<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________
Commission File Number 1-6370
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State of incorporation) (IRS Employer Identification No.)
14100 N.W. 60th Avenue, Miami Lakes, Florida 33014
(Address of principal executive offices) (zip code)
(305) 818-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Outstanding at
Class September 2, 1999
----- -----------------
Common Stock, $.01 par value 13,842,828 shares
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FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
January 31, 1999 and July 31, 1999. . . . . . . . . . . . . . 3
Consolidated Statements of Income -
Three and Six Months Ended July 31, 1998 and 1999 . . . . . . 4
Consolidated Statements of Cash Flows -
Six Months Ended July 31, 1998 and 1999 . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31, 1999 July 31, 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,111,603 $ 1,577,422
Accounts receivable, net 51,796,247 55,435,188
Inventories 133,305,803 133,337,106
Advances on inventory purchases 7,553,560 9,422,463
Prepaid expenses and other assets 5,758,399 10,698,527
------------ ------------
Total current assets 204,525,612 210,470,706
------------ ------------
Property and equipment, net 19,020,630 19,989,243
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 55,658,151 52,371,143
Senior note offering costs, net 4,491,073 4,220,041
Deferred income taxes, net 1,208,153 1,208,153
Other intangibles and other assets 9,804,560 8,696,740
------------ ------------
Total other assets 71,161,937 66,496,077
------------ ------------
Total assets $294,708,179 $296,956,026
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 5,639,369 13,101,000
Accounts payable - trade 21,698,507 25,670,713
Other payables and accrued expenses 15,869,404 9,367,180
Current portion of long-term debt 3,861,767 1,769,969
------------ ------------
Total current liabilities 47,069,047 49,908,862
------------ ------------
Long-term debt, net (See Note 4) 176,158,756 175,098,603
------------ ------------
Total liabilities 223,227,803 225,007,465
------------ ------------
Commitments and contingencies (See Note 6)
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000 shares
authorized; 271,596 and 265,801 shares issued
and outstanding, respectively 2,716 2,658
<PAGE>
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429 shares
authorized; 511,355 and 502,520 shares issued
and outstanding, respectively 5,114 5,026
Common stock, $.01 par value, 50,000,000 shares
authorized; 13,812,704 and 13,867,908 shares
issued and outstanding, respectively 138,127 138,679
Additional paid-in capital 31,633,413 31,815,546
Treasury stock (50,000 shares at cost) -- (363,200)
Retained earnings 39,701,006 40,349,852
------------ ------------
Total shareholders' equity 71,480,376 71,948,561
------------ ------------
Total liabilities and shareholders' equity $294,708,179 $296,956,026
============ ============
See Notes to Consolidated Financial Statements.
</TABLE
3
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</TABLE>
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1998 1999 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $61,899,682 $59,711,563 $108,445,976 $117,243,830
Cost of sales 43,481,703 34,419,575 76,710,833 74,737,878
----------- ----------- ------------ ------------
Gross profit 18,417,979 25,291,988 31,735,143 42,505,952
Operating expenses:
Warehouse and shipping 2,213,298 3,859,565 4,102,056 6,752,701
Selling, general and
administrative 6,632,114 10,837,940 12,488,786 20,077,147
Depreciation and amortization 1,835,143 2,721,666 3,431,258 5,494,212
----------- ----------- ------------ ------------
Total operating expenses 10,680,555 17,419,171 20,022,100 32,324,060
----------- ----------- ------------ ------------
Income from operations 7,737,424 7,872,817 11,713,043 10,181,892
----------- ----------- ------------ ------------
Other income (expense):
Interest expense, net (4,963,273) (4,573,201) (8,500,597) (9,126,076)
Other income 38,971 15,851 87,675 8,801
----------- ----------- ------------ ------------
Other income (expense), net (4,924,302) (4,557,350) (8,412,922) (9,117,275)
----------- ----------- ------------ ------------
Income before income taxes 2,813,122 3,315,467 3,300,121 1,064,617
Provision for income taxes 1,102,646 1,294,607 1,285,903 415,771
----------- ----------- ------------ ------------
Net income $ 1,710,476 $ 2,020,860 $ 2,014,218 $ 648,846
=========== =========== ============ ============
Earnings per common share:
