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 April 30, 1998
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) 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 June 11, 1998
---------------------------- -----------------
Common stock, $.01 par value 13,793,616 shares
FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
January 31, 1998 and April 30, 1998
Consolidated Statements of Income -
Three Months Ended April 30, 1997 and 1998
Consolidated Statements of Cash Flows -
Three Months Ended April 30, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1998 April 30, 1998
---------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,667,119 $ 4,930,066
Accounts receivable, net 53,412,248 66,756,191
Inventories 90,425,910 112,448,318
Advances on inventory purchases 6,978,285 6,488,784
Prepaid expenses and other assets 3,936,529 3,984,434
------------ ------------
Total current assets 162,420,091 194,607,793
------------ ------------
Property and equipment, net 19,501,742 20,053,050
------------ ------------
Other assets:
Exclusive brand licenses and trademarks, net 42,776,017 41,936,430
Senior note offering costs, net 3,756,911 4,769,833
Deferred income taxes, net 838,633 838,633
Other intangibles and other assets 3,359,891 10,905,705
------------ ------------
Total other assets 50,731,452 58,450,601
------------ ------------
Total assets $232,653,285 $273,111,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 1,743,000
Accounts payable - trade 24,393,878 19,075,288
Other payables and accrued expenses 12,454,835 10,471,980
Current portion of capital lease,
mortgage and term note 3,100,108 3,167,445
Due to affiliates, net 294,136 294,136
------------ ------------
Total current liabilities 40,242,957 34,751,849
------------ ------------
Long-term liabilities:
Senior notes, net 115,000,000 157,597,593
Subordinated debentures 7,131,873 9,581,995
Convertible subordinated debentures 4,960,633 4,911,833
Mortgage note 5,682,041 5,647,510
Capital lease 1,010,000 980,000
------------ ------------
Total liabilities 174,027,504 213,470,780
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Convertible, redeemable preferred stock,
Series B, $.01 par value (liquidation
preference of $.01 per share); 350,000
shares authorized; 279,877 and 271,596
shares issued and outstanding, respectively 2,799 2,716
Convertible, redeemable preferred stock,
Series C, $.01 par value (liquidation
preference of $.01 per share); 571,429
shares authorized; 525,490 and 511,355
shares issued and outstanding, respectively 5,255 5,114
Common stock, $.01 par value, 50,000,000
shares authorized; 13,623,734 and 13,793,616
shares issued and outstanding, respectively 136,238 137,936
Additional paid-in capital 30,786,503 31,496,170
Retained earnings 27,694,986 27,998,728
------------ ------------
Total shareholders' equity 58,625,781 59,640,664
------------ ------------
Total liabilities and shareholders' equity $232,653,285 $273,111,444
============ ============
See Notes to Consolidated Financial Statements.
/TABLE
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
April 30,
-------------------------
1997 1998
----------- -----------
Net Sales $35,102,038 $46,546,294
Cost of sales 23,598,456 33,229,130
----------- -----------
Gross Profit 11,503,582 13,317,164
----------- -----------
Operating Expenses
Warehouse and shipping 1,310,038 1,888,758
Selling, general and administration 5,156,653 5,856,672
Depreciation and amortization 1,107,314 1,596,115
----------- -----------
Total operating expenses 7,574,005 9,341,545
----------- -----------
Income from Operations 3,929,577 3,975,619
----------- -----------
Other income (expense):
Interest expense, net (1,742,440) (3,537,324)
Other income 37,668 48,704
----------- -----------
Other income (expense), net (1,704,772) (3,488,620)
----------- -----------
Income before equity in earnings
of unconsolidated affiliate and
provisions for income taxes 2,224,805 486,999
Equity in earnings of unconsolidated
affiliate, 50% owned 134,508 --
----------- -----------
Income before income taxes 2,359,313 486,999
Provision for income taxes 858,423 183,257
----------- -----------
Net Income $ 1,500,890 $ 303,742
=========== ===========
Earnings per common shares:
Basic $0.11 $0.02
===== =====
Diluted $0.10 $0.02
===== =====
Weighted average number of common shares:
Basic 13,250,833 13,669,122
=========== ===========
Diluted 16,385,201 17,618,366
=========== ===========
See Notes to Consolidated Financial Statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
--------------------------
1997 1998
----------- -----------
Cash flows from operating activities:
Net Income $ 1,500,890 $ 303,742
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 1,107,314 1,596,115
Equity in earnings of unconsolidated
affiliate (134,508) --
Amortization of senior note offering costs
and note premium -- 99,666
Change in assets and liabilities net
of effects from acquisitions:
Decrease (increase) in accounts receivable 20,321 (13,343,943)
Decrease (increase) in inventories 4,081,073 (11,461,831)
(Increase) decrease in advances on inventory
purchases (1,362,343) 489,501
Increase in prepaid expenses and other assets (620,068) (28,808)
Decrease in accounts payable (8,593,925) (15,879,168)
Decrease in other payables and accrued
expenses (516,923) (2,173,544)
Decrease in due to affiliate, net (514,657) --
----------- ------------
