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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, 1998
[ ] 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) 818-8000
(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 9, 1998 was approximately $181,409,000 based on
the $18.875 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 9, 1998, the registrant had 13,696,277 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's Proxy Statement relating to 1998
Annual Meeting of Shareholders to be held on June 25, 1998.
French Fragrances, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security-Holders
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Signatures
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN STATEMENTS THAT ARE
NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING. SUCH STATEMENTS INVOLVE
ESTIMATES, ASSUMPTIONS, RISKS AND UNCERTAINTIES. THERE IS NO ASSURANCE
THAT FUTURE RESULTS WILL NOT DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS. ACCORDINGLY, ANY FORWARD-LOOKING STATEMENTS
ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, AND READERS ARE CAUTIONED
THAT, A NUMBER OF FACTORS, INCLUDING THOSE IDENTIFIED BELOW, COULD
ADVERSELY AFFECT THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, INCLUDING (I) THE SUBSTANTIAL INDEBTEDNESS AND SIGNIFICANT DEBT
SERVICE OBLIGATIONS, (II) SUPPLY CONSTRAINTS OR DIFFICULTIES, (III) THE
IMPACT OF COMPETITIVE PRODUCTS AND PRICING, (IV) THE COMPANY'S ABILITY TO
SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES AND NEW BRANDS INTO THE COMPANY,
(V) CHANGES IN THE RETAIL INDUSTRY, (VI) THE AVAILABILITY OF KEY PERSONNEL,
AND (VII) GENERAL BUSINESS AND ECONOMIC CONDITIONS.
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 160 fragrance brands through brand ownership and exclusive
distribution arrangements, as well as through nonexclusive direct purchase
relationships and other sources. The brands distributed by the Company
include approximately 40 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 1-12, and the brands Colors of Benetton, Hot and Cold,
Ombre Rose, Lapidus, Faconnable, Salvador Dali, Dalissime, Laguna, Cafe and
Watt (collectively, the "Controlled Brands") and over 120 other brands that
are distributed by the Company on a non-exclusive basis (the "Distributed
Brands"). The Company distributes its products to more than 31,000
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, Rite Aid and American Stores and
independent fragrance, cosmetic and other stores such as Cosmetic Center,
Ulta 3, Sharper Image and Syms. In fiscal 1998, sales to mass merchants,
drug stores, independent fragrance, cosmetic and other stores
(collectively, "mass-market retailers") constituted approximately
86% of net sales, sales to department stores constituted approximately 9%
of net sales and the balance of the Company's sales was comprised of
international sales.
Over the past five years, the Company (including FFI prior to the
Merger (as defined below)) has emerged as a leading prestige fragrance
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 31,000 separate retail locations, (iii) consummating several
acquisitions of Controlled Brands, (iv) enhancing the overall performance
of its Controlled Brands through the Company's marketing and distribution
expertise, and (v) expanding the selection and distribution of the
Distributed Brands through new manufacturer relationships and other
sources. As a result, the Company's net sales have grown to approximately
$215.5 million for fiscal 1998 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 $36.2 million from approximately
$2.0 million.
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 the 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.
RECENT DEVELOPMENTS
ACQUISITION OF THE ASSETS OF J.P. FRAGRANCES, INC. In March 1998,
the Company acquired (the "JPF Acquisition") certain assets of J.P.
Fragrances, Inc.("JPF"), including inventory, returns, contract rights,
accounts receivable, books and records, fixed assets (including furniture
and warehouse materials and equipment), claims, intangible rights
(including non-compete agreements) and goodwill (collectively, the
"Acquired Assets"). The Company also assumed certain trade and other
payables of JPF, but did not assume any of JPF's facility leases. Prior
to the JPF Acquisition, JPF was a distributor of prestige fragrances in
the United States. During its fiscal year ended December 31, 1997, JPF
had net sales of $89.5 million, a significant portion of which consisted
of sales of prestige fragrances to retailers. The JPF Acquisition is
expected to increase the selection and market share of prestige fragrance
products the Company offers to its retail customers. The purchase price,
which will be adjusted based on JPF's balance sheet on the closing date
of the JPF Acquisition and the invoice support relating to a certain
account receivable, was financed from available cash from operations,
the Company's revolving credit facility with Fleet National Bank ("Fleet")
and a subordinated debenture in the principal amount of $3 million (the
"JPF Debenture"). The JPF Debenture is non-interest bearing, with the
principal amount being payable in three equal annual installments and
if certain conditions relating to the fragrance business of JPF (the
"JPF Business") are achieved by the Company, including achieving certain
gross profit thresholds from the JPF Business. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
BUSINESS STRATEGY
The Company's objective is to maintain and enhance its position as a
leading 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 and Bowling Green, 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, Hot and Cold and Tribu. In fiscal 1997, the Company
completed the purchase of the Halston fragrance brands, including Halston,
Catalyst, Z-14 and 1-12 and acquired the principal assets of Fragrance
Marketing Group, Inc. ("FMG"), including exclusive United States
distribution rights to Ombre Rose, Faconnable, Balenciaga, Lapidus and
several other brands. In May 1997, the Company acquired the remaining
50.01% of the common stock of Fine Fragrances, Inc. ("Fine Fragrances"),
that it did not already own (the "Fine Fragrances Acquisition"). Fine
Fragrances had been the exclusive distributor in North America of
fragrances manufactured by COFCI, S.A. ("COFCI"), including Salvador Dali,
Salvador, Laguna, Dalissime, Dalimix, Cafe, Taxi and Watt. After the Fine
Fragrances Acquisition, the Company became the distributor of these brands
under new ten-year exclusive distribution agreements with COFCI.
Management believes that the Company's strong market position and
reputation in the prestige fragrance industry have assisted the Company in
acquiring ownership or control 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 of Controlled Brands, 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 improve the sell-through 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 JPF Acquisition is expected to increase the number of
manufacturers for which the Company serves as a direct distributor and the
selection of Distributed Brands available on a continuous basis for its
retail customers. 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. 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 31,000 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
introduced into a limited market Eau de Grey Flannel, as an extension to
the Geoffrey Beene brand Grey Flannel, which is positioned as a lighter
fragrance targeted to a more contemporary market. Based on the success of
Eau de Grey Flannel, the Company is planning to introduce in the summer of
1998 more contemporary version extensions to the Halston brands Halston
Ladies and Z-14. In addition, the Company is also planning the
introduction of a women's fragrance for the Geoffrey Beene line for the
fall of 1998. There can be no assurance as to the timing, occurrence or
ultimate success of any new product introductions.
EXPLOIT OPERATING LEVERAGE TO FURTHER ENHANCE PROFITABILITY. The
Company recently completed an 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 volume of product distributed without a commensurate
increase in operating costs. Since its sales are characterized by a
relatively large number of orders (approximately 130,400 in fiscal 1998)
with a relatively low average order size (approximately $1,690 in fiscal
1998), 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. The Company also recently completed the installation of
a new management information system which, among other things, is expected
to improve forecasting, purchasing and order tracking capabilities, as
well as providing Year 2000 compliance.
INDUSTRY OVERVIEW
According to the United States Department of Commerce, fragrance and
related product sales in the United States were approximately $6 billion in
1996. 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 800 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, generally 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 81% of the
Company's cost of sales for the fiscal year ended January 31, 1998. 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
Except for its Halston, Geoffrey Beene and COFCI 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, Geoffrey Beene and COFCI fragrance products, is
dependent upon any particular trademark, license or similar property.
Management believes that the Halston trademarks, the Geoffrey Beene license
and trademarks and the COFCI 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 1-12 (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 has had agreements with COFCI
for the exclusive distribution in the United States and Canada of
fragrances and related cosmetic products, including the Salvador Dali,
Laguna, Salvador, Dalissime, Dalimix, Cafe, Taxi and Watt brands.
Following the Fine Fragrances Acquisition in May 1997, these agreements
were assigned to the Company. The agreements expire in April 2007, subject
to earlier termination by COFCI if the Company were to cease to purchase
certain minimum levels of product.
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, Hot
and Cold 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 and Ombre D'or 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, 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 9, 1998, the Company's sales and marketing force
consisted of approximately 35 sales and marketing employees and
approximately 44 independent sales representatives and 19 market
specialists that focus on the retail sell through of the Company's brands
in specific areas of the United States. 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 1.8%, 1.9% and 2.6%, respectively,
for the fiscal years ended January 31, 1996, 1997 and 1998. To date, the
Company's returns have not exceeded its returns reserves 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.
