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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For Fiscal Year Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number 0-15491
Parlux Fragrances, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2562955
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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Title of Class
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
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Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at June 25, 1997
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Common Stock, $ .01 par value 16,814,423
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The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $28,393,527 based on a
closing price of $2.125 for the Common Stock as of June 25, 1997 as reported on
the National Association of Securities Dealers Automated Quotation System on
such date. For purposes of the foregoing calculation, only the Directors and
beneficial owners of the registrant are deemed to be affiliates.
Documents incorporated by Reference: The information required by Part III (Items
10, 11, 12 & 13) is incorporated by reference from the registrant's definitive
proxy statement (to be filed pursuant to Regulation 14A).
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Item 1. BUSINESS
Parlux Fragrances, Inc. (the Company), was incorporated in Delaware in
1984 and is engaged in the creation, design, manufacture, distribution and sale
of prestige fragrances, cosmetics and beauty related products marketed primarily
through specialty stores and national department stores. The fragrance market is
generally divided into a prestige segment (distributed primarily through
department and specialty stores) and a mass market segment. The Company's
products are positioned primarily in the prestige segment. Additionally, the
Company manufactures and distributes certain brands through Perfumania Inc., a
related party national chain which is a leading specialty retailer of
fragrances. Currently, the Company engages in the manufacture (through
sub-contractors), distribution and sale of PERRY ELLIS, FRED HAYMAN BEVERLY
HILLS, BARYSHNIKOV, PHANTOM OF THE OPERA, TODD OLDHAM and VICKY TIEL fragrances
and grooming items on an exclusive worldwide basis as a licensee. Additionally,
the Company manufactures, distributes and sells its own brands of ANIMALE, BAL A
VERSAILLES, DANIEL DE FASSON, DECADENCE and LIMOUSINE fragrances and ALEXANDRA
DE MARKOFF cosmetics on a worldwide basis.
Recent Developments
On May 23, 1997, the Company entered into an agreement with General
Electric Capital Corporation for a $25 million senior secured revolving credit
facility. See "Liquidity and Capital Resources" for further discussion.
In November of 1996, the Company engaged Montgomery Securities to
explore a potential sale or merger of the Company, or other alternatives which
would lead to the maximization of shareholder value. In March of 1997, the
Company announced that the engagement of Montgomery Securities had not resulted
in any definitive offers. Accordingly, the Company concluded its relationship
with Montgomery Securities and announced that it would independently restructure
the Company by terminating warehousing and distribution operations in
Connecticut and France, discontinuing certain brands, and consolidating
operations in South Florida. As of March 31, 1997, the restructuring has been
completed and the costs related to this restructuring of approximately
$5,765,000 have been recorded in the quarter ended March 31, 1997.
In January 1997, the Company completed the repurchase of 350,000 shares
of its common stock under Phase I of its buyback program, and the Board of
Directors authorized a second phase covering an additional 500,000 shares. As of
June 18, 1997, the Company had repurchased 239,555 shares under the second
phase.
During October 1996, the Company entered into agreements to redeem
approximately $5,232,000 of previously issued convertible debentures by issuing
$6,134,000 of 10% bonds which were repaid in accordance with their terms. See
"Liquidity and Capital Resources" for further discussion.
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THE PRODUCTS
The Company's principal products are fragrances and cosmetics. Each
fragrance is distributed in a variety of sizes and packaging. In addition, each
fragrance line may be complemented by beauty-related products such as soaps,
deodorants, body lotions, cremes and dusting powders. The cosmetics are
full-service lines with treatment and make-up products consisting of over 200
stock keeping units (S.K.U.'s). The Company's basic products generally retail at
prices ranging from $20 to $300 per item.
The Company designs and creates fragrances and cosmetics/shades using
its own staff and independent contractors. It also supervises the design of its
packaging by independent contractors and has recently completed the design
process for FRED HAYMAN'S "HOLLYWOOD" for women, which the Company anticipates
launching in the fall of 1997.
During the last three fiscal years, the following brands have accounted
for 10% or more of the Company's gross sales:
Fiscal 1997 Fiscal 1996 Fiscal 1995
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PERRY ELLIS 48% 39% 16%
ANIMALE 15% 15% 24%
ALEXANDRA DE MARKOFF 14% 3% 0%
FRED HAYMAN 13% 20% 45%
MARKETING AND SALES
In the United States, the Company has established its own sales and
marketing staff, and also utilizes independent sales representatives for certain
channels of distribution. The Company sells directly to retailers, primarily
national and regional department stores and specialty stores, which it believes
will maintain the image of its products as prestige fragrances. The Company's
products are sold in over 1,800 retail outlets in the United States.
Additionally, the Company sells products to Perfumania, Inc., a related party,
which is a leading specialty retailer of fragrances with over 265 retail outlets
principally located in manufacturers' outlet malls and regional malls.
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors. The Company has established
relationships for the marketing of its fragrances with distributors in Canada,
Europe, the Middle East, the Far East, Latin America, the Caribbean and Russia.
The Company advertises both directly and through a cooperative
advertising program in association with major retailers in the fashion media on
a national basis and through retailers' statement enclosures and catalogues. The
Company is required to spend certain minimum amounts for advertising under
certain licensing agreements. See "Licensing Agreements" and Note 9 (B) to the
Consolidated Financial Statements.
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RAW MATERIALS
Raw materials and components for the Company's products are available
from sources in Europe and the United States. The Company uses third party
contract manufacturers to produce finished products. During the fiscal year
ended March 31, 1997, the Company completed the transition of its remaining
contract manufacturing in France to the United States.
In the past, the Company has had little difficulty obtaining raw
materials at competitive prices. The Company has no reason to believe that this
situation will change in the near future, but there can be no assurances that
this will continue.
SEASONALITY
Typical of the fragrance industry, the Company has its highest sales
during the calendar year end holiday season. Lower than projected sales during
this period could have a material adverse affect on the Company's operating
results.
INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that
market cosmetics and fragrances to department stores to provide the department
stores with rights to return merchandise. The Company's products are subject to
such return rights. It is the Company's practice to establish reserves and
provide allowances for product returns at the time of sale. The Company believes
that such reserves and allowances are adequate based on past experience,
however, no assurances can be made that reserves and allowances will continue to
be adequate. Consequently, if product returns are in excess of the reserves and
allowances made by the Company, sales will be reduced in later periods.
CUSTOMERS
The Company concentrates its sales efforts in the United States in
specialty stores, such as Nordstrom's, Neiman Marcus, and Bergdorf Goodman and a
number of regional department store retailers including, among others, Dillards,
Macy's, J.L. Hudson, and Bloomingdales. Retail distribution has been targeted by
brand to maximize potential and minimize overlap between each of these
distribution channels.
Sales to Perfumania, a company associated with Mr. Ilia Lekach, the
Company's Chairman of the Board and Chief Executive Officer, amounted to
$26,568,290 for the fiscal year ended March 31, 1997. Net amounts owed by
Perfumania to the Company amounted to $22,136,000 at March 31, 1997. The loss of
Perfumania as a customer could have a material adverse effect on the operations
of the Company.
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FOREIGN AND EXPORT SALES
A significant portion of the Company's international sales and exports
are made through its wholly-owned French subsidiary, Parlux S.A. Net sales to
unaffiliated customers by Parlux S.A. were $12,776,773, $9,101,611 and
$7,219,601 for fiscal years ended March 31, 1997, 1996, and 1995, respectively.
The French subsidiary reported net income of $817,649, $887,163 and $319,535 for
the fiscal years ended March 31, 1997, 1996 and 1995, respectively.
LICENSING AGREEMENTS
PERRY ELLIS: The Company acquired the Perry Ellis license from Sanofi Beaute in
December 1994. The Perry Ellis license is entering its twelfth year, and is
renewable every two years if the average annual sales in the completed period
exceed 75% of the average sales of the previous four years. All minimum sales
levels have been met by the previous licensee, and the Company believes that
this will continue. The license requires the payment of royalties, which decline
as a percentage of net sales as net sales volume increases, and the spending of
certain minimum amounts for advertising based upon net sales levels achieved in
the prior year.
FRED HAYMAN: In June 1994, the Company entered into an Asset Purchase Agreement
with Fred Hayman Beverly Hills, Inc. (FHBH), pursuant to which the Company
purchased substantially all of the assets and liabilities of the FHBH fragrance
division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year
license to use FHBH's United States Class 3 trademarks Fred Hayman(R), 273(R),
Touch(R), With Love(R) and Fred Hayman Personal Selections(R) and the
corresponding international registrations. There are no minimum sales or
advertising requirements.
PHANTOM OF THE OPERA: In April 1993, the Company entered into an exclusive
worldwide agreement with Creative Fragrances, Inc. for the worldwide
manufacturing and distribution rights to PHANTOM OF THE OPERA covering men's and
women's fragrances and beauty related products. The agreement expires in April
1998. Royalties are payable at 7% of net sales. There are no minimum sales or
advertising requirements.
BARYSHNIKOV: The Company assumed the Baryshnikov license as part of the RBF
acquisition, pursuant to which the Company has the exclusive right to
manufacture and distribute fragrances and personal care products using the
Baryshnikov trademark. The initial term of the license expires on December 31,
1997, renewable for subsequent three and four-year periods upon achieving
specified sales or minimum royalty levels. The license requires the payment of
royalties, and the spending of certain minimum amounts for advertising based
upon the annual net sales of the products.
VICKY TIEL: In September 1992, the Company entered into an exclusive worldwide
license agreement with VICKY TIEL S.A. in which the Company secured the rights
to
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manufacture and distribute fragrances and beauty care products using the VICKY
TIEL trademark for an initial five-year period, renewable for a subsequent
five-year period upon achieving specified sales or minimum royalty levels. Under
this agreement, the Company is obligated to pay royalties calculated as a
percentage of net sales, which decline as net sales volume increases. The
Company is also obligated to spend certain minimum amounts for advertising based
upon the annual net sales of the products.
TODD OLDHAM: In December 1992, the Company entered into an exclusive worldwide
licensing agreement with L-7 Designs, Inc. in which the Company secured the
rights to manufacture and distribute fragrances and beauty care products using
the TODD OLDHAM trademark for an initial contract period ending March 31, 1997,
renewable for subsequent three-year and four-year periods upon achieving
specified sales or minimum royalty levels. The license requires the payment of
royalties, which decline as a percentage of net sales as net sales volume
increases, and the spending of certain minimum amounts for advertising based
upon net sales levels. The Company has informed the licensor of its intent not
to renew the license. In accordance with the licensing agreement, the Company
may produce and sell the Todd Oldham trademarked products until March 31, 1998.
SUMMARY: The Company believes it is presently in compliance with all material
obligations under the above agreements. There can be no assurance the Company
will be able to continue to comply with the terms of these agreements in the
future.
BARTER ARRANGEMENTS
In June 1991, the Company entered into a barter arrangement (the Barter
Agreement) under which the Company would receive advertising credits in exchange
for its inventory of JOAN COLLINS products, which had been manufactured under a
manufacturing and distribution agreement terminated in 1991. Sales under the
Barter Agreement were finalized during fiscal 1994.
The estimated value of the advertising was recorded as a prepaid
expense on the Company's balance sheet at the time such inventory was sold, net
of unearned income equal to the amount of advertising credits minus the related
cost of goods bartered. As advertising credits are used by the Company, unearned
income is debited and cost of goods sold is credited. As a result, as the
advertising credits are used aggregate cost of goods as a percentage of net
sales decreases and gross margin as a percentage of net sales increases.
During the fiscal year ended March 31, 1997, the Company had no barter
sales, utilized $161,000 of its deferred advertising credits and realized
$88,000 of deferred income on the use of these credits. Since the inception of
the Barter Agreement, $6,186,000 of JOAN COLLINS products were bartered and
$5,858,000 of advertising credits have been used. In addition, in connection
with the FHBH acquisition in 1994, the Company acquired approximately $471,000
of advertising credits, of which $264,000
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were utilized during the fiscal year ended March 31, 1997. The balance of
deferred advertising credits and unearned income at March 31, 1997 were
$1,069,000 and $345,000, respectively ($933,000 and $345,000, respectively
relate to the Barter Agreement).
The Company expects to be able to fully utilize these advertising
credits as part of its normal ongoing advertising expenditures.