Basic $0.12 $0.15 $0.15 $0.05
===== ===== ===== =====
Diluted $0.10 $0.13 $0.12 $0.04
===== ===== ===== =====
Weighted average number of
common shares:
Basic 13,805,442 13,813,764 13,737,282 13,813,234
========== ========== ========== ==========
Diluted 17,750,557 16,075,563 17,684,462 15,644,003
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
4
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<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
Six Months Ended
July 31,
1998 1999
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,014,218 $ 648,846
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,431,258 5,494,212
Amortization of senior note offering costs
and note premium 264,641 287,138
Change in assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable (17,234,681) (4,394,441)
Increase in inventories (39,449,337) (1,004,254)
Decrease (increase) in advances on
inventory purchases 582,950 (1,868,903)
Increase in prepaid expenses and other assets (383,637) (4,884,668)
Increase in accounts payable 471,730 3,972,209
Decrease in other payables and accrued expenses (3,845,238) (6,244,701)
------------ -----------
Net cash used in operating activities (54,148,096) (7,994,562)
------------ -----------
Cash Flows from Investing Activities:
Net cash portion of purchase of intangible asset (5,150,000) --
Additions to property and equipment, net of disposals (1,649,583) (2,123,457)
------------ -----------
Net cash used in investing activities (6,799,583) (2,123,457)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from the exercise of employee stock options 117,480 --
Proceeds from the exercise of stock purchase warrants 275,000 --
Net proceeds from the issuance of senior notes 41,500,000 --
Payments to retire subordinated debentures (500,000) --
Proceeds from the conversion of preferred stock 268,778 182,539
Payments on term loans (475,336) (1,615,362)
Net proceeds from short-term debt 13,526,000 7,461,631
Payments on capital lease and installment loans (50,000) --
Payments on facility mortgage note (64,183) (81,770)
Repurchase of common stock -- (363,200)
------------ -----------
Net cash provided by financing activities 54,597,739 5,583,838
------------ -----------
Net Decrease in Cash and Cash Equivalents (6,349,940) (4,534,181)
Cash and Cash Equivalents at Beginning of Period 7,667,119 6,111,603
------------ -----------
Cash and Cash Equivalents at End of Period $ 1,317,179 $ 1,577,422
============ ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 7,138,983 $ 8,496,074
============ ===========
Income taxes paid during the period $ 5,426,475 $ 5,887,633
============ ===========
See Notes to Consolidated Financial Statements.
</TABLE>
5
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<PAGE> 6
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
French Fragrances, Inc. (the "Company") is a manufacturer, distributor
and marketer of prestige designer fragrances and related cosmetic products,
primarily to retailers in the United States.
The consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission") for interim financial information. As
such financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements, they should be read in conjunction with the financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended January 31, 1999, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 1999 is
audited. The other consolidated financial statements are unaudited, but in
the opinion of management contain all adjustments necessary to present fairly
the consolidated balance sheet of the Company as of July 31, 1999, the
consolidated statements of income of the Company for the three and six months
ended July 31, 1998 and 1999, and the consolidated statements of cash flow for
the six months ended July 31, 1998 and 1999. Operating results for the three
and six months ended July 31, 1999 are not necessarily indicative of the
results for the full fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 diluted earnings per share
calculation, the interest incurred on the convertible securities, net of tax,
is added back to net income. Such amounts were $56,737 and $54,657 for the
three months ended July 31, 1998 and 1999, respectively, and $113,474 and
$54,657 for the six months ended July 31, 1998 and 1999, respectively.
NOTE 3. SHORT-TERM DEBT
At July 31, 1999, the Company's credit facility (the "Credit Facility")
with Fleet National Bank ("Fleet") provided for borrowings on a revolving
basis of up to $50 million, with a $10 million sublimit for letters of credit.
