SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 31, 1998
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
Florida 1-6370 59-0914138
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 818-8000
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
On March 31, 1998, French Fragrances, Inc. (the "Company"),
consummated the acquisition (the "JPF Acquisition") of certain assets of
J.P. Fragrances, Inc. ("JPF"), a distributor of prestige fragrance
products, 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 approximately $10.5 million of certain trade and
other payables of JPF. In addition to the assumption of the payables, the
purchase price for the Acquired Assets, which is subject to adjustment
based on the agreed to March 31, 1998 balance sheet of JPF and the invoice
support relating to a certain account receivable, consisted of
approximately $36.4 million in cash and a subordinated debenture of $3
million (the "Debenture"). The purchase price for the acquisition was
based on negotiations between the Company, JPF and Joseph A. Pappalardo and
Gloria Pappalardo, the shareholders of JPF. The Company's determination of
the purchase price, which is subject to adjustment as described above, was
based on a value of $33.4 million for the inventory, $8.0 million for the
accounts receivable, $0.3 million for the fixed assets, $5.3 million for
the contract rights, and $2.9 million for the intangible rights and
goodwill. The cash portion of the purchase price was financed from
available cash from operations and the Company's revolving credit facility
with Fleet National Bank. The Debenture is non-interest bearing, with the
principal amount being payable in three equal annual installments if, and
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 Company did not assume
any facility leases and intends to use the physical property acquired from
JPF (consisting primarily of office and warehouse furniture and equipment)
for its fragrance operations in Miami Lakes, Florida in the same manner as
JPF used such property.
Included as Exhibits 2.1 and 2.2 is the Asset Purchase Agreement
between the Company, JPF, Joseph A. Pappalardo and Gloria Pappalardo, as
amended, and as such, the foregoing description is qualified in its
entirety by reference to and incorporation of the terms and provisions
thereof.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of JPF
INDEPENDENT AUDITORS' REPORT
To the Stockholders
J.P. Fragrances, Inc.
We have audited the accompanying balance sheet of J.P. Fragrances, Inc., as
of December 31, 1997, and the related statements of income and retained
earnings and cash flows for the year then ended. These financial
statements are the responsibility of J.P. Fragrances, Inc.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of J.P. Fragrances, Inc.
as of December 31, 1997, the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As disclosed in Note H to the accompanying financial statements, J.P.
Fragrances, Inc. has agreed to sell substantially all of its assets.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 11, 1998
J.P. FRAGRANCES, INC.
Balance Sheet
December 31, 1997
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $85,000 $ 8,758,345
Inventories 37,520,437
Due from stockholder 125,726
Other current assets 243,440
-----------
Total current assets 46,647,948
Property and equipment, net 510,074
Deferred loan costs, net of accumulated amortization 100,361
Security deposits 68,890
-----------
$47,327,273
===========
LIABILITIES
Current liabilities
Bank overdraft $ 483,894
Accounts payable 18,944,423
Accrued expenses 844,266
-----------
Total current liabilities 20,272,583
-----------
Long-term debt 18,719,768
-----------
Total liabilities 38,992,351
-----------
Commitments
STOCKHOLDERS' EQUITY
Common stock, no par value, 200 shares authorized;
issued and outstanding 20,000
Additional paid-in capital 109,546
Retained earnings 8,205,376
-----------
Total stockholders' equity 8,334,922
-----------
$47,327,273
===========
See notes to financial statements
/TABLE
J.P. FRAGRANCES, INC.
Statement of Income and Retained Earnings
Year Ended December 31, 1997
Net sales $89,135,023
Cost of goods sold 76,500,945
-----------
Gross profit 12,634,078
-----------
Expenses:
Selling, general and administrative 8,588,620
Interest expense 1,796,906
-----------
Total expenses 10,385,526
-----------
Income before provision for state income taxes 2,248,552
Provision for state income taxes 23,000
-----------
Net income 2,225,552
Retained earnings, beginning of year 6,379,824
-----------
8,605,376
Dividends paid 400,000
-----------
Retained earnings, end of year $ 8,205,376
===========
See notes to financial statements
J.P. FRAGRANCES, INC.