DISTRIBUTION
The Company distributes its products to more than 31,000 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 Cosmetic Center, Ulta 3, Sharper Image
and Syms. In addition, with respect to the Halston and Geoffrey Beene
fragrance products, the Company distributes 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 the Company and most
merchandise is shipped to customers by common carriers. In addition, to
expedite 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 78% of the
Company's purchase orders in fiscal 1998 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 38% of net sales for the
fiscal year ended January 31, 1998. 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
1998, 67% 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. In order to
accommodate its rapid growth, the Company recently completed the
installation of a new management information system which, among other
things, is expected to improve forecasting, purchasing and order tracking
capabilities, as well as providing Year 2000 compliance. At January 31,
1998, the Company had incurred approximately $1.8 million of costs for
the implementation of the new system. Because the Year 2000 compliance
feature was a part of the new system which the Company installed and is
in the process of being tested, no specific costs were allocated to resolve
the Year 2000 compliance issue. The Company is in the process of initiating
formal communications with all of its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to
those third parties' failure to remedy their own Year 2000 issues.
Although management of the Company does not anticipate any problems, there
can be no assurance that the systems of other companies on which the
Company's systems rely will be converted on time or that a failure to
convert by another company or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company.
The Company intends to continue to enhance its management information
systems 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
The Company has an employee leasing agreement with The Vincam Group,
Inc. ("Vincam"), pursuant to which Vincam is the employer of record and
assumes all payroll obligations and certain employee benefits
administration with respect to the full-time 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 9, 1998, the Company
leased the services of approximately 190 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 9, 1998,
with respect to each person who is an executive officer of the Company, as
indicated below:
Name Age Position
- --------------------- --- -------------------------------------
Rafael Kravec 66 Chairman of the Board
E. Scott Beattie 39 President and Chief Executive Officer
Gretchen Goslin 37 Vice President - Marketing
Oscar E. Marina 38 Vice President, General Counsel and
Secretary
William J. Mueller 51 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 as a director from the Merger until April 1997. Mr. Kravec served as
Chief Executive Officer and as a director of the Company from the Merger
until April 1997. 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.
E. Scott Beattie has served as President and Chief Executive Officer
of the Company since February 1998 and has been a director of the Company
since the Merger. From April 1997 to February 1998, Mr. Beattie served as
President and Chief Operating Officer of the Company, and from November
1995 until April 1997, Mr. Beattie 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). From September 1989 to
September 1997, Mr. Beattie served as President of E.S.B. Consultants, Inc.
("ESB"), a financial and management consulting firm that until September
1997 was controlled by Mr. Beattie. ESB provided consulting services to
the Company from 1992 until 1997. 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, Cash Converters, Inc., a specialty retailer,
and Janna Systems Inc., an applications software company.
Gretchen Goslin has served as Vice President - Marketing of the
Company since the Merger. Ms. Goslin served as Vice President - Marketing
of FFI from May 1993 until the consummation of the Merger. From August
1991 to May 1993, Ms. Goslin was Vice President - Marketing of Cosmyl
Corporation, a cosmetics company.
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 Vice President, General Counsel and Secretary of G.B.
Parfums and Halston Parfums since March 1997 and Secretary of G.B. Parfums
and Halston Parfums since March 1996. Mr. Marina has served 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. Mr. Mueller is a certified
public accountant.
ITEM 2. PROPERTIES
The Company's corporate headquarters and distribution center is at
the Miami Lakes Facility 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. In
1996, the Company issued a mortgage on the Miami Lakes Facility in the
amount of $6 million. See Note 2 to the Notes to Consolidated Financial
Statements. The Company has completed an upgrade of the Miami Lakes
Facility, which included a comprehensive re-racking of the warehouse area
and the installation of a computerized pick/sortation system that is
expected to improve the rate of orders filled and represent a savings in
labor costs. The Company is planning to expand its racked warehouse area
and to rack its shipping area by the summer of 1998. 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. See Notes 1 and 9 to the
Notes to Consolidated Financial Statements. The Company is continuing to
occupy the National Trading Facility as a warehouse, but National Trading
and the Company are pursuing a potential sale or lease of the National
Trading Facility to a third party, which would discharge the Company from
its lease obligation. There is no assurance that any such sale 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 a party to a number of pending legal actions,
proceedings and claims. While any litigation contains an element of
uncertainty, management of the company believes, based upon the advice of
counsel, that the outcome of such actions, proceedings or claims, pending
or known to be threatened, will not have a material adverse affect on the
Company's consolidated financial position 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, 1998.
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. The
following table sets forth the high and low sales prices for the Common
Stock, as reported on the National Market for each of the Company's fiscal
quarters from February 1, 1996 through January 31, 1998. OTC quotations
reflect interdealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
High Low
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
Quarter Ended 4/30/97 $9 3/16 $6 3/4
Quarter Ended 7/31/97 $10 1/2 $7 1/8
Quarter Ended 10/31/97 $12 1/2 $8 1/4
Quarter Ended 1/31/98 $11 3/4 $8 5/8
Holders. As of March 31, 1998 there were approximately 530 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
prohibits the payment of cash dividends by the Company and the Indenture
relating to the Company's 10-3/8% Series B Senior Notes due 2007 (the
"Series B Senior Notes") makes the payment of cash dividends subject to the
satisfaction of certain financial and other covenants.
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except earnings 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,
1994 1994 1995 1995 1996 1997 1998
---------- ----------------- ------------- ----------------------------
(Unaudited) (Unaudited)
Selected Income
Statement Data:
Net sales $46,105 $27,415 $50,922 $69,612 $87,979 $140,482 $215,487
Gross profit 8,152 4,723 10,100 13,504 21,639 46,078 69,978
Income from
operations 2,898 1,763 5,160 6,222 8,419 18,222 31,457
Net income $ 1,011 $ 641 $ 2,492 $ 2,862 $ 3,007 $ 8,248 $ 12,341
Selected Per
Share Data:
Basic earnings per
common share $0.14 $0.09 $0.35 $0.40 $0.40 $0.71 $0.92
Weighted average
common shares
outstanding 7,120 7,120 7,120 7,120 7,548 11,647 13,394
Other Data:
EBITDA $3,233 $1,964 $5,366 $6,562 $9,738 $21,885 $36,195
As of June 30, As of January 31,
------------- --------------------------------------
1994 1995 1996 1997 1998
------------- --------------------------------------
Selected Balance
Sheet Data:
Inventories $15,232 $21,829 $25,851 $67,989 $90,426
Working capital 4,747 6,874 8,022 17,734 121,985
Total assets 30,589 38,378 71,384 172,378 232,845
Short-term debt 11,280 16,000 16,713 37,631 --
Long-term debt, net 4,983 4,932 17,285 37,215 133,785
Redeemable preferred stock 2,000 2,000 2,000 -- --
Shareholders' equity 875 4,379 17,539 44,680 58,626
- ----------------------
(1) 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. Earnings per common share for
all periods reflect "basic" earnings per share in accordance with SFAS 128.
See Note 1 to the Notes to Consolidated Financial Statements.
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
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS INFORMATION WHICH CONSTITUTES
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INHERENTLY INVOLVE
RISKS AND UNCERTAINTIES. THE FACTORS, AMONG OTHERS, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR IMPLIED BY
FORWARD-LOOKING STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDE THOSE SET FORTH UNDER
PART I OF THIS ANNUAL REPORT ON FORM 10-K.
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 several other brands including Colors of Benetton, Hot and Cold, Tribu,
Ombre Rose, Ombre D'or, Faconnable, Salvador Dali, Salvador, Laguna,
Dalissime, Dalimix, Cafe, Taxi, Watt, Balenciaga, Rumba, Lapidus, Creation,
Fantasme and Chevignon, 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 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. The JPF Acquisition, which closed on March 31, 1998,
is anticipated to increase the proportion of the Company's business in
Distributed Brands. See Item 1 "Business - Recent Developments."
The following discussion of the Company's (and FFI's prior to the
Merger) results of operations is presented for the fiscal years ended
January 31, 1996, 1997 and 1998.
