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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14A-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Additional Materials Commission Only (as permitted)
[ ] Soliciting Material Pursuant to by Rule 14a-6(e)(2)
Rule 14a-11(c) or Rule 14a-12
FRENCH FRAGRANCES, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
[x] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Not applicable
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(2) Aggregate number of securities to which transaction applies: Not
applicable.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): Not
applicable.
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(4) Proposed maximum aggregate value of transaction: Not applicable.
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(5) Total Fee Paid: Not applicable.
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[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: Not applicable.
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(2) Form, Schedule or Registration Statement No.: Not applicable.
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(3) Filing Party: Not applicable.
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(4) Date Filed: Not applicable.
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FRENCH FRAGRANCES, INC.
14100 N.W. 60TH AVENUE
MIAMI LAKES, FLORIDA 33014
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS:
A Special Meeting of Shareholders of French Fragrances, Inc., a Florida
corporation, will be held at our principal executive offices, located at 14100
N.W. 60th Avenue, Miami Lakes, Florida 33014 on Wednesday, January 3, 2001,
beginning at 10:30 a.m., Eastern Standard Time, for the following purposes:
(1) Approval of Issuance of Stock. To approve the issuance or
potential issuance of our common shares in an amount greater
than 20% of the number of our outstanding common shares in
connection with the our acquisition of the Elizabeth Arden
skin treatment, cosmetics and fragrance brands, the Elizabeth
Taylor fragrance brands and the White Shoulders fragrance
brand and related assets and liabilities from Conopco, Inc.
and other affiliates of Unilever, N.V.
(2) Approval of Amendment to our Articles of Incorporation to
Change Our Corporate Name. To approve an amendment to our
Amended and Restated Articles of Incorporation to change our
corporate name from "French Fragrances, Inc." to "Elizabeth
Arden, Inc.," subject to the consummation of the Arden
acquisition.
(3) Approval of Stock Incentive Plan. To approve and adopt our
2000 Stock Incentive Plan.
(4) Approval of Amendment to our Non-Employee Director Stock
Option Plan. To approve an amendment to our Non-Employee
Director Stock Option Plan to increase (i) the number of
shares of common stock which may be issued pursuant to stock
options granted under such plan from 200,000 to 500,000, and
(ii) the number of shares of common stock exercisable in
connection with an eligible director being re-elected to our
Board of Directors at a subsequent annual meeting of
shareholders from 7,500 to 15,000.
(5) Other Matters. To consider and transact such other business as
may properly come before the meeting or any adjournment or
adjournments thereof.
Information regarding the matters to be acted upon at the meeting is
contained in the proxy statement accompanying this Notice. Only shareholders of
record at the close of business on November 1, 2000 will be entitled to notice
of and to vote at the Special Meeting or any adjournments or postponements
thereof.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE. IF YOU ARE ABLE TO ATTEND THE
MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO SO BY REVOKING THE
PROXY AT ANY TIME BEFORE IT IS EXERCISED.
Miami Lakes, Florida By Order of the Board of Directors,
December 4, 2000
Oscar E. Marina
Secretary
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FRENCH FRAGRANCES, INC.
14100 N.W. 60TH AVENUE
MIAMI LAKES, FLORIDA 33014
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
JANUARY 3, 2001
GENERAL
This Proxy Statement is being furnished to holders of common stock, par
value $.01 per share ("Common Stock"), of French Fragrances, Inc., a Florida
corporation (the "Company"), in connection with the solicitation of proxies by
our Board of Directors (the "Board of Directors") for use at the Special Meeting
of Shareholders (the "Special Meeting") to be held at our principal executive
offices located at 14100 N.W. 60th Avenue, Miami Lakes, Florida 33014, on
Wednesday, January 3, 2001, beginning at 10:30 a.m., Eastern Standard Time, and
at any adjournment or adjournments thereof.
This Proxy Statement and the accompanying form of proxy are first being
mailed to shareholders on or about December 8, 2000.
The Board of Directors has unanimously determined that the issuance or
potential issuance of shares of our Common Stock in an amount greater than 20%
of the number of our outstanding shares of Common Stock in connection with the
our acquisition of the Elizabeth Arden skin treatment, cosmetics and fragrance
brands, the Elizabeth Taylor fragrance brands and the White Shoulders fragrance
brand and related assets and liabilities from Conopco, Inc. and other affiliates
of Unilever, N.V., all as described below (Proposal One on the proxy card), is
fair to and in the best interest of the Company, and recommends a vote for the
approval of Proposal One.
The Board of Directors has unanimously determined that the proposed
amendment to our Amended and Restated Articles of Incorporation to change our
corporate name to "Elizabeth Arden, Inc.," as described below (Proposal Two on
the proxy card), is in the best interest of the Company, and recommends a vote
for the approval of Proposal Two.
The Board of Directors has unanimously determined that approval and
adoption of the proposed 2000 Stock Incentive Plan, as described below (Proposal
Three on the proxy card), is in the best interest of the Company, and recommends
a vote for the approval of Proposal Three.
The Board of Directors has unanimously determined that approval of the
amendment to our Non-Employee Director Stock Option Plan (the "Directors' Plan")
to increase (i) the number of shares of Common Stock which may be issued
pursuant to stock options granted under such plan from 200,000 to 500,000, and
(ii) the number of shares of Common Stock exercisable in connection with an
eligible director being re-elected to our Board of Directors at a subsequent
annual meeting of shareholders from 7,500 to 15,000, as described below
(Proposal Four on the proxy card) is in the best interest of the Company, and
recommends a vote for the approval of Proposal Four.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary .................................................................................................................1
Outstanding Shares And Voting Rights.....................................................................................3
Forward-Looking Statements...............................................................................................3
Proposal One-- Authorization Of Issuance Or Potential Issuance Of Common Shares Greater Than 20% Of The
Number Of Outstanding Common Shares Of The Company In Connection With The Arden Acquisition.....................5
General ................................................................................................................5
Arden Acquisition........................................................................................................5
Reasons For The Arden Acquisition........................................................................................6
Ancillary Agreements.....................................................................................................6
Issuance Of Common Shares Relating To The Arden Acquisition..............................................................8
Background Of The Transaction............................................................................................9
Distribution Agreement...................................................................................................9
Opinion Of Our Financial Advisor........................................................................................10
Selected Financial Data.................................................................................................14
Management's Discussion And Analysis Of Financial Condition And Results Of Operations...................................15
Quantitative And Qualitative Disclosures About Market Risk..............................................................22
Common Stock Ownership Following The Arden Acquisition..................................................................22
Required Approvals......................................................................................................22
Vote Required...........................................................................................................22
Proposal Two-- Amendment To The Amended And Restated Articles Of Incorporation To Change Our Corporate Name.............23
Reasons For The Proposal................................................................................................23
Vote Required...........................................................................................................23
Proposal Three-- Approval Of The 2000 Stock Incentive Plan..............................................................24
General ...............................................................................................................24
Summary Of The Plan.....................................................................................................24
Vote Required...........................................................................................................29
Proposal Four-- Approval Of Amendments To The Non-Employee Director Stock Option Plan...................................30
General ...............................................................................................................30
Vote Required...........................................................................................................31
Business ...............................................................................................................32
Our Business............................................................................................................32
Properties..............................................................................................................35
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TABLE OF CONTENTS - (CONTINUED)
Legal Proceedings.......................................................................................................36
The Arden Business......................................................................................................36
Market For Our Common Equity And Related Shareholder Matters............................................................37
Market Information......................................................................................................37
Holders ...............................................................................................................37
Dividends...............................................................................................................37
Description Of Capital Stock............................................................................................37
Common Stock............................................................................................................38
Series B Convertible Preferred Stock And Series C Convertible Preferred Stock...........................................38
Series D Convertible Preferred Stock....................................................................................38
Warrants ...............................................................................................................40
Serial Preferred Stock..................................................................................................40
Principal Shareholders..................................................................................................41
Executive Compensation..................................................................................................43
Summary Compensation Table..............................................................................................43
Options Granted In Last Fiscal Year.....................................................................................45
Fiscal Year End Option Values...........................................................................................45
Director Compensation...................................................................................................46
Compensation Committee Interlocks And Insider Participation.............................................................46
Compensation Committee Report On Executive Compensation.................................................................46
Performance Graph.......................................................................................................48
Certain Relationships And Related Transactions..........................................................................49
Certain Limitations On Deductibility Of Executive Compensation..........................................................49
Independent Auditors....................................................................................................49
2001 Proposals Of Shareholders..........................................................................................49
Other Business..........................................................................................................50
Additional Information..................................................................................................50
</TABLE>
Fairness Opinion.. Exhibit A
Unaudited Pro Forma Condensed Combined Financial Statements Exhibit B
French Fragrances, Inc. Audited Financial Statements Exhibit C-1
French Fragrances, Inc. Unaudited Financial Statements Exhibit C-2
Elizabeth Arden Business Financial Statements Exhibit D
Form Of 2000 Stock Incentive Plan Exhibit E
Form Of Amended Non-Employee Director Stock Option Plan Exhibit F
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SUMMARY
This summary highlights selected information from the portions of this proxy
statement relating to the Arden acquisition. To understand the Arden acquisition
more fully and for a more complete description of the terms of the Arden
acquisition and the shares of Series D Convertible Preferred Stock and other
securities to be issued in connection with the Arden acquisition, you should
carefully read this entire document.
o FRENCH FRAGRANCES, INC. We are a manufacturer and marketer of
prestige fragrances and related skin
treatment and cosmetic products
predominantly in the United States. We
have established ourselves as a source of
approximately 235 fragrance brands
through brand ownership, brand licensing
and distribution arrangements, including
Halston, Z-14, Grey Flannel, PS Fine
Cologne for Men, Design, Casual and Wings
by Giorgio Beverly Hills. We also provide
brand marketing and logistics and
fulfillment services to other fragrance
product manufacturers for the United
States mid-tier department stores and
mass market channels.
o ARDEN BUSINESS The Elizabeth Arden fragrance, skin
treatment and cosmetic brands (including
Elizabeth Arden's Red Door, 5th Avenue,
Green Tea, Sunflowers, Visible
Difference, Ceramides, Millenium and the
Elizabeth Arden cosmetic line), the
Elizabeth Taylor fragrance brands
(including White Diamonds and Passion)
and the White Shoulders fragrance brand.
o ARDEN ACQUISITION
PURCHASER French Fragrances, Inc. and its
affiliates
SELLER Conopco, Inc. (a subsidiary of Unilever
N.V.) and other affiliates of Unilever
N.V.
PURCHASED ASSETS Certain inventory, returns, contract
rights, real property and real property
leases, intellectual property, fixed
assets, promotional materials, certain
prepaid items, books and records and
intangibles relating to the Arden
business.
ASSUMED LIABILITIES Customer credits relating to products
returned following the closing date,
certain accruals for commissions and
bonuses, and all liabilities under
purchased contracts and real property
leases.
PURCHASE PRICE $250 million in cash, subject to certain
adjustments, and $50 million liquidation
preference of Series D Convertible
Preferred Stock having the terms
described below. Under certain
circumstances, we also may be obligated
to issue certain warrants to Conopco.
PURCHASE PRICE ADJUSTMENTS Adjustments for prepaid items, changes in
inventory, certain assumed liabilities
and net income of the Arden business are
expected to reduce the cash portion of
the purchase price to approximately $183
million.
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o SERIES D CONVERTIBLE
PREFERRED STOCK
INITIAL ISSUANCE 416,667 shares.
LIQUIDATION PREFERENCE $120 per share ($50 million aggregate)
plus accrued and unpaid dividends.
DIVIDENDS 5% per annum, commencing on second
anniversary of closing, payable in cash
or in additional shares of Series D
Convertible Preferred Stock or of a
combination of the foregoing.
REDEMPTION
Mandatory 12th anniversary of initial issuance, at
liquidation preference.
Optional Ten days after the first anniversary of
initial issuance, at a price per share
equal to the number of shares of Common
Stock into which the share is convertible
multiplied by $25.
CONVERSION
General 33.33% commencing on first anniversary of
initial issuance, 66.66% commencing on
second anniversary of initial issuance
and 100% commencing on the third
anniversary of initial issuance.
Potential Limitations The number of shares of
Common Stock into which the Series D
Convertible Preferred Stock may be
converted will be limited under Nasdaq
rules unless and until our shareholders
approve Proposal One.
Conversion Price $12.00 per share, subject to adjustments
specified under "Description of Capital
Stock-Series D Convertible Preferred
Stock."
APPROVAL RIGHTS Holders will have the right to approve
certain amendments to our articles of
incorporation, certain mergers and other
significant matters, and other actions
adversely affecting the rights of the
holders.
BOARD REPRESENTATION Holders will have the right to
representation on our Board of Directors
if shares are not redeemed or converted
by the 90th day following the third
anniversary of initial issuance.
REGISTRATION RIGHTS Holders will have certain demand and
"piggyback" registration rights.
o OPINION OF OUR FINANCIAL ADVISOR Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), our financial
advisor, has delivered to the Board of
Directors its written opinion to the
effect that the consideration to be paid
by us pursuant to the Arden acquisition
is fair to us and our
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shareholders from a financial point of
view. The full text of the written
opinion of DLJ containing the assumptions
made, the matters considered and the
scope of the review undertaken in
rendering such opinion, as well as the
limitations of such opinion, is included
in Exhibit A to this proxy statement.
Shareholders are urged to read the full
text of the opinion.
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OUTSTANDING SHARES AND VOTING RIGHTS
Only shareholders of record of the Common Stock on our books at the
close of business on November 1, 2000 (the "Record Date") are entitled to notice
of and to vote at the Special Meeting or any adjournments or postponements
thereof. On the Record Date, there were 13,223,945 shares of Common Stock
entitled to vote on each matter to be presented at the Special Meeting. Holders
of the Common Stock have one vote per share on all matters. No other class of
stock of the Company has voting rights.
A majority of the shares of Common Stock entitled to vote on a matter,
represented in person or by proxy, will constitute a quorum for action on a
matter at the Special Meeting. In determining the presence of a quorum at the
Special Meeting, abstentions are counted and broker non-votes are not. Our
Bylaws provide that the affirmative vote of a majority of the shares of the
voting stock represented, in person or by proxy, and entitled to vote on a
matter at a meeting at which a quorum is present will be the act of the
shareholders, except as otherwise provided by law. Abstentions will be counted
as votes against the proposals set forth herein and broker non-votes will not be
counted as votes for or against the proposals set forth herein.
As of November 1, 2000, our directors and executive officers (including
companies under their control) beneficially owned approximately 41.9 % of the
Common Stock. Pursuant to certain voting agreements between Conopco and certain
shareholders of the Company, including all of our directors, shareholders
representing in the aggregate over 50% of the outstanding shares of Common Stock
have agreed to vote all of such shares of Common Stock to approve Proposal One.
Accordingly, approval of Proposal One is assured.
Shares represented by a properly executed proxy received in time to
permit its use at the Special Meeting or any adjournment thereof will be voted
in accordance with the instructions indicated therein. If no instructions are
indicated, the shares represented by the proxy will be voted FOR Proposals One,
Two, Three and Four, and in the discretion of the proxy holders as to any other
matter which may properly come before the Special Meeting.
You are requested, regardless of the number of shares you hold, to sign
the proxy and return it promptly in the enclosed envelope. Each shareholder
giving a proxy has the power to revoke it at any time before it is voted, either
in person at the Special Meeting, by written notice to our Secretary or by
delivery of a later-dated proxy.
FORWARD-LOOKING STATEMENTS
This proxy statement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. We use words
such as "will likely result," "are expected to," "will continue," "is
anticipated," "estimated," "intends," "plans," "projection" and other similar
expressions to identify some forward-looking statements, but not all
forward-looking statements include these words. All of our forward-looking
statements involve estimates and uncertainties that could cause actual results
to differ materially from those expressed in the forward-looking statements and
such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by such
forward-looking statements, including: delays related to the Arden acquisition;
the ability to obtain the financing necessary to effect the Arden acquisition;
the ability to obtain necessary regulatory clearances for the Arden acquisition;
costs related to the Arden acquisition; our ability to successfully and
cost-effectively integrate the Arden business and other acquired companies and
new brands; our ability to retain current Arden employees; our ability to launch
new products and implement our growth strategy; risks of international
operations; our substantial indebtedness, including the indebtedness incurred in
connection with the Arden acquisition; supply constraints or difficulties; the
impact of competitive products and pricing; changes in the retail industry; the
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effect of business and economic conditions; and other risks and uncertainties.
More detailed information about these factors is included from time to time in
reports filed by us with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on forward-looking statements which speak
only as of the date hereof. We assume no responsibility to update or revise
forward-looking statements contained herein to reflect events or circumstances
following the date hereof.
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PROPOSAL ONE -- AUTHORIZATION OF ISSUANCE OR POTENTIAL ISSUANCE OF COMMON SHARES
GREATER THAN 20% OF THE NUMBER OF OUTSTANDING COMMON SHARES OF THE COMPANY IN
CONNECTION WITH THE ARDEN ACQUISITION
GENERAL
We have entered into a Purchase Agreement dated as of October 30, 2000
(the "Purchase Agreement") with Conopco, Inc., a New York corporation
("Conopco") and a subsidiary of Unilever, N.V. ("Unilever"), pursuant to which
we have agreed to purchase the Arden business, which consists of the Elizabeth
Arden brands of skin treatment, cosmetics and fragrance products, the Elizabeth
Taylor fragrance brands and the White Shoulders fragrance brand and related
assets and liabilities for (1) approximately $183 million in cash plus and (2)
$50 million in initial liquidation preference of our Series D convertible
preferred stock (the "Series D Convertible Preferred Stock") and, under certain
circumstances described below, warrants to purchase shares of our Common Stock
(the "Acquisition Warrants"). The Arden business is described in this proxy
statement under "Business-The Arden Business" and the terms of the Series D
Convertible Preferred Stock and the Acquisition Warrants are described in this
proxy statement under "Description of Capital Stock."
ARDEN ACQUISITION
Pursuant to the Purchase Agreement, we will purchase certain assets of
the Arden business, including inventory, returns, contract rights, real property
and real property leases, intellectual property, fixed assets, books and records
and intangibles. The aggregate consideration payable by us to Conopco upon
closing will consist of (1) $250 million in cash, subject to the adjustments
described below (which we expect will reduce the amount of cash we will be
required to deliver at closing to approximately $183 million), and (2) 416,667
shares of our Series D Convertible Preferred Stock. In addition, we have agreed
to assume certain liabilities for customer credits relating to products returned
following the closing date, and certain accruals for commissions and bonuses.
The cash portion of the purchase price will be subject to adjustment for (1)
prepaid charges and expenses paid prior to closing, (2) the variance between the
book value of the inventory purchased as of September 2, 2000 and the book value
of the actual inventory of the Arden business at the closing and (3) the net
income of the Arden business being for the period between September 3, 2000 and
the closing.
The Purchase Agreement contains customary representations and
warranties, covenants relating to the operation of the Arden business prior to
closing, closing conditions and indemnification obligations. Some of the rights
and obligations of the parties with respect to indemnification are subject to
certain caps, baskets, time limits and/or other qualifications. Either party may
terminate the Agreement if the closing has not occurred on or before April 30,
2001. We expect that the closing will take place in January 2001.
At the closing of the Arden acquisition, we will enter into several
agreements with Conopco and/or other affiliates of Unilever to facilitate the
transaction contemplated under the Purchase Agreement, including agreements
relating to post-closing manufacturing and distribution of products, information
technology systems and transition services. See "Ancillary Agreements."
We intend to finance the Arden acquisition with a combination of
long-term debt and revolving credit financing. We have obtained commitments from
affiliates of Credit Suisse First Boston Corporation and Fleet Corporate
Finance, Inc. (the "Lenders"), subject to customary conditions (including,
without limitation, conditions relating to a material disruption or adverse
change in the current financial, banking or capital markets), for a $160.0
million bridge loan and a $175.0 million senior secured revolving credit
facility.
The Arden acquisition will be accounted for as a "purchase" under
accounting principles generally accepted in the United States of America.
Accordingly, the results of the operation of the Arden business will be included
in our consolidated results of operations from and after the closing of the
Arden acquisition. The unaudited pro forma condensed combined financial
statements giving effect to the Arden acquisition are attached as Exhibit B to
this proxy statement.
