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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-6370
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices)
(305) 620-9090
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of April 18, 1997 was approximately $71,300,000 based on
the $7.9375 average of the bid and asked prices for the Common Stock on the
Nasdaq National Market on such date and determined by subtracting from the
number of shares outstanding on that date the number of shares held by the
registrant's directors, executive officers and holders of at least 10% of
the outstanding shares of Common Stock.
As of April 18, 1997, the registrant had 13,249,152 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's Proxy Statement relating to the
1997 Annual Meeting of Shareholders to be held on June 20, 1997.
French Fragrances, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security-Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . 13
Item 6. Selected Financial Data. . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . 15
Item 8. Financial Statements and Supplementary Data. . 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . 47
Part III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation. . . . . . . . . . . . 47
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . 47
Item 13. Certain Relationships and Related Transactions 47
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . 47
Signatures. . . . . . . . . . . . . . . . . . . . . . 51
PART I
ITEM 1. BUSINESS
General
French Fragrances, Inc. (the "Company"), is a manufacturer,
distributor and marketer of prestige fragrances and related cosmetic
products predominantly in the United States and principally to mass-market
retailers. The Company has established itself as a distribution source for
more than 150 fragrance brands through brand ownership and exclusive
distribution arrangements, as well as through nonexclusive direct purchase
relationships and relationships with other sources. The brands distributed
by the Company include over 50 for which it has exclusive marketing and
distribution rights, including the Geoffrey Beene brands of Grey Flannel,
Eau de Grey Flannel and Bowling Green, the Halston brands of Halston,
Catalyst, Z-14 and I-12, and the brands Colors of Benetton, Ombre Rose,
Lapidus, Salvador Dali and Faconnable (collectively, the "Controlled
Brands") and over 100 other brands that are distributed by the Company on a
non-exclusive basis (the "Distributed Brands"). The Company distributes
its products to more than 27,500 separate retail locations in the United
States, including department stores such as J.C. Penney, Sears, Macy's,
Dayton Hudson and Nordstrom's, mass merchants such as Wal-Mart, Target,
T.J. Maxx and K-Mart, drug stores such as CVS, Eckerd Drugs, Walgreens and
Drug Emporium and independent fragrance, cosmetic and other stores such as
Cosmetics Plus, Cosmetic Center, Ulta 3, Sharper Image and Syms. In fiscal
1997, sales to mass merchants, drug stores, independent fragrance, cosmetic
and other stores (collectively, "mass-market retailers") constituted
approximately 79% of net sales, sales to department stores constituted
approximately 17% of net sales and the balance of the Company's sales was
comprised of international sales.
Over the past three years, the Company has emerged as a leading
fragrance manufacturer, distributor and marketer by (i) providing
mass-market retailers a wide selection and reliable source of prestige
products, (ii) increasing and diversifying the Company's market penetration
by growing its distribution base to more than 27,500 separate retail
locations, (iii) consummating several acquisitions of Controlled Brands in
fiscal years ended 1996 and 1997, and (iv) enhancing the overall
performance of its Controlled Brands through the Company's marketing and
distribution expertise. As a result, the Company's net sales have grown to
approximately $140.5 million for fiscal 1997 from approximately $33.9
million for fiscal 1993. Over the same period, the Company's EBITDA (as
defined in Item 6 "Selected Financial Data") increased to $21.9 million
from approximately $2.0 million. In addition, the Company has increased
its percentage of revenue from Controlled Brands, which typically carry a
higher margin than Distributed Brands, to 36% for fiscal 1997 as compared
to 12% for fiscal 1993.
The Company was known as Suave Shoe Corporation until the November 30,
1995 merger of a privately-held Florida corporation named French
Fragrances, Inc. ("FFI") with and into the Company (the "Merger"). See
Note 2 to Notes to Consolidated Financial Statements. The Company was
incorporated in Florida in 1960 and, until January 1995, manufactured and
imported casual, athletic and leisure footwear. The footwear operations
were discontinued in January 1995 by prior management of the Company
following declining sales of shoe products, primarily as a result of
increased competition from foreign shoe manufacturers.
FFI was organized in 1992 and had been a distributor of prestige
fragrances and related cosmetic products since its inception. FFI
experienced rapid growth as a distributor of prestige fragrances to the
United States mass market and was searching for a large facility to
accommodate its growing operations. Through the Merger with the Company,
management of FFI was able to acquire the Company's Miami Lakes facility
(the "Miami Lakes Facility") and have FFI become a publicly-held company.
Following the Merger, the Company, as the surviving corporation in the
Merger, changed its name to "French Fragrances, Inc." In addition,
following the Merger, FFI's management became the management of the Company
and the Company's business operations have consisted entirely of the
business previously conducted by FFI, which is the manufacture,
distribution and marketing of prestige fragrances and related cosmetic
products.
Business Strategy
The Company's objective is to maintain and enhance its position as a
leading manufacturer, distributor and marketer of prestige fragrances and
related cosmetic products, principally to mass-market retailers. The
Company's strategy to achieve this objective includes the following:
Acquire Control of Additional Prestige Brands. The Company continues
to focus on acquiring ownership of, or exclusive distribution rights to,
classic prestige fragrance brands that enjoy established consumer loyalty.
These exclusive control positions allow the Company to actively manage the
brand so as to enhance the brand's prestige value in the market and at the
same time implement strategies intended to increase the brand's overall
long-term profit contribution. In fiscal 1996, the Company acquired from
Sanofi Beaute, Inc. ("Sanofi"), a long-term license to manufacture and
distribute worldwide the Geoffrey Beene fragrance brands, including Grey
Flannel, Bowling Green and Chance, and obtained the exclusive United States
distribution rights for the Galenic Elancyl skin care products and the
Benetton fragrance and cosmetic brands, including Colors of Benetton and
Tribu. In fiscal 1997, the Company completed the purchase of the Halston
fragrance brands, including Halston, Catalyst, Z-14 and I-12 and acquired
the principal assets of Fragrance Marketing Group, Inc. ("FMG"), including
exclusive United States distribution rights to Ombre Rose, Faconable,
Balenciaga, Lapidus and several other brands. Management believes that the
Company's strong market position and reputation in the prestige fragrance
industry have assisted the Company in acquiring ownership of prestige
fragrance brands, particularly when, as with the Geoffrey Beene and Halston
brands, the Company has already served as a direct distributor of the
brand. Although the Company is currently exploring additional acquisition
opportunities for prestige fragrance brands, the Company has no current
agreements or commitments for any additional acquisitions, and there is
accordingly no assurance that the Company will be able to complete any
future acquisitions.
Further Expand Direct Distribution. The Company intends to continue
to expand its distribution business and increase its sales to mass-market
retailers by: (i) increasing the number of prestige brands it distributes;
(ii) increasing the number of manufacturers for which it serves as a direct
distributor; (iii) expanding its customer base to include additional
mass-market retailers not presently served by the Company; and (iv) developing
and implementing innovative marketing and merchandizing programs targeted
to address the requirements of its customers, especially within the mass
market. Management believes that the Company's ability to further expand
its distribution business is enhanced by the competitive position it has
already achieved. In particular, the Company's broad selection of prestige
fragrances, its market presence as an established distributor to a large
number of mass-market stores and its value-added service capabilities,
combined with management's long-standing relationships with a number of
leading manufacturers and retailers, are considered by management to be
important to the Company's continued success and growth. The Company also
believes that, as a direct distributor of many classic prestige fragrances,
it has the ability to offer mass-market retailers a more predictable and
reliable source of supply of products than can be offered by other
secondary sources for such fragrances with which the Company competes. The
Company does not intend to open retail stores or otherwise engage in retail
sales.
Improve Brand Performance Through Focused Marketing. The Company
seeks to utilize its marketing expertise and its extensive distribution
network to successfully position, or reposition, its brands in the market
place to enhance their value. Such strategies typically include managing
sales volumes, channels of distribution, pricing, advertising and
promotions, packaging and gift set design, international marketing and
other factors in a manner intended to best position the brand in each of
its different distribution channels. For example, upon its acquisition of
the Halston brands, the Company largely eliminated low-margin sales to
international distributors (particularly to distributors who resold the
product into the United States market) and repositioned the brand's image
with the first national advertising campaign for Halston in a number of
years. The Company also implemented a policy of product differentiation
among distribution channels to enhance the brand's prestige image.
Strengthen and Expand Relationships with Retailers Through Providing
Value Added Services. The Company continues to increase the number of
retail locations to which it distributes its products and currently serves
more than 27,500 separate retail locations. The Company attributes its
growing distribution network to its ability to provide retailers with a
consistent supply of product as well as its ability to provide retailers,
especially mass-market retailers, with a level of service typically not
provided by its competitors. For example, in many cases, the Company's
sales and marketing professionals work closely with major retailers to act
as category managers by, among other things, (i) developing merchandising
programs that are designed to improve sales and profitability and that are
specific to the customers' business and marketing strategies, (ii) creating
regularly planned promotional campaigns and in-store displays designed to
increase sales, and (iii) designing model stock assortments and planograms
for the effective layout of customers' fragrance and cosmetics departments.
The Company believes that the provision of such services both creates a
partnership between the Company and the retailer and increases the absolute
amount of the Company's products sold through such retailers.
Develop Low-Risk Brand Line Extensions. The Company's strategy is to
opportunistically capitalize on existing brand awareness by introducing
product line extensions, rather than launching new fragrance brands. Since
the costs of developing a product line extension generally are not material
to the Company, the Company's brand extension strategy can provide a
significant increase in profitability to the Company with limited capital
risk. For example, in response to requests from retailers, the Company
recently introduced into a limited market Eau de Grey Flannel, as an
extension to the Geoffrey Beene brand Grey Flannel. The fragrance is
positioned as a lighter, more every day fragrance targeted to a younger
market. In addition, the Company is exploring the introduction of a new
Halston women's fragrance based on demand anticipated by a major national
advertising campaign by an unaffiliated company which holds the Halston
apparel license. The Company is also exploring the creation and launch of
a women's fragrance for the Geoffrey Beene line. There can be no assurance
as to the timing, occurrence or ultimate success of any new product
launches.
Exploit Operating Leverage to Further Enhance Profitability. The
Company is near completion of a comprehensive upgrade of the Miami Lakes
Facility intended to increase significantly its distribution capacity and
enhance operational efficiency. As a result of this upgrade, the Company
believes it will be able to increase the volumes distributed without a
commensurate increase in operating costs. Since its sales are
characterized by a relatively large number of orders (approximately 82,000
in fiscal 1997) with a relatively low average order size (approximately
$1,800 in fiscal 1997), the Company believes that by increasing the average
order size through the introduction of additional brands or increasing the
volume of existing brands sold to existing customers, it can further
enhance its operating margins.
Industry Overview
According to the United States Department of Commerce, fragrance and
related product sales in the United States were approximately $5 billion in
1995. The United States market for fragrances and related products
continues to grow moderately. The growth is generally attributed to new
product introductions appealing to a broader segment of the market,
population growth, increasing numbers of mature consumers and product
innovation such as special sizes and new product formulations.
Fragrance products in the United States are generally distributed
through two channels of distribution: (i) the prestige market, which
includes department stores; and (ii) the mass market, which includes
mass-market retailers, food and drug stores, independent fragrance, cosmetic and
other stores and direct selling firms including house-to-house and home
television shopping companies. Management of the Company believes that the
market has experienced a significant shift in the purchasing habits of
consumers away from higher priced department stores to mass-market
retailers. Management also believes that this trend is indicative of an
increasing desire among U.S. consumers to acquire prestige fragrance
products at the best value. Nevertheless, management believes that
successful launching and continued marketing support of a brand in the
prestige distribution channel is essential to establish and maintain the
brand's prestige status and marketability in the mass market.
Management believes there are a number of significant trends currently
impacting the mass-market segment that it expects should contribute to its
continued growth, including: (i) increasing acceptance of self-service
shopping; (ii) increasing desire by retailers to purchase more efficiently
and to buy more products from fewer vendors; (iii) sustained, and in some
instances, increasing demand for classic prestige fragrances; and (iv) more
upscale images communicated by mass merchandisers in their advertising.
Manufacturers of prestige fragrances have historically restricted
their direct sales in the United States primarily to prestige department
stores and specialty stores. As a result, mass-market retailers have
traditionally obtained prestige products from secondary sources.
Historically, the secondary sources available to the mass market have been
limited to (i) direct distributors such as the Company, which principally
receives products directly from perfume manufacturers, and (ii)
distributors of prestige products manufactured by, or distributed to,
foreign sources for foreign distribution which are diverted to the United
States market ("Diverted Sources"). Under existing court decisions, there
are variations in the extent to which trademark and copyright laws or
customs regulations may restrict the importation of trademarked or
copyrighted fragrance products through Diverted Sources without the consent
of the trademark or copyright owner. From time to time, the Company may
take advantage of favorable buying opportunities and purchase limited
amounts of fragrance products from sources which may purchase from Diverted
Sources. There can be no assurance that these sources of product will be
available in the future or that the Company may not become the subject of
legal action arising from its buying activities with respect to these
products. To date, the Company has not been the subject of any such legal
action.
Products
The Company sells prestige fragrances and related cosmetics products,
including perfume, cologne, eau de toilette, body spray, men's cologne and
after-shave, and gift sets. Each fragrance is distributed in a variety of
sizes and packaging arrangements. In addition, each fragrance line may be
complemented by body products, such as soaps, deodorants, body lotions,
cremes and dusting powders. The Company's products generally retail at
prices ranging from $20 to $100 per item.
The Company currently stocks approximately 60 Halston and Geoffrey
Beene brand name items which it manufactures and approximately 240 brand
name items of other Controlled Brands which it purchases from fragrance
manufacturers. The Company currently stocks, in addition to its Controlled
Brand products, more than 600 different brand name items purchased from
various fragrance manufacturers and other sources. The Company seeks to
continue to expand its base of direct purchase relationships with fragrance
manufacturers.
The Company uses third party contract manufacturers in the United
States and Europe to obtain substantially all of the raw materials,
components and packaging products and for the manufacture of finished
products relating to the Halston and Geoffrey Beene fragrance products.
The Company currently obtains its materials for these products from a
limited number of manufacturers and other suppliers. Management of the
Company believes that its relationships with these manufacturers are good,
and that there are sufficient alternatives should one or more of these
manufacturers become unavailable. Distributed Brand products are supplied
to the Company in finished goods form and are generally acquired directly
from major international fragrance manufacturers, as well as from other
sources.
Except as to Controlled Brand products, the Company, as is customary
in the industry, does not have long-term or exclusive contracts with
manufacturers or suppliers. Purchases from manufacturers or suppliers that
do not have exclusive distribution contracts with the Company are generally
made pursuant to purchase orders. The Company's ten largest suppliers of
Distributed Brands accounted for approximately 75% of the Company's cost of
sales for the fiscal year ended January 31, 1997. The loss of, or a
significant adverse change in, the relationship between the Company and any
of its major suppliers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Licensing and Exclusive Distribution Agreements; Fine Fragrances Option
Except for its Halston and Geoffrey Beene products, substantially all
of the Company's products are covered by trademarks owned by others.
Management does not believe that its business, other than with respect to
the Halston and Geoffrey Beene fragrance products, is dependent upon any
particular trademark, license or similar property. Management believes
that the Halston trademarks and the Geoffrey Beene license and trademarks
are important to its business.
Halston. In March 1996, the Company, directly and through its
subsidiary Halston Parfums, Inc. ("Halston Parfums") acquired from Halston
Borghese, Inc. ("Halston Borghese") 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 I-12 (the "Halston
Acquisition"). See Note 2 to the Notes to Consolidated Financial
Statements. The Company (and FFI since 1993) had been a direct distributor
of the Halston brands in the United States, which has been the primary
market for the Halston fragrance products. The Company also has patent
registrations in the United States for bottle designs associated with
certain of the Halston fragrance products.
Geoffrey Beene. In March 1995, FFI, directly and through its
subsidiary, G.B. Parfums, Inc. ("G.B. Parfums"), acquired certain assets
from Sanofi, including an exclusive worldwide license with Geoffrey Beene,
Inc. to manufacture and sell Geoffrey Beene fragrance and related products,
including the Grey Flannel, Bowling Green and Chance brands (the "Geoffrey
Beene Acquisition"). See Note 2 to the Notes to Consolidated Financial
Statements. FFI had been a direct distributor since 1989 of the Geoffrey
Beene brands in the United States, which has been the primary market for
the Geoffrey Beene brand products. The Company and G.B. Parfums have
trademark registrations and applications in the United States and in
numerous other countries for these brands. The license agreement has an
initial term of 30 years from February 1995, subject to automatic
extensions for successive ten-year periods unless earlier terminated by
G.B. Parfums in accordance with the agreement. In addition to certain
consulting and other payments required to be made by G.B. Parfums, G.B.
Parfums is obligated to pay royalties based on 3% of net sales of Geoffrey
Beene fragrance products, which royalty payments decrease if Mr. Geoffrey
Beene ceases to design apparel in the field of high fashion using his own
name.
Cofci. Since 1990, Fine Fragrances, Inc. ("Fine Fragrances"), in
which the Company has a 49.99% equity interest, has had agreements with
COFCI, S.A. ("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. The agreements expire in April 2007, subject to earlier
termination by Cofci if Fine Fragrances were to cease to purchase certain
minimum levels of product.
In April 1997, the Company executed an option agreement with a third
party (the "Fine Option"), pursuant to which it has the right until
September 30, 1997 to acquire the 50.01% equity interest in Fine Fragrances
that it does not already own for a purchase price of $2 million, plus an
additional payment of $1 million to be paid over time based on 5% of the
net sales of Cofci products, with any unpaid balance due after the third
anniversary date of the closing. If the Company exercises the Fine Option,
Fine Fragrances will become a wholly-owned subsidiary of the Company, and
its operations will be consolidated with those of the Company.