Net cash used in operating activities (5,032,826) (40,398,270)
----------- ------------
Cash flows from investing activities:
Additions to property and equipment,
net of disposals (1,490,151) (1,031,498)
Receipts of restricted cash for capital
improvements 954,820 --
Cash portion of purchase of intangible assets -- (5,150,000)
----------- ------------
Net cash used in investing activities (535,331) (6,181,498)
----------- ------------
Cash flows from financing activities:
Proceeds from the exercise of employee stock
options -- 117,480
Proceeds from the exercise of stock purchase
warrants -- 275,000
Proceeds from the conversion of preferred stock -- 268,780
Proceeds from the issuance of senior notes -- 41,500,000
Advances from unconsolidated affiliate 798,594 --
Payments on term loans (500,000) --
Net proceeds from short-term debt 6,692,047 1,743,000
Payments on capital lease and installment loans (42,937) (30,000)
Payments on facility mortgage note (38,748) (31,545)
----------- ------------
Net cash provided by financing activities 6,908,956 43,842,715
----------- ------------
Net increase (decrease) in cash and cash
equivalents 1,340,799 (2,737,053)
Cash and cash equivalents at beginning of period 855,969 7,667,119
----------- ------------
Cash and cash equivalents at end of period $ 2,196,768 $ 4,930,066
=========== ============
Supplemental disclosure of cash flow information:
Interest paid during the period $ 1,562,049 $ 368,447
=========== ============
Income taxes paid during the period $ 1,351,700 $ 5,213,675
=========== ============
See Notes to Consolidated Financial Statements.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
French Fragrances, Inc. (the "Company") is a manufacturer,
distributor and marketer of prestige designer fragrances and
related cosmetic products, primarily to mass-market retailers in
the United States.
The 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. 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 the Company's Annual Report on Form 10-K for the year
ended January 31, 1998, filed with the Commission.
The consolidated balance sheet of the Company as of
January 31, 1998 is audited. The other consolidated financial
statements are unaudited, but in the opinion of management
contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated balance
sheet of the Company as of April 30, 1998, the consolidated
statements of income of the Company for the three months ended
April 30, 1998 and 1997, and the consolidated statements of cash
flow for the three months ended April 30, 1998 and 1997.
Operating results for the three months ended April 30, 1998 are
not necessarily indicative of the results for the full fiscal
year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings per Share - Earnings per share for the three months
ended April 30, 1997 and 1998 have been calculated in accordance
with Statement of Financial Accounting Standards No. 128 Earnings
per Share ("SFAS 128"). SFAS 128, which was adopted by the
Company in the fourth quarter of fiscal 1998, requires the
presentation of "basic" earnings per share and "diluted" earnings
per share on the face of the income statement. Basic earnings
per share is computed by dividing the net income available to
common shareholders by the weighted average shares of outstanding
common stock. The calculation of diluted earnings per share is
similar to basic earnings per share except that the denominator
includes dilutive common stock potential such as stock options,
warrants and convertible securities.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Segments of an Enterprise - In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
changes the way public companies report information about
segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports issued to shareholders. SFAS No. 131 also
requires entity wide disclosures about the products and services
an entity provides, the foreign countries in which it holds
assets and reports revenues, and its major customers. SFAS 131
is effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS 131 for the Company's fiscal year ended
January 31, 1999 is not expected to have a material impact on the
Company's consolidated financial statement presentation.
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING
In March 1998, 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 $10.6 million
of certain trade and other payables of JPF. In addition to the
assumption of the payables, the purchase price for the Acquired
Assets consisted of approximately $37.3 million in cash and a
subordinated debenture of $3 million (the "Debenture"). The cash
portion of the purchase price was financed from available cash
from operations and the Company's revolving credit facility (the
"Credit Facility") with Fleet National Bank ("Fleet"). 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 Debenture has been recorded net of its discount of $485,528
calculated using an effective rate of 9.38%. The discount will
be amortized using the effective rate over the life of the
Debenture. As a result of the JPF Acquisition, the Company
acquired approximately $30.4 million of inventory, $12.1 million
of accounts receivable and $263,000 of fixed assets (consisting
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING -
(Continued)
primarily of office and warehouse furniture and equipment).