Statement of Cash Flows
Year Ended December 31, 1997
Cash flows from operating activities:
Net income $ 2,225,552
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 159,911
Changes in:
Amortization of deferred loan costs 69,831
Provision for bad debts 77,037
Accounts receivable 2,926,666
Inventories 10,186,839
Other current assets (4,781)
Security deposits 1,670
Accounts payable (9,059,222)
Accrued expenses (291,931)
------------
Net cash provided by operating activities 6,291,572
------------
Cash flows from investing activities:
Capital expenditures (168,005)
Decrease in due from stockholder (2,981)
------------
Net cash used in investing activities (170,986)
------------
Cash flows from financing activities:
Cash overdraft (187,136)
Dividends paid (400,000)
Decrease in notes payable to stockholders (250,000)
Principal advances on note payable 87,697,975
Principal payments on note payable (92,988,880)
Loan cost expenditures (64,009)
------------
Net cash used in financing activities (6,192,050)
------------
Net decrease in cash (71,464)
Cash - beginning of year 71,464
------------
Cash - end of year $ 0
============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,680,317
Income taxes $ 12,074
See notes to financial statements
/TABLE
J.P. FRAGRANCES, INC.
Notes to Financial Statements
December 31, 1997
Note A - Organization and Summary of Significant Accounting Policies
[1] Organization:
J.P. Fragrances, Inc. ("JPF") was incorporated in 1977 for the purpose
of selling name brand cosmetics. JPF sells to drug stores and
retailers located throughout the United States.
[2] Estimates:
The preparation of 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.
[3] Inventories:
Inventories representing principally finished goods are stated at the
lower of cost (first-in, first-out) or market.
[4] Property and equipment:
Depreciation and amortization are provided on the straight-line and
accelerated methods over the estimated useful lives of the respective
assets. Leasehold improvements are amortized over the shorter of the
useful life or the remainder of the lease term. Additions and
improvements are capitalized and the costs of maintenance and repairs
are expensed as incurred.
[5] Deferred loan costs:
Deferred loan costs represent costs associated with the line of credit
with the bank. These costs are being amortized over thirty-six months
(the term of the loan agreement).
[6] Income taxes:
The stockholders of JPF have elected to have JPF treated as an S
corporation for federal and New York state income tax purposes.
Accordingly, JPF's income is includible in the taxable income of the
stockholders. No provision for federal income taxes has been made in
the accompanying financial statements and state taxes are provided
based on the statutory rates.
[7] Advertising and promotion:
JPF grants advertising and promotional allowances to its customers.
Included in selling, general and administrative expenses were $759,025
in advertising and promotional allowances in 1997.
J.P. FRAGRANCES, INC.
Notes to Financial Statements
December 31, 1997
Note B - Major Customers
Sales activity with three major customers amounted to approximately
15%, 14% and 11%, respectively, of net sales for the year.
Note C - Property and Equipment
Property and equipment at cost consists of the following:
1997 Estimated Life-Years
---------- --------------------
Furniture and fixtures $ 261,256 7
Transportation equipment 40,088 3 - 5
Machinery and equipment 497,393 5
Leasehold improvements 317,977 4 - 7
----------
1,116,714
Less accumulated depreciation 606,640
----------
$ 510,074
==========
Note D - Notes Payable
Notes payable consists of the following:
Bank line of credit of $25,000,000 having an
interest rate option of either the institution's
prime rate plus 0.5% or the Eurodollar rate plus
3.25% on all or any portion of the outstanding
advances. The note is collateralized by accounts
receivable and inventories. The line of credit
agreement matures on February 1, 1999. An officer/
stockholder has guaranteed up to $7,500,000 of the
indebtedness under the line of credit. The loan
agreement contains certain financial covenants
regarding tangible net worth, funded debt, dividends
and capital expenditures among others. $17,684,768
Notes bearing interest at 10% per annum payable to
JPF's stockholders. These notes have been
subordinated to the note payable described above.
