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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, 2000
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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 _______________
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 Identification No.)
of incorporation or organization)
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 30, 2000
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Common Stock, $ .01 par value 9,963,847
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $18,955,000 based on a
closing price of $3.44 for the Common Stock as of June 30, 2000 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).
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Stock and Related Security Holder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
7A. Quantitative and Qualitative Disclosures About Market Risks 18
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 19
PART III
10. Directors and Executive Officers of the Registrant 19
11. Executive Compensation 19
12. Security Ownership of Certain Beneficial Owners and Management 20
13. Certain Relationships and Related Transactions 20
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 20
2
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 and beauty related products marketed primarily through
specialty stores, national department stores and perfumeries on a worldwide
basis. 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. ("Perfumania") a wholly-owned subsidiary of E Com
Ventures, Inc. ("ECMV"), a company in which the Company's Chairman and Chief
Executive Officer has an ownership interest and holds identical management
positions. Perfumania is a leading specialty retailer of fragrances in the
United States and Puerto Rico. Currently, the Company engages in the manufacture
(through sub-contractors), distribution and sale of PERRY ELLIS and FRED HAYMAN
BEVERLY HILLS fragrances and grooming items on an exclusive basis as a licensee,
and recently signed license agreements for OCEAN PACIFIC AND PEZ. See "LICENSING
AGREEMENTS" on pages 7 and 8 for further discussion. Additionally, the Company
manufactures, distributes and sells its own brand, ANIMALE fragrance, on a
worldwide basis.
Recent Developments
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On June 1, 2000, the Company entered into a new subordinated note
agreement with Perfumania. See "CUSTOMERS" section for further discussion.
On May 25, 2000, the Company entered into a forbearance and amendment
agreement with General Electric Capital Corporation. See "Liquidity and Capital
Resources" section for further discussion.
THE PRODUCTS
The Company's principal products are fragrances. 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 Company's basic fragrance products
generally retail at prices ranging from $20 to $215 per item.
The Company designs and creates fragrances using its own staff and
independent contractors. It also supervises the design of its packaging by
independent contractors. During fiscal 2000, the Company completed the design
process for PERRY ELLIS "PORTFOLIO" for men, which was launched in the fall of
1999. The Company is currently launching PERRY ELLIS "PORTFOLIO" for women as
well as developing "CHALEUR" for men, "CHALEUR" for women, and "OCEAN PACIFIC
for men anticipating Fall 2000 and Spring 2001 launches, respectively.
3
During the last three fiscal years, the following brands have accounted
for 10% or more of the Company's gross sales:
Fiscal 2000 Fiscal 1999 Fiscal 1998
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PERRY ELLIS 73% 65% 56%
FRED HAYMAN 16% 21% 17%
ANIMALE 11% 12% 11%
ALEXANDRA DE MARKOFF 0% 0% 12%
On March 2, 1998, the Company entered into an exclusive agreement to
license the Alexandra de Markoff ("AdM") rights to Cosmetic Essence, Inc. for an
annual fee of $500,000. The initial term of the agreement is ten years,
automatically renewable for additional ten and five year terms. The annual fee
reduces to $100,000 after the third renewal.
MARKETING AND SALES
In the United States, the Company has 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 1,900 retail outlets in the United States. Additionally, the
Company sells products to Perfumania/ECMV, which is a leading specialty retailer
of fragrances with 265 retail outlets principally located in manufacturers'
outlet malls and regional malls (see "CUSTOMERS" section for further
discussion).
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors, which are administered by
the Company's international sales staff. 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.
RAW MATERIALS
Raw materials and components for the Company's products are available
from sources in the United States and Europe. The Company uses third party
contract
4
manufacturers to produce finished products. During the fiscal year
ended March 31, 1998, the Company completed the transition of its contract
manufacturing in France to the United States.
To date, 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 assurance 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 assurance 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, net sales will be reduced when such fact becomes
known.