Other intangibles and other assets at April 30, 1998 includes
approximately $8.2 million of contract rights, intangible rights
(including non-compete agreements) and goodwill acquired as part
of the JPF Acquisition.
In April 1998, the Company consummated the private placement
under Rule 144A (the "Note Offering") pursuant to the Securities
Act of 1933, as amended, of $40 million principal amount of
10-3/8% Senior Notes due 2007, Series C (the "Series C Senior
Notes"). The Series C Senior Notes were sold at 106.5% of their
principal amount and have substantially similar terms to the
Company's existing 10-3/8% Senior Notes due 2007, Series B (the
"Series B Senior Notes"), which the Company issued in May 1997.
The net proceeds of approximately $41.4 million from the sale of
the Notes were used to repay outstanding borrowings under the
Credit Facility and other indebtedness to Fleet, which were used
for the JPF Acquisition, as well as for working capital purposes.
The Series C Senior Notes have not been registered under the Act
and may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements. The Series C Senior Notes are expected to be
exchanged for 10-3/8% Senior Notes due 2007, Series D (the
"Series D Senior Notes") containing identical terms which will be
registered under the Act. The exchange offer will be made only
by means of a prospectus.
The Indenture pursuant to which the Series C Senior Notes
(and the Series D Senior Notes following their exchange for the
Series C Senior Notes) were issued (the "Indenture") provides
that such notes will be senior unsecured obligations of the
Company and will rank senior in payment to all existing and
future subordinated indebtedness of the Company and pari passu in
right of payment with all existing and future senior indebtedness
of the Company, including indebtedness under the Credit Facility
and the Series B Senior Notes. The Indenture generally limits
the ability of the Company to (i) incur additional indebtedness,
(ii) pay any dividend or make any distribution on account of its
capital stock or other equity interest, (iii) purchase or redeem
any capital stock or equity interest of the Company, (iv) make
any principal payment, purchase or redeem subordinated
indebtedness except at scheduled maturities, or (v) make certain
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. J. P. FRAGRANCES ACQUISITION; SENIOR NOTE OFFERING -
(Continued)
investments; in each case subject to the satisfaction of a fixed
charge coverage ratio and, in certain cases, also a net income
test. In addition, the Indenture generally limits the ability of
the Company to create liens, merge or transfer or sell assets.
The Indenture also provides that the holders of the Series C
Senior Notes (and the Series D Senior Notes) have the option to
require the Company to repurchase their notes in the event there
is a change of control in the Company (as defined in the
Indenture).
The following unaudited information presents the Company's
pro forma operating data for the three months ended April 30,
1998 and 1997 as if the JPF Acquisition and the Note Offering had
been consummated at the beginning of each of the periods
presented and include certain adjustments to the historical
consolidated statements of income of the Company to give effect
to the acquisition of the net assets of JPF, the payment of the
purchase price and the increased amortization of intangible
assets as a result of the JPF Acquisition and the related
issuance of Series C Senior Notes by the Company to finance the
purchase price for the JPF Acquisition. The unaudited pro forma
financial data are not indicative of the results of operations
that would have been achieved had the JPF Acquisition and the
Note Offering been consummated prior to the periods in which they
were completed, or that might be attained in the future.
Three Months
Ended April 30,
1997 1998
----------- -----------
Net Sales $51,885,715 $60,141,229
Net Income $ 1,191,137 $ 18,546
Net Income per
Basic Share $0.09 --
Net Income per
Diluted Share $0.08 --
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SHORT-TERM DEBT
The Credit Facility with Fleet provides for borrowings on a
revolving basis of up to $40,000,000, with a $3,000,000 sublimit
for letters of credit. Borrowings under the Credit Facility are
limited to eligible accounts receivable and inventories and are
secured by a first priority lien on all of the Company's accounts
receivable and inventory. The Company's obligations under the
Credit Facility rank pari passu in right of payment with the
Series B Senior Notes and the Series C Senior Notes. The Credit
Facility contains several covenants, the more significant of
which are that the Company maintain a minimum level of equity and
meet certain debt-to-equity, interest coverage and liquidity
ratios. The Credit Facility also includes a prohibition on the
payment of dividends and other distributions to shareholders and
restrictions on the incurrence of additional non-trade
indebtedness. At April 30, 1998, the outstanding balance under
the Credit Facility was $1,743,000 and there was approximately
$747,000 in outstanding letters of credit.
