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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 OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number 1-6370
FRENCH FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-0914138
(State of incorporation) (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 November 17, 2000
----- -----------------
Common stock, $.01 par value 13,279,015 shares
FRENCH FRAGRANCES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2000 and October 31, 2000 ................................3
Consolidated Statements of Income - Three and Nine Months
Ended October 31, 1999 and 2000.....................................................................4
Consolidated Statement of Shareholders' Equity - Nine months Ended
October 31, 2000....................................................................................5
Consolidated Statements of Cash Flows - Nine Months Ended
October 31, 1999 and 2000...........................................................................6
Notes to Consolidated Financial Statements..........................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................15
Signatures....................................................................................................17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 OCTOBER 31, 2000
---------------- ----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 22,144,314 $ 2,109,417
Accounts receivable, net 63,485,136 149,591,444
Inventories 127,022,405 125,986,130
Advances on inventory purchases 2,785,475 1,892,321
Prepaid expenses and other assets 9,882,321 9,057,649
--------------- ---------------
Total current assets 225,319,651 288,636,961
--------------- ---------------
Property and equipment, net 20,232,312 22,105,123
--------------- ---------------
Other assets:
Exclusive brand licenses and trademarks, net 49,043,292 44,174,068
Senior note offering costs, net 3,949,009 3,542,461
Deferred income taxes, net 3,337,409 3,337,409
Other intangibles and other assets 7,749,982 6,240,094
--------------- ---------------
Total other assets 64,079,692 57,294,032
--------------- ---------------
Total assets $ 309,631,655 $ 368,036,116
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 30,994,807
Accounts payable - trade 31,436,903 49,877,637
Other payables and accrued expenses 19,102,919 20,008,733
Current portion of long-term debt 1,775,027 1,145,545
--------------- ---------------
Total current liabilities 52,314,849 102,026,722
--------------- ---------------
Long-term debt, net 175,030,227 171,427,100
--------------- ---------------
Total liabilities 227,345,076 273,453,822
--------------- ---------------
Commitments and contingencies (See Notes 4 and 6)
Shareholders' equity:
Convertible, redeemable preferred stock, Series B, $.01 par value
(liquidation preference of $.01 per share); 350,000 shares authorized;
265,801 and 264,168 shares, respectively, issued
and outstanding 2,658 2,642
Convertible, redeemable preferred stock, Series C, $.01 par value
(liquidation preference of $.01 per share); 571,429 shares
authorized; 502,520 and 499,870 shares, respectively,
issued and outstanding 5,025 4,999
Common stock, $.01 par value, 50,000,000 shares authorized;
14,186,399 and 14,219,345 shares issued and outstanding,
respectively 141,864 142,193
Additional paid-in capital 32,780,530 33,179,308
Treasury stock (870,500 and 995,400 shares, respectively) (5,673,940) (6,613,040)
Retained earnings 55,030,442 67,866,192
--------------- ---------------
Total shareholders' equity 82,286,579 94,582,294
--------------- ---------------
Total liabilities and shareholders' equity $ 309,631,655 $ 368,036,116
=============== ===============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1999 2000 1999 2000
------------------------------------ -------------------------------------
Net sales $153,719,284 $163,427,548 $270,963,115 $296,045,613
Cost of sales 100,591,767 108,413,347 175,329,645 193,337,251
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Gross profit 53,127,517 55,014,201 95,633,470 102,708,362
Operating expenses:
Warehouse and shipping 6,425,285 8,640,460 13,177,988 19,270,876
Selling, general and administrative 21,160,290 17,640,757 41,237,436 39,677,883
Depreciation and amortization 2,797,021 2,950,973 8,291,233 8,857,961
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Total operating expenses 30,382,596 29,232,190 62,706,657 67,806,720
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Income from operations 22,744,921 25,782,011 32,926,813 34,901,642
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Other income (expense):
Interest expense, net (5,206,850) (5,252,736) (14,332,926) (14,718,226)
Other income (expense) (76,521) 12,405 (67,720) 875,036
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Other income (expense), net (5,283,371) (5,240,331) (14,400,646) (13,843,190)
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Income before income taxes 17,461,550 20,541,680 18,526,167 21,058,452
Provision for income taxes 6,818,852 8,019,255 7,234,623 8,222,702
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Net income $ 10,642,698 $ 12,522,425 $ 11,291,544 $ 12,835,750
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Earnings per common share:
Basic $0.77 $0.95 $0.82 $0.97
===== ===== ===== =====
Diluted $0.67 $0.83 $0.72 $0.85
===== ===== ===== =====
Weighted average number of common shares:
Basic 13,843,835 13,213,905 13,823,434 13,244,233
========== ========== ========== ==========
Diluted 15,979,532 15,212,207 15,755,846 15,133,473
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PREFERRED STOCK
------------------------------------
SERIES B SERIES C
------------------------------------
SHARES AMOUNT SHARES AMOUNT
Balance at January 31, 2000 265,801 $2,658 502,520 $5,025
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (1,633) (16) -- --
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (2,650) (26)
Issuance of Common Stock
upon exercise of stock
options -- -- -- --
Repurchase of Common Stock -- -- -- --
Tax benefit from exercise of
stock options -- -- -- --
Net income -- -- -- --
Balance at October 31, 2000 264,168 $2,642 499,870 $4,999
======= ====== ======= ======
(unaudited)
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
Table continued...