In May 1999, the Credit Facility was renewed through May 2002. Borrowings
under the Credit Facility are limited to eligible accounts receivable and
inventories and are secured by a first priority lien on all of the Company's
accounts receivable and inventory. The Company's obligations under the Credit
Facility rank pari passu in right of payment with the 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; provided, however, that the Company is
permitted to repurchase up to $5 million of its common stock, $.01 par value
per share ("Common Stock"), and to incur certain acquisition indebtedness. At
July 31, 1999, the outstanding balance under the Credit Facility was $13.1
million and there were $4.1 million of outstanding letters of credit.
6
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<PAGE> 7
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT
The Company's long-term debt at January 31, 1999 and July 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
Description January 31, 1999 July 31, 1999
- ----------- --------------- -------------
<S> <C> <C>
10 3/8% Senior Notes due May 2007, net $157,453,466 $157,351,706
8.5% Subordinated Debenture due May 2004, net 6,479,966 6,479,966
7.5% Convertible Subordinated Debentures
due June 2006 4,778,643 4,778,643
J.P. Fragrances Debenture due May 2001, net 2,710,915 1,828,781
Miami Lakes Facility Mortgage Note due July 2004 5,694,068 5,612,298
Other Indebtedness 2,903,465 817,178
------------ ------------
Total Long-Term Debt, gross 180,020,523 176,868,572
Less Current Portion of Long-Term Debt 3,861,767 1,769,969
------------ ------------
Total Long-Term Debt, net $176,158,756 $175,098,603
============ ============
</TABLE>
NOTE 5. SHAREHOLDERS' EQUITY
A schedule of the transactions in the common stock and the preferred stock
of the Company and the additional paid-in capital accounts during the six
months ended July 31, 1999 is as follows:
<TABLE>
Preferred Stock Additional
Series B Series C Common Stock Paid Treasury
Shares Amount Shares Amount Shares Amount Capital Stock
--------------- --------------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1999 271,596 $2,716 511,355 $5,114 13,812,704 $138,127 $31,633,413 --
Issuance of
Common Stock
upon exercise
of warrants 5,110 51 (51)
Issuance of
Common Stock
upon conversion
of Series B
convertible
preferred stock (5,795) (58) 41,259 413 135,800
<PAGE>
Issuance of
Common Stock
upon conversion
of Series C
convertible
preferred stock (8,835) (88) 8,835 88 46,384
Repurchase of
Common Stock $(363,200)
------- ------ ------- ------ ---------- -------- ----------- ---------
Balance at
July 31, 1999 265,801 $2,658 502,520 $5,026 13,867,908 $138,679 $31,815,546 $(363,200)
======= ====== ======= ====== ========== ======== =========== =========
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
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.
NOTE 7. INCOME TAXES
The provision for income taxes for the three and six months ended July 31,
1999 was calculated based upon an estimated tax rate of 39% for the full
fiscal year ending January 31, 2000.
7
<PAGE>
<PAGE> 8
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK OPTION PLANS
During the six months ended July 31, 1999, the Company granted options for
the purchase of 235,000 shares of Common Stock at an exercise price of $6.00
per share under the Company's 1995 Stock Option Plan (the "1995 Plan"). At
the June 23, 1999 Annual Meeting of Shareholders, the Company's shareholders
approved an increase in the number of shares of Common Stock which may be
issued pursuant to stock options granted under the 1995 Plan from 1,500,000 to
2,200,000. At July 31, 1999, the Company had granted options to purchase in
the aggregate 1,387,040 shares of Common Stock under the 1995 Plan. During
the six months ended July 31, 1999, the Company granted options for 30,000
shares at an exercise price of $7.00 per share under the Company's
Non-Employee Director Stock Option Plan.
NOTE 9. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
The Company incurred the following non-cash financing and investing
activities during the six months ended July 31, 1998:
Six Months Ended
July 31, 1998
----------------
Conversion of 7.5% Convertible Subordinated
Debentures (including accrued interest) into
Common Stock $ 187,315
===========
Transactions in connection with the acquisition
of the assets of J.P. Fragrances, Inc. ("JPF"):
Issuance of Debenture to JPF $ 2,514,472
===========
Assumption of JPF's accounts payables $10,560,577
===========
There were no non-cash financing and investing activities during the six
months ended July 31, 1999.
8
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), French Fragrances, Inc. (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 Quarterly Report on Form 10-Q. 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 "likely will 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.