NOTE 5. RELATED PARTY TRANSACTION
At April 30, 1998, the Company had outstanding approximately
$294,000 in advances from National Trading Manufacturing, Inc., a
company which is wholly-owned by the Chairman of the Company
("National Trading"), which is reflected on the balance sheet as
Due to affiliates, net. These advances are payable upon demand.
NOTE 6. SUBORDINATED DEBENTURES
The subordinated debentures as of January 31, 1998 represent
the 8.5% Subordinated Debentures due May 2004 issued in
connection with the May 1996 acquisition of the assets of
Fragrance Marketing Group, Inc. (the "8.5% Debentures"). The
subordinated debentures as of April 30, 1998 represent the 8.5%
Debentures, the Debenture issued as part of the JPF Acquisition
and the non-current portion of a term note issued in connection
with the Fine Fragrances Acquisition. See Notes 3 and 9.
NOTE 7. CONTINGENCIES
The Company is a party to a number of pending legal actions,
proceedings and claims. While any litigation contains an element
of uncertainty, management of the Company, believes based upon
the advice of counsel, that the outcome of such actions,
proceedings or claims pending or known to be threatened, will
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONTINGENCIES - (Continued)
not have a material adverse effect on the Company's consolidated
financial position or results of operations.
NOTE 8. SHAREHOLDERS' EQUITY
A schedule of the transactions in the common stock and the
preferred stock of the Company and the additional paid-in capital
accounts is as follows:
Preferred Stock Additional
Series B Series C Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
---------------- ---------------- --------------------- -----------
Balance at
January 31, 1998 279,877 $2,799 525,490 $5,255 13,623,734 $136,238 $30,786,503
Issuance of common
stock upon
exercise of stock
options 35,600 356 117,124
Issuance of common
stock upon
exercise of
warrants 54,258 543 274,457
Issuance of common
stock upon
conversion of 7.5%
convertible
debentures 6,928 69 49,812
Issuance of common
stock upon
conversion
of Series B
convertible
preferred stock (8,281) (83) 58,961 589 194,065
Issuance of common
stock upon
conversion
of Series C
convertible
preferred stock (14,135) (141) 14,135 141 74,209
------- ------ ------- ------ ---------- -------- -----------
Balance at
April 30, 1998 271,596 $2,716 511,355 $5,114 13,793,616 $137,936 $31,496,170
======= ====== ======= ====== ========== ======== ===========
/TABLE
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATE,
50% OWNED
The following represents income statement information for
the three months ended April 30, 1997 for Fine Fragrances, Inc.
("Fine Fragrances"), a fragrance distribution company which prior
to May 1997, was 49.99% owned by the Company and distributed on
an exclusive basis in the United States and Canada the Salvador
Dali, Taxi, Cafe and Watt brands manufactured by COFCI, S.A.
("COFCI"). For the period presented, the Company's investment in
Fine Fragrances was accounted for under the equity method:
Three Months Ended
April 30, 1997
Net Sales $1,949,787
==========
Net Income $ 306,348
==========
The Company's equity in the net income of Fine Fragrances
for the three months ended April 30, 1997 was reduced for the
amortization of the exclusive distribution agreements of Fine
Fragrances. The exclusive distribution agreements were being
amortized using the straight-line method over the term of the
agreements.
In May 1997, the Company acquired the 50.01% interest of
Fine Fragrances (the "Fine Fragrances Acquisition") that the
Company did not own from an unaffiliated third party. As a result
of this acquisition, Fine Fragrances became a wholly-owned
subsidiary of the Company and the operations of Fine Fragrances
were consolidated with those of the Company. In connection with
the Fine Fragrances Acquisition, the Company entered into new 10
year distribution agreements for the brands manufactured by
COFCI.
NOTE 10. INCOME TAXES
The provision for income taxes for the three-month period
ended April 30, 1997 was calculated based upon the estimated tax
rate of 39% for the full fiscal year ending January 31, 1998.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK OPTION PLANS
During the three months ended April 30, 1998 and 1997, the
Company granted options for 500,000 shares at an exercise price
of $12.50 per share and 30,000 at an exercise price of $8.38,
respectively, under the 1995 Stock Option Plan to employees and
consultants.
