SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 21, 1999
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 7. Financial Statements and Exhibits.
(a) Financial Statements of Paul Sebastian, Inc.
Independent Auditors' Report
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998 and
1997
Statements of Stockholders' Deficiency for the Years Ended
December 31, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31, 1998 and
1997
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet as of October 31, 1998
Pro Forma Condensed Consolidated Statement of Income for the Year
Ended January 31, 1998
Pro Forma Condensed Consolidated Statement of Income for the
Nine Months Ended October 31, 1998
(c) Exhibits
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Paul Sebastian, Inc.
We have audited the accompanying balance sheets of Paul Sebastian, Inc. as of
December 31, 1998 and 1997 and the related statements of operations,
stockholders' deficiency, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paul Sebastian, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Paul
Sebastian, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses from
operations. There is no assurance that the Company's operations will generate
sufficient cash flow to meet its obligations or that the Company has the
ability to obtain additional financing as required, which raises substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
March 30, 1999
Edison, New Jersey
PAUL SEBASTIAN, INC.
Balance Sheets
December 31,
Assets
1998 1997
Current assets
Cash and cash equivalents $ 1,431,475 $ 1,898,668
Accounts receivable, net of allowance for
doubtful accounts of $2,350,000 and $2,097,000 11,760,559 22,345,644
Inventories 6,512,768 11,556,136
Promotional merchandise 1,677,562 2,811,510
Recoverable income taxes - 2,338,609
Prepaid expenses and other current assets 420,813 259,038
------------ ------------
21,803,177 41,209,605
Plant and equipment, net 428,765 976,683
Goodwill, net of accumulated amortization of
$2,853,000 and $2,147,000 676,860 1,382,890
Deferred financing costs, net of accumulated
amortization of $1,384,000 and $269,000 - 1,115,469
Covenants not to compete, net of accumulated
amortization of $500,000 and $402,000 - 98,472
Other assets 88,883 137,885
------------ ------------
$ 22,997,685 $ 44,921,004
============ ============
Liabilities and Stockholders' deficiency
Current liabilities
Current portion of long-term debt $ 49,176,581 $ 54,558,197
Accounts payable 5,880,647 4,229,683
Accrued expenses 19,148,248 25,241,205
------------ ------------
74,205,476 84,029,085
Other noncurrent liabilities - 200,000
Commitments and contingencies - -
Stockholders' deficiency
New Series A Preferred Stock, no par value,
liquidation preference $100 per share, authorized
41,000 shares, issued and outstanding 38,941 shares 3,894,000 3,894,000
Common stock, no par value, authorized 12,000,000
shares, issued and outstanding 2,867,500 shares at
December 31, 1998 and 2,067,500 shares at
December 31, 1997 8,069,049 8,061,049
Accumulated deficit (62,793,481) (50,821,681)
Equity participation loans (377,359) (441,449)
------------ ------------
Total stockholders' deficiency (51,207,791) (39,308,081)
------------ ------------
$ 22,997,685 $ 44,921,004
============ ============
See accompanying notes to financial statements
PAUL SEBASTIAN, INC.
Statements of Operations
For the Years Ended December 31,
1998 1997
Net sales $ 64,834,609 $ 94,890,200
Cost of goods sold 15,979,264 32,645,467
------------ ------------
Gross profit 48,855,345 62,244,733
------------ ------------
Selling, general and administrative expenses 54,621,376 85,439,923
Research and development expenses 140,018 272,337
Loss on refinancing of debt - 901,586
------------ ------------
54,761,394 86,613,846
------------ ------------
Loss from operations (5,906,049) (24,369,113)
------------ ------------
Other (expense) income
Interest expense (6,135,061) (5,453,371)
Interest income 69,310 77,039
------------ ------------
(6,065,751) (5,376,332)
------------ ------------
Loss before provision for income taxes (11,971,800) (29,745,445)
Provision for income taxes - 76,000
------------ ------------
Net loss $(11,971,800) $(29,821,445)
============ ============
See accompanying notes to financial statements
PAUL SEBASTIAN, INC.
Statements of Stockholders' Deficiency
For the Years Ended December 31, 1998 and 1997
Series A Series B New Series A
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
Balance -
January 1, 1997 39,000 $ 3,900,000 30,000 $ 1,926,000 - $ -
Surrender and
cancellation of
preferred stock (39,000) (3,900,000) (30,000) (1,926,000) - -
Issuance of new
preferred stock
for cash - - - - 38,941 3,894,000
Issuance of common
stock in exchange for
debt and preferred
stock - - - - - -
Issuance of warrants
to subordinated
debt holders for cash - - - - - -
Collection of equity
participation
loans - - - - - -
Net loss - - - - - -
-------- ------------ -------- ------------ ------- ----------
Balance -
December 31, 1997 - $ - - $ - 38,941 $3,894,000
======== ============ ======== ============ ======= ==========
Warrants exercised - - - - - -
Collection of equity
participation loans - - - - - -
Net loss - - - - - -
-------- ------------ -------- ------------ ------- ----------
Balance -
December 31, 1998 - $ - - $ - 38,941 $3,894,000
======== ============ ======== ============ ======= ==========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
PAUL SEBASTIAN, INC.