RESULTS OF OPERATIONS
General
- -------
The following table sets forth, for the periods indicated, certain
information relating to the Company's (and FFI prior to the Merger)
operations expressed as percentages of net sales for the period
(percentages may not add due to rounding):
Years Ended January 31,
1996 1997 1998
------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 75.4 67.2 68.0
----- ----- -----
Gross profit 24.6 32.8 32.0
Warehouse and shipping expenses 3.1 3.2 3.3
Selling, general and administrative
expenses 10.4 14.0 11.9
Depreciation and amortization 1.5 2.6 2.2
----- ----- -----
Operating income 9.6 13.0 14.6
Interest expense, net of interest
and other income 4.3 4.1 5.5
----- ----- -----
Income before equity in earnings of
unconsolidated affiliate and income
taxes 5.3 8.9 9.1
Equity in earnings of unconsolidated
affiliate 0.3 0.3 0.1
----- ----- -----
Income before income taxes 5.6 9.2 9.2
Provision for income taxes 2.2 3.3 3.4
----- ----- -----
Net income 3.4% 5.9% 5.8%
===== ===== =====
Other Data:
EBITDA 11.1% 15.6% 16.8%
- ------------------
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, 1998 Compared to the Fiscal Year Ended
January 31, 1997
- --------------------------------------------------------------------
NET SALES. Net sales increased $75.0 million, or 53.4%, to $215.5
million for the fiscal year ended January 31, 1998 from $140.5 million for
the fiscal year ended January 31, 1997. Of the increase in net sales (i)
approximately $18.3 million was attributable to an increase in sales of
Controlled Brands, resulting primarily from the increased sales of the
Halston, Geoffrey Beene and Benetton brands (including through the launch
of the Hot and Cold product line) and the addition of the net sales of
COFCI fragrance products following the Fine Fragrances Acquisition (which
were previously accounted for under the equity in earnings of
unconsolidated affiliate, 50% owned), and (ii) the balance was attributable
to an increase in sales of Distributed Brands, including specially designed
products, for the mass market. The increase in net sales represents both
an increase in the volume of products sold to existing customers (including
through increased sell through of existing products and sales of new
products), as well as sales to new customers. Management believes that 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 $22.9 million, or 49.7%, to
$69.0 million for the fiscal year ended January 31, 1998 from $46.1 million
for the fiscal year ended January 31, 1997. The increase in gross profit
was primarily attributable to the increase in product sales of both the
Controlled Brands and the Distributed Brands, including an increase in the
sale of holiday fragrance sets. Gross margins decreased slightly from
32.8% to 32.0% primarily as a result of a proportionally larger increase in
sales of Distributed Brands, which typically sell at lower margins than the
Controlled Brands.
WAREHOUSE AND SHIPPING EXPENSE. Warehouse and shipping expenses
increased $2.7 million, or 59.6%, to $7.2 million for the fiscal year ended
January 31, 1998, from $4.5 million for the fiscal year ended January 31,
1997. The increase resulted from both an increase in labor, warehouse,
shipping materials and freight costs, all of which were associated with the
increase in net sales, and an increase in inventory reserve for shrinkage
and obsolescence.
SG&A. Selling, general and administrative ("SG&A") expenses
increased $5.9 million, or 30.0%, to $25.6 million for the fiscal year
ended January 31, 1998 from $19.7 million for the fiscal year ended
January 31, 1997. As a percentage of net sales, SG&A expenses decreased
from 14.0% in fiscal 1997 to 11.9% in fiscal 1998. Of the increase in SG&A
expenses, approximately $2.8 million represented an increase in selling
expenses, primarily as a result of increased advertising and promotional
expenses, the addition of sales and marketing personnel and salary support
programs with retailers, partially offset by the decrease in sales
commissions and national media advertising costs. General and
administrative expenses increased $3.1 million primarily as a result of the
addition of administrative personnel, the termination of the management
fees derived from Fine Fragrances following the Fine Fragrances Acquisition
(which had reduced general and administrative expenses in the prior year's
period), the increased reserve for management incentive compensation (which
is based on the pre-tax income of the Company) and an increase in the
provision for bad debt.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $1.1 million, or 29.3%, to $4.7 million for the fiscal year ended
January 31, 1998 from $3.7 million for the fiscal year ended January 31,
1997. The increase was primarily attributable to the depreciation of costs
related to (i) improvements to the Miami Lakes facility, (ii) new machinery
and equipment (including equipment for the new pick/sortation system and
computer equipment associated with the Company's new management information
system), and (iii) tools and molds used in connection with the manufacture
of products, including gift sets; and to the amortization of the trademarks
and licenses from the Halston Acquisition, the FMG Acquisition and the Fine
Fragrances Acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
INTEREST EXPENSE, NET. Interest expense, net of interest income,
increased $5.6 million, or 81.5%, to $12.4 million for the fiscal year
ended January 31, 1998 from $6.8 million for the fiscal year ended January
31, 1997. This increase was due to the increase in average debt
outstanding resulting from the May 1997 offering (the "Note Offering") of
$115 million principal amount of 10-3/8% Series A Senior Notes (the "Series
A Senior Notes"). During the fiscal year ended January 31, 1998, interest
income increased by approximately $398,000 resulting from the investment of
the excess proceeds from the Note Offering.
OTHER INCOME. Other income decreased during the fiscal year ended
January 31, 1998 by approximately $0.5 million from the fiscal year ended
January 31, 1997, primarily as a result of the receipt 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.
NET INCOME. Net income increased $4.1 million, or 49.6%, to $12.3
million for the fiscal year ended January 31, 1998, from $8.2 million for
the fiscal year ended January 31, 1997, primarily as a result of the
increase in net sales, which were partially offset by higher interest and
SG&A expenses.
EBITDA. EBITDA increased $14.3 million, or 65.4%, to $36.2 million
for the fiscal year ended January 31, 1998 from $21.9 million for the
fiscal year ended January 31, 1997. The EBITDA margin increased to 16.8%
for the fiscal year ended January 31, 1998 from 15.6% for the fiscal year
ended January 31, 1997. The increases in EBITDA and EBITDA margin were
primarily attributable to the decrease in SG&A expenses as a percentage of
net sales.
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 SG&A 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 Suave 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.
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 SG&A
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 1998, 67% 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 $40.7 million of net cash in
operations during the fiscal year ended January 31, 1998, compared to $23.2
million of net cash used in operations during the fiscal year ended
January 31, 1997, primarily as a result of a significant decrease in
accounts payable partially offset by a decrease in the level of inventory
purchases. The Company utilized a portion of the proceeds from the Note
Offering to significantly reduce its accounts payable. The Company used
net cash in investing activities of approximately $7.4 million during the
fiscal year ended January 31, 1998, compared to approximately $21.1 million
during the fiscal year ended January 31, 1997, primarily as a result of the
cash used for purchases of brand licenses and trademarks for the Halston
Acquisition and the FMG Acquisition during fiscal 1997, partially offset by
significant additions to property and equipment for the Miami Lakes
Facility, including for a new racking system, a computerized pick/sortation
system and computer software and equipment associated with a new management
information system. During the fiscal year ended January 31, 1998, the
Company received approximately $54.9 million of net cash from financing
activities, which related to the proceeds from the May 1997 Note Offering
and the uses of a portion of such proceeds to pay off the outstanding
balances under the Company's credit facility and certain subordinated
debentures and for working capital purposes. 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 its credit facility. See Notes 2, 3
and 7 to the 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 several
acquisitions during the past three years, including the Geoffrey Beene
Acquisition, the Halston Acquisition and the FMG Acquisition, the growth in
direct distribution relationships for additional fragrance brands and
certain favorable product buying opportunities, the Company's working
capital needs have increased significantly and are expected to continue to
increase, especially following the closing of the JPF Acquisition.
The Company financed approximately $39 million of the purchase price
(not including the accounts payable assumed) for the JPF Acquisition with
available cash from operations, the Company's revolving credit facility
with Fleet (the "Credit Facility") and the $3 million Debenture. The
Debenture is non-interest bearing, with the principal amount being payable
in three equal annual installments if certain conditions relating to the
JPF Business are achieved by the Company, including achieving certain gross
profit thresholds from the JPF Business. See Item 1 "Business - Recent
Developments." Since a significant portion of the purchase price for the
JPF Acquisition was paid from the Credit Facility, management of the
Company is evaluating alternatives for additional external financing of
$30 million, which may be debt or equity financing, to pay down the
amounts borrowed under the Credit Facility. Management of the Company
believes that such financing (or other financing such as an increase in the
size of the Credit Facility) is, and will be, available. Subject to
receipt of financing to pay down and thereby create availability under the
Credit Facility, management of the Company believes that internally
generated funds and available financing under the Credit Facility will be
sufficient to cover the Company's working capital and debt service
requirements (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.
The Company's future liquidity will continue to be dependent upon
its relative amounts of current assets (principally cash, accounts
receivable and inventories) and current liabilities (principally short-term
debt, accrued expenses and accounts payable). Additional inventory
requirements and accounts receivable can have a significant impact on the
Company's liquidity, particularly during expansion. To date, the Company
generally has not experienced any material adverse problems with the
collection of accounts receivable relating to its fragrance operations.
There can be no assurance that refusals to pay or delays in payment would
not have a material adverse effect on the Company's liquidity, results of
operations and general financial condition in the future. The Company
establishes reserves and provides allowances for returns at the time of
sale, 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
distributors that hold exclusive distribution rights regarding possible
acquisitions by the Company of additional exclusive manufacturing and/or
distribution rights. The Company currently has no agreements or
commitments with respect to any such acquisition, although it periodically
executes routine agreements to maintain the confidentiality of information
obtained during the course of discussions with manufacturers and
distributors. There is no assurance that the Company will be able to
negotiate successfully for any such future acquisitions or that it will be
able to obtain acquisition financing or additional working capital
financing on satisfactory terms for further expansion of its operations.
