc. ("HBI")
and its affiliates of certain assets relating to the Halston fragrance brands,
including the trademarks and certain inventory and tangible assets. The
Halston Acquisition was financed as follows: (i) through the issuance of
$3,000,000 principal amount of 8% Secured Subordinated Debentures due 2005,
Series II (the "8% Series II Debentures"), and 571,429 shares of Series
C Convertible Preferred Stock, $.01 par value ("Series C Convertible
Preferred"); (ii) $16,000,000 in term loans from the two banks which were
parties to the Company's then existing credit facility; and (iii) a
$2,000,000 note issued to HBI maturing March 20, 2000 (the "HBI Note"), which
was to be repaid on a quarterly basis in an amount equal to 5% of the
Company's net sales of the Halston brands, provided that no payments were due
until October 15, 1997 and that the accrued amount bore interest at 8% per
annum. Each share of Series C Convertible Preferred is convertible into one
share of Common Stock upon the payment of a conversion price of $5.25 per
share. The term loans were repaid in June and July 1996 through the issuance
of a mortgage in the amount of $6,000,000 on the Miami Lakes Facility and the
net proceeds from a public offering in July 1996 of 3,364,000 shares of Common
Stock of the Company (the "Stock Offering"). See Note 3. The mortgage note
provides for interest at 8.84%, a 20-year amortization
35
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS -- (Continued)
schedule and a maturity date eight years from issuance. The outstanding
amounts due under the 8% Series II Debentures were retired in May 1997 with a
portion of the net proceeds from the May 1997 offering (the "May 1997 Note
Offering") of $115,000,000 principal amount of 10 3/8% Series A Senior Notes
due 2007 ("Series A Senior Notes"). See Note 10.
In September 1997, the Company informed HBI that it was setting off
amounts due under the HBI Note as a result of the Company's indemnification
claim against HBI and its affiliates for breach of the asset purchase
agreement relating to the Halston Acquisition. HBI, in turn, made a demand
that the Company pay the full principal balance and accrued interest on the
HBI Note, as well as other payments it claimed were owed under such
agreements, which together with the Note HBI claimed were in excess of
$2,400,000. In July 1998, HBI submitted the matter to arbitration. The
amount of the HBI Note is reflected in the Current portion of capital lease,
mortgage and term note in the accompanying Consolidated Balance Sheet of the
Company at January 31, 1999. In April 1999, the parties settled the dispute.
Pursuant to the settlement, the HBI Note was canceled and all claims of HBI
were released in exchange for a payment from the Company of approximately
$530,000. As a result of the settlement, the HBI Note and accrued interest
will be removed from the Consolidated Balance Sheet at April 30, 1999.
FMG Acquisition. In May 1996, the Company completed the acquisition (the
"FMG Acquisition") of certain assets of Fragrance Marketing Group, Inc.
("FMG"), including contract rights under certain license and exclusive
distribution agreements in the United States for several brands, including
Ombre Rose, Lapidus, Faconnable, Balenciaga and Bogart, inventory, accounts
receivable and tangible assets. The Company financed the FMG Acquisition as
follows: (i) through the issuance of $11,100,000 aggregate principal amount of
8.5% Subordinated Debentures (the "8.5% Debentures"); and (ii) $4,300,000 from
its revolving bank credit facility. The Company also issued to FMG warrants
to purchase an aggregate of 1,075,000 shares of Common Stock, which will be
exercisable in full at $7.50 per share from July 1997 to January 2002. In
addition, warrants for 170,000 shares of Common Stock, which are exercisable
in three equal amounts at $7.50 per share following July 1997, 1998 and 1999
and expire January 2002, were issued to certain key employees of FMG as an
inducement to join the Company. An 8.5% Debenture of $4,000,000 principal
amount was retired in May 1997 with a portion of the net proceeds from the May
1997 Note Offering and an 8.5% Debenture of $500,000 was retired in June 1998
with cash from operations. The $6,500,000 principal amount 8.5% Debenture
which was outstanding at January 31, 1999 requires mandatory annual principal
repayments of $2,167,000 in May 2002, 2003 and 2004.
JPF Acquisition. In March 1998, the Company acquired (the "JPF
Acquisition") 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 "JPF Acquired
Assets"). The Company also assumed approximately $10,600,000 of certain trade
and other payables of JPF. In addition to the assumption of payables, the
purchase price for the JPF Acquired Assets consisted of approximately
$37,300,000 in cash and a subordinated debenture of $3,000,000 (the "JPF
Debenture"). The cash portion of the purchase price was financed from
available cash from operations and the Company's current revolving credit
facility. The JPF 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 JPF Debenture has been recorded
net of its discount of $485,528 and calculated using an effective rate of
9.38%. The discount will be amortized using the effective rate over the life
of the JPF Debenture. As a result of the JPF Acquisition, the Company
acquired approximately $30,400,000 of inventory, $12,100,000 of accounts
receivable and $263,000 of fixed assets (consisting primarily of office and
warehouse furniture and equipment). Other intangibles and other assets
acquired as part of the JPF Acquisition at January 31, 1999 include
approximately $6,800,000 of contract rights, intangible rights (including
non-compete agreements) and goodwill. The JPF Acquisition was accounted for
under the purchase method.
