UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________
Commission File Number 1-6370
FRENCH FRAGRANCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0914138
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
14100 N.W. 60th Avenue, Miami Lakes, Florida 33014
---------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(305) 818-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Outstanding at
Class September 8, 2000
---------------------------- -----------------
Common Stock, $.01 par value 13,209,718 shares
2
FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2000 and
July 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations -
Three and Six Months Ended July 31, 1999 and 2000 . . . . . . . 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended July 31, 2000. . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flow -
Six Months Ended July 31, 1999 and 2000 . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements. . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 2000 July 31, 2000
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,144,314 $ 734,652
Accounts receivable, net 63,485,136 67,323,176
Inventories 127,022,405 140,849,552
Advances on inventory purchases 2,785,475 2,818,683
Prepaid expenses and other assets 9,882,321 9,344,811
------------ ------------
Total current assets 225,319,651 221,070,874
------------ ------------
Property and equipment, net 20,232,312 21,782,073
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 49,043,292 45,704,786
Senior note offering costs, net 3,949,009 3,677,977
Deferred income taxes, net 3,337,409 3,337,409
Other intangibles and other assets 7,749,982 6,756,600
------------ ------------
Total other assets 64,079,692 59,476,772
------------ ------------
Total assets $309,631,655 $302,329,719
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 11,283,201
Accounts payable - trade 31,436,903 32,736,383
Other payables and accrued expenses 19,102,919 3,089,043
Current portion of long-term debt 1,775,027 1,646,641
------------ ------------
Total current liabilities 52,314,849 48,755,268
------------ ------------
Long-term debt, net 175,030,227 171,524,022
------------ ------------
Total liabilities 227,345,076 220,279,290
------------ ------------
Commitments and contingencies (See Note 6)
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000 shares
authorized; 265,801 and 265,794 shares issued
and outstanding, respectively 2,658 2,658
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429 shares
authorized; 502,520 shares issued and outstanding 5,025 5,025
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,186,399 and 14,205,118 shares
issued and outstanding, respectively 141,864 142,051
Additional paid-in capital 32,780,530 33,127,291
Treasury stock (870,500 and 989,400 shares,
respectively) (5,673,940) (6,570,362)
Retained earnings 55,030,442 55,343,766
------------ ------------
Total shareholders' equity 82,286,579 82,050,429
------------ ------------
Total liabilities and shareholders' equity $309,631,655 $302,329,719
============ ============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
4
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
1999 2000 1999 2000
----------- ----------- ------------ ------------
Net sales $59,711,563 $66,909,358 $117,243,830 $132,618,065
Cost of sales 34,419,575 40,412,373 74,737,878 84,923,904
----------- ----------- ------------ ------------
Gross profit 25,291,988 26,496,985 42,505,952 47,694,161
Operating expenses:
Warehouse and shipping 3,859,565 6,081,065 6,752,701 10,630,417
Selling, general and
administrative 10,837,940 12,129,939 20,077,147 22,037,125
Depreciation and
amortization 2,721,666 2,972,924 5,494,212 5,906,989
----------- ----------- ------------ ------------
Total operating expenses 17,419,171 21,183,928 32,324,060 38,574,531
----------- ----------- ------------ ------------
Income from operations 7,872,817 5,313,057 10,181,892 9,119,630
----------- ----------- ------------ ------------
Other income (expense):
Interest expense, net (4,573,201) (4,812,527) (9,126,076) (9,465,490)
Other income 15,851 545,015 8,801 862,631
----------- ----------- ------------ ------------
Other income (expense), net (4,557,350) (4,267,512) (9,117,275) (8,602,859)
----------- ----------- ------------ ------------
Income before provision for
income taxes 3,315,467 1,045,545 1,064,617 516,771
Provision for income taxes 1,294,607 408,259 415,771 203,447
----------- ----------- ------------ ------------
Net income $ 2,020,860 $ 637,286 $ 648,846 $ 313,324
=========== =========== ============ ============
Earnings per common share:
Basic $0.15 $0.05 $0.05 $0.02
===== ===== ===== =====