GENERAL
This discussion should be read in conjunction with the Notes to
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in the
Company's Annual Report on Form 10-K for the year ended January 31, 1999.
The results of operations for an interim period may not give a true indication
of results for the year. In the following discussions, all comparisons are
with the corresponding items in the prior year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1998
Net Sales. Net sales decreased $2.2 million, or 3.5%, to $59.7 million
for the three months ended July 31, 1999, from $61.9 million for the three
months ended July 31, 1998. The decrease in net sales was primarily
attributable to the decision of some of the Company's customers to schedule
shipments of holiday gift sets for the third quarter this fiscal year as
compared to the second quarter last fiscal year. Net sales of the brands of
products that are distributed by the Company on a non-exclusive basis through
direct purchase relationships with manufacturers or other sources
("Distributed Brands") declined during the three months ended July 31, 1999,
as compared to the three months ended July 31, 1998, primarily as a result of
the shifting of the customer gift set shipments discussed above and the
increased sales realized during the three months ended July 31, 1998 due to
significant customer pipeline orders for the Distributed Brands following
the March 1998 acquisition (the "JPF Acquisition") of the assets of J.P.
Fragrances, Inc. The decline in net
9
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<PAGE> 10
sales was partially offset by an increase in net sales of the Company's owned
or licensed brands (collectively, the "Controlled Brands"), including the
brands acquired as part of the January 1999 acquisition (the "PSI
Acquisition") of the assets of Paul Sebastian, Inc. ("PSI"). Management
believes that net sales have benefited from its ability to provide customers
with a larger selection of products and a continuous, direct supply of
products.
Gross Profit. Gross profit increased $6.9 million, or 37.3%, to $25.3
million for the three months ended July 31, 1999, from $18.4 million for the
three months ended July 31, 1998. The increase in gross profit and gross
margin (from 29.8% to 42.4%) was primarily attributable to the increase in
product sales of Controlled Brands, which typically sell at higher margins
than the Distributed Brands.
Warehouse and Shipping Expense. Warehouse and shipping expenses increased
$1.6 million, or 74.4%, to $3.9 million for the three months ended July 31,
1999, from $2.2 million for the three months ended July 31, 1998. The
increase resulted primarily from an increase in labor costs, including
additional supply chain management and operations personnel to accommodate
anticipated volume growth and labor costs associated with the implementation
of a new inventory management software system (including conducting
a full physical inventory), and an increase in inventory reserves. Warehouse
expenses also increased as a result of start-up expenses associated with the
July 1999 engagement of an unaffiliated third party to lease and operate a
facility in Pennsylvania which will serve as a distribution center for
shipment of the Company's gift sets, as well as a returns processing center.
SG&A. Selling, general and administrative ("SG&A") expenses increased
$4.2 million, or 63.4%, to $10.8 million for the three months ended July 31,
1999, from $6.6 million for the three months ended July 31, 1998. As a
percentage of net sales, SG&A expenses increased from 10.7% for the three
months ended July 31, 1998 to 18.2% for the three months ended July 31, 1999.
Of the increase in SG&A expenses, $3.9 million represented an increase in
selling and marketing expenses, primarily as a result of the additional sales
force and promotional and marketing expenses related to the prestige fragrance
lines added in connection with the PSI Acquisition. General and
administrative expenses for the three months ended July 31, 1999 increased
$323,000 primarily as a result of an increase in accounts receivable reserves
and the addition of administrative personnel.
Depreciation and Amortization. Depreciation and amortization increased
$887,000, or 48.3%, to $2.7 million for the three months ended July 31, 1999,
from $1.8 million for the three months ended July 31, 1998. The increase was
primarily attributable to the amortization of intangibles acquired in
connection with the PSI Acquisition and the Company's acquisition of the
license for Wings by Giorgio Beverly Hills in November 1998.
Interest Expense, Net. Interest expense, net of interest income,
decreased $390,000, or 7.9%, to $4.6 million for the three months ended July
31, 1999, from $5.0 million for the three months ended July 31, 1998. The
decrease was primarily due to a decrease in the average debt outstanding under
the credit facility (the "Credit Facility") with Fleet National Bank
("Fleet").