Statements of Stockholders' Deficiency
For the Years Ended December 31, 1998 and 1997
Equity
Common Stock Participation Accumulated
Shares Amount Loans Deficit Total
Balance -
January 1, 1997 695,000 $ 866,827 $(475,613) $(21,000,236) $(14,783,022)
Surrender and
cancellation of
preferred stock - - - - (5,826,000)
Issuance of new
preferred stock
for cash - - (140,000) - 3,754,000
Issuance of common
stock in exchange for
debt and preferred
stock 1,372,500 6,074,222 - - 6,074,222
Issuance of warrants
to subordinated
debt holders for cash - 1,120,000 - - 1,120,000
Collection of equity
participation loans - - 174,164 - 174,164
Net loss - - - (29,821,445) (29,821,445)
--------- ---------- ---------- ------------- -------------
Balance -
December 31, 1997 2,067,500 $8,061,049 $(441,449) $(50,821,681) $(39,308,081)
========= ========== ========== ============= =============
Warrants exercised 800,000 8,000 - - 8,000
Collection of equity
participation loans - - 64,090 - 64,090
Net loss - - - (11,971,800) (11,971,800)
--------- ---------- ---------- ------------- -------------
Balance -
December 31, 1998 2,867,500 $8,069,049 $(377,359) $(62,793,481) $(51,207,791)
========= ========== ========== ============= =============
See accompanying notes to financial statements
PAUL SEBASTIAN, INC.
Statements of Cash Flows
For the Years Ended December 31,
1998 1997
Cash flows from operating activities
Net loss $ (11,971,800) $ (29,821,445)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 3,157,228 3,125,044
Imputed interest - 821,686
Provision for bad debts 294,379 1,353,750
Deferred income taxes - 2,415,000
(Increase) decrease in
Accounts receivable 10,290,706 (513,238)
Due from predecessor stockholders - 1,100,000
Inventories 5,043,368 (3,508,891)
Promotional merchandise 1,133,948 (737,154)
Recoverable income taxes 2,338,609 (2,338,609)
Prepaid expenses and other current assets (161,775) 491,955
Other assets 49,002 (65,624)
Increase (decrease) in
Accounts payable 1,650,964 193,465
Accrued expenses (6,284,957) 12,572,794
Income tax payable - (296,674)
-------------- --------------
5,539,672 (15,207,941)
-------------- --------------
Cash flows from investing activities
Purchases of plant and equipment (689,339) (495,602)
Cash flows from financing activities
Proceeds from long-term debt - 4,880,000
Payments of long-term debt (5,381,616) (4,153,389)
Proceeds/payments from line of credit - 8,200,000
Surrender and cancellation of preferred stock - (5,826,000)
Proceeds from issuance of New Series A
Preferred Stock - 3,894,000
Proceeds from issuance of common stock - 5,932,022
Proceeds from issuance of warrants - 1,122,200
Collection of equity participation loans 64,090 174,164
-------------- --------------
(5,317,526) 14,222,997
-------------- --------------
Net decrease in cash and cash equivalents (467,193) (1,480,546)
Cash and cash equivalents - beginning 1,898,668 3,379,214
-------------- --------------
Cash and cash equivalents - ending $ 1,431,475 $ 1,898,668
============== ==============
Supplemental disclosures of cash paid
(received)
Interest $ 906,884 $ 3,945,373
Income taxes (2,338,609) -
See accompanying notes to financial statements
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 1 - LIQUIDITY
The financial statements of Paul Sebastian, Inc. (the "Company")
have been presented on the basis that the Company is a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
For the years ended December 31, 1998 and 1997, the Company had
recurring losses from continuing operations of $11,971,800 and
$29,821,445, and a net capital deficiency of $51,207,791 and
$39,308,081, respectively, was in default of various financial,
and other, covenants of its debt agreements, and had classified
all of its debt as current. These factors, among others, may
indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The financial statements do not include any adjustments relating
to the recoverability and the classification of liabilities,
which might be necessary, should the Company be unable to
continue as a going concern. As described in Note 5, the Company
was not in compliance with the covenants of its debt agreements
at December 31, 1998 and 1997, and has not obtained waivers
and/or amendments from its lenders. As a result of the covenant
violations, the Company has classified the balance of its
long-term debt of $49,176,581 and $54,558,197 as a current
liability as of December 31, 1998 and 1997, respectively. The
Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations
on a timely basis, to comply with the terms of its debt
agreements, to obtain additional financing or refinancing, as may
be required, and, ultimately, to attain profitability. In
January 1999, the Company sold substantially all of its assets
and will cease operations (see Note 10).
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company designs and distributes men's and women's fragrances
and related products to department and specialty stores,
distributors, exporters, and the U.S. Military. A majority
of the fragrances sold are licensed from other companies.
Licensing fees are paid based on minimum requirements and level
of sales. Licensed products represented 53% and 58% of sales for
the years ended December 31, 1998 and 1997, respectively (see
Note 9). Unsecured credit is granted to substantially all
customers.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in the financial statements and in the accompanying
notes. The more significant areas, requiring the use of
management estimates, relate to allowances for uncollectible
receivables, merchandise returns, excess and discontinued
inventory reserves, co-op advertising allowances, and future cash
flows associated with assets. Actual results could differ from
those estimates.
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
CASH EQUIVALENTS
The Company considers all highly liquid investments, with a
maturity of three months or less when purchased, to be cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
REVENUE RECOGNITION
Sales are recognized when products are shipped, except for
consignment sales, which are recognized upon receipt of payment.
The Company also establishes liabilities for estimated
returns, allowances and sales commissions at the time of
shipment.
PROMOTIONAL MERCHANDISE
Promotional merchandise is valued at cost and charged to expense
at the time the merchandise is shipped to the Company's
customers.
DEPRECIATION AND AMORTIZATION
Depreciation of plant and equipment is computed using the
straight-line and various accelerated methods at rates adequate
to depreciate the cost of the applicable assets over their
expected useful lives. Leasehold improvements are amortized
using the straight-line method over the lesser of the term of the
lease or the estimated useful lives of the related improvements.