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN TREASURY RETAINED SHAREHOLDERS'
--------------------------------------------------------------------------
SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY
Balance at January 31, 2000 14,186,399 $141,864 $32,780,530 $(5,673,940) $55,030,442 $82,286,579
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock 11,628 116 38,271 -- -- 38,371
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock 2,650 26 13,912 -- -- 13,912
Issuance of Common Stock
upon exercise of stock
options 18,668 187 116,821 -- -- 117,008
Repurchase of Common Stock -- -- -- (939,100) -- (939,100)
Tax benefit from exercise of
stock options -- -- 229,774 -- -- 229,774
Net income -- -- -- -- 12,835,750 12,835,750
Balance at October 31, 2000 14,219,345 $142,193 $33,179,308 $(6,613,040) $67,866,192 $94,582,294
========== ======== =========== ============ =========== ===========
(unaudited)
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
1999 2000
-----------------------------
Cash Flows from Operating Activities:
Net income $ 11,291,544 $ 12,835,750
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 8,291,233 8,857,961
Amortization of senior note offering costs and note premium 428,925 298,241
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (93,575,141) (86,126,309)
Decrease in inventories 5,619,872 1,036,275
Decrease in advances on inventory purchases 3,954,616 893,152
(Increase) decrease in prepaid expenses and other assets (2,272,851) 823,295
Increase in accounts payable 24,285,967 18,440,734
Increase in other payables and accrued expenses 6,621,633 999,272
------------ ------------
Net cash used in operating activities (35,354,202) (41,941,629)
------------ ------------
Cash Flows from Investing Activities:
Additions to property and equipment, net of disposals (3,039,355) (4,213,965)
------------ ------------
Net cash used in investing activities (3,039,355) (4,213,965)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from the exercise of employee stock options 258,456 169,167
Payments to retire convertible subordinated debentures -- (2,184,000)
Proceeds from the conversion of preferred stock 182,539 124
Payments on term loans (1,615,362) (317,178)
Net proceeds from short-term debt 38,639,552 30,994,807
Payment of J.P. Fragrances debenture and other indebtedness -- (1,480,000)
Payments on facility mortgage note (119,245) (123,123)
Repurchase of Common Stock (363,200) (939,100)
------------ ------------
Net cash provided by financing activities 36,982,740 26,120,697
------------ ------------
Net Decrease in Cash and Cash Equivalents (1,410,817) (20,034,897)
Cash and Cash Equivalents at Beginning of Period 6,111,603 22,144,314
------------ ------------
Cash and Cash Equivalents at End of Period $ 4,700,786 $ 2,109,417
============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 8,496,074 $ 10,147,428
============ ============
Income taxes paid during the period $ 5,887,633 $ 12,898,152
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SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
French Fragrances, Inc., doing business as FFI Fragrances (the
"Company"), is a manufacturer and marketer of prestige designer fragrances and
related skin treatment and cosmetic products, primarily to retailers in the
United States.
The accompanying unaudited consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission") for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statement presentation and should be
read in conjunction with the financial statements and related footnotes included
in the Company's Annual Report on Form 10-K for the year ended January 31, 2000,
filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 2000 is
audited. The other consolidated financial statements are unaudited, but in the
opinion of management contain all adjustments necessary to present fairly the
consolidated balance sheet of the Company as of October 31, 2000, the
consolidated statements of income of the Company for the three and nine months
ended October 31, 1999 and 2000, the consolidated statement of shareholders'
equity for the nine months ended October 31, 2000, and the consolidated
statements of cash flow for the nine months ended October 31, 1999 and 2000.