Net Income. Net income increased $310,000, or 18.2%, to $2.0 million for
the three months ended July 31, 1999, from $1.7 million for the three months
ended July 31, 1998, as a result of the increase in net sales of Controlled
Brands, which was partially offset by the increase in operating expenses
primarily associated with the addition of the PSI business.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $1.0 million, or 10.7%, to $10.6 million for the three months ended
July 31, 1999, from $9.6 million for the three months ended July 31, 1998.
The EBITDA margin increased to 17.7% for the three months ended July 31, 1999,
from 15.5% for the three months ended July 31, 1998. The increases in EBITDA
and EBITDA margin are primarily attributable to the increase in product sales
of higher margin Controlled Brands.
10
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<PAGE> 11
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1998
Net Sales. Net sales increased $8.8 million, or 8.1%, to $117.2 million
for the six months ended July 31, 1999, from $108.4 million for the six months
ended July 31, 1998. The increase in net sales was primarily attributable to
an increase in net sales of Controlled Brands, including the brands acquired
in connection with the PSI Acquisition, which was partially offset by a
decline in net sales of Distributed Brands. The decrease in net sales of
Distributed Brands reflected both the decision of some of the Company's
customers to schedule shipments of holiday gift sets for the third quarter
this fiscal year as compared to the second quarter last fiscal year and the
increased sales realized during the three months ended July 31, 1998 as a
result of the significant customer pipeline orders for the Distributed Brands
following the March 1998 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 have resulted from the Company's ability to
provide its customers with a larger selection of products and a continuous,
direct supply of products.
Gross Profit. Gross profit increased $10.8 million, or 33.9%, to $42.5
million for the six months ended July 31, 1999, from $31.7 million for the six
months ended July 31, 1998. The increase in gross profit and gross margin
(from 29.3% to 36.3%) was primarily attributable to the increase in product
sales of Controlled Brands, which typically sell at higher margins than the
Distributed Brands.
Warehouse and Shipping Expense. Warehouse and shipping expenses increased
$2.7 million, or 64.6%, to $6.8 million for the six months ended July 31,
1999, from $4.1 million for the six months ended July 31, 1998. The increase
resulted primarily from an increase in labor costs, including additional
supply chain management and operations personnel to accommodate anticipated
volume growth and labor costs associated with the increase in net sales and
the implementation of a new inventory management software system (including
conducting a full physical inventory), and an increase in inventory reserves.
SG&A. SG&A expenses increased $7.6 million, or 60.8%, to $20.1 million
for the six months ended July 31, 1999, from $12.5 million for the six months
ended July 31, 1998. As a percentage of net sales, SG&A expenses increased
from 11.5% for the six months ended July 31, 1998 to 17.1% for the six months
ended July 31, 1999. Of the increase in SG&A expenses, $6.7 million
represented an increase in selling and marketing expenses, primarily as a
result of the additional sales force and promotional and marketing expenses
related to the prestige fragrance lines added in connection with the PSI
Acquisition. General and administrative expenses for the six months ended
July 31, 1999 increased $903,000 primarily as a result of the addition of
administrative personnel and an increase in accounts receivable reserves.
Depreciation and Amortization. Depreciation and amortization increased
$2.1 million, or 60.1%, to $5.5 million for the six months ended July 31,
1999, from $3.4 million for the six months ended July 31, 1998. The increase
was primarily attributable to the amortization of intangibles acquired in
connection with the PSI Acquisition, the Company's acquisition of the license
for Wings by Giorgio Beverly Hills in November 1998 and the JPF Acquisition.
Interest Expense, Net. Interest expense, net of interest income,
increased $625,000, or 7.3%, to $9.1 million for the six months ended July 31,
1999, from $8.5 million for the six months ended July 31, 1998. This increase
was primarily due to an increase in average debt outstanding resulting from
the April 1998 offering of $40 million principal amount of 10 3/8% Senior
Notes due 2007.