Diluted $0.13 $0.04 $0.04 $0.02
===== ===== ===== =====
Weighted average number of
common shares:
Basic 13,813,764 13,216,942 13,813,234 13,259,398
========== ========== ========== ==========
Diluted 16,075,563 15,051,915 15,644,003 15,094,106
========== ========== ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
5
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Stock Additional
Series B Series C Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------
Balance at
January 31, 2000 265,801 $2,658 502,520 $5,025 14,186,399 $141,864 $32,780,530
Issuance of
Common Stock upon
conversion of
Series B convertible
preferred stock (7) -- -- -- 51 -- 166
Issuance of
Common Stock upon
exercise of stock
options -- -- -- -- 18,668 187 116,821
Repurchase of
Common Stock -- -- -- -- -- -- --
Tax benefit from
exercise of stock
options -- -- -- -- -- -- 229,774
Net income -- -- -- -- -- -- --
------- ------ ------- ------ ---------- -------- -----------
Balance at
July 31, 2000 265,794 $2,658 502,520 $5,025 14,205,118 $142,051 $33,127,291
(unaudited ======= ====== ======= ====== ========== ======== ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Treasury Retained Shareholders'
Stock Earnings Equity
---------------------------------------------------------------
Balance at
January 31, 2000 $(5,673,940) $55,030,442 $82,286,579
Issuance of
Common Stock upon
conversion of
Series B convertible
preferred stock -- -- 166
Issuance of
Common Stock upon
exercise of stock
options -- -- 117,008
Repurchase of
Common Stock (896,422) -- (896,422)
Tax benefit from
exercise of
stock options -- -- 229,774
Net income -- 313,324 313,324
----------- ----------- -----------
Balance at
July 31, 2000 $(6,570,362) $55,343,766 $82,050,429
(unaudited) =========== =========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
6
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
July 31,
1999 2000
------------ ------------
Cash Flows from Operating Activities:
Net income $ 648,846 $ 313,324
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,494,212 5,906,989
Amortization of senior note offering costs and
note premium 287,138 216,611
Change in assets and liabilities:
Increase in accounts receivable (4,394,441) (3,838,040)
Increase in inventories (1,004,254) (13,827,147)
Increase in advances on inventory purchases (1,868,903) (33,210)
(Increase) decrease in prepaid expenses and
other assets (4,884,668) 523,382
Increase in accounts payable 3,972,209 1,299,480
Decrease in other payables and accrued expenses (6,244,701) (15,784,100)
----------- ------------
Net cash used in operating activities (7,994,562) (25,222,711)
----------- ------------
Cash Flows from Investing Activities:
Additions to property and equipment, net of disposals (2,123,457) (3,110,734)
----------- ------------
Net cash used in investing activities (2,123,457) (3,110,734)
----------- ------------
Cash Flows from Financing Activities:
Proceeds from the exercise of employee stock options -- 117,008
Payments to retire convertible subordinated debentures -- (2,184,000)
Proceeds from the conversion of preferred stock 182,539 166
Payments on term loans (1,615,362) (317,178)
Net proceeds from short-term debt 7,461,631 11,283,201
Repurchase of Common Stock (363,200) (896,422)
Payment of JP Fragrances debenture -- (1,000,000)
Payments on facility mortgage note (81,770) (78,992)
----------- ------------
Net cash provided by financing activities 5,583,838 6,923,783
----------- ------------
Net Decrease in Cash and Cash Equivalents (4,534,181) (21,409,662)
Cash and Cash Equivalents at Beginning of Period 6,111,603 22,144,314
----------- ------------
Cash and Cash Equivalents at End of Period $ 1,577,422 $ 734,652
=========== ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 8,496,074 $ 9,183,104
=========== ============
Income taxes paid during the period $ 5,887,633 $ 11,123,225
=========== ============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
7
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
French Fragrances, Inc., doing business as FFI Fragrances (the
"Company"), is a manufacturer and marketer of prestige designer
fragrances and related skin treatment and cosmetic products, primarily
to retailers in the United States.
The accompanying unaudited consolidated financial statements
included herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission") for interim financial information. Accordingly, they do
not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statement presentation and should be
read in conjunction with the financial statements and related
footnotes included in the Company's Annual Report on Form 10-K for the
year ended January 31, 2000, filed with the Commission.