Estimated useful lives are as follows:
Machinery and equipment 3 - 7 years
Leasehold improvements 2 - 5 years
Furniture and fixtures 5 - 7 years
ADVERTISING
Advertising costs are expensed as incurred, and were
approximately $8,391,000 and $16,639,000 in 1998 and 1997,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are for company-sponsored
projects and are expensed as incurred.
INCOME TAXES
The Company utilizes the asset and liability approach to
accounting for income taxes, as provided by Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income tax assets and liabilities arise from
differences between the tax basis of an asset or liability and
its reported amount in the financial statements. Deferred tax
balances are determined by using tax rates expected to be in
effect when the taxes will actually be paid or the refunds
received.
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
COVENANTS NOT TO COMPETE
The covenants not to compete reflect agreements made regarding
confidentiality and restriction of competitive activity, and are
being amortized by the straight-line method over the five-year
period of the agreements. Amortization expense was $98,472 and
$198,472 for the years ended December 31, 1998 and 1997,
respectively. The covenants were fully amortized as of
December 31, 1998, due to the events that occurred in 1999 (see
Note 10).
DEFERRED FINANCING COSTS
Deferred financing costs consist of costs incurred in connection
with the Company's credit agreements (see Note 7) and the senior
subordinated notes payable, and are amortized on a straight-line
basis over the terms of the debt. Amortization expense related
to these costs was $1,115,469 and $261,707 for the years ended
December 31, 1998 and 1997, respectively. The amortization was
accelerated and was fully amortized in 1998 due to the Company
ceasing operations in 1999.
GOODWILL
Goodwill reflects the excess of cost over net tangible and
intangible assets of acquired businesses and is amortized by the
straight-line method over a period of five years. Periodically
the Company reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the
ability to recover the balance of goodwill from expected future
operating cash flows on a nondiscounted basis. Goodwill was
impaired in the amount of $894,000 at December 31, 1997 and was
included in amortization expense in 1997. Amortization expense
related to goodwill was $706,031 and $1,600,519 for the years
ended December 31, 1998 and 1997, respectively.
DEBT DISCOUNTS
The senior subordinated notes payable have been reduced by
discount amounts of $2,713,851 and $3,306,581 at December 31,
1998 and 1997, respectively. These discounts reflect the
difference between the proceeds received from such financing and
the face amount of debt instruments. Such discounts are
amortized using the interest method over the terms of the related
debt.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The Company records
impairment losses on long-lived assets used in operations or of
which there is expected disposal when events and circumstances
indicate that the cash flows, expected to be derived from those
assets, are less than the carrying amounts of those assets.
Goodwill was impaired in 1997 (see above) and plant and equipment
was impaired in 1998 (see Note 4).
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation," the Company has
elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations in accounting for its stock-based awards
granted to employees. Under APB 25, no compensation expense is
recognized at the time of option grant if the exercise price
of the Company's employee stock option is fixed and equals or
exceeds the fair market value of the underlying common stock on
the date of grant, and if the number of shares to be issued,
pursuant to the exercise of such option, are known and are fixed
at the grant date. (See also Note 7, Stockholders' Deficiency.)
CONCENTRATION OF CASH BALANCES
Periodically, the Company maintains cash balances in excess of
the $100,000 insured by the Federal Deposit Insurance Corporation
(FDIC).
Note 3 - INVENTORIES
Inventories consist of the following at December 31,:
1998 1997
----------- -----------
Raw materials and work
in progress $ 4,175,043 $ 8,994,113
Finished products 2,337,725 2,562,023
----------- -----------
$ 6,512,768 $11,556,136
=========== ===========
Note 4 - PLANT AND EQUIPMENT
Plant and equipment is valued at cost and consist of the
following at December 31,:
1998 1997
----------- -----------
Machinery and equipment $ 2,145,045 $ 1,479,201
Leasehold improvements 428,040 410,813
Furniture and fixtures 182,705 176,439
----------- -----------
2,755,790 2,066,453
Less
accumulated depreciation
and amortization 2,327,025 1,089,770
----------- -----------
$ 428,765 $ 976,683
=========== ===========
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 4 - PLANT AND EQUIPMENT - (continued)
Due to the sale of assets in 1999 (see Note 10), there was
impairment to plant and equipment in 1998 as follows:
Machinery and equipment $ 292,629
Leasehold improvements 122,722
Furniture and fixtures 21,808
-----------
Total impairment loss $ 437,159
===========
The impairment loss was included in depreciation expense and
accumulated depreciation for 1998.
Note 5 - LONG-TERM DEBT
Long-term debt consists of the following at December 31,:
1998 1997
Line of credit
(Senior credit agreement) $ 4,764,851 $ 10,650,000
Term loan, payable in semi-annual
installments beginning
November 2000 (Senior credit
agreement) 30,725,581 30,814,778
Senior subordinated notes payable,
("Electra Notes") due in equal
installments in December 2001 and
2002 8,000,000 8,000,000
Senior subordinated notes payable
("New Notes") due in equal
installments in December 2001 and
June 2002 8,400,000 8,400,000
------------- -------------
51,890,432 57,864,778
------------- -------------
Less:
Unamortized debt discount (2,713,851) (3,306,581)
Current portion (49,176,581) (54,558,197)
------------- -------------
$ - $ -
============= =============
RESTRUCTURING
On June 10, 1997, the Company, its stockholders, and its
lenders restructured the Company's capital structure and
amended certain provisions of its debt agreements (the
"Restructuring"). Specifically, the Company issued to its
principal stockholders and others 10% senior subordinated notes
in the principal amount of $8.4 million (the "New Notes"),
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 5 - LONG-TERM DEBT - (continued)
RESTRUCTURING - (continued)
together with warrants exercisable at a price of $.01 per
share, which would represent 80% of the Company's common stock
(on a fully diluted basis) in exchange for aggregate cash
proceeds of $6 million. In addition, the holders of the
Company's Preferred Stock, Series A and Series B, exchanged all
of their shares of Preferred Stock; the former stockholders
exchanged their $4.0 million subordinated notes for, (a) shares
of common stock which, together with their existing holdings of
common stock, represent 15% of the fully diluted common shares
of the Company and, (b) shares of a New Series A Preferred
Stock with dividends paid "in kind" at a rate of 8% annually
and an aggregate liquidation preference of $3.9 million.