Galenic Elancyl. In October 1995, FFI entered into a five year
agreement (which is automatically renewable for successive three year terms
unless either party gives written notice prior to the applicable term) with
Pierre Fabre Dermo Cosmetique, a large French skin care manufacturer,
pursuant to which the Company serves as the exclusive distributor in the
United States of the Galenic Elancyl skin care products.
Benetton. In December 1995, the Company entered into agreement with
S.A.B., USA Corp., with an initial term through December 1, 2000 (which is
automatically renewable for successive three year terms unless either party
gives written notice prior to the applicable term) pursuant to which the
Company serves as the exclusive distributor in the United States of the
Benetton fragrance lines, including the Colors of Benetton and Tribu
brands.
Faconnable. In May 1996, in connection with the acquisition of the
principal assets of FMG (the "FMG Acquisition"), the Company acquired a
distribution agreement with Fairtrade Sarl having an initial term through
June 1999, pursuant to which the Company serves as the exclusive
distributor in the United States of the Faconnable fragrance line,
including the Faconnable and Face a Face brands. See Note 2 to the Notes
to Consolidated Financial Statements. The distribution agreement
automatically renews for two successive five-year terms unless the Company
terminates the agreement at the end of the initial term.
Lapidus. In May 1996, in connection with the FMG Acquisition, the
Company acquired a distribution agreement with Les Parfums Ted Lapidus,
S.A. having an initial term through June 1999, pursuant to which the
Company serves as the exclusive distributor in the United States of the
Lapidus, Fantasme and Creation fragrance lines. The distribution agreement
automatically renews for two successive five-year terms unless the Company
terminates the agreement at the end of the initial term.
Ombre Rose. In May 1996, in connection with the FMG Acquisition, the
Company acquired a distribution agreement with Inter Parfums, S.A. with a
minimum term through December 31, 2003, pursuant to which the Company
serves as the exclusive distributor in the United States of the Ombre Rose,
Ombre D'or and Ombre Bleue fragrance lines.
Others. In May 1996, in connection with the FMG Acquisition, the
Company acquired a number of distribution agreements pursuant to which the
Company serves as the exclusive distributor in the United States of
additional prestige fragrance brands, including Balenciaga Pour Homme,
Chevignon, Talisman, Witness, Niki de Saint Phalle, Bogart, Rumba, Le Dix,
Prelude and One Man Show. These agreements generally extend through 1998
or 1999 and are generally automatically renewable for successive five-year
terms unless either party gives written notice prior to the end of the
applicable term.
Marketing and Sales
In the United States and Canada, the Company has established its own
sales and marketing staff, and also utilizes independent sales
representatives. As a result of the Halston Acquisition and the FMG
Acquisition, the Company significantly increased its sales and marketing
force. As of April 15, 1997, the Company's sales and marketing force
consisted of approximately 25 sales and marketing employees and
approximately 70 independent sales representatives. In general, each sales
employee and representative is assigned sales responsibility for a customer
or territory. The Company's sales and marketing employees and
representatives routinely visit retailers to assist in the merchandising,
layout and stocking of selling areas. As a result of the increased use of
electronic data interchange ("EDI") by the Company's customers, which
reduces the administrative time and costs associated with processing
orders, the Company has refocused its sales and marketing force to increase
the promotion of in-store sales.
The Company's senior sales and marketing personnel support the efforts
of its sales employees and representatives by working with the merchandise
managers, lead buyers and marketing departments of its major retailers to
develop advertising and promotional plans tailored to these customers'
retail needs. The Company's sales and marketing personnel frequently work
with customers to (i) assist in the development of merchandising and
promotional programs and budgets for specific products or selling seasons,
(ii) design model schematic planograms for the budgeting of the customer's
fragrance and cosmetics departments, (iii) identify trends in consumer
preferences and (iv) conduct training programs for the retailers' sales
personnel.
The Company nationally advertises its Controlled Brand products
directly in leading men's and women's print media, through radio
advertising in key markets and through cooperative advertising in
association with major retailers. The Company also promotes products
through the use of gift-with-purchase programs, sales personnel incentive
commissions and purchase-with-purchase programs.
It has been an industry practice for businesses that market fragrances
and cosmetics to prestige department stores to provide the department
stores with rights to return merchandise. The Company limits return rights
to certain promotional items offered in its Halston, Geoffrey Beene and
Galenic Elancyl lines to prestige department stores. The Company generally
does not offer any other return rights and seeks to limit sales of such
promotional products to each retailer to volumes that can be sold through
to the retailer's customer base. The Company establishes reserves and
provides allowances for returns of such products at the time of sale. As a
percentage of gross sales (net sales plus returns, reserves and
allowances), returns were approximately 2.6%,1.4%,1.8% and 1.9%,
respectively, for the fiscal year ended June 30, 1994, the seven months
ended January 31, 1995 and the fiscal years ended January 31, 1996 and
1997. To date, the Company's returns have not exceeded its returns and
allowances, although there can be no assurance that such reserves and
allowances will be adequate in the future.
Marketing and sales activities outside the United States and Canada
relate primarily to Geoffrey Beene and Halston products and are conducted
through arrangements with independent distributors. The Company's export
sales department coordinates the Company's relationship with various
international fragrance distributors and assists them in developing
promotional campaigns and marketing budgets for individual foreign markets.
Revenues related to export sales were not material during any of the last
three fiscal years.
A portion of the Company's accounts receivable are insured from risk
of uncollectibility by Heller Intercredit Company, a division of Heller
Financial, Inc. See Note 1 to Notes to Consolidated Financial Statements.
Distribution
The Company distributes its products to more than 27,500 separate
retail locations in the United States, including department stores such as
J.C. Penney, Sears, Macy's, Dayton Hudson and Nordstrom's, mass merchants
such as Wal-Mart, Target, T.J. Maxx and K-Mart, drug stores such as CVS,
Eckerd Drugs, Walgreens and Drug Emporium and independent fragrance,
cosmetic and other stores such as Cosmetics Plus, Cosmetic Center, Ulta 3,
Sharper Image and Syms. In addition, with respect to the Halston and
Geoffrey Beene fragrance products, the Company intends to continue to
expand the distribution of these products worldwide.
A majority of the Company's customers require rapid shipment of
products. Because the Company generally attempts to fill orders within two
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 Company or temporary
employees and most merchandise is shipped to customers by common carriers.
In addition to expedient delivery, the Company addresses its individual
customer needs by offering its customers U.P.C. coding, advance price
ticketing, case packing, drop ship programs (direct to store), shrink-wrap,
electronic service/anti-theft tagging and EDI capabilities. As an example
of the importance of these services to retailers, approximately 70% of the
Company's purchase orders in fiscal 1997 were received by EDI.
As is customary in the fragrance industry, the Company does not have
long-term or exclusive contracts with any of its customers. Sales to
customers are generally made pursuant to purchase orders. The Company
believes that its continuing relationships with its customers are based
upon its ability to provide a wide selection and reliable source of
prestige fragrance products as well as its ability to provide value-added
services to its customers, especially mass-market retailers. The Company's
ten largest customers accounted for approximately 41% of net sales for the
fiscal year ended January 31, 1997. No single customer accounted for more
than 10% of net sales for the same period. The loss of, or a significant
adverse change in, the relationship between the Company and any of its key
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Seasonality
The Company generally has significantly higher sales in the second
half of the calendar year as a result of increased demand by retailers in
anticipation of, and during, the holiday season. For example, in fiscal
1997, 69% of the Company's net sales were made during the second half of
the fiscal year.
Management Information Systems
The Company's management information system provides on-line,
real-time, fully integrated information for its sales, purchasing,
warehouse and financial departments. The order entry portion of the system
is designed around EDI to provide enhanced turnaround and reduced
opportunity for errors in orders and invoicing for both the Company and its
customers. The system forms the basis for a number of the value-added
services that the Company provides to its customers, including inventory
replenishment, customer billing, sales analysis, product availability and
pricing information, and expedited order processing. This system has been
enhanced, and the Company intends to continue to enhance the system on an
ongoing basis, to provide improved service to the Company's customers
through quicker response times in shipments, customer service and sales
information, and to provide the Company's management the ability to
identify opportunities for increased efficiencies and cost savings.
Competition
The fragrance industry is highly competitive and at times subject to
rapidly changing consumer preferences and industry trends. The Company
competes with other distributors, Diverted Sources, manufacturers of
mass-market fragrances and other manufacturers of prestige fragrances.
Competition is generally a function of assortment and continuity of
merchandise selection, price, timely delivery and level of in-store
customer support. The Company believes that it competes primarily on the
basis of (i) its established relationships with its fragrance manufacturer
suppliers and, in particular, its ability to offer mass-market retailers a
reliable, direct supply of prestige fragrances and related cosmetic
products at competitive prices, and (ii) its emphasis on providing
value-added customer services to its mass-market retailers. There are
products which are better known than the products produced for or
distributed by the Company. Many of the Company's competitors are
substantially larger and more diversified, and have substantially greater
financial and marketing resources, than the Company, as well as greater
name recognition, and the ability to develop and market products similar to
and competitive with those distributed by the Company.
Employees
As a result of the Company's recent growth, management reviewed the
Company's human resources needs and concluded that the most cost-effective
method of meeting the Company's needs was to out source a portion of the
human resources functions. Accordingly, the Company entered into an
employee leasing agreement with The Vincam Group, Inc. ("Vincam"), and,
effective January 1, 1997, the Company's existing employees became
employees of Vincam and were leased to the Company. Under the terms of the
agreement, Vincam is the employer of record and assumes all payroll
obligations and certain employee benefits administration with respect to
the personnel of the Company, while allowing the Company to retain
management control of these persons. References herein to "employees" or
"personnel" of the Company include individuals whose services are leased.
As of April 15, 1997, the Company leased the services of approximately 170
full-time employees. None of the Company's employees are covered by a
collective bargaining agreement, and the Company believes that its
relationship with its employees is satisfactory. The Company also uses the
services of independent contractors in various capacities, including sales
representatives and information systems personnel. The Company also
contracts with a temporary personnel agency for temporary or seasonal
labor.
Executive Officers of the Company
The following table sets forth information, as of April 15, 1997, with
respect to each person who is an executive officer of the Company, as
indicated below:
Name Age Position
-----------------------------------------------------------------------
Rafael Kravec 65 Chairman of the Board & Chief Executive Officer
E. Scott Beattie 38 President and Chief Operating Officer
Gretchen Cuzydlo 36 Vice President - Marketing
Joseph M. Gilfarb 47 Vice President - Sales
Saul Kravec 34 Vice President - Sales
Oscar E. Marina 37 Vice President, General Counsel and Secretary
William J. Mueller 50 Vice President - Operations,
Chief Financial Officer and Treasurer
All officers are elected annually by the Board of Directors (the
"Board") and serve at the discretion of the Board. The business
experience, principal occupations and employment as well as the periods of
service of each of the executive officers of the Company during the last
five years are set forth below.
Rafael Kravec has served as Chairman of the Board since April 1997 and
has served as Chief Executive Officer and as a director of the Company
since the Merger in November 1995. Mr. Kravec served as President and
Chief Executive Officer and a director of FFI from its formation in July
1992 until the consummation of the Merger. Mr. Kravec has also served as
President and Chief Executive Officer and a director of (i) G.B. Parfums
since its formation in March 1995, (ii) Halston Parfums since its formation
in March 1996, (iii) Fine Fragrances since March 1990, (iv) FRM Services,
Inc. ("FRM"), a wholly-owned subsidiary of the Company, since December
1996, and (v) National Trading Manufacturing, Inc. ("National Trading"), a
company controlled by Mr. Kravec since 1981. Rafael Kravec is the father
of Saul Kravec.
E. Scott Beattie has served as President and Chief Operating Officer
of the Company since April 1997, and has been a director of the Company
since the Merger. From November 1995 until April 1997, Mr. Beattie served
as served as Vice Chairman of the Board and Assistant Secretary of the
Company (positions he held with FFI from January 1995 until the
consummation of the Merger). Since September 1989, Mr. Beattie has served
as President of E.S.B. Consultants, Inc. ("ESB"), a financial and
management consulting firm that is controlled by Mr. Beattie and has a
consulting agreement with the Company. Mr. Beattie has also served as
Executive Vice President of Bedford Capital Corporation ("Bedford"), a
Toronto, Canada based firm that is engaged in the business of providing
merchant banking services through two private pools of capital to
middle-market companies, since March 1995 and as Vice President of Bedford
from September 1989 to March 1995. Mr. Beattie is a director of Bedford,
Bedford Capital Financial Corporation, which is the parent company of
Bedford and trades on the Toronto Stock Exchange, Microbix Biosystems,
Inc.,a biotechnology company, Cash Converters, Inc., a specialty retailer,
and Janna Systems Inc., an applications software company.
Gretchen Cuzydlo has served as Vice President - Marketing of the
Company since the Merger. Ms. Cuzydlo served as Vice President - Marketing
of FFI from May 1993 until the consummation of the Merger. Ms. Cuzydlo has
also served as Vice President - Marketing of Fine Fragrances since May
1993. From August 1991 to May 1993, Ms. Cuzydlo was Vice President -
Marketing of Cosmyl Corporation, a cosmetics company.
Joseph M. Gilfarb has served as Vice President - Sales of the Company
since the Merger. Mr. Gilfarb served as Vice President - Sales of FFI from
December 1992 until the consummation of the Merger. Mr. Gilfarb started
with FFI as a sales representative in April 1992 and was promoted to Sales
Manager in May 1992 before serving as Vice President - Sales.
Saul Kravec has served as Vice President - Sales of the Company since
March 1996. Prior to that time he had served as Vice President, General
Counsel and Secretary of the Company since the Merger. Mr. Kravec served
as Vice President, General Counsel and Secretary of FFI from its formation
in July 1992 until the consummation of the Merger. From October 1989 until
July 1992, Mr. Kravec served as General Counsel and Sales Manager of
National Trading, working primarily in the perfume division which was
acquired by FFI in July 1992. Saul Kravec is the son of Rafael Kravec.
Oscar E. Marina has served as Vice President, General Counsel and
Secretary of the Company and Fine Fragrances since March 1996. Mr. Marina
has also served as Secretary of G.B. Parfums and Halston Parfums since
March 1996 and as a director and Assistant Secretary of FRM since December
1996. From October 1988 until March 1996, Mr. Marina was an attorney with
the law firm of Steel Hector & Davis LLP in Miami, becoming a partner of
the firm in January 1995.
William J. Mueller has served as Vice President - Operations, Chief
Financial Officer and Treasurer of the Company since the Merger. Mr.
Mueller served as Vice President - Operations, Chief Financial Officer and
Treasurer of FFI from April 1993 until the consummation of the Merger. Mr.
Mueller has also served as Vice President - Finance and Chief Financial
Officer of Fine Fragrances since April 1993 and Treasurer of G.B. Parfums
and Halston Parfums since March 1996. From May 1991 to August 1992, Mr.
Mueller was Vice President, Chief Financial Officer and Treasurer of
Homeowners Group, a real estate marketing company. Mr. Mueller is a
certified public accountant.
ITEM 2. PROPERTIES
The Company's Miami Lakes Facility is located at 14100 N.W. 60th
Avenue, Miami Lakes, Florida 33014 in a building owned by the Company on a
tract of land comprising approximately 13 acres. The Miami Lakes Facility
contains approximately 200,000 square feet of assembly, distribution,
shipping and storage space and approximately 30,000 square feet of office
space. The Company has issued a mortgage on the Miami Lakes Facility in
the amount of $6 million. The Company is renovating the Miami Lakes
Facility, and management of the Company expects to complete the renovation
and to relocate its executive offices to the Miami Lakes Facility in May
1997. The Company also leases from National Trading a 59,000 square foot
building in Miami, Florida (the "National Trading Facility"), which had
housed the Company's distribution facilities prior to the Merger and which
presently houses the executive offices of the Company. See Note 10 to the
Notes to Consolidated Financial Statements. Pending completion of the
renovation of the Miami Lakes Facility, the Company is continuing to occupy
the National Trading Facility as its executive offices. Subsequent to
relocation of the executive offices, the Company and National Trading will
pursue a potential sale or lease of the National Trading Facility to a
third party which would discharge the Company from the lease obligation.
There is no assurance that any such sale or lease will be consummated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings that are
believed by management to be material to the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended January 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market information. The Company's Common Stock, $.01 par value
("Common Stock") has been traded on the Nasdaq National Market (the
"National Market") under the symbol "FRAG" since December 21, 1995. From
February 10, 1995 until December 20, 1995, the Common Stock was traded on a
very limited basis on the Over-the-Counter Bulletin Board ("OTC") under the
symbol "SVSH." Prior to February 10, 1995, the Stock was traded on the New
York Stock Exchange ("NYSE"). On February 10, 1995, the NYSE suspended
trading in the Common Stock based on the Company's announcement of its
intention to discontinue its shoe manufacturing operations.
The following table sets forth (i) for the Company's fiscal 1995
quarters until December 20, 1995, the high and low closing bid prices for
the Common Stock on the OTC, and (ii) from December 21,1995 to the January
31, 1997 fiscal year end, the high and low sales prices for the Common
Stock, as reported on the National Market. OTC quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
High Low
-----------------------------------------------------
Quarter Ended 3/31/95 $2 1/4 $ 5/8
Quarter Ended 6/30/95 $2 9/16 $ 13/16
Quarter Ended 9/30/95 $2 5/8 $1 15/16
10/1/95 - 12/20/95 $5 3/8 $1 15/16
12/21/95 - 1/31/96 $6 5/8 $4 11/16
Quarter Ended 4/30/96 $7 7/16 $5 1/8
Quarter Ended 7/31/96 $8 1/8 $5 5/16
Quarter Ended 10/31/96 $9 1/4 $6
Quarter Ended 1/31/97 $9 5/8 $7 3/8
In connection with the Merger, the Company adopted a January 31 year
end to correspond to the fiscal year end of FFI, the accounting acquiror in
the Merger.