TRADEMARKS
The Company owns the worldwide trademarks and distribution rights to
ANIMALE, BAL A VERSAILLES, DANIEL DE FASSON, DECADENCE and LIMOUSINE fragrances,
and ALEXANDRA de MARKOFF cosmetics. Accordingly, there are no licensing
agreements requiring the payment of royalties. Additionally, the Company has the
rights to license certain of these trademarks for all classes of merchandise.
PRODUCT LIABILITY
The Company has insurance coverage for product liability in the amount
of $5 million per incident. The Company maintains an additional $5 million of
coverage under an "umbrella" policy. In addition, the Company believes that the
manufacturers of the products sold by the Company also carry product liability
coverage and that the Company effectively is protected thereunder.
There are no pending and, to the best of the Company's knowledge, no
threatened product liability claims. Over the past nine years, the Company has
not been presented with any significant product liability claims. Based on this
historical experience, management believes that its insurance coverage is
adequate.
COMPETITION
The market for fragrances and beauty related products is highly
competitive and sensitive to changing consumer preferences and demands. The
Company believes that the quality of its fragrance and cosmetics products, as
well as its ability to develop, distribute and market new products, will enable
it to continue to compete effectively in the future and to continue to achieve
positive product reception, position and inventory levels in retail outlets.
However, there are products which are better known than the products distributed
by the Company. There are also companies which are substantially larger and more
diversified, and which have substantially greater financial and marketing
resources than the Company, as well as greater name recognition, and the ability
to develop and market products similar to, and competitive with, those
distributed by the Company.
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EMPLOYEES
As of March 31, 1997, the Company had 173 full-time and part-time
employees. Of these, 36 were engaged in worldwide sales activities, 76 in
operations, administrative and finance functions and 61 in warehousing and
distribution activities, which reflects the increased staffing requirements to
support the AdM cosmetic line. None of the Company's employees are covered by a
collective bargaining agreement and the Company believes that its relationship
with its employees is satisfactory. The Company also uses the services of
independent contractors in various capacities, including sales representatives.
During June 1993, the Company established a 401-K Plan covering
substantially all of its U.S. employees. Commencing on April 1, 1996, the
Company matched 25% of the first 6% of employee contributions, within annual
limitations established by the Internal Revenue Code.
ITEM 2. PROPERTIES
In November 1995, the Company moved its corporate headquarters and
domestic operations from a 38,500 square foot leased facility in Pompano Beach,
Florida to a new 100,000 square foot leased facility in Fort Lauderdale, Florida
to accommodate current and future growth. The annual lease cost of the new
facility is approximately $600,000, with the lease covering a ten-year period.
On February 10, 1997, the Company consummated an agreement with
Cosmetic Essence, Inc., one of the Company's third-party fillers, to sublease
the manufacturing and distribution areas (78,000 square feet), and purchase
certain fixed assets, at the 90,000 square foot facility in Orange, Connecticut,
which lease was assumed as part of the Richard Barrie Fragrances, Inc. ("RBF")
acquisition. The Company's liability, net of the sublease, is approximately
$12,500 per month, which has been recorded as part of the Company's
restructuring charge during the quarter ended March 31, 1997. The Company is
actively seeking to sublease the remaining 12,000 square feet of office space.
The lease on this facility expires on December 31, 1998.
All of the remaining distribution and warehousing activities previously
performed at the Connecticut facility have been consolidated in South Florida.
In connection therewith, the Company has leased an additional 26,600 square feet
of warehouse space adjacent to its corporate headquarters at an annual cost of
approximately $170,000. The lease expires in March 2002.
Effective October 1, 1996, the Company entered into an agreement with
Hirel Holdings, Inc., a publicly traded company, to sublease the Company's
previous corporate headquarters and distribution center in Pompano Beach,
Florida, for the approximate lease commitment, including escalations.
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The Company's French subsidiary leases approximately 1,500 square feet
under an operating lease which provides for annual rentals equivalent to
approximately $42,000, which terminates in 1999.
ITEM 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no proceedings
pending against the Company or any of its properties which, if determined
adversely to the Company, would have a material effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 12, 1996, the Company held a special meeting of its
shareholders to vote on an increase in the amount of authorized shares of common
stock from 15,000,000 to 30,000,000 shares. The shareholders approved the
proposal as follows:
For Against Abstained
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8,214,421 275,100 5,500
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The Company's Common Stock, par value $0.01 per share, has been listed
on the National Association of Securities Dealers Automatic Quotation System
("NASDAQ") National Small Cap List market since February 26, 1987 and commenced
trading on the NASDAQ National Market on October 24, 1995. All share references
below have been retroactively adjusted to reflect the two-for-one stock split
effected on November 3, 1995.
In July 1992, 250,000 shares included in the Company's employee stock
option plans were registered with the SEC via a Form S-8 registration statement.
Of these shares, 174,092 have been exercised through March 31, 1997. Of the
75,908 remaining shares, 67,000 have been granted and 8,908 remain available for
future grants.
At March 31, 1995, certain officers and/or directors and previous
employees of the Company held warrants to purchase 2,172,916 shares of the
Company's common stock exercisable at prices ranging from $1.50 to $3.125 per
share. In addition, Mr. Boris Lekach, a relative of the Company's chairman
received warrants to purchase 100,000 shares of common stock in connection with
a $200,000 loan extended to the Company during 1990. In connection with the
October 1990 acquisition of certain fragrance brands from the Deco Distribution
Group, Inc. (Deco), the Deco shareholders held 1,100,000 warrants exercisable at
$2.00 per share, which were to expire in March 1996. In
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connection with the FHBH acquisition, FHBH held 200,000 warrants exercisable at
$2.125 per share.
In May 1995, the Company extended a discount of $0.75 per share to
those holders of warrants issued in connection with the FHBH and Deco
acquisitions, as well as the loan to Mr. Boris Lekach, if the holders would
exercise by May 31, 1995. The exercise period was subsequently extended to July
31, 1995. These warrant holders exercised all of their warrants into 1,400,000
shares of common stock, increasing stockholders' equity by approximately
$2,300,000. The Company had agreed to register with the SEC all shares issued as
a result of such warrants being exercised prior to July 31, 1995, and the
registration was completed in September 1995.
In June 1995, in connection with a $300,000 long-term loan, the Company
issued warrants to acquire 60,000 unregistered shares of common stock to Mr. F.
Lekach, which were exercisable at $6.94 per share, for a two-year period. On
July 15, 1996, these warrants were exercised, and a portion of the proceeds was
utilized to repay the $300,000 loan and accrued interest thereon.
During the year ended March 31, 1996, the Company issued 1,125,044
shares of common stock in private placements pursuant to Regulation S or Rule
144, which resulted in an increase in stockholders' equity of $7,715,000.
In December 1995, the Company issued 424,000 shares of common stock to
Revlon in connection with the AdM acquisition. In addition, the Company granted
Revlon an option to purchase 176,000 shares of the Company's common stock at an
exercise price of $8.00 per share, which was exercised in May 1996. The combined
effect increased stockholders' equity by $4,800,000 ($3,392,000 in the year
ended March 31, 1996 and $1,408,000 during the current fiscal year).
During the period November 2, 1995 through March 31, 1996, the Company
issued $3,700,000 of 7% convertible debentures and $15,000,000 of 5% convertible
debentures, (the "Debentures") pursuant to Regulation S. The Debentures were
convertible into shares of the Company's common stock at 85% of the closing
price of the stock as listed on NASDAQ over specific time frames. As of March
31, 1996, $7,000,000 of the Debentures, plus accrued interest of $48,146, had
been converted into 1,073,688 shares of common stock. Subsequent to March 31,
1996, the remaining $11,700,000 have been converted into 1,348,058 shares of
common stock.
During April and May 1996, the Company issued an additional $13,000,000
of 5% convertible debentures, $3,000,000 pursuant to Regulation S and
$10,000,000 pursuant to Regulation D with the same conversion features and terms
as those issued above, of which $9,355,324, plus accrued interest of $130,916,
have been converted into 1,868,272 shares of common stock.
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On July 2, 1996, the Company issued an additional $10,000,000 of 5%
Debentures, in private placements pursuant to Regulation D, with the same
conversion features and terms as those issued above, except that the conversion
rate was 86%. During October 1996, $8,412,236 of the debentures, plus accrued
interest of $72,466, were converted into 2,154,222 shares of common stock.
During October 1996, the Company entered into agreements to redeem
$5,232,440 of the May and July Debentures which had not been converted, plus
$105,638 of accrued interest thereon, by issuing $6,239,726 of 10% bonds which
were repaid in accordance with their terms in December 1996. The redemption
resulted in a one-time charge to net income of $901,648 during the quarter ended
December 31, 1996, which is not deductible for income tax purposes.
On July 12, 1996, a proxy statement was distributed to
shareholders of record as of June 28, 1996, requesting a special shareholders'
meeting to vote on a proposed increase in the authorized shares of common stock
from 15,000,000 to 30,000,000 shares. On August 12, 1996, the shareholders
approved the proposal.
On July 18, 1996, the Company filed a Form S-3 registration statement
with the Securities and Exchange Commission ( "S.E.C.") to register 460,000
shares of previously issued and outstanding stock, and 1,617,646 shares of
common stock underlying the $10,000,000 of 5% convertible debentures issued
during May 1996. The registration statement was declared effective on August 12,
1996.
On September 13, 1996, the Company filed a Form S-3 registration
statement with the S.E.C. to register 2,154,222 shares of common stock
underlying the $10,000,000 of 5% convertible debentures issued during July 1996.
The registration statement was declared effective on October 2, 1996.
On July 24, 1996, the Board of Directors authorized the
repurchase of up to 350,000 shares of the Company's common stock. This phase of
the repurchase was completed during January 1997, at which time the Board of
Directors authorized the repurchase of an additional 500,000 shares. As of June
25, 1997, the Company has repurchased a total of 589,355 shares at a cost of
$2,244,915 (381,055 shares at a cost of $1,749,173 as of March 31, 1997).
The Company believes that the number of beneficial owners of its common
stock is approximately 1,500.
The following chart, as reported by the National Association of
Securities Dealers, Inc., shows the high and low bid prices, adjusted for the
stock split, for the Company's securities available for each quarter of the last
two years and the interim period from January through June 1997. The prices
represent quotations by the dealers without adjustments for retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
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Calendar Quarter Common Stock
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High Low
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First 1995 4.875 2.875
Second 1995 7.313 4.500
Third 1995 9.188 6.500
Fourth 1995 10.000 7.000
First 1996 13.250 6.125
Second 1996 15.250 9.000
Third 1996 11.250 4.125
Fourth 1996 4.563 3.063
First 1997 4.063 2.250
Second 1997
(to June 25, 1997) 3.188 2.125
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from financial statements audited
by Price Waterhouse LLP, independent certified public accountants. Consolidated
balance sheets at March 31, 1996 and 1997 and the related consolidated
statements of income and of cash flows for the three years ended March 31, 1997
and notes thereto appear elsewhere in this Annual Report on Form 10-K.
For the Year Ended March 31, (in thousands of dollars, except per share data)
- ----------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $87,640 $67,727 $38,209 $25,366 $28,427
Costs/operating exp. 84,321 53,539 31,208 23,071 26,982
Operating income 3,319 14,188 7,001 2,295 1,445
Net income 176 7,772 4,231 1,362 135
Income per share:
Primary $0.02 $0.74 $0.50 $0.22 $0.03
Fully diluted $0.02 $0.72 $0.48 $0.22 $0.03
At March 31, 1997 1996 1995 1994 1993
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Current assets $81,205 $67,666 $31,955 $18,514 $18,094
Current liabilities 31,885 36,866 27,113 14,679 12,575
Working capital 49,320 30,800 4,842 3,835 5,519
Long-term debt 4,949 4,694 5,281 0 3,021
Total assets 111,385 95,239 45,477 20,746 20,184
Total liabilities 37,266 53,194 32,394 14,678 15,596
Stockholders' equity 74,119 42,045 13,083 6,068 4,588
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto appearing elsewhere
in this annual report. Except for the historical matters contained herein,
statements made in this annual report are forward looking and are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Investors are cautioned that forward looking statements involve risks and
uncertainties which may affect the Company's business and prospects, including
economic, competitive, governmental, technological and other factors discussed
in this annual report and in the Company's filings with the Securities and
Exchange Commission.
