<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 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 December 10, 1999
----- -----------------
Common Stock, $.01 par value 13,800,728 shares
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<PAGE> 2
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 October 31, 1999 . . . . . . . . . . . . 3
Consolidated Statements of Income -
Three and Nine Months Ended October 31, 1998 and 1999 . . . . 4
Consolidated Statements of Cash Flows -
Nine Months Ended October 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 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31, 1999 October 31, 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,111,603 $ 4,700,786
Accounts receivable, net 51,796,247 144,615,888
Inventories 133,305,803 126,712,980
Advances on inventory purchases 7,553,560 3,598,944
Prepaid expenses and other assets 5,758,399 8,086,712
------------ ------------
Total current assets 204,525,612 287,715,310
------------ ------------
Property and equipment, net 19,020,630 20,277,805
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 55,658,151 50,709,221
Senior note offering costs, net 4,491,073 4,084,525
Deferred income taxes, net 1,208,153 1,208,153
Other intangibles and other assets 9,804,560 8,190,391
------------ ------------
Total other assets 71,161,937 64,192,290
------------ ------------
Total assets $294,708,179 $372,185,405
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 5,639,369 $ 44,278,921
Accounts payable - trade 21,698,507 45,984,474
Other payables and accrued expenses 15,869,404 22,234,928
Current portion of long-term debt 3,861,767 1,771,902
------------ ------------
Total current liabilities 47,069,047 114,270,225
------------ ------------
Long-term debt, net (See Note 4) 176,158,756 175,065,466
------------ ------------
Total liabilities 223,227,803 289,335,691
Commitments and contingencies (See Notes 3 and 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 5,025
Common stock, $.01 par value, 50,000,000 shares
authorized; 13,812,704 and 13,946,228 shares
issued and outstanding, respectively 138,127 139,462
Additional paid-in capital 31,633,413 32,073,219
Treasury stock (50,000 shares at cost) -- (363,200)
Retained earnings 39,701,006 50,992,550
------------ ------------
Total shareholders' equity 71,480,376 82,849,714
------------ ------------
Total liabilities and shareholders' equity $294,708,179 $372,185,405
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<PAGE> 4
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $112,506,135 $153,719,284 $220,952,111 $270,963,115
Cost of sales 78,900,821 100,591,767 155,611,654 175,329,645
------------ ------------ ------------ ------------
Gross profit 33,605,314 53,127,517 65,340,457 95,633,470
Operating expenses:
Warehouse and shipping 3,537,255 6,425,285 7,639,311 13,177,988
Selling, general and
administrative 11,507,284 21,160,290 23,996,070 41,237,436
Depreciation and amortization 1,816,208 2,797,021 5,247,466 8,291,233
------------ ------------ ------------ ------------
Total operating expenses 16,860,747 30,382,596 36,882,847 62,706,657
------------ ------------ ------------ ------------
Income from operations 16,744,567 22,744,921 28,457,610 32,926,813
------------ ------------ ------------ ------------
Other income (expense):
Interest expense, net (5,111,060) (5,206,850) (13,611,657) (14,332,926)
Income from sale of contract and
intangible rights 932,763 -- 932,763 --
Litigation settlement expense (1,500,000) -- (1,500,000) --
Other income (expense) 93,007 (76,521) 180,682 (67,720)
------------ ------------ ------------ ------------
Other income (expense), net (5,585,290) (5,283,371) (13,998,212) (14,400,646)
------------ ------------ ------------ ------------
Income before income taxes 11,159,277 17,461,550 14,459,398 18,526,167
Provision for income taxes 4,357,417 6,818,852 5,643,320 7,234,623
------------ ------------ ------------ ------------
Net income $ 6,801,860 $ 10,642,698 $ 8,816,078 $ 11,291,544
============ ============ ============ ============
Earnings per common share:
Basic $0.49 $0.77 $0.64 $0.82
===== ===== ===== =====
Diluted $0.42 $0.67 $0.52 $0.72
===== ===== ===== =====
Weighted average number of
common shares:
Basic 13,812,704 13,843,835 13,762,423 13,823,434
========== ========== ========== ==========
Diluted 16,485,419 15,979,532 17,284,781 15,755,846
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<PAGE> 5
<TABLE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
Nine Months Ended
October 31,
1998 1999
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 8,816,078 $ 11,291,544
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,247,466 8,291,233