Holders. As of April 18, 1997, there were approximately 545 record
holders of the Common Stock.
Dividends. The Company has not declared any cash dividends in its two
most recent fiscal years and currently has no plans to declare dividends in
the foreseeable future. Any future determination by the Company's Board of
Directors to pay dividends will be made only after consideration of the
Company's financial condition, results of operations, capital requirements
and other relevant factors. The Company's credit facility with Fleet
National Bank currently prohibits the payment of cash dividends by the
Company.
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
The shoe manufacturing and importing operations of the Company were
permanently discontinued in the first quarter of 1995, and the operations
of the Company following the November 30, 1995 Merger, have consisted
solely of the fragrance operations of FFI, which was the accounting
acquiror in the Merger. Therefore, the following selected financial data
represent the selected financial data of FFI until the Merger and the
selected financial data of the Company following the Merger. The
information has been derived from the audited and unaudited consolidated
financial statements of the Company and FFI for the relevant periods.
Effective January 31, 1995, FFI changed its fiscal year end to January 31
from June 30. For this reason, the seven months ended January 31, 1995 and
1994 are presented. The following data should be read in conjunction with
the Financial Statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere herein.
Fiscal Seven Months Twelve Months Fiscal
Year Ended Ended Ended Year Ended
June 30, January 31, January 31, January 31,
1993 1994 1994 1995 1995 1996 1997
----------------- ----------------- ------------- -----------------
Selected Income
Statement Data:
Net sales $33,854 $46,105 $27,415 $50,922 $69,612 $87,979 $140,482
Gross profit 5,346 8,152 4,723 10,100 13,504 21,639 46,078
Income from operations 1,742 2,898 1,763 5,160 6,222 8,419 18,222
------- ------- ------- ------- ------- ------- --------
Net income $ 595 $ 1,011 $ 641 $ 2,492 $ 2,862 $ 3,007 $ 8,248
======= ======= ======= ======= ======= ======= ========
Selected Per Share Data:
Earnings per
common share $0.08 $0.14 $0.09 $0.35 $0.40 $0.35 $0.61
======= ======= ======= ======= ======= ======= ========
Weighted average
common shares
outstanding 7,120 7,120 7,120 7,120 7,120 8,518 13,640
Other Data:
EBITDA (2) $1,990 $3,233 $1,964 $5,366 $6,562 $9,738 $21,885
As of June 30 As of January 31,
----------------- ---------------------------
1993 1994 1995 1996 1997
----------------- ---------------------------
Selected Balance
Sheet Data:
Inventories $ 8,595 $15,232 $21,829 $25,851 $67,989
Working capital 3,972 4,747 6,874 8,022 17,734
Total assets 19,419 30,589 38,378 71,384 172,378
Short-term debt 8,840 11,280 16,000 16,713 39,631
Long-term debt 5,020 4,983 4,932 17,285 37,215
Redeemable preferred
stock 2,000 2,000 2,000 2,000 --
Shareholders' equity 875 1,887 4,379 17,539 44,680
- --------------------
Earnings per share and the weighted average number of shares
outstanding are determined based on the number of the Company's common
shares (7,120,000) received by the shareholders of FFI in the Merger for
each period prior to the year ended January 31, 1996. For the year ended
January 31, 1996, earnings per share and the weighted average number of
shares outstanding is based on the 7,120,000 shares received by the
shareholders of FFI in the Merger through the date of the Merger and
thereafter is based on the actual number of common shares and common share
equivalents outstanding.
EBITDA is defined as operating income, 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. However,
EBITDA may not be comparable in all instances to other similar types of
measures used in the fragrance industry.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The shoe manufacturing and importing operations of the Company were
permanently discontinued in the first quarter of 1995, and the operations
of the Company following the Merger which was consummated on November 30,
1995, consist solely of the fragrance operations of FFI, which was the
accounting acquiror in the Merger. Therefore, the following discussion and
analysis relates to the results of operation of FFI until the Merger and
the financial condition and results of operation of the Company following
the Merger.
The Company's business is the manufacturing, distribution and
marketing of prestige fragrances and related cosmetic products. The
Company distributes and markets on an exclusive basis in the United States
to both department stores and mass-market retailers the Controlled Brands,
including, the Geoffrey Beene brands of Grey Flannel, Eau de Grey Flannel
and Bowling Green, the Halston brands of Halston, Catalyst, Z-14 and 1-12,
and the brands Colors of Benetton, Tribu, Ombre Rose, Ombre D'or, Ombre
Bleue, Faconnable, Balenciaga, Talisman, Rumba, Le Dix, Lapidus, Creation,
Fantasme, Bogart, Witness, One Man Show, Chevignon and Niki de Saint
Phalle, as well as the Galenic Elancyl skin care products. In the case of
the Halston and Geoffrey Beene fragrance brands, the Company also controls
the manufacturing and exclusive worldwide distribution of such brands. In
addition to the Controlled Brand operations, the Company also distributes,
primarily to mass-market retailers, Distributed Brands it obtains from
manufacturers and other sources.
The Company also has a 49.99% ownership interest in Fine Fragrances
which distributes on an exclusive basis in the United States and Canada
fragrances manufactured by Cofci, including the Salvador Dali, Salvador,
Laguna, Dalissime, Dalimix, Cafe, Taxi and Watt brands. The Company
accounts for its investment in Fine Fragrances under the equity method of
accounting, whereby its initial investment is recorded at cost, adjusted by
its share of the Fine Fragrances' operating results and reduced by
distributions received. If, as management expects, the Company exercises
the Fine Option, Fine Fragrances will become a wholly-owned subsidiary of
the Company, and the Company will account for the operations of Fine
Fragrances on a consolidated basis. See "Item 1 Business - Licensing and
Exclusive Distribution Agreements; Fine Fragrances Option - Cofci."
The Controlled Brand operations have somewhat different financial
characteristics than the Distributed Brand operations. As a percentage of
net sales, the Controlled Brand operations tend to have higher gross
margins, as well as higher marketing and selling, general and
administrative expenses, than the Distributed Brand operations. The higher
gross margins have been greater than the higher marketing and selling,
general and administrative expenses associated with the Controlled Brand
operations. The acquisition of the licenses and trademarks associated with
the Controlled Brand operations also increases amortization expense.
Overall, brand contribution margin (operating income after
amortization of acquisition costs and amortization of exclusive brand
licenses, as a percentage of net sales) of Controlled Brands is greater
than that of Distributed Brands.
Effective with the period ended January 31, 1995, FFI changed its
fiscal year end to January 31 from June 30 to conform to its business year.
The following discussion of FFI's (and the Company's following the Merger)
results of operations is presented for the fiscal years ended June 30, 1993
and 1994, the seven months ended January 31, 1994 and 1995, the twelve
months ended January 31, 1995 and the fiscal years ended January 31, 1996
and 1997.
Results of Operations
General
The following table sets forth, for the periods indicated, certain
information relating to FFI's (and the Company's following the Merger)
operations expressed as percentages of net sales for the period
(percentages may not add due to rounding):
Fiscal Seven Twelve Fiscal
Ended Ended Ended Year Ended
June 30, January 31, January 31, January 31,
1993 1994 1994 1995 1995 1996 1997
--------------- ---------------- ----------- -------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.2 82.3 82.8 80.2 80.6 75.4 67.2
----- ----- ----- ----- ----- ----- -----
Gross profit 15.8 17.7 17.2 19.8 19.4 24.6 32.8
Warehouse and
shipping expenses 2.4 3.0 2.6 2.8 2.9 3.1 3.2
Selling, general and
administrative expenses 7.5 7.7 7.4 6.5 7.0 10.5 14.0
Depreciation and
amortization 0.7 0.7 0.7 0.4 0.5 1.5 2.6
----- ----- ----- ----- ----- ----- -----
Operating income 5.1 6.3 6.4 10.1 9.0 9.6 13.0
Interest expense, net of
interest and other
income 3.2 3.3 3.0 2.7 2.9 4.3 4.1
----- ----- ----- ----- ----- ----- -----
Income before equity
in earnings of
unconsolidated
affiliate and
income taxes 1.9 3.0 3.4 7.5 6.1 5.3 8.9
Equity in earnings of
unconsolidated
affiliate 0.5 0.4 0.2 0.4 0.4 0.3 0.3
----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes 2.4 3.3 3.6 7.8 6.5 5.6 9.2
Provision for
income taxes 0.7 1.2 1.3 2.9 2.4 2.2 3.3
----- ----- ----- ----- ----- ----- -----
Net income 1.8% 2.2% 2.3% 4.9% 4.1% 3.4% 5.9%
===== ===== ===== ===== ===== ===== =====
Other Data:
EBITDA 5.9% 7.0% 7.2% 10.5% 9.4% 11.1% 15.6%
- ----------------
EBITDA is defined as operating income, 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. However,
EBITDA may not be comparable in all instances to other similar types of
measures used in the fragrance industry.
Fiscal Year Ended January 31, 1997 Compared to the Fiscal Year Ended
January 31, 1996
Net Sales. Net sales increased $52.5 million, or 60%, to $140.5
million for the fiscal year ended January 31, 1997 from $88.0 million for
the fiscal year ended January 31, 1996. Of the increase in net sales (i)
approximately $28.0 million was attributable to an increase in sales of
Controlled Brands resulting primarily from the Halston Acquisition, the FMG
Acquisition, the Company's engagement to serve as the exclusive United
States distributor of the Benetton fragrance brands and increased sales of
the Geoffrey Beene fragrance brands, and (ii) the balance was attributable
to an increase in sales of Distributed Brands, including specially designed
products, for the mass market. International sales increased to
approximately $5.1 million for the fiscal year ended January 31, 1997,
compared to approximately $1.2 million for the fiscal year ended January
31, 1996, as a result of both increased sales of Geoffrey Beene products
and sales of Halston products since the Halston Acquisition. The increase
in net sales represents both an increase in the volume of products sold to
existing customers, as well as sales to new customers. Management believes
that the increased sales resulted primarily from the Company's ability to
provide its customers with a larger selection of products and a continuous,
direct supply of product, and the growth in sales of customized gift sets.
Gross Profit. Gross profit increased $24.5 million, or 113%, to $46.1
million for the fiscal year ended January 31, 1997 from $21.6 million for
the fiscal year ended January 31, 1996. The increase in gross profit and
gross margin (from 24.6% to 32.8%) was primarily attributable to the
increase in product sales of the Controlled Brands, including the Halston,
Geoffrey Beene and Benetton brands, as well as the brands formerly
distributed by FMG (all of which were at higher gross margins) and an
increase in the sale of certain product categories with higher gross
margins such as holiday fragrance sets. The increase in gross margin was
partially offset by an increase in sales of certain Distributed Brands
which typically sell at lower margins.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $1.8 million, or 67%, to $4.5 million for the fiscal year ended
January 31, 1997, from $2.7 million for the fiscal year ended January 31,
1996. The increase resulted from both the increase in net sales and higher
customer service expenses.
SG&A. Selling, general and administrative expenses increased $10.5
million, or 114%, to $19.7 million for the fiscal year ended January 31,
1997 from $9.2 million for the fiscal year ended January 31, 1996. The
increase in selling, general and administrative expenses (which increased
as a percentage of net sales from 10.5% to 14.0%), was primarily a result
of an increase in advertising and promotional expenses for the Halston and
Geoffrey Beene brands, an increase in sales commissions associated with the
increase in net sales and the addition of sales, marketing and
administrative personnel since the FMG Acquisition in May 1996.
Depreciation and Amortization. Depreciation and amortization
increased $2.4 million, or 185%, to $3.7 million for the fiscal year ended
January 31, 1997 from $1.3 million for the fiscal year ended January 31,
1996. The increase was primarily attributable to increased amortization of
intangibles arising from the acquisition of the Halston trademarks in March
1996 and the acquisition of the exclusive license agreements in the FMG
Acquisition in May 1996.
Interest Expense, Net. Interest expense, net of interest income,
increased $2.7 million, or 66%, to $6.8 million for the fiscal year ended
January 31, 1997 from $4.1 million for the fiscal year ended January 31,
1996. This increase was primarily due to the increase in average debt
outstanding resulting from the Halston Acquisition and the FMG Acquisition
and increased borrowings under the revolving portion of the Existing Credit
Facility to accommodate increased working capital requirements, including
the increased inventory levels needed to support higher net sales.
Other Income. Other income primarily reflects the receipt by the
Company of $0.5 million from the September 1996 sale of the common stock of
a company engaged in an unrelated business which Suave had held since 1984,
as well as approximately $0.1 million from the sale of shoe products and
equipment held by the Company from before the Merger.
Equity in Earnings of Affiliate. Equity in earnings of unconsolidated
affiliate increased $0.1 million, or 33%, to $0.4 million for the fiscal
year ended January 31, 1997 from $0.3 million for the fiscal year ended
January 31, 1996, as a result of increases in net sales by Fine Fragrances
of fragrance products manufactured by Cofci, partially offset by an
increase in the management fee paid to the Company.
Net Income. Net income increased $5.2 million, or 173%, to $8.2
million for the fiscal year ended January 31, 1997, from $3.0 million for
the fiscal year ended January 31, 1996, primarily as a result of the
increase in net sales and gross profit which were partially offset by
increased amortization expenses resulting from the Halston Acquisition and
the FMG Acquisition, increased interest expense and increased selling
expenses.
Net income per share. Net income per share for the Company
increased to $0.61 for the fiscal year ended January 31, 1997, compared to
$0.35 per share for the fiscal year ended January 31, 1996, primarily as a
result of the increase in net income, which was partially offset by (i) the
increased number of outstanding shares to give effect to the Merger in
November 1995 and the Company's public offering of 3,364,000 shares of
Common Stock in July 1996, and (ii) the assumed exercise or conversion of
stock options and convertible securities whose exercise or conversion price
was below the market price for the Company's common shares at the end of
the fiscal year under the treasury stock method.
EBITDA. EBITDA increased $12.2 million, or 126%, to $21.9 million for
the fiscal year ended January 31, 1997 from $9.7 million for the fiscal
year ended January 31, 1996. The EBITDA margin increased to 15.6% for the
fiscal year ended January 31, 1997 from 11.1% for the fiscal year ended
January 31, 1996. The increase was primarily attributable to the increase
in gross profit discussed above, partially offset by the increase in
selling, general and administrative expenses.
Fiscal Year Ended January 31, 1996 Compared to Twelve Months Ended
January 31, 1995
Net Sales. Net sales increased $18.4 million, or 26%, to $88.0
million for the fiscal year ended January 31, 1996 from $69.6 million for
the twelve months ended January 31, 1995. Management estimates that
approximately $9.6 million of the increase in net sales was attributable to
new customers and approximately $8.8 million was attributable to increased
sales to existing customers. Approximately $4.3 million of the net sales
increase represented an increase in net sales of Geoffrey Beene products
over the prior year due to the Company's acquisition of that brand in March
1995. Management believes that increased sales to existing customers and
sales to new customers resulted from both the Company's ability to provide
these accounts with a continuous, direct supply of product and a larger
selection of products.
Gross Profit. Gross profit increased $8.1 million, or 60%, to $21.6
million for the fiscal year ended January 31, 1996 from $13.5 million for
the twelve months ended January 31, 1995. The increases in gross profit
and gross margin (from 19.4% to 24.6%) were primarily attributable to an
increase in the sale of certain products with higher gross margins such as
custom packaged products, and additional Geoffrey Beene product sales which
were also at higher gross margins.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $0.7 million, or 33%, to $2.7 million for the fiscal year ended
January 31, 1996, from $2.0 million for the twelve months ended January 31,
1995. The increase resulted from the increase in net sales.
SG&A. Selling, general and administrative expenses increased $4.3
million, or 87%, to $9.2 million for the fiscal year ended January 31, 1996
from $4.9 million for the twelve months ended January 31, 1995. The
increase in selling, general and administrative expenses (which increased
as a percentage of net sales from 7.0% to 10.5%) was primarily a result of
increases in sales and marketing costs attributable to the higher level of
sales, the Geoffrey Beene Acquisition and higher marketing expenses
(including approximately $1.3 million of national media advertising related
to Geoffrey Beene products and approximately $2.3 million of additional
sales and marketing expenses resulting from increased sales volumes).
Depreciation and Amortization. Depreciation and amortization
increased $1.0 million, or 289%, to $1.3 million for the fiscal year ended
January 31, 1996 from $0.3 million for the twelve months ended January 31,
1995. The increase was attributable to increased amortization of
intangibles arising from the acquisition of the Geoffrey Beene license in
March 1995.
Interest Expense, Net. Interest expense, net of interest and other
income, increased 89% to $3.8 million for the fiscal year ended January 31,
1996 from $2.0 million for the twelve months ended January 31, 1995. This
increase was primarily due to the increase in average debt outstanding as a
result of the Geoffrey Beene Acquisition in which the Company issued $8.2
million aggregate principal amount of subordinated debentures and a $7.0
million term note under the Company's credit facility. The increase in
interest expense also reflected higher interest rates in 1996 and increased
borrowings under the revolving portion of the credit facility to
accommodate increased working capital requirements, including the increased
inventory levels needed to support higher net sales. See " - Liquidity and
Capital Resources."
Equity in Earnings of Affiliate. Equity in earnings of unconsolidated
affiliate decreased $16,000, or 5%, to $288,000 for the fiscal year ended
January 31, 1996 from $303,000 for the twelve months ended January 31,
1995, as a result of increases in sales and marketing expenses incurred by
Fine Fragrances relating to products manufactured by Cofci.
Net Income. Net income increased $0.1 million, or 5%, to $3.0 million
for the fiscal year ended January 31, 1996, compared to net income of $2.9
million for the twelve months ended January 31, 1995, primarily as a result
of the increase in net sales and gross profit which were partially offset
by higher sales, marketing, interest and amortization expenses.