Operating results for the three and nine months ended October 31, 2000 are not
necessarily indicative of the results for the full fiscal year ended January 31,
2001.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income
available to common shareholders by the weighted average shares of outstanding
common stock. The calculation of diluted earnings per share is similar to basic
earnings per share except that the denominator includes dilutive potential
common stock such as stock options, warrants and convertible securities. In
addition, for the diluted earnings per share calculation, the interest incurred
on the convertible securities, net of tax, is added back to net income. Such
amounts were $54,657 and $29,676 for the three months ended October 31, 1999 and
2000, respectively, and $109,313 and $80,702 for the nine months ended October
31, 1999 and 2000, respectively.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
weighted-average method. The components of inventory at January 31, 2000 and
October 31, 2000 were as follows:
JANUARY 31, 2000 OCTOBER 31, 2000
---------------- ----------------
Finished $103,548,955 $104,278,548
Work in progress 6,727,835 4,508,785
Raw materials 16,745,615 17,198,797
---------------- ----------------
$127,022,405 $125,986,130
================ ================
FRENCH FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. SHORT-TERM DEBT
The Company's credit facility (the "Credit Facility") with Fleet
National Bank ("Fleet") provides for borrowings on a revolving basis of up to
$50 million, with a $10 million sublimit for letters of credit. On October 12,
2000, the Credit Facility was amended to provide for a seasonal increase in the
borrowing limit to $65 million through December 31, 2000. The Credit Facility
matures in May 2002. Borrowings under the Credit Facility are limited to
eligible accounts receivable and inventories and are secured by a first priority
lien on all of the Company's accounts receivable and inventory. The Company's
obligations under the Credit Facility rank pari passu in right of payment with
the Company's 10 3/8% Senior Notes due 2007. The Credit Facility contains
several covenants, the more significant of which are that the Company maintain a
minimum level of equity and meet certain debt-to-equity, interest coverage and
liquidity ratios. The Credit Facility also includes a prohibition on the payment
of dividends and other distributions to shareholders and restrictions on the
incurrence of additional non-trade indebtedness; provided, however, that the
Company is permitted to repurchase up to $10 million of its common stock, $.01
par value per share ("Common Stock"), and to incur certain acquisition
indebtedness. At October 31, 2000, the outstanding balance under the Credit
Facility was $31.0 million and there were $1.0 million of outstanding letters of
credit.
NOTE 5. LONG-TERM DEBT
The Company's long-term debt at January 31, 2000 and October 31, 2000
consisted of the following:
Description January 31, 2000 October 31, 2000
- ----------- ---------------- ----------------
10 3/8% Senior Notes due May 2007, net $157,245,157 $157,083,496
8.5% Subordinated Debenture due May 2004, net 6,479,966 6,479,966
7.5% Convertible Subordinated Debentures due June 2006 4,778,643 2,594,643
J.P. Fragrances Debenture due May 2001, net 1,946,646 1,000,000
8.84% Miami Lakes Facility Mortgage Note due July 2004 5,537,663 5,414,540
Other Indebtedness 817,179 --
---------------- ----------------
Total Long-Term Debt 176,805,254 172,572,645
Less Current Portion of Long-Term Debt 1,775,027 1,145,545
---------------- ----------------
Total Long-Term Debt, net $175,030,227 $171,427,100
================ ================
In February 2000, the Company repurchased $2.18 million principal
amount of 7.5% Convertible Subordinated Debentures due 2006 (the "7.5%
Convertible Debentures") owned by its former Chairman and a company he controls
for an aggregate purchase price of $2.65 million. The purchase price was based
on the estimated fair market value of the 7.5% Convertible Debentures on the
date of the transaction, which includes consideration for the value of
unrealized gain that the debenture holder could have recognized upon a
conversion of the 7.5% Convertible Debentures into Common Stock and sale of such
Common Stock. The Company recognized a loss related to the repurchase of
$468,000, which is included in Other income (expense) in the Company's
Consolidated Statement of Income for the nine months ended October 31, 2000.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In February 2000, the Company entered into a lease with an unaffiliated
third party for approximately 295,000 square feet of a warehouse facility in
Edison, New Jersey, which is being used as a fulfillment center for the
Company's promotional set business and to process its product returns. The lease
has a term of twenty-six months.