COMPARISON OF THE TWELVE-MONTH PERIOD ENDED MARCH 31, 1997 WITH THE
TWELVE-MONTH PERIOD ENDED MARCH 31, 1996
For the fiscal year ended March 31, 1997 net sales increased 29% to
$87,640,006 as compared to $67,726,926 in the prior fiscal year. This increase
was primarily due to continued growth of Perry Ellis brand products, the full
year effect of Alexandra de Markoff (AdM) brand cosmetics, and Bal a Versailles
(BAV) brand products in fiscal 1997, compared to a partial year of operations in
the prior year, and licensed sales of Baryshnikov brand products acquired in
connection with the RBF acquisition in June 1996. Gross sales of Perry Ellis
increased 64% to $43,807,624 as compared to $26,663,302 in the prior year. Gross
sales of Parlux house brands (brands which the Company owns) increased 34% to
$41,209,043, as compared to $30,759,544 in the prior year, due to significant
increases in AdM and BAV which are included in this category. AdM and BAV
increased to $12,951,646 and $2,137,682, respectively, as compared to $2,095,035
and $1,542,138, respectively, in the prior year. Baryshnikov brand product sales
totaled $2,147,781 in its initial period of operations by the Company. These
increases were partially offset by a decrease in gross sales of $3,933,695 of
Francesco Smalto brand fragrances, which license was terminated on September 30,
1996.
Net Sales to unrelated customers increased by 44% to $59,799,669, while
net sales to related parties increased by 6% to $27,840,337. The percentage of
net sales to related parties in relation to total net sales decreased from 39%
in the prior year to 32% in fiscal 1997. Approximately 85% of total net sales in
the fiscal year ended March 31, 1997 came from operations in, or supplied by,
the United States, and 15% from the Company's French subsidiary.
Cost of goods sold increased as a percentage of net sales from 42% for
the fiscal year ended March 31, 1996 to 45% for the fiscal year ended March 31,
1997, which was mainly attributable to the costs involved in discontinuing
certain brands and closing distribution centers in the last quarter of the
fiscal year. These costs totaled approximately $5,243,000. Without the effects
of the restructuring costs, cost of goods sold in the fiscal year ended March
31, 1997 would have been 39%. Cost of goods sold on sales to unrelated customers
and related parties approximated 42% and 51%,
13
14
respectively. All of the Company's products are manufactured by third parties.
For fiscal 1997, approximately 2% of the Company's products were manufactured in
France, and the Company has consolidated its manufacturing, warehousing and
shipping in the United States, as it expects to continue to achieve cost
reductions through consolidation.
Operating expenses increased 80% to $45,138,306 for the year ended
March 31, 1997 compared to $25,099,294 in the prior year, and as a percentage of
sales were 51% in fiscal 1997 compared to 37% in the prior year. The major
portion of the increase was due to advertising and promotional expenses which
increased by 87% to $24,245,502 compared to $12,942,647 in fiscal 1996,
reflecting the investments required to launch new brands, particularly Perry
Ellis "America", the full year support costs for AdM and increased promotional
expenses in connection with the U.S. department and specialty store business.
Selling and distribution costs increased by 86%, and as a percentage of sales
increased from 8% in the prior fiscal year to 11% currently. This was partially
due to costs of approximately $522,000 in connection with terminating
warehousing and distribution operations in Connecticut and France and certain
duplicate costs from maintaining two domestic facilities until March 1997.
General and administrative costs increased by 62% in fiscal 1997 compared to the
prior year, and increased as a percentage of net sales from 8% to 10%. The
increases were mainly attributable to the full year's effect of staff additions
during the last quarter of fiscal 1996 and increased support required for the
AdM cosmetic line. Royalty expense increased by 61% in fiscal 1997 compared to
the prior year, principally due to the royalties required on the sale of Perry
Ellis brand products, and increased to 3% of net sales as compared to 2% in the
prior year. As a result of the above, operating income decreased by 77% to
$3,318,535 or 4% of net sales for the year ended March 31, 1997, compared to
$14,187,843 or 21% of net sales in the prior year.
Interest expense increased by 15% for fiscal 1997 compared to fiscal
1996 due to increased borrowing levels, but decreased from 3% of net sales in
the prior year to 2% in the current year. Exchange gains were $595,045 for
fiscal 1997 compared to exchange gains of $234,074 in the prior year, due to the
weakening of the French franc against the U.S. dollar and the Company's net
French franc liability position.
As a result of the above, income before extraordinary item and taxes
decreased to $1,737,952 in fiscal 1997 compared to $12,536,505 in fiscal 1996.
Due to the redemption of $5,232,440 in convertible debentures in October 1996,
the Company incurred an extraordinary charge of $901,648, which is not
deductible for income tax purposes. Accordingly, the effective tax rate
increased to 79% in the current fiscal year as compared to 38% in the prior
year. As a result, net income decreased 98% to $176,223 in the fiscal year ended
March 31, 1997, compared to $7,772,691 for the fiscal year ended March 31, 1996.
14
15
COMPARISON OF THE TWELVE-MONTH PERIOD ENDED MARCH 31, 1996 WITH THE TWELVE-MONTH
PERIOD ENDED MARCH 31, 1995
For the fiscal year ended March 31, 1996 net sales increased 77% to
$67,726,926 as compared to $38,209,099 in the prior fiscal year. This increase
was primarily due to strong international growth of Perry Ellis and to the full
year effect of Perry Ellis brands in fiscal 1996, compared to a partial year of
operations in the prior year. Sales of Perry Ellis increased 337% to $26,663,302
as compared to $6,101,700 in the prior year. Sales of Parlux continued brands
(brands which the Company owned or held licenses at March 31, 1994) increased
60% to $24,890,474, as compared to $15,551,408 in the prior year, due to
significant increases in Vicky Tiel and Todd Oldham fragrances, and to the
resolution of out-of-stock situations existing in the prior year. Sales of the
FHBH brands declined 18% from $18,024,268 in the prior year to $14,848,225 in
the current fiscal year. Sales of AdM and Bal a Versailles were $2,095,305 and
$1,542,138, respectively, compared to no sales in the prior year period.
Sales of $41,539,466 to unrelated customers increased by 81%, while
sales to related parties of $26,187,460 increased by 72%. The percentage of
sales to related parties in relation to total sales decreased from 40% in the
prior year to 39% in fiscal 1996. Approximately 82% of total net sales in the
fiscal year ended March 31, 1996 came from operations in, or supplied by, the
United States, and 17% from the Company's French subsidiary.
In June 1991, the Company entered into the Barter Agreement for which
the Company would receive advertising credits in exchange for its inventory of
JOAN COLLINS products. The Company expects to fully utilize these bartered
advertising credits as part of its ongoing advertising expenditures. Advertising
credits, less unearned income, are accounted for as prepaid expenses on the
Company's balance sheet at the time such inventory is bartered. Unearned income
equals the amount of advertising credits minus the cost of goods bartered. As
advertising credits are used by the Company, unearned income is debited and the
cost of goods sold is credited. As a result, as the advertising credits are
used, the aggregate cost of goods sold as a percentage of net sales decreases
and gross margin as a percentage of net sales increases.
Cost of goods sold increased as a percentage of net sales from 39% for
the fiscal year ended March 31, 1995 to 42% for the fiscal year ended March 31,
1996, which was mainly attributable to the effect of the Barter Agreement. The
Company utilized advertising credits amounting to $684,000 in the current year
($1,592,000 in 1995) generating $355,000 ($866,000 in 1995) of earned income
which partially offset cost of goods during this period. Without the effects of
the Barter Agreement, cost of goods sold in the fiscal year ended March 31, 1996
would have remained at 42% compared to 41% in the prior fiscal year. All of the
Company's products are manufactured by third parties. For fiscal 1996,
approximately 10% of the Company's products were manufactured in France. The
Company will continue transitioning the consolidation of
15
16
manufacturing, warehousing and shipping to the United States, as it believes
that it can continue to achieve cost reductions through consolidation.
Operating expenses increased 54% to $25,099,294 for the year ended
March 31, 1996 compared to $16,251,094 in the prior year, but as a percentage of
sales were 37% in fiscal 1996 compared to 43% in the prior year. Advertising and
promotional expenses of $12,942,647 increased by 79% compared to fiscal 1995,
reflecting the similar increase in sales. Selling and distribution costs
increased by 45%, but as a percentage of sales decreased from 9% in the prior
fiscal year to 8% currently. General and administrative costs increased by 19%
in fiscal 1996 compared to the prior year, however, as a percentage of net
sales, general and administrative costs declined to 8% compared to 12% in the
prior fiscal year. These percentage decreases reflect the economies of scale
realized from the acquisition of FHBH, Perry Ellis and Alexandra de Markoff
brand products. Royalty expense increased by 83% in fiscal 1996 compared to the
prior year, principally due to the royalties required on the sale of Perry Ellis
and Todd Oldham brand products, but remained relatively constant at 2% of net
sales. As a result of the above, operating income increased by 103% to
$14,187,843 or 21% of net sales for the year ended March 31, 1996, compared to
$7,000,530 or 18% of net sales in the prior year.
Interest expense increased by 58% for fiscal 1996 compared to fiscal
1995 due to increased borrowing levels, but remained relatively constant at 3%
of net sales. Exchange gains were $234,074 for fiscal 1996 compared to exchange
losses of $300,661 in the prior year, due to the weakening of the French franc
against the U.S. dollar and the Company's net French franc liability position.
As a result of the above, income before taxes increased to $12,536,505
in fiscal 1996 compared to $5,510,211 in fiscal 1995. Taxes increased to
$4,763,814 in fiscal 1996 compared to $1,279,000 in fiscal 1995, as the Company
utilized all tax loss carry forwards and reversed its valuation allowance on
deferred tax assets in fiscal 1995. As a result, net income increased 84% to
$7,772,691, or 11% of net sales in the fiscal year ended March 31, 1996,
compared to $4,231,211, or 11% of net sales for the fiscal year ended March 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $49,320,272 at March 31, 1997 from
$30,800,351 at March 31, 1996. The increase was mainly attributable to: (i)
During May 1996, the Company issued $10,000,000 of 5% convertible debentures,
due May 1, 1998 (the "May Debentures"), in private placements pursuant to
Regulation D. The net proceeds were used to repay current liabilities. During
September and October 1996, $6,355,324 of the May Debentures, plus accrued
interest of $110,505, were converted into 1,559,545 shares of common stock; (ii)
During April 1996, the Company issued $3,000,000 of 5% convertible debentures in
private placements pursuant to Regulation S. In June 1996, the debentures, plus
accrued interest of $20,411, were converted into 308,727 shares of common stock,
increasing working capital and stockholders' equity by approximately $2,950,000,
net of
16
17
placement costs; (iii) During July 1996, the Company issued an additional
$10,000,000 of 5% convertible debentures, due June 1, 1997 (the "July
Debentures"), in private placements pursuant to Regulation D. During October
1996, $8,412,236 of the July Debentures, plus accrued interest of $72,466, were
converted into 2,154,222 shares of common stock.
During October 1996, the Company entered into agreements to redeem
$5,232,440 of the May and July Debentures which had not been converted, plus
$105,638 of accrued interest thereon, by issuing $6,239,726 of 10% bonds which
were repaid in accordance with their terms in December 1996. The redemption
resulted in a one-time charge to net income of $901,648 during the quarter ended
December 31, 1996, which is not deductible for income tax purposes.
On July 24, 1996, the Board of Directors authorized the repurchase of
up to 350,000 shares of the Company's common stock. This phase of the repurchase
was completed during January 1997, at which time the Board of Directors
authorized the repurchase of an additional 500,000 shares. As of June 25, 1997,
the Company has repurchased a total of 589,355 shares at a cost of $2,244,915
(381,055 shares at a cost of $1,749,173 as of March 31, 1997).
In August 1995, the Company entered into an agreement to borrow, on an
unsecured basis, $500,000 from Distribudora de Perfumes Senderos, Ltda., with an
additional $500,000 available at the option of the Company, to be drawn upon
prior to October 31, 1995. The note bore interest at 12% per annum and was
originally due on February 23, 1996, but was subsequently extended through
August 1996. In connection with the note, the Company issued warrants to
purchase 53,978 shares of Parlux common stock at a price of $8.11 per share,
which expire on August 21, 1997. The Company borrowed a total of $674,722 under
the agreement, which was repaid in installments of $500,000 and $174,722 in May
and August 1996, respectively.