NOTE 12. SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND
INVESTING ACTIVITIES
The Company incurred the following non-cash financing and
investing activities for the three months ended April 30, 1997
and 1998:
Three Months Ended
April 30,
1997 1998
========== ==========
Redemption of 8% Debentures
used to pay for conversion
of preferred stock $40,559
=======
Conversion of 7.5% convertible
debentures (including
accrued interest) into Common
Stock $ 49,880
===========
Transactions in connection with the
JPF Acquisition: (See Note 3)
Issuance of Debenture to Seller $ 2,514,472
===========
Assumption of accounts payables $10,560,577
===========
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"), 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
herein. 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 "will likely result," "are
expected to," "will continue," "is anticipated," "estimated,"
"intends," "plans" and "projection") are not historical facts and
may be forward-looking and, accordingly, such statements involve
estimates, assumptions 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 certain suppliers; the Company's ability to
successfully integrate acquired businesses or new brands into the
Company; the impact of competitive products and pricing; the
substantial indebtedness and debt service obligations of the
Company; changes in the retail industry; and general economic and
business conditions. The Company cautions that the risk factors
described herein could cause actual results or outcomes 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 statements is made or
to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for management
to predict all of such factors. Further, management cannot
assess the impact of each such factor on the Company's business
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 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, 1998. 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 April 30, 1998 Compared to the Three Months
Ended April 30, 1997
- --------------------------------------------------------------
NET SALES. Net sales increased $11.4 million, or 33%, to
$46.5 million for the three months ended April 30, 1998 from
$35.1 million for the three months ended April 30, 1997.
Approximately 75% of the increase in net sales was attributable
to an increase in sales of brands that are distributed by the
Company on a non-exclusive basis through direct purchase
relationships with manufacturers or other sources ("Distributed
Brands"), including certain of the brands which the Company is
distributing following the March 1998 acquisition (the "JPF
Acquisition") of the assets of J.P. Fragrances, Inc. ("JPF").
The balance of the increase in net sales was attributable to an
increase in sales of the Company's owned or licensed brands
(collectively, the "Controlled Brands"), including through the
addition of the net sales of COFCI S.A. fragrance products
following the May 1997 acquisition of the interest in Fine
Fragrances, Inc. that the Company did not own (a portion of which
sales were previously accounted for under the equity in earnings
of unconsolidated affiliate, 50% owned). See Note 9 to Notes to
Consolidated Financial Statements. The increase in net sales
represents both an increase in the volume of products sold to
existing customers, as well as sales to new customers.
Management believes that increased sales have resulted from the
Company's ability to provide its customers with a larger
selection of products and a continuous, direct supply of
products.
GROSS PROFIT. Gross profit increased $1.8 million, or 16%,
to $13.3 million for the three months ended April 30, 1998 from
$11.5 million for the three months ended April 30, 1997. The
increase in gross profit was primarily attributable to the
increase in product sales of both the Controlled Brands and the
Distributed Brands. Gross margins decreased from 32.8% to 28.6%
primarily as a result of a proportionally larger increase in
sales of Distributed Brands, which typically sell at lower
margins than the Controlled Brands.
WAREHOUSE AND SHIPPING EXPENSE. Warehouse and shipping
expenses increased $579,000, or 44%, to $1.9 million for the
three months ended April 30, 1998 from $1.3 million for the three
months ended April 30, 1997. The increase resulted from both an
increase in labor, warehouse, shipping materials and freight
costs, all of which were associated with the increase in net
sales.
SG&A. Selling, general and administrative ("SG&A") expenses
increased $700,000, or 14%, to $5.9 million for the three months
ended April 30, 1998 from $5.2 million for the three months ended
April 30, 1997. As a percentage of net sales, SG&A expenses
decreased from 14.7% for the three months ended April 30, 1997 to
12.6% for the three months ended April 30, 1998. Of the increase
in SG&A expenses, approximately $200,000 represented an increase
in selling expenses, primarily as a result of the addition of
sales and marketing personnel and marketing costs associated with
the planned summer roll out of the Halston line extensions of
Halston Ladies and Z-14 and the planned fall launch of a Geoffrey
Beene ladies brand. General and administrative expenses
increased $500,000 primarily as a result of the one-time
operating expenses of approximately $300,000 incurred in
integrating the assets and liabilities, and in closing the
operations of JPF and the addition of administrative personnel.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $489,000, or 44%, to $1.6 million for the three months
ended April 30, 1998 from $1.1 million for the three months ended
April 30, 1997. The increase was primarily attributable to
amortization of intangibles acquired as a result of the JPF
Acquisition and adjustments to intangibles and other assets
acquired in connection with the acquisition of the assets of
Fragrance Marketing Group in May 1996, and increased
depreciation of computer software and equipment in connection
with the implementation of a new management information system
which was completed in February 1998.