The consolidated balance sheet of the Company as of January 31,
2000 is audited. The other consolidated financial statements are
unaudited, but in the opinion of management contain all adjustments
necessary to present fairly the consolidated balance sheet of the
Company as of July 31, 2000, the consolidated statements of operations
of the Company for the three and six months ended July 31, 1999 and
2000, the consolidated statement of shareholders' equity for the six
months ended July 31, 2000, and the consolidated statements of cash
flow for the six months ended July 31, 1999 and 2000. Operating
results for the three and six months ended July 31, 2000 are not
necessarily indicative of the results for the full fiscal year ended
January 31, 2001.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income
available to common shareholders by the weighted average shares of
outstanding common stock. The calculation of diluted earnings per
share is similar to basic earnings per share except that the
denominator includes dilutive potential common stock such as stock
options, warrants and convertible securities. In addition, for the
diluted earnings per share calculation, the interest incurred on the
convertible securities, net of tax, is added back to net income.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the weighted-average method. The components of
inventory at January 31, 2000 and July 31, 2000 were as follows:
January 31, July 31,
2000 2000
------------ ------------
Finished $103,548,955 $109,757,601
Work in progress 6,727,835 9,710,654
Raw materials 16,745,615 21,381,297
------------ ------------
$127,022,405 $140,849,552
============ ============
7
8
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. SHORT-TERM DEBT
At July 31, 2000, the Company's credit facility (the "Credit
Facility") with Fleet National Bank ("Fleet") provided for borrowings
on a revolving basis of up to $50 million, with a $10 million sublimit
for letters of credit. The Credit Facility matures in May 2002.
Borrowings under the Credit Facility are limited to eligible accounts
receivable and inventories and are secured by a first priority lien on
all of the Company's accounts receivable and inventories. The
Company's obligations under the Credit Facility rank pari passu in
right of payment with the Company's 10 3/8% Senior Notes due 2007.
The Credit Facility contains several covenants, the more significant
of which are that the Company maintain a minimum level of equity and
meet certain debt-to-equity, interest coverage and liquidity ratios.
The Credit Facility also includes a prohibition on the payment of
dividends and other distributions to shareholders and restrictions on
the incurrence of additional non-trade indebtedness; provided,
however, that the Company is permitted to repurchase up to $10 million
of its common stock, $.01 par value per share ("Common Stock"), and to
incur certain acquisition indebtedness. At July 31, 2000, the
outstanding balance under the Credit Facility was $11.3 million and
there were $3.7 million of outstanding letters of credit.
NOTE 5. LONG-TERM DEBT
The Company's long-term debt at January 31, 2000 and July 31,
2000 consisted of the following:
Description January 31, 2000 July 31, 2000
---------------- -------------
10 3/8% Senior Notes due May 2007, net $157,245,157 $157,137,383
8.5% Subordinated Debenture due May 2004, net 6,479,966 6,479,966
7.5% Convertible Subordinated Debentures
due June 2006 4,778,643 2,594,643
J.P. Fragrances Debenture due May 2001, net 1,946,646 1,000,000
8.84% Miami Lakes Facility Mortgage Note
due July 2004 5,537,663 5,458,671
Other Indebtedness 817,179 500,000
------------ ------------
Total Long-Term Debt 176,805,254 173,170,663
Less Current Portion of Long-Term Debt 1,775,027 1,646,641
------------ ------------
Total Long-Term Debt, net $175,030,227 $171,524,022
============ ============
In February 2000, the Company repurchased $2.18 million principal
amount of 7.5% Convertible Subordinated Debentures due 2006 (the "7.5%
Convertible Debentures") owned by its former Chairman and a company he
controls for an aggregate purchase price of $2.65 million. The 7.5%
Convertible Debentures that were repurchased were convertible into
approximately 303,000 shares of Common Stock. The purchase price was
based on the estimated fair market value of the 7.5% Convertible
Debentures on the date of the transaction, which includes
consideration for the value of unrealized gain (based on the $8.81
price of the Common Stock on the date of repurchase) that the
debenture holder could have recognized upon a conversion and sale of
the 7.5% Convertible Debentures into Common Stock. The Company
recognized a loss related to the repurchase of $468,000, which is
included in Other income in the Company's Consolidated Statement of
Operations for the six months ended July 31, 2000.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In May 1998, the Company entered into a lease with an
unaffiliated third party for approximately 48,000 square feet of a
warehouse facility (the "Miami Lakes Annex") in Miami Lakes, Florida
to accommodate additional inventory requirements associated primarily
with its promotional set business. The lease has an initial term of
thirty months, with the Company having an option to extend for an
additional term of thirty months. The Company does not intend to
exercise its option on the Miami Lakes Annex.
