Exhibit C-1
FRENCH FRAGRANCES, INC. FINANCIAL STATEMENTS
(FISCALYEAR ENDED JANUARY 31, 2000)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
French Fragrances, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of French
Fragrances, Inc. and subsidiaries (the "Company") as of January 31, 1999 and
2000, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended January 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 31,
1999 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 7, 2000
61
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1999 2000
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 6,111,603 $ 22,144,314
Accounts receivable, net .............................................................. 51,796,247 63,485,136
Inventories ........................................................................... 133,305,803 127,022,405
Advances on inventory purchases ....................................................... 7,553,560 2,785,475
Prepaid expenses and other assets ..................................................... 5,758,399 9,882,321
------------- -------------
Total current assets ............................................................ 204,525,612 225,319,651
------------- -------------
Property and equipment, net ............................................................... 19,020,630 20,232,312
------------- -------------
Other assets:
Exclusive brand licenses and trademarks, net .......................................... 55,658,151 49,043,292
Senior note offering costs, net ....................................................... 4,491,073 3,949,009
Deferred income taxes, net ............................................................ 1,208,153 3,337,409
Other intangibles and other assets .................................................... 9,804,560 7,749,982
------------- -------------
Total other assets .............................................................. 71,161,937 64,079,692
------------- -------------
Total assets .................................................................... $ 294,708,179 $ 309,631,655
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ....................................................................... $ 5,639,369 $ --
Accounts payable--trade ............................................................... 21,698,507 31,436,903
Other payables and accrued expenses ................................................... 15,869,404 19,102,919
Current portion of long-term debt ..................................................... 3,861,767 1,775,027
------------- -------------
Total current liabilities ....................................................... 47,069,047 52,314,849
------------- -------------
Long-term debt, net ................................................................... 176,158,756 175,030,227
------------- -------------
Total liabilities ............................................................... 223,227,803 227,345,076
============= =============
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
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 14,186,399 shares issued and outstanding, respectively ...................... 138,127 141,864
Additional paid-in capital ............................................................ 31,633,413 32,780,530
Treasury stock (870,500 shares at cost) ............................................... -- (5,673,940)
Retained earnings ..................................................................... 39,701,006 55,030,442
------------- -------------
Total shareholders' equity ...................................................... 71,480,376 82,286,579
------------- -------------
Total liabilities and shareholders' equity ...................................... $ 294,708,179 $ 309,631,655
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
62
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .............................................................. $ 215,487,487 $ 309,614,611 $ 361,243,106
Cost of sales .......................................................... 146,509,086 221,121,582 236,128,990
------------- ------------- -------------
Gross profit ................................................. 68,978,401 88,493,029 125,114,116
------------- ------------- -------------
Operating expenses:
Warehouse and shipping ....................................... 7,225,319 11,816,762 19,173,614
Selling, general and administrative .......................... 25,557,962 30,497,592 49,827,350
------------- ------------- -------------
Depreciation and amortization ................................ 4,738,077 7,494,607 11,166,409
------------- ------------- -------------
Total operating expenses .............................. 37,521,358 49,808,961 80,167,373
------------- ------------- -------------
Income from operations ................................................. 31,457,043 38,684,068 44,946,743
Other income (expense):
Interest expense, net ........................................ (12,390,622) (18,689,595) (19,412,229)
Litigation settlement expense ................................ -- (1,500,000) --
Income from sale of contract and intangible rights ........... -- 932,763 --
Other ........................................................ 562,866 265,655 (203,923)
------------- ------------- -------------
Other income (expense), net ........................... (11,827,756) (18,991,177) (19,616,152)
------------- ------------- -------------
Income before equity in earnings of unconsolidated affiliate and
provisions for income taxes ........................................ 19,629,287 19,692,891 25,330,591
Equity in earnings of unconsolidated affiliate, 50% owned .............. 134,508 -- --
Income before income taxes ............................................. 19,763,795 19,692,891 25,330,591
Provision for income taxes ............................................. 7,422,426 7,686,871 10,001,155
------------- ------------- -------------
Net income ............................................................. $ 12,341,369 $ 12,006,020 $ 15,329,436
============= ============= =============
Earnings per common share:
Basic ........................................................ $ 0.92 $ 0.87 $ 1.11
============= ============= =============
Diluted ...................................................... $ 0.76 $ 0.73 $ 0.99
============= ============= =============
Weighted average number of common shares:
Basic ........................................................ 13,394,385 13,774,993 13,801,196
============= ============= =============
Diluted ...................................................... 16,492,041 16,728,798 15,577,422
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
63
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------------
SERIES B SERIES C
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1997 ........................ 316,005 $ 3,160 571,429 $ 5,714
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... (36,128) (361) -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... -- -- (45,939) (459)
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. -- -- -- --
Net income for the year ............................ -- -- -- --
------- ------------ ------- ------------
Balance at January 31, 1998 ........................ 279,877 2,799 525,490 5,255
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... (8,281) (83) -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... -- -- (14,135) (141)
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. -- -- -- --
Issuance of Common Stock upon exercise of stock
options ......................................... -- -- -- --
Issuance of Common Stock upon exercise of warrants . -- -- -- --
Net income for the year ............................ -- -- -- --
------- ------------ ------- ------------
Balance at January 31, 1999 ........................ 271,596 2,716 511,355 5,114
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... (5,795) (58) -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... -- -- (8,835) (89)
Issuance of Common Stock upon exercise of stock
options ......................................... -- -- -- --
Issuance of Common Stock upon exercise of warrants . -- -- -- --
Repurchase of Common Stock ......................... -- -- -- --
Tax benefit from exercise of stock options ......... -- -- -- --