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REASONS FOR THE ARDEN ACQUISITION
We believe that the Arden acquisition presents numerous opportunities
for us, including:
o Expand our portfolio of owned and licensed brands, sales and
profitability. We will acquire a number of well-recognized fragrance
brands and licenses including Elizabeth Arden's Red Door, 5th Avenue,
and Green Tea brands, Elizabeth Taylor's White Diamonds and Passion
brands, and White Shoulders. We will also acquire the Elizabeth Arden
skin care lines such as Visible Difference, Ceramides and Millenium and
the Elizabeth Arden color cosmetics products including lipstick,
foundation and other color cosmetic products. Elizabeth Taylor's White
Diamonds fragrance has consistently ranked among the top 10 women's
fragrances in department stores in the United States. We have developed
a strong knowledge of the Elizabeth Arden and Elizabeth Taylor brands as
a result of our serving as the primary distributor in the mid-tier
departments stores and mass retail channels in the United States. We
believe that this significant expansion of our portfolio of owned and
licensed brands will make us a more attractive "one stop" source of
supply for our retail customers. Accordingly, we believe that this
acquisition should significantly increase our sales, gross margins and
profitability.
o Introduce international distribution capability. Because the Arden
business has sales in more than 90 countries, the Arden acquisition will
significantly increase our international operations. The addition of
this international distribution infrastructure will also enable us to
expand the sales of our other brands abroad and to support the
international expansion of certain of our U.S. retail customers.
o Improved business efficiencies. The combination of the Arden business
with our existing business is expected to significantly increase the
scale of our operations and to provide us with opportunities to increase
our operating efficiency. We intend to rationalize our distribution
facilities and optimize capacity utilization. We expect to be able to
eliminate duplicative shipping and handling charges and generate
incremental profit with respect to the Elizabeth Arden products we
previously purchased from the Arden business. For the fiscal year ended
January 31, 2000, we purchased $56 million of these products. In
addition, we intend to outsource the manufacturing of Elizabeth Arden
products, reducing manufacturing overhead as well as capital needs. We
will combine and optimize the sales forces. As a result of these
actions, we believe that we can operate the combined business with fewer
personnel than have historically been employed in the businesses
collectively, and that our distribution and fulfillment capacity should
be enhanced.
o Additional breadth of management. As a result of the acquisition of the
Arden business, we expect that several experienced management personnel
will join us in various key areas such as international, accounting,
operations and supply chain. We believe that the addition of these
persons should further solidify our management and position us to
continue our growth.
ANCILLARY AGREEMENTS
We will enter into the following ancillary agreements with Conopco to
facilitate the integration of the Arden business with our existing business.
Each of the agreements contains customary termination provisions and events of
default.
Employee Lease Agreement
We will enter into an employee lease agreement with Conopco whereby
Conopco agrees to provide the services of certain of the employees of the Arden
business for a specified transition period and we agree to reimburse Conopco for
any direct payroll costs and out-of-pocket expenses related to those employees.
If we offer employment to a minimum number of employees of the Arden business,
we will not be responsible for any severance costs associated with the employees
of the Arden business that do not join us. The lease period for each employee
varies by employee, but will terminate no later than June 30, 2001.
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Transition Services Agreement
We will enter into a transition services agreement under which Conopco
has agreed to provide us with post-closing services relating to, among other
things, finance/accounting, payroll processing, research and development. Under
this agreement, we are also obligated to provide Conopco and certain of its
affiliates various transition services. The transition services agreement will
terminate six months after the closing of the Arden acquisition and the parties
may agree to extend the agreement for an additional one-month term.
Information Technology Services Agreement
We will enter into an information technology services agreement whereby
Conopco and its affiliates have agreed to provide us with various post-closing
information technology services, software, infrastructure, equipment and other
services. The compensation for these services is fixed until February 28, 2001
and thereafter is subject to review. The agreement will terminate on December
31, 2001, but will be automatically renewable for additional one-year terms. If
the agreement is terminated, at our request, Conopco will use reasonable efforts
to provide the information technology services on a transition basis for up to
two years after the termination.
Distribution Agreements
We will enter into a distribution agreement relating to Conopco's
distribution facility in Lille, France. This agreement provides for the
provision of post-closing order fulfillment services, which includes the receipt
and storage of finished products, order fulfillment, import/export operations
and the support of electronic data interchange. Under the distribution
agreement, we will pay Conopco a fixed fee based on the number of different
products shipped. The price for services rendered will be reviewed and
determined annually by mutual agreement of the parties. The agreement will
terminate on December 31, 2001 and will be automatically renewable for
additional one year terms.
We will also enter into a distribution agreement whereby we will
provide Conopco post-closing distribution services from our new facility at
Roanoke, Virginia. Conopco will pay a fixed fee based on the number of different
products shipped. The agreement will terminate on May 31, 2001, but may be
extended for an additional month.
Manufacturing Agreements
We will enter into three manufacturing agreements under which Unilever
or its affiliates will manufacture fragrance and cosmetics products for us out
of their Las Piedras, Puerto Rico, Roanoke, Virginia and Acton, England
manufacturing facilities.
Under the Las Piedras manufacturing agreement, Unilever or its
affiliates will manufacture fragrance products for us on a year-to-year basis.
Pricing is based on cost per piece and will be negotiated annually. The Las
Piedras manufacturing agreement will terminate on December 31, 2001, but will be
automatically renewable for additional one-year terms.
Under the Roanoke manufacturing agreement, Unilever or its affiliates
will manufacture certain skin care and cosmetics for us until May 31, 2001
(unless extended on a month-by-month basis by both parties). Pricing will be
based on a cost sharing basis at the Roanoke facility.
Under the Acton manufacturing agreement, Unilever or its affiliates
will manufacture fragrance products for us for European distribution until the
Acton facility is closed on March 31, 2001. We intend to subcontract the
manufacture of these products to a third party when the agreement ends.
Following the termination of the Roanoke and Acton manufacturing
agreements, we intend to outsource the manufacturing of such products to third
parties.
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Registration Rights Agreement
We have granted certain registration rights with respect to the common
stock underlying the Series D Convertible Preferred Stock. Conopco has the right
to demand the filing of up to three registration statements, accruing on the
first, second and third anniversary of the closing of the Arden acquisition,
respectively. In addition, Conopco will have "piggy-back" registration rights
with respect to certain registration statements filed by us other than pursuant
to a demand by Conopco. For a more detailed description of the terms of the
Series D Convertible Preferred Stock, see "Description of Capital Stock - Series
D Convertible Preferred Stock."
ISSUANCE OF COMMON SHARES RELATING TO THE ARDEN ACQUISITION
Neither Florida law nor our Amended and Restated Articles of
Incorporation or Bylaws require us to obtain shareholder approval for the Arden
acquisition. Our Common Stock, however, is currently listed on the Nasdaq Stock
Market National Market System, and we are therefore subject to the rules of The
Nasdaq Stock Market ("Nasdaq"). Among other things, Nasdaq rules require listed
companies to seek and obtain shareholder approval in connection with the
acquisition of assets of another company if in connection with such acquisition
the listed company proposes to issue common stock, or securities convertible
into or exercisable for common stock, with voting power equal to or in excess of
20% of the voting power outstanding before the issuance of stock or securities
convertible into or exercisable for common stock, or if the number of shares of
common stock to be issued is or will be equal to or in excess of 20% of the
number of shares of common stock outstanding prior to the issuance of the stock
or securities.
The Series D Convertible Preferred Stock will be convertible into
Common Stock on an incremental basis in accordance with and subject to certain
conversion ratios contained in the terms of the Series D Convertible Preferred
Stock, and, following the first anniversary of the issuance date, will be
initially convertible into 4,166,667 shares of our Common Stock, less the number
of Acquisition Warrants, if any. The Purchase Agreement provides that if the
closing price of a share of Common Stock on Nasdaq on the trading day
immediately preceding the closing date of the Arden acquisition is less than
$10.00 (any such shortfall being referred to as the "Shortfall Amount") then (x)
we will be obligated to deliver to Conopco Acquisition Warrants for 1,357,466
shares of Common Stock (having the terms described under "Description of Capital
Stock - Warrants") for every $1.00 of Shortfall Amount (to be prorated
appropriately) and (y) the number of shares of Common Stock into which the
Series D Convertible Preferred Stock issued at the closing is convertible will
be reduced by a like amount. We expect that at the time of completion of the
Arden acquisition we will have outstanding approximately 15,605,000 shares of
Common Stock (without including any Financing Warrants as defined below).
Accordingly, the 4,166,667 shares of Common Stock issuable upon conversion of
the Series D Preferred Stock and exercise of the Acquisition Warrants will
itself exceed the 20% Nasdaq threshold.
In connection with the financing of the Arden acquisition, we expect to
issue warrants (the "Financing Warrants"), in an amount to be determined, to
purchase shares of our Common Stock. We expect that Nasdaq would count the
Financing Warrants towards the 20% threshold described above, thereby reducing
the number of shares of Common Stock into or for which the Series D Convertible
Preferred Stock and/or Acquisition Warrants issuable to Conopco may be converted
or exercised, absent shareholder approval of Proposal One.
In light of the foregoing and in order to maintain compliance with
Nasdaq rules, if shareholder approval of Proposal One is not obtained prior to
the closing of the Arden acquisition, we intend to issue upon the closing of the
Arden acquisition the Financing Warrants, the maximum number of Acquisition
Warrants that may be issued without shareholder approval and all 416,667 shares
of Series D Convertible Preferred Stock. However, until shareholder approval of
Proposal One is obtained, the number of shares of Common Stock into which the
Series D Convertible Preferred Stock will be convertible will be limited so that
the securities issued upon or in connection with the closing of the Arden
acquisition (and shares of Series D Convertible Preferred Stock issued as
dividends on previously-issued shares) will be exercisable for or convertible
into, in the aggregate, not more that 19.5% of the number of shares of our
Common Stock outstanding immediately prior to completion. We are seeking
shareholder approval of the issuance of potential issuance of our common shares
greater than 20% of the number of our outstanding common shares in connection
with the Arden acquisition. The shareholder approval will permit (1) the
convertibility of the Series D Convertible Preferred Stock (including shares
issued in payment of dividends on previously-issued shares) into shares of
Common Stock without regard to the foregoing limitations and (2) the issuance of
any Acquisition Warrants that could not be issued as a result of the application
of the foregoing limitations.
8
<PAGE>
If the number of Acquisition Warrants we are able to issue is limited
as a result of Nasdaq rules and shareholder approval of Proposal One is not
obtained within six months following the completion of the Arden acquisition, we
will be required to deliver to Conopco other consideration, in the form of cash
or securities, having a value equal to the value of the Acquisition Warrants we
could not issue. However, as a result of the Voting Agreements, approval of
Proposal One is assured.
Our Board of Directors has considered the Arden acquisition, including
the potential dilutive effects, which may be material, of the issuance of the
Common Stock underlying the Series D Convertible Preferred Stock, the
Acquisition Warrants and the Financing Warrants, and has approved the Arden
acquisition and recommended the approval of Proposal One.
BACKGROUND OF THE TRANSACTION
Pursuant to certain agreements with Conopco, since April 1998, we have
served as the primary distributor of many of the fragrance brands which are part
of the Arden business for certain mid-tier department stores and mass market
retail accounts in the United States. See "Distribution Agreement". As a result
of this relationship, we became Conopco's single largest customer for those
brands and developed a significant knowledge of the value and future potential
of the Arden business. Following Unilever's announcement in February 2000 that
it was planning to either reorganize or divest itself of certain businesses,
including the Arden business, Unilever's representatives approached us in April
and inquired as to our interest in acquiring the Arden business.
On April 25, 2000, we entered into a confidentiality agreement with
Unilever to permit us to evaluate certain information about the Arden business
for purposes of determining whether to make a proposal. Along with DLJ, our
financial advisor, we evaluated the preliminary materials provided to us by
Unilever during May 2000. On June 1, 2000, representatives of DLJ and our
company met with representatives of Unilever and made a presentation which
contained our assessment of the valuation we were attributing to the assets of
the Arden business. During the month of June, there were further discussions
between the parties as to the valuations associated with the Arden business.
On July 7, 2000, representatives of DLJ and our company met with
representatives of Unilever and made a more specific proposal relating to the
value of the Arden business. During the month of July, the parties exchanged
correspondence seeking and providing further clarification of the proposal,
including the specific assets to be acquired, transition services required,
employees and facilities. Between July and October, we conducted due diligence
activities relating to the Arden business. Although the parties continued to
discuss the parameters of a possible transaction during this time, there was no
commitment made to sell the Arden business at any time. Discussions between the
parties focused on the amount and type of consideration to be received and our
financing commitments.
On August 16, 2000, representatives of DLJ made a presentation to our
Board relating to the status of the negotiations and due diligence, the
parameters for valuation and the type of financing that would be available. Our
Board of Directors authorized senior management to continue negotiations with
Unilever based on the parameters discussed. On August 24, 2000, representatives
of DLJ and our company met with representatives of Unilever to discuss the
potential financing for the transaction and the process by which the Lenders
could give a financing commitment.
During the months of September and October, the parties had numerous
meetings to discuss the business terms of a potential transaction and to
negotiate terms of an asset purchase agreement and several ancillary agreements.
On October 18, 2000, our Board met to discuss the status of the transaction,
including the terms of the purchase agreement and the financing commitments to
be provided by the Lenders. On October 25, 2000, following a presentation to our
Board of Directors by representatives of DLJ, including representatives
providing the fairness opinion, our Board of Directors approved the terms of the
asset purchase agreement and authorized senior management to proceed with the
Arden acquisition and associated financing. The Purchase Agreement was signed by
the parties on October 30, 2000.
DISTRIBUTION AGREEMENT
We are currently a party to a distribution agreement with Conopco
whereby we have agreed to be the exclusive distributor of certain fragrance
brands, including brands which are part of the Arden business for certain
mid-tier department stores and mass market retail accounts in the United States.
We have agreed to purchase certain minimum amounts of products, with pricing and
9
<PAGE>
volumes to be determined by agreement of the parties during the term. The
agreement terminates in December 2002.
OPINION OF OUR FINANCIAL ADVISOR
We asked DLJ, in its role as our financial advisor, to render an
opinion to our Board of Directors as to the fairness, from a financial point of
view, to us and our shareholders of the consideration to be paid by us for the
Arden acquisition. On October 25, 2000, DLJ delivered to the Board of Directors
its oral opinion, subsequently confirmed in writing on October 30, 2000, to the
effect that, as of that date, based on and subject to the assumptions,
limitations and qualifications set forth in its written opinion, the
consideration to be paid by us for the Arden acquisition was fair to us and the
holders of our Common Stock from a financial point of view. The full text of
DLJ's opinion is attached as Exhibit A to this proxy statement.
DLJ expressed no opinion as to the fair market value of the Series D
Convertible Preferred Stock. DLJ's opinion did not address the relative merits
of the Arden acquisition and the other business strategies considered by the
Board of Directors nor did it address the Board of Directors' decision to
proceed with the Arden acquisition. DLJ's opinion did not constitute a
recommendation to any of our shareholders as to how such shareholder should vote
on Proposal One or any other matters related to the Arden acquisition.
Our company and Conopco determined the consideration to be paid by us
in arm's length negotiations, in which DLJ advised us.
We selected DLJ as our financial advisor because DLJ is an
internationally recognized investment banking firm that has substantial
experience providing strategic advisory services. DLJ was not retained as an
advisor or agent to the our shareholders or any other person. As part of its
investment banking business, DLJ is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. We did not
impose any restrictions or limitations upon DLJ with respect to the
investigations made or the procedures followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ:
o reviewed a draft dated October 30, 2000 of the Purchase
Agreement and assumed the final form of the Purchase Agreement
would not vary in any material respect to DLJ's analysis;
o reviewed a draft dated October 30, 2000 of our Articles of
Amendment to the Amended and Restated Articles of
Incorporation;
o reviewed financial and other information that was publicly
available or that our company, Conopco and Unilever furnished
to DLJ, including information provided during discussions with
their respective managements. Included in the information
provided during discussions with our management were certain
financial projections of the Arden business for the period
beginning the fourth quarter of fiscal 2001 and ending the
fourth quarter of fiscal 2010 prepared by our management and
certain financial projections of our company for the period
beginning the fourth quarter fiscal 2001 and ending the fourth
quarter fiscal 2010 prepared by our management;
o compared certain financial and securities data of our company
and certain financial data of the Arden business with various
other companies whose securities are traded in public markets;
o reviewed prices paid in certain other business combinations;
and
o conducted other financial studies, analyses and investigations
as DLJ deemed appropriate for purposes of rendering its
opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by us, Conopco, Unilever or
their respective representatives, or that DLJ otherwise reviewed. DLJ assumed
that we were not aware of any information prepared by us or our other advisors
10
<PAGE>
that might be material to DLJ's opinion had it been made available to DLJ. With
respect to the financial projections supplied to DLJ, DLJ relied on our
representations that the projections were reasonably prepared on the basis
reflecting the best currently available estimates and judgments as to the future
operating and financial performance of our company and the Arden business,
respectively, on both a growth and no-growth basis. DLJ expressed no opinion
with respect to these projections or the assumptions upon which they were based.
DLJ did not assume responsibility for making any independent evaluation of the
assets or liabilities, or for making any independent verification of the
information DLJ reviewed. DLJ relied as to certain tax matters on advice of our
counsel.
DLJ necessarily based its opinion on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of its opinion. DLJ states in its opinion that, although
subsequent developments may affect the conclusions reached in its opinion, DLJ
does not have any obligation to update, revise or reaffirm its opinion unless
requested to do so under its engagement letter with us.
Summary of Financial Analyses Performed by DLJ
The following is a summary of the financial analyses DLJ presented to
the Company's Board of Directors on October 25, 2000 in connection with the
preparation of DLJ's opinion. No company or transaction DLJ used in the analyses
described below is directly comparable to the Company, the Arden business,
Conopco or the contemplated transaction. In addition, mathematical analysis such
as determining the mean or median is not in itself a meaningful method of using
selected company or transaction data. The analyses DLJ performed are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses. The
information summarized in the tables which follow should be read in conjunction
with the accompanying text.
Comparable Publicly Traded Company Analysis. DLJ analyzed the market
values and trading multiples of selected publicly traded fragrance, apparel and
cosmetics companies that DLJ believed were reasonably comparable to the Arden
business. These comparable companies consisted of:
o InterParfums Inc.
o Parlux Fragrances Inc.
o French Fragrances, Inc.
o Jones Apparel Group Inc.
o VF Corporation
o Liz Claiborne Inc.
o Polo Ralph Lauren Corp.
o Alberto-Culver Co.
o Revlon Inc.
In examining these comparable companies, DLJ calculated the enterprise
value of each company as a multiple of its respective: (i) LTM revenue and (ii)
LTM EBITDA and (iii) LTM EBIT. The enterprise value of a company is equal to the
value of its fully diluted common equity plus debt and the liquidation value of
outstanding preferred stock, if any, minus cash and the value of certain other
asses, including minority interests in other entities. LTM means the last
twelve-month period for which financial data for the company at issue has been
reported. EBITDA means earnings before interest expense, taxes, depreciation and
amortization. EBIT means earnings before interest expense and taxes. All
historical data was derived from publicly available sources and all projected
data was obtained from Wall Street research reports where available. DLJ's
analysis of the comparable companies yielded the following multiple ranges:
11
<PAGE>
ENTERPRISE VALUE /
------------------
LTM Revenue LTM EBITDA LTM EBIT
----------- ---------- --------
High 1.0x 7.4x 9.3x
Low 0.9x 5.8x 7.4x
Precedent Merger and Acquisition Transaction Analysis. DLJ reviewed
selected acquisitions involving companies in the fragrance and cosmetics
industries that DLJ believed are reasonably comparable to the merger. These
transactions consisted of:
o Alberto Culver Co. acquisition of St. Ives Laboratories
o L'Oreal acquisition of Maybelline Inc.
o Unilever N.V. acquisition of Helene Curtis Industries Inc.
o Renaissance Cosmetics Inc. acquisition of Great American
Cosmetics Inc.
o Renaissance Cosmetics Inc. acquisition of MEM Company
o Renaissance Cosmetics Inc. acquisition of certain Procter &
Gamble Co. brands
o LVMH Moet Hennessey L.V. acquisition of Sephora
o Estee Lauder Co. acquisition of Aveda Corporation
o Antonio Puig Inc. acquisition of Nina Ricci SA
o French Fragrances, Inc. acquisition of J.P. Fragrances, Inc.
o Artemis (PPR) acquisition of Sanofi SA - Beauty Products
o Oriflame Trading Co. acquisition of Oriflame International SA
o LVMH Moet Hennessey L.V. minority investment in InterParfums
Inc.
o Tupperware Corp. acquisition of BeutiControl Cosmetics Inc.