36
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS -- (Continued)
PSI Acquisition. In January 1999, the Company acquired certain assets
(the "PSI Acquisition") of Paul Sebastian, Inc. ("PSI"), a manufacturer,
marketer and distributor of prestige fragrance products, including trademarks
or licenses to manufacture and distribute the fragrance brands PS Fine Cologne
for Men, Design for Women, Design for Men, Casual for Women, Casual for Men
and Cigar Aficionado, inventory, returns, accounts receivable, books and
records, fixed assets (consisting of manufacturing tools, dyes and molds),
claims and goodwill (collectively, the "PSI Acquired Assets"). The purchase
price for the PSI Acquired Assets consisted of approximately $9,700,000 in
cash and a subordinated debenture of $500,000 (the "PSI Debenture"). The cash
portion of the purchase price was financed from available cash from
operations. The PSI Debenture is non-interest bearing, with the principal
amount being payable within 18 months of the date of closing of the PSI
Acquisition, and is being held by the Company as security for PSI's
indemnification obligations under the asset purchase agreement between the
Company and PSI. The PSI Acquisition was accounted for under the purchase
method.
The following unaudited information presents the Company's pro forma
operating data for the year ended January 31, 1997, 1998 and 1999 as if the
JPF Acquisition, the PSI Acquisition, the May 1997 Note Offering and the April
1998 note offering (the "April 1998 Note Offering") of $40,000,000 principal
amount of 10 3/8% Series C Senior Notes due 2007 (the "Series C Senior Notes")
had been consummated at the beginning of each of the periods presented and
includes certain adjustments to the historical consolidated statements of
income of the Company to give effect to the acquisition of the net assets of
JPF and PSI, the payment of the purchase prices and the increased amortization
of intangible assets as a result of the JPF Acquisition and the PSI
Acquisition and the related issuance of additional indebtedness. The
unaudited pro forma financial data is not necessarily indicative of the
results of operations that would have been achieved had the JPF Acquisition,
the PSI Acquisition and the April 1998 Note Offering been consummated prior
to the period in which they were completed, or that might be attained in the
future.
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1998 1999
------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net Sales $315,731,000 $399,208,000 $388,045,000
Net (Loss) Income $(11,236,000) $ (7,515,000) $ 2,464,000
Net (Loss) Income
per Basic Share $(.96) $(.56) $.18
Net (Loss) Income
per Diluted Share $(.96) $(.56) $.16
</TABLE>
3. PUBLIC OFFERING OF COMMON STOCK
In July 1996, the Company completed the offering of 3,364,000 shares of
Common Stock at a price of $6.00 per share. The Company realized
approximately $18,000,000 of net proceeds from the Stock Offering.
Approximately $9,300,000 of the net proceeds were used to repay the
outstanding balance of the term loans issued in connection with the Halston
Acquisition, and the balance of the net proceeds was used to reduce
outstanding borrowings under the Company's credit facility. See Note 2. In
connection with the Stock Offering, the Company issued warrants to the
representatives of the underwriters entitling them to purchase an aggregate of
162,500 shares of Common Stock at an exercise price of $7.20 per share from
June 1997 through June 1999.
37
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EXCHANGE OFFER
In July 1996, the Company consummated an exchange offer (the "Exchange
Offer"), pursuant to which the Company issued $5,460,000 principal amount of
7.5% Convertible Subordinated Debentures due 2006 (the "7.5% Convertible
Debentures") in exchange for the 20,000 outstanding shares of Series A
Preferred and the $3,460,000 outstanding principal amount of 12.5% Secured
Subordinated Debentures Due 2002 (the "12.5% Debentures"). Pursuant to the
Exchange Offer, each share of Series A Preferred was exchanged for $100
principal amount of 7.5% Convertible Debentures, and each outstanding 12.5%
Debenture was exchanged for the equivalent principal amount of 7.5%
Convertible Debentures. The 7.5% Convertible Debentures (i) are unsecured,
(ii) require interest only payments at 7.5% per annum, payable semi-annually
until maturity ten years from the date of issue, at which time the entire
principal amount and any unpaid accrued interest is due and payable, (iii) are
convertible at any time, at the option of the Holder, into shares of Common
Stock at $7.20 per share, and (iv) are redeemable, at the option of the
Company, at their principal amount commencing July 1999, but only in the event
the Common Stock, at the time the redemption notice is delivered by the
Company, has been trading at no less than $14.40 for 20 consecutive trading
days. The shares of Series A Preferred have been canceled.
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------- ----------------
<S> <C> <C>
Land $ 3,447,000<FN1> $ 2,871,000
Building 6,743,452<FN2> 5,519,452
Building improvements 3,611,947 4,627,236
Furniture and fixtures 885,019 979,329
Machinery, equipment and vehicles 1,997,661 4,078,736
Computer equipment and software 1,283,879 3,815,532
Tools and molds 1,222,598 1,534,668
----------- -----------
19,191,556 23,425,953
Less accumulated depreciation (2,791,895) (4,478,029)
----------- -----------
16,399,661 18,947,924
Construction in progress 538,789 --
Projects in progress 2,563,292 72,706
----------- -----------
Property and equipment, net $19,501,742 $19,020,630
=========== ===========
<FN>
<FN1> Includes $576,000 under capital lease. See Note, 1 Capital Lease.
<FN2> Includes $1,224,000 under capital lease. See Note, 1 Capital
Lease.