In February 2000, the Company entered into a lease with an
unaffiliated third party for approximately 295,000 square feet of a
warehouse facility in Edison, New Jersey, which is being used
primarily for the Company's promotional set business. The lease has a
term of twenty-six months.
8
9
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES -Continued
In February 2000, the Company assumed a lease for approximately
173,000 square feet of a warehouse facility in Allentown,
Pennsylvania, which was leased by an unaffiliated third party as the
Company's promotional set fulfillment center for the 1999 holiday
season and extended through June 30, 2004. In May 2000, the Company
was released from all of its obligations under that lease, including
minimum lease payments in the aggregate of approximately $2.5 million
during the fiscal years ended January 31, 2001 through 2005.
The Company has commitments to purchase products from fragrance
manufacturers in the amount of approximately $63 million annually
during the calendar years ended December 31, 2000 and 2001.
The Company is a party to a number of pending legal actions,
proceedings or claims. While any action, proceeding or claim contains
an element of uncertainty, management of the Company believes that the
outcome of such actions, proceedings or claims likely will not have a
material adverse effect on the Company's business, consolidated
financial position or results of operations.
NOTE 7. INCOME TAXES
The provision for income taxes for the six months ended July 31,
1999 and 2000 was calculated based upon an estimated effective tax
rate of 39% for the full fiscal years ending January 31, 2000 and
2001, respectively.
NOTE 8. STOCK OPTION PLANS
During the six months ended July 31, 2000, the Company granted
options for the purchase of 590,000 shares of Common Stock at an
exercise price of $8.125 per share under the Company's 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan currently provides for
the issuance of options to purchase in the aggregate 2,200,000 shares
of Common Stock. At July 31, 2000, the Company had granted options to
purchase in the aggregate 1,928,374 shares of Common Stock under the
1995 Plan, including shares subject to outstanding options and those
issued upon the exercise of options and excluding shares canceled as a
result of the termination of employment relationships. During the
six months ended July 31, 2000, the Company granted options for 30,000
shares at an exercise price of $7.25 per share under the Company's
Non-Employee Director Stock Option Plan.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
In connection with the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), French
Fragrances, Inc., doing business as FFI Fragrances (the "Company"), is
hereby providing cautionary statements identifying important factors
that could cause the Company's actual results to differ materially
from those projected in forward-looking statements (as such term is
defined in the Reform Act) made in this Quarterly Report on Form 10-Q.
Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events
or performance (often, but not always, through the use of words or
phrases such as "likely will result," "are expected to," "will
continue," "is anticipated," "estimated," "intends," "plans" and
"projection") are not historical facts and may be forward-looking and
may involve estimates and uncertainties which could cause actual
results to differ materially from those expressed in the
forward-looking statements. Accordingly, any such statements are
qualified in their entirety by reference to, and are accompanied by,
the following key factors that have a direct bearing on the Company's
results of operations: the absence of contracts with customers or
suppliers and the Company's ability to maintain and develop
relationships with customers and suppliers; the substantial
indebtedness and debt service obligations of the Company; the
Company's ability to successfully integrate acquired businesses or new
brands into the Company; the impact of competitive products and
pricing; supply constraints or difficulties; changes in the retail and
fragrance industries; the retention and availability of key personnel;
and general economic and business conditions. The Company cautions
that the factors described herein could cause actual results to differ
materially from those expressed in any forward-looking statements of
the Company and that investors should not place undue reliance on any
such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which such statement is made,
and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of anticipated or
unanticipated events or circumstances. New factors emerge from time
to time, and it is not possible for the Company to predict all of such
factors. Further, the Company cannot assess the impact of each such
factor on the Company's results of operations or the extent to which
any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements.