In June 1995, the Company borrowed, on an unsecured basis, $300,000
from an individual related to the Company's Chairman of the Board. The note bore
interest at 11% per annum and was due on June 27, 1997. In connection with the
note, the Company issued warrants to purchase 60,000 shares of Parlux common
stock at a price of $6.94 per share, which were to expire on June 27, 1997. On
July 15, 1996, these warrants were exercised, and a portion of the proceeds was
utilized to repay the $300,000 note and accrued interest thereon.
The Company has overdraft and trade financing facilities aggregating
18,150,000 French francs (approximately $3,220,000 as of March 31, 1997). These
credit facilities are reviewed annually.
In May 1997, the Company entered into a three year Loan and Security
Agreement (the Credit Agreement) with General Electric Capital Corporation
(GECC). Under the Credit Agreement, the Company is able to borrow, depending on
the availability of a borrowing base, on a revolving basis, up to $25,000,000 at
an interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street
Journal prime rate, at the Company's option.
17
18
GECC has taken a security interest in substantially all of the domestic assets
of the Company. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios. Proceeds from the Credit Agreement
were used, in part, to repay the Company's previous $10,000,000 credit facility
with Finova Capital Corporation and Merrill Lynch Financial Services, Inc.
Management believes that, based on current circumstances, the new
Credit Agreement will be sufficient to fund the Company's operating needs.
IMPACT OF CURRENCY EXCHANGE AND INFLATION
The Company's business operations were positively affected in the
current year in the amount of $595,045, positively affected in the amount of
$234,074 in the fiscal year ended March 31, 1996, and negatively affected in the
amount of $300,661 in the fiscal year ended March 31, 1995, due to the
movement of the French franc vs. the U.S. dollar.
The Company's sales and purchases are virtually all in U.S. dollars or
French francs. A strengthening of the French franc vis-a-vis the U.S. dollar
results in exchange rate losses for the Company. Conversely, a weakening of the
French franc vis-a-vis the U.S. dollar results in exchange rate gains for the
Company.
The Company monitors exchange rates on a daily basis and regularly
seeks to evaluate long-term expectations for the French franc in order to
minimize its exchange rate risk.
The Company has completed the centralization of manufacturing in the
United States which will minimize the currency exchange impact on intercompany
transactions for the future.
ITEM 8. FINANCIAL STATEMENTS
The financial statements are included herein commencing on page F-1.
The financial statement schedules are listed in the Index to Financial
Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
18
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
19
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements beginning on page F-1 of this annual
report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1 of this annual
report.
3. Exhibit Index
The following exhibits are attached:
4.24 Credit Agreement, dated May 23, 1997, between the Company and General
Electric Capital Corporation
10.40 Employment Agreement with Ilia Lekach, dated as of April 1, 1997.
10.41 Employment Agreement with Zalman Lekach, dated as of April 1, 1997.
10.42 Employment Agreement with Frank A. Buttacavoli, dated as of April 1,
1997.
10.43 Employment Agreement with Ruben Lisman, dated as of April 1, 1997.
10.44 Consulting Agreement with Cosmix, Inc., dated as of April 1, 1997.
10.45 Consulting Agreement with Cambridge Development Corp.,dated as of
April 1, 1997.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended
March 31, 1997.
20
21
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
FORM 10-K SCHEDULES:
Schedule VIII - Valuation and Qualifying Accounts F-25
Schedule IX - Short-term Bank Borrowings F-26
All other Schedules are omitted as the required information is not
applicable or the information is presented in the financial statements
or the related notes thereto.
F-1
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and
Shareholders of Parlux Fragrances, Inc.
In our opinion, the consolidated financial statements listed in the index
referred to under Item 14(a)(1) and (2) on page 20 and appearing on page F-1
present fairly, in all material respects, the financial position of Parlux
Fragrances, Inc. and its subsidiaries at March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1997, in conformity with generally accepted
accounting principles. 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Miami, Florida
June 26, 1997
F-2
23
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31,
---------------------------------
1997 1996
---------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 191,486 $ 339,423
Receivables, net of allowance for
doubtful accounts, sales returns and
allowances of approximately $2,494,000 and $2,121,000
in 1997 and 1996, respectively 14,289,841 10,892,347
Trade receivables from related parties 22,862,335 13,482,423
Inventories, net 35,595,323 35,762,570
Prepaid expenses and other current assets 8,266,126 7,189,213
------------- -------------
TOTAL CURRENT ASSETS 81,205,111 67,665,976
Equipment and leasehold improvements, net 3,253,800 2,475,919
Trademarks, licenses and goodwill, net 26,783,807 24,623,417
Other 142,526 473,611
------------- -------------
TOTAL ASSETS $ 111,385,244 $ 95,238,923
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ 12,665,065 $ 11,564,917
Accounts payable 11,904,808 18,739,117
Accrued expenses 2,255,966 1,543,591
Income taxes payable 5,059,000 4,768,000
Convertible debentures -- 250,000
------------- -------------
TOTAL CURRENT LIABILITIES 31,884,839 36,865,625
Borrowings, less current portion 4,949,230 4,694,239
Convertible debentures -- 11,450,000
Deferred tax liability 432,440 183,864
------------- -------------
TOTAL LIABILITIES 37,266,509 53,193,728
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
------------- -------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 0 issued and outstanding -- --
Common stock, $0.01 par value, 30,000,000
shares authorized, 17,447,478 and 11,456,426
shares issued in 1997 and 1996, respectively 174,475 114,564
Additional paid-in capital 66,753,596 32,881,207
Retained earnings 9,176,872 9,000,649
Cumulative translation adjustment (103,562) 182,247
------------- -------------
76,001,381 42,178,667
Less - 420,055 and 39,000 shares of common stock in treasury,
at cost in 1997 and 1996, respectively (1,882,646) (133,472)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 74,118,735 42,045,195
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,385,244 $ 95,238,923
============= =============
See notes to consolidated financial statements.
F-3
24
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year ended March 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales:
Unrelated customers $ 59,799,669 $ 41,539,466 $ 22,978,956
Related parties 27,840,337 26,187,460 15,230,143
------------ ------------ ------------
87,640,006 67,726,926 38,209,099
Cost of goods sold 39,183,165 28,439,789 14,957,475
------------ ------------ ------------
Gross profit 48,456,841 39,287,137 23,251,624
------------ ------------ ------------
Operating expenses:
Advertising and promotional 24,245,502 12,942,647 7,248,839
Selling and distribution 9,553,192 5,130,099 3,530,133
General and administrative 8,926,499 5,524,416 4,648,899
Royalties 2,413,113 1,502,132 823,223
------------ ------------ ------------
Total operating expenses 45,138,306 25,099,294 16,251,094
------------ ------------ ------------
Operating income 3,318,535 14,187,843 7,000,530
Interest expense and bank charges 2,175,628 1,885,412 1,189,658
Exchange (gains) losses (595,045) (234,074) 300,661
------------ ------------ ------------
Income before extraordinary item and income taxes 1,737,952 12,536,505 5,510,211
Income taxes 660,081 -- --
------------ ------------ ------------
Income before extraordinary item 1,077,871 12,536,505 5,510,211
Extraordinary item - loss on conversion of debt 901,648 4,763,814 1,279,000
------------ ------------ ------------
Net income $ 176,223 $ 7,772,691 $ 4,231,211
============ ============ ============
Earnings per common and common
equivalent share:
Primary:
Income before extraordinary item $ 0.07 $ 0.74 $ 0.50
Extraordinary item - loss on
conversion of debt $ (0.05) -- --
------------ ------------ ------------
Net income $ 0.02 $ 0.74 $ 0.50
============ ============ ============
Fully diluted:
Income before extraordinary item $ 0.07 $ 0.72 $ 0.48
Extraordinary item - loss on
conversion of debt $ (0.05) -- --
------------ ------------ ------------
Net income $ 0.02 $ 0.72 $ 0.48
============ ============ ============
See notes to consolidated financial statements.
F-4
25
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
COMMON STOCK
-------------------------- RETAINED
ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
----------- ----------- ----------- -----------
BALANCE at April 1, 1994 2,861,189 $ 28,612 $ 8,868,994 (2,959,264)
Net income -- -- -- 4,231,211
Issuance of common stock in connection with:
Exercise of employee stock options 19,025 190 61,020 --
Sale of stock in private placement 110,000 1,100 438,523 --
Acquisition of assets 500,000 5,000 2,195,000 --
Foreign currency translation adjustment -- -- -- --
Purchase of 39,000 shares of treasury stock, at cost -- -- -- --
----------- ----------- ----------- -----------
BALANCE at March 31, 1995 3,490,214 34,902 11,563,537 1,271,947
Net income -- -- -- 7,772,691
Issuance of common stock upon exercise of:
Employee stock options 11,175 112 33,910 --
Warrants 1,056,916 10,569 3,006,022 --
Sale of stock in private placements 1,001,514 10,015 7,605,570 --
Stock issued in connection with the acquisition of assets 424,000 4,240 3,739,760 --
Conversion of debentures, net of unamortized debt 1,073,688 10,737 6,932,408 --
issuance costs
Adjustment for stock split 4,398,919 43,989 -- (43,989)
Foreign currency translation adjustment -- -- -- --
----------- ----------- ----------- -----------
BALANCE at March 31, 1996 11,456,426 114,564 32,881,207 9,000,649
Net income -- -- -- 176,223
Issuance of common stock upon exercise of:
Employee stock options 14,500 145 18,448 --
Options 176,000 1,760 1,406,240 --
Warrants 60,000 600 415,650 --
Stock issued in connection with the acquisition of assets 370,000 3,700 3,002,550 --
Conversion of debentures, net of unamortized debt
issuance costs 5,370,552 53,706 29,029,501 --
Foreign currency translation adjustment -- -- -- --
Purchase of 381,055 shares of treasury stock, at cost -- -- -- --
----------- ----------- ----------- -----------
BALANCE at March 31, 1997 17,447,478 $ 174,475 $66,753,596 $ 9,176,872
=========== =========== =========== ===========
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
----------- ----------- -----------
BALANCE at April 1, 1994 $ 129,258 -- $ 6,067,600
Net income -- -- 4,231,211
Issuance of common stock in connection with:
Exercise of employee stock options -- -- 61,210
Sale of stock in private placement -- -- 439,623
Acquisition of assets -- -- 2,200,000
Foreign currency translation adjustment 216,495 -- 216,495
Purchase of 39,000 shares of treasury stock, at cost -- $ (133,472) (133,472)
----------- ----------- -----------
BALANCE at March 31, 1995 345,753 (133,472) 13,082,667
Net income -- -- 7,772,691
Issuance of common stock upon exercise of:
Employee stock options -- -- 34,022
Warrants -- -- 3,016,591
Sale of stock in private placements -- -- 7,615,585
Stock issued in connection with the acquisition of assets -- -- 3,744,000
Conversion of debentures, net of unamortized debt
issuance costs -- -- 6,943,145
Adjustment for stock split -- -- --
Foreign currency translation adjustment (163,506) -- (163,506)
----------- ------------ -----------
BALANCE at March 31, 1996 182,247 (133,472) 42,045,195
Net income -- -- 176,223
Issuance of common stock upon exercise of:
Employee stock options -- -- 18,593
Options issued in connection with the
acquisition of assets -- -- 1,408,000
Warrants -- -- 416,250
Stock issued in connection with the acquisition of assets -- -- 3,006,250
Conversion of debentures, net of unamortized debt
issuance costs -- -- 29,083,207
Foreign currency translation adjustment (285,809) -- (285,809)
Purchase of 381,055 shares of treasury stock, at cost -- (1,749,174) (1,749,174)
----------- ------------ -----------
BALANCE at March 31, 1997 $ (103,562) $(1,882,646) $74,118,735
=========== =========== ===========
See notes to consolidated financial statements
F-5
26
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended March 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 176,223 $ 7,772,691 $ 4,231,211
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,784,790 1,563,673 807,491
Loss on disposal of equipment 137,971
Net deferred tax benefit (1,103,817) (4,184) (628,504)
Changes in assets and liabilities net of effect of acquisitions:
(Increase) decrease in trade receivables - customers (4,107,535) (7,900,097) 2,683,107
Increase in trade receivables - related parties (9,379,912) (8,588,713) (1,788,026)
Decrease (increase) in inventories 1,451,721 (15,371,203) 1,919,988
Decrease (increase) in prepaid expenses and other current assets 954,549 (1,032,135) 944,125
Decrease (increase) in other non-current assets 296,061 (376,504) (4,497)
(Decrease) increase in accounts payable (7,989,864) 11,401,204 (1,321,624)
Increase in accrued expenses and income taxes payable 1,296,895 2,726,637 2,557,874
(Decrease) increase in advances from customers -- (2,451,059) 2,451,059
------------ ------------ ------------
Total adjustments (15,659,141) (20,032,381) 7,620,993
------------ ------------ ------------
Net cash (used in) provided by operating activities (15,482,918) (12,259,690) 11,852,204
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (1,579,912) (1,168,386) (336,046)
Purchases of trademarks (19,309) (82,122) (17,467)
Cash paid in acquisitions:
Fred Hayman Beverly Hills -- -- (2,000,000)
Perry Ellis -- -- (7,500,000)
Alexandra de Markoff -- (8,608,000) --
Richard Barrie Fragrances, Inc. (694,707) -- --
Bal a Versailles -- (1,697,500) --
------------ ------------ ------------
Net cash used in investing activities (2,293,928) (11,556,008) (9,853,513)
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - overdraft facilities (646,368) 145,450 (481,929)
Proceeds (payments) - receivable financing facilities 1,188,890 579,731 (348,082)
(Payments) proceeds - notes payable Distr. de Perfumes Senderos (674,722) 674,722 --
(Payments) proceeds - notes payable related parties (400,000) 300,000 --
Proceeds (payments) - revolving credit facility Finova Capital Corp. 3,989,713 (127,352) 4,015,729
Payments to National Bank of Kuwait -- (560,000) (2,040,000)
(Payments) proceeds from Eagle Bank (482,392) 401,378 81,014
Payments to Sanofi Beaute, Inc. -- (5,501,535) (947,335)
Payments to Fred Hayman Beverly Hills (478,510) (202,480) (2,770,027)
Proceeds - International Finance Bank 753,125 -- --
Payments - Parfums Jean Desprez (2,553,360) -- --
Proceeds - Lyon Credit Corporation 984,858 -- --
Payments - note payable to stockholder (148,545) -- --
Proceeds (payments) - other notes payable 122,450 -- (29,969)
Proceeds - 7% debentures, net -- 3,666,000 --
Proceeds - 5% debentures, net 16,451,774 14,614,500 --
Purchases of treasury stock (1,749,174) -- (133,472)
Proceeds from issuance of common stock, net 1,489,520 9,771,094 500,833
------------ ------------ ------------
Net cash provided by (used in) financing activities 17,847,259 23,761,508 (2,153,238)
------------ ------------ ------------
Effect of exchange rate changes on cash (218,350) 91,500 417,968
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (147,937) 37,310 263,421
Cash and cash equivalents, beginning of year 339,423 302,113 38,692
------------ ------------ ------------
Cash and cash equivalents, end of year $ 191,486 $ 339,423 $ 302,113
============ ============ ============
See notes to consolidated financial statements.