NOTE 6. COMMITMENTS AND CONTINGENCIES -- CONTINUED
In February 2000, the Company assumed a lease for approximately 173,000
square feet of a warehouse facility in Allentown, Pennsylvania, which was leased
by an unaffiliated third party as the Company's promotional set fulfillment
center for the 1999 holiday season and extended through June 30, 2004. In May
2000, the Company was released from all of its obligations under that lease,
including minimum lease payments in the aggregate of approximately $2.5 million
during the fiscal years ended January 31, 2001 through 2005.
The Company has commitments to purchase products from fragrance
manufacturers in the amount of approximately $63 million and $76 million
annually during the calendar years ended December 31, 2000 and 2001,
respectively.
The Company is a party to a number of pending legal actions,
proceedings and claims. While any action, proceeding and claim contains an
element of uncertainty, management of the Company believes that the outcome of
such actions, proceedings or claims likely will not have a material adverse
effect on the Company's business, consolidated financial position or results of
operations.
NOTE 7. INCOME TAXES
The provision for income taxes for the nine months ended October 31,
1999 and 2000 was calculated based upon an estimated effective tax rate of 39%
for the full fiscal years ending January 31, 2000 and 2001.
NOTE 8. STOCK OPTION PLANS
During the nine months ended October 31, 2000, the Company granted
options for the purchase of 861,626 shares of Common Stock at exercise prices
ranging from $8.125 per share to $8.4375 per share under the Company's 1995
Stock Option Plan (the "1995 Plan"). The 1995 Plan currently provides for the
issuance of options to purchase in the aggregate 2,200,000 shares of Common
Stock, all of which have been issued. During the nine months ended October 31,
2000, the Company granted options for 30,000 shares at an exercise price of
$7.25 per share under the Company's Non-Employee Director Stock Option Plan.
In November 2000, the Company's Board of Directors adopted a 2000 Stock
Incentive Plan (the 2000 "Plan"). Pursuant to the 2000 Plan, the Company may
grant stock options, stock appreciation rights, stock awards, performance awards
and stock units to its officers, employees, consultants and advisors in an
aggregate of up to 3,000,000 shares of Common Stock. The 2000 Plan will be
submitted to the shareholders of the Company for approval at a special meeting
of shareholders.
NOTE 9. ARDEN ACQUISITION
On October 30, 2000, the Company entered into a definitive agreement
with an affiliate of Unilever, N.V. ("Unilever") to acquire certain assets and
to assume certain liabilities relating to the Elizabeth Arden prestige
fragrance, cosmetics and skin care lines and the Elizabeth Taylor and White
Shoulders prestige fragrance lines. In connection with the consummation of this
acquisition, the Company will enter into agreements with affiliates of Unilever
related to product distribution, manufacturing, transition services and
information technology services. The purchase price is expected to consist of
approximately $190 million cash and $50 million liquidation preference ($35
million estimated fair value) of
NOTE 9. ARDEN ACQUISITION - CONTINUED
a new series of convertible preferred stock of the Company. The transaction has
been approved by the Boards of Directors of both the Company and Unilever and is
subject to customary closing conditions including certain regulatory approvals.
While neither party's shareholders are required to approve the transaction, the
Company intends to convene a special shareholders meeting for shareholders to
approve certain issuances of Common Stock upon conversion of the convertible
preferred stock to be included, and the exercise of certain warrants that may be
included, as part of the purchase price. At such meeting, the shareholders will
also be asked to approve an amendment to the Company's Amended and Restated
Articles of Incorporation to change the Company's name to Elizabeth Arden, Inc.
Holders of a majority of the outstanding Common Stock of the Company have agreed
to vote in favor of such issuances of Common Stock. There is no guarantee that
the Company and Unilever will be able to satisfy all of the closing conditions,
or that the Company will obtain the requisite financing. Accordingly, there is
no assurance that the acquisition will be consummated.