GENERAL
This discussion should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements contained herein and
Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in the Company's Annual Report on Form
10-K for the year ended January 31, 2000. The results of operations
for an interim period may not give a true indication of results for
the year. In the following discussions, all comparisons are with the
corresponding items in the prior year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THE THREE MONTHS ENDED
JULY 31, 1999
- -------------------------------------------------------------------
Net Sales. Net sales increased $7.2 million, or 12%, to $66.9
million for the three months ended July 31, 2000, from $59.7 million
for the three months ended July 31, 1999. The increase in net sales
represents primarily an increase in the volume of products sold to
existing customers. In fact, sales to the Company's top 20 retail
accounts increased by 60% over the corresponding prior-year period.
Management believes that the increased sales resulted from the
Company's ability to provide its customers with a larger selection of
products and a continuous, direct supply of products, as well as other
value-added services such as category management services.
Gross Profit. Gross profit increased $1.2 million, or 4.8%, to
$26.5 million for the three months ended July 31, 2000, from $25.3
million for the three months ended July 31, 1999, due to the increase
in net sales. Gross margin for the three months ended July 31, 2000
decreased to 39.6% from 42.4% for the three months ended July 31, 1999
primarily due to an increase in the proportion of sales to the
mid-tier
10
11
department stores and mass market retailers, which typically generate
lower margins than sales to prestige department stores.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $2.2 million to $6.1 million for the three months ended July
31, 2000, from $3.9 million for the three months ended July 31, 1999.
The increase resulted primarily from an increase in facility, labor
and freight expenses associated with the increased sales, an increase
in inventory reserves and costs associated with the closing of a
facility in Allentown, Pennsylvania (the "Allentown Facility"), which
served as a promotional set fulfillment center during 1999, and the
start-up of a facility in Edison, New Jersey (the "Edison Facility"),
which will serve as the promotional set fulfillment center this fiscal
year. The increases in warehouse and shipping expenses over the prior
year were made to improve second-half operating efficiencies and to
prepare for the anticipated holiday season sales. The Company was
released from all of its lease obligations on the Allentown Facility
in May 2000. Because the Allentown Facility and the Edison Facility
were opened in July 1999 and February 2000, respectively, results for
the three months ended July 31, 1999 do not reflect any expenses
associated with those facilities.
SG&A. Selling, general and administrative ("SG&A") expenses
increased $1.3 million, or 11.9%, to $12.1 million for the three
months ended July 31, 2000, from $10.8 million for the three months
ended July 31, 1999. The increase in SG&A expenses was primarily the
result of the addition of information systems and administrative
personnel. As a percent of sales, SG&A remained constant at 18.1% of
sales for the three months ended July 31, 1999 and 2000.
Depreciation and Amortization. Depreciation and amortization
increased approximately $251,000, or 9.2%, to $3.0 million for the
three months ended July 31, 2000, from $2.7 million for the three
months ended July 31, 1999. The increase was primarily attributable
to the addition of tools and molds developed for the Company's
manufactured products.
Interest Expense, Net. Interest expense, net of interest income,
increased $239,000, or 5.2%, to $4.8 million for the three months
ended July 31, 2000, from $4.6 million for the three months ended July
31, 1999. The increase was primarily due to an increase in the
average debt outstanding under the credit facility (the "Credit
Facility") with Fleet National Bank ("Fleet") to support working
capital needs.
Other Income. During the three months ended July 31, 2000, the
Company recognized other income, net of other expenses, of
approximately $530,000, primarily related to the resolution of
insurance claims.
Net Income. Net income decreased $1.4 million to $637,300 for the
three months ended July 31, 2000, from $2.0 million for the three
months ended July 31, 1999. The decrease in net income was primarily
due to the increase in warehouse and shipping expenses, which was
partially offset by the increase in net sales.
EBITDA. EBITDA (operating income, plus depreciation and
amortization) decreased $2.3 million to $8.3 million for the three
months ended July 31, 2000, from $10.6 million for the three months
ended July 31, 1999. The EBITDA margin decreased to 12.4% for the
three months ended July 31, 2000, from 17.7% for the three months
ended July 31, 1999. The decreases in EBITDA and EBITDA margin were
primarily due to the increase in warehouse and shipping expenses,
which were partially offset by the increase in net sales.