F-6
27
PARLUX FRAGRANCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF BUSINESS
Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984,
and is a manufacturer and distributor of prestige fragrances, cosmetics
and beauty related products.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Parlux
Fragrances, Inc., Parlux S.A., a wholly-owned French subsidiary
(S.A.) and Parlux, Ltd. (jointly referred to as the "Company"). All
material intercompany accounts and transactions have been eliminated
in consolidation.
C. REVENUE RECOGNITION
Revenue is recognized when the product is shipped to a customer.
Estimated amounts for sales returns and allowances are recorded at the
time of sale.
D. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The more significant
estimates relate to the Company's reserve for doubtful accounts, sales
returns and allowances, inventory obsolescence and periods of
amortization for trademarks, licenses and goodwill. Actual results
could differ from those estimates.
E. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. The cost of inventories includes product costs and
handling charges, including the allocation of the Company's applicable
overhead.
F. BARTER SALES AND CREDITS
The Company has sold certain of its products to a barter broker in
exchange for advertising that the Company will use. The Company defers
the gross margin on barter sales until the advertising is used.
The estimated value of the advertising is recorded as a prepaid expense
on the Company's balance sheet at the time such inventory is sold, net
of unearned income equal to the amount of advertising credits minus the
related cost of goods sold. As advertising credits are used by the
Company, advertising and promotional expense is charged for the
advertising credits used, unearned income is debited and cost of goods
sold is credited. As a result, as the advertising credits are used,
aggregate cost of goods sold as a percentage of net sales decreases and
gross margin as a percentage of net sales increases.
F-7
28
G. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Equipment is
depreciated using the straight-line method over the estimated useful
life of the asset. Leasehold improvements are amortized over the lesser
of the estimated useful life or the lease period. Repairs and
maintenance charges are expensed as incurred, while betterments and
major renewals are capitalized.
H. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are recorded at cost and amortized
over the estimated periods of benefit, principally 25 years.
Accumulated amortization at March 31, 1997 of trademarks, licenses and
goodwill was $2,360,373 ($983,499 at March 31, 1996).
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of" (SFAS 121), which requires a
review of the carrying value of intangibles whenever events or changes
in circumstances indicate that the carrying value amount of the asset
may not be recoverable. Any such determination would require a charge
to income for the estimated reduction in carrying value.
I. ADVERTISING COSTS
Advertising and promotional expenditures are charged to operations as
incurred. These expenditures include print and media advertising as
well as in-store promotions.
J. INCOME TAXES
The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and
liabilities are recorded, using currently enacted tax rates, based upon
the difference between the tax bases of assets and liabilities and
their carrying amounts for financial statement purposes.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense
is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
K. FOREIGN CURRENCY TRANSLATION
The assets and liabilities of S.A. are translated into U.S. dollars at
year-end exchange rates. Income and expense items are translated at
weighted average rates of exchange prevailing during the year.
Translation adjustments are accumulated as a separate component of
stockholders' equity.
Both realized and unrealized gains and losses arising from foreign
currency transactions are recorded in the statement of income.
L. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of instruments
whose fair value approximates their carrying value.
M. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
On October 26, 1995, the Company announced a two-for-one stock split
effected in the form of a dividend to shareholders of record as of
November 3, 1995 (the stock split). All references to share and per
share data within the financial statements and notes thereto have been
retroactively adjusted to reflect the stock split.
F-8
29
Fully dilutive earnings per common and common equivalent share have
been computed based upon the weighted average number of shares of
common stock and common stock equivalents outstanding of 17,647,503,
10,924,808 and 9,014,808 for the years ended March 31, 1997, 1996 and
1995, respectively. The modified treasury stock method was used during
1995 to determine the dilutive effect of the options, warrants, and
convertible debentures since the number of shares of common stock
issuable upon their exercise exceeds 20% of the outstanding common
shares.
N. STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, Accounting For
Stock Based Compensation (SFAS 123). SFAS 123 establishes a fair value
based method of accounting for stock based compensation plans, the
effect of which can either be disclosed or recorded. The Company
adopted the provisions of SFAS 123 for the year ended March 31, 1997.
Upon adoption, the Company retained the intrinsic value method of
accounting for stock based compensation, which it previously used. Had
the fair value based provisions of SFAS 123 been adopted, the effect
would be insignificant. Accordingly, no proforma disclosures have been
presented.
O. CASH FLOW INFORMATION
The Company considers temporary investments with an original maturity
of three months or less to be cash equivalents.
Supplemental disclosures of cash flow information follow:
1997 1996 1995
---- ---- ----
Cash paid for:
Interest $2,210,000 $1,940,000 $ 991,000
========== ========== ==========
Income taxes $ 840,000 $1,390,000 $ 162,000
========== ========== ==========
In addition to the barter transactions discussed in Note 9 (D), the
following non-cash transactions were entered into:
Year ended March 31, 1997:
- Notes payable and accrued interest in the amount of $300,000 and
$53,323, respectively, were repaid from the proceeds of the
issuance of common stock in connection with the exercise of
certain warrants.
- Acquisition of Richard Barrie Fragrances, Inc. was partially
funded through the issuance of common stock, as discussed in
Note 6.
Year ended March 31, 1996:
- Acquisition of the Alexandra de Markoff cosmetic line and the
Bal A Versailles fragrance lines were partially funded through the
issuance of common stock and notes payable, respectively, as
discussed in Note 6.
- Notes payable and accrued interest in the amount of $792,603 and
$178,750, respectively, were repaid through the issuance of common
stock in connection with the exercise of certain warrants and
options.
Year ended March 31, 1995:
- Acquisitions of the Fred Hayman and Perry Ellis fragrance lines
which were partially financed through the issuance of common
stock and notes payable as discussed in Note 6.
F-9
30
P. RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for prior
years have been reclassified to conform to the 1997 presentation.
2. CORPORATE RESTRUCTURING
In November of 1996, the Company engaged investment bankers to explore a
potential sale or merger of the Company, or other alternatives which would
lead to the maximization of shareholder value. In March of 1997, the
Company announced that such exploration had not resulted in alternatives
which should be pursued. Accordingly, the Company announced that it would
independently restructure the Company by terminating warehousing and
distribution operations in Connecticut and France, discontinuing certain
brands, and consolidating operations in South Florida. Costs related to
this restructuring of approximately $5,765,000 have been recorded in the
quarter ended March 31, 1997, increasing costs of goods sold and selling
and distribution expenses by approximately $5,243,000 and $522,000,
respectively.
3. INVENTORIES
The components of inventories are as follows:
March 31,
----------------------------
1997 1996
---- ----
Finished products $16,075,376 $13,477,055
Components and packaging material 14,944,196 17,306,010
Raw material 4,575,751 4,979,505
----------- -----------
$35,595,323 $35,762,570
=========== ===========
The above amounts are net of reserves for potential inventory obsolescence
of $2,833,000 and $1,200,000 at March 31, 1997 and 1996, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
---------------------------
1997 1996
---- ----
Promotional supplies $4,313,083 $2,903,611
Deferred tax assets 2,168,945 816,552
Prepaid advertising 534,686 424,000
Advertising barter credits, net 723,263 1,059,332
Advances to vendors 117,854 1,463,007
Other 408,295 522,711
---------- ----------
$8,266,126 $7,189,213
========== ==========
F-10
31
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
March 31, Estimated
------------------------------ useful lives
1997 1996 (in years)
---- ---- ----------
Molds and equipment $ 6,113,025 $ 4,593,621 3-7
Furniture and fixtures 966,149 840,908 5
Leasehold improvements 460,411 126,756 5-7
Vehicles 5,617 6,260 3
----------- -----------
7,545,202 5,567,545
Less: accumulated depreciation and
amortization (4,291,402) (3,091,626)
----------- ----------
$ 3,253,800 $2,475,919
=========== ==========
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended March 31,1997, 1996 and 1995 was
$1,407,916, $1,007,522, and $560,771, respectively.
6. ACQUISITIONS
On June 28, 1996, the Company consummated the acquisition of substantially
all of the assets and assumption of certain liabilities of Richard Barrie
Fragrances, Inc. (RBF), pursuant to an asset purchase agreement entered
into on January 31, 1996.
Parlux acquired from RBF certain inventories, fixed assets and licenses
relating to the brands Baryshnikov and Melrose Place, as well as fixed
assets located in RBF's office and distribution center in Orange,
Connecticut.
Parlux provided as consideration $750,000 in cash which was paid on July 1,
1996, and 370,000 shares of common stock. The common stock was valued at
$3,006,250, the average price of the shares on January 30, 1996, the date
of the original asset purchase agreement, which in management's opinion,
better reflected the acquisition price, since the average price of the
common stock at the date of closing was affected by matters unrelated to
the acquisition or the regular operations of the Company.
The estimated fair value of the net assets acquired is summarized as
follows:
Molds and other fixed assets $ 893,856
Inventories, net 1,784,474
Other assets 141,518
Goodwill and licenses 2,417,957
Accounts payable and other liabilities (1,481,555)
-----------
Fair value of net assets acquired $ 3,756,250
===========
On March 19, 1996, the Company consummated the acquisition of the
trademarks and certain inventory for the Bal A Versailles (BAV) fragrance
and beauty products brand name from Parfums Jean Desprez, S.A., pursuant to
a letter of intent entered into on January 11, 1996.