In examining these acquisitions, DLJ calculated the enterprise value of
the acquired company implied by each of these transactions as a multiple of LTM
revenue, LTM EBITDA and LTM EBIT. DLJ's analysis of these comparable
acquisitions yielded the following multiple ranges:
ENTERPRISE VALUE /
------------------
LTM Revenue LTM EBITDA LTM EBIT
----------- ---------- --------
High 1.4x 9.0x 11.0x
Low 0.7x 5.0x 6.0x
12
<PAGE>
Discounted Cash Flow Analysis. DLJ performed a Discounted Cash Flow
("DCF") analysis of the projected cash flows of Conopco for the fiscal years
ending January 31, 2002 through January 31, 2010, using projections and
assumptions provided by the management of the Company under base case and no
growth case scenarios. Base and no growth case assumptions include, the closing
of unprofitable operations, a reduction in overhead, and an adjustment for
inter-company sales. Under the no growth case, annual revenues are assumed to
remain unchanged at the fiscal 2001 level. The DCFs for the Arden business were
estimated using discount rates ranging from 13.0% to 15.0%, based on estimates
related to the weighted average costs of capital of the Arden business, and
terminal multiples of estimated EBITDA for the Arden business's fiscal year
ending January 31, 2010 ranging from 5.0 x to 7.0 x.
Pro Forma Financial Impact Analysis. Using projections provided by the
management of the Company and Conopco, DLJ compared the projected EPS and cash
EPS of the Company for 2001 and 2002 on a stand-alone basis to the projected pro
forma EPS and cash EPS for 2001 and 2002 of the combined company after the
acquisition. EPS means earnings per share. This analysis showed that with
synergies, the acquisition would be dilutive to EPS and cash EPS in 2001 and
accretive to EPS and cash EPS in 2002.
The summary set forth above does not purport to be a complete
description of the analyses performed by DLJ but describes the material elements
of the presentation that DLJ made to our Board of Directors board on October 25,
2000 in connection with the preparation of DLJ's fairness opinion. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. DLJ conducted each of the
analyses in order to provide a different perspective on the transaction and to
add to the total mix of information available. DLJ did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, DLJ considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. DLJ did not place any particular reliance or weight
on any individual analysis, but instead concluded that its analyses, taken as a
whole, supported its determination. Accordingly, notwithstanding the separate
factors summarized above, DLJ has indicated to the Company that it believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The analyses DLJ performed are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by these analyses.
13
<PAGE>
Engagement Letter
Pursuant to the terms of an engagement agreement dated October 30,
2000, we have agreed to pay a fee that is customary in transactions of this
nature, a substantial portion of which is contingent upon the consummation of
the Arden acquisition. In addition, we agreed to indemnify DLJ and certain
related persons against certain liabilities in connection with its engagement,
including liabilities under U.S. federal securities laws. DLJ and our company
negotiated the terms of the fee arrangement. In addition, Credit Suisse First
Boston Corporation (of which DLJ is now a part) and its affiliates will receive
customary fees for their assistance in connection with the financing of the
Arden acquisition.
Other Relationships
In the ordinary course of business, DLJ and its affiliates may own or
actively trade our securities or Unilever's securities, for their own accounts
and for the accounts of their customers and, accordingly, may at any time hold a
long or short position in our or Unilever's securities. DLJ or certain of its
affiliates have, with Fleet National Bank and its affiliates, provided us with a
$160.0 million bridge loan commitment and a $175.0 million senior secured credit
facility commitment to fund the consummation of the Arden acquisition, and are
advising us with respect to our permanent financing.
SELECTED FINANCIAL DATA
We derived the selected financial data presented below from our audited
consolidated financial statements, unless otherwise indicated. The following
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements, and the notes related thereto, included
as Exhibit C-1 and Exhibit C-2 to this proxy statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
YEAR ENDED JANUARY 31, OCTOBER 31,
---------------------- -----------
1996 1997 1998 1999 2000 1999 2000
-------- --------- --------- --------- --------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net Sales.......................... $ 87,979 $ 140,482 $ 215,487 $ 309,615 $ 361,243 $270,963 $296,046
Gross profit....................... 21,639 46,078 68,978 88,493 125,114 95,633 102,709
Income from Operations............. 8,419 18,222 31,457 38,684 44,947 32,927 34,902
------ ------- ------- ------- ------- ------- -------
Net Income......................... $3,007 $ 8,248 $12,341 $12,006 $15,329 $11,292 $12,836
====== ======= ======= ======= ======= ======= =======
SELECTED PER SHARE DATA:
Earnings per common share:
Basic.............................. $ 0.40 $ 0.71 $ 0.92 $ 0.87 $ 1.11 $ .82 $ .97
------ ------- ------ ------ ------ ------ ------
Diluted............................ $ 0.35 $ 0.60 $ 0.76 $ 0.73 $ 0.99 $ .72 $ .85
====== ======= ====== ====== ====== ====== ======
Weighted average.....................
Number of common shares:
Basic.............................. 7,548 11,647 13,394 13,775 13,801 13,823 13,244
Diluted............................ 8,518 13,831 16,492 16,729 15,577 15,756 15,133
OTHER DATA:
EBITDA (1)......................... $9,738 $ 21,885 $36,195 $46,179 $56,113 $41,218 $43,760
Net cash provided by (used in)
operating Activities............. 5,179 (23,221) (40,729) (36,948) 31,971 (35,354) (41,942)
Net cash used in investing activities (17,983) (21,117) (7,392) (11,142) (3,699) (3,039) (4,213)
Net cash provided by (used in)
financing Activities............. 12,282 45,070 54,932 46,534 (12,239) 36,983 26,121
AS OF JANUARY 31, AS OF
----------------- -----
1996 1997 1998 1999 2000 OCTOBER 31, 2000
-------- ------- -------- -------- --------- ----------------
(DOLLARS IN MILLIONS)
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Inventories............... $ 25,851$ 67,989 $ 90,426$ 113,306 $ 127,022 $125,986
Working capital........... 8,022 17,734 122,177 157,457 173,005 186,610
Total Assets.............. 71,384 172,378 232,653 294,708 309,632 368,036
Short-term Debt........... 16,713 37,631 -- 5,639 -- 32,140
Long-term Debt, net....... 17,285 37,215 133,785 176,159 175,030 171,427
Redeemable preferred stock 2,000 -- -- -- -- --
Shareholders' equity...... 17,539 44,680 58,626 71,480 82,287 94,582
</TABLE>
14
<PAGE>
(1) EBITDA is defined as income from operations, plus depreciation and
amortization. EBITDA should not be considered as an alternative to operating
income (loss) or net income (loss) (as determined in accordance with generally
accepted accounting principles) as a measure of the Company's operating
performance or to net cash provided by operating, investing and financing
activities (as determined in accordance with generally accepted accounting
principles) as a measure of its ability to meet cash needs. The Company believes
that EBITDA is a measure commonly reported and widely used by investors and
other interested parties in the fragrance industry as a measure of a fragrance
company's operating performance and debt servicing ability because it assists in
comparing performance on a consistent basis without regard to depreciation and
amortization, which can vary significantly depending upon accounting methods
(particularly when acquisitions are involved) or nonoperating factors (such as
historical cost). Accordingly, this information has been disclosed herein to
permit a more complete comparative analysis of the Company's operating
performance relative to other companies in the fragrance industry and of the
Company's debt servicing ability. EBITDA, may not, however, be comparable in all
instances to other similar types of measures used in the fragrance industry.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's business is the manufacturing and marketing of prestige
fragrances and related skin treatment and cosmetic products. The Company markets
its brands principally in the United States to both department stores and mass
market retailers, including such brands as Halston, Halston Z-14, Grey Flannel,
PS Fine Cologne for Men, Design, Casual, Wings by Giorgio Beverly Hills, Ombre
Rose and Faconnable.
The following discussion of the Company's results of operations is
presented for the fiscal years ended January 31, 1998, 1999 and 2000 and the
nine months ended October 31, 1999 and 2000.
RESULTS OF OPERATIONS
GENERAL
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as percentages of net
sales for the period (percentages may not add due to rounding):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED
1998 1999 2000 1999 2000
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.0 71.4 65.3 64.7 65.3
----- ----- ----- ----- -----
Gross profit 32.0 28.6 34.6 35.3 34.7
Warehouse and shipping expenses 3.3 3.8 5.3 4.9 6.5
Selling, general and administrative expenses 11.9 9.9 13.8 15.2 13.4
Depreciation and amortization 2.2 2.4 3.1 3.1 3.0
----- ----- ----- ----- -----
Income from operations 14.6 12.6 12.5 12.1 11.8
Interest expense, net of interest and
other income 5.5 5.6 5.4 5.3 5.0
Litigation settlement expense - 0.5 - -- .3
----- ----- ----- ----- -----
Income before equity in earnings
of unconsolidated affiliate and income taxes 9.1 6.5 7.0 6.8 7.1
Equity in earnings of unconsolidated affiliate 0.1 0.0 0.0 -- --
----- ----- ----- ----- -----
Income before income taxes 9.2 6.5 7.0 6.8 7.1
Provision for income taxes 3.4 2.5 2.8 2.7 2.8
----- ----- ----- ----- -----
Net income 5.8% 4.0% 4.2% 4.1% 4.3%
===== ===== ===== ===== =====
OTHER DATA:
EBITDA margin (1) 16.8% 14.9% 15.5% 15.2% 14.8%
</TABLE>
(1) EBITDA margin represents EBITDA (as defined in Note 1 "Selected Financial
Data") divided by net sales.
15
<PAGE>
Nine Months Ended October 31, 2000 Compared to the Nine Months Ended
--------------------------------------------------------------------
October 31, 1999
----------------
Net Sales. Net sales increased $25.1 million, or 9.3%, to $296.0
million for the nine months ended October 31, 2000, from $271.0 million for the
nine months ended October 31, 1999. The increase in net sales represents
primarily an increase in the volume of products sold to existing customers.
Sales to our top 20 retail accounts increased by 23% over the corresponding
prior-year period. We believe that increased sales during the nine months ended
October 31, 2000 have resulted from the Company's ability to provide its
customers with a larger selection of products and a continuous, direct supply of
products, as well as other value-added services such as category management
services.
Gross Profit. Gross profit increased $7.1 million, or 7.4%, to $102.7
million for the nine months ended October 31, 2000, from $95.6 million for the
nine months ended October 31, 1999, due to the increase in net sales. Gross
margin for the nine months ended October 31, 2000 decreased to 34.7% from 35.3%
for the nine months ended October 31, 1999, primarily due to an increase in the
proportion of sales to the mid-tier department stores and mass market retailers,
which typically generate lower margins, due to the broader mix of products sold
to those customers, but which require less sales support than sales to prestige
department stores.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $6.1 million, or 46.2%, to $19.3 million for the nine months ended
October 31, 2000, from $13.2 million for the nine months ended October 31, 1999.
The increase resulted primarily from an increase in facility, labor and freight
expenses associated with the increased sales, costs associated with the closing
of the Company's promotional set fulfillment center in Allentown, Pennsylvania
(the "Allentown Facility") and the start-up and operation of the Edison
Facility. We were released from all of our lease obligations on the Allentown
Facility in May 2000. Because the Edison Facility was opened in February 2000,
results for the nine months ended October 31, 1999 do not reflect any expenses
associated with that facility.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased $1.6 million, or 3.8%, to $39.7 million for
the nine months ended October 31, 2000, from $41.2 million for the nine months
ended October 31, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 13.4% for the nine months ended October 31,
2000 from 15.2% for the nine months ended October 31, 1999. The decrease in
selling, general and administrative expenses was primarily the result of lower
direct selling and marketing expenses due to the decrease in the proportion of
sales to prestige department stores.
Depreciation and Amortization. Depreciation and amortization increased
$567,000, or 6.8%, to $8.9 million for the nine months ended October 31, 2000,
from $8.3 million for the nine months ended October 31, 1999. The increase was
primarily due to additional investment in tools and molds developed for our
manufactured products.
Interest Expense, Net. Interest expense, net of interest income,
increased $385,000, or 2.7%, to $14.7 million for the nine months ended October
31, 2000, from $14.3 million for the nine months ended October 31, 1999. The
increase was primarily due to an increase in the average debt outstanding under
the credit facility (the "Credit Facility") with Fleet National Bank ("Fleet")
to support working capital needs.
Other Income. During the nine months ended October 31, 2000, we
recognized other income, net of other expenses, of $875,000, primarily related
to the resolution of insurance claims and the sale of a trademark.
Net Income. Net income increased $1.5 million, or 13.7%, to $12.8
million for the nine months ended October 31, 2000, from $11.3 million for the
nine months ended October 31, 1999. The increase in net income was primarily due
to the increase in net sales and the decrease in selling, general and
administrative expenses, which was partially offset by the increase in warehouse
and shipping expenses.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $2.5 million, or 6.2%, to $43.8 million for the nine months ended
October 31, 2000, from $41.2 million for the nine months ended October 31, 1999.
The EBITDA margin decreased slightly to 14.8% for the nine months ended October
31, 2000, from 15.2% for the nine months ended October 31, 1999. The increase in
EBITDA was primarily due to the increase in net sales and the decrease in
selling, general and administrative expenses, which was partially offset by the
increase in warehouse and shipping expenses. The slight decrease in EBITDA
margin was primarily due to the increase in the proportion of sales to mid-tier
department stores and mass market
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retailers, which typically generate lower margins than sales to prestige
department stores due to the broader mix of products sold to those customers.
Fiscal Year Ended January 31, 2000 Compared to the Fiscal Year Ended
--------------------------------------------------------------------
January 31, 1999
----------------
Net Sales. Net sales increased $51.6 million, or 16.7%, to $361.2
million for the fiscal year ended January 31, 2000, from $309.6 million for the
fiscal year ended January 31, 1999. The increase in net sales was primarily
attributable to an increase in net sales of the brands acquired in connection
with the Paul Sebastian acquisition. The increase in net sales represents both
an increase in the volume of products sold to existing customers (including
through increased sell through of existing products and sales of new products),
as well as sales to new customers. Management believes that increased sales
during the fiscal year ended January 31, 2000 have resulted from our ability to
provide our customers with a larger selection of products and a continuous,
direct supply of products, and the growth in sales of customized gift sets.
Gross Profit. Gross profit increased $36.6 million, or 41.4%, to $125.1
million for the fiscal year ended January 31, 2000, from $88.5 million for the
fiscal year ended January 31, 1999. The increase in gross profit and gross
margin (from 28.6% to 34.6%) was primarily attributable to the increase in
product sales of the higher margin brands acquired in connection with the Paul
Sebastian acquisition.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $7.4 million, or 62.2%, to $19.2 million for the fiscal year ended
January 31, 2000, from $11.8 million for the fiscal year ended January 31, 1999.
The increase resulted primarily from increased labor and facility expenses
associated with the opening of a promotional set fulfillment center in
Pennsylvania in July 1999, the increased sales volume and an increase in
inventory reserves.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $19.3 million, or 63.4%, to $49.8 million for
the fiscal year ended January 31, 2000, from $30.5 million for the fiscal year
ended January 31, 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 9.9% for the fiscal year ended January
31, 1999 to 13.8% for the fiscal year ended January 31, 2000. Of the increase in
selling, general and administrative expenses, $15.9 million represented an
increase in selling and marketing expenses (including advertising co-op, gifts
with purchase and salary support programs), 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 Paul Sebastian
acquisition. General and administrative expenses for the fiscal year ended
January 31, 2000 increased $3.4 million primarily as a result of the addition of
information systems and financial personnel and an increase in the accounts
receivable reserves.
Depreciation and Amortization. Depreciation and amortization increased
$3.7 million, or 49.0%, to $11.2 million for the fiscal year ended January 31,
2000, from $7.5 million for the fiscal year ended January 31, 1999. The increase
was primarily attributable to the amortization of intangibles acquired in
connection with the Paul Sebastian acquisition and our acquisition of the
license for Wings by Giorgio Beverly Hills in November 1998. These intangibles
are being amortized over a five-year period.
Interest Expense, Net. Interest expense, net of interest income,
increased approximately $723,000, or 3.9%, to $19.4 million for the fiscal year
ended January 31, 2000, from $18.7 million for the fiscal year ended January 31,
1999. 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% Series C Senior. See Note 5 to Exhibit C-1 Notes to the Consolidated
Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $9.9 million, or 21.5%, to $56.1 million for the fiscal year ended
January 31, 2000, from $46.2 million for the fiscal year ended January 31, 1999.
EBITDA margin increased to 15.5% for the fiscal year ended January 31, 2000,
from 14.9% for the fiscal year ended January 31, 1999. The increase in EBITDA
and EBITDA margin was primarily attributable to the increase in product sales of
the higher margin brands acquired in connection with the Paul Sebastian
acquisition.
Net Income. Net income increased $3.3 million, or 27.7%, to $15.3
million for the fiscal year ended January 31, 2000, from $12.0 million for the
fiscal year ended January 31, 1999, 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 Paul Sebastian business.
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Fiscal Year Ended January 31, 1999 Compared to the Fiscal Year Ended
--------------------------------------------------------------------
January 31, 1998
----------------
Net Sales. Net sales increased $94.1 million, or 44%, to $309.6 million
for the fiscal year ended January 31, 1999, from $215.5 million for the fiscal
year ended January 31, 1998. The increase in net sales was primarily
attributable to an increase in net sales of brands distributed by us on a
non-exclusive basis. The proportion of the our net sales of such brands
increased significantly as a result of our acquisition of certain assets of JPF
during the fiscal year ended January 31, 1999. The increase in net sales
represents both an increase in the volume of products sold to existing customers
(including through increased sell through of existing products and sales of new
products), as well as sales to new customers. Management believes that increased
sales during the fiscal year ended January 31, 1999 resulted primarily from our
ability to provide our customers with a larger selection of products and a
continuous, direct supply of products, and the growth in sales of customized
gift sets.
Gross Profit. Gross profit increased $19.5 million, or 28%, to $88.5
million for the fiscal year ended January 31, 1999, from $69.0 million for the
fiscal year ended January 31, 1998. The increase in gross profit was primarily
attributable to the increase in net sales of the brands distributed by us on a
non-exclusive basis. Gross margins decreased from 32.0% to 28.6%, primarily as a
result of a proportionally larger increase in sales of brands distributed by us
on a non-exclusive basis, which typically sell at lower margins than brands we
manufacture or license.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $4.6 million, or 63.5%, to $11.8 million for the fiscal year ended
January 31, 1999, from $7.2 million for the fiscal year ended January 31, 1998.
The increase resulted primarily from an increase in freight and labor costs,
which were associated with the increase in net sales and the production of
customized gift sets, and an increase in inventory reserves.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $4.9 million, or 19.3%, to $30.5 million for
the fiscal year ended January 31, 1999, from $25.6 million for the fiscal year
ended January 31, 1998. Of the increase in selling, general and administrative
expenses, approximately $3.2 million represented an increase in selling expenses
largely as a result of steps taken by us to increase the sell-through of our
products through salary support programs with retailers and market specialists
and to shift advertising and promotional expenses into market and
retailer-specific advertising co-op and gift-with-purchase programs. General and
administrative expenses for the fiscal year ended January 31, 1999 increased by
approximately $1.7 million primarily as a result of the addition of
administrative personnel (including information systems personnel) and increased
legal costs. As a percentage of net sales, selling, general and administrative
expenses decreased from 11.9% in fiscal 1998 to 9.9% in fiscal 1999.
Depreciation and Amortization. Depreciation and amortization increased
$2.8 million, or 58.2%, to $7.5 million for the fiscal year ended January 31,
1999, from $4.7 million for the fiscal year ended January 31, 1998. The increase
was primarily attributable to the amortization of intangibles acquired in
connection with the acquisition of JPF Fragrances and of additional intangibles
and other assets acquired from Fragrance Marketing Group, Inc., and increased
depreciation from (I) computer software and equipment relating to our new
information systems, and (ii) capital projects for improvement of warehouse
operations.
Interest Expense, Net. Interest expense, net of interest income,
increased $6.3 million, or 50.8%, to $18.7 million for the fiscal year ended
January 31, 1999, from $12.4 million for the fiscal year ended January 31, 1998.
This increase was primarily due to an increase in average debt outstanding
resulting from the April 1998 Note Offering of $40 million principal amount of
10 3/8% Series C Senior Notes, which were used to provide long-term working
capital financing and to finance the acquisition of JPF Fragrances. See Note 5
to Exhibit C-1 Notes to the Consolidated Financial Statements. We had interest
income of approximately $91,000 for fiscal 1999, compared to approximately
$424,000 for fiscal 1998.
Other Income and Expense. During the fiscal year ended January 31,
1999, we had a one-time litigation settlement expense of $1.5 million, partially
offset by other income of $933,000 relating to the sale of a purchase option on
a warehouse and office facility that we formerly leased and an intangible right
acquired in connection with the acquisition of certain Halston brands. See Notes
6 and 8 to Exhibit C-1 Notes to Consolidated Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $10.0 million, or 28%, to $46.2 million for the fiscal year ended
January 31, 1999, from $36.2 million for the fiscal year ended January 31, 1998.