SIX MONTHS ENDED JULY 31, 2000 COMPARED TO THE SIX MONTHS ENDED
JULY 31, 1999
- ---------------------------------------------------------------
Net Sales. Net sales increased $15.4 million, or 13.1%, to $132.6
million for the six months ended July 31, 2000, from $117.2 million
for the six months ended July 31, 1999. The increase in net sales
over the corresponding prior-year period was attributable, in part, to
an increase in sales of the brands acquired as part of the January
1999 acquisition (the "PSI Acquisition") of the assets of Paul
Sebastian, Inc. The increase in net sales represents primarily an
increase in the volume of products sold to existing customers. In
fact, sales to the Company's top 20 retail accounts increased by 107%
over the corresponding prior-year period. Management believes that
increased sales during the six months ended July 31, 2000 have
resulted from the Company's ability to provide its customers with a
larger selection of
11
12
products and a continuous, direct supply of products, as well as other
value-added services such as category management services.
Gross Profit. Gross profit increased $5.2 million, or 12.2%, to
$47.7 million for the six months ended July 31, 2000, from $42.5
million for the six months ended July 31, 1999 due to an increase in
net sales. Gross margin for the six months ended July 31, 2000 was
approximately 36.0% compared to the gross margin for the six months
ended July 31, 1999 of 36.3%.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $3.9 million to $10.6 million for the six months ended July
31, 2000, from $6.8 million for the six months ended July 31, 1999.
The increase resulted primarily from an increase in facility, labor
and freight expenses associated with the increased sales, an increase
in inventory reserves and costs associated with the closing of the
Allentown Facility and the start-up of the Edison Facility. The
Company was released from all of its lease obligations on the
Allentown Facility in May 2000. Because the Allentown Facility and
the Edison Facility were opened in July 1999 and February 2000,
respectively, results for the six months ended July 31, 1999 do not
reflect any expenses associated with those facilities.
SG&A. SG&A expenses increased $2.0 million, or 9.8%, to $22.0
million for the six months ended July 31, 2000, from $20.1 million for
the six months ended July 31, 1999. The increase in SG&A expenses was
primarily a result of the addition of information systems and
administrative personnel to support the growth of the business. As a
percent of sales, SG&A decreased to 16.6% for the six months ended
July 31, 2000, from 17.1% for the six months ended July 31, 1999.
Depreciation and Amortization. Depreciation and amortization
increased $413,000, or 7.5%, to $5.9 million for the six months ended
July 31, 2000, from $5.5 million for the six months ended July 31,
1999. The increase was primarily due to additional investment in
tools and molds developed for the Company's manufactured products.
Interest Expense, Net. Interest expense, net of interest income,
increased $339,000, or 3.7%, to $9.5 million for the six months ended
July 31, 2000, from $9.1 million for the six months ended July 31,
1999. The increase was primarily due to an increase in the average
debt outstanding under the Credit Facility with Fleet to support
working capital needs.
Other Income. During the six months ended July 31, 2000, the
Company recognized other income, net of other expenses, of
approximately $863,000, primarily related to the sale of certain
trademark and related intangible rights and the resolution of
insurance claims, partially offset primarily by a loss associated with
the repurchase of convertible subordinated debentures.
Net Income. Net income decreased $336,000 to $313,000 for the six
months ended July 31, 2000, from $649,000 for the six months ended
July 31, 1999. The decrease in net income over the corresponding
prior-year period was primarily due to the increase warehouse and
shipping expenses, which was partially offset by the increase in net
sales.
EBITDA. EBITDA (operating income, plus depreciation and
amortization) decreased $649,000, or 4.1%, to $15.1 million for the
six months ended July 31, 2000, from $15.7 million for the six months
ended July 31, 1999. The decrease in EBITDA over the prior period was
primarily due to the increase in warehouse and shipping expenses,
which was partially offset by the increase in net sales.