Net income for the year ............................ -- -- -- --
------- ------------ ------- ------------
Balance at January 31, 2000 ........................ 265,801 $ 2,658 502,520 $ 5,025
======= ============ ======= ============
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1997 ........................ 13,249,146 $ 132,492 $ 29,185,161 $ 15,353,617 $ --
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 257,230 2,572 846,660 -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 45,939 459 241,179 -- --
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. 71,419 715 513,503 -- --
Net income for the year ............................ -- -- -- 12,341,369 --
---------- ------------ ------------ ------------ ------------
Balance at January 31, 1998 ........................ 13,623,734 136,238 30,786,503 27,694,986 --
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 58,961 589 194,065 -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 14,135 141 74,209 -- --
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. 26,016 260 187,055 -- --
Issuance of Common Stock upon exercise of stock
options ......................................... 35,600 356 117,124 -- --
Issuance of Common Stock upon exercise of warrants . 54,258 543 274,457 -- --
Net income for the year ............................ -- -- -- 12,006,020 --
---------- ------------ ------------ ------------ ------------
Balance at January 31, 1999 ........................ 13,812,704 138,127 31,633,413 39,701,006 --
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 41,259 412 135,800 -- --
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 8,835 89 46,384 -- --
Issuance of Common Stock upon exercise of stock
options ......................................... 318,491 3,185 660,574 -- --
Issuance of Common Stock upon exercise of warrants . 5,110 51 (51) -- --
Repurchase of Common Stock ......................... -- -- -- -- (5,673,940)
Tax benefit from exercise of stock options ......... -- -- 304,410 -- --
Net income for the year ............................ -- -- -- 15,329,436 --
---------- ------------ ------------ ------------ ------------
Balance at January 31, 2000 ........................ 14,186,399 $ 141,864 $ 32,780,530 $ 55,030,442 $ (5,673,940)
========== ============ ============ ============ ============
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
------------
<S> <C>
Balance at January 31, 1997 ........................ $ 44,680,144
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 848,871
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 241,179
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. 514,218
Net income for the year ............................ 12,341,369
------------
Balance at January 31, 1998 ........................ 58,625,781
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 194,571
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 74,209
Issuance of Common Stock upon conversion of 7.5%
subordinated convertible debentures ............. 187,315
Issuance of Common Stock upon exercise of stock
options ......................................... 117,480
Issuance of Common Stock upon exercise of warrants . 275,000
Net income for the year ............................ 12,006,020
------------
Balance at January 31, 1999 ........................ 71,480,376
Issuance of Common Stock upon conversion of Series B
convertible preferred stock ..................... 136,154
Issuance of Common Stock upon conversion of Series C
convertible preferred stock ..................... 46,384
Issuance of Common Stock upon exercise of stock
options ......................................... 663,759
Issuance of Common Stock upon exercise of warrants . --
Repurchase of Common Stock ......................... (5,673,940)
Tax benefit from exercise of stock options ......... 304,410
Net income for the year ............................ 15,329,436
------------
Balance at January 31, 2000 ........................ $ 82,286,579
============
</TABLE>
See Notes to Consolidated Financial Statements.
64
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income .............................................................. $ 12,341,369 $ 12,006,020 $ 15,329,436
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ...................................... 4,738,077 7,494,607 11,166,409
Amortization of senior note offering costs and note
premium ......................................................... 286,301 556,084 569,487
Equity in earnings of unconsolidated affiliate ..................... (134,508) -- --
Deferred tax provision (benefit) ................................... 117,172 (369,520) (2,129,256)
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable .................................... (18,887,502) (249,999) (12,444,389)
(Increase) decrease in inventories and advances on
inventory purchases ............................................. (19,630,950) (32,894,592) 10,078,532
Increase in prepaid expenses and other assets ...................... (7,249,730) (2,288,307) (2,003,967)
(Decrease) increase in accounts payable ............................ (13,452,678) (16,171,948) 9,738,399
Increase (decrease) in other payables and accrued expenses ......... 1,157,859 (5,030,105) 1,666,189
Decrease in due to affiliate, net .................................. (14,508) -- --
------------- ------------- -------------
Net cash (used in) provided by operating activities ......... (40,729,098) (36,947,760) 31,970,840
------------- ------------- -------------
Cash Flows from Investing Activities:
Purchase of exclusive brand licenses and trademarks ..................... -- (2,732,381) --
Additions to property and equipment, net of disposals ................... (6,960,899) (3,259,481) (3,699,353)
Receipts of restricted cash for capital improvements .................... 1,314,602 -- --
Net cash portion of purchase of intangible asset ........................ -- (5,150,000) --
Net cash portion of unconsolidated affiliate purchase ................... (1,745,768) -- --
------------- ------------- -------------
Net cash used in investing activities ....................... (7,392,065) (11,141,862) (3,699,353)
------------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds from the conversion of preferred stock ......................... 1,049,487 268,780 182,538
Payments to retire subordinated debentures .............................. (14,494,512) (500,000) --
Net proceeds from the issuance of senior notes .......................... 111,550,000 41,500,000 --
Advances from unconsolidated affiliate, net ............................. 798,894 -- --
Payments on term loans .................................................. (4,333,333) (596,535) (1,615,359)
(Payments on) net proceeds from short-term debt ......................... (39,367,096) 5,639,369 (5,639,369)
Payments on capital lease and installment loans ......................... (141,144) (50,000) --
Proceeds from the exercise of stock purchase warrants ................... -- 275,000 --
Payments on facility mortgage note ...................................... (129,983) (119,988) (156,405)
Repurchase of Common Stock .............................................. -- -- (5,673,940)
Proceeds from the exercise of stock options ............................. -- 117,480 663,759
------------- ------------- -------------
Net cash provided by (used in) financing activities ......... 54,932,313 46,534,106 (12,238,776)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents ......................... 6,811,150 (1,555,516) 16,032,711
Cash and Cash Equivalents at Beginning of Year ............................... 855,969 7,667,119 6,111,603
------------- ------------- -------------
Cash and Cash Equivalents at End of Year ..................................... $ 7,667,119 $ 6,111,603 $ 22,144,314
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year ........................................... $ 9,990,420 $ 16,766,085 $ 19,019,248
============= ============= =============
Income taxes paid during the year ....................................... $ 8,064,127 $ 12,430,731 $ 1,445,481
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
65
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity. French Fragrances, Inc. (the "Company")
is a manufacturer and marketer of prestige designer fragrances and related skin
treatment and cosmetic products, primarily to retailers in the United States.