CUSTOMERS
The Company concentrates its sales efforts in the United States in
specialty stores and a number of regional department store retailers including,
among others, Burdines, Famous Barr, Foley's, J.L. Hudson, Lord & Taylor,
Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. Retail
distribution has been targeted by brand to maximize potential and minimize
overlap between each of these distribution channels.
During the fiscal years ended March 31, 2000 and 1999, the Company had
net sales of $30,426,952 and $22,527,451, respectively, to Perfumania. Net trade
accounts receivable and note receivable owed by Perfumania to the Company
amounted to $9,561,550 and $2,500,000, respectively, (after giving effect to the
stock transaction discussed below) at March 31, 2000 and trade accounts
receivable of $18,258,213 at March 31, 1999. Amounts due from related parties
are non-interest bearing and are realizable in less than one year, except for
the subordinated note receivable discussed below.
5
During the period from April 1, 1999 through March 31, 2000, the
Company collected $32.1 million from Perfumania, including 100% of the total of
the outstanding receivable at March 31, 1999, excluding the effect of the stock
transaction discussed below.
On July 1, 1999, Perfumania and the Company's Board of Directors approved
the transfer of 1,512,406 shares of Perfumania treasury stock to the Company in
consideration for a partial reduction of the outstanding trade receivable
balance in the amount of $4,506,970. The transfer price was based on a per share
price of $2.98, which approximated 90% of the closing price of Perfumania's
common stock for the previous 20 business days. In connection with the agreement
for the transfer of the shares, the parties executed a registration rights
agreement whereby the Company would be able to demand registration of the shares
with the Securities and Exchange Commission at any time after February 29, 2000.
Both agreements were consummated on August 31, 1999, and the demand registration
was requested on March 3, 2000. Effective February 1, 2000, ECMV was formed as a
holding company and accordingly, former Perfumania shareholders now hold common
stock in ECMV. A registration statement was filed by ECMV during April 2000. As
of June 30, 2000, the fair market value of the investment in ECMV is $3,886,883
($2.57 per share).
In addition, on October 4, 1999, the parties entered into an agreement
which converted $8 million of the outstanding trade receivable into a
subordinated secured note receivable. The note bears interest at prime plus one
percent and is repayable in installments of $3,000,000 in October 1999, six
equal monthly installments of $500,000 from November 1999 through April 2000,
with the balance of $2,000,000 due on May 31, 2000. As of March 31, 2000,
$5,500,000 of the note receivable had been repaid in accordance with its terms.
During the period of April 1, 2000 through June 30, 2000, the Company
received cash payments of $4.72 million from Perfumania, including the April
installment and May interest payment due under the note receivable.
On June 1, 2000, the parties entered into a new subordinated $5 million
note agreement which refinanced the remaining $2 million under the October 4,
1999 note, as well as converted $3 million of the outstanding trade receivable
due from Perfumania to the Company. The new note is repayable in six equal
monthly installments of $500,000, plus interest, from July 2000 through December
2000, with the balance of $2 million due on December 29, 2000. The terms and
conditions of the new note are identical to the October 4, 1999 note.
As indicated in various public press releases, Perfumania has reported
both aggregate and comparative store sales increases for each of the months
during the period February 1999 through May 2000. In addition during September
1999, its subsidiary, perfumania.com, successfully completed a public offering
in which Perfumania also sold one million of its perfumania.com shares,
subsequently selling an additional two million shares and five hundred thousand
shares in January 2000 and May 2000,
6
respectively, generating over $25 million in cash from the four transactions.
Additionally, during May 2000, Perfumania entered into a new $40 million line of
credit agreement with General Motors Commercial Credit Corporation. Based on the
factors described above, management believes that the receivable from Perfumania
is fully collectible.
FOREIGN AND EXPORT SALES
A significant portion of the Company's international sales and exports
had previously been made through its wholly-owned French subsidiary, Parlux S.A.
("S.A.") Net sales to unaffiliated customers by S.A. were $2,128,698 for the
fiscal year ended March 31, 1998. All of S.A.'s operations were subsequently
transitioned to the Company's South Florida location.