NEW NOTES
The New Notes bear interest at a rate of 10% except if an event
of default exists, as defined in the agreement, whereby the
interest rate is 16% from issuance through June 30, 2002.
Interest payments are due semi-annually on March 15 and
September 15 of each year, with the September 15, 1997 and 1998
payments to be paid "in kind" (all interest payments
subsequent to March 15, 1999 will be paid in cash). The
Company may, at its option, redeem all or part of the New Notes
at any time without penalty or a redemption premium.
Additionally, the New Notes must be redeemed upon either, (a)
the occurrence of an initial public offering (as defined) or,
(b) sale of substantially all of the outstanding common stock
or assets of the Company to a third party. The New Notes place
certain restrictions upon the Company and require the Company
to maintain certain financial ratios which limits the amount
of additional financing and payment of dividends and to meet
certain other financial conditions similar to those contained
in the 1996 Credit Agreement and Electra Notes as described
below. During 1998 and 1997, the Company was not in compliance
with certain of the financial ratios and certain other
requirements of the New Notes. Accordingly, this amount
is reflected as a current liability.
1996 SENIOR CREDIT AGREEMENT
In June 1996, and amended as part of the restructuring
agreement dated June 10, 1997, the Company entered into a
$50,000,000 Senior Credit Agreement that provided a $31,000,000
term loan and a $19,000,000 revolving line of credit, both of
which mature in May 2004 (the "1996 Senior Credit Agreement").
The term loan and the revolving line of credit bear interest
at the lender's term and revolving Eurodollar rates,
respectively, and are payable monthly. The lender's term rate
was 8.797% and 8.925% and the Eurodollar rate was 8.547% and
8.688% at December 31, 1998 and 1997, respectively. In
addition, the Company paid a commitment fee of .375% on the
unused portion of the revolving line of credit. Borrowings
under the 1996 Senior Credit Agreement are collateralized by
substantially all of the Company's assets as well as a pledge
of all of the shares of common stock held by each of the
Company's stockholders.
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 5 - LONG-TERM DEBT - (continued)
1996 SENIOR CREDIT AGREEMENT - (continued)
The Company is required to make semi-annual repayments of
$3,875,000 on the term loan, commencing November 2000. The
1996 Senior Credit Agreement also requires the Company
to make additional principal repayments on the term loan in the
event that cash flow, as defined in the 1996 Senior Credit
Agreement, exceeds specified amounts. The Company was
not required to make these additional principal repayments for
1998 or 1997. The Company is also required to make additional
quarterly principal repayments on the term loan in amounts
equal to the principal payments received on the equity
participation loans described in Note 7.
At December 31, 1998 and 1997, the Company was not in
compliance with certain financial ratios and certain other
requirements of the 1996 Senior Credit Agreement. Accordingly,
these amounts are reflected as a current liability.
ELECTRA NOTES
As amended and restated, the senior subordinated notes payable
to Electra Investment Trust, P.L.C. (the "Electra Notes") bear
interest at a rate of 10% from issuance through March 14,
1999, increasing to 11.5%, 13%, and 14.5% effective 2000, 2001,
and 2002, respectively. Accordingly, interest expense has been
computed at an effective rate of 11.9%. The Electra Notes are
subordinated to the Company's borrowings under the 1996 Senior
Credit Agreement.
Interest payments, based upon the stated rates in the Electra
Notes, are due semi-annually on March 15 and on September 15 of
each year, with the September 15, 1997 and 1998 payments to be
paid "in kind" (all interest payments subsequent to March 15,
1999 will be paid in cash). The Company may, at its option,
redeem all or part of the Electra Notes at any time without a
penalty or a redemption premium. Additionally, the Electra
Notes must be redeemed upon, (A) the occurrence of an initial
public offering (as defined) or, (B) the sale of substantially
all of the outstanding common stock or assets of the Company to
a third party. The Electra Notes also place certain
restrictions upon the Company, requiring the Company to
maintain certain financial ratios which limits the amounts of
additional financing and payments of dividends, and to meet
certain other financial conditions similar to those contained
in the 1996 Credit Agreement as described above. During 1998
and 1997, the Company was not in compliance with certain
financial ratios and certain other requirements of the Electra
Notes. Accordingly, this amount is reflected as a current
liability.
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 6 - INCOME TAXES
The provision for income taxes (benefit) consists of the
following:
Year Ended
December 31,
1998 1997
------------- -------------
Current
Federal $ - $ (2,267,300)
State - (71,700)
Deferred
Federal - 1,893,500
State - 521,500
------------- -------------
Total $ - $ 76,000
============= =============
For 1997, the effective tax rate is lower than the statutory
federal tax rate of 34%, principally resulting from the
nondeductibility of goodwill amortization, write-down of
assets, other expenses and valuation allowance.