EBITDA. EBITDA increased $3.1 million, or 47%, to $9.7 million for
the fiscal year ended January 31, 1996 from $6.6 million for the twelve
months ended January 31, 1996. The EBITDA margin increased to 11.1% for
the fiscal year ended January 31, 1996 from 9.4% for the twelve months
ended January 31, 1995. The increase was primarily attributable to the
increase in gross profit discussed above, partially offset by the increase
in selling, general and administrative expenses.
Seven Months Ended January 31, 1995 Compared to Seven Months Ended
January 31, 1994
Net Sales. Net sales increased $23.5 million, or 86%, to $50.9
million for the seven months ended January 31, 1995 from $27.4 million for
the seven months ended January 31, 1994, as a result of additional
distribution sales. Management believes that the increase in distribution
sales resulted primarily from significant increases in sales to certain
mass-market customers due to the Company's ability to provide these
accounts with continuous, direct supply of product, and the ongoing
development and growth of certain product categories such as custom
packaged products. Management also believes that sales levels were aided
by an increased emphasis on marketing activities to mass-market customers.
Gross Profit. Gross profit increased $5.4 million, or 114%, to $10.1
million for the seven months ended January 31, 1995 from $4.7 million for
the seven months ended January 31, 1994. The increases in gross profit and
in gross margin (from 17.2% to 19.8%) were primarily attributable to
favorable product purchases during the seven months ended January 31, 1995,
as well as an increase in sales of certain product categories, such as
custom packaged products, with higher gross margins.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $0.7 million, or 94%, to $1.4 million for the seven months ended
January 31, 1995 from $0.7 million for the seven months ended January 31,
1994. The increase resulted from the increase in net sales.
SG&A. Selling, general and administrative expenses increased $1.3
million, or 64%, to $3.3 million for the seven months ended January 31,
1995 from $2.0 million for the seven months ended January 31, 1994. The
increase in selling, general and administrative expenses was primarily a
result of increases in sales and marketing costs, including sales
commissions resulting from higher net sales, increases in sales and
marketing personnel, as well as increases in administrative costs resulting
from management bonuses, increased audit costs due to the change in the
Company's fiscal year end and increases in credit insurance expenses due to
the increase in net sales and accounts receivable.
Interest Expense, Net. Interest expense, net of interest and other
income, increased $0.6 million or 66%, to $1.4 million for the seven months
ended January 31, 1995 as compared to $0.8 million for the seven months
ended January 31, 1994. This increase was primarily attributable to
increased short-term debt to accommodate the Company's working capital
needs, including the increased inventory levels needed to support higher
net sales.
Equity in Earnings of Affiliate. Equity in earnings of unconsolidated
affiliate increased $0.1 million, or 300%, to $0.2 million for the seven
months ended January 31, 1995 from $46,000 for the seven months ended
January 31, 1994 as a result of increases in net sales by Fine Fragrances
of products manufactured by Cofci.
Net Income. Net income for the seven months ended January 31, 1995
was $2.5 million compared to $0.6 million for the seven months ended
January 31, 1994, primarily as a result of higher net sales.
EBITDA. EBITDA increased $3.4 million, or 170%, to $5.4 million for
the seven months ended January 31, 1995 from $2.0 million for the seven
months ended January 31, 1994. The EBITDA margin increased to 10.5% for
the seven months ended January 31, 1995 from 7.2% for the seven months
ended January 31, 1994. The increase was primarily attributable to the
increase in gross profit discussed above, partially offset by the increase
in warehouse and shipping and selling, general and administrative expenses.
Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993
Net Sales. Net sales increased $12.3 million, or 36%, to $46.1
million for the fiscal year ended June 30, 1994 from $33.9 million for the
fiscal year ended June 30, 1993. This increase was attributable to
additional distribution sales, which resulted primarily from increases in
sales to certain mass-market customers commencing in the second calendar
quarter of 1994 as a result of the Company's ability to offer these
accounts a continuous, direct supply of product. Management believes that
sales levels were aided by an increased emphasis on marketing activities
with mass-market customers.
Gross Profit. Gross profit increased $2.8 million, or 52%, to $8.2
million for the fiscal year ended June 30, 1994 from $5.3 million for the
fiscal year ended June 30, 1993. The increases in gross profit and in
gross margin (from 15.8% to 17.7%) were primarily attributable to the
Company's elimination of certain low margin products and slow turning
inventory items through a significant reduction in the number of fragrance
and cosmetic brand items from approximately 3,500 to 1,200.
SG&A. Selling, general and administrative expenses increased $1.0
million, or 40%, to $3.5 million for the fiscal year ended June 30, 1994
from $2.5 million for the fiscal year ended June 30, 1993. The increase in
selling, general and administrative expenses was primarily a result of
increases in sales and marketing costs, including sales commissions
resulting from higher net sales, advertising costs and increases in sales
and marketing personnel, as well as increases in administrative costs
resulting from increases in management salaries and the leasing of an
additional warehouse facility.
Interest Expense, Net. Interest expense, net of interest and other
income, increased 40% to $1.5 million for the fiscal year ended June 30,
1994 as compared to $1.1 million for the fiscal year ended June 30, 1993.
This increase was primarily attributable to the increase in short-term debt
to accommodate working capital needs, including the increased inventory
levels needed to support higher net sales.
Equity in Earnings of Affiliate. Equity in earnings of unconsolidated
affiliate decreased $10,000, or 6%, to $166,000 for the fiscal year ended
June 30, 1994 from $176,000 for the year ended June 30, 1993.
Net Income. Net income for the fiscal year ended June 30, 1994 was
$1.0 million compared to $0.6 million for the fiscal year ended June 30,
1993, primarily as a result of higher net sales.
EBITDA. EBITDA increased $1.2 million, or 60%, to $3.2 million for
the fiscal year ended June 30, 1994 from $2.0 million for the fiscal year
ended June 30, 1994. The EBITDA margin increased to 7.0% for the fiscal
year ended June 30, 1994 from 5.9% for the fiscal year ended June 30, 1993.
The increase was primarily attributable to the increase in gross profit
discussed above, partially offset by the increase in selling, general and
administrative expenses.
Seasonality
The fragrance operations of the Company have historically been
seasonal, with higher sales generally occurring in the second half of the
fiscal year as a result of increased demand by retailers in anticipation of
and during the holiday season. For example, in fiscal 1997, 69% 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 and October. During the fourth
fiscal quarter ending January 31, significant cash is normally generated as
customer payments on holiday orders are received.
Liquidity and Capital Resources
The Company used approximately $23.2 million of net cash in operations
during the fiscal year ended January 31, 1997, compared to generating $5.2
million of net cash from operations during the fiscal year ended January
31, 1996, primarily as a result of a significant increase in inventory and
accounts receivable, partially offset by an increase in accounts payable.
The increase in inventory resulted primarily from opportunity buying of
certain Distributed Brand products on favorable pricing and credit terms,
as well as advanced purchases of customized gift sets for the calendar year
1997 Father's Day/Mother's Day promotions on favorable pricing terms. The
increase in accounts receivable is directly related to the increase in net
sales. The Company used net cash in investing activities of approximately
$21.1 million during the fiscal year ended January 31, 1997, compared to
approximately $18.0 million during the fiscal year ended January 31, 1996,
primarily as a result of additions to the Miami Lakes Facility. During the
fiscal year ended January 31, 1997, the Company received approximately
$45.1 million of net cash from financing activities, primarily to fund the
Halston Acquisition, the FMG Acquisition and for working capital purposes.
The Company financed these activities through the public offering of Common
Stock in July 1996, the issuance of subordinated debentures, the mortgage
on the Miami Lakes Facility and the revolving portion of the existing
credit facility. See Notes 2,3 and 7 to Notes to Consolidated Financial
Statements. During the fiscal year ended January 31, 1996, the Company
received approximately $12.3 million of net cash from financing activities,
primarily to fund the Geoffrey Beene Acquisition. The Company financed
this transaction through the issuance of subordinated debentures and a term
note under the existing credit facility. See Note 2 to Notes to
Consolidated Financial Statements.
The Company (and FFI prior to the Merger) has historically financed,
and expects to continue to finance, its internal growth and acquisitions
primarily through its credit facility, external financing and internally
generated funds. 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 the
Halston Acquisition and the FMG Acquisition, the growth in direct
distribution relationships for additional fragrance brands and certain
favorable buying opportunities, the Company's working capital needs have
increased significantly and are expected to continue to increase.
Management of the Company believes that internally generated funds and
other available financing under the Company's credit facility will be
sufficient to cover the Company's working capital and debt service
requirements (other than any additional working capital requirements which
may result from further expansion, through acquisitions of brands or new
product distribution arrangements, of the Company's operations) for at
least the next 12 months.
In an effort to refinance indebtedness (including the indebtedness
under its existing credit facility and approximately $14 million principal
amount of subordinated debentures), to provide additional working capital
support and to provide increased operational and financial flexibility to
take advantage of expansion opportunities, through acquisitions of brands
or new product distribution arrangements, the Company has commenced a
private placement of approximately $100 million in Senior Notes Due 2007
(the "Notes"). The offering of the Notes (the "Offering") is expected to
close by the middle of May 1997. The Notes will not be registered under
the Securities Act of 1933, as amended and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements. There is no assurance that the terms of the
Offering will be acceptable to the Company or that the Company will be able
to consummate the Offering. If the Offering is consummated, the Company
expects to enter into a new standby credit facility to be available for
additional working capital support, but substantially all other new
indebtedness will be conditioned on the Company satisfying certain fixed
charge coverage ratios. If the Offering is not consummated, the Company
will retain its existing credit facility.
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. A portion of the
Company's accounts receivable relating to its fragrance operations is
insured by a third party to cover the risk of uncollectibility. However,
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. In addition, as
a result of increased sales to department stores of products subject to
return rights, the Company expects that it may incur higher levels of
returns. The Company establishes reserves and provides allowances for
returns at the time of sale, but there can be no assurance that such
reserves and allowances will be adequate.
Further expansion of the Company's operations, including through
additional brand acquisitions or the acquisition of exclusive distribution
rights to additional fragrance brands, will require increased investment in
accounts receivable and inventories, which may negatively impact the
Company's cash flow from operations. The Company has discussions from time
to time with manufacturers of prestige fragrance brands and with other
wholesalers 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 such persons. 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 existing credit facility (the "Credit Facility") with
Fleet National Bank ("Fleet") currently provides for borrowings on a
revolving basis of up to $45 million (which is increased to $55 million
from July 1 to December 31 to accommodate increased working capital
requirements in anticipation of and during the holiday season and is
decreased to $30 million from January 1, 1998 through May 31, 1998),
including up to $2 million in commercial letters of credit. Amounts
borrowed on the revolving portion of the Credit Facility mature on May 31,
1998. The Credit Facility also includes the remaining balance ($4.3
million at January 31, 1997) of the $7 million term loan (the "Geoffrey
Beene Term Note") which was used to finance a portion of the purchase price
for the Geoffrey Beene Acquisition. Principal and interest payments on the
Geoffrey Beene Term Note are due on a monthly basis, and principal payments
are due: $2 million during the fiscal year ended January 31, 1998, and the
balance during the fiscal year ended January 31, 1999. At January 31,
1997, the Company had outstanding borrowings under the Credit Facility
(including the Geoffrey Beene Term Note) of approximately $42.0 million.
Loans under the revolving credit portion of the Credit Facility bear
interest at a floating rate (currently 1% over Fleet's prime rate), as does
the Geoffrey Beene Term Note (currently 1.75% over Fleet's prime rate).
The Company's borrowing availability under the revolving credit portion of
the Credit Facility is limited to the sum of between 80 to 85% of eligible
accounts receivable and, subject to certain limitations, 50% (60% from July
1 through October 31 of each year) of eligible inventory.
The Credit Facility is secured by a first priority lien on all of the
Company's assets, other than the Miami Lakes Facility (see "Item 2 -
Properties"), as well as by a security interest in the assets and the
capital stock of its wholly-owned subsidiaries and its stock of Fine
Fragrances and a collateral assignment of brand licenses and trademarks.
The Credit Facility restricts the Company's ability to incur additional
debt or other obligations, limits its ability to enter into certain
acquisitions, mergers, investments and affiliated transactions, prohibits
the declaration or payment of dividends on, or the redemption of, the
Company's capital stock, prohibits certain payments on subordinated debt
and prohibits the sale of the Company's interest in Fine Fragrances or its
wholly-owned subsidiaries. The Credit Facility also contains covenants
requiring the Company to maintain a maximum leverage ratio, and minimum
debt service and interest coverage ratios. In addition, it is an event of
default under the Credit Facility if Rafael Kravec, the Company's President
and Chief Executive Officer, ceases to be actively involved in the
Company's management and a replacement satisfactory to Fleet does not
succeed him. This event of default will not be contained in the New Credit
Facility (as defined below). Management believes that the Company is
currently in compliance with the covenants in the Credit Facility. As long
as the Credit Facility is outstanding, the Company will need the consent of
Fleet to enter into future acquisition or debt financing activities.
Fleet has delivered a commitment to the Company to establish a new
standby credit facility (the "New Credit Facility") if the Company
consummates the Offering and repays all outstanding amounts under the
Credit Facility with a portion of the net proceeds of the Offering. The
New Credit Facility with Fleet would commence upon consummation of the
Financing and provide for borrowings on a revolving basis of up to $40
million to finance general corporate purposes, including working capital
needs and acquisitions, subject to certain borrowing base limitations. All
borrowings under the New Credit Facility would mature and be due and
payable on May 31, 1999. The Company's borrowings under the New Credit
Facility would be secured by a first priority lien on all of the Company's
accounts receivable and inventory. Loans under the revolving portion of
the New Credit Facility would bear interest at floating rates ranging from,
at the option of the Company, either (i) 1.75% over LIBOR to 2.25% over
LIBOR or (ii) the prime rate quoted by Fleet to 0.5% over such prime rate,
and combinations thereof, in each case depending upon the Company's funded
debt to equity ratio as calculated pursuant to the terms of the New Credit
Facility.
In connection with the Halston Acquisition in March 1996, the Company
currently has outstanding the following indebtedness: (i) a $6 million
mortgage note on the Facility which provides for interest at 8.84%, a 20
year amortization schedule and a maturity date eight years from issuance;
(ii) a $2 million term note (the "Halston Note") which matures March 2000
and is to be repaid on a quarterly basis in an amount equal to 5% of the
net sales revenues derived from the sales of the Halston brands, provided
that no payments are due until October 15, 1997 and that the accrued amount
bears interest at 8% per annum; and (iii) approximately $3 million
aggregate principal amount of 8% Secured Subordinated Debentures Series II
Due 2005 (the "8% Series II Debentures"). See Note 2 to the Notes to
Consolidated Financial Statements. The Company also has outstanding $7.4
million aggregate principal amount of 8% Subordinated Debentures Series I
Due 2005 (the "8% Series I Debentures"), which FFI had issued in
connection with the Geoffrey Beene Acquisition in March 1995. The 8%
Series I Debentures are secured by a lien on all of the personal property
assets of the Company junior to the lien of the Lenders under the Credit
Facility, while the 8% Series II Debentures are also secured by an interest
in the proceeds from the sale of the Miami Lakes Facility following the
satisfaction of amounts due the mortgage company. The 8% Series I
Debentures and 8% Series II Debentures require aggregate mandatory annual
principal payments of approximately $2.1 million commencing January 31,
2001, with the final payment due January 31, 2005.
The Company also has outstanding $5.46 million aggregate principal
amount of 7.5% Convertible Debentures Due 2006. See Note 4 to the Notes to
Consolidated Financial Statements. The 7.5% Convertible Debentures are
convertible at any time at $7.20 per share (the "Conversion Price") 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 no less than $14.40 for 20 consecutive trading days.
The 7.5% Convertible Debentures are due June 30, 2006 and require
interest-only payments payable semi-annually until maturity at which time
the entire unpaid principal amount and any unpaid accrued interest is due
and payable.
In connection with the FMG Acquisition, the Company issued
approximately $11.1 million aggregate principal amount of 8.5% Subordinated
Debentures (the "8.5% Debentures"). See Note 2 to Notes to Consolidated
Financial Statements. The 8.5% Debentures consist of a $4 million 8.5%
Debenture which requires mandatory principal payments of $2 million in May
1998 and 1999, and three additional 8.5% Debentures in the aggregate
principal amount of $7.1 million which requires mandatory annual principal
repayments in the aggregate amount of $2.37 million commencing May 2002,
with the remaining balance due May 2004.
The characteristics of the Company's business do not generally require
it to make significant ongoing capital expenditures. During the fiscal
year ended January 31, 1997, the Company incurred approximately $2.5
million in capital expenditures, primarily for renovation of the Miami
Lakes Facility. See "Item 2 - Properties." In connection with the
renovation of the Miami Lakes Facility, the Company expects to incur
renovation costs estimated at $2.5 million for the fiscal year ended
January 31, 1998. Approximately $1.3 million of these amounts will be
funded from escrowed funds held by the mortgage company from the mortgage
on the Miami Lakes Facility. Following the renovation of the Miami Lakes
Facility, the Company anticipates that its annual capital expenditures will
be less than $1 million for the foreseeable future.
The Company also has a lease on the National Trading Facility which
FFI had been using for its fragrance operations. The lessor of the
property is National Trading and the property has been mortgaged by
National Trading as security for its obligation for Industrial Development
Revenue Bonds issued through Dade County, Florida which mature on December
1, 2011. The balance of these bonds was approximately $2.1 million at
January 31, 1997. Future lease obligations of FFI through 2011 under this
lease are approximately $2.2 million, including interest. Pending
completion of the renovation of the Miami Lakes Facility, the Company is
continuing to occupy the National Trading Facility as its executive
offices. Subsequent to relocation of the executive offices, the Company
and National Trading will pursue a potential sale or lease of the National
Trading Facility to a third party that would discharge the Company from the
lease obligation. There is no assurance that any such sale or lease will
be consummated.