</FN>
</TABLE>
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information for the years
ended January 31, 1997 and 1998 of Fine Fragrances, a fragrance distribution
Company which, prior to May 1997, was 49.99% owned by the Company and
distributed the Salvador Dali, Laguna, Dalissime, Salvador, Dalimix, Cafe,
Taxi and Watt brands manufactured by COFCI, S.A. ("COFCI"). Prior to May
1997, the Company's investment in Fine Fragrances was accounted for under the
equity method.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
January 31, 1997 April 30, 1998
---------------- ------------------
<S> <C> <C>
Net Sales $7,279,739 $1,949,787
========== ==========
Net Income $ 941,301 $ 306,348
========== ==========
</TABLE>
38
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE -- (Continued)
The Company's equity in the net income of Fine Fragrances was reduced for
the amortization of the exclusive distribution agreements held by Fine
Fragrances prior to May 1997. Amortization expense on these exclusive
distribution agreements was approximately $75,000 and $19,000 for the years
ended January 31, 1997 and 1998, respectively.
In May 1997, the Company used approximately $4,226,000 of the net
proceeds from the May 1997 Note Offering 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 was paid based on 5% of the
net sales of COFCI products sold by the Company following this acquisition.
The acquisition was accounted for under the purchase method. As a result of
this acquisition, Fine Fragrances became a wholly-owned subsidiary of the
Company and the operations of Fine Fragrances have been consolidated with
those of the Company. The brands manufactured by COFCI are distributed by the
Company under new agreements expiring in 2007.
7. SHORT-TERM DEBT
Concurrently with the closing of the May 1997 Note Offering, the Company
entered into a new stand-by credit facility (the "Credit Facility") with Fleet
National Bank ("Fleet"), which provides for borrowings on a revolving basis
of up to $50,000,000, with a $3,000,000 sublimit for letters of credit.
Borrowings under the Credit Facility are limited to eligible accounts
receivable and inventory 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
Company's 10 3/8% Senior Notes due 2007. 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 to shareholders and restrictions
on the incurrence of additional non-trade indebtedness. At January 31, 1998,
the Credit Facility did not have an outstanding balance. At January 31, 1999,
the outstanding balance under the Credit Facility was approximately
$5,639,000. As part of the Credit Facility, the Company had approximately
$369,000 and $1,661,000 in outstanding letters of credit at January 31, 1998
and 1999, respectively. The Company is presently negotiating a three-year
renewal of the Credit Facility with Fleet to become effective June 1999.
8. SUBORDINATED DEBENTURES
The subordinated debentures, net as of January 31, 1998 represent the
8.5% Debenture due May 2004, which was issued in connection with the FMG
Acquisition. See Note 2. The subordinated debentures as of January 31, 1999
represent the 8.5% Debenture and the JPF Debenture. See Note 2.
9. 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
its promotional set business. The lease has an initial term of thirty months,
with the Company having an option to extend for an additional term of thirty
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.
39
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES -- (Continued)
In October 1998, the Company paid $1.5 million to settle a lawsuit filed
against the Company in the United States 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 fiscal year ended January 31, 1999.
The Company is a party to a number of pending legal actions, proceedings
or claims. While any action, proceeding or claim contains an element of
uncertainty, management of the Company believes that the outcome of such
actions, proceedings or claims likely will not have a material adverse effect
on the Company's business, consolidated financial position or results of
operations.
10. SENIOR NOTE OFFERINGS
In May 1997, the Company consummated the private placement under Rule
144A pursuant to the Securities Act of 1933, as amended (the "Act"), of $115
million principal amount of 10 3/8% Series A Senior Notes. Approximately
$48,595,000 of the net proceeds from the sale of the Series A 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 Note 2. 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 6. The balance of the net proceeds
from the May 1997 Note Offering was used to provide the Company working
capital support. In July 1997, the Series A Senior Notes were exchanged for
an equivalent principal amount of Series B Senior Notes (the "Series B Senior
Notes") containing identical terms to the Series A Senior Notes but which have
been registered under the Act.
In April 1998, the Company consummated the private placement under Rule
144A of $40.0 million principal amount of 10 3/8% 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 Series B Senior Notes.
The Series C Senior Notes were 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 fiscal year ended January 31, 1999, the Company
amortized $146,534 of premium against interest expense. The net proceeds of
approximately $41.4 million from the sale of Series C Senior 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% Series D Senior Notes
(the "Series D Senior Notes") containing identical terms to the Series C
Senior Notes, but which have been registered under the Act.
The Indentures pursuant to which the Series B Senior Notes and the Series
D Senior Notes were issued (the "Indentures") provide 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. The Indentures
generally permit the Company (subject to the satisfaction of a fixed charge
covenant ratio and, in certain cases, also a net income test) to incur
additional indebtedness, pay dividends, purchase or redeem capital stock of
the Company, or redeem subordinated indebtedness. The Indentures generally
limit the ability of the Company to create liens, merge or transfer or sell
assets. The Indentures also provide that the holders of the Series B Senior
Notes and the Series D Senior Notes have the option to require the Company to
repurchase their notes in the event there of a change of control in the
Company (as defined in the Indentures).