The Company was formerly known as Suave Shoe Corporation and was the surviving
corporation in the reverse acquisition (the "Merger") by a privately-held
fragrance distributor named French Fragrances, Inc., which occurred in November
1995.
Basis of Consolidation. The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries G.B. Parfums, Inc., Halston
Parfums, Inc., Fine Fragrances, Inc. ("Fine Fragrances") and FRM Services, Inc.
All significant intercompany accounts and transactions have been eliminated in
consolidation. In January 2000, the Company's wholly-owned subsidiaries were
merged into the Company.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition. Sales are recognized upon shipment. During the fiscal
year ended January 31, 1998, no customer accounted for more than 10% of total
sales. During the fiscal year ended January 31, 1999, two customers accounted
for an aggregate of 28% of the Company's net sales. During the fiscal year ended
January 31, 2000, two customers accounted for an aggregate of 29% of the
Company's net sales.
Cash and Cash Equivalents. Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined on the weighted-average method. Inventory balances at January 31,
1999 and 2000 were as follows:
JANUARY 31,
----------------------------------
1999 2000
------------ ------------
Finished..................... $116,071,991 $103,548,955
Work in progress............. 7,927,388 6,727,835
Raw materials................ 9,306,424 16,745,615
------------ ------------
$133,305,803 $127,022,405
============ ============
66
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable. A provision has been made and an allowance established
for potential losses from receivables and estimated sales returns in the normal
course of business. Because these allowances are based on estimates, there is no
assurance that such reserves and allowances will be sufficient to cover losses
or returns. The activity for these allowance accounts are as follows:
YEARS ENDED JANUARY 31,
1998 1999 2000
----------- ----------- ------------
Allowance for Bad Debt:
Beginning balance ........... $ 489,937 $ 676,387 $ 533,696
Provision ................... 570,000 401,626 1,138,800
Write offs, net of recoveries (383,550) (544,317) (506,826)
----------- ----------- ------------
Ending balance .............. $ 676,387 $ 533,696 $ 1,165,670
=========== =========== ============
Allowance for Sales Returns:
Beginning balance ........... $ 366,608 $ 558,651 $ 555,245
Provision ................... 6,014,283 7,630,810 13,289,613
Actual returns .............. (5,822,240) (7,634,216) (13,028,413)
----------- ----------- ------------
Ending balance .............. $ 558,651 $ 555,245 $ 816,445
=========== =========== ============
Property and Equipment, and Depreciation. Property and equipment are stated
at cost. Expenditures for major improvements and additions are recorded to the
asset accounts while replacements, maintenance and repairs which do not improve
or extend the lives of the respective assets are charged to expense.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line method, as follows:
CATEGORY YEARS
-------- -----
Building ..................................... 40
Building improvements ........................ 20-40
Furniture and fixtures ....................... 8
Machinery, equipment and vehicles ............ 3-8
Computer equipment and software .............. 3-5
Tools and molds .............................. 1-3
Exclusive Brand Licenses and Trademarks, Customer Lists and Amortization.
These intangible assets are being amortized using the straight-line method, as
follows at January 31:
<TABLE>
<CAPTION>
ACCUMULATED AMORTIZATION
------------------------
CATEGORY YEARS COST 1999 2000
-------- ----- ---- ---- ----
<S> <C> <C> <C> <C>
Exclusive brand licenses and trademarks ............... 5 and 15 $66,398,376 $10,691,367 $17,355,084
Contract rights and other intangibles ................. 3 and 5 11,179,593 2,395,020 4,395,020
</TABLE>
Long-Lived Assets. Long-lived assets are reviewed on an ongoing basis for
impairment based on comparison of carrying value against undiscounted future
cash flows. If an impairment is identified, the assets carrying value is
adjusted to estimated fair value. No such adjustments were recorded for the
fiscal years ended January 31, 1998, 1999 and 2000.
67
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Note Offering Costs. Debt issuance costs and transaction fees which
are associated with the issuance of senior notes are being amortized (and
charged to interest expense) over the term of the related notes using a method
which approximates the level yield method. See Note 5.
Advertising and Promotional Costs. Advertising and promotional costs are
expensed as incurred. Advertising and promotional costs totaled approximately
$6.2 million, $4.8 million and $10.2 million during the fiscal years ended
January 31, 1998, 1999 and 2000, respectively.