Impact of Inflation and Foreign Exchange Fluctuations
The Company believes that although inflation has not had a material
impact on its results of operations, inflation would likely increase the
interest rates that the Company pays on its floating rate indebtedness.
Although large fluctuations in foreign exchange rates could have a material
effect on the prices the Company pays for certain products it purchases
from outside of the United States, the prices obtainable for sales
denominated in foreign currencies and wholesale sales to foreign customers,
such fluctuations have not been material to the Company's results of
operations to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS*
Page
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1996 and 1997
Consolidated Statements of Income for the Year Ended June 30, 1994,
for the Seven Months Ended January 31, 1994 and 1995, for the
Twelve Months Ended January 31, 1995 and for the Years Ended
January 31, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the Year Ended
June 30, 1994, for the Seven Months Ended January 31, 1995 and
for the Years Ended January 31, 1996 and 1997
Consolidated Statements of Cash Flows for the Year Ended
June 30, 1994, for the Seven Months Ended January 31, 1994 and
1995, for the Twelve Months Ended January 31, 1995 and for the
Years Ended January 31, 1996 and 1997
Notes to Consolidated Financial Statements
- -----------------
* The shoe manufacturing and importing operations of the Company were
permanently discontinued in the first quarter of 1995, and the operations
of the Company following the Merger which was consummated on November 30,
1995, consist solely of the fragrance operations of FFI, which was the
accounting acquiror in the Merger. Therefore, the following financial
statements and supplementary data represent the financial statements and
supplementary data of FFI until the Merger and the financial statements and
supplementary data of the Company following the Merger. Effective
January 31, 1995, FFI changed its fiscal year end to January 31 from June
30. For this reason, the audited financial statements as of January 31,
1995 consisted of seven months.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
French Fragrances, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets
of French Fragrances, Inc. and subsidiaries (the "Company") as of
January 31, 1996 and 1997, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year ended
June 30, 1994, for the seven months ended January 31, 1995 and for
the years ended January 31, 1996 and 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of January 31, 1996 and 1997, and the results of its
operations and its cash flows for the year ended June 30, 1994, for
the seven months ended January 31, 1995 and for the years ended
January 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
March 14, 1997
(April 11, 1997 as to Note 16)
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, January 31,
1996 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 123,960 $ 855,969
Accounts receivable, net 14,236,326 35,021,081
Inventories 25,850,669 67,989,322
Advances on inventory purchases -- 3,441,020
Equipment held for sale 1,000,000 --
Prepaid expenses and other assets 1,370,777 909,250
----------- -----------
Total current assets 42,581,732 108,216,642
----------- -----------
Investment in unconsolidated affiliate 1,708,235 2,104,218
----------- -----------
Restricted cash and investments -- 1,314,602
----------- -----------
Property and equipment, net 11,099,492 13,817,203
----------- -----------
Other assets:
Exclusive brand licenses and
trademarks, net 14,671,875 45,126,465
Deferred income taxes, net 761,342 955,805
Other intangibles and other assets 561,138 843,109
Total other assets 15,994,355 46,925,379
----------- -----------
Total assets $ 71,383,814 $172,378,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 16,713,333 $ 39,631,301
Accounts payable - trade 11,115,664 37,329,059
Other payables and accrued expenses 3,250,365 10,600,000
Current portion of capital lease,
installment loans, mortgage and term note 201,630 1,308,370
Loans from shareholders 410,000 --
Convertible subordinated debentures 600,000 --
Due to affiliates, net 2,268,819 1,613,989
----------- -----------
Total current liabilities 34,559,811 90,482,719
----------- -----------
LONG-TERM LIABILITIES:
Secured subordinated debentures 11,681,500 10,435,035
Subordinated debentures -- 11,080,000
Convertible subordinated debentures -- 5,460,000
Mortgage note -- 5,824,231
Term notes 4,333,333 3,285,915
Capital lease and installment loans 1,269,860 1,130,000
----------- -----------
Total liabilities 51,844,504 127,697,900
----------- -----------
Commitments (Notes 7 and 12)
Redeemable preferred stock:
Series A, $.01 par value; stated at
liquidation preference value of $100
per share; 20,000 shares issued and
outstanding at January 31, 1996 2,000,000 --
----------- -----------
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000
shares authorized; 350,000 and
316,005 shares issued and outstanding,
respectively 3,500 3,160
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429
shares authorized, issued and outstanding
at January 31, 1997 -- 5,714
Common stock, $.01 par value, 50,000,000
shares authorized 9,641,290 and 13,249,152
shares issued and outstanding, respectively 96,413 132,492
Additional paid-in capital 10,333,539 29,185,161
Retained earnings 7,105,858 15,353,617
----------- -----------
Total shareholders' equity 17,539,310 44,680,144
----------- -----------
Total liabilities and shareholders' equity $ 71,383,814 $172,378,044
=========== ===========
See notes to consolidated financial statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Seven
Year Ended Months Ended
June 30, January 31,
----------- ------------------
1994 1994 1995
----------- -------------------------
(Unaudited)
Net sales $46,104,536 $27,415,158 $50,922,407
Cost of sales 37,952 555 22,692,581 40,822,023
----------- ----------- -----------
Gross profit 8,151,981 4,722,577 10,100,384
----------- ----------- -----------
Operating expenses:
Warehouse and shipping 1,375,110 722,642 1,403,280
Selling, general and
administration 3,543,436 2,035,628 3,330,805
Depreciation and
amortization 335,052 201,431 206,010
----------- ----------- -----------
Total operating
expenses 5,253,598 2,959,701 4,940,095
----------- ----------- -----------
Income from operations 2,898,383 1,762,876 5,160,289
----------- ----------- -----------
Other income (expense):
Interest expense, net (1,537,815) (827,027) (1,408,415)
Other income 15,410 8,519 46,909
----------- ----------- -----------
Other income (expense),
net (1,522,405) (818,508) (1,361,506)
----------- ----------- -----------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 1,375,978 944,368 3,798,783
Equity in earnings of
unconsolidated affiliate,
50% owned 165,899 45,778 183,231
----------- ----------- -----------
Income before income taxes 1,541,877 990,146 3,982,014
Provision for income taxes 530,510 349,089 1,490,119
----------- ----------- -----------
Net income $ 1,011,367 $ 641,057 $ 2,491,895
=========== =========== ===========
Earnings per common share
equivalent:
Primary $ 0.14 $ 0.09 $ 0.35
=========== =========== ===========
Fully Diluted $ 0.14 $ 0.09 $ 0.35
=========== =========== ===========
Weighted average number of
common share equivalents:
Primary 7,120,000 7,120,000 7,120,000
=========== =========== ===========
Fully diluted 7,120,000 7,120,000 7,120,000
=========== =========== ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Twelve Months Year Year
Ended Ended Ended
January 31, January 31, January 31,
-------------- ----------- ------------
1995 1996 1997
-------------- ----------- ------------
(Unaudited)
Net sales $69,611,785 $87,978,695 $140,482,299
Cost of sales 56,108,042 66,339,698 94,404,288
------------- ----------- ------------
Gross profit 13,503,743 21,638,997 46,078,011
Operating expenses:
Warehouse and shipping 2,034,271 2,706,782 4,528,022
Selling, general and
administration 4,907,354 9,193,929 19,644,857
Depreciation and
amortization 339,632 1,319,675 3,663,261
------------- ----------- ------------
Total operating
expenses 7,281,257 13,220,386 27,856,140
------------- ----------- ------------
Income from operations 6,222,486 8,418,611 18,221,871
------------- ----------- ------------
Other income (expense):
Interest expense, net (2,119,201) (4,142,475) (6,826,248)
Other income 127,126 374,120 1,108,489
------------- ----------- ------------
Other income (expense),
net (1,992,075) (3,768,355) (5,717,759)
------------- ----------- ------------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 4,230,411 4,650,256 12,504,112
Equity in earnings of
unconsolidated affiliate,
50% owned 303,353 287,553 395,983
------------- ----------- ------------
Income before income taxes 4,533,764 4,937,809 12,900,095
Provision for income taxes 1,671,537 1,930,691 4,652,336
------------- ----------- ------------
Net income $ 2,862,227 $ 3,007,118 $ 8,247,759
============= =========== ============
Earnings per common share
equivalent:
Primary $ 0.40 $ 0.35 $ 0.61
============= =========== ============
Fully Diluted $ 0.40 $ 0.33 $ 0.60
============= =========== ============
Weighted average number of
common share equivalents:
Primary 7,120,000 8,517,760 13,639,952
============= =========== ============
Fully diluted 7,120,000 9,121,091 13,787,660
============= =========== ============
See notes to consolidated financial statements
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK
SERIES B SERIES C COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------- -------------- --------------------
Balance at
June 30, 1994 -- -- -- -- 7,120,000 $ 71,200
Net income for
the seven
months ended -- -- -- -- -- --
- --------------------------------------------------------------------------
Balance at
January 31, 1995 -- -- -- -- 7,120,000 71,200
Issuance of Series
B convertible
preferred shares 350,000 $3,500 -- -- -- --
Issuance of Common
Stock in Merger -- -- -- -- 2,521,290 25,213
Net income for
the year -- -- -- -- -- --
- --------------------------------------------------------------------------
Balance at
January 31, 1996 350,000 3,500 -- -- 9,641,290 96,413
Issuance of Common
Stock upon
conversion of
Series B
convertible
preferred stock (33,995) (340) -- -- 242,041 2,421
Issuance of Common
Stock upon
conversion of 5%
convertible
subordinated
debentures -- -- -- -- 1,815 18
Issuance of Common
Stock in public
offering -- -- -- -- 3,364,000 33,640
Issuance of warrants -- -- -- -- -- --
Issuance of Series C
convertible
preferred stock -- -- 571,429 $5,714 -- --
Net income for
the year -- -- -- -- -- --
- --------------------------------------------------------------------------
Balance at
January 31, 1997 316,005 $3,160 571,429 $5,714 13,249,146 $132,492
======================================================
(RESTUBBED TABLE CONTINUED FROM ABOVE)
ADDITIONAL TOTAL
PAID-IN RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- ----------- -------------
Balance at
June 30, 1994 $ 208,800 $ 1,606,845 $1,886,845
Net income for
the seven
months ended -- 2,491,895 2,491,895
- --------------------------------------------------------------------------
Balance at
January 31, 1995 208,800 4,098,740 4,378,740
Issuance of Series
B convertible
preferred shares -- -- 3,500
Issuance of Common
Stock in Merger 10,124,739 -- 10,149,952
Net income for
the year -- 3,007,118 3,007,118
- --------------------------------------------------------------------------
Balance at
January 31, 1996 10,333,539 7,105,858 17,539,310
Issuance of Common
Stock upon
conversion of
Series B
convertible
preferred stock 796,655 -- 798,736
Issuance of Common
Stock upon
conversion of 5%
convertible
subordinated
debentures 13,982 -- 14,000
Issuance of Common
Stock in public
offering 17,979,361 -- 18,013,001
Issuance of warrants 61,624 -- 61,624
Issuance of Series C
convertible
preferred stock -- -- 5,714
Net income for
the year -- 8,247,759 8,247,759
- --------------------------------------------------------------------------
Balance at
January 31, 1997 $29,185,161 $15,353,617 $44,680,144
================================================
See notes to consolidated financial statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Seven Months
Year Ended Ended
June 30, January 31,
1994 1994 1995
----------- ------------ -----------
(Unaudited)
Cash flows from operating activities:
Net Income $ 1,011,367 $ 641,057 $ 2,491,895
Adjustments to reconcile net
income to cash (used in)
provided by operating activities:
Depreciation and amortization 335,052 201,431 206,010
Equity in earnings of
unconsolidated affiliate (165,899) (45,778) (183,231)
Deferred tax benefit -- -- (257,852)
Change in assets and liabilities
net of effects from the acquisitions:
Increase in accounts receivable (3,146,558) (1,457,130) (1,678,019)
(Increase) decrease in inventories (6,470,448) (16,493,423) (5,280,552)
(Increase) decrease in prepaid
expenses and other assets (224,093) (182,416) (41,200)
Increase (decrease) in accounts payable 4,616,011 14,633,049 1,050,077
Increase (decrease) in other payables
and accrued expenses 1,105,100 864,259 (32,549)
Increase (decrease) in due to
affiliate, net 346,603 149,251 (192,059)
----------- ------------ -----------
Net cash (used in) provided by
operating activities (2,592,865) (1,689,700) (3,917,480)
----------- ------------ -----------
Cash flows from investing activities:
Purchase of exclusive brand licenses
and trademarks -- -- --
Additions to property and equipment,
net of disposals (373,731) (239,867) (80,921)
Receipts of restricted cash -- -- --
Net cash acquired in merger -- -- --
----------- ------------ -----------
Net cash used in investing activities (373,731) (239,867) (80,921)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock -- -- --
Proceeds from stock offering -- -- --
Proceeds from the issuance of secured
subordinated debentures -- -- --
Advances from (payments to) unconsolidated
affiliate 695,991 (228,022) 4,058
Proceeds from term loan 1,700,000 1,700,000 --
Payments on term loans (840,000) (140,000) (860,000)
Net proceeds from short-term debt 1,580,000 1,034,478 5,580,004
Proceeds from installment loans 185,202 185,206 --
Payments on capital lease and
installment loans (155,332) (93,973) (121,096)
Loans from shareholders 150,000 -- --
Payments on loans from shareholders
and officer (85,000) -- (235,000)
Proceeds from the grant of stock
purchase warrants -- -- --
Proceeds from bridge and inventory loans -- -- --
Payments on bridge and inventory loans -- -- --
Proceeds from mortgage note -- -- --
Payments on mortgage note -- -- --
Proceeds from conversion of 5%
subordinated debentures -- -- --
Payments on convertible subordinated
debentures -- -- --
----------- ------------ -----------
Net cash provided by financing activities 3,230,861 2,457,689 4,367,966
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents 264,265 528,122 369,565
Cash and cash equivalents at
beginning of period 12,319 12,319 276,584
----------- ------------ -----------
Cash and cash equivalents at
end of period $ 276,584 $ 540,441 $ 646,149
=========== ============ ===========
Supplemental disclosure of cash flow
information:
Interest paid during the period $ 1,241,794 $ 806,792 $ 1,152,461
=========== ============ ===========
Income taxes paid during the period $ 235,000 $ 215,000 $ 1,740,000
=========== ============ ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Twelve Months Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
----------- ------------ -----------
(Unaudited)
Cash flows from operating activities:
Net Income $ 2,862,227 $ 3,007,118 $ 8,247,759
Adjustments to reconcile net
income to cash (used in)
provided by operating activities:
Depreciation and amortization 339,632 1,319,675 3,663,261
Equity in earnings of
unconsolidated affiliate (303,353) (287,553) (395,983)
Deferred tax benefit (257,852) (504,211) (194,463)
Change in assets and liabilities
net of effects from the acquisitions:
Increase in accounts receivable (3,367,448) (3,192,712) (20,784,755)
(Increase) decrease in inventories 4,742,423 (4,021,498) (44,216,341)
(Increase) decrease in prepaid
expenses and other assets 157,639 1,005,334 990,242
Increase (decrease) in accounts payable (9,052,244) 2,991,835 26,213,395
Increase (decrease) in other payables
and accrued expenses (19,290) 3,417,215 4,294,542
Increase (decrease) in due to
affiliate, net 5,281 1,444,160 (1,038,451)
----------- ------------ -----------
Net cash (used in) provided by
operating activities (4,892,985) 5,179,363 (23,220,794)
----------- ------------ -----------
Cash flows from investing activities:
Purchase of exclusive brand licenses
and trademarks -- (18,370,655) (19,315,291)
Additions to property and equipment,
net of disposals (246,763) (149,394) (2,486,960)
Receipts of restricted cash -- -- 685,398
Net cash acquired in merger -- 536,913 --
----------- ------------ -----------
Net cash used in investing activities (246,763) (17,983,136) (21,116,853)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock -- 3,500 5,714
Proceeds from stock offering -- -- 18,013,001
Proceeds from the issuance of secured
subordinated debentures -- 8,221,500 3,000,035
Advances from (payments to) unconsolidated
affiliate 928,070 (418,476) 383,621
Proceeds from term loan -- 7,000,000 8,960,000
Payments on term loans (1,560,000) (833,333) (10,833,332)
Net proceeds from short-term debt 6,125,522 (1,120,001) 22,751,300
Proceeds from installment loans 106,009 -- --
Payments on capital lease and
installment loans (184,145) (221,606) (200,346)
Loans from shareholders 150,000 250,000 --
Payments on loans from shareholders
and officer (320,000) -- (410,000) Proceeds from the grant of stock
purchase warrants -- -- 41,624
Proceeds from bridge and inventory loans -- -- 7,000,000
Payments on bridge and inventory loans -- -- (7,000,000)
Proceeds from mortgage note -- -- 4,000,000
Payments on mortgage note -- -- (55,961)
Proceeds from conversion of 5%
subordinated debentures -- -- 14,000
Payments on convertible subordinated
debentures -- (600,000) (600,000)
----------- ------------ -----------
Net cash provided by financing activities 5,245,456 12,281,584 45,069,656
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents 105,708 (522,189) 732,009
Cash and cash equivalents at
beginning of period 540,441 646,149 123,960
----------- ------------ -----------
Cash and cash equivalents at
end of period $ 646,149 $ 123,960 $ 855,969
=========== ============ ===========
Supplemental disclosure of cash flow
information:
Interest paid during the period $ 1,813,516 $ 4,082,339 $ 6,014,871
=========== ============ ===========
Income taxes paid during the period $ 1,760,000 $ 2,245,000 $ 2,113,441
=========== ============ ===========
See notes to consolidated financial statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business Activity. French Fragrances, Inc. (the
"Company") is a manufacturer, distributor and marketer of prestige designer
fragrances and related cosmetic products, primarily to mass-market
retailers in the United States. In 1992, a company called French
Fragrances, Inc.("FFI") was formed to acquire the net assets of the
fragrance and cosmetics distribution business of National Trading
Manufacturing, Inc. ("National Trading"). In connection with the
acquisition of the net assets of National Trading, FFI purchased 50% of
Fine Fragrances, Inc. ("Fine Fragrances"), a company which distributes
fragrances manufactured in France by COFCI, S.A. ("COFCI").