NOTE 10. REDEMPTION OF SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK
On October 30, 2000, the Company issued an irrevocable notice of
redemption to holders of the Company's Series B and Series C convertible
preferred stock. Holders of the 264,168 shares of the Company's Series B
convertible preferred stock may convert each share of Series B convertible
preferred stock into 7.12 shares of the Company's Common Stock, for a total of
1,880,876 shares of Common Stock, at a conversion price of $3.30 per share of
Common Stock. Holders of the 499,870 shares of the Company's Series C
convertible preferred stock may convert each share of Series C convertible
preferred stock into one share of the Company's Common Stock at a conversion
price of $5.25 per share of Common Stock. These holders must convert their
shares into shares of the Company's Common Stock prior to December 29, 2000 or
the Company will redeem each share for $.01 per share. If all holders of the
Company's Series B and Series C convertible preferred stock convert their
shares, the total proceeds to the Company will be approximately $8.8 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), French Fragrances, Inc., doing
business as FFI Fragrances (the "Company"), is hereby providing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
(as such term is defined in the Reform Act) made in this Quarterly Report on
Form 10-Q. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"likely will result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans" and "projection") are not historical facts and
may be forward-looking and may involve estimates and uncertainties which could
cause actual results to differ materially from those expressed in the
forward-looking statements. Accordingly, any such statements are qualified in
their entirety by reference to, and are accompanied by, the following key
factors that have a direct bearing on the Company's results of operations: the
absence of contracts with customers or suppliers and the Company's ability to
maintain and develop relationships with customers and suppliers; the substantial
indebtedness and debt service obligations of the Company; the Company's ability
to successfully integrate acquired businesses or new brands into the Company;
the impact of competitive products and pricing; supply constraints or
difficulties; changes in the retail and fragrance industries; the retention and
availability of key personnel; and general economic and business conditions. The
Company cautions that the factors described herein could cause actual results to
differ materially from those expressed in any forward-looking statements of the
Company and that investors should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of anticipated or unanticipated events or circumstances. New factors
emerge from time to time, and it is not possible for the Company to predict all
of such factors. Further, the Company cannot assess the impact of each such
factor on the Company's results of operations or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
GENERAL
This discussion should be read in conjunction with the Notes to
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in the
Company's Annual Report on Form 10-K for the year ended January 31, 2000. The
results of operations for an interim period may not give a true indication of
results for the year. In the following discussions, all comparisons are with the
corresponding items in the prior year.
RESULTS OF OPERATIONS
Three Months Ended October 31, 2000 Compared to the Three Months Ended October
- ------------------------------------------------------------------------------
31, 1999
- --------
Net sales. Net sales increased $9.7 million, or 6.3%, to $163.4 million
for the three months ended October 31, 2000, from $153.7 million for the three
months ended October 31, 1999. The increase in net sales represents primarily an
increase in the volume of products sold to existing customers. Sales to the
Company's top 20 retail accounts increased by 15% over the corresponding
prior-year period. Management believes that increased sales resulted primarily
from the Company's ability to provide its customers with a larger selection of
products and a continuous, direct supply of products, growth in sales of
customized gift sets, as well as other value-added services such as category
management services.
Gross Profit. Gross profit increased $1.9 million, or 3.6%, to $55.0
million for the three months ended October 31, 2000, from $53.1 million for the
three months ended October 31, 1999, due to the increase in net sales. Gross
margin for the three months ended October 31, 2000 decreased to 33.7% from 34.6%
for the three months ended October 31, 1999, primarily due to an increase in the
proportion of sales to mass market retailers, which typically generate lower
margins due to the broader mix of products sold to those customers, but which
require less sales support than sales to prestige department stores.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $2.2 million to $8.6 million for the three months ended October 31,
2000, from $6.4 million for the three months ended October 31, 1999. The
increase resulted primarily from an increase in facility and labor expenses
associated with the increased sales and, in particular, the operation of the
Company's promotional set fulfillment center in Edison, New Jersey (the "Edison
Facility").
SG&A. Selling, general and administrative ("SG&A") expenses decreased
$3.5 million, or 16.6%, to $17.6 million for the three months ended October 31,
2000, from $21.2 million for the three months ended October 31, 1999. As a
percentage of net sales, SG&A expenses decreased from 13.8% for the three months
ended October 31, 1999 to 10.8% for the three months ended October 31, 2000. The
decrease in SG&A expenses was primarily the result of a decrease in the
proportion of sales to prestige department stores, which led to lower direct
selling and marketing expenses.
Depreciation and Amortization. Depreciation and amortization increased
approximately $154,000 or 5.5%, to $3.0 million for the three months ended
October 31, 2000, from $2.8 million for the three months ended October 31, 1999.
The increase was primarily attributable to the addition of tools and molds
developed for the Company's manufactured products.