Income Taxes. The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities. The Company provides for deferred taxes under the
liability method. Under such method, deferred taxes are adjusted for tax rate
changes as they occur. Deferred income tax assets and liabilities are computed
annually for differences between the financial statements and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
recorded when necessary to reduce deferred tax assets to the amount expected to
be realized.
Fair Value of Financial Instruments. The Company's financial instruments
include accounts receivable, accounts payable, short-term debt, long-term debt
and convertible redeemable preferred stock. The fair value of such financial
instruments has been determined using available market information and interest
rates as of January 31, 1999 and 2000.
At January 31, 1999 and 2000, the estimated fair value of the Company's
subordinated debentures and senior notes was as follows:
JANUARY 31,
------------------------------
1999 2000
------------ ------------
Subordinated debentures .................. $ 9,875,000 $ 6,479,966
Convertible subordinated debentures ...... 5,289,000 4,778,643
Senior notes.............................. 158,875,000 148,800,000
The fair value of all other financial instruments was not materially
different than their carrying value.
Reclassifications. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform with fiscal 2000
presentations.
68
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings per Share. Basic earnings per share is computed by dividing the
net income available to common shareholders by the weighted average shares of
outstanding common stock. The calculation of diluted earnings per share is
similar to basic earnings per share except that the denominator includes
dilutive potential common stock such as stock options, warrants and convertible
securities. In addition, for the dilutive earnings per share calculation, the
interest incurred on the convertible securities, net of tax, is added back to
net income. The following table represents the computation of earnings per
share:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Basic
Net income ........................................................... $12,341,369 $12,006,020 $15,329,436
=========== =========== ===========
Weighted average shares outstanding .................................. 13,394,385 13,774,993 13,801,196
=========== =========== ===========
Net income per basic share ........................................... $ 0.92 $ 0.87 $ 1.11
=========== =========== ===========
Diluted
Net income ........................................................... $12,341,369 $12,006,020 $15,329,436
Add: 7.5% convertible subordinated debentures' interest--net
of tax ........................................................... 250,086 163,933 109,313
----------- ----------- -----------
Net income as adjusted ........................................ $12,591,455 $12,169,953 $15,438,749
=========== =========== ===========
Weighted average shares outstanding .................................. 13,394,385 13,774,993 13,801,196
Potential common shares--treasury method ............................. 2,350,430 2,448,181 1,444,376
Assumed conversion of 7.5% convertible subordinated
debentures ....................................................... 747,226 505,624 331,850
----------- ----------- -----------
Weighted average shares and potential dilutive shares ................ 16,492,041 16,728,798 15,577,422
=========== =========== ===========
Net income per diluted share .................................. $ 0.76 $ 0.73 $ 0.99
=========== =========== ===========
</TABLE>
Stock-Based Compensation. Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee and
non-employee members of the Board of Directors of the Company (the "Board")
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation to employees and non-employee members of the Board
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options issued to
employees and non-employee members of the Board are measured as the excess, if
any, of the fair value of the Company's stock at the date of grant over the
amount an employee or non-employee member of the Board must pay for the stock.
See Note 11.
69
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments, and
Hedging Activities. Among other provisions, SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It also requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS No. 133 is effective for financial statements for fiscal years beginning
after June 15, 2000. Management has not determined what effects, if any, the
adoption of SFAS No. 133 will have on the Company's financial statements.
2. ACQUISITIONS
Fine Fragrances Acquisition. In May 1997, the Company used approximately
$4,226,000 of the net proceeds from the May 1997 offering of $115,000,000
principal amount of 10 3/8% Series A Senior Notes due 2007 ("Series A Senior
Notes") to acquire the 50.01% interest of Fine Fragrances that the Company did
not own (the "Fine Fragrances Interest") from an unaffiliated third party and to
repay Fine Fragrances' credit line. The purchase price for the Fine Fragrances
Interest was $2,000,000, plus an additional $1,000,000 which was paid based on
5% of the net sales of COFCI, S.A. ("COFCI") products sold by the Company
following this acquisition. The acquisition was accounted for under the purchase
method. As a result of this acquisition, Fine Fragrances became a wholly-owned
subsidiary of the Company and the operations of Fine Fragrances have been
consolidated with those of the Company. The brands manufactured by COFCI are
distributed by the Company under new agreements expiring in 2006.
JPF Acquisition. In March 1998, the Company acquired (the "JPF
Acquisition") certain assets of J.P. Fragrances, Inc. ("JPF"), a distributor of
prestige fragrance products, including inventory, returns, contract rights,
accounts receivable, books and records, fixed assets (including furniture and
warehouse materials and equipment), claims, intangible rights (including
non-compete agreements) and goodwill (collectively, the "JPF Acquired Assets").
The Company also assumed approximately $10,600,000 of certain trade and other
payables of JPF. In addition to the assumption of payables, the purchase price
for the JPF Acquired Assets consisted of approximately $37,300,000 in cash and a
subordinated debenture of $3,000,000 (the "JPF Debenture"). The cash portion of
the purchase price was financed from available cash from operations and the
Company's current revolving credit facility, which financing was replaced by the
offering of 10 3/8% Series C Senior Notes (the "Series C Senior Notes"). See
Note 5. The JPF Debenture is non-interest bearing, with the principal amount
being payable in three equal installments on May 1999, 2000 and 2001 if, and
only if, certain conditions relating to the fragrance business of JPF (the "JPF
Business") are achieved by the Company, including achieving certain gross profit
thresholds from the JPF Business. To date, the Company has made one payment on
the JPF Debenture. The JPF Debenture has been recorded net of its discount of
$485,528 and calculated using an effective rate of 9.38%. The discount will be
amortized using the effective rate over the life of the JPF Debenture. As a
result of the JPF Acquisition, the Company acquired approximately $30,400,000 of
inventory, $12,100,000 of accounts receivable, $263,000 of fixed assets
(consisting primarily of office and warehouse furniture and equipment),
70
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and approximately $7,700,000 of contract rights, intangible rights (including
non-compete agreements) and goodwill. The JPF Acquisition was accounted for
under the purchase method.
