FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
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) (IRS Employer Identification No.)
14100 N.W. 60TH AVENUE, MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (zip code)
(305) 620-9090
(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 JUNE 12, 1996
----- --------------
Common stock, $.01 par value 9,679,879 shares
FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Cash Flows - Three Months
Ended April 30, 1996 and 1995................................5
Notes to Condensed Consolidated Financial Statements.........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................15
Signatures.............................................................15
2
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 1996 JANUARY 31, 1996
-------------- ----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,104,316 $ 123,960
Accounts receivable, net of allowance for doubtful accounts of
$637,145 and $630,339, respectively 19,337,762 14,236,326
Inventories 30,588,857 25,850,669
Equipment held for sale 0 1,000,000
Prepaid expenses and other assets 960,946 1,370,777
------------ ------------
Total current assets 51,991,881 42,581,732
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1,799,705 1,708,235
------------ ------------
PROPERTY AND EQUIPMENT, NET 12,188,378 11,099,492
------------ ------------
OTHER ASSETS
Exclusive brand license, net 32,707,025 14,671,875
Deferred income taxes, net 761,342 761,342
Other intangibles and other assets 802,744 561,138
------------ ------------
Total other assets 34,271,111 15,994,355
------------ ------------
TOTAL ASSETS $100,251,075 $ 71,383,814
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 28,217,000 $ 16,713,333
Accounts payable - trade 12,672,467 11,115,664
Other payables and accrued expenses 2,523,424 3,250,365
Current portion of capital lease and installment loans 187,531 201,630
Loans from shareholders 410,000 410,000
Convertible subordinated debentures 600,000 600,000
Due to affiliates, net 2,311,726 2,268,819
------------ ------------
Total current liabilities 46,922,148 34,559,811
LONG-TERM LIABILITIES
Secured subordinated debentures 14,681,535 11,681,500
Capital lease and installment loans 1,226,690 1,269,860
Term loans and bridge loan 17,543,333 4,333,333
------------ ------------
Total liabilities 80,373,706 51,844,504
------------ ------------
COMMITMENTS
REDEEMABLE PREFERRED STOCK
Series A, $.01 par value; stated at liquidation preference value
of $100 per share; 20,000 shares authorized and outstanding 2,000,000 2,000,000
SHAREHOLDERS' EQUITY
Convertible, redeemable preferred stock, Series B, $.01 par value
(liquidation preference of $.01 per share); 350,000 shares authorized,
issued and outstanding 3,500 3,500
Convertible, redeemable preferred stock, Series C, $.01 par value
(liquidation preference of $.01 per share); 571,429 shares authorized,
issued and outstanding 5,714 -
Common stock, $.01 par value, 50,000,000 shares authorized;
9,641,290 shares issued and outstanding 96,413 96,413
Additional paid-in capital 10,373,539 10,333,539
Retained earnings 7,398,203 7,105,858
------------ ------------
Total shareholders' equity 17,877,369 17,539,310
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $100,251,075 $ 71,383,814
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
-----------------------------------
1996 1995
----------- -----------
NET SALES $19,316,493 $15,732,117
COST OF SALES 13,455,988 12,690,538
----------- -----------
GROSS PROFIT 5,860,505 3,041,579
OPERATING EXPENSES
WAREHOUSE AND SHIPPING 805,511 528,131
SELLING 2,399,163 997,258
GENERAL AND ADMINISTRATION 703,171 383,629
DEPRECIATION AND AMORTIZATION 532,301 285,907
----------- -----------
TOTAL OPERATING EXPENSES 4,440 146 2,194,925
----------- -----------
INCOME FROM OPERATIONS 1,420,359 846,654
OTHER INCOME (EXPENSE)
INTEREST INCOME 2,629 5,897
INTEREST EXPENSE (1,201,458) (795,265)
OTHER 139,546 (6,467)
----------- -----------
OTHER INCOME (EXPENSE), NET (1,059,283) (795,835)
----------- -----------
INCOME BEFORE EQUITY IN EARNINGS
OF UNCONSOLIDATED AFFILIATE
AND PROVISIONS FOR INCOME TAXES 361,076 50,819
EQUITY IN EARNINGS OF UNCONSOLIDATED
AFFILIATE, 50% OWNED 91,469 129,878
----------- -----------
INCOME BEFORE INCOME TAXES 452,545 180,697
PROVISION FOR INCOME TAXES 160,200 32,641
----------- -----------
NET INCOME $ 292,345 $ 148,056
=========== ===========
EARNINGS PER COMMON SHARE EQUIVALENT:
PRIMARY $0.03 $0.02
=========== ===========
FULLY DILUTED $0.03 $0.02
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARE EQUIVALENTS:
PRIMARY 11,175,985 7,120,000
=========== ===========
FULLY DILUTED 11,485,697 7,120,000
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
FRENCH FRAGRANCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
-------------------------------
1996 1995
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 292,345 $ 148,056
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization 532,301 285,907
Equity in earnings of unconsolidated affiliate (91,469) (129,878)
Change in assets and liabilities net of effects from the acquisitions:
(Increase)in accounts receivable (5,101,435) (2,831,407)
(Increase) decrease in inventories (3,665,189) 5,852,276
Decrease (increase) in prepaid expenses and other assets 1,147,720 (281,435)
Increase (decrease) in accounts payable 1,556,804 (2,948,151)
(Decrease) increase in other payables and accruals (726,940) 358,874
(Decrease) increase in due to affiliate, net (163,184) 585,671
------------ ------------
Net cash (used in) provided by operating activities (6,219,047) 1,039,913
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of exclusive brand license (18,431,324) (18,370,655)
Additions to property and equipment, net of disposals (277,511) (48,578)
------------ ------------
Net cash used in investing activities (18,708,835) (18,419,233)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the grant of stock purchase warrants 40,000
Proceeds from the issuance of preferred stock 5,714 3,500
Proceeds from the issuance of secured subordinated debentures 3,000,035 8,221,500
Advances from unconsolidated affiliate 206,091 727,699
Proceeds from term loan 8,960,000 7,000,000
Payments on term loans (583,333) (83,334)
Net proceeds from short-term debt 8,337,000 1,247,025
Payments on capital lease and installment loans (57,269) (54,424)
Loans from shareholders 250,000
Proceeds from bridge loan 6,000,000
------------ -----------
Net cash provided by financing activities 25,908,238 17,311,966
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 980,356 (67,354)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 123,960 646,148
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,104,316 $ 578,794
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 781,997 $ 544,313
============ ===========
Income taxes paid during the period $ 393,000 $ 240,000
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Issuance of note to seller in connection with Halston acquisition $ 2,000,000
============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND BUSINESS
French Fragrances, Inc. ("FFI") is a manufacturer, distributor and
marketer of prestige designer fragrances and related cosmetic products,
primarily to mass retailers in the United States. FFI was formed in 1992 to
acquire the net assets of the fragrance and cosmetics distribution business of
National Trading Manufacturing, Inc. ("National Trading"). On November 30,
1995, FFI merged with Suave Shoe Corporation ("Suave") in a reverse acquisition
(the "Merger"). 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 fragrance business previously conducted by
FFI. In connection with the Merger, FFI has relocated its fragrance
distribution facilities to the larger facility formerly occupied by Suave in
Miami Lakes, Florida (the "Suave Facility").
All references to FFI in these condensed consolidated financial
statements and notes refer to the company organized in 1992 until the November
30, 1995 Merger and to the surviving corporation following the Merger. The
consolidated financial statements also include the accounts of FFI's
wholly-owned subsidiaries GB Parfums, Inc. and Halston Parfums, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements included herein have
been prepared by FFI pursuant to the rules and regulations of the Securities
and Exchange Commission (the "Commission") for interim financial information.
As such financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, they should be read in conjunction with the financial
statements and related footnotes included in FFI's Formhs ended April 30, 1996
and 1995, and the consolidated statements of cash flow for the three months
ended April 30, 1996 and 1995. Operating results for the three months ended
April 30, 1996 are not necessarily indicative of the results for the full
fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LONG LIVED ASSETS - FFI adopted the provisions of SFAS No. 121
effective for the three months ended April 30, 1996. Long lived assets are
reviewed on an ongoing basis for impairment. Estimated fair value is calculated
using discounted cash flow methods and other valuation techniques, such as
appraisals.