LICENSING AGREEMENTS
PERRY ELLIS: The Company acquired the Perry Ellis license in December 1994. The
license is renewable every two years if the average annual sales in the two-year
license period exceed 75% of the average sales of the previous four years. All
minimum sales levels have been met, and based on the Company's current sales
projections, management 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), purchasing 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.
OCEAN PACIFIC: On August 20, 1999, the Company entered into an exclusive
worldwide licensing agreement with Ocean Pacific Apparel Corp. ("OP"), to
manufacture and distribute men's and women's fragrances and other related
products under the OP label. The initial term of the agreement extends through
December 31, 2003, with seven (7) three-year renewal options, of which the last
four require the achievement of certain minimum net sales. 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 the annual net sales of the products. The Company
anticipates launching the first OP fragrance for the Spring 2001 season.
7
PEZ CANDY, INC.: Effective January 1, 2000, the Company entered into an
exclusive licensing agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and
distribute men's and women's fragrances and other related products under the PEZ
trademark throughout the Western Hemisphere. The initial term of the agreement
extends through December 31, 2004, with an option to renew for an additional
five-year period upon achievement of certain minimum net sales. 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 the annual net sales of the products. The Company
anticipates launching the first PEZ fragrances for the Summer 2001 season.
BARYSHNIKOV: The Company assumed the Baryshnikov license as part of the Richard
Barrie Fragrances acquisition, pursuant to which the Company has the exclusive
right to manufacture and distribute fragrances and personal care products using
the Baryshnikov trademark. The license was renewed through March 31, 2001 and
was further renewable for a subsequent three-year period 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.
On October 13, 1999, the Company was notified by the Baryshnikov
licensor of its intent to immediately terminate the license agreement with the
Company, which was to expire on March 31, 2001, due to the Company's
unwillingness to develop and distribute a new women's fragrance by October 31,
1999, as stipulated in the license agreement. On January 11, 2000, a settlement
was reached which entitles the Company to continue producing and selling
Baryshnikov brand products until April 30, 2000, at which time all remaining
unsold inventory and advertising material would be destroyed. On April 28, 2000,
the parties agreed to extend the sales period until June 30, 2000. Sales of
Baryshnikov products represented less than 2% of total Company net sales for
each of the three years ended March 31, 2000. Management believes that the
effect of this matter will not have a material adverse effect on the Company's
financial position or results of operations.
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.
TRADEMARKS
The Company owns the worldwide trademarks and distribution rights to
ANIMALE, BAL A VERSAILLES, DECADENCE and LIMOUSINE fragrances, and ALEXANDRA de
MARKOFF for products other than fragrances and cosmetics. There are no licensing
agreements requiring the payment of royalties by the Company for these
trademarks. Additionally, royalties are payable to the Company by the licensees
of the ALEXANDRA de MARKOFF and BAL A VERSAILLES brands. See Note 7 to the
accompanying Consolidated Financial Statements for further discussion. The
Company has the rights to license certain of these trademarks for all classes of
merchandise.
8
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. 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 ten 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 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.
EMPLOYEES
As of March 31, 2000, the Company had 114 full-time and part-time
employees. Of these, 32 were engaged in worldwide sales activities, 46 in
operations, administrative and finance functions and 36 in warehousing and
distribution activities. 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.
The Company has 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.
9
Item 2. PROPERTIES
In November 1995, the Company moved its corporate headquarters and
domestic operations to a new 100,000 square foot leased facility in Fort
Lauderdale, Florida. The annual lease cost of the facility is approximately
$640,000, with the lease covering a ten-year period through 2005.
The Company had 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 was to expire in March 2002. With additional capacity being
provided from the discontinuation of certain brands and licensing of the AdM
brand, the Company vacated the premises in November 1997, paying $155,000 to
cancel the lease with no further liability.
Effective October 1, 1996, the Company entered into an agreement with
Hirel Holdings, Inc. ("Hirel"), 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.
Hirel encountered financial difficulties and vacated the premises in June 1998.
On June 30, 1998, the Company entered into a new agreement with Panache Party
Rentals to sublease the premises through November 2000, the remaining lease
commitment, at the same rental rates included in the Company's original lease.