FINANCIAL CONDITION
The Company used $25.2 million of net cash for operations during
the six months ended July 31, 2000, compared to using $8.0 million of
net cash for operations during the six months ended July 31, 1999.
The increase in net cash used for operating activities is primarily
due to increases in inventory as a result of the Company's decision to
accelerate the production of holiday promotional sets as compared to
last year in anticipation of strong retailer demand, as well as a
decrease in other payables and accrued liabilities versus the
corresponding prior-year period. The reduction in other payables and
accrued liabilities was primarily due to a change in the timing of tax
payments compared to the corresponding prior- year period. The
Company received $6.9 million in net cash from financing activities
during the six
12
13
months ended July 31, 2000, compared to $5.6 million in net cash from
financing activities during the six months ended July 31, 1999,
primarily as a result of increased borrowings under the Company's
Credit Facility, partially offset by the Company's repurchase of
certain convertible subordinated debentures and Common Stock and a
payment on the J.P. Fragrances debenture. See Note 5 to Notes to
Unaudited Consolidated Financial Statements.
The Company has the Credit Facility with Fleet, which provides
for borrowings on a revolving basis of up to $50 million (with a $10
million sublimit for commercial letters of credit) for general
corporate purposes, including working capital needs and acquisitions.
See Note 4 to the Notes to Unaudited Consolidated Financial
Statements. At July 31, 2000, the Company had $11.3 million
outstanding under the Credit Facility and approximately $3.7 million
of outstanding letters of credit.
In fiscal 2000, the Company's Board of Directors authorized a
share repurchase program that allows the Company to purchase up to an
aggregate of $10 million of its Common Stock. As of July 31, 2000,
the Company had repurchased an aggregate of 989,400 shares of its
Common Stock under the share repurchase program at an average price of
$6.64.
In February 2000, the Company repurchased $2.18 million principal
amount of 7.5% Convertible Subordinated Debentures due 2006 (the "7.5%
Convertible Debentures") owned by its former Chairman and a company he
controls for an aggregate purchase price of $2.65 million. The 7.5%
Convertible Debentures that were repurchased were convertible into
approximately 303,000 shares of Common Stock. The purchase price was
based on the estimated fair market value of the 7.5% Convertible
Debentures on the date of the transaction, which includes
consideration for the value of unrealized gain (based on the $8.81
price of the Common Stock on the date of repurchase) that the
debenture holder could have recognized upon a conversion and sale of
the 7.5% Convertible Debentures into Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that it is materially at risk
relating to interest rate, foreign currency exchange rate or commodity
price risks fluctuations. The only debt instrument of the Company
that is subject to interest rate fluctuations is its $50 million
Credit Facility. While inflation likely would increase the interest
rates that the Company pays on its Credit Facility, based on the
amounts and projected utilization of the Credit Facility, the Company
does not anticipate that any such increase would be material to its
results of operations. Further, all of the Company's purchases of
fragrances and related cosmetic products from foreign suppliers are in
U.S. dollars, which avoids foreign currency exchange rate risks.
Moreover, while the Company's international sales may be subject to
foreign currency fluctuation risks, such sales, and any currency
fluctuations relating to those sales, have not been and are not
expected to be material to the Company's results of operations. The
Company does not believe that it experienced any material change in
its market risk relating to interest rate, foreign currency exchange
rate or commodity price risks fluctuations during the six months ended
July 31, 2000.
13
14
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders (the "Annual Meeting") of
the Company was held on June 16, 2000 in Miami Lakes, Florida.
(b) The following directors were elected at the Annual Meeting
effective June 16, 2000: E. Scott Beattie, J. W. Nevil Thomas,
Rafael Kravec, Fred Berens, Richard C. W. Mauran and George
Dooley.
(c) The shareholders voted at the Annual Meeting on the matters set
forth below. There were no broker non-votes.
1. The vote on the election of directors to serve until the
next annual meeting of shareholders or until their
successors are duly elected and qualified was as follows:
Votes Cast
----------
Against or
For Withheld
---------- ----------
E. Scott Beattie 11,004,110 242,311
J. W. Nevil Thomas 11,108,735 33,061
Rafael Kravec 11,106,235 38,061
Fred Berens 11,108,735 33,061
Richard C. W. Mauran 11,108,735 33,061
George Dooley 11,108,735 33,061
2. The vote on the ratification of the appointment of Deloitte
& Touche LLP as independent auditors of the Company for the
fiscal year ending January 31, 2001 was 11,128,226 for,
7,970 against and 5,600 withheld.