EARNINGS PER SHARE - Earnings per share is based on the weighted
average number of common shares outstanding and includes the effect of the
issuance of shares in connection with the assumed exercise of dilutive stock
options and warrants and the assumed conversion of dilutive convertible
preferred stock. Fully diluted earnings per share reflects additional dilution
due to the use of the market price at the end of the period when higher than
the average market price for the period, and does not assume the conversion of
the convertible subordinated debentures with corresponding adjustments for
interest expense, net of tax, since the effect of such conversion is anti-
dilutive. Earnings per share for the three months ended April 30, 1995 were
computed using the number of common shares received by the shareholders of FFI
in connection with the Merger. Earnings per share for the three months ended
April 30, 1996 are calculated based on the actual number of common shares and
common share equivalents outstanding.
6
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. HALSTON ACQUISITION
On March 20, 1996, FFI completed the acquisition (the "Halston
Acquisition") from Halston Borghese, Inc. ("HBI") and its affiliates of certain
assets relating to the Halston fragrance brands including the trademarks and
certain inventory and tangible assets. The purchase price was approximately
$22,000,000 and was paid as follows: (i) $19,000,000 in cash; and (ii) a
$2,000,000 note issued to HBI maturing March 20, 2000 (the "Seller Note"),
which is to be repaid on a quarterly basis in an amount equal to 5% of the net
sales revenues of FFI from the sale of the Halston brands, provided that no
payments are due until October 15, 1997 and that the accrued amount bears
interest at 8% per annum. FFI also assumed approximately $1,000,000 in trade
payables. The cash portion of the purchase price was financed as follows:
(a) $3,000,000 from the issuance of 8% Secured Subordinated Debentures, due
2005, Series II, and 571,429 shares of Series C Convertible Preferred Stock,
$.01 par value; and (b) $16,000,000 in term loans from the two banks which are
parties to FFI's credit facility. The term loans consist of the following:
(1) a $1,000,000 term loan from one of the banks due December 31, 1996, bearing
interest at 0.75% over prime (the "Halston Term Loan 1"); (2) a $9,000,000 term
loan from both banks on the credit facility due December 31, 1998, bearing
interest at 1.75% over prime with principal payments due on a monthly basis
aggregating approximately $2,380,000, $3,000,000, and $3,620,000 during the
years ended January 31, 1997, 1998 and 1999, respectively (the "Halston Term
Loan 2"); and (3) a $6,000,000 term loan bearing interest at 2% over prime from
one of the banks due June 14, 1996 (the "Bridge Loan"). In June 1996, FFI
issued a first mortgage on the Suave Facility to repay the Bridge Loan. The
mortgage note provides for interest at 8.84%, a 20-year amortization schedule
and a maturity date eight years from issuance.
The following information presents FFI's pro forma results of
operations data for the year ended January 21, 1996 and the three months ended
April 30, 1996 as if the Halston Acquisition had occurred at the beginning of
each period.
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, 1996 APRIL 30, 1996
---------------- -----------------
Net sales $ 110,996,000 $20,150,000
============= ===========
Net income and brand contribution (deficit) $ 4,749,000 $ (464,000)
============= ===========
NOTE 4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The following represents condensed financial information of Fine
Fragrances, Inc. ("Fine Fragrances"), a fragrance distribution company which is
50% owned by FFI; FFI's investment in Fine Fragrances is accounted for under
the equity method:
7
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 JANUARY 31, 1996
-------------- ----------------
Current assets $ 3,553,656 $ 3,284,066
Other assets 1,148,149 742,265
----------- -----------
Total assets $ 4,701,805 $ 4,026,331
=========== ===========
Current liabilities $ 1,425,917 $ 970,716
Shareholders' equity 3,275,888 3,055,615
------------ -----------
Total liabilities and shareholder's equity $ 4,701,805 $ 4,026,331
=========== ===========
THREE MONTHS ENDED APRIL 30,
----------------------------
1996 1995
---------- -----------
Net Sales $1,474,123 $ 1,658,538
========== ===========
Net Income $ 220,273 $ 290,837
========== ===========
FFI's equity in the net income of Fine Fragrances as reflected in the
accompanying statements of income has been reduced for the amortization of the
exclusive distribution agreements of Fine Fragrances. The exclusive distribution
agreements are being amortized using the straight-line method over six years,
the term of the agreements.