The Company has agreed to guarantee such sublease payments of approximately
$20,000 per month.
The Company's French subsidiary leased approximately 1,500 square feet
under an operating lease which provided for annual rentals equivalent to
approximately $42,000, which was to terminate in 1999. In connection with the
closing of the French operations in December 1997, the Company vacated the
premises paying $20,000 to cancel the lease with no further liability.
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
The Company did not submit any actions for shareholders' approval
during the quarter ended March 31, 2000 and through June 30, 2000.
10
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
have been retroactively adjusted to reflect the two-for-one stock split effected
on November 3, 1995.
The Company believes that the number of beneficial owners of its common
stock is approximately 4,000.
The following chart, as reported by the National Association of
Securities Dealers, Inc., shows the high and low bid prices for the Company's
securities available for each quarter of the last two years and the interim
period from April through June 30, 2000. The prices represent quotations by the
dealers without adjustments for retail mark-ups, mark-downs or commissions and
may not represent actual transactions.
Fiscal Quarter Common Stock
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High Low
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First (April/June) 1998 $2.969 $1.750
Second (July/Sept.) 1998 2.250 1.313
Third (Oct./Dec.) 1998 2.094 0.875
Fourth (Jan./Mar.) 1999 2.625 1.063
First (April/June) 1999 2.156 1.000
Second (July/Sept.) 1999 2.594 1.625
Third (Oct./Dec.) 1999 4.625 2.000
Fourth (Jan./Mar.) 2000 4.250 3.250
First (April/June) 2000 4.125 2.500
The Company has not paid a cash dividend on its common stock nor does
it contemplate paying any dividends in the near future.
Item 6. SELECTED FINANCIAL DATA
The following data has been derived from financial statements audited
by PricewaterhouseCoopers LLP, independent certified public accountants.
Consolidated balance sheets at March 31, 2000, and 1999, and the related
consolidated statements of operations and of cash flows for the three years
ended March 31, 2000 and notes thereto appear elsewhere in this Annual Report on
Form 10-K.
11
For the Year Ended March 31, (in thousands of dollars, except per share data)
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2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 66,385 $ 56,151 $ 62,369 $ 87,640 $ 67,727
Costs/operating expenses 59,786 51,920 73,911 84,321 53,539
Operating income (loss) 6,599 4,231 (11,542) 3,319 14,188
Net income (loss) 3,873 1,418 (8,687) (3,278) 4,972
Income (loss) per share
Basic $ 0.32 $ 0.10 ($ 0.53) ($ 0.22) $ 0.57
Diluted $ 0.31 $ 0.10 $ 0.48
(in thousands of dollars)
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At March 31, 2000 1999 1998 1997 1996
- ------------ ---- ---- ---- ---- ----
Current assets $ 57,992 $ 56,349 $ 66,359 $ 81,205 $ 67,666
Current liabilities 23,238 18,159 30,185 31,885 36,866
Working capital 34,754 38,190 36,174 49,320 30,800
Trademarks, licenses and
goodwill, net 21,469 23,926 25,378 26,784 24,623
Long-term debt 2,571 3,561 4,108 4,949 4,694
Total assets 81,862 82,081 95,731 111,385 95,239
Total liabilities 28,217 22,227 34,713 37,266 51,641
Stockholders' equity 53,645 59,854 61,018 74,119 43,598
The fiscal 2000 financial statements have been prepared assuming the
Company will continue as a going concern. The Company's current credit agreement
expires on August 29, 2000. The Company has not obtained financing from an
alternative source as of June 30, 2000 and there is no assurance that such
financing will be obtained in the future. See additional discussion under
"Liquidity and Capital Resources" and Notes 1 and 8 of the Consolidated
Financial Statements.
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.
12
Comparison of the twelve-month period ended March 31, 2000 with the twelve-month
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period ended March 31, 1999
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During the fiscal year ended March 31, 2000, net sales increased 18% to
$66,385,151 as compared to $56,150,575 for the same period for the prior year.