(d) Not applicable.
14
15
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description
- ------- ------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the
Company dated March 6, 1996 (incorporated herein by
reference to Exhibit 3.1 filed as a part of the Company's
Form 10-K for the fiscal year ended January 31, 1996
(Commission File No. 1-6370)).
3.2 Amendment dated September 19, 1996 to the Amended and
Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 4.4 filed as part of
the Company's Form 10-Q for the quarter ended October 31,
1996 (Commission File No. 1-6370)).
3.3 By-Laws of the Company (incorporated herein by reference to
Exhibit 3.2 filed as a part of the Company's Form 10-K for
the fiscal year ended January 31, 1996 (Commission File No.
1-6370)).
4.1 Indenture, dated as of May 13, 1997, between the Company and
HSBC Bank USA (formerly Marine Midland Bank), as trustee
(incorporated herein by reference to Exhibit 4.1 filed as a
part of the Company's Form 8-K dated May 13, 1997
(Commission File No. 1-6370)).
4.2 Indenture dated as of April 27, 1998, between the Company
and HSBC Bank USA (formerly Marine Midland Bank), as trustee
(incorporated herein by reference to Exhibit 4.1 filed as a
part of the Company's Form 8-K dated April 27, 1998
(Commission File No. 1-6370)).
4.3 Credit Agreement, dated as of May 13, 1997, between the
Company and Fleet National Bank (incorporated herein by
reference to Exhibit 4.3 filed as a part of the Company's
Form 8-K dated May 13, 1997 (Commission File No. 1-6370)).
4.4 First Amendment to Credit Agreement and Other Transaction
Documents dated as of December 31, 1997, between the Company
and Fleet National Bank (incorporated herein by reference to
Exhibit 4.3 filed as a part of the Company's Form 10-K for
the fiscal year ended January 31, 1998 (Commission File No.
1-6370)).
4.5 Second Amendment to Credit Agreement and Other Transaction
Documents dated as of November 13, 1998, between the Company
and Fleet National Bank (incorporated herein by reference to
Exhibit 4.6 filed as a part of the Company's Form 10-Q for
the quarter ended October 31, 1998 (Commission File No.
1-6370)).
4.6 Third Amendment to Credit Agreement and Other Transaction
Documents dated as of May 17, 1999, between the Company and
Fleet National Bank (incorporated herein by reference to
Exhibit 4.7 filed as a part of the Company's Form 10-Q for
the quarter ended April 30, 1999 (Commission File No.
1-6370)).
10.1 Registration Rights Agreement dated as of November 30, 1995,
among the Company, Bedford Capital Corporation, 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 Capital Corporation, 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)).
15
16
10.3 Second Amendment dated as of July 22, 1996 to Registration
Rights Agreement dated as of November 30, 1995, among the
Company, Bedford Capital Corporation, Fred Berens, Rafael
Kravec and the Estate of Eugene Ramos (incorporated by
reference to Exhibit 10.3 filed as part of the Company's
Form 10-Q for the quarter ended July 31, 1996 (Commission
File No. 1-6370)).
10.4 Non-Employee Director Stock Option Plan (incorporated herein
by reference to Exhibit 4.11 filed as a part of the
Company's Form S-8 dated July 7, 1999 (Commission File No.
1-6370)).
10.5 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 4.12 filed as a part of the Company's Form S-8 dated
July 7, 1999 (Commission File No. 1-6370)).
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 Securities and Exchange
Commission upon request.
(b) Reports on Form 8-K.
None.
16
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FRENCH FRAGRANCES, INC.
Date: September 12, 2000 /s/ E. Scott Beattie
-----------------------------------
E. Scott Beattie
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 12, 2000 /s/ Frank V. Vetrano
-----------------------------------
Frank V. Vetrano
Vice President, Finance, Treasurer
and Corporate Controller
(Principal Financial and Accounting
Officer)
17