F-11
32
At closing, the Company provided as consideration $1,697,500 in cash and
$2,553,360 in the form of non-interest bearing promissory notes due in
varying installments through August 1996.
The estimated fair value of the assets acquired is summarized as follows:
Goodwill, licenses and trademarks $2,872,500
Inventories 878,360
Covenant-not-to-compete 300,000
Molds and other fixed assets 200,000
----------
Fair value of assets acquired $4,250,860
==========
On December 27, 1995, the Company consummated the acquisition of
substantially all of the assets of Alexandra de Markoff (AdM), a prestige
cosmetic line, pursuant to an asset purchase agreement entered into on
September 21, 1995 between the Company and Revlon Holdings, Inc. (Revlon).
Parlux acquired from Revlon certain inventories and fixed assets and the
rights in certain trademarks relating to AdM. Parlux provided as
consideration $8,608,000 in cash, 424,000 shares of common stock valued at
$3,392,000 and agreed to accept returns and allowances in excess of
$100,000 related to sales of AdM products by Revlon prior to December 27,
1995. In addition, the Company granted Revlon an option to purchase 176,000
shares of the Company's common stock, until June 30, 1996, at an exercise
price of $8.00 per share; management's estimate of the value of these
options was $352,000.
The estimated fair value of the net assets acquired is summarized as
follows:
Goodwill, licenses and trademarks $11,117,000
Advance for future inventory purchases 4,000,000
Molds and other fixed assets 85,000
Reserve for sales returns and allowances (2,850,000)
-----------
Fair value of net assets acquired $12,352,000
===========
In December 1994, the Company consummated the acquisition of the license
for the worldwide manufacturing and distribution rights and for the use of
the trademarks associated with the Perry Ellis International, Inc. ( Perry
Ellis ) line of fragrances and beauty products pursuant to an Asset
Purchase Agreement entered into in October 1994 between the Company and
Sanofi Beaute, Inc., the prior holder of the Perry Ellis fragrances
license. In addition to the acquisition of the license, which is renewable
every two years if the Company meets certain average sales levels, Parlux
acquired from Sanofi: a) the assets, rights, claims and contracts relating
to the brands Perry Ellis for Men(R) and 360(Degree) Perry Ellis(R) ( the
Brands ), b) certain inventories relating to the Brands, c) certain fixed
assets relating to the Brands, and d) the ownership rights in certain
trademarks relating to the Brands.
At closing, the Company provided as consideration, $7,500,000 in cash and
$6,535,660 in the form of a one-year promissory note, bearing interest at
7% and secured by the assets acquired under the Purchase Agreement.
The estimated fair value of the assets acquired is summarized as follows:
Goodwill, license and trademarks $ 7,500,000
Inventories 4,528,925
Promotional supplies 1,073,135
Molds and other fixed assets 933,600
-----------
Fair value of assets acquired $14,035,660
===========
F-12
33
In June 1994, the Company entered into an Asset Purchase Agreement with
Fred Hayman Beverly Hills, Inc. ( FHBH ) pursuant to which the Company
purchased substantially all of the assets and liabilities of the FHBH
fragrance division, including inventory, accounts receivable molds and
other assets. In addition, FHBH granted Parlux an exclusive 55-year,
royalty free license to use FHBH's United States Class 3 trademarks for
Fred Hayman(R), 273(R), Touch(R), With Love(R), and Fred Hayman Personal
Selections(R) and the corresponding international registrations.
In consideration for the purchased assets, the Company provided the
following to the seller: (i) payment of $2,000,000 in cash, (ii) issuance
of 1,000,000 shares of the Company's common stock (approximately $2,200,000
market value at date of closing), (iii) delivery of a short-term
non-interest bearing note in the amount of $2,544,942 and (iv) delivery of
a 10-year 7.25% note in the amount of $5,950,774. In addition, the Company
granted FHBH warrants to purchase 200,000 shares of the Company's common
stock, for a five-year period, at an exercise price of $2.13 per share.
The estimated fair value of the net assets acquired is summarized as
follows:
Accounts receivable, net $ 2,252,796
Inventories 6,461,236
Prepaid promotional supplies and
expenses 1,407,897
Molds 477,894
Goodwill 2,655,719
Accounts payable and other liabilities (559,827)
------------
Fair value of net assets acquired $ 12,695,715
============
Goodwill, licenses and trademarks recorded in connection with these
acquisitions are being amortized over periods ranging from 10 to 25 years.
7. BORROWINGS
The composition of debt is as follows:
March 31, 1997 March 31, 1996
-------------- --------------
Note payable to FHBH, secured by the acquired
licensed trademarks, interest at 7.25%, payable
in equal monthly installments of $69,863,
including interest, through June 2004 $ 4,694,699 $ 5,173,209
Revolving credit facility payable to Finova Capital
Corporation, interest at Citibank N.A. prime rate
(8.25% at March 31, 1997) plus 2%, payable on
December 27, 1997, net of restricted cash of $884,464
and $273,587 at March 31, 1997 and 1996, respectively 7,878,090 3,888,378
Unsecured $1,000,000 line of credit payable to
International Finance Bank, interest at the bank's prime
rate plus 2%, due January 1, 1998 753,125 --
Note payable to Lyon Credit Corporation,
secured by certain equipment, interest at 11%,
payable in equal monthly installments through
September 2001 984,858 --
F-13
34
Notes payable to Parfums Jean Desprez,
non-interest bearing, payable in installments
through February 1997 -- 2,553,360
Note payable to Distribuidora de Perfumes Senderos,
Ltda., unsecured, interest at 12%, repaid in August 1996 -- 674,722
Unsecured $500,000 line of credit payable to
Eagle National Bank, interest at the bank's
prime rate plus 2%, repaid in January 1997 -- 482,392
Unsecured notes payable to related parties,
interest payable monthly at 11%, repaid
during fiscal 1997 -- 700,000
Overdraft facilities, interest from 10.25%
to 10.75%, payable on demand (1) 1,128,946 646,368
Receivable financing facilities, interest at 9.25% to
10.25%, payable on demand (1) 1,981,820 1,921,876
Note payable to stockholder, interest at 10%,
repaid in May 1996 (1) -- 148,544
Other notes payable 192,757 70,307
------------ ------------
17,614,295 16,259,156
Less: long-term borrowings (4,949,230) (4,694,239)
------------ ------------
Short-term borrowings $ 12,665,065 $ 11,564,917
============ ============
(1) Denominated in French francs
In May 1997, the Company entered into a Loan and Security Agreement ( the
Credit Agreement ) with General Electric Capital Corporation (GECC),
pursuant to which the Company is able to borrow, depending on the
availability of a borrowing base, on a revolving basis for a three-year
period, up to $25,000,000 at an interest rate of LIBOR plus 2.50% or .75%
in excess of the Wall Street Journal prime rate, at the Company's option.
GECC has taken a security interest in substantially all of the domestic
assets of the Company. The Credit Agreement contains customary events of
default and covenants which prohibit, among other things, incurring
additional indebtedness in excess of a specified amount, paying dividends,
creating liens, and engaging in mergers and acquisitions without the prior
consent of GECC. The Credit Agreement also contains certain financial
covenants relating to net worth, interest coverage and other financial
ratios. Proceeds from the Credit Agreement were used, in part, to repay the
Company's previous $10,000,000 credit facility with Finova Capital
Corporation and Merrill Lynch Financial Services, Inc.
The Company has overdraft and trade financing facilities aggregating
18,150,000 French francs (approximately $3,220,000 as of March 31, 1997),
which were fully utilized at March 31, 1997. These credit facilities are
reviewed annually.
On September 21, 1995, in connection with the proposed purchase of the AdM
cosmetic line, the Company entered into a $2,400,000 loan agreement with
Revlon. The loan was repaid on December 27, 1995 upon closing of the AdM
transaction.
F-14
35
In August, 1995, the Company entered into an agreement to borrow, on an
unsecured basis, $500,000 from Distribuidora de Perfumes Senderos, Ltda.,
with an additional $500,000 available at the option of the Company, to be
drawn upon prior to October 31, 1995. The note bore interest at 12% per
annum and was originally due on February 23, 1996. The Company borrowed a
total of $674,722 under the agreement which was repaid in installments of
$500,000 and $174,722 in May and August 1996, respectively.
In June 1995, the Company borrowed, on an unsecured basis, $300,000 from an
individual related to the Company's Chairman and Chief Executive Officer.
The note bore interest at 11% per annum and was due on June 27, 1997. In
connection with the note, the Company issued warrants to purchase 60,000
shares of Parlux common stock at a price of $6.94 per share, which were to
expire on June 27, 1997. On July 15, 1996, these warrants were exercised,
and a portion of the proceeds was utilized to repay the $300,000 note and
accrued interest thereon.
During September 1990, the Company borrowed on an unsecured basis, $400,000
from individuals related to the Company's Chairman and Chief Executive
Officer. The notes bore interest at 11% per annum and repayment had been
postponed until December 1996. The Company repaid $50,000 of these loans
during each of December 1996 and January 1997. The remaining $300,000
liability was assumed by the Company's Chairman and offset against advances
due from him.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
1998 $12,665
1999 806
2000 827
2001 849
2002 822
Thereafter 1,645
-------
Total $17,614
=======
8. CONVERTIBLE DEBENTURES
During the period November 2, 1995 through March 31, 1996, the Company
issued $3,700,000 of 7% convertible debentures and $15,000,000 of 5%
convertible debentures (the Debentures), pursuant to Regulation S. The
Debentures were convertible into shares of the Company's common stock at
85% of the closing price of the stock as listed on NASDAQ over specific
time frames. As of March 31, 1996, $7,000,000 of the Debentures, plus
accrued interest of $48,146, had been converted into 1,073,688 shares of
common stock. Subsequent to March 31, 1996, the remaining $11,700,000 have
been converted into 1,348,058 shares of common stock.
During April and May 1996, the Company issued an additional $13,000,000 of
5% convertible debentures, $3,000,000 pursuant to Regulation S and
$10,000,000 pursuant to Regulation D with the same conversion features and
terms as those issued above, of which $9,355,324, plus accrued interest of
$130,916, have been converted into 1,868,272 shares of common stock.
On July 2, 1996, the Company issued an additional $10,000,000 of 5%
Debentures, in private placements pursuant to Regulation D, with the same
conversion features and terms as those issued above, except that the
conversion rate was 86%. During October 1996, $8,412,236 of the debentures,
plus accrued interest of $72,466, were converted into 2,154,222 shares of
common stock.
F-15
36
During October 1996, the Company entered into agreements to redeem
$5,232,440 of the May and July Debentures which had not been converted,
plus $105,638 of accrued interest thereon, by issuing $6,239,726 of 10%
bonds which were repaid in accordance with their terms in December 1996.
The redemption resulted in a one-time charge to net income of $901,648
during the quarter ended December 31, 1996, which is not deductible for
income tax purposes.
9. COMMITMENTS AND CONTINGENCIES
A. LEASES:
The Company leases its office space and certain equipment in both the
U.S. and France under operating leases expiring on various dates through
the year ending October 31, 2005. Total rent expense charged to
operations for the years ended March 31, 1997, 1996 and 1995 was
approximately $1,451,000, $916,000 and $568,000, respectively.
At March 31, 1997, the minimum annual rental commitments are as follows
(in 000's):
For the year ending March 31,
-----------------------------
1998 $1,149
1999 1,097
2000 958
2001 860
2002 782
Thereafter 2,051
------
Total $6,897
======
B. LICENSE AND DISTRIBUTION AGREEMENTS:
The Company holds the following exclusive worldwide licenses to
manufacture and sell fragrance and other related products:
Perry Ellis
Baryshnikov
Phantom of the Opera
Vicky Tiel
Todd Oldham
Under each of these arrangements, the Company must pay royalties at
various rates based on net sales, and spend minimum amounts for
advertising based on sales volume. The agreements expire on various
dates through 1998 and are subject to renewal.
In May 1995, the Company terminated its license agreement with Francesco
Smalto for breach of contract. On October 5, 1995, the Company entered
into a transition and termination agreement with SMALTO which provided
for the continued use of the Francesco Smalto trademark through
September 30, 1996. The agreement contained certain production
restrictions and required a fixed amount of royalties during the period,
which approximated 5% of net sales of Smalto fragrances. Sales of
Francesco Smalto products represented approximately 1% of total Company
net sales for the year ended March 31, 1997.