40
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The components of the provision for income taxes for the years ended
January 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $4,108,569 $6,555,997 $6,906,407
State 738,230 749,257 1,149,984
---------- ---------- ----------
Total current 4,846,799 7,305,254 8,056,391
---------- ---------- ----------
Deferred income taxes:
Federal (173,364) 105,155 (316,834)
State (21,099) 12,017 (52,686)
---------- ---------- ----------
Total deferred (194,463) 117,172 (369,520)
---------- ---------- ----------
Total provision for
income taxes $4,652,336 $7,422,426 $7,686,871
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes and
operating loss carryforwards. The tax effects of significant items
comprising the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment -- $ (365,105)
Merger assets -- (222,008)
---------- ----------
-- (587,113)
---------- ----------
Deferred tax assets:
Excess of book bad debts
reserve over tax reserve $ 265,310 205,873
Intangibles 85,701 481,765
Accruals -- 95,087
Net operating loss carryforwards 790,335 790,335
Property and equipment 6,702 --
Inventories related 480,920 1,012,541
---------- ----------
Gross deferred tax assets 1,628,968 2,585,601
---------- ----------
Net deferred tax asset 1,628,968 1,998,488
Valuation allowance for
deferred taxes (790,335) (790,335)
---------- ----------
Net deferred tax asset $ 838,633 $1,208,153
========== ==========
</TABLE>
As of January 31, 1998 and 1999, the valuation allowance relates to the
net operating loss carryforwards available in connection with the Merger
discussed in Note 2 which expire through 2009.
The total income tax provision differs from the amount obtained by
applying the statutory federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
--------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Income tax at
statutory rates $4,386,033 34.00% $6,917,329 35.00% $6,892,512 35.00%
State tax, net of
federal benefit 473,307 3.67 494,828 2.50 712,887 3.62
Undistributed earnings
in affiliate (138,594) (1.07) (47,078) (.24) -- --
Other (68,410) (0.53) 57,347 .30 81,472 .41
---------- ----- ---------- ----- ---------- -----
Total income taxes $4,652,336 36.07% $7,422,427 37.56% $7,686,871 39.03%
========== ===== ========== ===== ========== =====
</TABLE>
41
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
Prior to the Company's acquisition of the Fine Fragrances Interest in May
1997, the Company had a management agreement with Fine Fragrances (the
"Management Agreement") pursuant to which the Company provided office space
and equipment, warehousing facilities and managerial services to Fine
Fragrances in exchange for a management fee of 12% of the gross sales of Fine
Fragrances. The Company received management fees totaling $925,000 and
$242,000 during the fiscal years ended January 31, 1997 and 1998,
respectively. The Management Agreement was terminated following the
acquisition in May 1997 of the Fine Fragrances Interest. See Note 6.
In the normal course of business and from time to time prior to 1998,
National Trading provided loans to the Company. At January 31, 1998, the
Company had an outstanding balance to National Trading in the principal amount
of $294,000, which is reflected in the Company's Consolidated Balance Sheet at
January 31, 1998 as Due to affiliates, net. Additionally, prior to August
1998, the Company leased from National Trading the National Trading Facility,
which had housed the Company's offices prior to May 1997 and which the Company
had an option to purchase. During the fiscal years ended January 31, 1997,
1998 and 1999, the Company made lease payments to National Trading of
$260,200, $256,000 and $144,500, respectively. In connection with National
Trading's sale of the National Trading Facility, the Company agreed to
terminate the lease and its option to purchase the National Trading Facility
(the "Contract Rights"). As part of the consideration for the Contract
Rights, the Company's outstanding loan from National Trading in the principal
amount of $294,000 was canceled and the Company received from National Trading
a cash payment of approximately $416,000 and a promissory note payable upon
demand in the principal amount of $300,000 and bearing interest at 8.5% per
annum. At January 31, 1999, 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 January 31, 1999 in Prepaid expenses and other assets.
Approximately $632,000, representing the income 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
right at January 31, 1999. See Note 1, Capital Lease.
In April 1997, the Company terminated various monitoring agreements it
had with affiliates of the Company since 1992. 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 consulting
agreement with E.S.B. Consultants, Inc. ("ESB"), a Company which prior to
September 1997 was wholly-owned by the President and Chief Executive Officer
of the Company, pursuant to which ESB provided financial advisory and
management services for an annual fee of $300,000. In September 1997, the
consulting agreement with ESB was terminated and the President and Chief
Executive Officer ceased to have an affiliation with ESB. The President and
Chief Executive Officer is now an employee of the Company. During the fiscal
year ended January 31, 1999, the Company provided loans to the President and
Chief Executive Officer of the Company in the aggregate principal amount of
$500,000 for payment of certain Canadian tax liabilities resulting from his
relocation to Florida. At January 31, 1999, the principal amount of loans
outstanding was $500,000 and is reflected in the Company's Consolidated
Balance Sheet in Prepaid expenses and other assets. The loans accrue interest
at 8.5% per annum and mature in August and November 2000.
42
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
-------------------------------------
<S> <C> <C> <C>
HBI Note issued in connection
with the Halston Acquisition
(See Note 2) $ 2,000,000
===========
7.5% Convertible Debentures issued
in connection with the Exchange Offer $ 5,460,000
===========
Redemption of 8% Debentures used to pay
for Conversion of Preferred Stock $ 786,500 $ 40,563
=========== ==========
Conversion of 7.5% Convertible
Debentures into Common Stock $ 514,223 $ 187,315
========== ===========
Transactions in connection with the
FMG Acquisition (See Note 2):
Fair value of assets acquired
excluding inventory $14,552,489
===========
8.5% Debentures issued, net of discount $11,080,000
===========
Warrants issued $ 20,000
===========
Liabilities assumed $ 3,107,328
===========
Discharge of receivable and inventory
transferred $ 1,544,489
===========
Inventory acquired for other than cash $ 1,199,332
===========
Acquisition of Fine Fragrances Interest
(See Note 6):
Book value of assets acquired,
excluding inventory $2,296,051
==========
Liabilities assumed $3,156,895
==========
Inventory acquired $2,805,638
==========
Note issued $1,000,000
==========
Transactions in connection with
the JPF Acquisition (See Note 2):
Issuance of JPF Debenture, net $ 2,514,472
===========
Assumption of accounts payable $10,560,577
===========
Transactions in connection with the
sale of the Contract Rights for the
National Trading Facility (See Note 12):
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
===========
Transactions in connection with the
PSI Acquisition (See Note 2):
Issuance of PSI Debenture, net $ 458,000
===========
</TABLE>
43
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS
In January 1995, the FFI Board of Directors adopted two stock option
plans, one for the benefit of non-employee directors (the "Non-Employee
Director Plan") and another for directors, officers, and employees (the "1995
Stock Option Plan"). Both the 1995 Stock Option Plan and the Non-Employee
Director Plan were assumed by the Company in the Merger and the outstanding
options were adjusted for the Merger. See Note 2.