In May 1997, the Company consummated the Note Offering of $115
million principal amount of the Series A Senior Notes. See Note 10 to
Notes to Consolidated Financial Statements. In July 1997, the Series A
Senior Notes were exchanged for an equivalent principal amount of the
Series B Senior Notes which contain identical terms to the Series A Senior
Notes but have been registered under the Securities Act of 1933, as
amended. Approximately $48.6 million of the net proceeds from the sale of
the Series A Senior Notes was used to repay all of the outstanding
indebtedness under the Company's then existing credit facility (including
amounts outstanding under a term loan issued in connection with the
Geoffrey Beene Acquisition) and such credit facility was terminated.
Approximately $10.4 million of the net proceeds was used to repay the
Company's 8% Secured Subordinated Debentures Series I and II (plus accrued
interest) which were issued in connection with the Geoffrey Beene
Acquisition and the Halston Acquisition. Approximately $3.9 million
of the net proceeds was used to pay accrued interest and purchase, at a
discount, an 8.5% Subordinated Debenture due 1999 which was issued in
connection with the FMG Acquisition. In addition, approximately $4.2
million of the net proceeds was used for the Fine Acquisition and to repay
Fine Fragrances' bank credit line. The balance of the net proceeds from
the Note Offering were used for working capital support.
The Indenture pursuant to which the Series A Senior Notes (and the
Series B Senior Notes following their exchange for the Series A Senior
Notes) were issued (the "Indenture") provides that such notes will be
senior unsecured obligations of the Company and will rank senior in payment
to all existing and future subordinated indebtedness of the Company and
pari passu in right of payment with all existing and future senior
indebtedness of the Company, including indebtedness under the Credit
Facility. The Indenture generally limits the ability of the Company to
(i) incur additional indebtedness, (ii) pay any dividend or make any
distribution on account of its capital stock or other equity interest,
(iii) purchase or redeem any capital stock or equity interest of the
Company, (iv) make any principal payment, purchase or redeem subordinated
indebtedness except at scheduled maturities, or (v) make certain
investments, in each case, subject to the satisfaction of a fixed charge
coverage ratio and, in certain cases, also a net income test. In addition,
the Indenture generally limits the ability of the Company to create liens,
merge or transfer or sell assets. The Indenture also provides that the
holders of the Series B Senior Notes have the option to require the Company
to repurchase their notes in the event there is a change of control in the
Company.
Concurrently with the closing of the Note Offering, the Company
entered into the Credit Facility with Fleet which provides for borrowings
on a revolving basis of up to $40 million (including up to $3 million in
commercial letters of credit) for general corporate purposes, including
working capital needs and acquisitions, subject to certain borrowing base
limitations. Amounts borrowed on the revolving portion of the Credit
Facility mature on May 31, 1999. Loans under the revolving credit portion
of the Credit Facility will bear interest, payable monthly, at a floating
rate ranging from, at the option of the Company, either (i) 1.75% over
LIBOR to 2.25% over LIBOR or (ii) the prime rate as quoted by Fleet to 0.5%
over such prime rate, and combinations thereof, in each case depending on
the ratio of the Company's total funded debt to its shareholders equity
base. The Company's borrowing availability under the Credit Facility is
limited to the sum of between 80 to 85% of eligible accounts receivable and
50% of eligible inventory (up to a maximum of $20 million). The Company's
obligations under the Credit Facility will rank pari passu in right of
payment with the Series B Senior Notes and senior in right of payment to
all existing and future subordinated indebtedness of the Company. In
addition, borrowings under the Credit Facility are secured by a first
priority lien on all of the Company's accounts receivable and inventory.
See Note 7 to Notes to Consolidated Financial Statements.
The Credit Facility: restricts the Company's ability to incur
additional non-trade debt (with certain exceptions, including indebtedness
not exceeding $50 million for a fiscal year issued in connection with
certain asset purchases), and to enter into certain acquisitions, mergers,
investments and affiliated transactions; and prohibits the declaration or
payment of dividends on, or the redemption of, the Company's capital stock,
certain payments on the subordinated debt and the sale of the Company's
interest in its subsidiaries. The Credit Facility also contains covenants
requiring the Company to maintain a minimum shareholders' equity, a maximum
leverage ratio, and minimum debt service and interest coverage ratios. At
January 31, 1998, the Company had the entire balance of the Credit Facility
available for additional working capital support and general corporate
purposes, including acquisitions. The Company pays quarterly in arrears
a fee of .375% per annum on the unused portion of the Credit Facility and
a letter of credit fee of 1.0% per annum on the face amount of trade
letters of credit and 2.0% per annum on the face amount of stand-by letters
of credit issued and outstanding. In March 1998, The Company used
approximately $36 million of availability under the Credit Facility to pay
for a portion of the purchase price of the JPF Acquisition.
At January 31, 1998, the Company had outstanding approximately $5.0
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 not less than $14.40 for 20 consecutive
trading days. The 7.5% Convertible Debentures are due June 30, 2006 and
require interest-only payments payable semi-annually until maturity at
which time the entire unpaid principal amount and any unpaid accrued
interest is due and payable. The Company also has outstanding $7.0 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 require mandatory annual principal repayments in the
aggregate amount of $2.33 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, 1998; however, the Company incurred
approximately $6.9 million in capital expenditures, primarily for the
renovation of the executive offices, a comprehensive re-racking of the
warehouse area, the construction and installation of a computerized
pick/sortation system and the purchase and installation of software and
equipment for a new management information system. See Item 1 "Business -
Management Information Systems." The Company is planning to expand its
racked warehouse area, to rack the shipping area and install a new inbound
inventory management software system by the summer of 1998 and anticipates
capital expenditures for the fiscal year ended January 31, 1999 of
approximately $2 million. Exclusive of the possible impact from
acquisitions, the Company does not anticipate that its annual
capital expenditures will be more than $1 million for the foreseeable
future following fiscal 1999.
The Company 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 which approximate the obligations of FFI through 2011 under
this lease was approximately $2.0 million at January 31, 1998. The
Company and National Trading are pursuing 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*
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1997 and 1998
Consolidated Statements of Income for the Years Ended
January 31, 1996, 1997 and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
January 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1996, 1997 and 1998
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.