The reconciliation of the investment in unconsolidated affiliate is as
follows:
APRIL 30, 1996 JANUARY 31, 1996
-------------- ---------------
Equity interest at 50% $ 1,637,944 $1,527,800
Unamortized exclusive distribution agreements 161,761 180,435
----------- ----------
Carrying value $ 1,799,705 $1,708,235
=========== ==========
Current liabilities primarily relate to a $2,000,000 secured line of
credit from a bank. The interest is prime rate plus 2.5% (prime rate was
8.5% at April 30, 1996). The line is secured by receivables and inventories.
The line is subject to annual review and renewal by the bank in April. Amounts
outstanding were $663,000 and $912,000 at April 30, 1996 and January 31, 1996,
respectively. There are no other material commitments or contingencies for Fine
Fragrances.
NOTE 5. SHORT-TERM DEBT
On March 14, 1996, FFI entered into a new credit facility with two
banks to replace the existing credit facility. The new credit facility provides
for borrowings on a revolving basis of up to $30,000,000 (which is increased to
$40,000,000 from July 1 to December 31 as an over line for the holiday season).
Borrowings are limited to eligible accounts receivable and inventories.
Borrowings are also collateralized
8
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
by FFI's shares of common stock in its subsidiaries and in Fine Fragrances and
all other assets other than the Suave Facility, including accounts receivable
and inventories. The credit facility contains several covenants, the more
significant of which are that FFI maintain a minimum level of equity and meet
certain debt-to-equity, interest coverage and liquidity ratios. The credit
facility also includes a prohibition on the payment of dividends and other
distributions to shareholders and restrictions on the incurrence of additional
indebtedness. The new credit facility also includes the term loan issued in
connection with the Geoffrey Beene acquisition in March 1995 and the $10,000,000
aggregate principal amount of the Halston Term Loan 1 and Halston Term Loan 2
issued in connection with the Halston Acquisition. In connection with the
Halston Acquisition, FFI also issued to one of the banks in the credit facility
the Bridge Loan in the principal amount of $6,000,000. See Note 2. In connection
with the new credit facility, FFI issued to the banks warrants to purchase
75,000 shares of common stock exercisable at $5.50 per share, provided that
warrants for 25,000 shares of common stock are exercisable only after March 14,
1997, and only to the extent FFI has not completed an equity offering of its
securities in which FFI has obtained at least $5,000,000 of net proceeds.
NOTE 6. RELATED PARTY TRANSACTIONS
FFI has various monitoring agreements with affiliates of FFI pursuant
to which such affiliates provide financial advisory services to FFI. In
consideration of the services provided, such affiliates receive annual fees
totaling $275,000 which are payable in quarterly installments. In connection
with the Halston Acquisition, FFI agreed to pay one of its affiliates a
management services fee of $200,000 for management and financial advisory
services performed in connection with such acquisition.
In the normal course of business or from time-to-time, FFI and its
affiliates, Fine Fragrances and National Trading, have entered into transactions
which are reflected on the balance sheet as Due to Affiliates, net. During the
three months ended April 30, 1996, such transactions are summarized as follows:
ADVANCES FINE FRAGRANCES DUE TO (FROM) DUE TO (FROM) TOTAL DUE TO
FROM FINE MANAGEMENT FEES FINE FRAGRANCES, NATIONAL TRADING, (FROM) AFFILIATES,
FRAGRANCES AND OTHER NET NET NET
---------- --------------- ---------------- ----------------- -----------------
Balance at January 31, $1,863,160 ($1,151,436) $711,724 $1,557,095 $2,268,819
1996
Advances, net 495,000 495,000 495,000
Management fee (8%) (119,318) (119,318) (119,318)
Interest (10%) 75,906 75,906 75,906
Repayments (245,497) (245,497) (163,184) (408,681)
---------- ------------ --------- ----------- -----------
Balance at April 30, 1996 $2,188,569 $(1,270,754) $917,815 $1,393,911 $2,311,726
========== ============ ========= ========== ===========
NOTE 7. INCOME TAXES
The provision for income taxes for the three month period ended April 30,
1996 was calculated based upon the estimated tax rate of 39% for the full fiscal
year ending January 31, 1997.