The stock options under the Non-Employee Director Plan are generally
exercisable within a year after grant provided the grantee remains a director
of the Company. The options granted under the Non-Employee Director Plan are
non-qualified under the Internal Revenue Code. The option exercise price
cannot be less than the fair value of the underlying Common Stock as of the
date of the option grant, and the maximum option term cannot exceed ten years.
The number of shares of Common Stock authorized under the Non-Employee
Director Plan is 200,000.
The stock options awarded under the 1995 Stock Option Plan are
exercisable at any time or in any installments as determined by the
Compensation Committee of the Board at the time of grant, provided that no
stock options shall be exercisable prior to six months from the date of
grant. The options granted under the 1995 Stock Option Plan may be either
incentive and/or non-qualified stock options under the Internal Revenue Code
as determined by the Compensation Committee. For incentive stock options, the
aggregate fair market value (determined at the grant date) of Common Stock
with respect to which such options first become exercisable by a participant
of the plan during any calendar year may not exceed $100,000. The number of
shares of Common Stock authorized under the 1995 Stock Option Plan is
1,500,000. In March 1999, the Board approved for submission to the
shareholders at the June 1999 Annual Meeting of shareholders an increase in
the number of shares authorized under the 1995 Stock Option Plan to 2,200,000.
In addition, two stock option plans were established by Suave prior to
the Merger, the 1981 Employee Stock Option and Stock Appreciation Plan (the
"1981 Employee Plan") and the 1993 Stock Option Plan (the "1993 Plan"). The
terms relating to grants of options under the 1981 Employee Plan are similar
to those of options granted under the 1995 Stock Option Plan. Effective
June 25, 1996, the Board determined that there would be no additional option
grants under the 1981 Employee Plan or the 1993 Plan.
The option activities of all plans are as follows:
<TABLE>
<CAPTION> Years Ended January 31,
1997 1998 1999
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Beginning outstanding 527,040 $3.49 729,040 $4.31 806,540 $ 4.75
Granted 202,000 6.45 77,500 8.93 530,000 12.72
Exercised -- -- -- -- (35,600) 3.30
Canceled -- -- -- -- -- --
------- ----- ------- ----- --------- ------
Ending Outstanding 729,040 $4.31 806,540 $4.75 1,300,940 $ 8.04
======= ===== ======= ===== ========= ======
Exercisable as of
January 31, 1997,
1998, and 1999 552,845 686,548 1,190,585
======= ======= =========
Weighted average fair
value of options
granted during the
year 202,000 $4.25 77,500 $5.17 530,000 $ 9.33
======= ===== ======= ===== ======= ======
44
<PAGE>
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS -- (Continued)
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise January 31, Contractual Exercise January 31, Exercise
Price 1999 Life Price 1999 Price
------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.30-$5.25 511,440 1.12 $ 3.57 511,440 $ 3.57
$6.00-$9.38 259,500 4.22 7.28 246,170 7.22
$12.50-16.38 530,000 8.15 12.72 432,975 12.50
------------ --------- ---- ------ --------- ------
$3.30-$16.38 1,300,940 4.60 $ 8.04 1,190,585 $ 7.57
============ ========= ==== ====== ========= ======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock options to employees and non-employee members of the Board as
described in Note 1. Accordingly, no compensation expense has been recognized
during the years ended January 31, 1997, 1998 and 1999 related to the stock
options. Net income and net income per common share would have been as
follows had the fair value of stock options granted during 1997, 1998 and 1999
been recognized as compensation expense as prescribed by SFAS No. 123:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
-------------------------------------------
<S> <C> <C> <C>
Pro forma net income $8,142,000 $12,188,000 $9,254,000
========== =========== ==========
Pro forma net income
per common share:
Basic $0.70 $0.91 $0.67
===== ===== =====
Diluted $0.59 $0.75 $0.56
===== ===== =====
</TABLE>
The fair value of each option granted is estimated on the grant date
using the
Black-Sholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1998 1999
---------------------------
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Expected price volatility 52.27% 55.60% 74.42%
Risk-free interest rate 7.00% 6.50% 5.50%
Expected life of options in years 5 - 10 4 - 8 4 - 8
</TABLE>
45
<PAGE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
Proxy Statement for its 1999 Annual Meeting of shareholders (the "Proxy
Statement"), and is incorporated herein by this reference, or is included in
Part I under "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference, provided that the
Compensation Committee Report and Performance Graph which is contained in the
Proxy Statement shall not be deemed to be incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - The consolidated financial statements and
independent auditors' report are listed in the "Index to Financial
Statements and Schedules" on page 25 and included on pages 26
through 45.