In November 1995, FFI merged with and into Suave Shoe Corporation
("Suave") in a reverse acquisition (the "Merger"). See Note 2.
Effective January 31, 1995, the Company changed its fiscal year-end to
January 31 from June 30 to conform to its business year.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company's wholly owned subsidiaries G.B. Parfums, Inc.
("G.B. Parfums"), Halston Parfums, Inc. and FRM Services, Inc., an inactive
subsidiary (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation. All references to the Company in these
consolidated financial statements and notes refer to FFI until the Merger
and to the surviving corporation following the Merger (see Note 2). The
unaudited financial statements for the twelve months ended January 31, 1995
and for the seven months ended January 31, 1994 have been prepared on the
same basis as the audited financial statements included herein. In the
opinion of management, such unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results for such periods.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Revenue Recognition. Sales are recognized upon shipment. During the
year ended June 30, 1994, the seven months ended January 31, 1995, and the
years ended January 31, 1996 and 1997, no customer accounted for more than
10% of total sales.
Cash and Cash Equivalents. Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
Accounts Receivable. A portion of the Company's accounts receivable is
insured from risk of uncollectibility by an independent party, which
received service fees of approximately $129,000, $170,000, $117,000 and
$199,000 for the year ended June 30, 1994, for the seven months ended
January 31, 1995, and for the years ended January 31, 1996 and 1997,
respectively. Receivables are not factored. A provision has been made and
an allowance established for potential losses from uninsured receivables
and estimated sales returns in the normal course of business. Since these
allowances are based on estimates, there is no assurance that such reserves
and allowances will be sufficient to cover unforeseen losses or returns.
The activity for these allowance accounts are as follows:
Seven Months
Ended Year Ended Year Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ----------- ------------
Allowance for Doubtful Accounts:
Beginning balance $ 72,526 $ 112,094 $ 290,645
Provision 70,000 180,000 205,000
Write offs, net of recoveries (30,432) (1,449) (5,708)
------------ ----------- ------------
Ending balance $ 112,094 $ 290,645 $ 489,937
============ =========== ============
Allowance for Sales Returns
Beginning balance $ 0 $ 56,000 $ 346,500
Provision 700,486 1,650,602 2,726,143
Actual returns (644,486) (1,360,102) (2,706,035)
------------ ----------- ------------
Ending balance $ 56,000 $ 346,500 $ 366,608
============ =========== ============
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Inventories. Inventories are stated at the lower of cost or market.
Cost is determined on the weighted-average method. Inventory balances at
January 31, 1996 and 1997 were as follows:
January 31,
1996 1997
----------- -----------
Finished $23,433,669 $61,117,587
Work in progress -- 1,303,514
Raw materials 2,417,000 5,568,221
----------- -----------
$25,850,669 $67,989,322
=========== ===========
Equipment Held for Sale. Certain equipment acquired in connection
with the Merger was designated as equipment held for sale (see Note 2).
Equipment held for sale was disposed of in the fiscal year ended January
31, 1997.
Investment in Unconsolidated Affiliate. The Company's investment in
Fine Fragrances is accounted for under the equity method (see Notes 6 and
16).
Restricted Cash Investments. Restricted cash and investments consist
of cash and investments held in trust and committed for capital
improvements on the Miami Lakes Facility (as defined in Note 2).
Property and Equipment, and Depreciation. Property and equipment are
stated at cost. Expenditures for major improvements and additions are
recorded to the asset accounts while replacements, maintenance, and repairs
which do not improve or extend the lives of the respective assets are
charged to expense. Depreciation is provided over the estimated useful
lives of the assets using the straight-line method, as follows:
Category Years
Building 20
Building improvements 20
Furniture and fixtures 8
Machinery and equipment 3-8
Tools and molds 1-3
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Capital Lease. The Company has entered into a lease for the building
and the land which are presently used for its business offices (the
"National Trading Facility") that transfers substantially all benefits and
risks of ownership to the Company. The lessor of this property is National
Trading, which is owned by a shareholder of the Company. This property is
mortgaged by National Trading to secure its obligations under Industrial
Development Revenue Bonds (Series 1985) (the "Bonds") issued through
Metropolitan Dade County, Florida which mature on December 1, 2011. The
balance of the Bonds was approximately $2,220,000 and $2,100,000 at January
31, 1996 and January 31, 1997, respectively. The Company has an option to
purchase the National Trading Facility on or before the end of the lease
term at a price of $1,800,000 less the amount equal to the product of
$10,000 multiplied by the number of months for which the Company has paid
rent pursuant to the lease.
This lease is accounted for as the acquisition of assets and
incurrence of obligations under the capital lease standards issued by the
Financial Accounting Standards Board (see Note 10). Accordingly, the
capitalized leased assets are recorded as property at the fair value of the
property, which is the present value of the minimum lease payments.
Depreciation of the building is computed using the term of the lease and is
included in depreciation expense.
Income Taxes. The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred
taxes under the liability method. Under such method, deferred taxes are
adjusted for tax rate changes as they occur. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statements and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are recorded when necessary to
reduce deferred tax assets to the amount expected to be realized.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Exclusive Brand Licenses and Trademarks, Customer Lists and
Amortization. These intangible assets are being amortized using the
straight-line method, as follows at January 31:
Accumulated Amortization
Category Years Cost 1996 1997
----------------------------------------------------------------------------
Exclusive brand licenses
and trademarks 15 $48,838,574 $908,877 $3,712,109
Customer lists and other
intangibles 3 and 5 546,131 439,874 521,886
The Company reviews its intangible assets periodically for events or
changes in circumstances that may indicate that the carrying amount is not
recoverable on an undiscounted cash flow basis in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
0F. If the estimated future cash flows are projected to be less than the
carrying value, an impairment write-down would be recorded.
Fair Value of Financial Instruments. The Company's financial
instruments include accounts receivable, accounts payable, short-term debt,
loans from shareholders, convertible subordinated debentures, secured
subordinated debentures, subordinated debentures, a capital lease,
installment loans, a term loan and convertible redeemable preferred stock.
The fair value of such financial instruments has been determined using
available market information and interest rates as of January 31, 1996 and
1997.
At January 31, 1996 and 1997, the estimated fair value of the
Company's subordinated debentures was as follows:
1996 1997
----------- ----------
Secured subordinated debentures $10,236,000 $9,939,000
Subordinated debentures -- 9,616,000
Convertible subordinated debentures -- 5,904,000
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
The fair value of all other financial instruments was not materially
different than their carrying value.
Earnings per Share. Earnings per share for fiscal periods other than
for the fiscal year ended January 31, 1997 is based on the weighted average
number of common shares and common share equivalents outstanding and
includes the effect of the issuance of shares in connection with the
assumed exercise of dilutive stock options and the assumed conversion of
dilutive convertible preferred stock using the treasury stock method.
Earnings per share for the fiscal year ended January 31, 1997 is based on
the weighted average number of common shares and common share equivalents
outstanding and includes an additional 230,168 shares to give effect to the
issuance of shares in connection with the assumed exercise of dilutive
stock options and the assumed conversion of dilutive convertible preferred
stock using the modified treasury stock method. Primary earnings for the
fiscal year ended January 31, 1997 also reflect $101,672 of interest
savings net of tax based on the calculation of earnings per share under the
modified treasury stock method. Fully diluted earnings per share reflects
additional dilution due to the use of the market price at the end of the
period when higher than the average market price for the period. Fully
diluted earnings per share for the fiscal year ended January 31, 1997
includes an additional 75,650 shares to give effect to the issuance of
shares in connection with the assumed exercise of dilutive stock options
and the assumed conversion of dilutive convertible preferred stock using
the modified treasury stock method. Fully diluted earnings for the fiscal
year ended January 31, 1997 also reflect $36,064 of interest savings net of
tax based on the calculation of earnings per share under the modified
treasury stock method. Earnings per share for the year ended June 30,
1994, for the seven months ended January 31, 1994 and 1995 and for the
twelve months ended January 31, 1995, were computed using the number of
common shares received by the shareholders of FFI in the Merger (see Note
2). Earnings per share for the year ended January 31, 1996 is based on the
number of shares received by the shareholders of FFI in the Merger through
the date of the Merger and thereafter is based on the actual number of
common shares and common share equivalents outstanding. Earnings per share
for the year ended January 31, 1997 is based on actual number of common
shares and common share equivalents outstanding.
Stock-Based Compensation. Effective February 1, 1996, the Company
adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
encourages, but does not require companies to record compensation cost for
stock-based employee and non-employee members of the Board of Directors of
the Company (the "Board") compensation plans at fair value. The Company
has chosen to continue to account for stock-based compensation to employees
and non-employee members of the Board using the intrinsic value method as
prescribed by Accounting Principles Board Opinion ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
Accordingly, compensation cost for stock options issued to employees and
non-employee members of the Board are measured as the excess, if any, of
the fair value of the Company's stock at the date of grant over the amount
an employee or non-employee member of the Board must pay for the stock. See
Note 15.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reclassifications. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform with the fiscal 1997
presentations.
2. MERGER AND ACQUISITIONS
Merger. In November 1995, FFI merged with and into Suave Shoe
Corporation in a reverse acquisition. Following the Merger, Suave, as the
surviving corporation, changed its name to "French Fragrances, Inc." The
principal business operations following the Merger consist of the business
previously conducted by FFI, which is the manufacture, distribution and
marketing of prestige fragrances and related cosmetic products. Pursuant to
the terms of the Merger: (i) each outstanding share of FFI common stock,
$.01 par value per share ("FFI Common Stock"), was converted into the right
to receive 7.12 shares of common stock, $.01 par value per share ("Common
Stock"), of the surviving corporation; (ii) each outstanding share of FFI
Series A Preferred was converted into the right to receive one share of
Series A Preferred Stock, $.01 par value per share ("Series A Preferred");
(iii) each outstanding share of FFI Series B Convertible Preferred, $.01
par value ("Series B Convertible Preferred"), was converted into one share
of Series B Convertible Preferred Stock, $.01 par value per share ("Series
B Convertible Preferred"); and (iv) each outstanding option to purchase one
share of FFI Common Stock was adjusted to be exercisable for 7.12 shares of
Common Stock. In connection with the Merger, the surviving corporation
issued to FFI shareholders 7,120,000 shares of Common Stock, 20,000 shares
of Series A Preferred and 350,000 shares of Series B Convertible Preferred.
In connection with the Merger, FFI relocated its distribution facilities to
the larger facility formerly occupied by Suave in Miami Lakes, Florida (the
"Miami Lakes Facility").
In connection with the Merger, the shareholders of Suave adopted
amendments to Suave's Articles of Incorporation to: (i) change the name of
Suave to "French Fragrances, Inc."; (ii) increase the number of authorized
shares of Common Stock, from 10,000,000 to 50,000,000; (iii) authorize
20,000 shares of Series A Preferred and 350,000 shares of Series B
Convertible Preferred issued pursuant to the Merger; and (iv) authorize
5,000,000 shares of undesignated preferred stock.
The Merger was treated as a recapitalization of the Company, with FFI
as the accounting acquiror (i.e., a reverse acquisition) and has been
accounted for under the "purchase" method of accounting in accordance with
generally accepted accounting principles. In connection therewith, the
Company acquired net assets with a fair value of approximately $10,100,000,
consisting of $9,500,000 in property and equipment and $3,200,000 in
current assets, offset by $2,600,000 in assumed liabilities.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. MERGER AND ACQUISITIONS - (Continued)
Geoffrey Beene Acquisition. In March 1995, FFI completed the
acquisition (the "Geoffrey Beene Acquisition") from Sanofi Beaute, Inc. of
certain assets, including the worldwide license to the Geoffrey Beene
fragrance and cosmetic lines, which include the brands Grey Flannel,
Bowling Green and Chance and certain inventory. The license agreement
extends for thirty years (subject to renewal by G.B. Parfums) and requires
royalty payments of 3% of net sales. A related agreement provides
consulting fees to the licensor. The purchase price approximated
$18,000,000 and included the exclusive license and trademarks for the
manufacture and distribution of the brands in the amount of $15,000,000 and
inventories in the amount of approximately $3,000,000.
FFI financed the Geoffrey Beene Acquisition in part with $8,225,000 of
proceeds from the issuance to a group of shareholders of $8,225,000
principal amount of 8% Secured Subordinated Debentures due 2005 Series I
("8% Series I Debentures") and 350,000 shares of FFI Series B Convertible
Preferred. Each share of FFI Series B Convertible Preferred was
convertible prior to January 31, 2005 into one share of FFI Common Stock
upon payment by the Holder of $23.50 per share. Pursuant to the Merger,
each of these shares was exchanged for one newly issued Series B
Convertible Preferred share which is convertible into 7.12 shares of Common
Stock upon the payment of $3.30 per share. The amount received was
allocated based on estimated fair value and accounted for by allocating
$3,500 to Series B Convertible Preferred and $8,221,500 to the 8% Series I
Debentures. Interest expense on these debentures totaled approximately
$594,000 and $639,000 for the years ended January 31, 1996 and 1997,
respectively. As of January 31, 1997, the shareholders had redeemed
$786,500 principal amount of 8% Series I Debentures to convert 33,995
shares of Series B Convertible Preferred Stock into 242,041 shares of
Common Stock. As of January 31, 1997, principal payments for these
debentures are currently payable at the rate of $1,488,000 per year from
2001 through 2005.
FFI funded the balance of the purchase price for the Geoffrey Beene
Acquisition through borrowings under its bank credit facility, including a
new $7,000,000 term loan facility (the "Geoffrey Beene Term Loan"). The
Geoffrey Beene Term Loan is repayable monthly, commencing April 1995, and
currently bears interest at prime plus 1.75%. The monthly payments were
$83,333 for the first twelve months, increasing to $166,667 for the
remaining months. The final payment of all principal and interest
outstanding is due in full on December 31, 1998. Interest expense for the
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. MERGER AND ACQUISITIONS - (Continued)
Geoffrey Beene Term Loan approximated $620,000 and $527,000 for the years
ended January 31, 1996 and 1997, respectively.
Halston Acquisition. In March 1996, the Company completed the
acquisition (the "Halston Acquisition") from Halston Borghese, Inc. ("HBI")
and its affiliates of certain assets relating to the Halston fragrance
brands, including the trademarks and certain inventory and tangible assets.
The purchase price was approximately $22,000,000 and was paid as follows:
(i) $19,000,000 in cash; and (ii) a $2,000,000 note issued to HBI maturing
March 20, 2000 (the "HBI Note"), which is to be repaid on a quarterly basis
in an amount equal to 5% of the Company's net sales of the Halston brands,
provided that no payments are due until October 15, 1997 and that the
accrued amount bears interest at 8% per annum. The Company also assumed
approximately $1,000,000 in trade payables. The cash portion of the
purchase price was financed as follows: (a) $3,000,000 from the issuance of
the equivalent principal amount of 8% Secured Subordinated Debentures due
2005, Series II (the "8% Series II Debentures"), and 571,429 shares of
Series C Convertible Preferred Stock, $.01 par value ("Series C Convertible
Preferred"); and (b) $16,000,000 in term loans from the two banks which
were parties to the Company's then existing credit facility. Each share of
Series C Convertible Preferred is convertible into one share of Common
Stock upon the payment of a conversion price of $5.25 per share. The term
loans consisted of the following: (1) a $1,000,000 term loan from one of
the banks due December 31, 1996, bearing interest at 0.75% over prime (the
"Halston Term Loan 1"); (2) $9,000,000 term loans from both banks on the
credit facility due December 31, 1998, bearing interest at 1.75% over prime
(collectively, the "Halston Term Loan 2"); and (3) a $6,000,000 term loan
bearing interest at 2% over prime from one of the banks due June 14, 1996
(the "Bridge Loan"). In June 1996, the Company issued a mortgage in the
amount of $6,000,000 on the Miami Lakes Facility to partially repay the
Bridge Loan. The mortgage note provides for interest at 8.84%, a 20-year
amortization schedule and a maturity date eight years from issuance. Of
the proceeds from the $6,000,000 mortgage note, $2,000,000 was placed in
escrow to be drawn upon for the completion of the capital improvements on
the Miami Lakes Facility. As of January 31, 1997, approximately $1,315,000
remained in escrow pending completion of the capital improvements on the
Miami Lakes Facility and is reflected as restricted cash and investment in
the accompanying consolidated balance sheet. In July 1996, with a portion
of the net proceeds received from the public offering (the "Offering") of
3,364,000 shares of Common Stock, the Company repaid the Halston Term Loan
1 and the Halston Term Loan 2. See Note 3.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. MERGER AND ACQUISITIONS - (Continued)
FMG Acquisition. In May 1996, the Company completed the acquisition
(the "FMG Acquisition") of certain assets of Fragrance Marketing Group,
Inc. ("FMG"), including contract rights under certain license and exclusive
distribution agreements in the United States for several brands, including
Ombre Rose, Lapidus, Faconnable, Balenciaga, Bogart, Chevignon and Niki de
Saint Phalle, inventory, accounts receivable and tangible assets. In
addition, the Company assumed approximately $3,100,000 of certain trade and
other payables of FMG and discharged approximately $600,000 of accounts
receivable due from FMG. In addition to the payables assumed and the
discharge of the receivable, the consideration for the assets included
approximately $4,300,000 in cash, $11,100,000 aggregate principal amount of
8.5% Subordinated Debentures (the "8.5% Debentures") and $900,000 of the
Company's inventory to be delivered to FMG. The Company also issued to FMG
(for assignment to its shareholders and senior management) warrants for an
aggregate of 1,075,000 shares of Common Stock, which will be exercisable at
$7.50 per share from July 1997 to January 2002. The cash portion of the
purchase price was financed from the Company's revolving credit facility.