9
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK OPTION PLANS
During the three months ended April 30, 1996, FFI granted options for
20,000 shares exercisable at $5.25 per share under the 1981 Employee Stock
Option and Stock Appreciation Plan. On May 2, 1996, FFI granted additional
options for 45,000 shares at an exercise price of $6.50 per share under the same
plan.
NOTE 9. SUBSEQUENT EVENTS
On May 14, 1996, FFI completed the 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 the OMBRE
ROSE, LAPIDUS, FACONNABLE, BALENCIAGA, BOGART, CHEVIGNON and NIKI DE SAINT
PHALLE fragrance brands, inventory, accounts receivable and tangible assets. In
addition, FFI assumed approximately $3,100,000 of certain trade and other
payables of FMG and discharged approximately $600,000 of accounts receivable
from FMG. In addition to the payables assumed and the discharge of the
receivable, the consideration for the assets included approximately $4,300,000
in cash, $11,100,000 aggregate principal amount of 8.5% Subordinated Debentures
(the "8.5% Debentures") and $900,000 of FFI inventory delivered to FMG. FFI also
issued to FMG (for assignment to its shareholders and senior management)
warrants for an aggregate of 1,075,000 shares of common stock of FFI, which will
be exercisable at $7.50 per share from July 1997 to January 2002. The cash
portion of the purchase price was financed from FFI's revolving credit facility.
The 8.5% Debentures consist of: (i) a $4,000,000 8.5% Debenture which requires
mandatory principal payments of $2,000,000 in May 2000 and 2001 (such payments
are subject to acceleration to May 1998 and 1999 if FFI raises a minimum of
$10,000,000 of net capital from a public offering of equity securities (the
"Financing Condition"); provided that if the Financing Condition is satisfied
after May 1998, payment of the entire balance will be due on the later to occur
of May 1999, or 30 days after the Financing Condition is satisfied); (ii) a
$7,000,000 8.5% Debenture which requires mandatory annual principal repayments
of $2.33 million commencing May 2002, with the remaining balance due May 2004;
(iii) a $100,000 8.5% Debenture which requires mandatory annual principal
repayments of $33,000 commencing May 2002, with the remaining balance due May
2004. In addition, warrants for 160,000 shares of common stock, which will be
exercisable at $7.50 per share from July 1997 to January 2002, were issued to
certain key employees of FMG as an inducement to join FFI.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Notes to
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in the
Company's Form 10-K for the year ended January 31, 1996. 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.
French Fragrances, Inc, a Florida corporation (the "Company"), was
known as Suave shoe Corporation until the November 30, 1995 merger of a
privately-held Florida corporation named French Fragrances, Inc. ("French") with
and into the Company (the "Merger"). Following the Merger, the Company, as the
surviving corporation in the Merger, changed its name to "French Fragrances,
Inc." In December 1994, the Company permanently discontinued its shoe
manufacturing and importing operations and prior to the Merger was engaged
primarily in disposing of its property, plant and equipment. Following the
Merger, the Company's operations consist solely of the business of French (the
accounting acquiror in the Merger) which is the manufacturing, distribution and
marketing of prestige fragrances and cosmetic products. Therefore, the following
discussion and analysis of the results of operations of the Company represents
the discussion and analysis of the results of operation of French until the
Merger and the discussion and analysis of financial condition and results of
operation of the Company following the Merger.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THE THREE MONTHS ENDED APRIL 30,
1995
Net sales increased $3.6 million, or 23%, to $19.3 million for the
three months ended April 30, 1996 from $15.7 million for the three months ended
April 30, 1995. The increase in net sales was primarily attributable to the
acquisition of the Geoffrey Beene fragrance brands in March 1995 (the "Geoffrey
Beene Acquisition"), and the Company's engagement to serve as the exclusive
United States distributor of the Galenic Elancyl skin care products in October
1995 and the Benetton fragrance brands in December 1995, as well as the
Company's focus on specially designed products for the mass market.