Amortization of senior note offering costs
and note premium 408,073 428,925
Change in assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable (57,706,806) (93,575,141)
(Increase) decrease in inventories (52,494,708) 5,619,872
Decrease in advances on inventory purchases 177,449 3,954,616
Increase in prepaid expenses and other assets (1,073,325) (2,272,851)
Increase in accounts payable 16,630,701 24,285,967
Increase in other payables and accrued expenses 6,962,524 6,621,633
------------ ------------
Net cash used in operating activities (73,032,548) (35,354,202)
Cash Flows from Investing Activities:
Net cash portion of purchase of intangible asset (5,150,000) --
Additions to property and equipment, net of disposals (1,742,711) (3,039,355)
------------ ------------
Net cash used in investing activities (6,892,711) (3,039,355)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from the exercise of stock options 117,480 258,456
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 (530,972) (1,615,362)
Net proceeds from short-term debt 35,594,734 38,639,552
Payments on capital lease and installment loans (50,000) --
Payments on facility mortgage note (97,469) (119,245)
Repurchase of common stock -- (363,200)
------------ ------------
Net cash provided by financing activities 76,577,551 36,982,740
<PAGE>
Net Decrease in Cash and Cash Equivalents (3,347,708) (1,410,817)
Cash and Cash Equivalents at Beginning of Period 7,667,119 6,111,603
------------ ------------
Cash and Cash Equivalents at End of Period $ 4,319,411 $ 4,700,786
============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 7,549,782 $ 8,496,074
============ ============
Income taxes paid during the period $ 7,134,031 $ 5,887,633
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
<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 October 31, 1999, the
consolidated statements of income of the Company for the three and nine months
ended October 31, 1998 and 1999, and the consolidated statements of cash flow
for the nine months ended October 31, 1998 and 1999. Operating results for
the three and nine months ended October 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 $50,458 and $54,657 for the
three months ended October 31, 1998 and 1999, respectively, and $163,932 and
$109,313 for the nine months ended October 31, 1998 and 1999, respectively.
NOTE 3. SHORT-TERM DEBT
At October 31, 1999, the Company's credit facility (the "Credit
Facility") with Fleet National Bank 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 October 31, 1999, the outstanding balance under
the Credit Facility was $44.3 million and there were $1.8 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 October 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
Description January 31, 1999 October 31, 1999
- ----------- ---------------- ----------------
<S> <C> <C>
10 3/8% Senior Notes due May 2007, net $157,453,466 $157,299,044
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 1,887,714
Miami Lakes Facility Mortgage Note due July 2004 5,694,068 5,574,823
Other Indebtedness 2,903,465 817,178
------------ ------------
Total Long-Term Debt, gross 180,020,523 176,837,368
Less Current Portion of Long-Term Debt 3,861,767 1,771,902
------------ ------------
Total Long-Term Debt, net $176,158,756 $175,065,466
============ ============
</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
nine months ended October 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 options 78,320 783 257,673
Issuance of
Common Stock
upon exercise
of warrants 5,110 51 (51)
<PAGE>
Issuance of
Common Stock
upon conversion
of Series B
convertible
preferred stock (5,795) (58) 41,259 412 135,800
Issuance of
Common Stock
upon conversion
of Series C
convertible
preferred stock (8,835) (89) 8,835 89 46,384
Repurchase of
Common Stock $(363,200)
------- ------ ------- ------ ---------- -------- ----------- ---------
Balance at
October 31, 1999 265,801 $2,658 502,520 $5,025 13,946,228 $139,462 $32,073,219 $(363,200)
======= ====== ======= ====== ========== ======== =========== =========
</TABLE>
7
<PAGE>
<PAGE> 8
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended
October 31, 1999 was calculated based upon an estimated tax rate of 39% for
the full fiscal year ending January 31, 2000.
NOTE 8. STOCK OPTION PLANS
During the nine months ended October 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. During the nine months ended October 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 nine months ended October 31, 1998:
Nine Months Ended
October 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 nine
months ended October 31, 1999.