2. Financial Statement Schedules - All schedules for which provision is
made in the applicable accounting regulations of the Commission are
either not required under the related instructions, are not
applicable (and therefore have been omitted), or the required
disclosures are contained in the financial statements included
herein.
3. Exhibits including those incorporated by reference.
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)).
46
<PAGE>
<PAGE>
Exhibit
Number Description
- ------- --------------------------------------------------------------------
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 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 (incorporated herein by reference to Exhibit 4.6 filed
as a part of the Company's Form 10-Q for the quarter ended
October 31, 1998 (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)).
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 Employment Agreement dated as of April 6, 1998, between the Company
and Paul West.
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)).
47
<PAGE>
<PAGE>
Exhibit
Number Description
- ------- --------------------------------------------------------------------
10.8 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)).
10.9 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)).
10.10 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)).
10.11 Asset Purchase Agreement dated as of January 20, 1999, by and
between the Company and Paul Sebastian, Inc. (incorporated herein by
reference to Exhibit 2.1 filed as part of the Company's Form 8-K
dated January 21, 1999 (Commission File No. 1-6370)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent.
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.
(c) Exhibits to Form 10-K.
See Item 14(a)3.
(d) Financial Statement Schedules.
See Item 14(a)2.
48
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 29th
day of April, 1999.
FRENCH FRAGRANCES, INC.
By: /s/ E. Scott Beattie
--------------------
E. Scott Beattie
President, Chief Executive Officer and
Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rafael Kravec Chairman of the Board and April 29, 1999
- ----------------------- Director
Rafael Kravec
/s/ E. Scott Beattie President, Chief Executive April 29, 1999
- ----------------------- Officer and Director
E. Scott Beattie (Principal Executive Officer)
/s/ William J. Mueller Vice President, Chief Financial April 29, 1999
- ----------------------- Officer and Treasurer
William J. Mueller (Principal Financial and
Accounting Officer)
/s/ J.W. Nevil Thomas Director April 29, 1999
- -----------------------
J.W. Nevil Thomas
/s/ Richard C.W. Mauran Director April 29, 1999
- -----------------------
Richard C.W. Mauran
/s/ Fred Berens Director April 29, 1999
- -----------------------
Fred Berens
/s/ George Dooley Director April 29, 1999
- -----------------------
George Dooley
49
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of April 6, 1998, is
entered into by and between Paul West, an individual whose address is 2488
Provence Circle, Weston, Florida ("Employee"), and French Fragrances, Inc., a
Florida corporation (the "Company").
RECITALS
The Company desires to employ Employee upon the terms and subject to the
conditions set forth in this Agreement, and Employee desires to accept such
employment.
AGREEMENT
In consideration of the recitals set forth above and the mutual promises
and covenants contained in this Agreement, the parties agree as follows:
1. ENGAGEMENT. The Company hereby employs Employee upon the terms and
subject to the conditions set forth in this Agreement and Employee agrees to
do so. Employee shall initially serve in the capacity of Senior Vice
President - Sales Management and Planning. Employee shall report to the
President of the Company and shall use his best efforts, skills and abilities
to faithfully and efficiently perform such duties and responsibilities as are
reasonably required and assigned to him by the Company, including, without
limitation, in the areas of sales, marketing, business and customer
development and strategic planning. Employee shall devote all of his business
time, energy, attention and skills to promoting the interests of the
Company.
2. TERM; TERMINATION. This Agreement shall commence on April 6, 1998
and continue until January 31, 2000 (the "Term"), subject to earlier
termination as set forth below. This Agreement may be terminated prior to the
expiration of the term set forth above as follows:
(a) DEATH OF EMPLOYEE. This Agreement shall terminate immediately upon
the death of Employee.
(b) PERMANENT DISABILITY. This Agreement shall terminate immediately in
the event Employee becomes permanently disabled. For purposes of this
Agreement, "permanent disability" shall mean Employee's inability to perform
the Services hereunder for a period of 90 consecutive days or 120
non-consecutive days, in either event in any 12 month period due to illness,
accident or any other physical or mental incapacity, as reasonably determined
by a physician selected in good faith by the Company.
(c) CAUSE. The Company may, at its discretion terminate this Agreement
at any time for Cause, effective immediately. For purposes of this Agreement,
the Company shall have "Cause" to terminate this Agreement upon the occurrence
of any one of the following events: (i) the commission of embezzlement, theft
or other dishonest or fraudulent acts (other than a good faith dispute
relating to the erroneous reporting of an amount as an expense); (ii)
commission of a felony, whether or not committed in the course of his
consulting with the Company; (iii) willful misconduct or gross negligence
<PAGE>
which would tend to have a material adverse effect on the Company or its
business; and (iv) the material breach by Employee of this Agreement,
including, without limitation, breach of Section 5 of the Agreement.
(d) VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time upon giving 30 days' written notice to the Company.
(e) EFFECT OF TERMINATION. In the event of a termination as set forth
above, the Company shall have no further obligation under this Agreement to
make any payments to, or bestow any benefits on, Employee or Employee's
beneficiary or beneficiaries in the case of his death, from and after the date
of said termination, other than payments accrued and due and payable to
Employee prior to the date of said termination and any benefits required to be
afforded by law.