PSI Acquisition. In January 1999, the Company acquired certain assets (the
"PSI Acquisition") of Paul Sebastian, Inc. ("PSI"), a manufacturer, marketer and
distributor of prestige fragrance products, including trademarks or licenses to
manufacture and distribute the fragrance brands PS Fine Cologne for Men, Design
for Women, Design for Men, Casual for Women and Casual for Men, inventory,
returns, accounts receivable, books and records, fixed assets (consisting of
manufacturing tools, dyes and molds), claims and goodwill (collectively, the
"PSI Acquired Assets"). The purchase price for the PSI Acquired Assets consisted
of approximately $9,700,000 in cash and a subordinated debenture of $500,000
(the "PSI Debenture"). The cash portion of the purchase price was financed from
available cash from operations. The PSI Debenture is non-interest bearing, with
the principal amount being payable in July 2000, and is being held by the
Company as security for PSI's indemnification obligations under the asset
purchase agreement between the Company and PSI. The PSI Acquisition was
accounted for under the purchase method.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
JANUARY 31,
-----------------------------
1999 2000
------------ ------------
Land ................................... $ 2,871,000 $ 2,871,000
Building ............................... 5,519,452 5,519,452
Building improvements .................. 4,856,291 5,240,713
Furniture and fixtures ................. 979,329 1,172,620
Machinery, equipment and vehicles ...... 3,438,681 3,989,700
Computer equipment and software ........ 4,226,532 5,567,043
Tools and molds ........................ 1,534,668 2,282,659
------------ ------------
23,425,953 26,643,187
Less accumulated depreciation .......... (4,478,029) (6,965,700)
------------ ------------
18,947,924 19,677,487
Projects in progress ................... 72,706 554,825
------------ ------------
Property and equipment, net ............ $ 19,020,630 $ 20,232,312
============ ============
4. SHORT-TERM DEBT
At January 31, 2000, 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. The
Credit Facility matures in May 2002. Loans under the revolving credit portion of
the Credit Facility 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. Borrowings under the Credit Facility are limited to
eligible
71
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $10 million of its common stock, $.01
par value per share ("Common Stock"), and to incur certain acquisition
indebtedness. At January 31, 1999, the outstanding balance under the Credit
Facility was approximately $5,639,000. At January 31, 2000, the Credit Facility
did not have an outstanding balance. As part of the Credit Facility, the Company
had approximately $1,661,000 and $2,543,000 in outstanding letters of credit at
January 31, 1999 and 2000, respectively.
72
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
The Company's long-term debt at January 31, 1999 and January 31, 2000
consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
DESCRIPTION 1999 2000
----------- ---- ----
<S> <C> <C>
103/8% Senior Notes due May 2007, net ................ $157,453,466 $157,245,157
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 1,946,646
8.84% Miami Lakes Facility Mortgage Note due July 2004 5,694,068 05,537,663
Other Indebtedness ................................... 2,903,465 817,179
Total Long-Term Debt ................................. 180,020,523 176,805,254
Less Current Portion of Long-Term Debt ........... 3,861,767 1,775,027
Total Long-Term Debt, net ..................... $176,158,756 $175,030,227
</TABLE>
The scheduled maturities of long-term debt at January 31, 2000 are as
follows:
FISCAL YEAR AMOUNT
----------- ------------
2001 ............................................... $ 1,775,027
2002 ............................................... 3,477,128
2003 ............................................... 2,363,105
2004 ............................................... 7,166,194
2005 and thereafter ................................ 162,023,800
------------
Total ....................................... $176,805,254
============
Senior Notes. In May 1997, the Company consummated the private placement
under Rule 144A pursuant to the Securities Act of 1933, as amended (the "Act"),
of $115.0 million principal amount of 103/8% Series A Senior Notes. In July
1997, the Series A Senior Notes were exchanged for an equivalent principal
amount of Series B Senior Notes (the "Series B Senior Notes") containing
identical terms to the Series A Senior Notes but which have been registered
under the Act. In April 1998, the Company consummated the private placement
under Rule 144A of $40.0 million principal amount of 103/8% Series C Senior
Notes. The Series C Senior Notes were sold at 106.5% of their principal amount
and had substantially similar terms to the Company's existing Series B Senior
Notes. The Series C Senior Notes were recorded net of a premium of $2.6 million.
The premium is being amortized over the life of the notes using the effective
interest method. Through January 31, 2000, the Company has amortized $208,309 of
premium against interest expense. In August 1998, the Series C Senior Notes were
exchanged for an equivalent principal amount of 103/8% Series D Senior Notes
(the "Series D Senior Notes") containing identical terms to the Series C Senior
Notes, but which have been registered under the Act.