INTEREST EXPENSE, NET. Interest expense, net of interest
income, increased $1.8 million, or 103% to $3.5 million for the
three months ended April 30, 1998 from $1.7 million for the three
months ended April 30, 1997. This increase was primarily due to
the increase in average debt outstanding resulting from (i) the
May 1997 offering (the "1997 Note Offering") of $115 million
principal amount of 10-3/8% Senior Notes due 2007, and (ii) the
draw down against the Company's revolving credit facility for
payment of the cash portion of the purchase price for the JPF
Acquisition. See Note 3 to Notes to Consolidated Financial
Statements.
NET INCOME. Net income decreased $1.2 million, or 80%, to
$304,000 for the three months ended April 30, 1998 from $1.5
million for the three months ended April 30, 1997, primarily as a
result of the increase in interest and SG&A expenses, which were
partially offset by higher net sales.
EBITDA. EBITDA (operating income, plus depreciation and
amortization) increased $535,000, or 11%, to $5.6 million for the
three months ended April 30, 1998 from $5.0 million for the three
months ended April 30, 1997. The EBITDA margin decreased to
12.0% for the three months ended April 30, 1998 from 14.3% for
the three months ended April 30, 1997. The increase in EBITDA was
primarily attributed to the increase in gross profit discussed
above. The decrease in EBITDA margin was primarily attributable
to the decrease in gross margins and the integration expenses
associated with the JPF Acquisition discussed above.
FINANCIAL CONDITION
In March 1998, the Company consummated the JPF Acquisition.
As a result of the JPF Acquisition, the Company acquired
approximately $30.4 million of inventory, $12.1 million of
accounts receivable and $263,000 of fixed assets (consisting
primarily of office and warehouse furniture and equipment). See
Note 3 to Notes to Consolidated Financial Statements. These
amounts are the primary reason for increases in inventory and
accounts receivable at April 30, 1998. As a result of the JPF
Acquisition, the Company also acquired approximately $8.2
million of contract rights, intangible rights (including
non-compete agreements) and goodwill, which account for the
increase in other intangibles and other assets at April 30, 1998.
The Company also assumed approximately $10.6 million of certain
trade and other payables of JPF in connection with the JPF
Acquisition. In addition to the assumption of the payables, the
purchase price for the assets of JPF consisted of approximately
$37.3 million in cash and a subordinated debenture of $3 million
(the "Debenture"). The cash portion of the purchase price was
financed from available cash from operations and the Company's
revolving credit facility (the "Credit Facility") with Fleet
National Bank ("Fleet"). 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.
In April 1998, the Company consummated the private placement
under Rule 144A (the "Note Offering") pursuant to the Securities
Act of 1933, as amended (the "Act"), of $40 million principal
amount of 10-3/8% Senior Notes due 2007, Series C (the "Series C
Senior Notes"). The Series C Senior Notes were sold at 106.5% of
their principal amount and have substantially similar terms to
the Company's existing 10-3/8% Senior Notes due 2007, Series B
(the "Series B Senior Notes"), which the Company issued in May
1997. The net proceeds of approximately $41.4 million from the
sale of the Notes were used to repay outstanding borrowings under
the Credit Facility to Fleet, which were used for the JPF
Acquisition, as well as for working capital purposes. The Series
C Senior Notes have not been registered under the Act and may not
be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The Series
C Senior Notes are expected to be exchanged for 10-3/8% Senior
Notes due 2007, Series D (the "Series D Senior Notes") containing
identical terms which will be registered under the Act. The
exchange offer will be made only by means of a prospectus.
The Indenture pursuant to which the Series C Senior Notes
(and the Series D Senior Notes following their exchange for the
Series C Senior Notes) were issued (the "Indenture") provides
that such notes will be senior unsecured obligations of the
Company and will rank senior in payment to all existing and
future subordinated indebtedness of the Company and pari passu in
right of payment with all existing and future senior indebtedness
of the Company, including indebtedness under the Credit Facility
and the Series B Senior Notes. The Indenture generally limits
the ability of the Company to (i) incur additional indebtedness,
(ii) pay any dividend or make any distribution on account of its
capital stock or other equity interest, (iii) purchase or redeem
any capital stock or equity interest of the Company, (iv) make
any principal payment, purchase or redeem subordinated
indebtedness except at scheduled maturities, or (v) make certain
investments; in each case subject to the satisfaction of a fixed
charge coverage ratio and, in certain cases, also a net income
test. In addition, the Indenture generally limits the ability of
the Company to create liens, merge or transfer or sell assets.