International sales of the Geoffrey Beene products increased to over $1.0
million in the three months ended April 30, 1996, compared to less than $100,000
for the three months ended April 30, 1995. Management believes that increased
sales have resulted from the Company's ability to provide its customer accounts
with a continuous, direct supply of product, a larger selection of products and
the development and growth of certain product categories.
Gross profit increased $2.8 million, or 93%, to $5.9 million for the
three months ended April 30, 1996 from $3.0 million for the three months ended
April 30, 1995. The increase in gross profit and the increase in gross margin
(from 19.3% to 30.3%) were primarily attributable to an increase in the sale on
a wholesale basis of certain product categories with higher gross margins such
as custom packaged products, and the addition of the Geoffrey Beene, Halston,
Elancyl and Benetton product sales which were also at higher gross profit
margins.
Warehouse and shipping expenses increased $277,000, or 53%, to $806,000
for the three months ended April 30, 1996 from $528,000 for the three months
ended April 30, 1995. The increase resulted from the increase in net sales and
higher customer service expenses.
Selling, general and administrative expenses increased $1.7 million, or
125%, to $3.1 million for the three months ended April 30, 1996 from $1.4
million for the three months ended April 30, 1995. The increase in selling,
general and administrative expenses was primarily a result of a 900% increase in
advertising and promotional expenses associated with national advertising
campaigns for the Geoffrey Beene
11
and Halston brands, as well as higher administrative expenses resulting from the
increased sales volume. The Company expects its advertising and promotional
expenses to continue to grow as a result of the acquisition of the Halston and
Geoffrey Beene brands and exclusive United States distribution arrangements for
other fragrance brands.
Depreciation and amortization increased $246,000, or 86%, to $532,000
for the three months ended April 30, 1996 from $286,000 for the three months
ended April 30, 1995. The increase was attributable to increased amortization of
intangibles arising from the acquisition of the Geoffrey Beene license in March
1995 and the increase in depreciation incurred for the Miami Lakes facility
acquired in the Merger (the "Suave Facility").
Interest expense, net of interest aneased 33% to
$1.1 million for the three months ended April 30, 1996 from $796,000 for the
three months ended April 30, 1995. This increase was primarily due to the
increase in average debt outstanding resulting from the acquisition of the
Geoffrey Beene brands in which French issued $8.225 million aggregate principal
amount of subordinated debentures and a $7.0 million promissory term note under
its bank credit facility. The increase in interest expense also reflects
increased borrowings under the revolving portion of its bank credit facility to
accommodate increased working capital requirements, including the increased
wholesale inventory levels needed to support higher net sales.
Net income increased $144,000, or 97%, to $292,000 for the three months
ended April 30, 1996, compared to net income of $148,000 for the three months
ended April 30, 1995, primarily as a result of the increase in net sales and
gross profit which were partially offset by higher sales, marketing and interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Company entered into a new credit facility (the
"Credit Facility") with Fleet National Bank ("Fleet") and Bank of America
Illinois ("Bank of America" and collectively with Fleet, the "Lenders") which
provides for borrowings on a revolving basis of up to $30 million (which is
increased to $40 million from July 1 to December 31 as an overline for the
holiday season), including up to $2 million in commercial letters of credit.