Net Income. Net income increased $1.9 million to $12.5 million for the
three months ended October 31, 2000, from $10.6 million for the three months
ended October 31, 1999. The increase in net income was primarily due to the
increase in net sales and the decrease in SG&A expenses, which were partially
offset by the increase in warehouse and shipping expenses.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $3.2 million to $28.7 million for the three months ended October 31,
2000, from $25.5 million for the three months ended October 31, 1999. The EBITDA
margin increased to 17.6% for the three months ended October 31, 2000, from
16.6% for the three months ended October 31, 1999. The increases in EBITDA and
EBITDA margin were primarily due to the increase in net sales and the decrease
in SG&A expenses, which were partially offset by the increase in warehouse and
shipping expenses.
Nine Months Ended October 31, 2000 Compared to the Nine Months Ended October 31,
- --------------------------------------------------------------------------------
1999
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Net Sales. Net sales increased $25.1 million, or 9.3%, to $296.0
million for the nine months ended October 31, 2000, from $271.0 million for the
nine months ended October 31, 1999. The increase in net sales represents
primarily an increase in the volume of products sold to existing customers.
Sales to the Company's top 20 retail accounts increased by 23% over the
corresponding prior-year period. Management believes that increased sales during
the nine months ended October 31, 2000 have resulted from the Company's ability
to provide its customers with a larger selection of products and a continuous,
direct supply of products, as well as other value-added services such as
category management services.
Gross Profit. Gross profit increased $7.1 million, or 7.4%, to $102.7
million for the nine months ended October 31, 2000, from $95.6 million for the
nine months ended October 31, 1999, due to the increase in net sales. Gross
margin for the nine months ended October 31, 2000 decreased to 34.7% from 35.3%
for the nine months ended October 31, 1999, primarily due to an increase in the
proportion of sales to the mid-tier department stores and mass market retailers,
which typically generate lower margins due to the broader mix of products sold
to those customers, but which require less sales support than sales to prestige
department stores.
Warehouse and Shipping Expense. Warehouse and shipping expenses
increased $6.1 million, or 46.2%, to $19.3 million for the nine months ended
October 31, 2000, from $13.2 million for the nine months ended October 31, 1999.
The increase resulted primarily from an increase in facility, labor and freight
expenses associated with the increased sales, costs associated with the closing
of the Company's promotional set fulfillment center in Allentown, Pennsylvania
(the "Allentown Facility") and the start-up and operation of the Edison
Facility. The Company was released from all of its lease obligations on the
Allentown Facility in May 2000. Because the Edison Facility was opened in
February 2000, results for the nine months ended October 31, 1999 do not reflect
any expenses associated with that facility.
SG&A. SG&A expenses decreased $1.6 million, or 3.8%, to $39.7 million
for the nine months ended October 31, 2000, from $41.2 million for the nine
months ended October 31, 1999. As a percentage of net sales, SG&A expenses
decreased to 13.4% for the nine months ended October 31, 2000 from 15.2% for the
nine months ended October 31, 1999. The decrease in SG&A expenses was primarily
the result of lower direct selling and marketing expenses due to the decrease in
the proportion of sales to prestige department stores.
Depreciation and Amortization. Depreciation and amortization increased
$567,000, or 6.8%, to $8.9 million for the nine months ended October 31, 2000,
from $8.3 million for the nine months ended October 31, 1999. The increase was
primarily due to additional investment in tools and molds developed for the
Company's manufactured products.
Interest Expense, Net. Interest expense, net of interest income,
increased $385,000, or 2.7%, to $14.7 million for the nine months ended October
31, 2000, from $14.3 million for the nine months ended October 31, 1999. The
increase was primarily due to an increase in the average debt outstanding under
the credit facility (the "Credit Facility") with Fleet National Bank ("Fleet")
to support working capital needs.
Other Income. During the nine months ended October 31, 2000, the
Company recognized other income, net of other expenses, of $875,000, primarily
related to the resolution of insurance claims and the sale of a trademark.
Net Income. Net income increased $1.5 million, or 13.7%, to $12.8
million for the nine months ended October 31, 2000, from $11.3 million for the
nine months ended October 31, 1999. The increase in net income was primarily due
to the increase in net sales and the decrease in SG&A expenses, which was
partially offset by the increase in warehouse and shipping expenses.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $2.5 million, or 6.2%, to $43.8 million for the nine months ended
October 31, 2000, from $41.2 million for the nine months ended October 31, 1999.