Deferred tax attributes resulting from differences between
financial accounting amounts and tax basis of assets and
liabilities are as follows:
December 31,
1998 1997
------------- -------------
Current assets and liabilities
Allowance for doubtful
accounts $ 940,000 $ 839,000
Allowance for inventory
obsolescence 2,189,000 1,982,000
Sales returns and allowances 1,454,000 2,420,000
Inventory valuation (IRC 263A) 412,000 796,000
Plant and equipment 308,000 -
Deferred financing costs 377,000 -
Net operating loss
carryforward 8,997,000 4,410,000
Accrued expenses and other 486,000 676,000
------------- -------------
15,163,000 11,123,000
Valuation allowance (15,163,000) (11,123,000)
------------- -------------
Net deferred taxes $ - $ -
============= =============
</TABLE
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 6 - INCOME TAXES - (continued)
The Company has federal and state net operating loss
carryforwards of approximately $23,000,000 and $30,000,000,
respectively, at December 31, 1998 which begin to expire in
2012 and 2004, respectively. Utilization of net operating loss
carryforwards may be significantly limited, based upon
ownership changes of the Company's common and preferred
stock (see Note 9).
The Company has a cumulative pretax loss for financial
reporting purposes. Recognition of deferred tax assets will
require generation of future taxable income. There can be no
assurance that the Company will generate earnings in future
years. Therefore, the Company established a valuation
allowance on deferred tax assets of approximately $15,163,000
and $11,123,000 as of December 31, 1998 and 1997, respectively.
Note 7 - STOCKHOLDERS' DEFICIENCY
COMMON AND PREFERRED STOCKS
In June 1997, the Company's stockholders approved a plan of
recapitalization and restatement of the Company's certificate
of incorporation, authorizing 41,000 shares of New Series A
Preferred Stock and 12,000,000 shares of common stock.
Management stockholders have agreed to be governed by the terms
of a management stockholders' agreement, which provides the
Company a right of first refusal with respect to any bona fide
offers received by such stockholders to sell their shares of
common stock. Such shares vested one-third, each, on
December 21, 1995, 1996, and 1997. In the event any such
stockholder ceases full-time employment, the Company has the
right, but not the obligation, to repurchase any unvested
shares at a price equal to the lesser of, (A) the book value
or, (B) the price paid by such stockholder, and any vested
shares at a price equal to book value, in each case subject to
certain adjustments after the occurrence of an initial public
offering (as defined).
The New Series A Preferred Stock has a $100 per share
liquidation preference and is senior to the Company's common
stock with respect to dividend and liquidation preferences.
The New Series A Preferred Stock is not convertible to any
other class of stock of the Company and has no voting rights.
Dividends at an annual rate of $8 per share (8% of the stated
par value) on each of the New Series A Preferred Stocks are
cumulative from the date of issuance and are payable annually
in arrears on December 20, as declared by the Company's board
of directors. At December 31, 1998 and 1997, accumulated
dividends in arrears for the New Series A Preferred Stock
totaled $623,056 and $311,528, respectively.
EQUITY PARTICIPATION LOANS
Certain key employees and other investors borrowed funds from
the Company to finance their purchases of common stock. Such
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 7 - STOCKHOLDERS' DEFICIENCY - (continued)
EQUITY PARTICIPATION LOANS - (continued)
loans, which aggregated $377,359 and $441,449 at December 31,
1998 and 1997, respectively, bear interest at 9% and are due in
equal quarterly principal payments aggregating approximately
$36,000, plus interest, through March 2001. These loans are
collateralized by the shares of common stock held by these
stockholders, and such stockholders have also pledged these
shares as collateral for the Company's borrowings under the
1996 Senior Credit Agreement described in Note 5.
WARRANTS
The Company issued to the holders of the Electra Notes and the
New Notes warrants to purchase 762,500 shares and 12,200,000
shares, respectively, of the Company's common stock at $.01 per
share, subject to certain adjustments for dilution. The
warrants are exercisable through June 2002. The warrants have
been pledged as additional collateral for the 1996 Senior
Credit Agreement. During 1998, 800,000 warrants were
exercised.
STOCK OPTIONS
The Company has a stock option plan (the "Plan"), which
provides for the granting of stock options to purchase up to an
aggregate of 80,000 shares of common stock to select
management employees of the Company at an exercise price of
$7.1683 per share.
In connection with certain employment, and other agreements,
the Company granted options during 1994 to purchase an
aggregate of 45,000 shares of common stock at an exercise price
of $7.1683 per share, 35,000 of which are currently
exercisable. The remaining options vested on December 31,
1997.
As of December 31, 1998 and 1997, 512,305 shares of common
stock have been reserved for issuance, in connection with the
warrants and options described above.
Note 8 - RELATED PARTY TRANSACTIONS
The Company entered into long-term leases for two facilities
rented from the stockholders. Under the terms of such leases,
the office-warehouse facility is rented at an annual amount
of approximately $300,000 and the second facility, another
warehouse, is rented at an annual amount of approximately
$208,000. Both lease terms expire on December 31, 1999.
Note 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases, including
related party, which expire through 2000. At December 31,
1998, minimum lease commitments, under all operating
leases with initial or remaining lease terms of more than one
year, are as follows:
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 9 - COMMITMENTS AND CONTINGENCIES - (continued)
OPERATING LEASES - (continued)
1999 $ 895,000
2000 222,000
-----------
$ 1,117,000
===========
Rental expense under operating leases approximated $689,000
and $1,029,000 in 1998 and 1997, respectively.