3. COMPENSATION.
(a) BASE COMPENSATION. Employee shall receive an initial salary of
$250,000 per annum, pro rated for any partial employment period, which salary
(less applicable taxes, withholdings and insurance deductions) shall be
payable weekly in arrears commencing on April 10, 1998 and ending upon
termination of this Agreement.
(b) OTHER BENEFITS. Employee shall also be eligible to receive such
other compensation as the Board or the Compensation Committee shall, in their
sole discretion, determine, including, without limitation, bonuses and stock
option grants. Employee shall be entitled to participate in or benefit from,
in accordance with the eligibility and other provisions thereof, such medical,
dental, disability and life insurance, retirement or other benefit plans or
policies as the Company may make available to, or have in effect for, its
employees from time to time; provided, however, that Employee will be eligible
for medical and dental coverage upon the commencement of the Term. The
Company retains the rights to terminate or alter any such plans or policies
from time to time. Employee shall also be entitled to holidays, paid vacation
time, sick leave and other similar benefits in accordance with policies of the
Company from time to time in effect for its employees. In addition, the
Company will reimburse Employee $50,000 to cover expenses incurred by the
Employee for the sale of his house and for moving his household goods to
Florida when the household goods are moved and/or his house is sold.
4. REIMBURSEMENT OF BUSINESS EXPENSES. The Company shall reimburse
Employee, within the Company's normal reimbursement time frame, for all proper
and reasonable expenses incurred by him in connection with the performance of
his duties and responsibilities hereunder and subject to such policies and
limits as may be established by the Company's management from time to time and
notified to Employee in advance of the incurrence thereof. Employee shall
provide the Company with all appropriate receipts and documentation relating
to those expenses for which he seeks reimbursement.
5. COVENANTS.
(a) COVENANT NOT TO COMPETE. During the period commencing on the date
hereof and ending two years from the termination or expiration of this
Agreement, Employee will not, directly or indirectly or through an affiliate:
(i) as an individual proprietor, owner, partner, stockholder,
officer, employee, director, consultant, agent, joint venturer, investor,
lender, or in any other capacity whatsoever (other than as the holder of not
<PAGE>
more than five percent of the total outstanding stock of any company the
securities of which are traded on a regular basis on recognized securities
exchanges or any national over-the-counter market), alone or in association
with others, or in any capacity, own, manage, operate, control, consult with,
provide financing to, be employed by, or invest in, any business competitive
with that of the Company, including, without limitation, the manufacture,
distribution and marketing of perfume and other fragrance products or related
services or business in the United States;
(ii) recruit or otherwise solicit or induce any person (natural or
otherwise) who is or becomes an employee or consultant of the Company to
terminate his or her employment with, or otherwise cease his or her
relationship with, the Company or any of its affiliates, or hire any such
employee or consultant who has left the employ of the Company or its
affiliates within one year after termination of such employee's or
consultant's employment with the Company or its affiliates;
(iii) solicit or attempt to solicit any licensors, licensees,
suppliers, manufacturers, customers or clients of the Company.
(b) COVENANT OF NON-DISCLOSURE. Employee further covenants and agrees
that during the Term, and at all times thereafter, he shall keep secret and
shall not disclose to any person, firm or corporation or make use for his
personal benefit or for the benefit of any person other than the Company and
its affiliates, except in furtherance of the business of the Company or its
successors in interest to its business or assets, any Confidential Information
of any type that is acquired or developed by any of the directors, officers,
employees, consultants, advisors, agents or representatives of the Company,
its subsidiaries or affiliates prior to or during the Term. For purposes of
this Agreement, "Confidential Information" shall include, without limitation,
customer lists, supplier lists, operating data, business contacts, pricing
information, inventory information, product sources, manufacturing
information, advertising and marketing information, information concerning
distribution relationships , discussions with investment bankers and research
analysts, information regarding potential acquisitions and negotiations with
potential suppliers and customers and any other information concerning
suppliers and customers. All records and documents that Employee shall
prepare for, contribute to, or receive from the Company or its affiliates
shall remain the sole and exclusive property of the Company or its affiliates,
and upon termination or expiration of this Agreement, Employee shall return
promptly to the Company all property of the Company and its affiliates in its
possession and shall not make any copy thereof.
(c) Employee acknowledges and agrees that the provisions set forth in
clauses (a) and (b) above are a material and integral part of this Agreement
and necessary and reasonable to protect the legitimate business interest of
the Company. Employee further acknowledges and agrees that, due to his
knowledge of the business of J.P. Fragrances, Inc., which the Company has
acquired, and the Company's business, any subsequent competition would
irreparably harm the Company and that the only effective way of protecting the
Company is to enter into the non-competition and non-solicitation agreements
on the terms and conditions contained herein. In view of the substantial harm
which would result from a breach or threatened breach by Employee of the
covenants contained in clauses (a) and (b) hereof, the parties agree that such
covenants shall be enforced to the maximum extent permitted by law. In the
event of a breach or threatened breach of the provisions of clauses (a) and
(b) hereof, the parties acknowledge and agree that the Company would suffer
<PAGE>
irreparable harm and that monetary damages would be inadequate. Accordingly,
in addition to all other remedies to which the Company may be entitled, at law
or in equity, the Company shall be entitled to seek specific performance
and/or injunctive relief without the necessity of posting a bond in the event
of any such breach or threatened breach.