The Indenture also provides that the holders of the Series C
Senior Notes (and the Series D Senior Notes) have the option to
require the Company to repurchase their notes in the event there
is a change of control in the Company (as defined in the
Indenture).
At April 30, 1998, the Company had available $37.5 million
under the Credit Facility for general corporate purposes,
including working capital needs and acquisitions, subject to
certain borrowing base limitations.
In May 1998, the Company entered into a lease with an
unaffiliated third party for approximately 48,000 square feet of
a warehouse facility to accommodate the additional inventory
requirements associated primarily with the promotional sets which
will arrive in anticipation of the holiday season. The lease has
an initial term of 30 months with the Company having an option to
extend for an additional term of 30 months. The future minimum
lease payments for the fiscal years ended January 31, 1999, 2000
and 2001 are approximately $190,400, $257,600, and $193,200,
respectively.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
In April 1998, the Company consummated the private placement
of $40 million principal amount of 10-3/8% Senior Notes due 2007,
Series C (the "Series C Senior Notes"). The Series C Senior
Notes are expected to be exchanged for Series D Senior Notes
containing identical terms which will be registered under the
Securities Act of 1933, as amended. The exchange offer will be
made only by means of a prospectus. The Indenture pursuant to
which the Series C Senior Notes (and the Series D Senior Notes
following their exchange for the Series C Senior Notes) were
issued (the "Indenture") provides that such notes will be senior
unsecured obligations of the Company and will rank senior in
payment to all existing and future subordinated indebtedness of
the Company and pari passu in right of payment with all existing
and future senior indebtedness of the Company, including
indebtedness under the Company's revolving credit facility and
the Company's 10-3/8% Senior Notes due 2007, Series B. The
Indenture generally limits the ability of the Company to (i)
incur additional indebtedness, (ii) pay any dividend or make any
distribution on account of its capital stock or other equity
interest, (iii) purchase or redeem any capital stock or equity
interest of the Company, (iv) make any principal payment,
purchase or redeem subordinated indebtedness except at scheduled
maturities, or (v) make certain investments; in each case subject
to the satisfaction of a fixed charge coverage ratio and, in
certain cases, also a net income test. In addition, the
Indenture generally limits the ability of the Company to create
liens, merge or transfer or sell assets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition."
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)).
Exhibit
Number Description
- ------- -----------------------------------------------------
3.2 Amendment dated September 19, 1996 to the Amended and
Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 4.4 filed as
part of the Company's Form 10-Q for the quarter ended
October 31, 1996 (Commission File No. 1-6370)).
3.3 By-Laws of the Company (incorporated herein by
reference to Exhibit 3.2 filed as a part of the
Company's Form 10-K for the fiscal year ended
January 31, 1996 (Commission File No. 1-6370)).
4.1 Indenture dated as of May 13, 1997, between the
Company and Marine Midland Bank, as trustee
(incorporated herein by reference to Exhibit 4.1
filed as a part of the Company's Form 8-K dated
May 13, 1997 (Commission File No. 1-6370)).
4.2 Indenture dated as of April 27, 1998, between the
Company and Marine Midland Bank, as trustee
(incorporated herein by reference to Exhibit 4.1
filed as a part of the Company's Form 8-K dated
April 27, 1998 (Commission File No. 1-6370)).
4.3 Registration Rights Agreement dated as of
April 27, 1998, among the Company and Donaldson,
Lufkin & Jenrette Securities Corporation
(incorporated herein by reference to Exhibit 4.2
filed as a part of the Company's Form 8-K dated
April 27, 1998 (Commission File No. 1-6370)).
4.4 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)).
4.5 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)).
Exhibit
Number Description
- ------- -----------------------------------------------------
4.6 Letter Agreement dated as of March 23, 1998, between
the Company and Fleet National Bank (incorporated
herein by reference to Exhibit 4.4 filed as a part of
the Company's Form 10-K for the fiscal year ended
January 31, 1998 (Commission File No. 1-6370)).