TRADEMARK AGREEMENTS
The Company has entered into exclusive trademark license
agreements with four separate companies. These agreements
generally entitle the Company to utilize the other companies'
trademarks solely in connection with the manufacture,
advertising, merchandising, promotion, sale and distribution
of specific agreed-upon product lines. These agreements,
three of which expire December 31, 2000 and one of which
expires December 31, 2002, require the Company to pay
royalties based upon a percentage of sales revenues of such
product lines as defined in the agreements. These agreements
require guaranteed minimum royalty payments ranging from
$1,137,000 for 1998 to $1,350,000 for 2000, and $200,000
thereafter. The Company may renew two of these agreements for
up to a five year term and a four year term, respectively, in
the event that certain provisions of these agreements have
been satisfied. Certain clauses provide for termination of
the agreement if certain minimum sales volumes have not been
achieved. The Company is also required to make minimum annual
advertising and promotional expenditures to support sales of
the licensed products, principally defined as percentage of
sales.
Trademark expenses for the years ended December 31, 1998
1997 are included in selling, general and administrative
expenses.
LETTERS OF CREDIT
As of December 31, 1997, the Company had outstanding letters
of credit aggregating approximately $885,000. At December 31,
1998, there were no letters of credit outstanding.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its president,
providing for minimum combined annual compensation ranging
from approximately $324,000 for calendar year 1997 to $363,104
for calendar year 2000. Additionally, such employment
agreements provide for various incentive compensation payments
based upon the Company's annual pretax earnings, as defined in
such agreements, for 1997 through 2000. There were no
incentive compensation payments applicable to 1998 or 1997.
PAUL SEBASTIAN, INC.
Notes to Financial Statements
Note 9 - COMMITMENTS AND CONTINGENCIES - (continued)
ARRANGEMENTS FOR CONSULTING AND ADVISORY SERVICES
PTJ-Rosecliff, Inc. ("Rosecliff") and the Company are parties
to an agreement, pursuant to which Rosecliff provides
management, consulting, and financial services to the Company.
Electra Investment Trust, P.L.C. ("Electra") and the Company
are parties to an agreement, pursuant to which Electra
provides financial advisory services to the Company. Rosecliff
and Electra are stockholders of the Company. In consideration
of such services, the Company, during 1997, accrued an
aggregate of $400,000.
Effective May 1998, Rosecliff and Electra transferred their
stock in the Company to Anoka Realty Corporation. At
December 31, 1998, there were no accruals for advisory services
for Electra or Rosecliff.
SAVINGS PLAN
The Company established a defined contribution plan for all
employees. The Plan allows employees to contribute portions of
their pretax incomes in accordance with certain guidelines.
The Company, at its discretion, may make contributions to the
Plan. No such contributions were made in 1998 or 1997.
The Plan has not received a determination letter from the
Internal Revenue Service ("IRS").
It has been determined that certain employees of the Company
may have met the Plan's eligibility requirements but may not
have been afforded the opportunity to participate therein.
This operational defect may affect the qualified status of the
Plan. The Company is in the process of preparing an SVP
application under the Revenue Procedure 98-22 for filing with
the Internal Revenue Service and shall take all corrective
measures necessary to maintain the Plan's qualification.
CONCENTRATION OF CREDIT RISK
For the year ended December 31, 1998 two entities accounted for
approximately 23.2% and 19.0% of net sales and 32.0% and 20.8%
of total accounts receivable, respectively. For the year ended
December 31, 1997, two entities accounted for approximately
23.2% and 20.5% of net sales, and 18.9% and 15.5% of total
accounts receivable, respectively. The Company performs
ongoing credit evaluations of its customers and, generally,
does not require collateral.
The Company is a defendant in a few lawsuits for breach of
contract in the normal course of business. Management believes
that these matters will be resolved without a material effect
on the Company's financial position or results of operations.
Note 10 - SUBSEQUENT EVENTS
On January 21, 1999, the Company sold substantially all of its
assets for approximately $9,300,000 consisting of cash of
$8,800,000 and a subordinated debenture of $500,000. The
debenture is non-interest bearing and is due July 2000. The
Company will cease operations during 1999.
(b) Pro Forma Financial Information
PRO FORMA FINANCIAL INFORMATION
On January 21, 1999, French Fragrances, Inc. (the "Company") completed
the acquisition (the "PSI Acquisition") of certain assets of Paul Sebastian,
Inc. ("PSI"), which will be accounted for using the purchase method of
accounting. The following Unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended January 31, 1998 and nine months ended
October 31, 1998 is pro forma for, and the Unaudited Pro Forma Consolidated
Balance Sheet as of October 31, 1998 is adjusted to give effect to, the PSI
Acquisition, including the payment of the purchase price and the related
issuance of additional indebtedness by the Company, but excluding any
reduction in PSI's operating expenses, as if such acquisition had occurred as
of February 1, 1997 and 1998, respectively, with respect to the Unaudited Pro
Forma Condensed Consolidated Statements of Income, and as of October 31, 1998,
with respect to the Unaudited Pro Forma Condensed Consolidated Balance Sheet.
In addition, on March 31, 1998, the Company completed the acquisition
(the "JPF Acquisition") of certain assets of J.P. Fragrances, Inc. ("JPF"),
which was accounted for using the purchase method of accounting. The
following Unaudited Pro Forma Condensed Consolidated Statement of Income for
the year ended January 31, 1998 and the nine months ended October 31, 1998 is
pro forma for 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 and 1998, respectively.