Amounts borrowed on the revolving portion of the Credit Facility mature on May
31, 1998. The Credit Facility also includes the remaining balance ($5.8 million
at April 30, 1996) of the $7 million term loan which was used to finance a
portion of the purchase price for the Geoffrey Beene Acquisition. Principal and
interest payments on this term loan are due on a monthly basis, and principal
payments are due: $1.83 million during the fiscal year ended January 31, 1997,
$2 million during the fiscal year ended January 31, 1998, and the balance during
the fiscal year ended January 31, 1999. The Credit Facility also includes the $9
million term loan (the "Halston Term Note 2") which was used to finance a
portion of the purchase price for the March 1996 acquisition of the Halston
brands (the "Halston Acquisition"). Principal and interest payments on this loan
are due on a monthly basis, and principal payments are due: $2.5 million during
the fiscal year ended January 31, 1997, $3.0 million during the fiscal year
ended January 31, 1998, and $3.5 million during the fiscal year ended January
31, 1999. The Credit Facility also includes a $1 million term loan (the "Halston
Term Note 1") which was also used to finance the Halston Acquisition and matures
on December 31, 1996. At April 30, 1996, the Company had outstanding borrowings
under the Credit Facility (including term loans relating to the Geoffrey Beene
Acquisition and the Halston Acquisition) of approximately $37.8 million. Loans
under the revolving credit portion of the Credit Facility bear interest at a
floating rate (currently 1% over Fleet's prime rate), while the term loans
(other than the $1 million Halston term loan) bear interest at a floating rate
(currently 1.75% over Fleet's prime rate). The Company's borrowing availability
under the revolving credit portion of the Credit Facility is limited to the sum
of between 80 to 85% of eligible accounts receivable and 50% (60% from July 1
through October 31 of each year) of eligible inventory. The Lenders permitted
the overline in the Credit Facility to commence as of May 10, 1996 for fiscal
1997.
12
The Credit Facility is secured by a first priority lien on all of the
Company's assets (other than the Suave Facility), as well as by a security
interest in the assets and the capital stock of its wholly-owned subsidiaries
Halston Parfums, Inc. and GB Parfums, Inc. and its stock of Fine Fragrances,
Inc. ("Fine Fragrances") and by collateral assignment of brand licenses and
trademarks. The Credit Facility restricts the Company's ability to incur
additional debt or other obligations, to enter into crohibits the declaration or
payment of dividends on, or the redemption of, the Company's capital stock,
prohibits certain payments on the subordinated debt and prohibits the sale of
the Company's interest in Fine Fragrances and 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. In addition, it is an event of default under the
Credit Facility if (i) Rafael Kravec, the Company's President and Chief
Executive Officer, ceases to be actively involved in the Company's management
and a replacement satisfactory to Fleet does not succeed him, or (ii) Mr.
Kravec, Fred Berens, a director of the Company, and investors (the "Bedford
Interests") in certain funds (Bedford Fund I and Bedford Fund II) which are
managed by Bedford Capital Corporation, a Canadian corporation, in the
aggregate, cease to have control of the Company's Board of Directors or voting
control of the Company. Management of the Company believes that it is currently
in compliance with the covenants in the Credit Facility. As long as the Credit
Facility is outstanding, the Company will need the consent of the Lenders to
enter into future acquisition or financing activities.
During the three months ended April 30,1996, the Company increased its
debt by approximately $27 million, approximately $21 million of which was used
to finance the purchase price for the acquisition of the Halston fragrance
brands in March 1996 (the "Halston Acquisition"), and the balance of which is
attributable to increased borrowings under its revolving credit facility for
working capital purposes. The $21 million in debt associated with the Halston
Acquisition includes the Halston Term Note 1, the Halston Term Note 2, a $ 2
million term note maturing March 20, 2000 which was issued to the seller and
which is to be repaid on a quarterly basis in an amount equal to 5% of the net
sales revenues derived from the sales of Halston brand products (with initial
payments due October 1997 and accrued amounts earning interest at 8% per annum),
and a $6 million term loan maturing June 14, 1996 (the "Bridge Loan"). The
Company repaid the Bridge Loan in June 1996 using the proceeds of a new $6
million mortgage on the Suave Facility (the "Mortgage") and borrowings under the
Credit Facility. The Mortgage note provides for interest at 8.84%, a 20-year
amortization schedule and a maturity date eight years from issuance. In
connection with the Halston Acquisition, the Company also assumed trade payables
from the seller of approximately $1 million.