(d) The two-year period set forth in clause (a) shall be tolled for any
period(s) of violation or period(s) of time required for litigation to enforce
the covenants herein in the event that no preliminary injunction is issued
against Employee and the Company is the prevailing party. If any covenant or
portion thereof is found by any court of competent jurisdiction to be illegal,
void or unenforceable because it extends for too long a period of time or over
too broad a range of activities or in too large a geographic area or for any
other reason, however, such restriction shall be interpreted to extend only
over the maximum period of time, range of activities or geographic area as to
which it may be enforceable or otherwise so as to render the covenant
enforceable. As used in this Agreement, the term "affiliate" shall mean any
corporation or other business entity controlling, controlled by or under
common control with the Company.
6. NOTICES. Any notice, request, demand, consent, approval or other
communication provided or permitted hereunder shall be in writing and may be
given by personal delivery, telecopy or may be sent by registered mail,
postage prepaid, addressed to the party for which it is intended at its
address as follows:
If to Employee: Paul West
24 Provence Circle
Weston, Florida
Telecopy:
If to the Company: French Fragrances, Inc.
14100 N.W. 60th Avenue
Miami, Florida 33014
Attention: General Counsel
Telecopy: (305) 818-8020
A party may change its address for purposes of receipt of any such
communication by giving ten days' prior notice of such change in the manner
above prescribed. Any notice sent by registered mail as aforesaid shall be
deemed to have been given on the fifth business day next following the mailing
thereof. Any notice sent by telecopy or personally delivered shall be deemed
to have been received on the date of delivery. In the event of an actual or
threatened disruption in postal service, notice shall be sent by telecopy or
personally delivered.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, without regard to principles
of conflicts of laws.
8. BINDING EFFECT; ASSIGNMENT. This Agreement and all documents and
agreements delivered pursuant hereto shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither party may assign any of its or his rights or obligations
under this Agreement without the prior written consent of the other party.
<PAGE>
9. ENTIRE AGREEMENT; MODIFICATION. This Agreement represents the
entire agreement between the parties with respect to the subject matter hereof
and shall supersede and cancel all prior oral or written agreements. This
Agreement may be modified or amended only by a written instrument properly
executed by the parties hereto.
10. SEVERABILITY. In the event that any one or more of the provisions
of this Agreement shall be held to be invalid, void or unenforceable for any
reason, the remaining provisions of this Agreement shall remain in full force
and effect, and the invalid, void or unenforceable provision shall be
interpreted as closely as possible to the manner in which it was written.
11. WAIVER. Failure of a party to enforce one or more of the provisions
of this Agreement or to require at any time performance of any of the
obligations hereof shall not be construed to be a waiver of such provisions by
such party nor to in any way affect the validity of this Agreement or such
party's right thereafter to enforce any provision of this Agreement. An
effective waiver must be in writing and executed by the party to be bound
thereby.
12. HEADINGS. The headings herein are for convenience only and shall
not control or affect the meaning or construction of any provision of this
Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of
the day and year first written above.
/s/ Paul West
-----------------------
Paul West
FRENCH FRAGRANCES, INC.
/s/ E. Scott Beattie
-----------------------
By: E. Scott Beattie
Its: President and Chief
Executive Officer
<TABLE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Seven Months Seven Months Twelve Months
Ended Ended Ended
January 31, January 31, January 31,
1994 1995 1995
------------ ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Earnings, as defined:
Net income $ 641,057 $2,491,895 $2,862,227
Income taxes 349,089 1,490,119 1,671,537
Fixed charges,
as below 834,722 1,413,636 2,125,153
---------- ---------- ----------
Total earnings,
as defined $1,824,868 $5,395,650 $6,658,917
========== ========== ==========
Fixed charges,
as defined:
Interest expense $ 834,722 $1,413,636 $2,125,153
---------- ---------- ----------
Total fixed charges,
as defined $ 834,722 $1,413,636 $2,125,153
========== ========== ==========
Ratio of earnings to
fixed charges 2.19 3.82 3.13
========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended January 31,
1996 1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C> <C>
Earnings, as defined:
Net income $3,007,118 $ 8,247,759 $12,341,369 $12,006,020
Income taxes 1,930,691 4,652,336 7,422,426 7,686,871
Fixed charges, as
defined below 4,157,576 6,852,612 12,814,966 18,780,969
---------- ----------- ----------- -----------
Total earnings, as defined $9,095,385 $19,752,707 $32,578,761 $38,473,860
========== =========== =========== ===========
Fixed charges, as defined:
Interest expense $4,157,576 $ 6,852,612 $12,814,966 $18,780,969
---------- ----------- ----------- -----------
Total fixed charges,
as defined $4,157,576 $ 6,852,612 $12,814,966 $18,780,969
========== =========== =========== ===========
Ratio of earnings to
fixed charges 2.19 2.88 2.54 2.05
========== =========== =========== ===========
</TABLE>
SUBSIDIARIES OF THE COMPANY
State of
Name Incorporation Doing Business As Name
- --------------------- ------------- ----------------------
G.B. Parfums, Inc. Delaware G.B. Parfums, Inc.
Halston Parfums, Inc. Delaware Halston Parfums, Inc.
Fine Fragrances, Inc. Delaware Fine Fragrances, Inc.
FRM Services, Inc. Delaware FRM Services, Inc.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-36353 of French Fragrances, Inc. on Form S-3 of our report dated
April 16, 1999 appearing in this Annual Report on Form 10-K of French
Fragrances, Inc. for the year ended January 31, 1999.
DELOITTE & TOUCHE LLP
Miami, Florida
April 29, 1999
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