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 Financial Information do not purport to
represent what the Company's consolidated results of operations or
consolidated financial position would have been had the PSI Acquisition and
the JPF Acquisition actually occurred at the beginning of the relevant
periods. In addition, the Unaudited Pro Forma Financial Information 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 Financial Information 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 and Quarterly Report on
Form 10-Q for the quarter ended October 31, 1998.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
Historical Historical
Company PSI
As of As of
October 31, December 31,
1998 1998 Adjustments (1) Pro Forma
-------------------------- ----------------------------
Assets
Current assets
Cash and cash equivalents $ 4,319 $ 1,431 $ (5,750) (c) $ -
Accounts receivable, net 107,696 11,761 (11,761) (e) 107,696
Inventories 153,481 8,190 (94) (e) 161,577
Advances on inventory purchases 6,801 - - 6,801
Prepaid expenses and other
current assets 4,417 421 (421) (a) 4,417
-------- --------- --------- --------
Total current assets. 276,714 21,803 (18,026) 280,491
Property and equipment, net 18,835 429 (18) (a) 19,246
Exclusive brand licenses, net 40,317 - 10,256 (b)(f) 50,573
Deferred financing costs 4,629 - - 4,629
Purchased contract rights and
intangibles - 677 (677) (a) -
Other assets 10,978 89 (89) (a) 10,978
-------- --------- --------- --------
Total assets $351,473 $ 22,998 $ (8,554) $365,917
======== ========= ========= ========
Liabilities and Shareholders'
Equity
Current liabilities
Short-term debt $ 35,595 $ - $ 4,436 (c) $ 40,031
Accounts payable - trade 51,585 5,880 (5,880) (a) 51,585
Other payables and accrued
expenses 16,405 19,148 (9,640) (a)(f) 25,913
Current portion of long-term
liabilities 3,424 49,177 (49,177) (a) 3,424
-------- --------- --------- --------
Total current liabilities 107,009 74,205 (60,261) 120,953
Long-term obligations
Senior notes and long-term debt 157,503 - - 157,503
Subordinated debentures, net 8,316 - 500 (c) 8,816
Convertible subordinated
debentures 4,779 - - 4,779
Mortgage note 5,576 - - 5,576
-------- --------- --------- --------
Total liabilities 283,183 - (59,761) 297,627
Shareholders' equity
Convertible, redeemable
preferred stock 8 - - 8
Preferred stock - 3,894 (3,894) (d) -
Common stock 138 8,069 (8,069) (d) 138
Additional paid-in capital 31,633 - - 31,633
Equity participation loans - (377) 377 (d) -
Retained earnings
(accumulated deficit) 36,511 (62,793) 62,793 (d) 36,511
-------- --------- --------- --------
Total shareholders' equity
(deficiency) 68,290 (51,207) 51,207 68,290
-------- --------- --------- --------
Total Liabilities and
Shareholders' Equity $351,473 $ 22,998 $ (8,554) $365,917
======== ========= ========= ========
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1998
(In Thousands)
(1) Adjustments to reflect the PSI Acquisition
(a) Represents the assets of PSI not acquired or the liabilities not
assumed.
(b) Intangibles consist of licenses and trademarks to manufacture
fragrance products to be amortized over 5 years.
(c) Represents the financing of the purchase price (as if the
acquisition had been consummated on October 31, 1998) through the
use of cash and debt. The Company used available cash from
operations and issued a debenture of $500 to finance the purchase
price. The debenture is being held as security for certain
indemnification obligations of PSI under the Asset Purchase
Agreement.
(d) Represents the elimination of the common stock, additional paid-in
capital and retained earnings of PSI.
(e) Adjustments to reflect the fair market value of inventory and
accounts receivable purchased from PSI.
(f) Includes additional reserves established by the Company in
connection with the PSI Acquisition.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998
(In thousands, except per share data)
Historical Historical Historical
Company JPF PSI
--------------------------------------------------------
Fiscal Year Ended
January 31, December 31, December 31,
1998 1997 1997
--------------------------------------------------------
Net sales $ 215,487 $ 89,135 $ 94,890
Cost of sales 146,509 76,501 32,645
--------- -------- ---------
Gross profit 68,978 12,634 62,245
Operating expenses 37,521 8,588 86,614
--------- -------- ---------
Income (loss) from
operations 31,457 4,046 (24,369)
Interest income 423 - 77
Interest expense 12,815 1,797 5,453
Other income 563 - -
Earnings of
unconsolidated affiliate 135 - -
--------- -------- ---------
Income (loss) before
income taxes 19,763 2,249 (29,745)
Income taxes (benefit) 7,422 23 76
--------- -------- ---------
Net income (loss) $ 12,341 $ 2,226 $(29,821)
========= ======== =========
Basic earnings per share 0.92
Diluted earnings per share 0.76
Basic Shares 13,394
Diluted Shares 16,492
See Notes to Unaudited Pro Forma Condensed Consolidates Statement of Income
(RESTUBBED TABLE CONTINUED FROM ABOVE)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998
(In thousands, except per share data)
Adjustments Pro Forma
---------------- ---------
Net sales $ (304) (a) $399,208
Cost of sales (877) (a)(b) 254,778
--------- ---------
Gross profit 573 144,430
Operating expenses (21) (c) 132,702
--------- ---------
Income from operations 594 11,728
Interest income - 500
Interest expense 755 (d) 20,820
Other expenses - 563
Earnings of unconsolidated affiliate - 135
--------- ---------
Income (loss) before income taxes (161) (7,894)
Income taxes (benefit) (10,489) (e)(f) (2,968)
--------- ---------
Net income (loss) $ 10,328 $ (4,926)
========= =========
Basic earnings per share (0.37)
Diluted earnings per share (0.28)
Basic Shares 13,394
Diluted Shares 16,492
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(In Thousands)
Adjustments to reflect the JPF Acquisition and the PSI 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 of JPF 1,497
Reduction in operating expenses based on asset
purchase agreement with JPF (4,417)
Additional amortization relating to licenses
and trademarks of PSI 2,051
Transition services fee paid to JPF to ensure
servicing of customer accounts 275
--------
$ (21)
Although no reduction in PSI's operating expenses were made, the
Company expects to derive a reduction in operating expenses from the
PSI Acquisition relative to PSI's operating expenses.