The 8.5% Debentures consist of: (i) a $4,000,000 8.5% Debenture which
requires mandatory principal payments of $2,000,000 in May 1998 and 1999;
(ii) a $6,500,000 8.5% Debenture which requires mandatory annual principal
repayments of $2,167,000 commencing May 2002, with the remaining balance
due May 2004; (iii) a $500,000 8.5% Debenture which requires mandatory
annual principal repayments of $167,000 commencing May 2003 with the
remaining balance due May 2004; and (iv) a $100,000 8.5% Debenture which
requires mandatory annual principal repayments of $33,000 commencing May
2002, with the remaining balance due May 2004. In addition, warrants for
160,000 shares of Common Stock, which are exercisable at $7.50 per share
from July 1997 to January 2002, were issued to certain key employees of FMG
as an inducement to join the Company.
The following unaudited information presents the Company's pro forma
operating data for the years ended January 31, 1996 and 1997 as if the
Halston Acquisition and the FMG Acquisition had been consummated at the
beginning of each of the periods presented and includes certain adjustments
to the historical consolidated statements of income of the Company to give
effect to the acquisition of intangible assets including trademarks and
associated intellectual property, license and distribution arrangements and
of other net assets, the payment of the purchase prices in such
acquisitions, the related issuances of additional indebtedness by the
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. MERGER AND ACQUISITIONS - (Continued)
Company, and the increased amortization of intangible assets. The Halston
fragrance brands acquired were not operated or accounted for separately by
HBI. In addition, HBI had never segregated indirect operating cost
information relative to these brands. Accordingly, the pro forma
adjustments reflect the historical net sales, cost of sales and direct
operating expenses of the Halston fragrance brands for the year ended
December 30, 1995 and for the period from January 1, 1996 through March 20,
1996. Direct operating expenses for the Halston brands consist principally
of marketing, advertising and demonstrator expenses and exclude selling,
general and administrative, research and development, interest, income tax
and amortization of intangible expenses. The unaudited pro forma financial
data are not indicative of the results of operations that would have been
achieved had the transactions been consummated prior to the periods in
which they were completed, or that might be attained in the future.
Pro Forma Year Ended
January 31, 1996 January 31, 1997
---------------- ----------------
Net sales $130,426,000 $143,905,000
Net income $ 4,243,000 $ 7,380,000
Net income per share equivalent $ 0.50 $ 0.54
3. PUBLIC OFFERING OF COMMON STOCK
In July 1996, the Company completed the offering of 3,364,000 shares
of Common Stock at a price of $6.00 per share. The Company realized
approximately $18,000,000 of net proceeds from the Offering. Approximately
$9,300,000 of the net proceeds were used to repay the outstanding balance
of the Halston Term Loan 1 and the Halston Term Loan 2, and the balance of
the net proceeds was used to reduce outstanding borrowings under the
Company's credit facility. See Notes 2 and 7. In connection with the
Offering, the Company issued warrants for an aggregate of 162,500 shares of
Common Stock to the representatives of the underwriters, exercisable at
$7.20 per share from June 28, 1997 to June 28, 1999.
4. EXCHANGE OFFER
In July 1996, the Company also consummated an exchange offer (the
"Exchange Offer"), pursuant to which the Company issued $5,460,000
principal amount of 7.5% Convertible Subordinated Debentures Due 2006 (the
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. EXCHANGE OFFER - (Continued)
"7.5% Convertible Debentures") in exchange for the 20,000 outstanding
shares of Series A Preferred and the $3,460,000 outstanding principal
amount of 12.5% Secured Subordinated Debentures Due 2002 (the "12.5%
Debentures") (see Note 9). Pursuant to the Exchange Offer, each share of
Series A Preferred was exchanged for $100 principal amount of 7.5%
Convertible Debentures, and each outstanding 12.5% Debenture was exchanged
for the equivalent principal amount of 7.5% Convertible Debentures. The
7.5% Convertible Debentures (i) are unsecured, (ii) require interest only
payments at 7.5% per annum, payable semi-annually until maturity ten years
from the date of issue, at which time the entire principal amount and any
unpaid accrued interest is due and payable, (iii) are convertible at any
time, at the option of the Holder, into shares of Common Stock at $7.20 per
share, and (iv) are redeemable, at the option of the Company, at their
principal amount commencing three years from the date of issue, but only in
the event the Common Stock, at the time the redemption notice is delivered
by the Company, has been trading at no less than $14.40 for 20 consecutive
trading days. The shares of Series A Preferred have been canceled.
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
January 31, January 31,
1996 1997
----------- -----------
Land (includes $576,000 under
capital lease) $ 3,447,000 $ 3,447,000
Building (includes $1,224,000
under capital lease) 6,743,452 6,743,452
Building improvements -- 454,863
Furniture and fixtures 491,540 640,400
Machinery and equipment 1,161,020 1,811,780
Tools and molds -- 1,051,689
----------- -----------
11,843,012 14,149,184
Less accumulated depreciation (743,520) (1,508,275)
----------- -----------
11,099,492 12,640,909
Construction in progress -- 1,176,294
----------- -----------
Property and equipment, net $11,099,492 $13,817,203
=========== ===========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information of Fine
Fragrances, a fragrance distribution Company which is 49.99% owned by the
Company and distributes the Salvador Dali, Cafe, Taxi and Watt brands.
January 31, January 31,
1996 1997
----------- -----------
Current assets $3,284,066 $4,327,313
Other assets 742,265 1,386,694
---------- ----------
Total assets $4,026,331 $5,714,007
========== ==========
Current liabilities $ 970,716 $1,717,091
Shareholders' equity 3,055,615 3,996,916
---------- ----------
Total liabilities and
shareholders' equity $4,026,331 $5,714,007
========== ==========
Seven Months Twelve Months Years
Year Ended Ended Ended Ended
June 30, January 31, January 31, January 31,
1994 1994 1995 1995 1996 1997
---------- ---------------------- ------------- ----------------------
Net Sales $3,742,342 $2,048,794 $3,004,644 $4,698,192 $4,746,765 $7,279,739
========== ========== ========== ========== ========== ==========
Net Income $ 481,129 $ 178,343 $ 453,574 $ 756,360 $ 724,438 $ 941,301
========== ========== ========== ========== ========== ==========
The Company's equity in the net income of Fine Fragrances as reflected
in the accompanying statements of income has been reduced for the
amortization of the exclusive distribution agreements. The exclusive
distribution agreements are being amortized using the straight-line method
over six years, the term of the agreements. Amortization expense on these
exclusive distribution agreements was approximately $75,000 for the year
ended June 30, 1994, $44,000 for the seven months ended January 31, 1995,
and $75,000 for each of the years ended January 31, 1996 and 1997.
The reconciliation of the investment in unconsolidated affiliate is as
follows:
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE - (Continued)
January 31, 1996 January 31, 1997
---------------- ----------------
Equity interest at 50% $1,527,800 $1,998,440
Unamortized exclusive distribution
agreements 180,435 105,778
---------------- ----------------
Carrying value $1,708,235 $2,104,218
================ ================
Current liabilities primarily relate to a $3,000,000 secured line of
credit from a bank. The interest rate is prime rate plus 2.5% (prime rate
was 8.25% at January 31, 1997). The line is secured by receivables and
inventories. The line is subject to annual review and renewal by the bank
in April. Amounts outstanding were $912,000 and $952,000 as of January 31,
1996 and 1997, respectively. There are no other material commitments or
contingencies for Fine Fragrances other than the management fees owed to
the Company (see Note 12).
7. SHORT-TERM DEBT
In March 1996, the Company entered into a credit facility to replace
its then existing credit facility. The credit facility provides for
borrowings on a revolving basis of up to $30,000,000 (which is increased to
$40,000,000 from July 1 to December 31 as an over line for the holiday
season). Borrowings are limited to eligible accounts receivable and
inventories. Borrowings are also collateralized by the Company's shares of
common stock in its subsidiaries and in Fine Fragrances and all other
assets (including accounts receivable and inventories) other than the
Miami Lakes Facility. The credit facility contains several covenants, the
more significant of which are that the Company maintain a minimum level of
equity and meet certain debt-to-equity, interest coverage and liquidity
ratios. The credit facility also includes a prohibition on the payment of
dividends and other distributions to shareholders and restrictions on the
incurrence of additional indebtedness. The credit facility also includes
the Geoffrey Beene Term Loan of which $4,333,333 remained outstanding as of
January 31, 1997 (see Note 2). In connection with the credit facility, the
Company issued to the banks warrants to purchase 50,000 shares of Common
Stock exercisable at $5.50 per share until March 14, 1998. In August 1996,
the credit facility was amended to increase the over line borrowings for
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. SHORT-TERM DEBT - (Continued)
the 1996 holiday season from $40,000,000 to $55,000,000. In December 1996,
the credit facility was amended to provide for an increase in the borrowing
limit from $30,000,000 to $40,000,000 from January 1997 through March 1997.
The outstanding balance under the credit facility (excluding the Geoffrey
Beene Term Loan) as of January 31, 1997 and 1996 was $37,631,000 and
$14,880,000 respectively. Interest expense under the credit facility
totaled approximately $716,000 for the year ended June 30, 1994, $383,000
and $855,000 for the seven months ended January 31, 1994 and 1995,
respectively; and $1,130,000, $1,910,000 and $3,192,000 for the twelve
months ended January 31, 1995, and for the years ended January 31, 1996 and
1997, respectively. As part of the credit facility, the Company had
approximately $599,000 in outstanding letters of credit at January 31,
1997. In March 1997, the Company's credit facility was amended to provide
for an increase in the borrowing limit from $30,000,000 to $45,000,000 from
March 31, 1997 through June 30, 1997.
8. CONVERTIBLE SUBORDINATED DEBENTURES
The convertible subordinated debentures as of January 31, 1996
represent 5% convertible debentures due 1997 (the "5% Convertible
Debentures") which were convertible into Common Stock. Prior to the
January 1, 1997 maturity, bondholders elected to convert $14,000 aggregate
principal amount of the 5% Convertible Debentures into 1,815 shares of
Common Stock. The balance of the 5% Convertible Debentures was redeemed by
the Company at maturity. The convertible subordinated debentures as of
January 31, 1997 represent the 7.5% Convertible Debentures issued in the
Exchange Offer (see Note 4).
9. SECURED SUBORDINATED DEBENTURES
Secured subordinated debentures as of January 31, 1996, include
(1) $3,460,000 principal amount of 12.5% Debentures which were issued on
July 2, 1992, and (2) $8,225,000 principal amount of 8% Series I
Debentures. Secured subordinated debentures as of January 31, 1997, include
(1) $7,438,500 principal amount of 8% Series I Debentures, and (2)
$3,000,000 principal amount of 8% Series II Debentures (see Note 2). The
12.5% Debentures were exchanged for 7.5% Convertible Debentures in the
Exchange Offer (see Note 4). Interest expense on the secured subordinated
debentures totaled approximately $443,000 for the year ended June 30, 1994;
$252,000 for each of the seven months ended January 31, 1994 and 1995,
and $433,000, $433,000 and $1,069,000, for the twelve months
ended January 31, 1995 and for the years ended January 31, 1996 and 1997,
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. SECURED SUBORDINATED DEBENTURES - (Continued)
respectively. The 8% Series I Debentures and 8% Series II Debentures are
secured by a lien on all of the personal property and assets of the Company
junior to the lien of the lender under the Company's credit facility (see
Note 7).
10. CAPITAL LEASE AND INSTALLMENT LOANS
As of January 31, 1997, the future minimum lease payments for the
National Trading Facility under capital lease (see Note 1) and payments due
on installment loans are as follows:
Capital Installment
January 31, Total Lease Loans
---------------------------------------------------------------------
1998 $ 271,646 $ 250,462 $ 21,184
1999 242,813 242,813 --
2000 235,163 235,163 --
2001 227,513 227,513 --
2002 and thereafter 1,292,463 1,292,463 --
----------- ----------- --------
Total 2,269,598 2,248,414 21,184
Less amount representing
interest (998,414) (998,414) --
----------- ----------- --------
Present value of net
future payments 1,271,184 1,250,000 21,184
Less current portion (141,184) (120,000) (21,184)
----------- ----------- --------
Balance at January 31, 1997 $1,130,000 $ 1,130,000 $ 0
=========== =========== ========
11. INCOME TAXES
The components of the provision for income taxes for the year ended
June 30, 1994, for the seven months ended January 31, 1995 and for the
years ended January 31, 1996 and 1997 are as follows:
Seven Months
Year Ended Ended Year Ended Year Ended
June 30, January 31, January 31, January 31,
1994 1995 1996 1997
-------------------------------------------------------------------------------
Current income taxes:
Federal $450,374 $1,579,491 $2,082,263 $4,108,569
State 79,415 168,480 352,639 738,230
-------- ---------- ---------- ----------
Total current 529,789 1,747,971 2,434,902 4,846,799
-------- ---------- ---------- ----------
Deferred income taxes:
Federal 610 (233,117) (455,642) (173,364)
State 111 (24,735) (48,569) (21,099)
Total deferred 721 (257,852) (504,211) (194,463)
-------- ---------- ---------- ----------
Total provision for
income taxes $530,510 $1,490,119 $1,930,691 $4,652,336
======== ========== ========== ==========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. INCOME TAXES - (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes and
operating loss carry forwards. The tax effects of significant items
comprising the Company's net deferred tax asset are as follows:
January 31, 1996 January 31, 1997
------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment $ 1,966 $ --
Management incentive arrangements 119,304 --
Other -- 97,047
----------- ----------
Gross deferred tax liabilities 121,300 97,047
----------- ----------
Deferred tax assets:
Excess of book bad debts reserve
over tax reserve 141,701 78,720
Intangibles 232,252 129,224
Management incentive arrangements -- 310,043
Net operating loss carry forwards 800,468 800,468
Property and equipment -- 80,332
Inventories related 290,475 454,533
Other 218,214 --
----------- ----------
Gross deferred tax assets 1,683,110 1,853,320
----------- ----------
Net deferred tax asset 1,561,810 1,756,723
Valuation allowance for deferred taxes (800,468) (800,468)
----------- ----------
Net deferred tax asset $ 761,342 $ 955,805
=========== ==========
As of January 31, 1996 and 1997, the valuation allowance relates to
the net operating loss carry forwards available in connection with the
Merger discussed in Note 2 which expire through 2009.
The total income tax provision differs from the amount obtained
by applying the statutory federal income tax rate to pretax income for the
following reasons:
Seven Months Year Year
Year Ended Ended Ended
Ended January 31, January 31, January 31,
June 30, 1994 1995 1996 1997
Amount Rate Amount Rate Amount Rate Amount Rate
---------------- ------------------ ------------------ -----------------
Income tax at
statutory rates $524,239 34.00% $1,291,586 34.00% $1,672,126 34.00% $4,386,033 34.00%
Florida tax,
net of federal
benefit 51,724 3.35 154,177 4.06 232,742 4.71 473,307 3.67
Undistributed
earnings in
affiliate (65,434) (4.24) (61,686) (1.62) (116,426) (2.36) (138,594)(1.07)
Other 19,981 1.30 106,042 2.79 142,249 2.88 (68,410)(0.53)
-------- ----- ---------- ----- ---------- ----- ---------- -----
Total income
taxes $530,510 34.41% $1,490,119 39.23% $1,930,691 39.23% $4,652,336 36.07%
=============== ================= ================= ================
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. RELATED PARTY TRANSACTIONS
As of January 31, 1996, the Company had $410,000 outstanding in loans
from shareholders, which were repaid in fiscal year end 1997. Interest
expense on these loans totaled approximately $22,000 for the year ended
June 30, 1994; $14,000 and $10,000 for the seven months ended January 31,
1994 and 1995, respectively; and $18,000, $28,000 and $16,000 for the
twelve months ended January 31, 1995, and for the years ended January 31,
1996 and 1997, respectively.
In the normal course of business and from time-to-time, the Company
and its affiliates, Fine Fragrances and National Trading, have entered into
transactions which are reflected on the balance sheet as Due to Affiliates,
net. During the seven months ended January 31, 1995 and for the years
ended January 31, 1996 and 1997, such transactions are summarized as
follows:
Due to Due to
Advances (from) (from) Total due
from Management Fine National to (from)
Fine Fees and Fragrances, Trading, Affiliates,
Fragrances Other net net net
Balance at
June 30, 1994 $ 1,616,991 $ (490,849) $ 1,126,142 $ 304,994 $ 1,431,136
Advances, net 430,000 -- 430,000 87,941 517,941
Management fee (8%) -- (254,000) (254,000) -- (254,000)
Miscellaneous -- (31,011) (31,011) -- (31,011)
Interest (8.5%) 74,433 -- 74,433 7,000 81,433
Repayments (215,364) -- (215,364) (287,000) (502,364)
----------- ---------- ----------- ---------- -----------
Balance at
January 31, 1995 1,906,060 (775,860) 1,130,200 112,935 1,243,135
Advances, net 873,000 -- 873,000 1,444,160 2,317,160
Management fee (8%) -- (375,576) (375,576) -- (375,576)
Interest (8.5%) 236,788 -- 236,788 -- 236,788
Repayments (1,152,688) -- (1,152,688) -- (1,152,688)
----------- ---------- ----------- ---------- -----------
Balance at
January 31, 1996 1,863,160 (1,151,436) 711,724 1,557,095 2,268,819
Advances, net 1,495,000 -- 1,495,000 222,500 1,717,500
Management fee (12%) -- (925,289) (925,289) -- (925,289)
Interest (8.25%) 154,199 -- 154,199 -- 154,199
Repayments (340,289) -- (340,289) (1,260,951) (1,601,240)
----------- ---------- ----------- ---------- -----------
Balance at
January 31, 1997 $ 3,172,070 $(2,076,725) $ 1,095,345 $ 518,644 $ 1,613,989
=========== =========== =========== ========== ===========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. RELATED PARTY TRANSACTIONS - (Continued)
The Company had various monitoring agreements with affiliates of the
Company pursuant to which such affiliates provide financial advisory
services to the Company. In consideration of the services provided, such
affiliates received annual fees totaling $275,000 which are payable in
quarterly installments. These agreements were terminated and replaced by a
new consulting agreement on April 1, 1997. See Note 16.