In addition, in connection with the acquisition of certain assets of
Fragrance Marketing Group, Inc. in May 1996 (the "FMG Acquisition"), the Company
issued approximately $11.1 million of 8.5% Subordinated Debentures ("8.5%
Debentures") and borrowed approximately $4.3 million from its revolving credit
facility to fund the purchase price. The 8.5% Debentures consist of: (i) a $4
million 8.5% Debenture which requires mandatory principal payments of $2 million
in May 2000 and 2001 (such payments are subject to acceleration to May 1998 and
1999 if the Company raises a minimum of $10 million of new capital from a public
offering of equity securities (the "Financing Condition"); provided that if the
Financing Condition is satisfied after May 1998, payment of the entire balance
will be due on the later to occur of May 1999, or 30 days after the Financing
Condition is satisfied); (ii) a $7 million 8.5% Debenture which requires
mandatory annual principal repayments of $2.33 million commencing May 2002, with
the remaining balance due May 2004; (iii) a $100,000 8.5% Debenture which
requires mandatory annual principal repayments of $33,000 commencing May 2002,
with the remaining balance due May 2004. The Company also issued to FMG (for
assignment to its shareholders and senior management) warrants for an aggregate
of 1,075,000 shares of the Company's Common Stock, which will be exercisable at
$7.50 per share from July 1997 to January 2002. In connection with the FMG
Acquisition, the Company also assumed trade payables of approximately $3.1
million. In addition, warrants for 160,000 shares of common stock, which will
be exercisable at $7.50 per share from July 1997 to January 2002, were issued
to certain key employees of FMG as an inducement to join FFI.
13
The Company has filed a registration statement with the Securities and
Exchange Commission for a proposed public offering of Common Stock if market
conditions permit. The Company hopes to raise approximately $20 million, which
it expects to use to repay the indebtedness of the banks in connection with the
Halston Acquisition, as well as to reduce outstanding borrowings under the
revolving portion of the Credit Facility.
As a result of the Merger, the Company assumed French's obligations to
repay certain loans and advances from French's shareholders and affiliates. At
April 30, 1996, the Company had outstanding balances owed to National Trading
Manufacturing, Inc., a company controlled by Mr. Kravec, Fine Fragrances and
Bedford Interests in the principal amounts of $1,394,000, $918,000, and
$410,000, respectively. These loans or advances generally bear interest at prime
and are short-term in nature.
The characteristics of the Company's business do not generally require
it to make significant ongoing capital expenditures. In connection with
renovation of the Suave Facility to occur prior to the Company's relocation of
its executive offices, the Company expects to incur construction costs
approximating $2 million during fiscal 1997. The Company will finance these
construction costs from note issued in connection with the Mortgage.
During the three months ended April 30, 1996, the Company used $6.2
million in cash in operations, primarily as a result of an increase in accounts
receivable and inventory, partially offset by an increase in accounts payable.
In the three months ended April 30, 1995, the Company generated $1.0 million in
cash from operations. During the three months ended April 30, 1996, the Company
received cash from financing activities of approximately $26 million to fund the
Halston Acquisition and for working capital purposes. During the three months
ended April 30, 1995, the Company received cash from financing activities of
approximately $17.3 million primarily to fund the Geoffrey Beene Acquisition.
The Company financed these investments primarily through the use of term loans
and the revolving portion of the Credit Facility from the banks and the issuance
of subordinated debentures.
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PART II. OTHER INFORMATION
ITEM 1 - 5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K:
(1) A Current Report on Form 8-K dated February 22, 1996,
was filed on February 29, 1996 reporting one event under
Item 4. Changes in Registrant's Certifying Accountants.
(2) A Current Report on Form 8-K dated March 20, 1996, was
filed on April 4, 1996 reporting on the Halston
Acquisition under Item 2. Acquisition or Disposition of
Assets Accountants, and on the Credit Facility under
Item 5. Other Events.
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: JUNE 13, 1996 /S/ RAFAEL KRAVEC
------------- -----------------
Rafael Kravec
President and Chief Executive
Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: JUNE 13, 1996 /S/ WILLIAM J. MUELLER
------------- ----------------------
William J. Mueller
Vice President-Operations and Chief
Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
15