(d) Interest expense includes (i) $482 incurred on additional
Indebtedness of $5,354 and imputed interest of $228 on the $3,000
non-interest bearing debenture issued in connection with the JPF
Acquisition at the current interest rate of the Company's credit
facility of 9.0%, and (ii) imputed interest of $45 on the $500
non-interest bearing debenture issued in connection with the PSI
Acquisition 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. Because the combined entity will be
operated as a C corporation, an adjustment of $1,547 to increase the
taxes to the rate that would have been incurred if JPF was a C
corporation, which was then 37.6% after giving effect to the
operating expense adjustments included above.
(f) To record a tax benefit of $12,036 for the losses incurred by PSI at
the Company's then current income tax rate of 37.6%.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
(In thousands, except per share data)
Historical Historical Historical
Company JPF PSI
Nine Months Two Months Nine Months
Ended Ended Ended
October 31, March 31, September 30,
1998 1998 1998
--------------------------------------------------------
Net sales $ 220,952 $ 13,595 $ 40,857
Cost of sales 155,612 12,284 9,771
--------- --------- ---------
Gross profit 65,340 1,311 31,086
Operating expenses 36,883 1,163 37,753
--------- --------- ---------
Income from operations 28,457 148 (6,667)
Interest income 80 - 63
Interest expense 13,691 253 4,630
Other expenses 387 121
--------- --------- ---------
Income before income taxes 14,459 (105) (11,355)
Income taxes (benefit) 5,643 - -
--------- --------- ---------
Net income $ 8,816 $ (105) $(11,355)
========= ========= =========
Basic earnings per share 0.64
Diluted earnings per share 0.54
Basic Shares 13,762
Diluted Shares 17,285
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
(RESTUBBED TABLE CONTINUED FROM ABOVE)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
(In thousands, except per share data)
Adjustments Pro Forma
---------------- ---------
Net sales - $275,404
Cost of sales - 177,667
-------- --------
Gross profit - 97,737
Operating expenses $ 1,788 (a) 77,587
-------- --------
Income from operations (1,788) 20,150
Interest income - 143
Interest expense 137 (b) 18,711
Other expenses - 508
-------- --------
Income before income taxes (1,925) 1,074
Income taxes (benefit) (5,224) (c)(d) 419
-------- --------
Net income $ 3,299 $ 655
======== ========
Basic earnings per share 0.05
Diluted earnings per share 0.05
Basic Shares 13,762
Diluted Shares 17,285
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
(In Thousands)
Adjustments to reflect the JPF Acquisition and the PSI Acquisition:
(a) Operating expense adjustments include:
Additional amortization relating to
contract rights, non-compete & goodwill of JPF $ 250
Additional amortization relating to licenses and
trademarks of PSI 1,538
-------
$ 1,788
Although no reduction in PSI's operating expenses were made, the
Company expects to derive a reduction in operating expenses from the
PSI Acquisition relative to PSI's operating expenses.
(b) Interest expense includes (i) $80 incurred on additional
indebtedness of $5,354 and imputed interest of $23 on the $3,000
non-interest bearing debenture issued in connection with the JPF
Acquisition at the current interest rate of the Company's credit
facility of 9.0%, and (ii) imputed interest of $34 on the $500
non-interest bearing debenture issued in connection with the PSI
Acquisition at the current interest rate of the Company's credit
facility of 9.0%.
(c) JPF operated as an S corporation, which allowed it to pass taxable
income through to its shareholders. Because the combined entity
will be operated as a C corporation, an adjustment of $183 to
decrease the taxes to the rate that would have been incurred if JPF
was a C corporation, which is currently 39% after giving effect to
the operating expense adjustments included above.
(d) To record a tax benefit of $5,041 for the losses incurred by PSI at
the Company's current income tax rate of 39%.
(c) Exhibits
2.1 Asset Purchase Agreement dated as of January 20, 1999, between the
Company and PSI (incorporated herein by reference to Exhibit 2.1 filed
as part of the Company's Form 8-K dated January 21, 1999 (Commission
File No. 1-6370)).
2.2 Asset Purchase Agreement dated as of February 25, 1998, among the
Company, JPF, Joseph A. Pappalardo and Gloria Pappalardo (incorporated
herein by reference to Exhibit 2.1 filed as part of the Company's Form
8-K dated March 31, 1998 (Commission File No. 1-6370)).
2.3 Amendment to Asset Purchase Agreement dated as of March 30, 1998, among
the Company, JPF, Joseph A. Pappalardo and Gloria Pappalardo
(incorporated herein by reference to Exhibit 2.2 filed as part of the
Company's Form 8-K dated March 31, 1998 (Commission File No. 1-6370)).
23.1 Consent of Amper, Politziner & Mattia P.A.
- --------------------
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 5, 1999. /s/ William J. Mueller
----------------------
William J. Mueller
Vice President and
Chief Financial Officer