The increase is mainly attributable to the continuing strength of Perry Ellis
brand products. Approximately $7,451,000 and $2,115,000 of the increase is
related to the initial launches of the Perry Ellis "Portfolio for Men" (August
1999) and "Portfolio for Women" (March 2000) fragrances, which are expected to
continue their roll-out through the Fall 2000 season. Total gross sales of all
Perry Ellis brands increased 38% compared to the same period in the prior year
from $36,850,017 to $50,683,564.
Net sales to unrelated customers increased 7% to $35,958,199 in the
current period, compared to $33,623,124 in the same period in the prior year.
Sales to related parties increased 35% to $30,426,952 in the current period
compared to $22,527,451 in the same period in the prior fiscal year.
Cost of goods sold increased as a percentage of net sales from 39% for
the fiscal year ended March 31, 1999 to 43% for the current period. The increase
was mainly attributable to the sale of certain close-out merchandise to
international customers at or below cost. Cost of goods sold on sales to
unrelated customers and related parties approximated 43% and 42%, respectively,
during the fiscal year ended March 31, 2000, compared to 37% and 43%,
respectively, in the prior year period.
Operating expenses for the current fiscal year period increased 4%
compared to the prior year period from $29,873,060 to $31,133,646, decreasing as
a percentage of net sales from 53% to 47%. Advertising and promotional expenses
decreased 2% to $15,307,913 compared to $15,612,506 in the prior year period,
reflecting a strategic emphasis on point-of-sale and in-store spending in lieu
of heavy print advertising. Selling and distribution costs increased 7% to
$6,050,583 in the current fiscal period as compared to $5,644,923 in the same
period of the prior fiscal year, decreasing as a percentage of net sales from
10% to 9%. General and administrative expenses decreased by 3% compared to the
prior year period from $4,570,055 to $4,442,578, decreasing as a percentage of
net sales from 8% to 7%. The above decreases reflect the effect of the Company's
restructuring during the quarter ended March 31, 1998, which was fully
implemented during the first quarter of fiscal 1999, coupled with certain
non-recurring professional and consulting fees which were incurred during the
prior year period. Depreciation and amortization increased $1,081,132 as a
result of the increased amortization of goodwill due to the cancellation of the
Baryshnikov license agreement. Royalties increased to $1,790,347 for the current
period compared to $1,584,483 in the prior year, remaining relatively constant
at 3% of net sales.
As a result of the above, the Company had operating income of
$6,599,304 or 10% of net sales for the fiscal year period ended March 31, 2000,
compared to $4,231,318 or 8% of net sales for the comparable period in the prior
year. Net interest
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expense decreased by 52% to $871,919 in the current fiscal year as compared to
$1,800,149 in the same period in the prior year, reflecting the reduction in
average borrowings outstanding coupled with interest earned on notes receivable
during the current period. There were exchange losses of $30,143 in the current
year as compared to losses of $117,334 in the same period in the prior year. The
current period includes a $541,013 gain on the sale of perfumania.com common
stock, which was originally purchased during October 1999.
Income before taxes increased to $6,238,255 or 9% of net sales for the
current fiscal year compared to $2,313,835 or 4% of net sales in the same period
in the prior year. Giving effect to the tax provision, net income amounted to
$3,872,611 or 6% of net sales for the fiscal year ended March 31, 2000, as
compared to $1,418,455 or 3% of net sales for the same period in the prior
fiscal year.
Comparison of the twelve-month period ended March 31, 1999 with the twelve-month
- --------------------------------------------------------------------------------
period ended March 31, 1998
- ---------------------------
During the fiscal year ended March 31, 1999, net sales decreased 10% to
$56,150,575 as compared to $62,368,523 in the same period in the prior year. The
prior year period included $8,608,270 in sales of Alexandra de Markoff (AdM)
cosmetics and Bal a Versailles (BAV) fragrances, both of which were licensed to
third parties during March and June 1998, respectively. The comparable period
increase, excluding prior year sales of AdM and BAV brand products, was 4%. The
decrease in total sales, which was anticipated, was also partially attributable
to the global economic difficulties which resulted in a 17% decline in
international gross sales to $20,120,885 in the current period as compared to
$24,100,980 in the prior year comparable period. Sales of Perry Ellis brand
products decreased 3% compared to the same period in the prior year from
$37,890,727 to $36,850,017 and sales of Fred Hayman brand products increased by
4% to $12,272,031 compared to $11,810,856 in the prior year period. Sales of the
Company's own trademark, Animale, decreased by 4% compared to the same prior
year period from $7,581,412 to $7,261,850.