8
<PAGE>
<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 OCTOBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED OCTOBER
31, 1998
Net sales. Net sales increased $41.2 million, or 36.7%, to $153.7
million for the three months ended October 31, 1999, from $112.5 million for
the three months ended October 31, 1998. The increase in net sales was
primarily attributable to an increase in net sales of the Company's owned or
licensed brands (collectively, the "Controlled Brands"), including brands
acquired as part of the January 1999 acquisition (the "PSI Acquisition") of
the assets of Paul Sebastian, Inc. ("PSI"), as well as 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. 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 three months
ended October 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.
9
<PAGE>
<PAGE> 10
Gross Profit. Gross profit increased $19.5 million, or 58.1%, to $53.1
million for the three months ended October 31, 1999, from $33.6 million for
the three months ended October 31, 1998. The increase in gross profit and
gross margin (from 29.9% to 34.6%) was primarily attributable to the increase
in product sales of Controlled Brands, which typically sell at higher margins
than the prestige fragrance brands that are distributed by the Company on a
non-exclusive basis through direct purchase relationships with manufacturers
or other sources ("Distributed Brands").
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $2.9 million, or 81.7%, to $6.4 million for the three months ended
October 31, 1999, from $3.5 million for the three months ended October 31,
1998. The increase resulted primarily from increased labor, freight and
facility expenses associated with the opening of a new promotional set
fulfillment center in Pennsylvania in July 1999 and the increased sales
volume.
SG&A. Selling, general and administrative ("SG&A") expenses increased
$9.7 million, or 83.9%, to $21.2 million for the three months ended October
31, 1999, from $11.5 million for the three months ended October 31, 1998. As
a percentage of net sales, SG&A expenses increased from 10.2% for the three
months ended October 31, 1998 to 13.8% for the three months ended October 31,
1999. Of the increase in SG&A expenses, $8.1 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 October 31, 1999 increased
$1.5 million primarily as a result of the addition of administrative personnel
and an increase in the accrual for management incentive compensation resulting
from the increase in pre-tax income.
Depreciation and Amortization. Depreciation and amortization increased
$981,000, or 54.0%, to $2.8 million for the three months ended October 31,
1999, from $1.8 million for the three months ended October 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,
increased $96,000, or 1.9%, to $5.2 million for the three months ended October
31, 1999, from $5.1 million for the three months ended October 31, 1998. The
slight increase was primarily due to an increase in the average debt
outstanding under the Company's credit facility (the "Credit Facility") with
Fleet National Bank ("Fleet").
Net Income. Net income increased $3.8 million, or 56.5%, to $10.6
million for the three months ended October 31, 1999, from $6.8 million for the
three months ended October 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 $7.0 million, or 37.6%, to $25.5 million for the three months ended
October 31, 1999, from $18.6 million for the three months ended October 31,
1998. The EBITDA margin increased slightly to 16.6% for the three months
ended October 31, 1999, from 16.5% for the three months ended October 31,
1998. The increases in EBITDA and EBITDA margin are primarily attributable to
the increase in product sales of higher margin Controlled Brands.
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE NINE MONTHS ENDED OCTOBER
31, 1998
Net Sales. Net sales increased $50.0 million, or 22.6%, to $271.0
million for the nine months ended October 31, 1999, from $221.0 million for
the nine months ended October 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. 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, and the growth in sales of
customized gift sets.
10
<PAGE>
<PAGE> 11
Gross Profit. Gross profit increased $30.3 million, or 46.4%, to $95.6
million for the nine months ended October 31, 1999, from $65.3 million for the
nine months ended October 31, 1998. The increase in gross profit and gross
margin (from 29.6% to 35.3%) 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 $5.5 million, or 72.5%, to $13.2 million for the nine months ended
October 31, 1999, from $7.6 million for the nine months ended October 31,
1998. The increase resulted primarily from increased labor, freight and
facility expenses associated with the opening of the new promotional set
fulfillment center in Pennsylvania in July 1999 and the increased sales
volume, and an increase in inventory reserves.
SG&A. SG&A expenses increased $17.2 million, or 71.9%, to $41.2 million
for the nine months ended October 31, 1999, from $24.0 million for the nine
months ended October 31, 1998. As a percentage of net sales, SG&A expenses
increased from 10.9% for the nine months ended October 31, 1999 to 15.2% for
the nine months ended October 31, 1999. Of the increase in SG&A expenses,
$14.8 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 nine months ended October 31, 1999 increased $2.4 million primarily as a
result of the addition of administrative personnel and an increase in the
allowance for bad debt.