The Company has informed the Todd Oldham licensor of its intent not to
renew the license. In accordance with the licensing agreement, the
Company may produce and sell the Todd Oldham trademarked products until
March 31, 1998. Sales of Todd Oldham products represented approximately
2% of total Company net sales for the year ended March 31, 1997.
F-16
37
The Company believes it is presently in compliance with all material
obligations under the above agreements. The Company expects to incur
continuing obligations for advertising and royalty expense under these
license agreements. The minimum amounts of these obligations derived
from the aggregate minimum sales goals, set forth in the agreements,
over the remaining contract periods are as follows (in 000's):
Fiscal year ending March 31, 1998 1999 2000
---------------------------- ---- ---- ----
Advertising $9,729 $8,409 $8,409
Royalties $696 $375 $375
C. TRADEMARKS:
Though various acquisitions since 1991, the Company acquired worldwide
trademarks and distribution rights to ANIMALE, DANIEL DE FASSON,
DECADENCE, LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de
MARKOFF cosmetics and fragrances. In addition, FHBH granted the Company
an exclusive 55-year royalty free license. Accordingly, there are no
licensing agreements requiring the payment of royalties. The Company
also has the rights to license these trademarks, other than FHBH, for
all classes of merchandise.
D. BARTER ARRANGEMENTS:
In June 1991, the Company entered into a barter arrangement (the Barter
Agreement ) for which the Company would receive advertising credits in
exchange for its inventory of JOAN COLLINS products. The final sale of
these products was completed in June 1993.
The following table sets forth the balances and transactions included in
the accompanying financial statements related to the Barter Agreement
(in 000's):
1997 1996 1995
---- ---- ----
Prepaid advertising at March 31, net of
deferred income of $345, $434 and $643
in 1997, 1996 and 1995, respectively $ 588 $ 660 $ 989
======= ======== ======
Advertising credits used for the year ended
March 31 $ 161 $ 684 $1,592
======= ======== ======
Deferred income recognized for the year ended
March 31 $ 89 $ 355 $ 866
======= ======== ======
In connection with the June 1994 FHBH acquisition, the Company acquired
$471,000 of advertising credits of which $263,640 and $72,000 was
utilized during the years ended March 31, 1997 and 1996, respectively.
The Company expects to be able to fully utilize all of these barter
advertising credits as part of its normal ongoing advertising
expenditures.
E. EMPLOYMENT AND CONSULTING AGREEMENTS:
The Company has employment contracts with certain officers and employees
which expire from January 1998 through March 2000. Minimum commitments
under these contracts are as follows (in 000's):
F-17
38
For the year ending March 31,
-----------------------------
1998 $1,818
1999 1,416
2000 970
------
$4,204
In connection with previous employment contracts, warrants to purchase
1,190,000 shares of common stock, at prices ranging from $1.50 to $7.50
have been issued. These warrants are exercisable for a ten-year period
from the date of grant and vest over the term of the applicable
contracts through January 1998. During the year ended March 31, 1996,
28,000 warrants were exercised. As of March 31, 1997, all of the above
mentioned warrants were vested. In addition, during January 1996, the
Board of Directors approved a resolution whereby the number of warrants
issued to key employees would double in the event of a change in
control.
On April 1, 1994, the Company entered into a three-year consulting
agreement with Cosmix, Inc., a company owned by Mr. Frederick Purches,
the Vice Chairman of the Board, which provides for monthly payments of
$8,333. The agreement calls for Mr. Purches to spend substantial time to
assist the Company in the areas of banking, SEC and stockholder
relations, financial planning, assessment and coordination of
acquisitions and divestiture, and any other similar activities which may
be assigned by the Board of Directors. Mr. Purches receives certain
insurance benefits as a part of his agreement, and has received 90,000
warrants to acquire shares of common stock at $2.06 over the three-year
period of the contract, of which 60,000 warrants have been exercised
during the year ended March 31, 1996. The consulting agreement was
extended for an additional three-year period until March 31, 2000, with
no additional warrants being provided.
On April 1, 1994, the Company entered into a three-year consulting
agreement commencing June 1, 1994, with Cambridge Development
Corporation, a company owned by Mr. Albert F. Vercillo, who is a
director of the Company. The Agreement calls for Mr. Vercillo to devote
substantial time to the Company in the areas of U.S. and international
financial analysis and planning. Cambridge Development Corporation
receives $4,500 a month and Mr. Vercillo receives certain insurance
benefits, and has received 30,000 warrants to acquire shares of common
stock at $2.06 over the three-year period of the contract. The
consulting agreement was extended for an additional three-year period
until May 31, 2000, at a rate of $5,416 per month. No additional
warrants were provided.
On April 1, 1994, the Company entered into a consulting agreement with
its former President, which provides for monthly payments of $16,667
through September 30, 1997. In addition, the former President had
previously received warrants to purchase 500,000 shares of common stock,
at an exercise price of $1.875 per share.
All of the previously described warrants were issued at the market value
of the underlying shares at the date of grant and reflect the
two-for-one stock split effected as of November 3, 1995.
F. CONTINGENCIES:
The Company is a party to legal and administrative proceedings arising
in the ordinary course of business. The outcome of these actions are not
expected to have a material effect on the Company's financial position
or results of operations.
F-18
39
10. FOREIGN SUBSIDIARY
The following amounts relate to the Company's wholly-owned subsidiary,
Parlux S.A.:
As of and for the year ended March 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Total assets $10,443,117 $ 9,458,774 $10,607,585
Working capital 2,731,167 2,115,755 1,112,504
Equity 2,761,554 2,229,714 1,506,057
Net Sales:
Trade 12,776,773 9,101,611 7,219,601
Affiliates 409,557 2,742,211 336,195
Intercompany 2,760,856 4,258,054 4,845,524
----------- ----------- -----------
Total $15,947,186 $16,101,876 $12,401,320
=========== =========== ===========
Net income $ 817,649 $ 887,163 $ 319,535
=========== =========== ===========
Prior to fiscal 1996, foreign sales were principally made by Parlux S.A.
During the years ended March 31, 1997 and 1996, sales to foreign customers
from the Company's domestic subsidiary amounted to approximately
$18,059,000 and $19,000,000, respectively. At March 31, 1997 and 1996,
trade receivables from foreign customers amounted to approximately
$11,228,000 and $5,753,000, respectively.
11. INCOME TAXES
Income tax expense is as follows:
Years Ended March 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
Current taxes:
U.S. Federal $ 1,116,040 $ 3,764,477 $ 1,570,504
U.S. state and local 132,058 472,360 175,000
Foreign income taxes 515,800 531,161 162,000
----------- ----------- -----------
1,763,898 4,767,998 1,907,504
U.S. Federal deferred tax benefit (1,103,817) (4,184) (628,504)
----------- ----------- -----------
Income tax expense $ 660,081 $ 4,763,814 $ 1,279,000
=========== =========== ===========
F-19
40
A reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate follows:
1997 1996 1995
---- ---- ----
Tax at statutory rate 35.0 % 35.0% 35.0 %
Utilization of net operating loss carry forward -- -- (4.3)%
Valuation allowance recognition -- -- (11.0)%
Loss on debt conversion 37.7 % -- --
Incremental foreign taxes 1.7 % .3% (.1)%
State and local taxes 5.5 % 2.4% 2.0 %
Other (1.0)% .3% .8 %
---- ---- ----
78.9 % 38.0% 22.4 %
==== ==== ====
Deferred tax assets, which are included in other current assets, and
deferred tax liabilities, are comprised of the following:
March 31,
-------------------------
1997 1996
---------- ---------
Allowance for doubtful accounts, sales returns and
allowances $ 961,118 $ 653,000
Reserve for inventory obsolescence 1,076,540 188,000
Other, net 131,287 (24,448)
---------- ---------
Total deferred tax assets $2,168,945 $ 816,552
========== =========
Deferred tax liabilities related to
depreciation and amortization $ 432,440 $ 183,864
========== =========
During fiscal 1995, the Company utilized approximately $700,000 of net
operating loss carryforwards to offset current U.S. taxable income. A
valuation allowance for 100% of these net operating loss carryforwards had
been established at March 31, 1994. Additionally, during fiscal 1995, the
Company reversed $544,000 of valuation allowances on deferred tax assets at
March 31, 1994, as a result of the expected recoverability of such deferred
tax assets in the future.
In fiscal 1997, the Internal Revenue Service audited the Company's federal
income tax return for the year ended March 31, 1994. Management believes
that the outcome of this audit will not have a material effect on the
Company's financial position or results of operations.
12. COMMON STOCK
At various dates since April 1989, the Company has issued, in addition to
the warrants described in Note 9 (E), a total of 688,000 warrants to key
employees and/or consultants to purchase the Company's common stock at an
exercise price of $1.87 per share. In March 1993, Mr. Gerard Semhon, in
exchange for an amount due him of $180,000, exercised warrants to acquire
96,000 registered shares and Mr. Fred Purches exercised warrants for the
acquisition of 28,000 unregistered shares in exchange for cash and amounts
due him of $47,000. In September 1993, Mr. Semhon exercised his remaining
warrants to acquire 24,000 registered shares in exchange for amounts due
him of $45,000. Accordingly, as of March 31, 1995, 540,000 of these
warrants remained outstanding. The underlying shares related to the
unexercised warrants had not been registered.
In September 1990, in connection with a long-term loan, the Company issued
100,000 warrants to Mr. Boris Lekach which were exercisable at $2.00 per
share. Mr. Boris Lekach is related to Mr. Ilia Lekach, the Company's
Chairman and Chief Executive Officer.
F-20
41
In March 1991, the Company issued warrants to Deco Distribution Group, Inc.
(Deco) to acquire 1,100,000 shares of common stock in accordance with an
Asset Acquisition Agreement of the same date. The warrants were exercisable
through March 1, 2001 at an exercise price of $2.00 per share.
In May 1995, the Company extended a discount of $0.75 per share to those
holders of warrants issued in connection with the FHBH and Deco
acquisitions, as well as the loan to Mr. Boris Lekach, if the holders would
exercise by May 31, 1995. The exercise period was subsequently extended to
July 31, 1995. These warrant holders exercised all of their warrants into
1,400,000 shares of common stock, increasing stockholders' equity by
approximately $2,300,000.
In June 1993, in recognition of continuing financial support, personal
guarantees and pledged deposits in connection with the NBK loan, the
Company issued 52,916 warrants to Mr. Zouheir Beidoun, a Director of the
Company, at an exercise price of $1.75. These warrants, along with an
additional 200,000 warrants issued during 1991, were exercised during
February 1996, whereby a portion of the note payable to Mr. Beidoun,
including accrued interest payable, was partially converted to equity.
The following table summarizes the activity for the warrants outstanding
under the commitments disclosed in Note 9 (E) and the warrants described
above after the retroactive effect of the stock split:
Amount Exercise Price
------ --------------
Balance at March 31, 1994 2,042,916 $1.50 - $2.00
Issued 1,530,000 $1.75 - $3.12
Exercised -- --
----------
Balance at March 31, 1995 3,572,916 $1.50 - $3.12
Issued 307,978 $3.75 - $4.06
Exercised (1,830,916) $1.62 - $2.06
----------
Balance at March 31, 1996 2,049,978 $1.50 - $8.11
Issued 10,000 $6.75
Exercised (236,000) $6.93 - $8.00
----------
Balance at March 31, 1997 1,823,978 $1.50 - $8.11
==========
13. STOCK OPTION AND OTHER PLANS
The Company has adopted a Stock Option Plan and a 1989 Stock Option Plan
(collectively, the "Plan") and has reserved and registered 250,000 shares
of its Common Stock for issue thereunder. Options for most of the shares in
the Plan may qualify as "incentive stock options" under the Internal
Revenue Code. The shares are also available for distribution pursuant to
options which do not so qualify. Under the Plan, options can be granted to
eligible officers and key employees at not less than the fair market value
of the shares at the date of grant of the option (110% of the fair market
value for 10% or greater stockholders).
Options which do not qualify as "incentive stock options" may also be
granted to consultants. Options generally may be exercised only if the
option holder remains continuously associated with the Company or a
subsidiary from the date of grant to the date of exercise.