Net sales to unrelated customers decreased 17% to $33,623,124 in the
current period compared to $40,429,288 in the same period in the prior year.
Without the effect of prior year sales of AdM brand products, which products
were sold only to unrelated customers, sales to unrelated customers increased
3%. Sales to related parties increased 3% to $22,527,451 in the current year
compared to $21,939,235 in the prior year period.
Cost of goods sold for the fiscal year ended March 31, 1999 decreased
to $22,046,197 or 39% of net sales, as compared to $35,729,618 or 57% of net
sales in the same period in the prior year. The year ended March 31, 1998
included approximately $8,195,000 in costs related to discontinuing certain
brands and products, and to the closeout of Todd Oldham merchandise at below
cost. See Note 3 to the accompanying consolidated financial statements for
further discussion of the restructuring charge. Without the effect of the
restructuring charge, cost of goods sold for the year ended
14
March 31, 1998 would have been 44%. The decrease in fiscal 1999 was mainly
attributable to the sale of Todd Oldham merchandise at below cost during fiscal
1998, the final year of the license agreement, coupled with a reduction in costs
of certain components utilized in production. Cost of goods sold for sales to
unrelated customers and related parties approximated 37% and 43%, respectively,
during the fiscal year ended March 31, 1999, as compared to 40% and 52%,
respectively in the prior year, excluding the effect of the special charge.
Operating expenses decreased by 22% compared to the prior fiscal year
from $38,180,919 to $29,873,060 and decreased as a percentage of net sales from
61% to 53%. Advertising and promotional expenses decreased 13% to $15,612,506
compared to $17,887,892 in the prior year period, as a result of controlled
expenditures for print advertising and promotional expenses in connection with
the launch of Fred Hayman's "Hollywood" for women and men. Selling and
distribution costs decreased by 24% to $5,644,923 in the current fiscal period
as compared to $7,425,800 in the same period of the prior fiscal year,
decreasing a percentage of net sales from 12% to 10%. General and administrative
expenses decreased by 37% compared to the prior year period from $7,295,236 to
$4,570,055, decreasing as a percentage of net sales from 12% to 8%. The above
decreases reflect cost reductions as a result of the Company's restructuring
during the quarter ended March 31, 1998, the support previously required for the
AdM cosmetic line, and licensing fees generated from the AdM and BAV licensing
agreements. In addition, the fiscal year ended March 31, 1998 included
approximately $900,000 in bad debts relating to the bankruptcy of two customers,
approximately $125,000 of costs in connection with the closing of the Company's
French operations, and approximately $154,000 in severance costs relating to the
previously mentioned staff reductions. Depreciation and amortization decreased
by $426,457 reflecting the reduction in depreciation of molds and equipment
relating to discontinued and licensed brands. Royalties decreased to $1,584,483
for the current period compared to $2,684,441 in the prior year, and decreased
as a percent of sales from 4% in the prior year to 3% primarily due to minimum
royalties due in fiscal 1998 on discontinued brands.
As a result of the above, the Company had operating income of
$4,231,318 for the fiscal year ended March 31, 1999, compared to an operating
loss of $11,542,014 for the comparable period in the prior year.
Net interest expense decreased by 20% to $1,800,149 in the current fiscal
year as compared to $2,241,170 in the same period in the prior year, reflecting
the reduction in average borrowings and lower interest rates. Exchange losses
were $117,334 in the current year as compared to a gain of $108,289 in the same
period in the prior year, reflecting the strengthening of the French franc
against the U.S. dollar.