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,
1997 and 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1998. 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, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended January 31,
1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
March 31, 1998
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, January 31,
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 855,969 $ 7,667,119
Accounts receivable, net 33,762,541 53,412,248
Inventories 67,989,322 90,425,910
Advances on inventory purchases 3,441,020 6,978,285
Prepaid expenses and other assets 2,167,790 3,936,529
------------ ------------
Total current assets 108,216,642 162,420,091
------------ ------------
Investment in unconsolidated affiliate 2,104,218 --
------------ ------------
Restricted cash and investments 1,314,602 --
------------ ------------
Property and equipment, net 13,817,203 19,501,742
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 45,126,465 42,776,017
Senior note offering costs, net -- 3,756,911
Deferred income taxes, net 955,805 838,633
Other intangibles and other assets 843,109 3,359,891
------------ ------------
Total other assets 46,925,379 50,731,452
------------ ------------
Total assets $172,378,044 $232,653,285
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 37,631,301 $ --
Accounts payable - trade 37,329,059 24,393,878
Other payables and accrued expenses 10,600,000 12,454,835
Current portion of capital lease, mortgage
and term note 3,308,370 3,100,108
Due to affiliates, net 1,613,989 294,136
------------ ------------
Total current liabilities 90,482,719 40,242,957
------------ ------------
Long-term liabilities:
Senior notes -- 115,000,000
Secured subordinated debentures 10,435,035 --
Subordinated debentures 11,080,000 6,979,966
Convertible subordinated debentures 5,460,000 4,960,633
Mortgage note 5,824,231 5,682,041
Term notes 3,285,915 151,907
Capital lease 1,130,000 1,010,000
------------ ------------
Total liabilities 127,697,900 174,027,504
------------ ------------
Commitments and Contingencies(See Note 9)
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000
shares authorized; 316,005 and 279,877
shares issued and outstanding, respectively 3,160 2,799
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429
shares authorized; 571,429 and 525,490
shares issued and outstanding, respectively 5,714 5,255
Common stock, $.01 par value, 50,000,000 shares
authorized; 13,249,146 and 13,623,734 shares
issued and outstanding, respectively 132,492 136,238
Additional paid-in capital 29,185,161 30,786,503
Retained earnings 15,353,617 27,694,986
------------ ------------
Total shareholders' equity 44,680,144 58,625,781
------------ ------------
Total liabilities and shareholders' equity $172,378,044 $232,653,285
============ ============
See Notes to Consolidated Financial Statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended January 31,
1996 1997 1998
-----------------------------------------
Net sales $87,978,695 $140,482,299 $215,487,487
Cost of sales 66,339,698 94,404,288 146,509,086
----------- ------------ ------------
Gross profit 21,638,997 46,078,011 68,978,401
----------- ------------ ------------
Operating expenses:
Warehouse and shipping 2,706,782 4,528,022 7,225,319
Selling, general and
administration 9,193,929 19,664,857 25,557,962
Depreciation and
amortization 1,319,675 3,663,261 4,738,077
----------- ------------ ------------
Total operating expenses 13,220,386 27,856,140 37,521,358
----------- ------------ ------------
Income from operations 8,418,611 18,221,871 31,457,043
----------- ------------ ------------
Other income (expense):
Interest expense, net (4,142,475) (6,826,248) (12,390,622)
Other income 374,120 1,108,489 562,866
----------- ------------ ------------
Other income (expense),
net (3,768,355) (5,717,759) (11,827,756)
----------- ------------ ------------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 4,650,256 12,504,112 19,629,287
Equity in earnings of
unconsolidated affiliate,
50% owned 287,553 395,983 134,508
----------- ------------ ------------
Income before income taxes 4,937,809 12,900,095 19,763,795
Provision for income taxes 1,930,691 4,652,336 7,422,426
----------- ------------ ------------
Net income $ 3,007,118 $ 8,247,759 $ 12,341,369
=========== ============ ============
Earnings per common share:
Basic $ 0.40 $ 0.71 $ 0.92
=========== ============ ============
Diluted $ 0.35 $ 0.60 $ 0.76
=========== ============ ============
Weighted average number
of common shares:
Basic 7,548,278 11,646,937 13,394,385
=========== ============ ============
Diluted 8,517,760 13,830,510 16,492,041
=========== ============ ============
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
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
Issuance of Common
Stock upon
conversion of
Series B
convertible
preferred stock (36,128) (361) -- -- 257,230 2,572
Issuance of Common
Stock upon
conversion of
Series C
convertible
preferred stock -- -- (45,939) (459) 45,939 459
Issuance of Common
Stock upon
conversion of 7.5%
subordinated
convertible
debentures -- -- -- -- 71,419 715
Net income for
the year -- -- -- -- -- --
- --------------------------------------------------------------------------
Balance at
January 31, 1998 279,877 $2,799 525,490 $5,255 13,623,734 $136,238
======= ====== ======= ====== ========== ========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
ADDITIONAL TOTAL
PAID-IN RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- ----------- -------------
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
Issuance of Common
Stock upon
conversion of
Series B
convertible
preferred stock 846,660 -- 848,871
Issuance of Common
Stock upon
conversion of
Series C
convertible
preferred stock 241,179 -- 241,179
Issuance of Common
Stock upon
conversion of 7.5%
subordinated
convertible
debentures 513,503 -- 514,218
Net income for
the year -- 12,341,369 12,341,369
- --------------------------------------------------------------------------
Balance at
January 31, 1998 $30,786,503 $27,694,986 $58,625,781
=========== =========== ===========
See notes to consolidated financial statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended January 31,
1996 1997 1998
-----------------------------------------
Cash flows from operating activities:
Net Income $ 3,007,118 $ 8,247,759 $ 12,341,369
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,319,675 3,663,261 4,738,077
Amortization of Senior Note Offering costs -- -- 286,301
Equity in earnings of unconsolidated affiliate (287,553) (395,983) (134,508)
Deferred tax (benefit) provision (504,211) (194,463) 117,172
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (3,192,712) (20,784,755) (18,887,502)
Increase in inventories (4,021,498) (44,216,341) (19,630,950)
Decrease (increase) in prepaid expenses and
other assets 1,005,334 990,242 (7,249,730)
Increase (decrease) in accounts payable 2,991,835 26,213,395 (13,452,678)
Increase in other payables and accrued expenses 3,417,215 4,294,542 1,157,859
Increase (decrease) in due to affiliate, net 1,444,160 (1,038,451) (14,508)
------------ ------------ ------------
Net cash provided by (used in) operating
activities 5,179,363 (23,220,794) (40,729,098)
------------ ------------ ------------
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 (149,394) (2,486,960) (6,960,899)
Receipts of restricted cash for capital
improvements -- 685,398 1,314,602
Net cash acquired in merger 536,913 -- --
------------ ------------ ------------
Net cash portion of unconsolidated affiliate
purchase -- -- (1,745,768)
Net cash used in investing activities (17,983,136) (21,116,853) (7,392,065)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock 3,500 5,714 --
Proceeds from the conversion of preferred stock 1,049,487
Proceeds from stock offering -- 18,013,001 --
Proceeds from the issuance of secured
subordinated debentures 8,221,500 3,000,035 --
Payments to retire secured subordinated
debentures -- -- (14,494,512)
Net proceeds from the issuance of Senior Notes -- -- 111,550,000
(Payments to) advances from unconsolidated
affiliate (418,476) 383,621 798,894
Proceeds from term loan 7,000,000 8,960,000 --
Payments on term loans (833,333) (10,833,332) (4,333,333)
Net (payments of) proceeds from short-term debt (1,120,001) 22,751,300 (39,367,096)
Payments on capital lease and installment loans (221,606) (200,346) (141,144)
Loans from shareholders 250,000 -- --
Payments on loans from shareholders and officer -- (410,000) --
Proceeds from the grant of stock purchase warrants -- 41,624 --
Proceeds from mortgage note -- 4,000,000 --
Payments on mortgage note -- (55,961) (129,983)
Proceeds from conversion of 5% subordinated
debentures -- 14,000 --
Payments to retire convertible subordinated
debentures (600,000) (600,000) --
------------ ------------ ------------
Net cash provided by financing activities 12,281,584 45,069,656 54,932,313
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (522,189) 732,009 6,811,150
Cash and cash equivalents at beginning of period 646,149 123,960 855,969
------------ ------------ ------------
Cash and cash equivalents at end of period $ 123,960 $ 855,969 $ 7,667,119
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid during the period $ 4,082,339 $ 6,014,871 $ 9,990,420
============ ============ ============
Income taxes paid during the period $ 2,245,000 $ 2,113,441 $ 8,064,127
============ ============ ============
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. In May 1997, the Company
acquired the 50% of Fine Fragrances that it did not own. See Note 6.
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., Fine Fragrances 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.
USE OF ESTIMATES. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION. Sales are recognized upon shipment. During the
years ended January 31, 1996, 1997 and 1998, 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.
INVENTORIES. Inventories are stated at the lower of cost or market.
Cost is determined on the weighted-average method. Inventory balances at
January 31, 1997 and 1998 were as follows:
January 31,
1997 1998
--------------------------------------------------------
Finished $61,117,587 $82,208,665
Work in progress 1,303,514 1,841,706
Raw materials 5,568,221 6,375,539
----------- -----------
$67,989,322 $90,425,910
=========== =========== /TABLE
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
INVESTMENT IN UNCONSOLIDATED AFFILIATE. The Company's investment in
Fine Fragrances prior to May 1997 was accounted for under the equity method
(see Notes 6 and 16).
RESTRICTED CASH INVESTMENTS. Restricted cash and investments at
January 31, 1997, consisted of cash and investments which were held in
trust and committed for capital improvements on the Miami Lakes Facility
(as defined in Note 2).
ACCOUNTS RECEIVABLE. 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:
Years Ended January 31,
1996 1997 1998
---------------------------------------
Allowance for Doubtful Accounts:
Beginning balance $ 112,094 $ 290,645 $ 489,937
Provision 180,000 205,000 570,000
Write offs, net of recoveries (1,449) (5,708) (383,550)
----------- ----------- -----------
Ending balance $ 290,645 $ 489,937 $ 676,387
=========== =========== ===========
Allowance for Sales Returns:
Beginning balance $ 56,000 $ 346,500 $ 366,608
Provision 1,650,602 2,726,143 6,014,283
Actual returns (1,360,102) (2,706,035) (5,822,240)
----------- ----------- -----------
Ending balance $ 346,500 $ 366,608 $ 558,651
=========== =========== ===========
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 20-40
Building improvements 40
Furniture and fixtures 8
Machinery, equipment and
vehicles 3-8
Computer equipment and software 3-5
Tools and molds 1-3
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
CAPITAL LEASE. The Company leases the building and the land which
were used for its principal business offices prior to May 1997 and are
presently used as a warehouse (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 $2,100,000 and $1,980,000 at January 31, 1997 and 1998,
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
($1,130,000 at January 31, 1998).
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 9. 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.
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 1997 1998
----------------------------------------------------------------------------
Exclusive brand licenses
and trademarks 15 $49,819,496 $3,712,109 $7,043,477
Customer lists and other
intangibles 3 and 5 3,470,121 521,886 634,656
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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. No write-downs
have been recorded during the fiscal years ended January 31, 1996, 1997 and
1998.