Net Income. Net income decreased $1.4 million, or 67.8%, to $649,000 for
the six months ended July 31, 1999, from $2.0 million for the six months ended
July 31, 1998, primarily as a result of an increase in selling, marketing and
other operating expenses associated with the addition of the PSI business,
which were partially offset by an increase in net sales and gross profit.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $532,000, or 3.5%, to $15.7 million for the six months ended July
11
<PAGE>
<PAGE> 12
31, 1999, from $15.1 million for the six months ended July 31, 1998. The
EBITDA margin decreased to 13.4% for the six months ended July 31, 1999, from
14.0% for the six months ended July 31, 1998. The increase in EBITDA was
primarily attributable to the increase in product sales of higher margin
Controlled Brands. The decrease in EBITDA margin was primarily attributable
to the increase in SG&A expenses as a percentage of net sales.
FINANCIAL CONDITION
The Company improved its working capital utilization during the six months
ended July 31, 1999. The Company used $8.0 million of net cash for operations
during the six months ended July 31, 1999, compared to using $54.1 million of
net cash for operations during the six months ended July 31, 1998, primarily
as a result of a smaller increase in accounts receivable and inventory
relative to last year. The Company's use of net cash in operations during the
six months ended July 31, 1998 included inventory and accounts receivable
acquired in connection with the JPF Acquisition, while the Company's use of
net cash in operations during the six months ended July 31, 1999 included
inventory and accounts receivable acquired in connection with the PSI
Acquisition.
The Company's Credit Facility with Fleet, which provides for borrowings on
a revolving basis of up to $50 million (including up to $10 million in letters
of credit) for general corporate purposes, including working capital needs and
acquisitions, was renewed through May 2002. See Note 3 to the Notes to
Consolidated Financial Statements. In connection with the renewal, loans
under the revolving credit portion of the Credit Facility now bear interest,
at the option of the Company, at a floating rate ranging from either (i)
1.625% over the London InterBank Offered Rate ("LIBOR") to 2.125% over LIBOR
or (ii) the prime rate as quoted by Fleet to 0.5% over such prime rate, in
each case depending on the ratio of the Company's funded debt to capital
base. In connection with the renewal, the Credit Facility was amended to
permit the Company to repurchase up to an aggregate of $5 million of its
common stock, $.01 par value per share ("Common Stock"). At July
31, 1999, the outstanding balance under the Credit Facility was $13.1 million
and there were $4.1 million of outstanding letters of credit.
In May 1999, the Company's Board of Directors authorized a share
repurchase program that allows the Company to purchase up to an aggregate of
$5 million of its Common Stock. Under the terms of the program, which has no
expiration date, the Company may buy stock, from time to time, in the open
market, depending on market conditions and other factors. As of July 31,
1999, the Company had repurchased an aggregate of 50,000 shares of its Common
Stock under the share repurchase program.
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
electronic data interchange ("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 receipt and
shipment of products. The software companies that developed those systems all
have represented to the Company that their systems are 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 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 has contacted these third parties through questionnaires, letters or
interviews in an effort to determine the status of their Year 2000 readiness.
The Company has received responses from many of those third parties and will
continue to follow up with them until it is satisfied with the reported status
12
<PAGE>
<PAGE> 13
of their Year 2000 compliance efforts. The Company expects to complete its
third-party compliance review process by the end of the third quarter of
fiscal 2000. 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
have not been and are not anticipated to be material to the Company's
business, results of operations or financial position.
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 the end of the third quarter of fiscal 2000.
ITEM 3. 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. The Company does not believe that it
experienced any material change in its market risk relating to interest rate,
foreign currency exchange rate or commodity price risks fluctuations during
the six months ended July 31, 1999.
13
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<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders (the "Annual Meeting") of the
Company was held on June 23, 1999 in Miami Lakes, Florida.
(b) The following directors were elected at the Annual Meeting effective
June 23, 1999: Rafael Kravec, J. W. Nevil Thomas, E. Scott Beattie,
Fred Berens, George Dooley and Richard C. W. Mauran.
(c) The shareholders voted at the Annual Meeting on the matters set forth
below. Broker non-votes were only received with respect to the
proposal to amend the Company's 1995 Stock Option (the "1995 Plan").