Depreciation and Amortization. Depreciation and amortization increased
$3.0 million, or 58.0%, to $8.3 million for the nine months ended October 31,
1999, from $5.2 million for the nine months ended October 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,
increased $721,000, or 5.3%, to $14.3 million for the nine months ended
October 31, 1999, from $13.6 million for the nine months ended October 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 increased $2.5 million, or 28.1%, to $11.3
million for the nine months ended October 31, 1999, from $8.8 million for the
nine months ended October 31, 1998, primarily as a result of the increase in
net sales and gross profit, which was partially offset by the increase in
operating expenses associated with the addition of the PSI business.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $7.5 million, or 22.3%, to $41.2 million for the nine months ended
October 31, 1999, from $33.7 million for the nine months ended October 31,
1998. The EBITDA margin decreased slightly to 15.2% for the nine months ended
October 31, 1999, from 15.3% for the nine months ended October 31, 1998. The
increase in EBITDA was primarily attributable to the increase in product sales
of higher margin Controlled Brands. The slight 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 nine
months ended October 31, 1999. The Company used $35.4 million of net cash
for operations during the nine months ended October 31, 1999, compared to
using $73.0 million of net cash for operations during the nine months ended
October 31, 1998, primarily as a result of a decrease in inventory, which was
partially offset by an increase in accounts receivable relative to last year.
The increase in accounts receivable related primarily to the significant
increase in volume of products shipped in October of 1999 compared to the same
month last year. The Company's use of net cash in operations during the nine
months ended October 31, 1998 included inventory and accounts receivable
acquired in connection with the acquisition of the assets of J.P. Fragrances,
Inc.
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
11
<PAGE>
<PAGE> 12
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 October 31, 1999,
the outstanding balance under the Credit Facility was $44.3 million and there
were $1.8 million of outstanding letters of credit. The Company expects to
pay down its borrowings under the Credit Facility by the fiscal year end of
January 31, 2000.
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 October 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 is
satisfied with the reported status of their Year 2000 compliance efforts.
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.
12
<PAGE>
<PAGE> 13
Although the Company does not believe that the actual impact of Year 2000
issues will be material, the Company has developed contingency plans to
respond to potential Year 2000 issues. In particular, the Company has
developed 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.
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 nine months ended October 31, 1999.
13
<PAGE>
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
- ----------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company dated
March 6, 1996 (incorporated herein by reference to Exhibit 3.1 filed
as a part of the Company's Form 10-K for the fiscal year ended
January 31, 1996 (Commission File No. 1-6370)).
3.2 Amendment dated September 19, 1996 to the Amended and Restated
Articles of Incorporation of the Company (incorporated by reference
to Exhibit 4.4 filed as a part of the Company's Form 10-Q for the
quarter ended October 31, 1996 (Commission File No. 1-6370)).
3.3 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 filed as a part of the Company's Form 10-K for the fiscal year
ended January 31, 1996 (Commission File No. 1-6370)).
4.1 Indenture dated as of May 13, 1997, between the Company and 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)).
14
<PAGE>
<PAGE> 15
Exhibit
Number Description
- ----------------------------------------------------------------------------
10.2 Amendment dated as of March 20, 1996 to Registration Rights Agreement
dated as of November 30, 1995, among the Company, Bedford, Fred
Berens, Rafael Kravec and Eugene Ramos (incorporated herein by
reference to Exhibit 10.2 filed as a part of the Company's
Form 10-K for the year ended January 31, 1996 (Commission File No.
1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to Registration Rights
Agreement dated as of November 30, 1995, among the Company, Bedford,
Fred Berens, Rafael Kravec and the Estate of Eugene Ramos
(incorporated 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)).
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)).
<PAGE>
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.
15
<PAGE>
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRENCH FRAGRANCES, INC.
Date: December 13, 1999 /s/ E. Scott Beattie
--------------------
E. Scott Beattie
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 13, 1999 /s/ William J. Mueller
----------------------
William J. Mueller
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
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