EBITDA margin decreased to 14.9% for the fiscal year ended January 31, 1999,
from 16.8% for the fiscal year ended January 31, 1998. The increase in EBITDA
was primarily the result of an increase in gross profit and a decrease in SG&A
expenses as a percentage of net sales. The decrease in EBITDA margin was
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primarily attributable to a decrease in gross margin resulting from the changing
mix of sales following the acquisition of JPF Fragrances and an increase in
warehouse and shipping expenses.
Net Income. Net income decreased $0.3 million, or 2.7%, to $12.0
million for the fiscal year ended January 31, 1999, from $12.3 million for the
fiscal year ended January 31, 1998, primarily as a result of the increase in
interest expense, the one-time litigation settlement expense and the decrease in
EBITDA margin, partially offset by an increase in net sales.
SEASONALITY
The fragrance operations of the Company have historically been
seasonal, with higher sales generally occurring in the second half of the fiscal
year as a result of increased demand by retailers in anticipation of and during
the holiday season. In fiscal 2000, 68% of the Company's net sales were made
during the second half of the fiscal year. Due to the size and timing of certain
orders from its customers, sales and results of operations can vary
significantly between quarters of the same and different years. As a result, the
Company expects to experience variability in net sales and net income on a
quarterly basis.
The Company's working capital borrowings are also seasonal, and are
normally highest in the months of September, October and November. During the
fourth fiscal quarter ending January 31, significant cash is normally generated
as customer payments on holiday season orders are received.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. During the fiscal year ended January 31, 2000, the Company
generated $32.0 million in net cash from operations. Of that amount, $7.0
million was generated primarily from a reduction in inventory and an increase in
accounts payable, and the remaining $25.0 million from operating cash flows. The
Company used $3.7 million of the cash it generated to purchase property and
equipment. The Company also used $12.2 million it generated for financing
activities, including the repayment of $5.6 million outstanding under its credit
facility, the retirement of $1.6 million of long-term debt, and the repurchase
of $5.7 million of its common stock under its share repurchase program. The
remaining $16.0 million was held in short-term investments and increased the
cash and cash equivalents on hand to $22.1 million at the end of the fiscal year
ended January 31, 2000.
Excluding the effects of acquisitions, during the fiscal year ending
January 31, 1999, the Company generated $1.2 million in net cash from
operations. The Company generated $19.7 million from operating cash flows, and
used $5.0 million to increase inventories and an additional $13.5 million
primarily to reduce accounts payable. The remaining $1.2 million, coupled with
cash on hand, was used to make $2.6 million in property and equipment purchases.
The Company also received $46.5 million from financing activities, including
$41.5 million in proceeds from its April 1998 note offering, and used those
proceeds to fund the acquisition of JPF Fragrances.
The Company used $41.9 million of net cash for operations during the
nine months ended October 31, 2000, compared to using $35.4 million of net cash
for operations during the nine months ended October 31, 1999. The increase in
net cash used for operating activities is primarily due to decreases in trade
and other payables, partially offset by decreases in inventory, receivables and
prepaid expenses relative to the corresponding prior-year period. The Company
received $26.1 million in net cash from financing activities during the nine
months ended October 31, 2000, compared to $37.0 million in net cash from
financing activities during the nine months ended October 31, 1999, primarily as
a result of decreased borrowings under the Credit Facility, which were partially
offset by its repurchase of certain convertible subordinated debentures,
repurchase of Common Stock and repayment of other indebtedness.
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Credit Facility. The Company's Credit Facility with Fleet provides for
borrowings on a revolving basis of up to $50 million (with a $10 million
sublimit for commercial letters of credit) for general corporate purposes,
including working capital needs and acquisitions, subject to certain borrowing
base limitations. On October 12, 2000, the Credit Facility was amended to
provide for a seasonal increase in the borrowing limit to $65 million through
December 31, 2000. The Credit Facility matures in May 2002. The Company's
borrowing availability under the Credit Facility is limited to the sum of
between 80% to 85% of eligible accounts receivable and 50% of eligible inventory
(up to a maximum of $25 million). The Company's existing collateral base is more
than adequate to cover the collateral requirements of the Credit Facility and
management believes, based on discussions with Fleet, that, if necessary, the
excess collateral could be used to increase the borrowing availability under the
Credit Facility to fund acquisitions or for additional working capital
requirements. The Credit Facility restricts the Company's ability to incur
additional non-trade debt (with certain exceptions, including indebtedness not
exceeding $50 million for a fiscal year issued in connection with certain asset
purchases), and to enter into certain acquisitions, mergers, investments and
affiliated transactions, and prohibits the payment of dividends on the Company's
capital stock, certain payments on its subordinated debt and the sale of the
Company's interest in its subsidiaries. At October 31, 2000, we had $31.0
million outstanding under the Credit Facility and approximately $1.0 million of
outstanding letters of credit.
Long-Term Debt. At January 31, 2000, the Company had outstanding $155
million principal amount of 10 3/8% Series B and D Senior Notes due 2007. The
Series B and Series D Senior Notes require interest- only payments semi-annually
until maturity. The Indentures pursuant to which the Series B Senior Notes and
the Series D Senior Notes were issued generally permit the Company (subject to
the satisfaction of a fixed charge covenant ratio and, in certain cases, also a
net income test) to incur additional indebtedness, pay dividends, purchase or
redeem capital stock of the Company, or redeem subordinated indebtedness. See
Note 5 to Exhibit C-1 Notes to Consolidated Financial Statements. In addition,
the Indentures do not limit the amounts which can be borrowed by the Company
under any credit facility.
At January 31, 2000, the Company had outstanding $4.8 million
aggregate principal amount of 7.5% Convertible Subordinated Debentures due 2006
(the "7.5% Convertible Debentures"). See Note 5 to Exhibit C-1 to Consolidated
Financial Statements. The 7.5% Convertible Debentures are convertible at any
time at $7.20 per share into shares of Common Stock, and are redeemable at par
at any time commencing July 22, 1999 at the option of the Company, but only in
the event the Common Stock, at the time a redemption notice is delivered by the
Company, has been trading at not less than $14.40 for 20 consecutive trading
days. The 7.5% Convertible Debentures are due June 30, 2006 and require
interest-only payments semi-annually until maturity, at which time the entire
unpaid principal amount and any unpaid accrued interest is due and payable. In
February 2000, the Company repurchased $2.18 million principal amount of 7.5%
Convertible Debentures owned by its Chairman and a company he controls for an
aggregate purchase price of $2.65 million. 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
(based on the $8.81 price of the Common Stock on the date of repurchase) that
the debenture holder could have recognized upon a conversion and sale of the
7.5% Convertible Debentures into Common Stock. See Note 8 to Exhibit C-1 Notes
to Consolidated Financial Statements. At January 31, 2000, the Company also had
outstanding $6.5 million aggregate principal amount of 8.5% Subordinated
Debenture (the "8.5% Debenture"). See Note 5 to Exhibit C-1 Notes to
Consolidated Financial Statements. The 8.5% Debenture requires mandatory annual
principal repayments in the aggregate amount of $2.17 million on May 2002, 2003
and 2004.
Share Repurchases. In fiscal 2000, the Company's Board authorized a
share repurchase program that allows the Company to purchase up to an aggregate
of $10 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 or in privately-negotiated transactions, depending on market conditions
and other factors. As of October 31, 2000, the Company had repurchased an
aggregate of 995,400 shares of its Common Stock under the share repurchase
program at an average price of $6.64. In connection with the Company's February
2000 repurchase of the 7.5% Convertible Debentures owned by the Company's
Chairman and a company he controls, the right to convert those debentures into
303,333 shares of Common Stock was extinguished.
Future Liquidity and Capital Needs. The Company has historically
financed, and expects to continue to finance, its internal growth and
acquisitions primarily through internally generated funds, its Credit Facility
and external financing. The Company's principal future uses of funds are for
working capital requirements, debt service and additional brand acquisitions or
product distribution arrangements. As a result of several acquisitions during
the past five years, the growth in direct distribution relationships for
additional fragrance brands and certain favorable product buying opportunities,
the Company's working capital needs have increased significantly. Nevertheless,
the Company believes that internally generated funds and available financing
under the Credit Facility will be sufficient to cover the Company's working
capital and debt service requirements for at least the next twelve months, other
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than any additional working capital requirements which may result from further
expansion of the Company's operations through acquisitions of brands or new
product distribution arrangements.
The Company has discussions from time to time with manufacturers of
prestige fragrance brands and with distributors that hold exclusive distribution
rights regarding possible acquisitions by the Company of additional exclusive
manufacturing and/or distribution rights. The Company currently has no
agreements or commitments with respect to any such acquisition, although it
periodically executes routine agreements to maintain the confidentiality of
information obtained during the course of discussions with manufacturers and
distributors. There is no assurance that the Company will be able to negotiate
successfully for any such future acquisitions or that it will be able to obtain
acquisition financing or additional working capital financing on satisfactory
terms for further expansion of its operations.
The Company's future liquidity will continue to be dependent upon its
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally short-term debt, accrued
expenses and accounts payable). Additional inventory requirements and accounts
receivable can have a significant impact on the Company's liquidity,
particularly during expansion. To date, the Company generally has not
experienced any material adverse problems with the collection of accounts
receivable relating to its fragrance operations. There can be no assurance that
refusals to pay or delays in payment would not have a material adverse effect on
the Company's liquidity, results of operations and general financial condition
in the future. The Company establishes reserves and provides allowances for
returns at the time of sale based upon historical experience, but there can be
no assurance that such reserves and allowances will be adequate.
The characteristics of the Company's business do not generally require
it to make significant ongoing capital expenditures. During the fiscal year
ended January 31, 2000, the Company incurred approximately $3.7 million in
capital expenditures, primarily relating to computer software and hardware costs
and the purchase of warehouse and manufacturing equipment. The Company
anticipates that its capital expenditures for the fiscal year ended January 31,
2001 will be approximately $5.0 million.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we are materially at risk relating to interest
rate, foreign currency exchange rate or commodity price risks fluctuations. The
only debt instrument of our company that is subject to interest rate
fluctuations is our $65 million credit facility. While inflation likely would
increase the interest rates that the we pay on our credit facility, based on the
amounts and projected utilization of the credit facility, we do not anticipate
that any such increase would be material to its results of operations. Further,
all of our purchases of fragrances and related cosmetic products from foreign
suppliers are in U.S. dollars, which avoids foreign currency exchange rate
risks. Moreover, while our 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 material to our results of operations.
We do not believe that we experienced any material change in our market risk
relating to interest rate, foreign currency exchange rate or commodity price
risks fluctuations during the fiscal year ended January 31, 2000 and the nine
months ended October 31, 2000.
COMMON STOCK OWNERSHIP FOLLOWING THE ARDEN ACQUISITION
Upon consummation of the Arden acquisition, and assuming Proposal One
is approved, Conopco will own shares of Series D Convertible Preferred Stock and
Acquisition Warrants (if any) convertible into or exchangeable for, when fully
vested, an aggregate of 4,166,667 shares of Common Stock, representing
approximately 24% of the total number of shares outstanding immediately after
the closing of the Arden acquisition (assuming no change in the number of issued
and outstanding shares of Common Stock prior to the closing and without regard
to any Financing Warrants that will be issued). Assuming the earlier conversion
of all outstanding shares of Series B convertible preferred stock and Series C
convertible preferred stock, which have been called for redemption on December
29, 2000 by our company, Conopco's ownership would represent approximately 21%
of the total number of shares outstanding. However, the holders of the Series D
Convertible Preferred Stock may only convert up to 33.33% of the shares of
Series D Convertible Preferred Stock beginning on the first anniversary of the
initial issuance date, 66.66% of the shares of Series D Convertible Preferred
Stock beginning on the second anniversary of the initial issuance date and all
of the shares of Series D Convertible Preferred Stock on and after the third
anniversary of the initial issuance date.
REQUIRED APPROVALS
We are required to comply with the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, in connection with the Arden
acquisition. We filed our Notification and Report Form with the Federal Trade
Commission and the Department of Justice on November 21, 2000. In addition, we
are required to obtain regulatory approval from the appropriate authorities in
South Africa and South Korea in order to transfer the assets of the Arden
business located in that jurisdiction, however, the receipt of such approval is
not a condition to the closing of the Arden acquisition.
VOTE REQUIRED
Proposal One will be approved if the number of votes cast for the
proposal represents the affirmative vote of a majority of all the issued and
outstanding shares of Common Stock entitled to vote thereon and represented at
the Special Meeting. Abstentions will be counted as votes against the proposal
and broker non-votes will not be counted as votes for or against the proposal.
Pursuant to certain Shareholder Voting Agreements dated as of October 30, 2000
between Conopco and certain of our shareholders, shareholders representing in
the aggregate over 50% of the outstanding shares of Common Stock have agreed to
vote all of such shares of Common Stock to approve Proposal One. Accordingly,
approval of Proposal One is assured.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
PROPOSAL ONE.
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PROPOSAL TWO-- AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO CHANGE OUR CORPORATE NAME
Our Board of Directors has approved a resolution amending Article I of
our Amended and Restated Articles of Incorporation, as amended, to change our
corporate name from French Fragrances, Inc. to Elizabeth Arden, Inc., subject to
the consummation of the Arden acquisition. At the Special Meeting, shareholders
will consider and vote on this proposed amendment. If approved, Proposal Two
will become effective upon the filing of Articles of Amendment to the Amended
and Restated Articles of Incorporation with the Secretary of State of Florida,
which is expected to occur immediately following the closing of the Arden
acquisition. The text of the proposed amendment is as follows:
"Article 1 Name - The name of the corporation is Elizabeth Arden, Inc.
(the "Corporation")."
REASONS FOR THE PROPOSAL
As described above, in connection with the Arden acquisition, we have
agreed to purchase the Arden business from Conopco. Among the assets we will be
acquiring are the trademarks and trade names relating to the Elizabeth Arden
fragrance, skin care and cosmetic brands, including, most significantly, the
name "Elizabeth Arden." The Elizabeth Arden name has been around for over 85
years and is known throughout the world as one of the leading brands of prestige
beauty products. The Elizabeth Arden lines represent the largest portion of the
assets of the Arden business, and will account for the largest component of the
sales of our company following the Arden acquisition. Because the Arden business
and operations are conducted worldwide, we will significantly expand our
international sales and operations as a result of the Arden acquisition.
Accordingly, the Board of Directors believes that the name Elizabeth
Arden, Inc. will be more reflective of our future activities and focus. The
costs necessary to implement the name change are not expected to be material and
our shareholders will not need to exchange their present stock certificates.
Stock certificates issued following the Arden acquisition and approval of
Proposal Two will reflect the new name of our company.
VOTE REQUIRED
The proposed amendment will be approved if the number of votes cast for
the amendment represents the affirmative vote of a majority of all the issued
and outstanding shares of Common Stock entitled to vote and represented at the
Special Meeting. Abstentions will be counted as votes against the proposal and
broker non-votes will not be counted as votes for or against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL
TWO.
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PROPOSAL THREE -- APPROVAL OF THE 2000 STOCK INCENTIVE PLAN
GENERAL
In connection with the substantial expansion of our operations, both in
the United States and internationally, associated with the Arden acquisition, we
will need to attract a significant number of additional management personnel and
key employees both from the Arden business being acquired and from other
sources. We will also need to properly reward our existing key employees for the
work they have performed for us, as reflected in the growth of our business. The
Board believes that it will be able to attract new personnel and maintain the
existing core of key employees together, without significantly altering its
executive salary structure through the direct grant of, or through the
opportunity of such persons to obtain, long-term incentive compensation.
Our existing plan for incentive compensation is the 1995 Stock Option
Plan (the "1995 Plan"). The 1995 Plan provides for the grant of stock options to
key employees and consultants for up to 2,200,000 shares of Common Stock. No
other types of performance-based awards are issuable under the 1995 Plan. Since
the inception of the 1995 Plan, the Compensation Committee of the Board of
Directors has granted stock options for the maximum number of shares of Common
Stock authorized for grant and no additional grants are possible without
amending such plan and obtaining shareholder approval. The Compensation
Committee and the Board of Directors believe that the 1995 Plan is too
restrictive with respect to the types of performance-based awards that are
permitted. Accordingly, the Board of Directors has elected to not to further
amend the 1995 Plan and in its place has adopted a more comprehensive plan that
will provide us with the necessary flexibility to accomplish our personnel
compensation and retention goals.
The Board of Directors has approved our 2000 Stock Incentive Plan (the
"Plan"), subject to shareholder approval. The Plan is intended to provide
incentives which will attract, retain and motivate highly competent persons as
officers and employees of, and consultants and advisors to, our company and our
subsidiaries and affiliates, by providing them opportunities to acquire shares
of our Common Stock, or to receive monetary payments based on the value of such
shares as described in the Plan (collectively, "Benefits" as defined below).
Additionally, the Plan is intended to assist in further aligning the interests
of our officers, employees, consultants and advisors to, those of our other
shareholders. Pursuant to the Plan, we may grant options with respect to an
aggregate of up to 3,000,000 shares of Common Stock, with no individual optionee
to receive in excess of 1,000,000 shares of Common Stock from Benefits granted
under the Plan. The following summary of the Plan is not intended to be complete
and is qualified in its entirety by reference to the Plan, which is attached as
Exhibit E to this Proxy Statement.
SUMMARY OF THE PLAN
Administration. The Plan will be administered by a stock option
committee of the Board of Directors (the "Committee"), which is comprised of not
less than two members who shall be (i) "Non-Employee Directors" within the
meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the
Securities Exchange Act of 1934, as amended, and (ii) "outside directors" within
the meaning of Treasury Regulation ss. 1.162-27(e)(3) under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"). The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such action in
connection with the Plan and any Benefits granted as it deems necessary or
advisable. Thus, among the Committee's powers are the authority to select
officers and other employees of, and consultants and advisors to, us and our
subsidiaries to receive Benefits, and to determine the form, amount and other
terms and conditions of Benefits, the timing of any grants, the number of shares
subject to each award, the period of exercisability, the designation of options
as ISOs or NSOs (as defined herein) and the other terms and provisions thereof.
The current members of the Committee are Fred Berens and George Dooley.
Eligibility. Options may be granted to officers and employees of, and
consultants and advisors to, our company and our subsidiaries and affiliates as
the Committee in its sole discretion determines to be significantly responsible
for our success and future growth and profitability.
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Type of Benefits. Benefits under the Plan may be granted in any one or
a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Awards and (e) Stock Units (each as described in the
Plan, and collectively, the "Benefits"). Stock Awards, Performance Awards, and
Stock Units may, as determined by the Committee in its discretion, constitute
Performance-Based Awards, as described in Section 11 of the Plan. Benefits shall
be evidenced by agreements (which need not be identical) in such forms as the
Committee may from time to time approve; provided, however, that in the event of
any conflict between the provisions of the Plan and any such agreements, the
provisions of the Plan shall prevail. Benefits may be granted singly, in
combination, or in tandem as determined by the Committee.
Stock Options. Under the Plan, the Committee may grant awards in the
form of options to purchase shares of Common Stock. Options may either be
incentive stock options ("ISOs"), qualifying for special tax treatment, or
non-qualified options. The Committee will, with regard to each stock option,
determine the number of shares subject to the option, the manner and time of the
option's exercise (but in no event later than ten years after the date of grant)
and vesting, and the exercise price per share of stock subject to the option;
however, the exercise price shall not be less than 100% of the fair market value
of the Common Stock as reflected by the closing price of the Common Stock on the
date the stock option is granted (the "Fair Market Value"). The exercise price
may be paid in cash or, in the discretion of the Committee, by the delivery of
shares of our Common Stock then owned by the participant, or by delivery to us
of (x) irrevocable instructions to deliver directly to a broker the stock
certificates representing the shares for which the Option is being exercised,
and (y) irrevocable instructions to such broker to sell such shares for which
the Option is being exercised, and promptly deliver to us the portion of the
proceeds equal to the Option exercise price and any amount necessary to satisfy
our obligation for withholding taxes, or any combination thereof. For purposes
of making payment in shares of Common Stock, such shares shall be valued at
their Fair Market Value on the date of exercise of the Option and shall have
been held by the Participant for at least six months. The Committee may
prescribe any other method of paying the exercise price that it determines to be
consistent with applicable law and the purpose of the Plan, including, without
limitation, in lieu of the exercise of a Stock Option by delivery of shares of
Common Stock then owned by a participant, providing us with a notarized
statement attesting to the number of shares owned, where upon verification by
us, we would issue to the participant only the number of incremental shares to
which the participant is entitled upon exercise of the Stock Option or by us
retaining from the shares of Common Stock to be delivered upon the exercise of
the Stock Option that number of shares having a Fair Market Value on the date of
exercise equal to the option price of the number of shares with respect to which
the Participant exercises the Stock Option.