The Company has an employment agreement through April 2000 with
its Chief Executive Officer, whereby he agrees to devote a majority of his
business time and energies to the business and affairs of the Company. The
agreement is automatically renewable for successive one year periods and
contains a non-compete clause during the term of the agreement and for a
period of five years after its termination.
13. REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock represents the Series A Preferred which was
issued in exchange for the FFI Series A Preferred in the Merger. The FFI
Series A Preferred was originally issued in July 1992. The Series A
Preferred was exchanged for 7.5% Convertible Debentures in the Exchange
Offer.
14. SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Years Ended
January 31, January 31,
1996 1997
---------------------------
Reverse acquisition of Suave
Fair value of non-cash assets acquired $12,267,430
===========
Liabilities assumed $(2,654,391)
===========
HBI Note issued in connection with the
Halston Acquisition $ 2,000,000
===========
7.5% Convertible Debentures issued in
connection with the Exchange Offer $ 5,460,000
===========
Redemption of 8% Debentures used to pay
for conversion of preferred stock $ 786,500
===========
Acquisition of FMG assets:
Fair value of assets acquired excluding
inventory $14,552,489
===========
8.5% Debentures issued, net of discount $11,080,000
===========
Warrants issued $ 20,000
===========
Liabilities assumed $ 3,107,328
===========
Discharge of receivable and inventory transferred $ 1,544,489
===========
Inventory acquired for other than cash $ 1,199,332
===========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. STOCK OPTION PLANS
In January 1995, the Board adopted two stock option plans, one for the
benefit of non-employee directors (the "Non-Employee Director Plan") and
another for directors, officers, and employees (the "1995 Stock Option
Plan"). Both the 1995 Stock Option Plan and the Non-Employee Director Plan
were assumed in the Merger and the outstanding options were adjusted for
the Merger (see Note 2).
The stock options awarded under the Non-Employee Director Plan are
generally exercisable within a year after grant provided the grantee
remains a director of FFI. The options granted under the Non-Employee
Director Plan are non-qualified under the Internal Revenue Code. The
option exercise price cannot be less than the fair value of the underlying
Common Stock as of the date of the option grant, and the maximum option
term cannot exceed ten years. The number of shares of Common Stock
authorized under the Non Employee Director Plan is 200,000. As of January
31, 1996, no options were outstanding under the Non-Employee Director Plan.
As of January 31, 1997, options for 44,500 shares of Common Stock were
outstanding but none were exercisable. Options for 7,000 shares are
exercisable at $6.00 per share on March 29, 1997, and options for 37,500
shares are exercisable at $7.00 per share on June 25, 1997.
The stock options awarded under the 1995 Stock Option Plan are
exercisable at any time or in any installments as determined by the
Compensation Committee of the Board at the time of grant, provided that no
stock options shall be exercisable prior to six months from the date
of grant. The options granted under the 1995 Stock Option Plan may be
either incentive and/or non-qualified stock options under the Internal
Revenue Code as determined by the Compensation Committee. The aggregate
fair value (determined at the grant date) of Common Stock with respect to
which incentive options are exercisable for the first time by a participant
of the plan during any calendar year shall not exceed $100,000. The number
of shares of Common Stock authorized under the 1995 Stock Option Plan is
1,500,000. On January 26, 1995, options for 477,040 shares of Common Stock
(following conversion in the Merger) were granted at $3.30 per share
exercisable as follows: (i) 150,114 shares on July 26, 1995; (ii) 150,114
shares on January 26, 1996; (iii) 150,112 shares on January 26, 1997; and
(iv) 26,700 shares on January 26, 1998. On December 19, 1995, options for
50,000 shares of Common Stock were granted at $5.25 per share exercisable
on June 19, 1996. On June 25, 1996, options for 92,500 shares of Common
Stock were granted at $6.50, of which 30,834 of such options are currently
exercisable and the remaining options become exercisable in equal amounts
when the Common Stock next trades at $11.00 and $15.00, respectively.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. STOCK OPTION PLANS
In addition, two stock option plans were established by Suave prior to
the Merger, the 1981 Employee Stock Option and Stock Appreciation Plan (the
"1981 Employee Plan") and the 1993 Stock Option Plan (the "1993 Plan"). On
February 22, 1996, options for 20,000 shares of Common Stock were granted
at $5.25 per share exercisable in thirds on September 11, 1996,
March 11, 1997 and March 11, 1998. On May 2, 1996, options for 45,000
shares of Common Stock were granted at $6.50 per share exercisable in
thirds on November 2, 1996, May 2, 1997 and May 2, 1998. The terms
relating to grants of options under the 1981 Employee Plan are similar to
those of options granted under the 1995 Stock Option Plan. Effective
June 25, 1996, the Board determined that there would be no additional
option grants under the 1981 Employee Plan or the 1993 Plan.
The option activities of all plans are as follows:
Year Ended Year Ended
January 31, 1996 January 31, 1997
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------- -----------------
Beginning outstanding 477,040 $3.30 527,040 $3.49
Granted 50,000 5.25 202,000 6.45
Exercised -- -- -- --
Canceled -- -- -- --
------- ----- ------- -----
Ending Outstanding 527,040 $3.49 729,040 $4.31
======= ===== ======= =====
Exercisable as of January 31, 1996
and January 31, 1997 300,228 552,845
======= =======
Options Outstanding Options Exercisable
- ------------------------------------------- ---------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise January 31, Contractual Exercise January 31, Exercise
Price 1997 Life Price 1997 Price
----------- ----------- ----------- -------- ----------- --------
$3.30-$5.25 547,040 3.11 $3.55 507,007 $3.52
$6.00-$7.00 182,000 5.57 $6.58 45,838 $6.50
----------- ----------- ----------- -------- ----------- --------
$3.30-$7.00 729,040 3.72 $4.31 552,845 $3.77
=========== =========== =========== ======== =========== ========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. STOCK OPTION PLANS - (Continued)
The Company applies APB No. 25 and related interpretations in
accounting for its stock options to employees and non-employee members of
the Board as described in Note 1. Accordingly, no compensation expense has
been recognized during the years ended January 31, 1996 and 1997 related to
the stock options. Net income and net income per primary common share
equivalent would have been as follows had the fair value of stock options
granted during 1996 and 1997 been recognized as compensation expense as
prescribed by SFAS No. 123:
Fiscal Years Ended
January 31,
1996 1997
--------------------------
Proforma net income $2,991,000 $8,142,000
Net income per primary share equivalent $0.35 $0.60
In calculating the fair value of the stock options, the Company
calculated the volatility of trading of its stock since it was listed on
the Nasdaq National Market. The Company used a 7% risk-free rate of return
and assumed no dividend payments over the life of the options.
16. SUBSEQUENT EVENTS
In April 1997, the Company entered into an agreement which grants to
the Company an option to acquire the 50.01% of the common stock of Fine
Fragrances that the Company does not already own from an unaffiliated third
party. The purchase price consists of $2,000,000 plus an additional
$1,000,000 to be paid over time based on 5% of the net sales of COFCI
products, with any unpaid balance due 30 days after the third anniversary
of the consummation of such transaction. Upon consummation of such
transaction, Fine Fragrances will become a wholly owned subsidiary of the
Company and its operations will be consolidated with those of the Company,
and the management agreement with Fine Fragrances will be terminated.
In April 1997, the monitoring agreements with affiliates of the
Company were terminated. In their place, the Company entered into an
agreement with E.S.B. Consultants, Inc. ("ESB") for financial, advisory and
management services. The agreement is for a term of one year, renewable at
the option of the Company for additional one-year terms and provides for a
fee to ESB of $300,000. See Note 12.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. SUBSEQUENT EVENTS - (Continued)
In April 1997, the Company commenced a private placement of
approximately $100 million in Senior Notes Due 2007 (the "Notes").
Proceeds from the sale of the Notes will be used to refinance indebtedness
(including the indebtedness under its existing credit facility and
approximately $14 million principal amount of subordinated debentures), to
provide additional working capital support and to provide increased
operational and financial flexibility to take advantage of expansion
opportunities, through acquisitions of brands or new product distribution
arrangements. The offering of the Notes (the "Offering") is expected to
close by the middle of May 1997. The Notes will not be registered under
the Securities Act of 1933, as amended and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements. There is no assurance that the terms of the
Offering will be acceptable to the Company or that the Company will be able
to consummate this Offering. If the Offering is consummated, the Company
expects to enter into a new standby credit facility to be available for
additional working capital support. If the Offering is not consummated,
the Company will retain its existing credit facility.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item has been previously reported in
the Company's Current Report on Form 8-K dated February 22, 1996, which was
filed on February 29, 1996 with the Securities and Exchange Commission, and
will also be contained in the Company's Proxy Statement relating to the
1996 Annual Meeting of Shareholders to be held on June 20, 1997 (the "Proxy
Statement").
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Proxy
Statement, and is incorporated herein by this reference, or is included in
Part I under "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference, provided that the
Compensation Committee Report and Performance Graph which is contained in
the Proxy Statement shall not be deemed to be incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements - The consolidated financial statements and
independent auditors' report are listed in the "Index to Financial
Statements and Schedules" on page 25 and included on pages 26 through 46.
2. Financial Statement Schedules - All schedules for which provision
is made in the applicable accounting regulations of the Commission are
either not required under the related instructions, are not applicable (and
therefore have been omitted), or the required disclosures are contained in
the financial statements included herein.
3. Exhibits including those incorporated by reference.
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of May 19, 1995,
by and between the Company and FFI (incorporated herein
by reference to Exhibit 2.1 filed as a part of the
Company's Form 8-K dated November 30, 1995 (Commission
File No. 1-6370)).
3.1 Amended and Restated Articles of Incorporation of the
Company dated March 6, 1996 (incorporated herein by
reference to Exhibit 3.1 filed as a part of the Company's
Form 10-K for the fiscal year ended January 31, 1996
(Commission File No. 1-6370)).
3.2 Amendment dated September 19, 1996 to the Amended and
Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 4.4 filed as part
of the Company's Form 10-Q for the quarter ended
October 31, 1996 (Commission File No. 1-6370)).
3.3 By-Laws of the Company (incorporated herein by reference
to Exhibit 3.2 filed as a part of the Company's Form 10-K
for the fiscal year ended January 31, 1996 (Commission
File No. 1-6370)).
4.1 Credit Agreement, dated as of March 14, 1996, among the
Company, Fleet National Bank and Bank of America Illinois
(incorporated herein by reference to Exhibit 4.1 filed as
a part of the Company's Form 8-K dated March 20, 1996
(Commission File No. 1-6370)).
4.2 First Amendment to Credit Agreement and Other Transaction
Documents dated as of May 10, 1996, among the Company,
Fleet National Bank and Bank of America Illinois
(incorporated herein by reference to Exhibit 4.1 filed as
a part of the Company's Form 8-K dated May 14, 1996
(Commission File No. 1-6370)).
4.3 Letter Agreement, dated May 29, 1996, regarding the
Credit Agreement dated as of March 14, 1996, as amended,
among the Company, Fleet National Bank and Bank of
America Illinois (incorporated herein by reference to
Exhibit 4.4(c) filed as a part of the Company's Amendment
No. 1 to Registration Statement on Form S-1 dated June 7,
1996 (Registration Statement No. 333-4588)).
4.4 Second Amendment to Credit Agreement and Other
Transaction Documents dated as of August 28, 1996, among
the Company, Fleet National Bank and Bank of America
Illinois (incorporated by reference to Exhibit 4.4 filed
as part of the Company's Form 10-Q for the quarter ended
July 31, 1996 (Commission File No. 1-6370)).
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------
4.5 Third Amendment to Credit Agreement and Other Transaction
Documents dated as of December 31, 1996, among the
Company, Fleet National Bank and Bank of America
Illinois.
4.6 Fourth Amendment to Credit Agreement and Other
Transaction Documents dated as of March 31, 1997, among
the Company and Fleet National Bank.
10.1 Registration Rights Agreement dated as of November 30,
1995, among the Company, Bedford Capital Corporation
("Bedford"), Fred Berens, Rafael Kravec and Eugene Ramos
(incorporated herein by reference to Exhibit 10.1 filed
as a part of the Company's Form 10-K for the fiscal year
ended September 30, 1995 (Commission File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration
Rights Agreement dated as of November 30, 1995, among the
Company, Bedford, Fred Berens, Rafael Kravec and Eugene
Ramos (incorporated herein by reference to Exhibit 10.2
filed as a part of the Company's Form 10-K for the year
ended January 31, 1996 (Commission File No. 1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to
Registration Rights Agreement dated as of November 30,
1995, among the Company, Bedford, Fred Berens, Rafael
Kravec and the Estate of Eugene Ramos (incorporated by
reference to Exhibit 10.3 filed as part of the Company's
Form 10-Q for the quarter ended July 31, 1996 (Commission
File No. 1-6370)).
10.4 Employment Agreement dated as of April 1, 1997, between
the Company and Rafael Kravec.
10.5 Chief Operating Officer Compensation Agreement dated as
of April 1, 1997, between the Company and E.S.B.
Consultants, Inc.
10.6 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 filed as a part of
the Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
10.7 1995 Stock Option Plan (incorporated herein by reference
to Exhibit 10.5 filed as a part of the Company's Form
10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.8 Lease Agreement, dated as of July 2,1992, between FFI and
National Trading (incorporated herein by reference to
Exhibit 10.13 filed as a part of the Company's Form 10-K
for the fiscal year ended September 30, 1995 (Commission
File No. 1-6370)).
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------
10.9 Option Agreement, dated July 2, 1992, between FFI and
National Trading and Memorandum of Lease and Option
Agreement related thereto (incorporated herein by
reference to Exhibit 10.14 filed as a part of the Company's
Form 10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.10 Amended and Restated Exclusive Trademark License
Agreement, dated February 29, 1980, between Geoffrey
Beene, Inc. and Epocha Distributors, Inc. (now known as
Sanofi Beaute, Inc.) as amended July 29, 1992 and
February 13, 1995 (incorporated herein by reference to
Exhibit 10.15 filed as a part of the Company's Form 10-K
for the fiscal year ended September 30, 1995 (Commission
File No. 1-6370)).
10.11 Asset Purchase Agreement dated as of February 1, 1996, by
and between the Company and Halston-Borghese, Inc. and
its affiliates (incorporated herein by reference to
Exhibit 2.1 filed as a part of the Company's Form 8-K
dated March 20, 1996 (Commission File No. 1-6370)).
10.12 Asset Purchase Agreement dated as of April 17, 1996, by
and between the Company and Fragrance Marketing Group,
Inc. and Rene Garcia and Jose Miguel Norona, including
the forms of Debentures and Seller's Warrant related
thereto (incorporated herein by reference to Exhibit
10.21(a) filed as a part of the Company's Registration
Statement on Form S-1 dated May 3, 1996 (Registration
Statement No. 333-4588)).
10.13 Amendment to Asset Purchase Agreement dated as of May 14,
1996, by and between the Company and Fragrance Marketing
Group, Inc. and Rene Garcia and Jose Miguel Norona
(incorporated herein by reference to Exhibit 2.2 filed as
a part of the Company's Form 8-K dated May 14, 1996
(Commission File No. 1-6370)).
10.14 Amendment to Asset Purchase Agreement dated as of July 1,
1996 by and between the Company and Fragrance Marketing
Group, Inc. and Rene Garcia and Jose Miguel Norona
(incorporated by reference to Exhibit 4.4 filed as part
of the Company's Form 10-Q for the quarter ended
October 31, 1996 (Commission File No. 1-6370)).
12.1 Computation of Ratio of Earnings to Fixed Charges.
16.1 Letter from Arthur Andersen LLP Regarding Change in
Certifying Accountant (incorporated herein by reference
to Exhibit 16.1 filed as a part of the Company's Form 8-K
dated February 22, 1996 (Commission File No. 1-6370)).
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
- -------------
The foregoing list omits instruments defining the rights of holders of
long term debt of the Company where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the
Company. The Company hereby agrees to furnish a copy of each such
instrument or agreement to the Commission upon request.
(b) Reports on Form 8-K.
None.
(c) Exhibits to Form 10-K.
See Item 14(a)3.
(d) Financial Statement Schedules.
See Item 14(a)2.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, as of
the 25th day of April, 1997.
FRENCH FRAGRANCES, INC.
By: /s/ Rafael Kravec
--------------------
Rafael Kravec
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ William J. Mueller Vice President-Operations April 25, 1997
- ----------------------
William J. Mueller and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ J.W. Nevil Thomas Director April 25, 1997
- ----------------------
J.W. Nevil Thomas
/s/ E. Scott Beattie Director April 25, 1997
- ----------------------
E. Scott Beattie
/s/ Richard C.W. Mauran Director April 25, 1997
- -----------------------
Richard C.W. Mauran
/s/ Fred Berens Director April 25, 1997
- ----------------------
Fred Berens
/s/ George Dooley Director April 25, 1997
- ----------------------
George Dooley