Income before taxes increased to $2,313,835 for the current period
compared to a loss of $13,674,895 in the same period in the prior year. Giving
effect to the tax provision (benefit), net income amounted to $1,418,455 for the
fiscal year ended March 31, 1999, as compared to a net loss of $8,686,923 for
fiscal year ended March 31, 1998.
15
Liquidity and Capital Resources
- -------------------------------
Working capital decreased to $34,753,382 at March 31, 2000 compared to
$38,189,586 at March 31, 1999, reflecting the current period's net income and
unrealized gain on investment in affiliate, offset by the purchase of
approximately $12,748,000 in treasury stock as discussed below. The Company has
reduced its total outstanding borrowings by approximately $9,396,000 over the
last two fiscal years.
In September 1999, the Company completed the fourth phase of its common
stock buy-back program involving 2,000,000 shares. In connection therewith, the
Board of Directors authorized the repurchase of an additional 2,500,000 shares.
As of March 31, 2000, the Company had repurchased under all phases a total of
7,665,798 shares at a cost of $20,841,230. The accompanying consolidated balance
sheets also include an additional 39,000 shares of treasury stock purchased at a
cost of $133,472 prior to fiscal 1996.
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.
Substantially all of the domestic assets of the Company collateralize
this borrowing. 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.
Due principally to the significant treasury stock purchases under the
Company's stock buy back program, as of March 31, 2000, the Company was not in
compliance with financial covenants relating to tangible net worth, current
ratio and minimum fixed charge coverage ratio as well as the restricted payment
covenants exceeding the amount of fixed assets and treasury stock which can be
purchased as well as advances to related parties and employees. GECC has waived
the violations of these debt covenants through May 31, 2000, and has agreed to
extend the maturity of the Credit Agreement until August 29, 2000, while
reducing the borrowing limit to $15 million, more in line with the Company's
current needs.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Management is
currently negotiating with other banks to obtain financing to replace the Credit
Agreement. As of June 30, 2000, the Company has not obtained financing from an
alternative source.
16
Management's plan initially consists of obtaining sufficient financing
from alternative sources to replace the Credit Agreement and management believes
that funds from operations and any new financing will be sufficient to meet the
Company's operating needs. There is no assurance, however, that alternative
financing will be available in the future, and if available, at terms and
conditions agreeable to the Company.
This factor among others indicates that the Company may be unable to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Year 2000 ("Y2K") Issues
- ------------------------
As of March 31, 2000, the Company's management information system
hardware consisted of an IBM AS 400, coupled with networked personal computer
workstations. The Company has upgraded its JD Edwards software to the latest
release, which is Y2K compliant. JD Edwards released its final Y2K upgrade
during September 1999 which was implemented by the Company. In connection
therewith, a hardware upgrade was completed on its 9406 processor from a model
310 to a model 620, which more than doubled the commercial processing workload
(CPW) to support the new release and other business applications. In addition,
the upgrade of the Company's Pitney Bowes shipping system was completed during
November 1999. The new upgrade interfaces fully with the AS400 and JD Edwards
software. The costs incurred in connection with the upgrades, including outside
consultants, amounted to approximately $400,000.
To date, the Company has not encountered any significant Y2K problem,
and continues to devote the necessary internal resources to ensure all Y2K
issues are addressed in a timely manner. Internal modifications to all personnel
computer operating systems have been completed. Testing of electronic data
interchange (EDI) modifications with all major customers has also been
completed. Verification of Y2K compliance with major suppliers continues,
however, no significant problems have been encountered.
Management believes that such processing issues, if any, will be
resolved. Nevertheless, if the Company, its customers or suppliers are unable to
resolve such processing issues, it could result in material financial risks such
as the inability to produce and distribute the Company's products. Contingency
plans for order processing are already in place.
New Accounting Pronouncements
- -----------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management has not determined the effect, if any,
of adopting SFAS No. 133.
17
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and is effective for the Company's fourth fiscal quarter ending March
31, 2001. The Company believes that its current revenue recognition policies
comply with SAB 101.