SENIOR NOTE OFFERING COSTS. Debt issuance costs and transaction
fees which are associated with the issuance of the Senior Notes are being
amortized (and charged to interest expense) over the term of the related
notes on a method which approximates the level yield method. See Note 10.
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, senior
notes, 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, 1997 and 1998.
At January 31, 1997 and 1998, the estimated fair value of the
Company's subordinated debentures and senior notes was as follows:
1997 1998
---------- ------------
Secured subordinated debentures $9,939,000 --
Subordinated debentures 9,616,000 $ 6,979,000
Convertible subordinated debentures 5,904,000 7,578,000
Senior Notes -- 121,900,000
The fair value of all other financial instruments was not materially
different than their carrying value.
RECLASSIFICATIONS. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform with the fiscal 1998
presentations.
EARNINGS PER SHARE. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards Number
128 "Earnings per Share" ("SFAS 128") which changes the method of
calculating earnings per share. SFAS 128 requires the presentation of
"basic" earnings per share and "diluted" earnings per share on the face of
the income statement. Basic earnings per share is computed by dividing the
net income available to common shareholders by the weighted average shares
of outstanding common stock. The calculation of diluted earnings per share
is similar to basic earnings per share except that the denominator includes
dilutive potential common stock such as stock options, warrants and
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
convertible securities. The statement was effective for financial
statements for periods ending after December 15, 1997. The Company adopted
SFAS 128 in the fourth quarter of fiscal 1998 and restated its earnings per
share for the fiscal years ended January 31, 1996, 1997 and 1998 to give
effect to SFAS 128. 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 and 1998 is based on actual
number of common shares and common share equivalents outstanding. The
following table represents the computation of earnings per share:
Years Ended January 31,
1996 1997 1998
-----------------------------------------
Basic
Net income $ 3,007,118 $ 8,247,759 $12,341,369
=========== =========== ===========
Weighted average shares
outstanding 7,548,278 11,646,937 13,394,385
=========== =========== ===========
Net income per basic share $ 0.40 $ 0.71 $ 0.92
=========== =========== ===========
Diluted
Net income $ 3,007,118 $ 8,247,759 $12,341,369
Add: 7.5% Convertible
subordinated debentures'
interest - net of tax -- 135,635 250,086
Add: 5% Convertible
subordinated debentures'
interest - net of tax -- 12,288 --
----------- ----------- -----------
Net income as adjusted $ 3,007,118 $ 8,395,682 $12,591,455
=========== =========== ===========
Weighted average shares
outstanding 7,548,278 11,646,937 13,394,385
Potential dilutive
shares - treasury method 969,482 1,762,848 2,350,430
Assumed conversion of 7.5%
convertible subordinated
debentures -- 384,361 747,226
Assumed conversion of 5%
convertible subordinated
debentures -- 36,364 --
----------- ----------- -----------
Weighted average shares and
potential dilutive shares 8,517,760 13,830,510 16,492,041
=========== =========== ===========
Net income per diluted share $ 0.35 $ 0.61 $ 0.76
=========== =========== ===========
/TABLE
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 14.
NEW ACCOUNTING PRONOUNCEMENT. In June 1997, the FASB issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. SFAS No. 131 also requires
entity wide disclosures about the products and services an entity provides,
the foreign countries in which it holds assets and reports revenues, and
its major customers. SFAS No. 131 is effective for fiscal year beginning
after December 15, 1997. The adoption of SFAS No. 131 is not expected to
have a material impact on the Company's consolidated financial statement
presentation.
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"),
of the surviving corporation; (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"), of the surviving
corporation; 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 and the
fragrance distribution operations were relocated from the National Trading
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS (Continued)
Facility 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.
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 Geoffrey Beene Acquisition was
financed through the issuance of $8,225,000 principal amount of 8% Secured
Subordinated Debentures due 2005 Series I ("8% Series I Debentures") and
350,000 shares of Series B Convertible Preferred and a $7,000,000 term loan
(the "Geoffrey Beene Term Loan") issued under its then existing bank credit
facility. The outstanding amounts due under the 8% Series I Debentures and
the Geoffrey Beene Term Loan were retired in May 1997 with a portion of the
net proceeds from the offering (the "Note Offering") of $115,000,000
principal amount of 10-3/8% Series A Senior Notes Due 2007 (the "Series A
Senior Notes"). See Note 10.
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 Halston Acquisition was financed as follows: (i) through the issuance
of $3,000,000 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"); (ii) $16,000,000 in term loans from the two banks which were
parties to the Company's then existing credit facility; and (iii) a
$2,000,000 note issued to HBI maturing March 20, 2000 (the "HBI Note"),
which was 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 were
due until October 15, 1997 and that the accrued amount bore interest at 8%
per annum. 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 were repaid in June and July 1996 through
the issuance of a mortgage in the amount of $6,000,000 on the Miami Lakes
Facility and the net proceeds from public offering of 3,364,000 shares of
Common Stock of the Company (the "Stock Offering"). See Note 3. The
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS (Continued)
mortgage note provides for interest at 8.84%, a 20-year amortization
schedule and a maturity date eight years from issuance.
In September 1997, the Company informed HBI that it was setting off
amounts due under the HBI Note against the amount of the Company's
indemnification claim against HBI and its affiliates for breach of the
asset purchase agreement relating to the Halston Acquisition. Since the
amount of the Company's claim exceeds any amounts due under the HBI Note
absent the claim, no payments under the HBI Note have been made. The
amount of the HBI Note is reflected in Current portion of capital lease,
mortgage and term note in the accompanying Consolidated Balance Sheet of
the Company at January 31, 1998. The outstanding amounts due under the 8%
Series II Debentures were retired in May 1997 with a portion of the net
proceeds from the Note Offering. See Note 10.
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 and Chevignon,
inventory, accounts receivable and tangible assets. The Company financed
the FMG Acquisition as follows: (i) through the issuance of $11,100,000
aggregate principal amount of 8.5% Subordinated Debentures (the "8.5%
Debentures"); and (ii) $4,300,000 from its bank credit facility.
The Company also issued to FMG warrants for an aggregate of 1,075,000
shares of Common Stock, which will be exercisable in full at $7.50 per
share from July 1997 to January 2002. In addition, warrants for 170,000
shares of Common Stock, which are exercisable in three equal amounts at
$7.50 per share following July 1997, 1998 and 1999 and expire January 2002,
were issued to certain key employees of FMG as an inducement to join the
Company. An 8.5% Debenture of $4,000,000 principal amount was retired in
May 1997 with a portion of the net proceeds from the Note Offering. The
8.5% Debentures which were outstanding at January 31, 1998 consist of: (a)
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; and (b) 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.
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 Stock Offering.
Approximately $9,300,000 of the net proceeds were used to repay the
outstanding balance of the term loans issued in connection with the Halston
Acquisition, and the balance of the net proceeds was used to reduce
outstanding borrowings under the Company's credit facility. See Note 2.
In connection with the Stock 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.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EXCHANGE OFFER
In July 1996, the Company 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
"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"). 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 July 1999, 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, 1997 January 31, 1998
----------------------------------------
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 3,611,947
Furniture and fixtures 640,400 885,019
Machinery, equipment and vehicles 1,007,069 1,997,661
Computer equipment and software 804,711 1,283,879
Tools and molds 1,051,689 1,222,598
----------- -----------
14,149,184 19,191,556
Less accumulated depreciation (1,508,275) (2,791,895)
----------- -----------
12,640,909 16,399,661
Construction in progress 1,176,294 538,789
Projects in progress -- 2,563,292
----------- -----------
Property and equipment, net $13,817,203 $19,501,742
=========== ===========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT (Continued)
Projects in progress at January 31, 1998 included the installation
of a computerized pick/sortation system and the installation of a new
management information system, both of which were completed in February
1998.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information at
January 31, 1997 and for the years ended January 31, 1997 and 1996 of Fine
Fragrances, a fragrance distribution Company which, prior to May 1997, was
49.99% owned by the Company and distributed the Salvador Dali, Laguna,
Dalissime, Salvador, Dalimix, Cafe, Taxi and Watt brands manufactured by
COFCI. Prior to May 1997, the Company's investment in Fine Fragrances was
accounted for under the equity method.
January 31, 1997
----------------
Current assets $4,327,313
Other assets 1,386,694
----------
Total assets $5,714,007
==========
Current liabilities $1,717,091
Shareholders' equity 3,996,916
----------
Total liabilities and shareholders' equity $5,714,007
==========
Current liabilities primarily related to a $3,000,000 secured line
of credit from a bank. Amounts outstanding were $952,000 as of January 31,
1997. There were no other material commitments or contingencies for Fine
Fragrances other than the management fees owed to the Company which were
terminated following the acquisition of the Fine Fragrances Interest. See
Note 12.