In the case of ISOs, however, the exercise price per share of ISOs
granted to any holder of our capital stock (or any subsidiary or parent
corporation) representing 10% or more of our voting power (or any subsidiary or
parent corporation ) will be in an amount that the Committee determines, in its
good faith judgement, to be not less than 110% of the Fair Market Value of the
Common Stock on the date the ISO is granted.
Options granted under the Plan are exercisable at such times, in such
amounts and during such period or periods as the Committee may determine at the
date the option is granted, which period or periods will end, at the discretion
of the Committee, not more than 10 years after the date of grant and, in the
case of a person who at the date of grant owns our capital stock (or the capital
stock of any subsidiary or parent corporation) representing 10% or more of our
voting power (or the voting power of any subsidiary or parent corporation), not
more than five years from the date of grant. Except as otherwise provided under
the Internal Revenue Code of 1986, as amended (the "Code"), to the extent that
the aggregate fair market value of shares subject to ISOs (under any of our
plans or the plans of any subsidiary or parent corporation) exercisable for the
first time in any calendar year exceeds $100,000, such excess will be treated as
NSOs (as defined below).
Stock Appreciation Rights (SARs). The Plan authorizes the Committee to
grant an SAR either in tandem with a stock option or independent of a stock
option. An SAR is a right to receive a payment, in cash, Common Stock, or a
combination thereof, equal to the excess of (x) the Fair Market Value, or other
specified valuation (which shall not be greater than the Fair Market Value), of
a specified number of shares of Common Stock on the date the right is exercised
over (y) the fair market value, or other specified valuation (which shall not be
less than Fair Market Value), of such shares of Common Stock on the date the
right is granted, all as determined by the Committee. Each SAR shall be subject
to such terms and conditions as the Committee shall impose from time to time.
Stock Awards. The Committee may, in its discretion, grant Stock Awards
(which may include mandatory payment of bonus incentive compensation in stock)
consisting of Common Stock issued or transferred to participants with or without
other payments therefor. Stock Awards may be subject to such terms and
conditions as the Committee determines appropriate, including, without
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limitation, restrictions on the sale or other disposition of such shares, the
right of the Company to reacquire such shares for no consideration upon
termination of the participant's employment within specified periods, and may
constitute Performance-Based Awards, as described below. The Stock Award shall
specify whether the participant shall have, with respect to the shares of Common
Stock subject to a Stock Award, all of the rights of a holder of shares of
Common Stock, including the right to receive dividends and to vote the shares.
Performance Awards. The Plan allows for the grant of performance awards
which may take the form of shares of Common Stock or stock units, or any
combination thereof and which may constitute Performance-Based Awards. Such
awards will be contingent upon the attainment over a period to be determined by
the Committee of certain performance targets. The length of the performance
period, the performance targets to be achieved and the measure of whether and to
what degree such targets have been achieved will be determined by the Committee.
Payment of earned performance awards will be made in accordance with terms and
conditions prescribed or authorized by the Committee. The participant may elect
to defer, or the Committee may require the deferral of, the receipt of
performance awards upon such terms as the Committee deems appropriate.
Stock Units. The Committee may, in its discretion, grant Stock Units to
participants, which may constitute Performance-Based Awards and which may be
entitled to a Dividend Equivalent Right. A "Stock Unit" means a notional account
representing one share of Common Stock. A "Dividend Equivalent Right" means the
right to receive the amount of any dividend paid on the share of Common Stock
underlying a Stock Unit. The Committee determines the criteria for the vesting
of Stock Units and whether a participant granted a Stock Unit shall be entitled
to Dividend Equivalent Rights (as defined in the Incentive Plan). Upon vesting
of a Stock Unit, unless the Committee has determined to defer payment with
respect to such unit or a participant has elected to defer payment, shares of
Common Stock representing the Stock Units will be distributed to the participant
(unless the Committee provides for the payment of the Stock Units in cash, or
partly in cash and partly in shares of Common Stock, equal to the value of the
shares of Common Stock which would otherwise be distributed to the participant).
Performance-Based Awards. Certain Benefits granted under the Plan may
be granted in a manner such that the Benefit qualifies for the performance-based
compensation exemption to Section 162(m) of the Code ("Performance-Based
Awards"). As determined by the Committee in its sole discretion, either the
granting or vesting of such Performance-Based Awards will be based upon one or
more of the following factors: net sales, earnings, net sales growth, market
share, net operating profit, expense targets, working capital targets relating
to inventory and/or accounts receivable, operating margin, return on equity,
return on assets, planning accuracy, market price per share and total return to
shareholders, or any combination of the foregoing.
With respect to Performance-Based Awards, the Committee shall establish
in writing, (x) the goals applicable to a given period and such performance
goals shall state, in terms of an objective formula or standard, the method for
computing the amount of compensation payable to the participant if such
performance goals are obtained and (y) the individual employees or class of
employees to which such performance-based goals apply no later than 90 days
after the commencement of such period (but in no event after 25% of such period
has elapsed). No Performance-Based Award shall be payable to, or vest with
respect to, as the case may be, any participant for a given fiscal period until
the Committee certifies in writing that the objective performance goals (and any
other material terms) applicable to such period have been satisfied.
Foreign Laws. The Committee may grant Benefits to individual
participants who are subject to the tax laws of nations other than the United
States, which Benefits may have terms and conditions as determined by the
Committee as necessary to comply with applicable foreign laws. The Committee may
take any action which it deems advisable to obtain approval of such Benefits by
the appropriate foreign governmental entity; provided, however, that no such
Benefits may be granted to such individuals and no action may be taken which
would result in a violation of the Exchange Act, the Code or any other
applicable law.
Other Terms of Benefits. The Amended and Restated Incentive Plan
provides that Benefits shall not be transferable other than by will or the laws
of descent and distribution. The Committee shall determine the treatment to be
afforded to a participant in the event of termination of employment for any
reason including death, disability or retirement. Notwithstanding the foregoing,
other than with respect to incentive stock options, the Committee may permit the
transferability of an award by a participant to members of the participant's
immediate family or trusts for the benefit of such person or family
partnerships.
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Upon the grant of any Benefit under the Plan, the Committee may, by way
of an agreement with the participant, establish such other terms, conditions,
restrictions and/or limitations covering the grant of the Benefit as are not
inconsistent with the Plan. No Benefit shall be granted under the Plan after
November 20, 2010. The Committee reserves the right to amend, suspend or
terminate the Plan at any time, subject to the rights of participants with
respect to any outstanding Benefits. No Amendment of the plan may be made
without approval of our shareholders if the amendment will: (i) disqualify any
ISOs granted under the Plan; (ii) increase the total number of shares which may
be issued under the Plan; (iii) increase the maximum number of shares with
respect to stock options, SARs and other Benefits that may be granted to any
individual under the Plan; (iv) change the types of factors on which
Performance-Based Awards are to be based under the plan; or (v) modify the
requirements as to eligibility for participation in the Plan.
The Plan contains provisions for equitable adjustment of Benefits in
the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, reverse stock split, split up, spinoff, combination of
shares, exchange of shares, dividend in kind or other like change in capital
structure or distribution (other than normal cash dividends) to our
shareholders. The Plan contains provisions for the acceleration of
exercisability or vesting of Benefits in the event of a Change in Control of our
company, including the cash settlement of such Benefits.
Certain Federal Income Tax Consequences. The statements in the
following paragraphs of the principal federal income tax consequences of
Benefits under the Plan are based on statutory authority and judicial and
administrative interpretations, as of the date of this Proxy Statement, which
are subject to change at any time (possibly with retroactive effect). The law is
technical and complex, and the discussion below represents only a general
summary.
Incentive Stock Options. ISOs granted under the Plan are intended to
meet the definitional requirements of Section 422(b) of the Code for "incentive
stock options."
An employee who receives an ISO does not recognize any taxable income
upon the grant of such ISO. Similarly, the exercise of an ISO generally does not
give rise to federal income tax to the employee, provided that (i) the federal
"alternative minimum tax," which depends on the employee's particular tax
situation, does not apply and (ii) the employee is employed by us from the date
of grant of the option until three months prior to the exercise thereof, except
where such employment terminates by reason of disability (where the three-month
period is extended to one year) or death (where this requirement does not
apply). If an employee exercises an ISO after these requisite periods, the ISO
will be treated as an NSO (as defined below) and will be subject to the rules
set forth below under the caption "Non-Qualified Stock Options and Stock
Appreciation Rights."
Further, if after exercising an ISO, an employee disposes of the Common
Stock so acquired more than two years from the date of grant and more than one
year from the date of transfer of the Common Stock pursuant to the exercise of
such ISO (the "applicable holding period"), the employee will generally
recognize a long-term capital gain or loss equal to the difference, if any,
between the amount received for the shares and the exercise price. If, however,
an employee does not hold the shares so acquired for the applicable holding
period -- thereby making a "disqualifying disposition" -- the employee would
recognize ordinary income equal to the excess of the fair market value of the
shares at the time the ISO was exercised over the exercise price and the
balance, if any, income would be long-term capital gain (provided the holding
period for the shares exceeded one year and the employee held such shares as a
capital asset at such time). If the disqualifying disposition is a sale or
exchange that would permit a loss to be recognized under the Code (were a loss
in fact to be realized), and the sale proceeds are less than the fair market
value of the shares on the date of exercise, the employee's ordinary income
therefrom would be limited to the gain (if any) realized on the sale.
An employee who exercises an ISO by delivering Common Stock previously
acquired pursuant to the exercise of another ISO is treated as making a
"disqualifying disposition" of Common Stock if such shares are delivered before
the expiration of their applicable holding period. Upon the exercise of an ISO
with previously acquired shares as to which no disqualifying disposition occurs,
despite some uncertainty, it appears that the employee would not recognize gain
or loss with respect to such previously acquired shares.
We will not be allowed a federal income tax deduction upon the grant or
exercise of an ISO or the disposition, after the applicable holding period, of
the Common Stock acquired upon exercise of an ISO. In the event of a
disqualifying disposition, we generally will be entitled to a deduction in an
amount equal to the ordinary income included by the employee, provided that such
amount constitutes an ordinary and necessary business expense to us and is
reasonable and the limitations of Sections 280G and 162(m) of the Code
(discussed below) do not apply.
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Non-Qualified Stock Options and Stock Appreciation Rights.
Non-qualified stock options ("NSOs") granted under the Plan are options that do
not qualify as ISOs. An employee who receives an NSO or an SAR will not
recognize any taxable income upon the grant of such NSO or SAR. However, the
employee generally will recognize ordinary income upon exercise of an NSO in an
amount equal to the excess of the fair market value of the shares of Common
Stock at the time of exercise over the exercise price. Similarly, upon the
receipt of cash or shares pursuant to the exercise of an SAR, the individual
generally will recognize ordinary income in an amount equal to the sum of the
cash and the fair market value of the shares received.
As a result of Section 16(b) of the Exchange Act, under certain
circumstances, the timing of income recognition may be deferred (generally for
up to six months (the "Deferral Period")) for any individual who is an officer
or director of our company or a beneficial owner of more than ten percent (10%)
of any class of our equity securities. Absent a Section 83(b) election (as
described below under "Other Awards"), recognition of income by the individual
will be deferred until the expiration of the Deferral Period, if any.
The ordinary income recognized with respect to the receipt of shares or
cash upon exercise of an NSO or an SAR will be subject to both wage withholding
and other employment taxes. In addition to the customary methods of satisfying
the withholding tax liabilities that arise upon the exercise of an SAR for
shares or upon the exercise of an NSO, we may satisfy the liability in whole or
in part by withholding shares of Common Stock from those that otherwise would be
issuable to the individual or by the employee tendering other shares owned by
him or her, valued at their fair market value as of the date that the tax
withholding obligation arises.
A federal income tax deduction generally will be allowed to us in an
amount equal to the ordinary income included by the individual with respect to
his or her NSO or SAR, provided that such amount constitutes an ordinary and
necessary business expense to us and is reasonable and the limitations of
Sections 280G and 162(m) of the Code do not apply.
If an individual exercises an NSO by delivering shares of Common Stock,
other than shares previously acquired pursuant to the exercise of an ISO which
is treated as a "disqualifying disposition" as described above, the individual
will not recognize gain or loss with respect to the exchange of such shares,
even if their then fair market value is different from the individual's tax
basis. The individual, however, will be taxed as described above with respect to
the exercise of the NSO as if he or she had paid the exercise price in cash and
we likewise generally will be entitled to an equivalent tax deduction.
Other Awards. With respect to other Benefits under the Plan that are
settled either in cash or in shares of Common Stock that are either transferable
or not subject to a substantial risk of forfeiture (as defined in the Code and
the regulations thereunder), employees generally will recognize ordinary income
equal to the amount of cash or the fair market value of the Common Stock
received.
With respect to Benefits under the Plan that are settled in shares of
Common Stock that are restricted to transferability or subject to a substantial
risk of forfeiture -- absent a written election pursuant to Section 83(b) of the
Code filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the award (a "Section 83(b) election") -- an
individual will recognize ordinary income at the earlier of the time at which
(i) the shares become transferable or (ii) the restrictions that impose a
substantial risk of forfeiture of such shares lapse, in an amount equal to the
excess of the fair market value (on such date) of such shares over the price
paid for the award, if any. If a Section 83(b) election is made, the individual
will recognize ordinary income, as of the transfer date, in an amount equal to
the excess of the fair market value of the Common Stock as of that date over the
price paid for such award, if any.
The ordinary income recognized with respect to the receipt of cash,
shares of Common Stock or other property under the Plan will be subject to both
wage withholding and other employment taxes.
We generally will be allowed a deduction for federal income tax
purposes in an amount equal to the ordinary income recognized by the employee,
provided that such amount constitutes an ordinary and necessary business expense
and is reasonable and the limitations of Sections 280G and 162(m) of the Code do
not apply.
Dividends and Dividend Equivalents. To the extent Benefits under the
Plan earn dividends or dividend equivalents, whether paid currently or credited
to an account established under the Plan, an individual generally will recognize
ordinary income with respect to such dividends or dividend equivalents.
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Change in Control. In general, if the total amount of payments to an
individual that are contingent upon a "change of control" of our company (as
defined in Section 280G of the Code), including payments under the Plan that
vest upon a "change in control," equals or exceeds three times the individual's
"base amount" (generally, such individual's average annual compensation for the
five calendar years preceding the change in control), then, subject to certain
exceptions, the payments may be treated as "parachute payments" under the Code,
in which case a portion of such payments would be non-deductible to us and the
individual would be subject to a 20% excise tax on such portion of the payments
Certain Limitations on Deductibility of Executive Compensation. With
certain exceptions, Section 162(m) of the Code denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year (including any deduction with
respect to the exercise of an NSO or SAR or the disqualifying disposition of
stock purchased pursuant to an ISO). One such exception applies to certain
performance-based compensation provided that such compensation has been approved
by shareholders in a separate vote and certain other requirements are met. If
approved by our shareholders, we believe that Stock Options, SARs and
Performance-Based Awards granted under the Plan should qualify for the
performance-based compensation exception to Section 162(m).
VOTE REQUIRED
The proposal will be approved if the number of votes cast for the
proposal represents the affirmative vote of a majority of all the issued and
outstanding shares of Common Stock entitled to vote thereon and represented at
the Special Meeting. Abstentions will be counted as votes against the proposal
and broker non-votes will not be counted as votes for or against the proposal.
If Proposal Three is approved by the shareholders, the Plan will become
effective immediately following the Special Meeting, regardless of whether or
not Proposals One, Two or Four are approved or the Arden acquisition is
consummated.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
PROPOSAL THREE.
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PROPOSAL FOUR - APPROVAL OF AMENDMENTS TO THE NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
GENERAL
The Directors' Plan was adopted in January 1995 by the board of
directors of a privately-held fragrance distributor ("FFI") and approved by
FFI's shareholders in April 1995. In connection with the merger of FFI into our
company in November 1995 (the "Merger"), we assumed the Directors' Plan. In
March 1996, our Board of Directors adopted, and in June 1996 our shareholders
approved, an amendment to the Directors' Plan to adjust the number of shares
authorized for issuance under the Directors' Plan and the number of shares
issuable under stock option grants upon the initial election and annual
re-election of our non-employee directors to give effect to the conversion rates
of 7.12 shares of our Common Stock for every share of FFI common stock reflected
in the Merger. Currently, options to purchase in the aggregate 200,000 shares of
Common Stock are authorized under the Directors' Plan. As of November 1, 2000,
options to purchase in the aggregate 164,500 shares of Common Stock have been
granted, limiting additional option grants under the Directors' Plan to an
aggregate of 35,500 shares.
Our Board of Directors believes that it is in our best interest to
increase the maximum number of shares of Common Stock available for grant under
the Directors' Plan so as to maintain the purposes of the Directors' Plan, which
is the promotion of the long-term financial interests and growth of our company
by attracting and retaining directors who will be instrumental to the success of
our company, and motivating such persons by means of growth-related incentives.
On November 20, 2000, our Board of Directors adopted, subject to shareholder
approval, an amendment to the Directors' Plan increasing (i) the number of
shares of Common Stock which may be issued pursuant to stock options granted
under the Directors' Plan from 200,000 to 500,000, and (ii) the number of shares
of Common Stock issued pursuant to stock options received upon reelection to the
Board of Directors from 7,500 to 15,000.
Other than the 1996 amendment to reflect the conversion rates agreed to
in the Merger, our compensation to non-employee directors has remained fixed for
over eight years. We pay our non-employee directors an annual fee of $3,000 and
a fee of $500 for each Board of Directors or committee of the Board of Directors
meeting attended (other than committee meetings held on the same date as the
date of a Board of Directors meeting). Our Board of Directors, including
management's representatives on the Board of Directors, believe that
growth-related incentives such as the stock options granted upon re-election are
a greater incentive to continue to attract and retain directors than adjustments
to monetary fees. As a result of our potential acquisition of the Arden
business, we anticipate that we will attract new non-employee directors and that
the composition of our Board of Directors will change. In order to be able to
attract new non-employee directors and to create further incentives to our
current non-employee members of the Board of Directors to continue to provide
guidance to our company, our Board of Directors has approved the amendment to
the Directors' Plan and recommends that shareholders vote for approval of such
amendments.
The following summary of the Directors' Plan is qualified in its
entirety by reference to the full text of the Directors' Plan, as amended and
restated, attached to this Proxy Statement as Exhibit F.
The Directors' Plan is administered by our Board of Directors. The
Directors' Plan provides that each member of our Board who at the time of grant
is not an "employee" of our company or any of its subsidiaries within the
meaning of the Employee Retirement Security Act of 1974, as amended ("ERISA"),
shall be eligible for the grant of stock options under the Directors' Plan.
Currently, Messrs. Berens, Dooley, Thomas and Mauran are eligible for the grant
of stock options under the Directors' Plan. Each eligible director first elected
to the Board after the annual meeting of shareholders will be granted an option
to purchase 7,000 shares of Common Stock provided that a sufficient number of
shares remain available under the Directors' Plan. In addition, each year on the
date of the annual meeting of the shareholders ("Annual Meeting Date") and again
provided that a sufficient number of shares remain available under the
Directors' Plan, there will automatically be granted to each eligible director
who is reelected to the Board an option to purchase 15,000 shares of Common
Stock. Each option granted under the Directors' Plan on an Annual Meeting Date
will become exercisable on the next Annual Meeting Date if such person has
continued to serve as a director until that meeting, while each option granted
other than on an Annual Meeting Date will become exercisable on the first
anniversary of the date the option is granted if such person has continued to
serve as a director until that date. No option may be exercisable after the
expiration of ten years from the date of grant. The exercise price will
represent the fair market value of the Common Stock at the date of grant and
will be determined by our Board of Directors. The options to be granted under
the Directors' Plan will be NSOs. For a summary of the tax consequences to
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eligible directors under the Directors' Plan, see the description of the tax
consequences of Nonqualified Options under "Proposal Three - Approval of Stock
Incentive Plan."
The number of shares of Common Stock subject to each outstanding stock
option and the option price with respect to outstanding stock options under the
Directors' Plan shall be subject to such adjustment as our Board deems
appropriate to reflect stock splits, stock dividends, recapitalizations,
mergers, consolidations and reorganizations of or by our company. The Directors'
Plan shall continue in effect until all options granted thereunder have expired
or been exercised unless sooner terminated under the provisions relating to the
options.