10.1 Registration Rights Agreement dated as of
November 30, 1995, among the Company, Bedford Capital
Corporation ("Bedford"), Fred Berens, Rafael Kravec
and Eugene Ramos (incorporated herein by reference to
Exhibit 10.1 filed as a part of the Company's Form
10-K for the fiscal year ended September 30, 1995
(Commission File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration
Rights Agreement dated as of November 30, 1995, among
the Company, Bedford, Fred Berens, Rafael Kravec and
Eugene Ramos (incorporated herein by reference to
Exhibit 10.2 filed as a part of the Company's Form
10-K for the year ended January 31, 1996 (Commission
File No. 1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to
Registration Rights Agreement dated as of
November 30, 1995, among the Company, Bedford, Fred
Berens, Rafael Kravec and the Estate of Eugene Ramos
(incorporated by reference to Exhibit 10.3 filed as
part of the Company's Form 10-Q for the quarter ended
July 31, 1996 (Commission File No. 1-6370)).
10.4 Employment Agreement dated as of April 1, 1997,
between the Company and Rafael Kravec (incorporated
herein by reference to Exhibit 10.4 filed as a part
of the Company's Form 10-K for the fiscal year ended
January 31, 1997 (Commission File No. 1-6370)).
10.5 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 filed as a part
of the Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
10.6 1995 Stock Option Plan (incorporated herein by
reference to Exhibit 10.5 filed as a part of the
Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
Exhibit
Number Description
- ------- -----------------------------------------------------
10.7 Lease Agreement dated as of July 2,1992, between FFI
and National Trading (incorporated herein by
reference to Exhibit 10.13 filed as a part of the
Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
10.8 Option Agreement dated July 2, 1992, between FFI and
National Trading and Memorandum of Lease and Option
Agreement related thereto (incorporated herein by
reference to Exhibit 10.14 filed as a part of the
Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
10.9 Amended and Restated Exclusive Trademark License
Agreement dated February 29, 1980, between Geoffrey
Beene, Inc., and Epocha Distributors, Inc. (now known
as Sanofi Beaute, Inc.), as amended July 29, 1992 and
February 13, 1995 (incorporated herein by reference
to Exhibit 10.15 filed as a part of the Company's
Form 10-K for the fiscal year ended September 30,
1995 (Commission File No. 1-6370)).
10.10 Asset Purchase Agreement dated as of February 1,
1996, by and between the Company and
Halston-Borghese, Inc. and its affiliates
(incorporated herein by reference to Exhibit 2.1
filed as a part of the Company's Form 8-K dated
March 20, 1996 (Commission File No. 1- 6370)).
10.11 Asset Purchase Agreement dated as of February 25,
1998, by and between the Company, J.P. Fragrances,
Inc., Joseph A. Pappalardo and Gloria Pappalardo
(incorporated herein by reference to Exhibit 2.1
filed as a part of the Company's Form 8-K dated
March 31, 1998 (Commission File No. 1-6370)).
10.12 Amendment to Asset Purchase Agreement dated as of
March 30, 1998, by and between the Company, J.P.
Fragrances, Inc., Joseph A. Pappalardo and Gloria
Pappalardo (incorporated herein by reference to
Exhibit 2.2 filed as a part of the Company's Form 8-K
dated March 31, 1998 (Commission File No. 1-6370)).
10.13 Lease Agreement dated as of May 4,1998, between the
Company and Mac Papers, Inc.
Exhibit
Number Description
- ------- -----------------------------------------------------
27.1 Financial Data Schedule.
- ---------------
The foregoing list omits instruments defining the rights of
holders of long term debt of the Company where the total amount
of securities authorized thereunder does not exceed 10% of the
total assets of the Company. The Company hereby agrees to furnish
a copy of each such instrument or agreement to the Commission
upon request.
(b) Reports on Form 8-K.
(1) A Current Report on Form 8-K dated March 31, 1998 was
filed on April 15, 1998 reporting the JPF Acquisition
under Item 2. Acquisition or Disposition of Assets and
setting forth historical financial information for J.P.
Fragrances, Inc. and pro forma financial data for the
Company in connection with the JPF Acquisition under
Item 7. Financial Statements and Exhibits.
(2) A Current Report on Form 8-K dated April 27, 1998 was
filed on May 7, 1998 reporting on the Company's offering
of senior notes 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 11, 1998 /s/ E. Scott Beattie
------------- -----------------------------
E. Scott Beattie
President and Chief Executive
Officer
(Principal Executive Officer)
Date: June 11, 1998 /s/ William J. Mueller
------------- -----------------------------
William J. Mueller
Vice President-Operations and
Chief Financial Officer
(Principal Financial and
Accounting Officer)