The stockholders have agreed that they will not
request payment while this subordination is in effect,
or until at least January 4, 1999. Interest paid on
the stockholders' loans amounted to $123,565. 1,035,000
-----------
$18,719,768
===========
J.P. FRAGRANCES, INC.
Notes to Financial Statements
December 31, 1997
Note E - Accounts Payable
During 1997, JPF had two suppliers from whom it purchased 70% and 27%,
respectively, of its merchandise. As of December 31, 1997, approximately
$12,772,000 and $5,972,000, respectively, was payable to these two
suppliers. During the year, JPF entered into a distribution agreement with
its major supplier to be the sole distributor of certain products produced
by the supplier to specific accounts located in certain geographic areas.
The agreement extends to December 31, 1999.
Note F - Retirement Plans
During 1996, JPF maintained a qualified simplified employee pension (SEP)
plan under Section 408(k) of the Internal Revenue Code which was
discontinued in 1997. Annual contributions of JPF under an SEP were
discretionary and were excluded from the participant's gross income to the
extent of 15% of the participant's compensation, subject to limits. JPF
made no contributions to the plan in 1997.
During 1997, JPF adopted a defined contribution plan under Section 401(k)
of the Internal Revenue Code, which provides for retirement benefits to its
employees. The plan covers all employees who are eligible and are 21 years
of age or older. Contributions are made through salary deductions from
participants who can contribute from 1% to 14% of their annual compensation
and receive a 50% matching employer contribution on up to 8% ($1,500
maximum) of the employees elected deferral. JPF's defined contribution
expense for 1997 was $27,000.
Note G - Commitments
JPF is obligated under several operating leases which expire on various
dates through 2001. The lease agreement for office space contains an
option to extend the lease for two years to December 31, 2001. Future
minimum lease payments for each of the years from December 31, 1997 are as
follows:
Facility
Year Amount Rent Equipment
---- -------- -------- ---------
1998 $448,000 $402,000 $46,000
1999 323,000 290,000 33,000
2000 11,000 11,000
2001 7,000 7,000
-------- -------- -------
$789,000 $692,000 $97,000
======== ======== =======
J.P. FRAGRANCES, INC.
Notes to Financial Statements
December 31, 1997
Note G - Commitments (Continued)
Rent expense for office and warehouse facilities for the year ended
December 31, 1997 was $762,942. Rent expense for equipment for the year
ended December 31, 1997 was $83,086.
Note H - Subsequent Events
Sale of assets of JPF
On February 25, 1998, JPF and the shareholders of JPF agreed to sell
substantially all of the assets of JPF to French Fragrances, Inc. Under the
terms of the agreement, the buyer will assume certain of JPF's trade
payables and other liabilities and will pay the indebtedness owed by JPF to
a bank and a shareholder. In connection with the sale, JPF has agreed to
provide employee severance benefits amounting to $1,100,000.
(b) Pro Forma Financial Information
PRO FORMA FINANCIAL DATA
On March 31, 1998, the Company completed the JPF Acquisition, which
will be accounted for using the purchase method of accounting. The
following Unaudited Pro Forma Condensed Consolidated Statement of Income
and Other Operating Data for the year ended January 31, 1998 is pro forma
for, and the Unaudited Pro Forma Consolidated Balance Sheet as of
January 31, 1998 is adjusted to give effect to, the JPF Acquisition,
including the payment of the purchase price and the related issuance of
additional indebtedness by the Company, as if such acquisition had occurred
as of February 1, 1997, with respect to the Unaudited Pro Forma Condensed
Consolidated Statement of Income and Other Operating Data, and as of
January 31, 1998, with respect to the Unaudited Pro Forma Consolidated
Balance Sheet.