VOTE REQUIRED
The proposal will be approved if the number of votes cast for the
proposal represents the affirmative vote of a majority of all the issued and
outstanding shares of Common Stock entitled to vote thereon and represented at
the Special Meeting. Abstentions will be counted as votes against the proposal
and broker non-votes will not be counted as votes for or against the proposal.
If Proposal Four is approved by the shareholders, the amendment to the
Directors' Plan will become effective immediately following the Special Meeting,
regardless of whether or not Proposals One, Two or Three are approved or the
Arden acquisition is consummated.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
PROPOSAL FOUR.
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BUSINESS
OUR BUSINESS
We are a manufacturer and marketer of prestige fragrances and related
skin treatment and cosmetic products predominantly in the United States. We have
established ourselves as a source of approximately 235 fragrance brands through
brand ownership, brand licensing and distribution arrangements. These brands
include such brands as Geoffrey Beene's Grey Flannel brand, Halston, Halston
Z-14, PS Fine Cologne for Men, Design and Wings by Giorgio Beverly Hills. In
addition to manufacturing many of the products we supply to our retail
customers, we provide brand marketing and logistics and fulfillment services to
other fragrance and cosmetic product manufacturers for the United States
mid-tier department store and mass market channels.
We sell our products in more than 35,000 separate retail locations in
the United States, including mass retailers such as Wal-Mart, Target, Walgreens
and CVS, mid-tier department stores such as JCPenney, Sears and Kohl's and
prestige department stores such as Dillard's, The May Company, Federated
Department Stores, Dayton's, Hudson's, Marshall Fields, Belk's and Nordstrom. In
addition, during fiscal 2000, we initiated supply relationships with a number of
internet-based retailers, including Ashford.com, Beauty.com, Bluefly.com,
ibeauty.com and sephora.com, as well as with our traditional retailers'
web-based operations, including JCPenney.com and Wal-Mart.com. During the fiscal
year ended January 31, 2000, sales to mass retailers, drug stores, independent
fragrance, cosmetic, gift and other stores and internet-based retailers
(collectively, "mass-market retailers") constituted approximately 70% of our net
sales, sales to traditional and mid-tier department stores constituted
approximately 29% of net sales and the balance of our sales was comprised of
international sales.
Over the past five years, we have emerged as a leading prestige
fragrance marketer by (i) providing retailers a wide selection and reliable
source of prestige products, (ii) increasing and diversifying our market
penetration by growing our customer base to more than 35,000 separate retail
locations, (iii) consummating several acquisitions of prestige fragrance brands,
(iv) enhancing the overall performance of our brands through our marketing,
logistics and fulfillment expertise, and (v) providing various category and
inventory management services through our e-commerce business-to-business
platform. As a result, our net sales have grown to approximately $361.2 million
for fiscal 2000 from approximately $88.0 million for fiscal 1996. Over the same
period, we have achieved a compounded annual growth rate of 40% in net sales,
57% in EBITDA and 50% in net income.
We were incorporated in 1960 and were formerly known as Suave Shoe
Corporation. We were the surviving corporation in the November 1995 Merger.
Products
We sell prestige fragrances and related cosmetic products, including
perfume, cologne, eau de toilette, body spray, men's after-shave and gift sets.
Each fragrance is sold in a variety of sizes and packaging arrangements. In
addition, each fragrance line may be complemented by bath and body products,
such as soaps, deodorants, body lotions, gels, creams and dusting powders. Our
products generally retail at prices ranging from $20 to $100 per item.
Our brand portfolio currently consists of more than 1,800 stock keeping
units. We continually seek to expand our brand portfolio. We use third-party
contract manufacturers in the United States and Europe to obtain substantially
all of the raw materials, components and packaging products for the manufacture
of finished products relating to the Halston, Geoffrey Beene and Paul Sebastian,
Inc. ("PSI") fragrance products. We currently obtain our materials for these
products from a limited number of suppliers. We believe that our relationships
with these suppliers are good, and that there are sufficient alternatives should
one or more of these suppliers become unavailable. Products that we purchase
directly from major fragrance manufacturers and other sources are delivered to
us in finished goods form.
Except as to products for which we have exclusive marketing and
distribution rights, we generally do not have long-term or exclusive contracts
with suppliers or manufacturers, as is customary in the industry. On occasion,
we have entered into supply contracts with manufacturers which govern the terms
under which the parties conduct business. Purchases from manufacturers or
suppliers that do not have exclusive supply contracts with us are generally made
pursuant to purchase orders. Our ten largest manufacturers or suppliers of
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brands that are distributed by us on a non-exclusive basis accounted for
approximately 64.7% of our cost of sales for the fiscal year ended January 31,
2000. The loss of, or a significant adverse change in, the relationship between
us and any of our major suppliers could have a material adverse effect on our
business, financial condition and results of operations.
Licensing and Exclusive Distribution Agreements
Except for our Halston, Geoffrey Beene, PSI and COFCI, S.A. ("COFCI")
fragrance products, substantially all of our products are covered by trademarks
owned by others. We do not believe that our business, other than with respect to
the Halston, Geoffrey Beene, PSI and COFCI fragrance products, is dependent upon
any particular trademark, license or similar property. We believe that the
Halston trademarks, the Geoffrey Beene license and trademarks, the PSI
trademarks and the COFCI license and trademarks are important to our business.
Geoffrey Beene. In March 1995, we acquired certain assets from Sanofi
Beaute, Inc., including an exclusive worldwide license with Geoffrey Beene, Inc.
to manufacture and sell Geoffrey Beene fragrance and related products, including
the Grey Flannel and Bowling Green brands. We have trademark registrations and
applications in the United States and in numerous other countries for these
brands. The license agreement has an initial term of 30 years from February
1995, subject to automatic extensions for successive ten-year periods unless
earlier terminated by us in accordance with the agreement.
Halston. In March 1996, we acquired from Halston Borghese, Inc. and its
affiliates certain assets, including the trademark registrations in the United
States and trademark registrations and applications in numerous other countries
for the Halston fragrance brands, including Halston, Catalyst, Z-14 and 1-12
(the "Halston Acquisition").
PSI. In January 1999, we acquired from PSI trademarks 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 (the "Paul Sebastian
Acquisition").
Wings. In November 1998, we entered into an exclusive license agreement
with an affiliate of The Procter & Gamble Company that grants us the right to
manufacture and distribute the fragrance brand Wings by Giorgio Beverly Hills in
the United States. The license agreement expires on December 31, 2003.
COFCI. Since 1990, Fine Fragrances, Inc. ("Fine Fragrances") has had
agreements with COFCI for the exclusive distribution in the United States and
Canada of fragrances and related cosmetic products, including the Salvador Dali,
Laguna, Salvador, Dalissime, Dalimix, Cafe, Taxi and Watt brands. In May 1997,
in connection with our acquisition of the remaining 50.01% of the common stock
of Fine Fragrances that we did not already own, these agreements were assigned
to us. The agreements expire in November 2006, subject to earlier termination by
COFCI if we were to fail to purchase certain minimum levels of product.
Others. Over the past five fiscal years, we have also entered into
exclusive licensing and distribution agreements for other fragrance brands and
related skin treatment and cosmetic products, including Faconnable, Lapidus and
Ombre Rose. These agreements generally may be extended through 2003 to 2004
although they may be terminated earlier under certain circumstances.
Marketing and Sales
We have established our own sales and marketing staff in the United
States and also utilize independent sales representatives in the United States.
In general, each sales employee and representative is assigned sales
responsibility for a customer or territory. Our sales and marketing employees
and representatives routinely visit retailers to assist in the merchandising,
layout and stocking of selling areas.
Our senior sales and marketing personnel support the efforts of our
sales employees and representatives by working with the merchandise managers,
lead buyers and marketing departments of our major retailers to develop
advertising and promotional plans tailored to these customers' retail needs. Our
sales and marketing personnel frequently work with customers to (i) assist in
the development of merchandising and promotional programs and budgets for
specific products or selling seasons, (ii) design model schematic planograms for
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the customer's fragrance and cosmetics departments, (iii) identify trends in
consumer preferences, (iv) conduct training programs for the customer's sales
personnel, and, in certain cases, (v) provide comprehensive sales analysis and
active management of the prestige fragrance category. We advertise our products
through cooperative advertising in association with major retailers. We also
promote products through the use of gift-with-purchase programs, sales personnel
incentive commissions and value-added programs.
The industry practice for businesses that market fragrances and
cosmetics has been to grant department stores the right to return merchandise.
We typically limit return rights to department stores and to certain promotional
items offered in our Halston, Geoffrey Beene, PSI and Wings lines. We generally
do not offer any other return rights and seek to limit sales of such promotional
products to each retailer to volumes that can be sold through to the retailer's
customer base. We establish reserves and provide allowances for returns of such
products at the time of sale. As a percentage of gross sales, returns were
approximately 2.6%, 2.5% and 3.4%, respectively, for the fiscal years ended
January 31, 1998, 1999 and 2000. To date, our returns have not exceeded our
returns reserves and allowances, though there can be no assurance that such
reserves and allowances will be adequate in the future. We have, however, an
active market to sell returns and generally recover a portion of the gross
margin loss on our returns by reselling those returns.
We conduct marketing and sales activities outside the United States and
Canada, primarily relating to Halston, Geoffrey Beene and PSI products. These
activities are generally conducted through arrangements with independent
distributors. Revenues related to export sales were not material during any of
the last three fiscal years.
Logistics and Fulfillment Services
We supply our products to more than 35,000 separate retail locations in
the United States, including traditional and mid-tier department stores such as
JCPenney, Sears, Kohl's, Macy's, Dayton's, Hudson's, Marshall Field's,
Robinsons-May, Proffitt's and Nordstrom, mass retailers such as Wal-Mart, Target
and T.J. Maxx, drug stores such as Walgreens, Rite Aid, CVS, Eckerd and American
Stores and independent fragrance, cosmetic, gift and other stores. In addition,
we serve as a source of products for a number of internet-based retailers,
including Ashford.com, Beauty.com, Bluefly.com, ibeauty.com and sephora.com, as
well as for traditional retailers' web-based operations.
A majority of our customers require rapid shipment of products. Because
we generally attempt to fill orders within three days from the receipt of a
purchase order, and because all orders are subject to cancellation without
penalty by the customer until shipment, management does not consider backlog to
be a significant indication of future sales activities. All orders are packaged
by us and most merchandise is shipped to customers by common carriers. In
addition, to expedite delivery, we address our individual customer needs by
offering our customers U.P.C. coding, advance price ticketing, case packing,
drop ship programs (direct to store), shrink-wrap, electronic service/anti-theft
tagging and EDI capabilities. As an example of the importance of EDI services to
retailers, approximately 91% of our customer orders in fiscal 2000 were received
by EDI.
As is customary in the fragrance industry, we do not generally have
long-term or exclusive contracts with any of our customers. Sales to customers
are generally made pursuant to purchase orders. We believe that our continuing
relationships with our customers are based upon our ability to provide a wide
selection and reliable source of prestige fragrance products, as well as our
ability to provide value-added services, including our category management
services, to mass-market retailers and mid-tier department stores. Our ten
largest customers accounted for approximately 58% of net sales for the fiscal
year ended January 31, 2000. The only customers that accounted for more than 10%
of our net sales for the same period were Wal-Mart and JCPenney (including
Eckerd, which is owned by JCPenney). The loss of, or a significant adverse
change in, the relationship between us and any of our key customers could have a
material adverse effect on our business, financial condition and results of
operations.
Seasonality
We generally have significantly higher sales in the second half of the
calendar year as a result of increased demand by retailers in anticipation of,
and during, the holiday season. In fiscal 2000, approximately 68% of our net
sales were made during the second half of the fiscal year.
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Management Information Systems
Our key management information systems consist of (i) a
fully-integrated accounting, forecasting, purchasing and order-entry software
system; (ii) an Electronic Data Interchange ("EDI") system, which allows our
customers to order products electronically from us and to be invoiced
electronically for those orders; and (iii) a warehouse management system, which
assists us in facilitating and managing the receipt and shipment of products. As
a whole, these management information systems provide on-line, real-time,
fully-integrated information for our sales, purchasing, warehouse and financial
departments. Our information systems form the basis of a number of the
value-added services that we provide to our customers, including vendor managed
inventory, inventory replenishment, customer billing, sales analysis, product
availability and pricing information, and expedited order processing. During
fiscal 2000, we added new features to our existing warehouse management system
that allow us to better manage the receipt and control of our inventory. We
intend to continue to enhance our management information systems on an ongoing
basis, to provide improved service to our customers through quicker response
times in shipments, customer service and sales information, and to provide our
management the ability to identify opportunities for increased efficiencies,
cost savings and sales growth.
Competition
The fragrance industry is highly competitive and, at times, subject to
rapidly changing consumer preferences and industry trends. We compete with
distributors, manufacturers of mass-market fragrances and other manufacturers of
prestige fragrances. Competition is generally a function of assortment and
continuity of merchandise selection, price, timely delivery and level of
in-store customer support. We believe that we compete primarily on the basis of
(i) our established relationships with our fragrance manufacturers and, in
particular, our ability to offer retailers a reliable, direct supply of prestige
fragrances and related skin treatment and cosmetic products at competitive
prices, and (ii) our emphasis on providing value-added customer services,
including category management services, to our mass-market retailers. There are
products which are better known and more popular than the products produced for
or supplied by us. Many of our competitors are substantially larger and more
diversified, and have substantially greater financial and marketing resources,
than us, as well as have greater name recognition and the ability to develop and
market products similar to and competitive with those distributed by us.
Employees
As of November 1, 2000, we had approximately 430 full-time employees
and 135 part-time employees. None of our employees are covered by a collective
bargaining agreement, and we believe that our relationship with our employees is
satisfactory. We also use the services of independent contractors in various
sales capacities. We also contract with temporary personnel agencies for
temporary or seasonal labor. During the peak of our sales season for fiscal
2000, we retained the services of approximately 260 temporary employees,
primarily in distribution, packaging and shipping functions.
PROPERTIES
Our corporate headquarters and principal distribution center (the
"Miami Lakes Facility") is located at 14100 N.W. 60th Avenue, Miami Lakes,
Florida 33014 in a building owned by us on a tract of land comprising
approximately 13 acres. The Miami Lakes Facility contains approximately 200,000
square feet of distribution and warehouse space and approximately 30,000 square
feet of office space. In 1996, we issued a mortgage on the Miami Lakes Facility
in the amount of $6 million.
In February 2000, we entered into a lease with an unaffiliated third
party for the 295,000 square foot Edison Facility, which is being used as a
distribution center for our promotional set business and to process product
returns. The lease on the Edison Facility has a term of 26 months.
LEGAL PROCEEDINGS
We are a party to a number of pending legal actions, proceedings or
claims. While any action, proceeding or claim contains an element of
uncertainty, our management believes that the outcome of such actions,
proceedings or claims likely will not have a material adverse effect on our
business, financial condition or results of operations.
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THE ARDEN BUSINESS
Elizabeth Arden ("Arden") is a worldwide business the assets of which
are directly or indirectly owned by Unilever PLC and Unilever N.V. (the
"Unilever Group"). We are buying substantially all of the Arden skin and
cosmetic brands and Arden branded fragrances, Elizabeth Taylor fragrance brands,
and White Shoulders fragrance brands along with certain net assets and
operations. The remaining Arden business, which is not part of the Arden
acquisition, includes the European designer fragrance operations, including the
Cerruti, Chloe, Valentino, Scherrer, Faberge and Lagerfeld brands.
The Arden business has historically focused on manufacturing and
marketing prestige fragrances, skin care and cosmetic products sold to
department stores, perfumeries, boutiques and travel retail (duty free) stores
in North America, Europe and the Asia Pacific region as well as other regions.
Department stores are the primary direct customers in North America, the United
Kingdom, Spain, Asia Pacific and South Africa. In North America, Arden fragrance
products are also sold in the mid-tier and mass channels by distributors,
including our company (whose volume in 1999 represented about 10% of Elizabeth
Arden business' worldwide net sales). The principal method of distribution in
Continental Europe is through independent or chains of perfumeries. The global
travel retail business operates through travel retail (duty free) stores in
airports, airlines, cruise ships, and outlets at country borders. Other than our
company, no customer accounted for more than 10% of the Arden business'
worldwide net sales.
The Arden business offers a portfolio of leading fragrance brands,
including Arden's Red Door, 5th Avenue and Green Tea brands, Elizabeth Taylor's
White Diamonds and Passion brands, and White Shoulders. Arden skin care brands
include Visible Difference, Ceramides and Millenium. Arden cosmetics products
include lipstick, foundation and other color cosmetic products under the Arden
brand name.
Certain financial statements of the Arden business are attached as
Exhibit D to this proxy statement.
MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock is quoted on Nasdaq under the symbol "FRAG." The
following table sets forth the high and low closing prices per share of our
Common Stock as reported on Nasdaq during the period from February 1, 1998
through November 21, 2000.
HIGH LOW
---- ---
FISCAL YEAR ENDED JANUARY 31, 1999
First Quarter.............................. $19 5/8 $10 3/8
Second Quarter............................. $18 7/16 $13 1/4
Third Quarter.............................. $14 1/16 $ 5 1/4
Fourth Quarter............................. $ 8 9/16 $ 5 1/16
FISCAL YEAR ENDED JANUARY 31, 2000
First Quarter.............................. $ 9 1/16 $ 5 5/8
Second Quarter............................. $ 8 23/32 $ 6 9/16
Third Quarter.............................. $ 8 $ 6 1/16
Fourth Quarter............................. $ 7 13/16 $ 6 1/8
FISCAL YEAR ENDED JANUARY 31, 2001
First Quarter.............................. $ 9 9/16 $ 6 5/8
Second Quarter............................. $ 8 3/4 $ 7 1/4
Third Quarter.............................. $ 11 1/2 $ 7 1/8
Fourth Quarter (through December 1, 2000). $ 13 1/2 $ 10 1/2
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HOLDERS
As of November 1, 2000, there were approximately 503 record holders of
the Common Stock.
DIVIDENDS
We have not declared any cash dividends for the last two fiscal years
and we currently have no plans to declare any dividends on our Common Stock in
the foreseeable future. Any future determination by our Board of Directors to
pay dividends will be made only after consideration of our financial condition,
results of operations, capital requirements and other relevant factors.
Additionally, our new credit facility will prohibit our payment of cash
dividends and our other financing arrangements will condition our ability to pay
cash dividends on the satisfaction of certain financial and other covenants.
DESCRIPTION OF CAPITAL STOCK
As of November 1, 2000, our Amended and Restated Articles of
Incorporation provided that we have authority to issue the following capital
stock:
o 50,000,000 shares of common stock, $.01 par value, of which 13,223,945
shares were issued and outstanding;
o 350,000 shares of Series B convertible preferred stock, $.01 par value, of
which 264,168 shares were issued and outstanding;
o 571,429 shares of Series C convertible preferred stock, $.01 par value, of
which 499,870 shares were issued and outstanding; and
o 4,428,571 shares of serial preferred stock, $.01 par value, none of which
were issued and outstanding.
In connection with the Arden acquisition, we will authorize the
issuance of 1,000,000 shares of Series D Convertible Preferred Stock. Of that
amount, 416,667 shares will be issued to Conopco. Upon completion of the Arden
acquisition, the authorized but unissued shares of Series D Convertible
Preferred Stock will be reserved for issuance in connection with the payment of
dividends on Series D Convertible Preferred Stock. See Proposal One.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, holders of the Common Stock are entitled to receive dividends as
may be declared by the Board of Directors out of funds legally available to pay
dividends, and, in the event we liquidate, dissolve or wind up our affairs, to
share in any distribution of assets after payment or providing for the payment
of liabilities and the liquidation preference of any outstanding preferred
stock. Each holder of Common Stock is entitled to one vote for each share held
of record on the applicable record date for all matters submitted to a vote of
shareholders. Holders of Common Stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities,
and there are no conversion rights or redemption, purchase, retirement or
sinking fund provisions with respect to the Common Stock. Thus, the holders of a
majority of the outstanding shares of Common Stock will be able to take all
actions requiring a vote of our Common Stock. Our Common Stock is traded on
Nasdaq under the symbol FRAG. Following the Arden acquisition, and assuming
Proposal Two is approved by our shareholders, we intend to change our symbol to
RDEN.
SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C CONVERTIBLE PREFERRED STOCK
On October 30, 2000, we issued an irrevocable notice of redemption to
holders of our Series B convertible preferred stock and our Series C convertible
preferred stock. Holders of Series B convertible preferred stock may convert
each share of Series B convertible preferred stock into 7.12 shares of Common
Stock at a conversion price of $3.30 per share. Holders of Series C convertible
preferred stock may convert each share of Series C convertible preferred stock
into one share of Common Stock at a conversion price of $5.25 per share. These
holders must convert their shares into shares of our Common Stock prior to
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December 29, 2000 or we will redeem each share for $0.01 per share. If all
holders of the Series B and Series C convertible preferred stock convert their
shares into Common Stock, our outstanding Common Stock will increase by
approximately 2.3 million shares. We expect the aggregate conversion price to be
paid to us to be approximately $8.8 million, although the proceeds will be less
to the extent these holders do not convert their shares.
SERIES D CONVERTIBLE PREFERRED STOCK
All of the initial shares of Series D Convertible Preferred Stock will
be issued to Conopco in connection with the Arden acquisition. We will initially
authorize up to 1,000,000 shares of Series D Convertible Preferred Stock for
issuance and will initially issue 416,667 shares. The additional authorized
shares may be used in the future to pay dividends on the outstanding shares of
Series D Convertible Preferred Stock or for other purposes if approved by the
holders of the Series D Convertible Preferred Stock; however, more shares may be
required to be authorized in the future for the payment of dividends on the
outstanding shares of Series D Convertible Preferred Stock. Any additional
shares of Series D Convertible Preferred Stock required will be designated by
the Board of Directors from our existing authorized but unissued Serial
Preferred Stock (described below).
Dividends. Holders of Series D Convertible Preferred Stock will be
entitled to receive cumulative stock dividends (in preference to all shares of
capital stock outstanding at the issue date and any future shares of capital
stock that are not expressly equal or senior to the Series D Convertible
Preferred Stock) beginning on the second anniversary of the date those shares
are issued at a rate of 5% per year on the amount of the then effective
liquidation value of those shares and such dividend will be payable at our
option either (i) in cash, (ii) in additional shares of Series D Convertible
Preferred Stock, or (iii) through a combination of both.
Liquidation. In the event of liquidation, dissolution or winding up of
our affairs, holders of Series D Convertible Preferred Stock would be entitled
to receive out of any assets legally available the liquidation preference on
such shares and the Series D Convertible Preferred Stock will rank senior to all
shares of capital stock outstanding at the issue date and any future shares of
capital stock that are not expressly equal or senior to the Series D Convertible
Preferred Stock.
Conversion. The holders of the Series D Convertible Preferred Stock
will have the right to convert, in whole or in part, up to 33.33% of their
shares of Series D Convertible Preferred Stock into shares of Common Stock
beginning on the first anniversary of the initial issuance date, 66.66% of their
shares of Series D Convertible Preferred Stock beginning on the second
anniversary and all of their shares of Series D Convertible Preferred Stock on
and after the third anniversary. In the event of a change of control (as defined
in the certificate of designations of the Series D Convertible Preferred Stock)
prior to the third anniversary, any holder of Series D Convertible Preferred
Stock may convert all of its shares into Common Stock. The initial conversion
price is $12.00 per share of Common Stock and is subject to adjustment to limit
dilution from certain transactions. Prior to shareholder approval of Proposal
One, the convertibility of the Series D Convertible Preferred Stock will be
limited as described above under "Proposal One - Issuance of Common Shares
Relating to the Acquisition."
Change of Control. In the event of a change of control (as defined in
the certificate of designations of the Series D Convertible Preferred Stock),
each holder of shares of Series D Convertible Preferred Stock will have the
right to require us to purchase all or any part of the shares held by such
holder at a purchase price equal to the liquidation value of the shares plus all
accumulated dividends, provided that if we are unable to purchase such shares
for cash due to the provisions of any of our debt instruments or pursuant to the
Florida Business Corporation Act, we will be required to offer to convert such
shares into shares of Common Stock. In addition, in the event of a change in
control, we will have the right to require each holder of Series D Convertible
Preferred Stock to tender such shares to us at a purchase price in cash equal to
the liquidation value of the shares plus all accumulated dividends. If we
exercise this right prior to the third anniversary of the initial issuance of
the Series D Preferred Stock, each holder of shares of Series D Convertible
Preferred Stock may convert all or part of its shares into Common Stock.
Approval Rights. Approval of the holders of two-thirds of the issued
and outstanding Series D Convertible Preferred Stock will be required for us to
(i) amend our articles of incorporation in a manner that affects adversely the
rights, preferences or privileges of holders of the Series D Convertible
Preferred Stock or that increases (other than for the payment of dividends in
accordance with the terms of the Series D Convertible Preferred Stock) or
decreases the number of authorized shares of Series D Convertible Preferred
Stock; (ii) consolidate or merge with or into, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of our assets, in a
single transaction or series of related transactions, to any person or adopt a
plan of liquidation (except as otherwise provided in the certificate of
designations of the Series D Convertible Preferred Stock); (iii) enter into, or
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permit any of our subsidiaries to enter into, any agreement that would impose
material restrictions on our ability to honor the exercise of any rights of
holders of the Series D Convertible Preferred Stock; or (iv) issue any shares of
Series D Convertible Preferred Stock other than (A) pursuant to the terms of the
purchase agreement entered into in connection with the Arden acquisition and (B)
shares issued in payment of dividends on the Series D Convertible Preferred
Stock as contemplated in the certificate of designations of the Series D
Convertible Preferred Stock.
Board Representation. If we do not redeem or call for redemption, or
the holders of the Series D Convertible Preferred Stock do not convert, all of
the outstanding Series D Convertible Preferred Stock by ninety days following
the third anniversary of the initial issuance of such shares, then the total
number of directors constituting our Board of Directors will be increased to
allow the holders of the Series D Convertible Preferred Stock to elect one
director. If the size of the increased Board would be less than six directors,
it will be increased to six and the vacancy will be filled as provided in the
Bylaws. In addition, the holders of the Series D Convertible Preferred Stock may
designate one observer to the Board of Directors who will not otherwise have any
voting or other rights of members of the Board of Directors. However, if at a
future date we increase the size of our Board of Directors such that the
observer, coupled with the director elected by the holders of the Series D
Convertible Preferred Stock, constitute less than 20% of the Board of Directors,
the observer will thereafter have the same rights as all other members of the
Board of Directors. All of such rights shall terminate upon the redemption or
conversion of all of the shares of Series D Convertible Preferred Stock.
Redemption. We are obligated to redeem all of the outstanding shares of
Series D Convertible Preferred Stock on the twelfth anniversary of the initial
issuance date (if not earlier redeemed or converted) at a redemption price per
share equal to 100% of the liquidation value of each such share, plus all
accrued and unpaid dividends thereon. At any time ten days after the first
anniversary of the initial issuance date, we may redeem, in whole or in part,
all of the shares of Series D Convertible Preferred Stock, plus accrued and
unpaid dividends thereon, for an amount of cash equal to (i) the number of
shares of Common Stock into which such shares of Series D Convertible Preferred
Stock are convertible, multiplied by (ii) $25.
Registration Rights. We have granted to Conopco certain registration
rights with respect to the common stock underlying the Series D Convertible
Preferred Stock. Conopco has the right to demand the filing of up to three
registration statements, accruing on the first, second and third anniversary of
the closing date. In addition, Conopco will have "piggy back" registration
rights with respect to certain registration statements filed by us other than
pursuant to a demand by Conopco.
WARRANTS
If the closing price of our Common Stock on the trading date
immediately preceding the closing date of the Arden acquisition is less than
$10, we will deliver to Conopco, at the closing, Acquisition Warrants for
1,357,466 shares of common stock for every $1.00 that the actual closing price
is less than $10 and the number of shares of Common Stock into which the Series
D Convertible Preferred Stock is convertible will be correspondingly reduced.
Each Acquisition Warrant will have an exercise price of $12 per share and will
expire on the twelfth anniversary of the closing. The initial exercise price is
subject to adjustment to limit dilution from certain transactions. The holder
will have the right to exercise up to 33.33% of its Acquisition Warrants
beginning on the first anniversary following the date the Acquisition Warrants
are issued, 66.66% of its Acquisition Warrants beginning on the second
anniversary and all of its Acquisition Warrants on and after the third
anniversary.
We will have the right to redeem the Acquisition Warrants, in whole or
in part, beginning on the tenth day following the first anniversary of the
issuance of the Acquisition Warrants at a price equal to $12. We may only redeem
that percentage of Acquisition Warrants equal to the corresponding percentage of
the liquidation value of the shares of Series D Convertible Preferred Stock that
has been redeemed or converted.
We have granted certain registration rights to the holders of the
Acquisition Warrants.
The amount of Financing Warrants to be issued in connection with our
intended financing for the Arden acquisition is not determinable until the
financing occurs. We anticipate that such Financing Warrants will have customary
terms, including registration rights and provisions to limit dilution. If we
draw upon our bridge commitments to obtain financing, the Financing Warrants we
issue in the bridge financing will be dilutive, and such dilution could be
material.
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SERIAL PREFERRED STOCK
We can issue, without shareholder approval, shares of serial preferred
stock in one or more series and with such preferences and designations as our
Board of Directors may determine, including: the designation of such series and
the number of shares constituting such series; dividend rights; redemption
rights; liquidation preferences; purchase, retirement or sinking fund
provisions; conversion rights; and voting rights.
The Board of Directors' ability to designate and issue serial preferred
stock having preferential rights could impede or deter an unsolicited tender
offer or takeover proposal for the Company, and the designation and issuance of
additional serial preferred stock having preferential rights could have a
negative effect on the voting power and other rights of holders of Common Stock.
There are no agreements or understandings for the issuance of serial preferred
stock, and the Board of Directors has no present intention to issue serial
preferred stock (other than to the extent necessary to satisfy our dividend
payment obligations with respect to the Series D Convertible Preferred Stock).
40
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of November 29, 2000: (i) the
ownership of Common Stock by all persons known by us to own beneficially more
than 5% of the outstanding shares of Common Stock; and (ii) the beneficial
ownership of Common Stock, Series B Convertible Preferred Stock, $.01 par value,
and Series C Convertible Preferred Stock, $.01 par value, by (a) our directors,
(b) the chief executive officer and the four other most highly compensated
executive officers for the fiscal year ended January 31, 2000, and (c) all of
our directors and executive officers as a group, without naming them.
<TABLE>
<CAPTION>
Series B Series C
Common Stock Convertible Preferred Convertible Preferred
----------------------------- ----------------------------- ----------------------------
Amount and Amount and Amount and
Nature of Percentage Nature of Percentage Nature of Percentage
Name and Address Beneficial of the Beneficial of the Beneficial of the
of Beneficial Owner(1) Ownership(2) Class(2) Ownership Class Ownership Class
<S> <C> <C> <C> <C> <C> <C>
Rafael Kravec(3)(5)(16) 2,169,890 16.4% 3,889 1.5% 8,835 1.8%
E. Scott Beattie(4)(5)(16) 983,356 7.0 6,046 2.3 11,143 2.2
Gretchen Goslin(6) 60,927 * - - 3,220 *
Paul West(7) 38,599 * - - 2,765 *
William J. Mueller (8) 61,180
Oscar E. Marina(9) 53,189 * - - 3,222 *
J.W. Nevil Thomas(10)(16) 181,190 1.4 8,558 3.2 26,369 5.3
Fred Berens(11)(16) 842,753 6.3 - - - -
Richard C.W. Mauran(12)(16) 2,160,544 15.2 100,492 38.0 136,213 27.2
George Dooley(13)(16) 46,000 * - - - -
Fragrance Marketing 1,122,727 8.5
Group, Inc.(14)
SAFECO Corporation(15)(16) 1,143,350 8.6
All directors and executive 6,411,448 41.9 118,985 45.0 191,767 38.4
officers as a group (9
persons)(17)
</TABLE>
----------
* Less than one percent of the class.
(1) The address of each of the persons shown in the above table other than
Messrs. Thomas and Mauran, Fragrance Marketing Group, Inc., and SAFECO
Corporation is c/o French Fragrances, Inc., 14100 N.W. 60th Avenue,
Miami Lakes, Florida 33014. The address of Mr. Thomas is Scotia Plaza,
40 King Street W., Suite 4712, Toronto, Canada M5H 3Y2. The address of
Mr. Mauran is 31 Burton Court, Franklins Row, London SW3, England. The
address of Fragrance Marketing Group, Inc. is 7445 N.W. 12th Street,
Miami, Florida 33126. The address of SAFECO Corporation is SAFECO
Plaza, Seattle, Washington 98185.
(2) Includes, where applicable, shares of Common Stock issuable upon the
conversion of Series B convertible preferred, Series C convertible
preferred and 7.5% Convertible Debentures, and upon the exercise of
warrants and of options to acquire Common Stock, held by such persons
which may be converted or exercised within 60 days after November 1,
2000. A total of 7.12 shares of Common Stock are issuable upon
conversion of one share of Series B convertible preferred at a
conversion price of $3.30 per share of Common Stock. One share of
41
<PAGE>
Common Stock is issuable upon conversion of one share of Series C
convertible preferred at a conversion price of $5.25 per share of
Common Stock. The 7.5% Convertible Debentures are convertible into
shares of Common Stock at $7.20 per share. Unless otherwise indicated,
we believe that all persons named in the table above have sole voting
power and investment power with respect to all shares of Common Stock,
Series B convertible preferred and Series C convertible preferred
beneficially owned by them.
(3) The Common Stock includes (i) 2,133,365 shares of Common Stock owned by
Mr. Kravec, including 1,000 shares which are owned by Mr. Kravec's
daughter and as to which he disclaims beneficial ownership, (ii) 27,690
shares of Common Stock issuable upon the conversion of Series B
convertible preferred owned by National Trading Manufacturing, Inc., a
corporation which is controlled by Mr. Kravec ("National Trading"), and
(iii) 8,835 shares of Common Stock issuable upon the conversion of
Series C convertible preferred owned by National Trading.
(4) The Common Stock includes (i) 114,635 shares of Common Stock owned by
Mr. Beattie, (ii) 624,167 shares of Common Stock issuable upon the
exercise of stock options, (iii) 43,047 shares of Common Stock issuable
upon the conversion of Series B convertible preferred, (iv) 11,143
shares of Common Stock issuable upon the conversion of Series C
convertible preferred, (v) 1,163 shares of Common Stock issuable upon
conversion of 7.5% Convertible Debentures, and (vi) the shares of
Common Stock referred to in Note (5). The Common Stock also includes
64,201 shares of Common Stock owned by E.S.B. Consultants, Inc., a
company that until September 1997 was controlled by Mr. Beattie
("ESB"), and as to which he disclaims beneficial ownership.
(5) The Common Stock includes 125,000 shares of Common Stock which Mr.
Beattie has an option to purchase.
(6) The Common Stock includes (i) 31,040 shares of Common Stock owned
individually by Ms. Goslin, (ii) 26,667 shares of Common Stock issuable
upon the exercise of stock options, and (iii) 3,220 shares of Common
Stock issuable upon the conversion of Series C convertible preferred.
(7) The Common Stock includes (i) 2,500 shares of Common Stock owned
individually by Mr. West, (ii) 33,334 shares of Common Stock issuable
upon the exercise of stock options, and (iii) 2,765 shares of Common
Stock issuable upon the conversion of Series C convertible preferred.
(8) Mr. Mueller left our company in May 2000. The information presented is
based on the information known to us at that time. The Common Stock
includes (i) 31,293 shares of Common Stock individually owned by Mr.
Mueller, (ii) 26,667 shares of Common Stock issuable upon the exercise
of stock options and (iii) 3,220 shares of Common Stock issuable upon
the conversion of Series C convertible preferred.
(9) The Common Stock includes (i) 46,667 shares of Common Stock issuable
upon the exercise of stock options and (ii) 3,222 shares of Common
Stock issuable upon the conversion of Series C convertible preferred.
The remaining 3,300 shares of Common Stock are owned by Mr. Marina
together with his spouse as joint tenants with right of survivorship.
(10) The Common Stock includes 37,624, 2,872, 2,748 and 20,644 shares of
Common Stock owned by Mr. Thomas, his spouse, four trusts for the
benefit of his children and for which he serves as a trustee (the
"Thomas Trusts") and Nevcorp, Inc., a corporation controlled by Mr.
Thomas, respectively. The Common Stock also includes 241, 53, 2,044 and
58,595 shares of Common Stock issuable upon the conversion of Series B
convertible preferred owned by Mr. Thomas, his spouse, the Thomas
Trusts and Nevcorp, respectively. The Common Stock also includes 26,369
shares of Common Stock issuable upon the conversion of Series C
convertible preferred owned by Nevcorp and 30,000 shares of Common
Stock issuable upon the exercise of stock options owned by Mr. Thomas.
Mr. Thomas disclaims beneficial ownership as to the shares of Common
Stock owned or issuable upon the conversion of Series B convertible
preferred owned by Mr. Thomas' spouse and the Thomas Trusts.
(11) The Common Stock includes (i) 736,920 shares of Common Stock, (ii)
30,000 shares of Common Stock issuable upon the exercise of stock
options, and (iii) 75,833 shares of Common Stock issuable upon
conversion of 7.5% Convertible Debentures.
(12) The Common Stock includes 918,448, 115,441, 127,768 and 6,210 shares of
Common Stock owned by Euro Credit Investments Limited, a company
controlled by Mr. Mauran; Devonshire Trust, a trust of which Mr. Mauran
is a trustee; Bed B.V.I. Corp., a company controlled by Mr. Mauran; and
Devonshire Holdings, a trust of which Mr. Mauran is a beneficiary,
respectively. The Common Stock also includes 490,567, 125,329, 95,014
and 4,590 shares of Common Stock issuable upon the conversion of Series
B convertible preferred owned by Euro Credit, Devonshire Trust, Bed
B.V.I. and Devonshire Holdings, respectively, and 112,949 and 23,264
shares of Common Stock issuable upon the conversion of Series C
convertible preferred owned by Euro Credit and Devonshire Trust,
respectively. The Common Stock also includes 109,114 and 1,850 shares
of Common Stock issuable upon conversion of 7.5% Convertible Debentures
42
<PAGE>
owned by Mr. Mauran and Devonshire Trust, respectively, and 30,000
shares of Common Stock issuable upon the exercise of stock options
owned by Mr. Mauran.
(13) The Common Stock includes 37,000 shares of Common Stock issuable upon
the exercise of stock options. The remaining 9,000 shares of Common
Stock are owned by Mr. Dooley together with his spouse as joint tenants
with right of survivorship.
(14) Represents shares of Common Stock issuable upon the exercise of
warrants that were issued to Fragrance Marketing Group in connection
with our acquisition of the principal assets of Fragrance Marketing
Group in May 1996.
(15) Based on a Schedule 13G dated January 28, 2000. SAFECO Corporation has
shared voting and dispositive power over 1,143,350 shares of Common
Stock, including 1,136,700 shares which are owned beneficially by
registered investment companies for which SAFECO Corporation's
subsidiary, SAFECO Asset Management Company, is an advisor.
(16) All of the shares of Common Stock owned by this shareholder are subject
to a certain Shareholder Voting Agreement dated October 30, 2000.
(17) The Common Stock includes (i) 847,173 shares of Common Stock issuable
upon the conversion of Series B convertible preferred, (ii) 191,767
shares of Common Stock issuable upon the conversion of Series C
convertible preferred, (iii) 187,960 shares of Common Stock issuable
upon the conversion of the 7.5% Convertible Debentures, and (iv)
857,835 shares of Common Stock issuable upon the exercise of warrants
or options. The information excludes Mr. Mueller's holdings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual
compensation for services in all capacities to us for the twelve months ended
January 31, 2000, January 31, 1999 and January 31, 1998 of the Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company.
ANNUAL COMPENSATION
-------------------
<TABLE>
<CAPTION>
NAME AND COMMON
PRINCIPAL POSITION OTHER ANNUAL STOCK
------------------ COMPEN- UNDERLYING
YEAR(1) SALARY($) BONUS($)(2) SATION ($)(3) OPTIONS COMPENSATION(4)
------- --------- ----------- ------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
E. Scott Beattie 1/31/00 375,000 200,000 3,961 100,000 3,413
Chairman, President 1/31/99 367,790 100,000 3,745 400,000 204
and Chief 1/31/98 257,405 175,000 -- 7,500 --
Executive Officer(5)
Paul West 1/31/00 250,000 100,000 269 50,000 2,879
Executive Vice President, 1/31/99 198,000 15,000 -- -- 1,502
Sales Management and
Planning(6)
Gretchen Goslin 1/31/00 197,116 100,000 207 10,000 2,915
Executive Vice 1/31/99 175,000 80,000 -- 10,000 1,113
President, Marketing 1/31/98 175,000 88,000 -- -- --
William J. Mueller 1/31/00 196,539 80,000 3,945 10,000 772
Senior Vice President, 1/31/99 170,000 80,000 3,605 10,000 204
Chief Financial Officer 1/31/98 170,000 88,000 4,585 -- --
and Treasurer
Oscar E. Marina 1/31/00 170,000 75,000 296 10,000 2,869
Senior Vice President, 1/31/99 168,077 70,000 -- 10,000 1,332
General Counsel and 1/31/98 150,000 75,000 -- 10,000 --
Secretary
</TABLE>
(1) The amounts shown for "1/31/00," "1/31/99" and "1/31/98" are for the fiscal
years ended January 31, 2000, 1999 and 1998, respectively.