73
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Indentures pursuant to which the Series B Senior Notes and the Series D
Senior Notes were issued (the "Indentures") provide that such notes will be
senior unsecured obligations of the Company and will rank senior in payment to
all existing and future subordinated indebtedness of the Company and pari passu
in right of payment with all existing and future senior indebtedness of the
Company, including indebtedness under the Credit Facility. The Indentures
generally permit the Company (subject to the satisfaction of a fixed charge
covenant ratio and, in certain cases, also a net income test) to incur
additional indebtedness, pay dividends, purchase or redeem capital stock of the
Company, or redeem subordinated indebtedness. The Indentures generally limit the
ability of the Company to create liens, merge or transfer or sell assets. The
Indentures also provide that the holders of the Series B Senior Notes and the
Series D Senior Notes have the option to require the Company to repurchase their
notes in the event of a change of control in the Company (as defined in the
Indentures).
6. COMMITMENTS AND CONTINGENCIES
In May 1998, the Company entered into a lease with an unaffiliated third
party for approximately 48,000 square feet of a warehouse facility (the "Miami
Lakes Annex") in Miami Lakes, Florida to accommodate additional inventory
requirements associated primarily with its promotional set business. The lease
has an initial term of thirty months, with the Company having an option to
extend for an additional term of thirty months.
In February 2000, the Company entered into a lease with an unaffiliated
third party for approximately 295,000 square feet of a warehouse facility (the
"Edison Facility") in Edison, New Jersey, which will be used primarily for the
Company's promotional set business and to process its product returns. The lease
has a term of twenty-six months.
In February 2000, the Company assumed a lease for approximately 173,000
square feet of a warehouse facility (the "Allentown Facility") in Allentown,
Pennsylvania, which was leased by an unaffiliated third party as the Company's
promotional set fulfillment center for the 1999 holiday season. The lease
extends through June 30, 2002. The Company currently intends to consolidate its
operations to its Miami Lakes facility, which contains approximately 200,000
square feet of distribution and warehouse space and approximately 30,000 square
feet of office space, and the Edison Facility. Accordingly, the Company does not
intend to exercise its option on the Miami Lakes Annex and intends to seek to
sublease or assign its lease on the Allentown Facility.
74
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's aggregate minimum lease payments under these leases are as
follows:
FISCAL YEAR AMOUNT
----------- ----------
2001 ................................................. $1,470,280
2002 ................................................. 1,272,916
2003 ................................................. 726,165
2004 ................................................. 630,644
2005 and thereafter .................................. 265,769
----------
Total ......................................... $4,365,774
==========
The Company has commitments to purchase products from fragrance
manufacturers in the amount of $63 million annually during the calendar years
ended December 31, 2000 and 2001.
In fiscal 1999, the Company paid $1.5 million to settle a lawsuit filed
against the Company in the United States Bankruptcy Court by the trustee of the
Model Imperial Liquidating Trust (the "Trust"). The lawsuit sought to recover
the value of certain unspecified sales of products by Model Imperial, Inc.
("Model") to the Company during 1994 and 1995, which the Trust alleged resulted
in Model obtaining financing under Model's credit facility to which Model was
not entitled. The litigation settlement is reflected in litigation settlement
expense for the fiscal year ended January 31, 1999.
In April 1999, the Company settled a dispute with Halston Borghese, Inc.
("HBI") and certain of its affiliates concerning the Company's acquisition of
certain assets relating to the Halston fragrance brands.
Pursuant to the settlement, a $2,000,000 note issued to HBI by the Company
(the "HBI Note") was cancelled and all claims of HBI were released in exchange
for a payment from the Company of approximately $530,000. As a result of the
settlement, the HBI Note and accrued interest thereon were removed from the
current portion of long-term liabilities in the Company's Consolidated Balance
Sheet at January 31, 2000.
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.
75
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The components of the provision for income taxes for the years ended
January 31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Current income taxes:
Federal .......................... $ 6,555,997 $ 6,906,407 $ 10,776,790
State ............................ 749,257 1,149,984 1,353,621
------------ ------------ ------------
Total current ............... 7,305,254 8,056,391 12,130,411
------------ ------------ ------------
Deferred income taxes:
Federal .......................... 105,155 (316,834) (1,954,835)
State ............................ 12,017 (52,686) (174,421)
------------ ------------ ------------
Total deferred .............. 117,172 (369,520) (2,129,256)
------------ ------------ ------------
Total provision for income taxes ...... $ 7,422,426 $ 7,686,871 $ 10,001,155
============ ============ ============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes and operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred tax
asset are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment ................................ $ (365,105) $ (580,918)
Merger assets ......................................... (222,008) (190,426)
(587,113) (771,344)
Deferred tax assets:
Excess of book bad debts reserve over tax reserve ..... 205,873 541,140
Intangibles ........................................... 481,765 2,053,530
Accruals .............................................. 95,087 223,121
Net operating loss carryforwards ...................... 790,335 790,335
Inventories related ................................... 1,012,541 865,590
Other ................................................. -- 425,372
----------- -----------
Gross deferred tax assets ...................... 2,585,601 4,899,088
----------- -----------
Net deferred tax asset before valuation allowance ............ 1,998,488 4,127,744
Valuation allowance for deferred taxes ....................... (790,335) (790,335)
----------- -----------
Net deferred tax asset ....................................... $ 1,208,153 $ 3,337,409
=========== ===========
</TABLE>
76
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of January 31, 1999 and 2000, the valuation allowance relates to the net
operating loss carryforwards available in connection with the Merger which
expire through 2009.