The unaudited pro forma adjustments are based upon available
information and certain assumptions which management of the Company
believes are factually supportable. The Unaudited Pro Forma Condensed
Consolidated Financial Statements do not purport to represent what the
Company's consolidated results of operations or consolidated financial
position would have been had the JPF Acquisition actually occurred at the
beginning of the relevant period. In addition, the Unaudited Pro Forma
Condensed Consolidated Financial Statements do not purport to project the
Company's consolidated results of operations or consolidated financial
position for the current year or any future date or period. The Unaudited
Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the notes thereto and the historical Consolidated
Financial Statements of the Company (including the notes thereto) and the
other historical financial information included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1998.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
Historial Historial
Company JPF
----------- ------------
As of As of
January 31, December 31,
1998 1997 Adjustments (1) Pro Forma
----------- ------------ --------------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 7,667 -- $(7,667) (d) --
Accounts receivable, net 53,412 $ 8,758 (68) (b) $ 62,102
Inventories 90,426 37,520 -- 127,946
Advances on inventory purchases 6,978 -- -- 6,978
Prepaid expenses and other
current assets 3,937 370 (126) (d) 4,181
-------- ------- ------- --------
Total current assets $162,420 $46,648 $(7,861) $201,207
Property and equipment, net 19,502 510 (238) (a) 19,774
Exclusive brand licenses, net 42,776 -- -- 42,776
Deferred financing costs 3,757 100 (100) (a) 3,757
Purchased contracts rights and
intangibles -- -- 8,150 (c) 8,150
Other assets 4,198 69 -- 4,267
-------- ------- ------- --------
Total assets $232,653 $47,327 $ (49) $279,931
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt -- $ 484 $24,074 (d)(e) $ 24,558
Accounts payable - trade $ 24,394 18,944 (68) (b) 43,270
Other payables and accrued expenses 12,455 844 -- 13,299
Current portion of capital lease,
mortgage and term note 3,100 -- -- 3,100
Due to affiliates, net 294 -- -- 294
-------- ------- ------- --------
Total current liabilities 40,243 20,272 24,006 84,521
Long-term obligations
Senior notes and long-term debt 115,000 18,720 (18,720) (d)(e) 115,000
Subordinated debentures 6,980 -- -- 6,980
Convertible subordinated debentures 4,960 -- -- 4,960
Mortgage note 5,682 -- -- 5,682
Capital lease 1,010 -- -- 1,010
Term notes 152 -- 3,000 (d) 3,152
-------- ------- ------- --------
Total liabilities 174,027 38,992 8,286 221,305
Shareholders' equity
Convertible, redeemable preferred
stock 8 -- -- 8
Common stock 136 20 (20) (f) 136
Additional paid-in capital 30,787 110 (110) (f) 30,787
Retained earnings 27,695 8,205 (8,205) (f) 27,695
-------- ------- ------- --------
Total shareholders' equity 58,626 8,335 (8,335) 58,626
-------- ------- ------- --------
Total Liabilities and
Shareholders' Equity $232,653 $47,327 $ (49) $279,931
======== ======= ======= ========
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JANUARY 31, 1998
(In Thousands)
(1) Adjustments to reflect the JPF Acquisition
(a) Represents the assets of JPF not acquired.
(b) Represents the elimination of accounts receivable and accounts
payable between the Company and JPF.
(c) Consideration given $16,147
Net assets acquired (7,997)
-------
Value of intangibles purchased $ 8,150
=======
Intangibles consists of contract rights of $5,275 (amortized
over 5 years), non-compete agreements of $1,875 (amortized over
5 years) and goodwill of $1,000 (amortized over 15 years).
(d) Represents the financing of the purchase price of the JPF
Acquisition through the use of cash and debt. The Company used
available cash from operations, indebtedness from its credit
facility and issued a debenture of $3,000 for, among other
things, the repayment of the outstanding debt of JPF other than
the trade and accounts payables. The outstanding debt of JPF
included amounts outstanding under JPF's bank line and amounts
outstanding under shareholder loans of $1,035, net of shareholder
advances of $126.
(e) Represents the reclassification of JPF's bank line of $17,685 to
short-term debt to conform to the Company's presentation.