43
<PAGE>
(2) The Company creates an annual bonus pool for members of its management and
other key personnel (the "Bonus Pool"). On an annual basis, the Committee
approves the allocation of the Bonus Pool among the members of our management
and other key personnel.
(3) During the fiscal year ended January 31, 2000, the Named Executives were
reimbursed for the following amounts of taxes incurred as a result of the
payment of executive disability insurance premiums: (a) E. Scott Beattie - $216;
(b) Paul West - $269; (c) Gretchen Goslin - $207; (d) William J. Mueller - $288;
and (e) Oscar E. Marina - $296. The amounts shown for Messrs. Beattie and
Mueller also include $3,745 and $3,657, respectively, which represents the
amount reimbursed by the Company for the payment of taxes on the value received
by them from a Company-provided automobile. The amounts reflected in the above
table do not include any amounts for perquisites and other personal benefits.
The aggregate amount of such compensation for each Named Executive did not
exceed 10% of the total annual salary and bonus of such Named Executive and,
accordingly, has been omitted from the table as permitted by the rules of the
Commission.
(4) Consists of matching payments made by the Company under the Company's 401(k)
Plan, term life insurance premiums and disability insurance premiums paid or
reimbursed by the Company, as follows:
401(K) LIFE DISABILITY
NAME YEAR MATCH($) INSURANCE($) INSURANCE($)
---- ---- -------- ------------ ------------
E. Scott Beattie 1/31/00 2,889 131 393
1/31/99 -- 28 176
1/31/98 -- -- --
Paul West 1/31/00 2,400 94 385
1/31/99 1,298 28 176
Gretchen Goslin 1/31/00 2,429 97 389
1/31/99 909 28 176
1/31/98 -- -- --
William J. Mueller 1/31/00 286 97 389
1/31/99 -- 28 176
1/31/98 -- -- --
Oscar E. Marina 1/31/00 2,400 89 380
1/31/99 1,128 28 176
1/31/98 -- -- --
(5) Mr. Beattie was appointed to the position of President and Chief Executive
Officer of the Company in March 1998. Mr. Beattie was appointed to the position
of President of the Company in April 1997. Salary for 1/31/98 represents $71,155
in salary paid to Mr. Beattie following his becoming an employee of the Company
in September 1997, and $186,250 in consulting fees paid to ESB under the terms
of certain consulting or monitoring agreements pursuant to which ESB, through
Mr. Beattie, provided financial advisory and management services to the Company.
All consulting and monitoring agreements between the Company and ESB were
terminated during the fiscal year ended January 31, 1998.
(6) Mr. West was appointed an executive officer of the Company as its Senior
Vice President Sales Management and Planning in March 1999. Mr. West joined in
the Company in April 1998.
44
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning options granted during
the twelve months ended January 31, 2000 to the named executives.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------
COMMON STOCK % OF TOTAL POTENTIAL REALIZABLE VALUE AT
UNDERLYING OPTIONS GRANTED EXERCISE OR ASSUMED ANNUAL RATES OF STOCK
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION OF
NAME GRANTED FISCAL YEAR ($/SHARE)(2) DATE OPTION TERM(1)
---- ------------- --------------- ------------- ---------- -----------------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
E. Scott Beattie 100,000 42.6% 6.00 3/3/09 377,337 956,245
Paul West 50,000 21.3% 6.00 3/3/04 82,884 183,153
Gretchen Goslin 10,000 4.2% 6.00 3/3/04 16,577 36,631
William J. Mueller 10,000 4.2% 6.00 3/3/04 16,577 36,631
Oscar E. Marina 10,000 4.2% 6.00 3/3/04 16,577 36,631
</TABLE>
(1) Amounts represent hypothetical gains that could be achieved for the
respective Options if exercised at the end of the option term. These gains are
based on assumed rates of stock price appreciation of 5% and 10% compounded
annually from the date the respective Options were granted to their expiration
dates. Hypothetical gains are calculated based on rules promulgated by the
Securities and Exchange Commission and do not represent an estimate by the
Company of its future stock price growth. This table does not take into account
any appreciation in the price of the Common Stock to date. Actual gains, if any,
on Option exercises and Common Stock holdings are dependent on the timing of
such exercises and the future performance of the Common Stock. There can be no
assurances that the rates of appreciation assumed in this table can be achieved
or that the amounts reflected will be received by the Named Executives.
(2) The exercise price for the Options granted was based upon the market price
of the Common Stock on the date of grant.
FISCAL YEAR END OPTION VALUES
The following table sets forth certain information concerning options
exercised by the named executives during the fiscal year ended January 31, 2000
and unexercised options held by the named executives at January 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT FISCAL
SHARES AT FISCAL YEAR-END YEAR-END ($)(2)
ACQUIRED ON VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME EXERCISE # REALIZED ($)(1) UNEXERCISABLE (U) UNEXERCISABLE (U)1
---- ---------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
E. Scott Beattie 53,400 132,485 590,834/66,666 79,167/33,333
Paul West -- -- 16,667/33/333 8,334/16,667
Gretchen Goslin 27,293 184,228 20,001/9,999 1,667/3,333
William J. Mueller 27,293 184,228 20,001/9,999 1,667/3,333
Oscar E. Marina 40,001/9,999 26,667/3,333
</TABLE>
(1) Value is based on the difference between the Option exercise price and the
fair market value per share of Common Stock on the date of exercise multiplied
by the number of shares underlying the Option. Shares acquired for Ms. Goslin
and Mr. Mueller reflect the shares received following a cashless exercise of
their Options for 53,400 shares of Common Stock.
(2) Value is based on the difference between the Option exercise price and the
fair market value per share of Common Stock on January 31, 2000 multiplied by
the number of shares underlying the Option.
45
<PAGE>
DIRECTOR COMPENSATION
Directors who are our employees do not receive any monetary
compensation for serving on the Board or any of its committees. Directors who
are not our employees (currently Messrs. Thomas, Berens, Dooley and Mauran)
receive an annual retainer of $3,000 and a fee of $500 for each meeting of the
Board of Directors or a committee of the Board of Directors attended. The Board
of Directors also reimburses all directors for all expenses incurred in
connection with their activities as directors. Under the terms of the Directors'
Plan, non-employee directors currently receive stock options for 7,000 shares of
Common Stock upon their initial election to the Board of Directors and stock
options for 7,500 shares of Common Stock annually upon reelection to the Board
of Directors at the annual meeting of shareholders. All options granted under
the Directors' Plan are exercisable one year from the date of grant. During the
fiscal year ended January 31, 2000, upon their reelection to the Board of
Directors at the annual meeting of shareholders in June 1999, each of Messrs.
Thomas, Berens, Dooley and Mauran were granted stock options under the
Directors' Plan for 7,500. In addition, upon reelection to the Board of
Directors at the annual meeting of shareholders in June 2000, each of such
directors were granted stock options under the Directors' Plan for 7,500 shares.
If Proposal Four is approved the non-employee directors will receive stock
options for 15,000 shares of Common Stock in connection with their reelection to
the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Fred Berens served as a member of the Compensation
Committee of the Board of Directors for the fiscal year ended January 31, 2000.
Mr. Berens owns $546,000 principal amount of the Company's 7.5% Convertible
Debentures. See "Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee submitted the following report for
fiscal 2000:
The function of the Compensation Committee is to determine the
compensation of our senior management and other key personnel who have
contributed to our performance, including bonuses, and to administer our 1995
Stock Option Plan. Our executive compensation program consists of three primary
components: base salaries, bonuses and grants of stock options. In the past,
certain members of management have also received vehicles or car allowances.
Bonuses for senior management and other key personnel are allocated from our
Bonus Pool. The Compensation Committee may also, in its discretion, supplement
monetary compensation with incentive compensation in the form of the grant of
stock options under the 1995 Plan. All of the components of executive
compensation are designed to facilitate fulfillment of the compensation
objectives of the Board of Directors and the Compensation Committee, which
objectives include: (i) providing market competitive compensation to attract and
retain key management personnel; (ii) relating management compensation to the
achievement of our goals and our performance; and (iii) aligning the interests
of management with those of our shareholders.
The determination of the total compensation package for our senior
management and other key personnel was made after reviewing and considering a
number of factors, including our performance, achievement of our goals and the
individual's contribution to the achievement of our goals, job responsibility,
level of individual performance, compensation levels at competitive companies,
as well as companies of similar size to us, and our historical compensation
levels. Following the completion of the fiscal year, the Compensation Committee
met with the President and Chief Executive Officer to review his recommendations
with respect to the compensation package for members of senior management and
other of our key personnel. The Compensation Committee then determined the
allocation of bonuses from the Bonus Pool and the grant of stock options. Other
than the Bonus Pool, which is specifically tied to our performance, the
compensation decisions for fiscal 2000 were based upon an overall review of all
of the relevant factors without giving specific weight to any one factor.
In its allocation of the Bonus Pool and the decision on the
individuals who should receive, and the amounts of, stock option grants for
fiscal 2000 performance, the Compensation Committee considered additional
factors, including, (i) that, commensurate with our growth in sales,
profitability and operations, a greater number of management personnel and key
employees made significant contributions to us in fiscal 2000, (ii) the
contributions of certain key executives whose monetary compensation had not been
adjusted for some time, and (iii) the form of incentive compensation most
appropriate for a specific individual. Based on all of these factors, the
Compensation Committee allocated the Bonus Pool and granted stock options to a
greater number of individuals than in past years. For fiscal 2000 performance,
the Compensation Committee granted options for a total of 590,000 shares of
46
<PAGE>
Common Stock, including 375,000 to the Named Executives. The period for full
vesting of these option grants was extended from two to three years. The
Compensation Committee's stock option grants reflected in the Summary
Compensation Table for the Named Executives for the fiscal year ended January
31, 2000 were granted in March 1999 and were based primarily on fiscal 1999
performance.
The compensation of our President and Chief Executive Officer was
determined based on the above-described factors. Based on his long-term
commitment to us and significant contributions during fiscal 2000, including,
among other things, with respect to our record levels of profitability and
continued improvements in supply chain management, sales growth and
relationships with its top retailers, the development of relationships with
fragrance suppliers, and operational and management initiatives, including our
new e-commerce and internet initiatives, the Compensation Committee allocated a
bonus of $200,000 and granted a stock option for 150,000 shares of Common Stock
to Mr. Beattie in March 2000 exercisable in thirds after each succeeding year
from the date of grant.
At the Compensation Committee meeting held in March 2000, the
Compensation Committee also adopted and the Board approved certain changes to
our compensation structure for the current fiscal year 2001, including, (i)
establishing potential bonus ranges based on the person's job responsibilities,
(ii) establishing specific criteria for the determination of bonuses, including,
percentages based on our performance and percentages based on the person's
attainment of certain key performance indicators, and (iii) standardizing our
car allowance program. The Compensation Committee believes that these changes
will provide both greater incentives for employees to focus on the collective
goal of improving our performance and greater certainty in understanding how to
achieve those personal goals which will most benefit us. In addition, the
Compensation Committee believes that these changes will assist us in continuing
to attract and retain top managerial talent.
Fred Berens
George Dooley
PERFORMANCE GRAPH
NOTE: Prior to the Merger, our predecessor, Suave Shoe Corporation had
discontinued its shoe manufacturing and distribution operations. Our management
believes that reflecting our total return data relating to the shoe operations
prior to the Merger would be of no relevance to our shareholders and potentially
misleading. Accordingly, our management has omitted all historical data which
does not relate to our fragrance operations following the Merger and has begun
the performance graph comparison as of the effective date of the Merger. The
performance graph data set forth below compares the cumulative total returns,
including the reinvestment of dividends, of the Common Stock with the companies
in The Nasdaq Stock Market (U.S.) Index and with four peer group companies (the
"Peer Group"), which include: Allou Health & Beauty Care, Inc.; Jean Philippe
Fragrances, Inc.; Parlux Fragrances, Inc.; and Perfumania, Inc. (now known as
eCom Ventures, Inc.). The Peer Group consists of companies engaged in fragrance
manufacturing, distribution and sales with similar market capitalizations to us
at the beginning of the comparative period. The comparison covers a 50-month
period from the November 30, 1995 effective date of the Merger in which our
operations became the fragrance operations of the Company until January 31,
2000, and is based on an assumed $100 investment on November 30, 1995 in The
Nasdaq Stock Market (U.S.) Index, the Peer Group and in the Common Stock. The
Common Stock is listed on Nasdaq under the symbol "FRAG."
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------- ----------- ------------ ------------- ------------ ------------ -----------
11/95 1/96 1/97 1/98 1/99 1/00
----------------------------------------- ----------- ------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
FRENCH FRAGRANCES, INC. 100 141 168 235 170 139
----------------------------------------- ----------- ------------ ------------- ------------ ------------ -----------
PEER GROUP 100 99 70 57 90 85
----------------------------------------- ----------- ------------ ------------- ------------ ------------ -----------
NASDAQ NATIONAL MARKET (U.S.) 100 100 131 155 242 377
----------------------------------------- ----------- ------------ ------------- ------------ ------------ -----------
</TABLE>
47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have, and may continue to be, engaged in transactions with
affiliates. Our policy with regard to transactions with affiliates is to require
that such transactions be on terms no less favorable to us than those that would
have been obtained in a comparable transaction by us with an unrelated third
party.
In August 1998, National Trading, a corporation controlled by Mr.
Kravec, one of our directors, sold a facility that formerly served as our
executive offices to an unaffiliated third party. We had an option to purchase
that facility. As part of the consideration for relinquishing our option to
purchase the facility, National Trading issued to us a promissory note in the
aggregate principal amount of $300,000. The note is payable upon demand and
bears interest at 8.5% per annum. At January 31, 2000, $100,000 principal amount
of the note, plus accrued interest of $16,000, was outstanding, which
represented the highest amount outstanding during the fiscal year ended January
31, 2000.
At January 31, 2000, we had outstanding approximately $4,779,000
aggregate principal amount of our 7.5% Convertible Debentures, of which:
o $2,184,000 in aggregate principal amount were owned by Mr.
Kravec and National Trading,
o $546,000 in aggregate principal amount were owned by Mr.
Berens, one of our directors,
o $798,942 in aggregate principal amount were owned by Mr.
Mauran, one of our directors, and Devonshire Trust, a trust of
which Mr. Mauran is a trustee, and
o $8,374 in aggregate principal amount were owned by Mr.
Beattie, our Chairman, President and Chief Executive Officer.
On February 9, 2000, we repurchased the 7.5% Convertible Debentures
owned by Mr. Kravec and National Trading for an aggregate purchase price of
$2,652,000.
During the fiscal year ended January 31, 1999, we provided loans to Mr.
Scott Beattie, our Chairman, Chief Executive Officer and President, 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. The loans accrue interest at 8.5% per annum and mature in March
2001.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION
With certain exceptions, Section 162(m) of the Code limits our
deduction for compensation paid to certain executive officers in excess of $1
million per executive per taxable year (including any deduction with respect to
the exercise of a NSO or the disqualifying disposition of stock purchased
pursuant to an ISO). This limitation would not apply to options granted under
the Plan if shareholder approval of Proposal 3 is obtained.
INDEPENDENT AUDITORS
Representatives of Deloitte & Touche LLP, the Company's independent
auditors, are expected to be present at the Special Meeting and will have the
opportunity to make a statement, if they so desire. In addition, such
representatives are expect to be available to respond to appropriate questions
from those attending the Special Meeting.
2001 PROPOSALS OF SHAREHOLDERS
Shareholder proposals to be considered for inclusion in our proxy
materials for our 2001 Annual Meeting of Shareholders must be received by us by
January 6, 2001.
48
<PAGE>
OTHER BUSINESS
The Board of Directors is not aware of any matters that may be
presented at the Special Meeting other than those described in the Notice of
Special Meeting of Shareholders enclosed herewith. If, however, any other
matters do properly come before the Special Meeting, or any adjournment or
adjournments thereof, it is intended that the persons named as proxies will
vote, pursuant to their discretionary authority, according to their best
judgment and in our interests.
ADDITIONAL INFORMATION
All of the expenses involved in preparing, assembling and mailing
this proxy statement and the accompanying materials will be paid by us. In
addition to solicitation by mail, our directors, officers and regular employees
may solicit proxies by telephone, telegram or by personal interviews. Such
persons will receive no additional compensation for such services. We will
reimburse brokers and certain other persons for their costs and expenses in
forwarding proxy materials to the beneficial owners of Common Stock held of
record by such persons.
By Order of the Board of Directors,
Oscar E. Marina
Secretary
Miami Lakes, Florida
December 4, 2000
49
<PAGE>
REVOCABLE PROXY
FRENCH FRAGRANCES, INC.
SPECIAL MEETING OF SHAREHOLDERS, JANUARY 3, 2001 AT 10:30 A.M.
The undersigned shareholder of French Fragrances, Inc. (the "Company") hereby
appoints Oscar E. Marina and Joel B. Ronkin as proxies, each with power of
substitution and revocation, to represent the undersigned at the Special Meeting
of Shareholders of French Fragrances, Inc. to be held at the our principal
executive offices located at 14100 N.W. 60th Avenue, Miami Lakes, Florida, 33014
on January 3, 2001 at 10:30 A.M. (local time), and at any adjournment or
postponement thereof, with authority to vote all shares held or owned by the
undersigned in accordance with the directions indicated herein.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED SHAREHOLDER. IF NO DIRECTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED FOR THE APPROVAL OF PROPOSAL ONE, FOR THE APPROVAL OF PROPOSAL TWO, FOR
THE APPROVAL OF PROPOSAL THREE AND FOR THE APPROVAL OF PROPOSAL FOUR, AND ON
OTHER MATTERS PRESENTED FOR A VOTE, IN ACCORDANCE WITH THE JUDGMENT OF THE
PERSON ACTING UNDER THIS PROXY.
Each shareholder giving a proxy has the power to revoke it at any time before it
is voted, either in person at the Special Meeting, by written notice to the
Secretary of French Fragrances, Inc. or by delivery of a later-dated proxy.
Attendance at the Special Meeting without further action will not automatically
revoke a proxy.
(attached hereto)
50
<PAGE>
Please mark your
[ x ] votes as in
this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL ONE.
Proposal to approve the issuance or potential issuance of our common
shares in an amount greater than 20% of the number of our outstanding common
shares in connection with the our acquisition of the Elizabeth Arden skin
treatment, cosmetics and fragrance brands, the Elizabeth Taylor fragrance brands
and the White Shoulders fragrance brand and related assets and liabilities from
Conopco, Inc. and other affiliates of Unilever, N.V.
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
[_] [_] [_]
---------------------------------------- ------------------------------------- -------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL TWO.
Proposal to approve an amendment to our Amended and Restated Articles
of Incorporation to change the our corporate name from "French Fragrances, Inc."
to "Elizabeth Arden, Inc." subject to the consummation of the Arden acquisition.
FOR AGAINST ABSTAIN
[_] [_] [_]
---------------------------------------- ------------------------------------- -------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL THREE
Proposal to ratify the adoption and approval of our 2000 Stock
Incentive Plan
FOR AGAINST ABSTAIN
[_] [_] [_]
---------------------------------------- ------------------------------------- -------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL FOUR
Proposal to approve an amendment to our Non-Employee Director Stock
Option Plan to increase (i) the number of shares of common stock which may be
issued pursuant to stock options granted under such plan from 200,000 to
500,000, and (ii) the number of shares of common stock exercisable in connection
with an eligible director being re-elected to our Board of Directors at a
subsequent annual meeting of shareholders from 7,500 to 15,000.
FOR AGAINST ABSTAIN
[_] [_] [_]
---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
<PAGE>
P Dated: _________ __, 200_
R
O
X -------------------------------------
Y (Signature)
-------------------------------------
(Signature if held jointly)
The signature should agree with the name on
your stock certificate. If shares are held
jointly, each shareholder should sign. If
acting as attorney, executor, administrator,
trustee, guardian, etc., you should so
indicate when signing. If the signer is a
corporation, please sign the full corporate
name by President or other authorized
officer. If the signer is a partnership,
please sign in partnership name by
authorized person.