On June 20, 1995, the Company granted to various employees additional
options to acquire 24,500 shares of common stock at $5.75, the closing bid
price of the stock on June 19, 1995. These options are exercisable at the
rate of 25% per annum beginning June 20, 1996. Concurrently, 5,500 options
were canceled through employee resignations.
As of March 31, 1997, and since the inception of the Plan, options have
been issued, net of cancellations, to purchase 241,092 shares at exercise
prices ranging from $1.06 to $5.75 per share. Through March 31, 1997,
174,092 options had been exercised under the Plan.
F-21
42
The following table summarizes the activity for options covered by the Plan
after the retroactive effect of the stock split:
Amount Exercise Price
------ --------------
Balance at March 31, 1995 84,850 $1.06 - $2.19
Issued 24,500 $5.75
Exercised (22,350) $1.06 - $2.19
Canceled (5,500) $1.44 - $5.75
------
Balance at March 31, 1996 81,500 $1.06 - $5.75
------
Issued --
Exercised (14,500) $1.06 - $1.44
Canceled --
------
Balance at March 31,1997 67,000 $1.44 - $5.75
======
As of March 31, 1997, options to purchase 67,000 shares are outstanding, of
which 54,750 are currently exercisable and 12,250 are exercisable during
the year ending March 31, 1999.
During June 1993, the Company established a 401-K plan covering
substantially all of its U.S. employees. No Company contribution was made
during the year. Commencing on April 1, 1996, the Company matched 25% of
the first 6% of employee contributions, within annual limitations
established by the Internal Revenue Code. The cost of the matching program
totaled approximately $54,000 for the year ended March 31, 1997.
14. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For the year ended March 31, 1995, the number of shares of common stock
issuable upon exercise of outstanding options and warrants, in the
aggregate, exceeded 20% of the number of common shares outstanding.
Accordingly, the modified treasury stock method was used to determine the
dilutive effect of the options and warrants on earnings per share.
Earnings per common and common equivalent share and the weighted average
number of shares outstanding used in the computations, retroactively
adjusted for the stock split, are summarized as follows:
Primary 1997 1996 1995
------- ---- ---- ----
Net income $ 176,223 $ 7,772,691 $4,231,211
Add - reduction of interest expense 199,491 (1) 104,099 (1) 237,585 (3)
----------- ----------- ----------
Adjusted for per share computation $ 375,714 $ 7,876,790 $4,468,796
=========== =========== ==========
Number of shares:
Weighted average shares outstanding 15,013,931 8,791,749 6,696,890
Add - net additional shares issuable 2,633,573 (2) 1,890,857 (2) 2,317,918 (4)
----------- ----------- ----------
Weighted average shares used in the per share
computation 17,647,503 10,682,606 9,014,808
=========== =========== ==========
Earnings per common and common equivalent share:
Income before extraordinary item $ 0.07 $ 0.74 $ 0.50
Extraordinary item - loss on conversion of debt
(0.05) -- --
----------- ----------- ----------
Net income $ 0.02 $ 0.74 $ 0.50
=========== =========== ==========
F-22
43
Fully diluted 1997 (5) 1996 1995
------------- -------- ---- ----
Net income $ 7,772,691 $ 4,231,211
Add - reduction of interest expense 104,099(1) 77,317(3)
----------- -----------
Adjusted for per share computation $ 7,876,790 $ 4,308,528
=========== ===========
Number of shares:
Weighted average shares outstanding 8,791,749 6,696,890
Add - net additional shares issuable 2,133,059(2) 2,317,918(4)
----------- ---------
Weighted average shares used in the per share
computation 10,924,808 9,014,808
=========== ==========
Earnings per common and common equivalent share
$ 0.72 $ 0.48
=========== ==========
(1) Reduction of interest expense assumes that the Debentures were
converted into shares of common stock on the date of their issuance.
Accordingly, no interest expense on the Debentures would have been
incurred.
(2) Assumes exercise or conversion of outstanding common stock equivalents
(options, warrants and convertible debentures) at the beginning of the
period, or at the date of issuance if issued during the period, net of the
assumed repurchase of common stock from exercise proceeds. The assumed
repurchase of common stock is based on the average price of the Company's
common stock during the period for primary and the end of period price for
fully diluted.
(3) Reduction of interest expense assumes that proceeds from the exercise
of stock options and warrants, after the assumed repurchase of 20% of the
weighted average common shares outstanding, were used to repay debt at the
beginning of the period.
(4) Assumes exercise of outstanding common stock equivalents (options and
warrants) at the beginning of the period, or at the date of issuance if
issued during the period, net of the assumed repurchase of common stock.
The assumed repurchase of common stock was limited to 20% of the weighted
average common shares outstanding and is based on the average price of the
Company's common stock during the period for primary and the end of period
price for fully diluted.
(5) The calculation of fully diluted earnings per share was not required
for 1997 since it would be antidilutive.
15. RELATED PARTY TRANSACTIONS, SIGNIFICANT CUSTOMERS AND CONCENTRATION OF
CREDIT RISK
The Company had sales of approximately $26,568,000, $26,187,000 and
$15,230,000 during the fiscal years ended March 31, 1997, 1996 and 1995,
respectively, to Perfumania, Inc. (Perfumania), and sales of $1,272,000
during the fiscal year ended March 31, 1997, to L. Luria & Son, Inc.
(Luria), companies affiliated with the Company's Chairman and Chief
Executive Officer. Net amounts due from Perfumania amounted to $22,136,000
and $13,482,000 at March 31, 1997 and 1996, respectively. Amounts due from
Luria totaled $726,000 at March 31, 1997. Amounts due from related parties
are non-interest bearing and are realizable in less than one year.
No unrelated customer accounted for more than 10% of the Company's sales
during the years ended March 31, 1997, 1996 and 1995.
F-23
44
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the Company's unaudited quarterly results of
operations for the years ended March, 31, 1997 and 1996 (in thousands,
except per share amounts).
Quarter Ended
----------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997(1)
-------- ------------- ------------ ---------
Net sales $18,740 $25,503 $ 27,020 $ 16,377
Gross margin 12,454 13,987 16,378 5,638
Income (loss) before extraordinary item
1,934 2,149 990 (3,995)
Extraordinary item - loss on conversion
of debt -- -- 902 --
Net income (loss) 1,934 2,149 88 (3,995)
Earnings (loss) per common and
common equivalent share (2):
Income (loss) before extraordinary
item $ 0.13 $ 0.12 $ 0.06 $ (0.23)
Extraordinary item - loss on
conversion of debt -- -- $ (0.05) --
Net income (loss) $ 0.13 $ 0.12 $ 0.01 $ (0.23)
Quarter Ended
----------------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996(1)
-------- ------------- ------------ ---------
Net sales $10,209 $13,925 $ 23,834 $ 19,759
Gross margin 7,076 8,495 13,687 10,029
Net income 1,142 1,508 2,991 2,132
Earnings per common and
common equivalent share:
Primary $ 0.13 $ 0.15 $ 0.29 $ 0.17
Fully diluted $ 0.13 $ 0.15 $ 0.29 $ 0.15
NOTE: Earnings per common and common equivalent shares have been
retroactively adjusted for the effect of the November 1995 two-for-one
stock split.
(1) Includes restructuring charge of approximately $5,765,000. See Note 2
for further discussion.
(2) The calculation of fully diluted earnings per share was not required
for 1997 since it would be antidilutive.
F-24
45
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions charged
Description beginning of to costs Balance at
period and expenses Deductions end of period
- --------------------------------------------------------------------------------------------------------------
Year ended
March 31, 1997
--------------
Reserves for:
Doubtful accounts $ 472,561 $ 557,502 $ 487,334 $ 542,729
Sales returns 637,221 3,915,488 4,169,308 383,401
Other allowances 1,011,463 7,368,791 6,812,504 1,567,750
----------- ----------- ----------- ----------
$ 2,121,245 $11,841,781(1) $11,469,146 $2,493,880
=========== =========== =========== ==========
Reserve for
inventory shrinkage
and obsolescence $ 1,200,000 $ 3,857,483(2) $ 2,224,483 $2,833,000
=========== =========== =========== ==========
Year ended
March 31, 1996
--------------
Reserves for:
Doubtful accounts $ 1,231,522 $ 123,936 $ 882,897 $ 472,561
Sales returns 318,972 780,342 462,093 637,221
Other allowances 504,919 4,144,166 3,637,622 1,011,463
----------- ----------- ----------- ----------
$ 2,055,413 $ 5,048,444(3) $ 4,982,612 $2,121,245
=========== =========== =========== ==========
Reserve for
inventory shrinkage
and obsolescence $ 685,629 $ 688,626(4) $ 174,255 $1,200,000
=========== =========== =========== ==========
Year ended
March 31, 1995
--------------
Reserves for:
Doubtful accounts $ 349,438 $ 971,255 $ 89,171 $1,231,522
Sales returns 94,315 471,430 246,773 318,972
Other allowances 298,198 558,916 352,195 504,919
----------- ----------- ----------- ----------
$ 741,951 $ 2,001,601(5) $ 688,139 $2,055,413
=========== =========== =========== ==========
Reserve for
inventory shrinkage
and obsolescence $ 200,000 $ 485,629(6) $ -- $ 685,629
=========== =========== =========== ==========
(1) Net of reserves of $630,562 recorded in connection with the RBFI
acquisition.
(2) Net of reserves recorded in connection with:
RBFI acquisition: $ 833,433
BAV acquisition: $ 100,000
AdM acquisition: $1,000,000
(3) Net of reserves of $1,500,000 recorded in connection with the AdM
acquisition.
(4) Includes $600,000 recorded in connection with the AdM acquisition.
(5) Net of reserves of $1,556,275 recorded in connection with the FHBH
acquisition.
(6) Includes $303,665 recorded in connection with the FHBH and Perry
Ellis acquisitions.
F-25
46
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BANK BORROWINGS
Col. A Col. B. Col.C Col.D Col.E Col.F
Weighted
Category of Weighted Maximum amount Average amount average
aggregate average outstanding outstanding interest
short-term Balance at end interest during the during the during the
borrowings of period rate(4) period period period(5)
- --------------------------------------------------------------------------------------------------------------------
March 31, 1997 Notes
Payable
Banks (1) $12,459,266 10.2% $12,459,266 $9,861,542 11.0%
March 31, 1996
Notes Payable
Banks (2) $6,939,014 10.2% $7,823,478 $7,361,251 12.1%
March 31, 1995
Notes Payable
Banks (3) $6,773,394 10.3% $6,773,394 $5,932,300 12.1%
(1) Loans of $8,595,375 from Finova, $753,125 for International Finance Bank
and $3,110,766 in overdraft and receivable facilities granted by French
banks.
(2) Loans of $3,888,378 from Finova, $482,392 from Eagle National Bank, as well
as overdraft and receivable facilities of $2,568,244 granted by French
banks.
(3) Loans of $4,289,316 from Finova , $560,000 from the National Bank of
Kuwait, $81,004 from Eagle National Bank, as well as overdraft and
receivable facilities of $1,843,074 granted by French banks.
(4) The weighted average interest rate was computed by dividing the annual
interest costs based on March 31, 1997 rates by the short-term bank
borrowings outstanding at March 31, 1997.
(5) The weighted average interest rate during the period was computed by
dividing the actual interest expense for the year by the average short-term
bank borrowings outstanding during the year.
F-26
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
PARLUX FRAGRANCES, INC.
/s/ Ilia Lekach
- -------------------------------------------------
Ilia Lekach, Chief Executive Officer and Chairman
Dated: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
/s/ Zalman Lekach
- -------------------------------------------------
Zalman Lekach, President, Chief Operating Officer
and Director
/s/ Frank A. Buttacavoli
- -------------------------------------------------
Frank A. Buttacavoli, Executive Vice President,
Chief Financial Officer and Director
/s/ Frederick E. Purches
- -------------------------------------------------
Frederick E. Purches, Vice Chairman and Director
/s/ Albert F. Vercillo
- -------------------------------------------------
Albert F. Vercillo, Director
/s/ Mayi de la Vega
- -------------------------------------------------
Mayi de la Vega, Director
/s/ Glenn Gopman
- -------------------------------------------------
Glenn Gopman, Director
F-27