(f) Represents the elimination of the common stock, additional
paid-in capital and retained earnings of JPF.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND OTHER OPERATING DATA
(In thousands, except per share data)
Historial Historial
Company JPF
----------- -----------
Fiscal Years Ended
January 31, December 31
1998 1997 Adjustments(1) Pro Forma
----------- ----------- -------------- ---------
Net sales $215,487 $89,135 $ (304) (a) $304,318
Cost of sales 146,509 76,501 (877) (a)(b) 222,133
-------- ------- ------- --------
Gross profit 68,978 12,634 573 82,185
Operating expenses 37,521 8,588 (2,072) (c) 44,037
-------- ------- ------- --------
Income from operations 31,457 4,046 2,645 38,148
Interest income 423 -- -- 423
Interest expense (12,815) (1,797) (710) (d) (15,322)
Other income 563 -- -- 563
Earnings of unconsolidated
affiliate 135 -- -- 135
-------- ------- ------- --------
Income before income taxes 19,763 2,249 1,935 23,947
Income taxes 7,422 23 1,547 (e) 8,992
-------- ------- ------- --------
Net income $ 12,341 $ 2,226 $ 388 $ 14,955
======== ======= ======= ========
Basic earnings per share 0.92 1.12
Diluted earnings per share 0.76 0.92
Basic Shares 13,394 13,394
Diluted Shares 16,492 16,492
Other Data:
EBITDA (2) 36,195 44,543
Depreciation and Amortization 4,738 6,395
Capital expenditures 6,961 7,129
Cash interest expense (3) 12,529 14,946
Ratio of EBITDA to cash interest
expense 2.89 2.98
Ratio of net debt to EBITDA (4) 3.57 3.69
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income and
Other Operating Data
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME AND
OTHER OPERATING DATA
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(In Thousands)
(1) Adjustments to reflect the JPF Acquisition
(a) Represents the elimination of JPF sales to the Company during the
period.
(b) Represents the reclassification of warehouse salary expenses of
$573 from cost of sales in JPF's statement of income to operating
expenses to conform to the Company's presentation.
(c) Operating expense adjustments include:
Addition of warehouse salary expenses from cost of
sales in JPF's statement of income to conform to the Company's
presentation $ 573
Additional amortization relating to contract rights,
non-compete & goodwill 1,497
Reduction in operating expenses based on asset purchase
agreement (4,417)
Transition services fee paid to JPF to ensure servicing
of customer accounts 275
-------
$(2,072)
(d) Interest expense includes $482 incurred on additional indebtedness
of $5,354 and imputed interest of $228 on the $3,000 non-interest
bearing debenture at the current interest rate of the Company's
credit facility of 9.0%.
(e) JPF operated as an S corporation, which allowed it to pass taxable
income through to its shareholders and record a relatively small
amount of income tax expense. Since the combined entity will be
operated as a C corporation, an adjustment is necessary in the pro
forma presentation to increase the taxes to the rate that would
have been incurred in the C corporation status which currently is
37.6% after giving effect to the operating expense adjustments
included above.
(2) 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.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND OTHER OPERATING DATA - Continued
(3) Cash interest expense is defined as total interest expense less non-
cash amortization of deferred financing fees.
(4) Net debt is defined as total debt less cash and cash equivalents.
EXHIBITS
2.1* Asset Purchase Agreement dated as of February 25, 1998, among the
Company, JPF, Joseph A. Pappalardo and Gloria Pappalardo.
2.2* Amendment to Asset Purchase Agreement dated as of March 30, 1998,
among the Company, JPF, Joseph A. Pappalardo and Gloria
Pappalardo.
23.1 Consent of Richard A. Eisner & Company LLP.
* The exhibits (consisting primarily of conveyance documents and
instruments representing the consideration paid by the Company) and
disclosure schedules to this Agreement setting forth information relating
to the representations, warranties and covenants have been omitted. The
registrant agrees to furnish supplementally copies of these documents to
the Commission upon request.
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 registrant agrees to furnish a copy of such
instrument or agreement to the Commission upon request.
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 hereunto duly authorized.
FRENCH FRAGRANCES, INC.
Date: April 14, 1998 /s/William J. Mueller
---------------------
Vice President - Operations and
Chief Financial Officer