The EBITDA margin decreased slightly to 14.8% for the nine months ended October
31, 2000, from 15.2% for the nine months ended October 31, 1999. The increase in
EBITDA was primarily due to the increase in net sales and the decrease in SG&A
expenses, which was partially offset by the increase in warehouse and shipping
expenses. The slight decrease in EBITDA margin was primarily due to the increase
in the proportion of sales to mid-tier department stores and mass market
retailers, which typically generate lower margins than sales to prestige
department stores due to the broader mix of products sold to those customers.
FINANCIAL CONDITION
The Company used $41.9 million of net cash for operations during the
nine months ended October 31, 2000, compared to using $35.4 million of net cash
for operations during the nine months ended October 31, 1999. The increase in
net cash used for operating activities is primarily due to decreases in trade
and other payables, partially offset by decreases in inventory, receivables and
prepaid expenses relative to the corresponding prior-year period. The Company
received $26.1 million in net cash from financing activities during the nine
months ended October 31, 2000, compared to $37.0 million in net cash from
financing activities during the nine months ended October 31, 1999, primarily as
a result of decreased borrowings under the Company's Credit Facility, which were
partially offset by the Company's repurchase of certain convertible subordinated
debentures, repurchase of Common Stock and repayment of other indebtedness.
The Company has a Credit Facility with Fleet, which provides for
borrowings on a revolving basis of up to $50 million (with a $10 million
sublimit for commercial letters of credit) for general corporate purposes,
including working capital needs and acquisitions. On October 12, 2000, the
Credit Facility was amended to provide for a seasonal increase in the borrowing
limit to $65 million through December 31, 2000. See Note 4 to the Notes to
Unaudited Consolidated Financial Statements. At October 31, 2000, the Company
had $31.0 million outstanding under the Credit Facility and approximately $1.0
million of outstanding letters of credit.
In fiscal 2000, the Company's Board of Directors authorized a share
repurchase program that allows the Company to purchase up to an aggregate of $10
million of its Common Stock. As of October 31, 2000, the Company had repurchased
an aggregate of 995,400 shares of its Common Stock under the share repurchase
program at an average price of $6.64.
In February 2000, the Company repurchased $2.18 million principal
amount of 7.5% Convertible Subordinated Debentures due 2006 (the "7.5%
Convertible Debentures") owned by its former Chairman and a company he controls
for an aggregate purchase price of $2.65 million. The 7.5% Convertible
Debentures that were repurchased were convertible into approximately 303,000
shares of Common Stock. The purchase price was based on the estimated fair
market value of the 7.5% Convertible Debentures on the date of the transaction,
which includes consideration for the value of unrealized gain (based on the
$8.81 price of the Common Stock on the date of repurchase) that the debenture
holder could have recognized upon a conversion and sale of the 7.5% Convertible
Debentures into Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that it is materially at risk relating to
interest rate, foreign currency exchange rate or commodity price risks
fluctuations. The only debt instrument of the Company that is subject to
interest rate fluctuations is the Credit Facility. While inflation likely would
increase the interest rates that the Company pays on its Credit Facility, based
on the amounts and projected utilization of the Credit Facility, the Company
does not anticipate that any such increase would be material to its results of
operations. Further, all of the Company's purchases of fragrances and related
cosmetic products from foreign suppliers are in U.S. dollars, which avoids
foreign currency exchange rate risks. Moreover, while the Company's
international sales may be subject to foreign currency fluctuation risks, such
sales, and any currency fluctuations relating to those sales, have not
historically been material to the Company's results of operations. The Company
does not believe that it experienced any material change in its market risk
relating to interest rate, foreign currency exchange rate or commodity price
risks fluctuations during the nine months ended October 31, 2000.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 30, 2000, the Company issued an irrevocable notice of
redemption to holders of the Company's Series B and Series C convertible
preferred stock. Holders of the Company's Series B convertible preferred stock
may convert each share of Series B convertible preferred stock into 7.12 shares
of the Company's Common Stock at a conversion price of $3.30 per share of Common
Stock. Holders of the Company's Series C convertible preferred stock may convert
each share of Series C convertible preferred stock into one share of the
Company's Common Stock at a conversion price of $5.25 per share of Common Stock.
These holders must convert their shares into shares of the Company's Common
Stock prior to December 29, 2000 or the Company will redeem each share for $.01
per share. If all holders of the Company's Series B and Series C convertible
preferred stock convert their shares, the total proceeds to the Company will be
approximately $8.8 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of the Company dated
March 6, 1996 (incorporated herein by reference to Exhibit 3.1 filed as
a part of the Company's Form 10-K for the fiscal year ended January 31,
1996 (Commission File No. 1-6370)).