1. The vote on the election of directors to serve until the next
annual meeting of shareholders or until their successors are duly
elected and qualified was as follows:
<TABLE>
<CAPTION>
Votes Cast
Against or
For Withheld
---------- ----------
<S> <C> <C>
Rafael Kravec 10,924,900 1,399,275
J. W. Nevil Thomas 12,232,969 91,206
E. Scott Beattie 12,233,969 90,206
Fred Berens 12,233,569 90,606
George Dooley 12,233,069 91,106
Richard C. W. Mauran 12,233,969 90,206
</TABLE>
2. The vote on the amendment to the 1995 Plan to increase the number
of shares of Common Stock which may be issued pursuant to stock
options granted under the 1995 Plan from 1,500,000 to 2,200,000
was 9,797,178 for, 2,502,481 against and 20,016 withheld.
Additionally, there were 4,500 broker non-votes.
3. The vote on the ratification of the appointment of Deloitte &
Touche LLP as independent auditors of the Company for the fiscal
year ending January 31, 2000 was 12,318,513 for, 3,302 against
and 2,360 withheld.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<PAGE>
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 a part of the Company's Form 10-Q for the
quarter ended October 31, 1996 (Commission File No. 1-6370)).
14
<PAGE>
<PAGE> 15
Exhibit
Number Description
- ----------------------------------------------------------------------------
3.3 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 filed as a part of the Company's Form 10-K for the fiscal year
ended January 31, 1996 (Commission File No. 1-6370)).
4.1 Indenture dated as of May 13, 1997, between the Company and HSBC Bank
USA (formerly 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 HSBC
Bank USA (formerly 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)).
4.7 Third Amendment to Credit Agreement and Other Transaction Documents
dated as of May 17, 1999, between the Company and Fleet National Bank
(incorporated herein by reference to Exhibit 4.7 filed as a part of
the Company's Form 10-Q for the quarter ended April 30, 1999
(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 herein by reference to Exhibit 10.3 filed as a part of
the Company's Form 10-Q for the quarter ended July 31, 1996
(Commission File No. 1-6370)).
15
<PAGE>
<PAGE> 16
Exhibit
Number Description
- ----------------------------------------------------------------------------
10.4 Employment Agreement dated as of April 6, 1998, between the Company
and Paul West (incorporated herein by reference to Exhibit 10.5 filed
as a part of the Company's Form 10-K for the year ended January 31,
1999 (Commission File No. 1-6370)).
10.5 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 4.11 filed as a part of the Company's Form S-8
dated July 7, 1999 (Commission File No. 1-6370)).
10.6 1995 Stock Option Plan (incorporated herein by reference to Exhibit
4.12 filed as a part of the Company's Form S-8 dated July 7, 1999
(Commission File No. 1-6370)).
10.7 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)).
10.8 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)).
10.9 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)).
10.10 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 a part of the Company's Form 8-K
dated January 21, 1999 (Commission File No. 1-6370)).
27.1 Financial Data Schedule.
- ------------------
The foregoing list omits instruments defining the rights of holders of
long-term debt of the Company where the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Company. The Company
hereby agrees to furnish a copy of each such instrument or agreement to the
Commission upon request.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated May 17, 1999 was filed on May 19,
1999 announcing that the Company's Board of Directors had approved a share
repurchase program of up to $5 million of the Company's Common Stock.
16
<PAGE>
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRENCH FRAGRANCES, INC.
Date: September 2, 1999 /s/ E. Scott Beattie
--------------------------------------------
E. Scott Beattie
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 2, 1999 /s/ William J. Mueller
--------------------------------------------
William J. Mueller
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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<S> <C> <C>
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<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JUL-31-1999
<CASH> 1,577,422
<SECURITIES> 0
<RECEIVABLES> 56,901,235
<ALLOWANCES> 1,466,047
<INVENTORY> 133,337,106
<CURRENT-ASSETS> 210,470,706
<PP&E> 25,621,673
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<TOTAL-ASSETS> 296,956,026
<CURRENT-LIABILITIES> 49,908,862
<BONDS> 175,098,603
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<OTHER-SE> 71,802,198
<TOTAL-LIABILITY-AND-EQUITY> 296,956,026
<SALES> 117,243,830
<TOTAL-REVENUES> 117,243,830
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