Years Ended January 31,
1996 1997
-----------------------
Net Sales $4,746,765 $7,279,739
========== ==========
Net Income $ 724,438 $ 941,301
========== ==========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE (Continued)
The reconciliation of the investment in unconsolidated affiliate is
as follows:
January 31,1997
---------------
Equity interest at 50% $1,998,440
Unamortized exclusive distribution agreements 105,778
----------
Carrying value $2,104,218
==========
The Company's equity in the net income of Fine Fragrances as
reflected in the accompanying statements of income was reduced for the
amortization of the exclusive distribution agreements held by Fine prior to
May 1997. Amortization expense on these exclusive distribution agreements
was approximately $75,000 for each of the years ended January 31, 1996 and
1997.
In May 1997, the Company used approximately $4,226,000 of the net
proceeds from the Note Offering to acquire the 50.01% interest of Fine
Fragrances that the Company did not own (the "Fine Fragrances Interest")
from an unaffiliated third party and to repay Fine Fragrances' credit line.
See Note 10. The purchase price for the Fine Fragrances Interest was
$2,000,000, plus an additional $1,000,000 which is to be paid over time
based on 5% of the net sales of COFCI products sold by Fine Fragrances or
the Company, with any unpaid balance due 30 days after the third
anniversary of the consummation of the transaction. The acquisition was
accounted for under the purchase method. As a result of this acquisition,
Fine Fragrances became a wholly-owned subsidiary of the Company and the
operations of Fine Fragrances have been consolidated with those of the
Company. The brands manufactured by COFCI are distributed by the Company
under new agreements expiring in 2007
7. SHORT-TERM DEBT
In May 1997, the Company used approximately $48,595,000 of the net
proceeds from the Note Offering to repay all amounts outstanding under its
then existing credit facility (including the Geoffrey Beene Term Loan) and
terminated such facility. Concurrently with the closing of the Note
Offering, the Company entered into a new stand-by credit facility (the
"Credit Facility") with the same lender which provides for borrowings on a
revolving basis of up to $40,000,000, with a $3,000,000 sublimit for
letters of credit. Borrowings under the Credit Facility are limited to
eligible accounts receivable and inventories. Borrowings under the Credit
Facility will be secured by a first priority lien on all of the Company's
accounts receivable and inventory. The Company's obligations under the
Credit Facility will rank pari passu in right of payment with the 10 3/8%
Series B Senior Notes Due 2007 (the "Series B Senior Notes"). 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
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM DEBT (Continued)
Facility also includes a prohibition on the payment of dividends and other
distributions to shareholders and restrictions on the incurrence of
additional non-trade indebtedness. At January 31, 1997, the outstanding
balance under the then existing credit facility was approximately
$37,631,000. At January 31, 1998, the Credit Facility did not have an
outstanding balance. As part of the Credit Facility, the Company had
approximately $599,000 and $369,000 in outstanding letters of credit at
January 31, 1997 and 1998, respectively.
8. SUBORDINATED DEBENTURES
The secured subordinated debentures as of January 31, 1997, included
(i) $7,438,500 principal amount of 8% Series I Debentures, and (ii)
$3,000,000 principal amount of 8% Series II Debentures. See Note 2. The
subordinated debentures as of January 31, 1997 and 1998 represent the 8.5%
Debentures. See Note 2. The convertible subordinated debentures as of
January 31, 1997 and 1998 represent the 7.5% Convertible Debentures. See
Note 4.
9. COMMITMENTS AND CONTINGENCIES
As of January 31, 1998, the future minimum lease payments for the
National Trading Facility under capital lease are as follows. See Note 1.
January 31, Capital Lease
----------------------------------------------------
1999 $ 242,813
2000 235,163
2001 227,513
2002 219,863
2003 and thereafter 1,072,600
----------
Total 1,997,952
Less amount representing interest 867,952
----------
Present value of net future payments 1,130,000
Less current portion (120,000)
----------
Balance at January 31, 1998 $1,010,000
==========
The Company is a party to a number of pending legal actions,
proceedings and claims. While any litigation contains an element of
uncertainty, management of the company believes, based upon the advice of
counsel, that the outcome of such actions, proceedings or claims pending or
known to be threatened, will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SENIOR NOTE OFFERING
In May 1997, the Company consummated the private placement of
$115,000,000 principal amount of Series A Senior Notes. Approximately
$48,595,000 of the net proceeds from the sale of the Series A Senior
Notes was used to repay all of the outstanding indebtedness under the
Company's credit facility and approximately $14,410,000 of the net proceeds
was used to repay subordinated debentures of the Company. See Notes 2 and
7. In addition, the Company applied approximately $4,226,000 to the
acquisition of the Fine Fragrances Interest and the repayment of all of the
outstanding indebtedness under Fine Fragrances' credit facility. See Note
6. The balance of the net proceeds from the Note Offering was used to
provide the Company working capital support. In July 1997, the Series A
Senior Notes were exchanged for an equivalent principal amount of Series B
Senior Notes which contain identical terms to the Series A Senior Notes but
have been registered under the Securities Act of 1933, as amended.
The Indenture pursuant to which the Series A Senior Notes (and the
Series B Senior Notes following their exchange for the Series A Senior
Notes) were issued (the "Indenture") provides that such notes will be
senior unsecured obligations of the Company and will rank senior in payment
to all existing and future subordinated indebtedness of the Company and
pari passu in right of payment with all existing and future senior
indebtedness of the Company, including indebtedness under the Credit
Facility. The Indenture generally limits the ability of the Company to
(i) incur additional indebtedness, (ii) pay any dividend or make any
distribution on account of its capital stock or other equity interest,
(iii) purchase or redeem any capital stock or equity interest of the
Company, (iv) make any principal payment, purchase or redeem subordinated
indebtedness except at scheduled maturities, and (v) make certain
investments; in each case subject to the satisfaction of a fixed charge
coverage ratio and, in certain cases, also a net income test. In addition,
the Indenture generally limits the ability of the Company to create liens
and merge or transfer or sell assets. The Indenture also provides that the
holders of the Series B Senior Notes have the option to require the Company
to repurchase their notes in the event there is a change of control in the
Company (as defined in the Indenture).
11. INCOME TAXES
The components of the provision for income taxes for the years ended
January 31, 1996, 1997 and 1998 are as follows:
Years Ended January 31,
1996 1997 1998
--------------------------------------------
Current income taxes:
Federal $2,082,263 $4,108,569 $6,555,997
State 352,639 738,230 749,257
---------- ---------- ----------
Total current 2,434,902 4,846,799 7,305,254
---------- ---------- ----------
Deferred income taxes:
Federal (455,642) (173,364) 105,155
State (48,569) (21,099) 12,017
---------- ---------- ----------
Total deferred (504,211) (194,463) 117,172
---------- ---------- ----------
Total provision for
income taxes $1,930,691 $4,652,336 $7,422,426
========== ========== ==========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 January 31, 1998
-----------------------------------
Deferred tax liabilities:
Other $ 97,047 --
---------- ---------
Deferred tax assets:
Excess of book bad debts reserve
over tax reserve 78,720 $ 265,310
Intangibles 129,224 85,701
Management incentive arrangements 310,043 --
Net operating loss carry forwards 800,468 790,335
Property and equipment 80,332 6,702
Inventories related 454,533 480,920
---------- ----------
Gross deferred tax assets 1,853,320 1,628,968
---------- ----------
Net deferred tax asset 1,756,723 1,628,968
Valuation allowance for deferred taxes (800,468) (790,335)
---------- ----------
Net deferred tax asset $ 955,805 $ 838,633
========== ==========
As of January 31, 1997 and 1998, 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:
Years Ended January 31,
1996 1997 1998
--------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
Income tax at
statutory rates $1,672,126 34.00% $4,386,033 34.00% $6,917,329 35.00%
State tax, net of
federal benefit 232,742 4.71 473,307 3.67 494,828 2.50
Undistributed
earnings in
affiliate (116,426) (2.36) (138,594) (1.07) (47,078) (.24)
Other 142,249 2.88 (68,410) (0.53) 57,347 .30
---------- ----- ---------- ----- ---------- -----
Total income taxes $1,930,691 39.23% $4,652,336 36.07% $7,422,426 37.56%
========== ===== ========== ===== ========== =====
/TABLE
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
In the normal course of business and from time-to-time, the Company
and its affiliates, Fine Fragrances and National Trading, entered into
transactions which are reflected on the balance sheet as Due to Affiliates,
net. During the years ended January 31, 1996, 1997 and 1998, 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
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
Advances, net 1,353,432 -- 1,353,432 -- 1,353,432
Management fee (12%) -- (242,227) (242,227) -- (242,227)
Interest (8.25%) 29,783 -- 29,783 -- 29,783
Repayments -- -- -- (224,508) (224,508)
Acquisition
elimination (4,555,286) 2,318,952 (2,236,334) -- (2,236,334)
----------- ----------- ----------- ---------- -----------
Balance at
January 31, 1998 $ -- $ -- $ -- $ 294,136 $ 294,136
=========== =========== =========== =========== ===========
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS (Continued)
As a result of the acquisition in May 1997 of the Fine Fragrances
Interest, the management agreement pursuant to which the Company was
performing management services on behalf of Fine Fragrances and receiving a
management fee was terminated, Fine Fragrances' credit facility was
terminated and advances from Fine Fragrances to the Company were canceled.