The total income tax provision differs from the amount obtained by applying
the statutory federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------------------------------------------
1998 1999 2000
---------------------- --------------------- ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates ................... $ 6,917,329 35.00% $ 6,892,512 35.00% $ 8,865,707 35.00%
State tax, net of federal benefit ............... 494,828 2.50 712,887 3.62 767,517 3.03
Undistributed earnings in affiliate ............. (47,078) (.24) -- -- -- --
Other ........................................... 57,347 .30 81,472 .41 367,931 1.45
----------- ----- ----------- ----- ----------- -----
Total income taxes .................... $ 7,422,426 37.56% $ 7,686,871 39.03% $10,001,155 39.48%
=========== ===== =========== ===== =========== =====
</TABLE>
8. RELATED PARTY TRANSACTIONS
Prior to August 1998, the Company leased from National Trading
Manufacturing, Inc. ("National Trading"), a company controlled by the Chairman
of the Company, a warehouse and office facility (the "National Trading
Facility"), which had housed the Company's executive offices prior to May 1997
and which the Company had an option to purchase. During the fiscal years ended
January 31, 1998 and 1999, the Company made lease payments to National Trading
of $256,000 and $144,500, respectively. In connection with National Trading's
sale of the National Trading Facility, the Company agreed to terminate the lease
and its option to purchase the National Trading Facility (the "Contract
Rights"). As part of the consideration for the Contract Rights, the Company's
outstanding loan from National Trading in the principal amount of $294,000 was
canceled and the Company received from National Trading a cash payment of
approximately $416,000 and a promissory note payable upon demand in the
principal amount of $300,000 and bearing interest at 8.5% per annum.
Approximately $633,000, representing the income from the Contract Rights less
the difference between the consideration received for the Contract Rights and
the fixed asset, is reflected in Income from sale of contract and intangible
rights for the fiscal year ended January 31, 1999. At January 31, 2000, the
principal amount and accrued interest on the demand note due to the Company was
$116,000 and is reflected in the Company's Consolidated Balance Sheet at January
31, 2000 in Prepaid expenses and other assets.
During the fiscal year ended January 31, 1999, the Company provided loans
to the President and Chief Executive Officer of the Company in the aggregate
principal amount of $500,000 for payment of certain Canadian tax liabilities
resulting from his relocation to Florida. At January 31, 2000, the principal
amount of loans outstanding and accrued interest were $556,000 cumulatively and
are reflected in the Company's Consolidated Balance Sheet in Prepaid expenses
and other assets. The loans accrue interest at 8.5% per annum and mature in
August and November 2000.
77
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 2000, the Company repurchased the 7.5% Convertible Subordinated
Debentures due 2006 (the "7.5% Convertible Debentures") held by its Chairman and
National Trading. The Company paid $2,652,000 to acquire $2,184,000 principal
amount of 7.5% Convertible Debentures. The purchase price was based on the
estimated fair market value of the 7.5% Convertible Debentures on the date of
the transaction, which includes consideration for the value of unrealized gain
that the Chairman could have recognized upon a conversion and sale of the 7.5%
Convertible Debentures into Common Stock. As a result of the repurchase, the
Company recognized a loss of $468,000 in February 2000.
9. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------------------------
1998 1999 2000
----------- ----------- -----------
Redemption of 8% Debentures used to pay for conversion of
<S> <C> <C> <C>
preferred stock .................................................................. $ 40,563
-----------
Conversion of 7.5% Convertible Debentures into Common Stock ........................ $ 514,223 $ 187,315
----------- -----------
Acquisition of Fine Fragrances Interest (See Note 2):
Book value of assets acquired, excluding inventory ............................ $ 2,296,051
-----------
Liabilities assumed ........................................................... $ 3,156,895
-----------
Inventory acquired ............................................................ $ 2,805,638
-----------
Note issued ................................................................... $ 1,000,000
-----------
Transactions in connection with the JPF Acquisition (See Note 2):
Issuance of JPF Debenture, net ................................................ $ 2,514,472
-----------
Assumption of accounts payable ................................................ $10,560,577
-----------
Transactions in connection with the sale of the Contract Rights for the National
Trading Facility (See Note 8):
Disposition of fixed asset in capital lease, net of accumulated
depreciation and cash received .............................................. $ 1,024,806
-----------
Termination of capital lease and of note payable to related party ............. $ 1,374,136
-----------
Note receivable from related party ............................................ $ 300,000
-----------
Transactions in connection with the PSI Acquisition (See Note 2):
Issuance of PSI Debenture, net ................................................ $ 458,000
-----------
Tax benefit from exercise of stock options ......................................... $ 304,410
-----------
</TABLE>
10. CONVERTIBLE PREFERRED STOCK
At January 31, 2000, the Company had outstanding 265,801 shares of Series B
Convertible Preferred Stock, $.01 par value per share ("Series B Convertible
Preferred"), and 502,520 shares of Series C Convertible Preferred Stock, $.01
par value per share ("Series C Convertible Preferred"). Each share of Series B
Convertible Preferred is convertible, at the option of the holder, into 7.12
shares of the Company's Common Stock upon payment of $3.30 per share of Common
Stock. Each share of Series C Convertible Preferred is convertible, at the
option of the holder, into one share of the Company's Common Stock upon payment
of $5.25 per share of Common Stock. The Series B Convertible Preferred and the
Series C Convertible Preferred must be redeemed by January 31, 2005.
78
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTION PLANS
The Company has two stock option plans, one for the benefit of non-employee
directors (the "Non-Employee Director Plan") and another for directors, officers
and employees (the "1995 Stock Option Plan").