3.2 Amendment dated September 19, 1996 to the Amended and Restated Articles
of Incorporation of the Company (incorporated by reference to Exhibit
4.4 filed as part of the Company's Form 10-Q for the quarter ended
October 31, 1996 (Commission File No. 1-6370)).
3.3 Amended By-Laws of the Company.
4.1 Indenture, dated as of May 13, 1997, between the Company and HSBC Bank
USA (formerly Marine Midland Bank), as trustee (incorporated herein by
reference to Exhibit 4.1 filed as a part of the Company's Form 8-K
dated May 13, 1997 (Commission File No. 1-6370)).
4.2 Indenture dated as of April 27, 1998, between the Company and HSBC Bank
USA (formerly Marine Midland Bank), as trustee (incorporated herein by
reference to Exhibit 4.1 filed as a part of the Company's Form 8-K
dated April 27, 1998 (Commission File No. 1-6370)).
4.3 Credit Agreement, dated as of May 13, 1997, between the Company and
Fleet National Bank (incorporated herein by reference to Exhibit 4.3
filed as a part of the Company's Form 8-K dated May 13, 1997
(Commission File No. 1-6370)).
4.4 First Amendment to Credit Agreement and Other Transaction Documents
dated as of December 31, 1997, between the Company and Fleet National
Bank (incorporated herein by reference to Exhibit 4.3 filed as a part
of the Company's Form 10-K for the fiscal year ended January 31, 1998
(Commission File No. 1-6370)).
4.5 Second Amendment to Credit Agreement and Other Transaction Documents
dated as of November 13, 1998, between the Company and Fleet National
Bank (incorporated herein by reference to Exhibit 4.6 filed as a part
of the Company's Form 10-Q for the quarter ended October 31, 1998
(Commission File No. 1-6370)).
4.6 Third Amendment to Credit Agreement and Other Transaction Documents
dated as of May 17, 1999, between the Company and Fleet National Bank
(incorporated herein by reference to Exhibit 4.7 filed as a part of the
Company's Form 10-Q for the quarter ended April 30, 1999 (Commission
File No. 1-6370)).
4.7 Fourth Amendment to Credit Agreement and Other Transaction Documents
dated as of October 12, 2000, between the Company and Fleet National
Bank.
10.1 Registration Rights Agreement dated as of November 30, 1995, among the
Company, Bedford Capital Corporation, Fred Berens, Rafael Kravec and
Eugene Ramos (incorporated herein by reference to Exhibit 10.1 filed as
a part of the Company's Form 10-K for the fiscal year ended September
30, 1995 (Commission File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration Rights Agreement
dated as of November 30, 1995, among the Company, Bedford Capital
Corporation, Fred Berens, Rafael Kravec and Eugene Ramos (incorporated
herein by reference to Exhibit 10.2 filed as a part of the Company's
Form 10-K for the year ended January 31, 1996 (Commission File No.
1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to Registration Rights
Agreement dated as of November 30, 1995, among the Company, Bedford
Capital Corporation, Fred Berens, Rafael Kravec and the Estate of
Eugene Ramos (incorporated by reference to Exhibit 10.3 filed as part
of the Company's Form 10-Q for the quarter ended July 31, 1996
(Commission File No. 1-6370)).
10.4 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 4.11 filed as a part of the Company's Form S-8
dated July 7, 1999 (Commission File No. 1-6370)).
10.5 1995 Stock Option Plan (incorporated herein by reference to Exhibit
4.12 filed as a part of the Company's Form S-8 dated July 7, 1999
(Commission File No. 1-6370)).
10.6 Asset Purchase Agreement dated as of October 30, 2000 between the
Company and Conopco, Inc.
27.1 Financial Data Schedule.
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The foregoing list omits instruments defining the rights of holders of
long-term debt of the Company where the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Company. The Company
hereby agrees to furnish a copy of each such instrument or agreement to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated October 31, 2000 was filed on that
same date attaching a press release announcing that the Company had entered into
a definitive agreement to acquire the Elizabeth Arden prestige fragrance,
cosmetics and skin care lines and the Elizabeth Taylor prestige fragrances
lines.
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: November 21, 2000 /s/ E. Scott Beattie
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E. Scott Beattie
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: November 21, 2000 /s/ Elizabeth A. Tuttle
--------------------------------------------
Elizabeth A. Tuttle
Senior Vice President, Finance and Treasurer
(Principal Financial and Accounting Officer)