See Note 6.
In April 1997, the Company terminated various monitoring agreements
it had with affiliates of the Company since 1992. Pursuant to these
agreements, the affiliates provided financial advisory services to the
Company for annual fees totaling $275,000. These agreements were replaced
by a consulting agreement with E.S.B. Consultants, Inc. ("ESB"), a Company
which prior to September 1997 was wholly-owned by the President and Chief
Executive Officer of the Company, pursuant to which ESB provided financial
advisory and management services for a fee of $300,000. In September 1997,
the consulting agreement with ESB was terminated and the President and
Chief Executive Officer ceased to have an affiliation with ESB. The
President and Chief Executive Officer is now an employee of the Company.
The Company has an employment agreement through April 2000 with its
Chairman, 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.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Years Ended January 31,
1996 1997 1998
---------------------------------------------
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 $ 40,563
=========== ==========
Conversion of 7.5% Convertible Debentures
into Common Stock $ 514,223
==========
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
===========
Acquisition of unconsolidated affiliate:
Book value of assets acquired, excluding
inventory $2,296,051
==========
Liabilities assumed $3,156,895
==========
Inventory acquired $2,805,638
==========
Note issued $1,000,000
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS
In January 1995, the FFI Board of Directors 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 by the Company in the Merger and
the outstanding options were adjusted for the Merger. See Note 2.
The stock options under the Non-Employee Director Plan are generally
exercisable within a year after grant provided the grantee remains a
director of the Company. The options granted under the Non-Employee
Director Plan are non-qualified under the Internal Revenue Code. The
option exercise price can not be less than the fair value of the
underlying Common Stock as of the date of the option grant, and the maximum
option term can not exceed ten years. The number of shares of Common Stock
authorized under the Non-Employee Director Plan is 200,000.
The stock options awarded under the 1995 Stock Option Plan are
exercisable at any time or in any installments as determined by the
Compensation Committee of the Board at the time of grant, provided that
no stock options shall be exercisable prior to six months from the
date of grant. The options granted under the 1995 Stock Option Plan may be
either incentive and/or non-qualified stock options under the Internal
Revenue Code as determined by the Compensation Committee. 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.
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"). 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.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS (Continued)
The option activities of all plans are as follows:
Years Ended January 31,
1996 1997 1998
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Beginning outstanding 477,040 $3.30 527,040 $3.49 729,040 $4.31
Granted 50,000 5.25 202,000 6.45 77,500 8.93
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Ending Outstanding 527,040 $3.49 729,040 $4.31 806,540 $4.75
======= ===== ======= ===== ======= =====
Exercisable as of
January 31, 1996,
1997, and 1998 300,228 552,845 686,548
======= ======= =======
Weighted average fair
value of options
granted during the
year 50,000 $2.61 202,000 $4.25 77,500 $5.17
======= ===== ======= ===== ======= =====
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 1998 Life Price 1998 Price
----------- ----------- ----------- -------- ----------- --------
$3.30-$5.25 547,040 2.11 $3.55 540,374 $3.53
$6.00-$9.38 259,500 5.22 $7.28 146,174 $6.73
----------- ------- ---- ----- ------- -----
$3.30-$9.38 806,540 3.11 $4.75 686,548 $4.21
=========== ======= ==== ===== ======= =====
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, 1997 and 1998
related to the stock options. Net income and net income per common
share would have been as follows had the fair value of stock, options
granted during 1996, 1997 and 1998 been recognized as compensation
expense as prescribed by SFAS No. 123:
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS (Continued)
Years Ended January 31,
1996 1997 1998
-----------------------------------------
Proforma net income $2,991,000 $8,142,000 $12,188,000
========== ========== ===========
Proforma net income
per common share:
Basic $0.40 $0.70 $0.91
===== ===== =====
Diluted $0.35 $0.59 $0.75
===== ===== =====
The fair value of each option granted is estimated on the grant date
using the Black-Sholes option pricing model with the following assumptions:
Years Ended January 31,
1996 1997 1998
-----------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected price volatility 52.27% 52.27% 55.60%
Risk-free interest rate 7.00% 7.00% 6.50%
Expected life of options
in years 5 5-10 4-8
15. SUBSEQUENT EVENT
In March 1998, the Company acquired (the "JPF Acquisition") certain
assets of J.P. Fragrances, Inc. ("JPF"), including inventory, returns,
contract rights, accounts receivable, books and records, fixed assets
(including furniture and warehouse materials and equipment), claims,
intangible rights (including non-compete agreements) and goodwill. The
Company also assumed certain trade and other payables of JPF, but did not
assume any of JPF's facility leases. The purchase price, which will be
adjusted based on JPF's balance sheet on the closing date of the JPF
Acquisition and the invoice support related to a certain account
receivable, was financed from available cash from operations, the Credit
Facility and a subordinated debenture in the principal amount of $3,000,000
(the "JPF Debenture"). The JPF Debenture is non-interest bearing, with
the principal amount being payable in three equal annual installments only
if certain conditions relating to the fragrance business of JPF (the
"JPF Business") are achieved by the Company, including achieving certain
gross profit thresholds from the JPF Business. The JPF Acquisition will be
accounted for under the purchase method.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders (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 23 and included on
pages 24 through 42.
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company
dated March 6, 1996 (incorporated herein by reference to Exhibit
3.1 filed as a part of the Company's Form 10-K for the fiscal
year ended January 31, 1996 (Commission File No. 1-6370)).
3.2 Amendment dated September 19, 1996 to the Amended and Restated
Articles of Incorporation of the Company (incorporated by
reference to Exhibit 4.4 filed as part of the Company's Form 10-Q
for the quarter ended October 31, 1996 (Commission File No.
1-6370)).
3.3 By-Laws of the Company (incorporated herein by reference to
Exhibit 3.2 filed as a part of the Company's Form 10-K for the
fiscal year ended January 31, 1996 (Commission File No.
1-6370)).
4.1 Indenture, dated as of May 13, 1997, between the Company and
Marine Midland Bank, as trustee (incorporated herein by reference
to Exhibit 4.1 filed as a part of the Company's Form
8-K dated May 13, 1997 (Commission File No. 1-6370)).
4.2 Credit Agreement, dated as of May 13, 1997, between the Company
and Fleet National Bank (incorporated herein by reference to
Exhibit 4.3 filed as a part of the Company's Form 8-K dated
May 13, 1997 (Commission File No. 1-6370)).
4.3 First Amendment to Credit Agreement and Other Transaction
Documents dated December 31, 1997 between the Company and Fleet
National Bank.
4.4 Letter Agreement dated March 23, 1998 between French Fragrances,
Inc. 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)).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------------------------------------------------------------
10.4 Employment Agreement dated as of April 1, 1997, between the
Company and Rafael Kravec (incorporated herein by reference to
Exhibit 10.4 filed as a part of the Company's Form 10-K for the
fiscal year ended January 31, 1997 (Commission File No. 1-6370)).
10.5 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)).
10.6 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)).
10.7 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)).
10.8 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)).
10.9 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)).
10.10 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)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent.
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
(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 9th day of April, 1998.
FRENCH FRAGRANCES, INC.
By: /s/ E. Scott Beattie
--------------------
E. Scott Beattie
President, Chief Executive Officer
and Director
(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/ Rafael Kravec Chairman of the Board April 9, 1998
- ----------------- and Director
Rafael Kravec
/s/ E. Scott Beattie President, Chief Executive April 9, 1998
- -------------------- Officer and Director
E. Scott Beattie (Principal Executive Officer)
/s/ William J. Mueller Vice President-Operations April 9, 1998
- ---------------------- and Chief Financial Officer
William J. Mueller (Principal Financial and
Accounting Officer)
/s/ J.W. Nevil Thomas Director April 9, 1998
- ---------------------
J.W. Nevil Thomas
/s/ Richard C.W. Mauran Director April 9, 1998
- -----------------------
Richard C.W. Mauran
/s/ Fred Berens Director April 9, 1998
- ---------------
Fred Berens
/s/ George Dooley Director April 9, 1998
- -----------------
George Dooley