The stock options under the Non-Employee Director Plan are generally
exercisable within a year after grant provided the grantee remains a director of
the Company. The options granted under the Non-Employee Director Plan are
non-qualified under the Internal Revenue Code. The option exercise price cannot
be less than the fair value of the underlying Common Stock as of the date of the
option grant, and the maximum option term cannot exceed ten years. The number of
shares of Common Stock authorized under the Non-Employee Director Plan is
200,000.
The stock options awarded under the 1995 Stock Option Plan are exercisable
at any time or in any installments as determined by the Compensation Committee
of the Board at the time of grant, provided that no stock options shall be
exercisable prior to six months from the date of grant. The options granted
under the 1995 Stock Option Plan may be either incentive and/or non-qualified
stock options under the Internal Revenue Code as determined by the Compensation
Committee. For incentive stock options, the aggregate fair market value
(determined at the grant date) of Common Stock with respect to which such
options first become exercisable by a participant of the plan during any
calendar year may not exceed $100,000. The number of shares of Common Stock
authorized under the 1995 Stock Option Plan is 2,200,000.
The option activities of all plans are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
--------------------------------------------------------------
1998 1999 2000
---------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Beginning outstanding .......................................... 729,040 $ 4.36 806,540 $ 4.80 1,300,940 $ 8.06
Granted .............................................. 77,500 8.93 530,000 12.72 265,000 6.11
Exercised ............................................ -- -- (35,600) 3.30 (441,440) 3.38
Canceled ............................................. -- -- -- -- (31,500) 10.32
------- ------ --------- ------ --------- ------
Ending outstanding ............................................. 806,540 $ 4.80 1,300,940 $ 8.06 1,093,000 $ 9.42
------- ------ --------- ------ --------- ------
Exercisable as of January 31, 1998, 1999
and 2000 ................................................... 686,548 1,190,585 885,682
------- --------- ---------
Weighted average fair value of options
granted during the year .................................... 77,500 $ 5.17 530,000 $ 9.33 265,000 $ 3.54
======= ====== ========= ====== ========= ======
</TABLE>
79
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE JANUARY 31, CONTRACTUAL EXERCISE JANUARY 31, EXERCISE
PRICE 2000 LIFE PRICE 2000 PRICE
-------- ----------- ----------- -------- ----------- --------
$ 5.25- 6.00 303,000 3.4 $ 5.83 152,343 $5.66
$ 6.50- 9.38 280,000 3.8 7.28 250,000 7.31
$12.50-16.38 510,000 7.3 12.73 483,339 12.74
------------ --------- --- ------ ------- -----
$ 5.25-16.38 1,093,000 5.3 $ 9.42 885,682 $9.99
============ ========= === ====== ======= =====
The Company applies APB No. 25 and related interpretations in accounting
for its stock options to employees and non-employee members of the Board as
described in Note 1. Accordingly, no compensation expense has been recognized
during the years ended January 31, 1998, 1999 and 2000 related to the stock
options. Net income and net income per common share would have been as follows
had the fair value of stock options granted during 1998, 1999 and 2000 been
recognized as compensation expense as prescribed by SFAS No. 123:
YEARS ENDED JANUARY 31,
--------------------------------------
1998 1999 2000
----------- ---------- -----------
Pro forma net income ................. $12,188,000 $9,254,000 $14,747,000
=========== ========== ===========
Pro forma net income per common share:
Basic ............................. $ 0.91 $ 0.67 $ 1.07
=========== ========== ===========
Diluted ........................... $ 0.75 $ 0.56 $ 0.95
=========== ========== ===========
The fair value of each option granted is estimated on the grant date using
the Black-Sholes option pricing model with the following assumptions:
YEARS ENDED JANUARY 31,
-----------------------------
1998 1999 2000
----- ----- -----
Expected dividend yield .................... 0.00% 0.00% 0.00%
Expected price volatility .................. 55.60% 74.42% 67.46%
Risk-free interest rate .................... 6.50% 5.50% 6.00%
Expected life of options in years .......... 4-8 4-8 4-8
80
<PAGE>
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY DATA (UNAUDITED)
Condensed consolidated quarterly information as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1999 1999 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 57,532,267 $ 59,711,563 $153,719,284 $ 90,279,992
Gross profit .................................. $ 17,213,964 $ 25,291,988 $ 53,127,517 $ 29,480,647
Income from operations ........................ $ 2,309,074 $ 7,872,817 $ 22,744,921 $ 12,019,931
Net (loss) income ............................. $ (1,372,014) $ 2,020,860 $ 10,642,698 $ 4,037,892
Earnings per common shares:
Basic ............................... $ (0.10) $ 0.15 $ 0.77 $ 0.29
Diluted ............................. $ (0.10) $ 0.13 $ 0.67 $ 0.27
<CAPTION>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1998 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 46,546,294 $ 61,899,682 $112,506,135 $ 88,662,500
Gross profit .................................. $ 13,317,164 $ 18,417,979 $ 33,605,314 $ 23,152,572
Income from operations ........................ $ 3,975,619 $ 7,737,424 $ 16,744,567 $ 10,226,458
Net income .................................... $ 303,742 $ 1,710,476 $ 6,801,860 $ 3,189,942
Earnings per common shares:
Basic ............................... $ 0.02 $ 0.12 $ 0.49 $ 0.23
Diluted ............................. $ 0.02 $ 0.10 $ 0.42 $ 0.21
</TABLE>
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