Impact of Currency Exchange and Inflation
- -----------------------------------------
The Company's business operations were negatively affected in the
amount of $30,143 and $117,334 in the fiscal years ended March 31, 2000 and
1999, respectively, and positively affected in the amount of $108,289 in the
fiscal year ended March 31, 1998, due to the movement of the French franc vs.
the U.S. dollar.
Prior to March 31, 1998, the Company's sales and purchases were
virtually all in U.S. dollars or French francs. A weakening of the French franc
vis-a-vis the U.S. dollar resulted in exchange rate gains for the Company.
Conversely, a strengthening of the French franc vis-a-vis the U.S. dollar
resulted in exchange rate losses for the Company.
The Company has completed the centralization of manufacturing in the
United States and closed its French operations in December 1997, which has
minimized the currency exchange impact.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
- ------------------
The Company's exposure to market risk for changes in interest rates relates
primarily to the Credit Agreement as discussed above under "Liquidity and
Capital Resources." The Company mitigates interest rate risk by continually
monitoring interest rates and electing the lower of the fixed rate LIBOR or
prime rate option available under the Credit Agreement. The company has fixed
rate notes payable of approximately $3,347,000 as of June 30, 2000. For this
fixed rate debt, interest rate changes affect the fair market value but do not
impact earnings or cash flows. As of June 30, 2000, the fair value of the fixed
rate debt is consistant with the outstanding principal balance.
The table below presents the outstanding principal amount and the
related fair values (in thousands), together with the maturity date as of March
31, 2000 and the weighted average interest rate for the Company's Credit
Agreement:
Outstanding Weighted
Principal Average Maturity
Amount Fair Value Interest Rate Date
--------- ---------- ------------- ------
Credit Agreement (prime option elected) $ 926 $ 926 9.75% May 2000
Credit Agreement (LIBOR option elected) 8,000 8,000 8.625% May 2000
------- -----
Total borrowings subject to variable rates $ 8,926 $ 8,926
======== ========
18
Based on the borrowing rate available to the Company for debt with
similar terms and average maturities, the fair value of the Company's borrowing
approximates carrying value.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data 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
As disclosed in a Form 8-K filed with the Securities and Exchange
Commission on April 11, 2000, on April 4, 2000, PricewaterhouseCoopers LLP
("PwC"), notified the Company that upon completion of their audit of the
Company's consolidated financial statements for the fiscal year ended March 31,
2000, they will resign as the Company's independent certified public
accountants.
PwC has previously audited the Company's consolidated financial
statements for the fiscal years ended March 31, 1999 and 1998 ("Prior Fiscal
Years"). Their reports on such consolidated financial statements did not contain
an adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. Further, in connection
with its audits of the Company's financial statements for the Prior Fiscal Years
and through June 30, 2000, the Company had no disagreements with PwC on any
matter of accounting procedure, which disagreements, if not resolved to the
satisfaction of PwC, would have caused them to make a reference to the subject
matter of the disagreements in connection with its reports on the consolidated
financial statements of the Company for each of the Prior Fiscal Years.
The Company's Audit Committee will select a successor independent
certified public accounting firm once they review the qualifications and meet
with potential applicants.
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.
19
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.
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:
4.26 Forbearance and Amendment Agreement, dated May 25, 2000, between the
Company and General Electric Capital Corporation.
10.56 Subordinated Secured Note Agreement, dated June 1, 2000, between the
Company and Perfumania, Inc.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On April 11, 2000, the Company filed a report on Form 8-K. See Item 9
above for further discussion.
20
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, President and Chairman
Dated: July 14, 2000
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/ Frank A. Buttacavoli
- -------------------------------------------
Frank A. Buttacavoli, Executive Vice President,
Chief Operating Officer, 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/ Zalman Lekach
- --------------------------------------------
Zalman Lekach, Director
/s/ Mayi de la Vega
- ---------------------------------------------
Mayi de la Vega, Director
/s/ Glenn Gopman
- ---------------------------------------------
Glenn Gopman, Director
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 Operations F-4
Consolidated Statements 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 II - Valuation and Qualifying Accounts F-24
Schedule IX - Short-term Bank Borrowings F-25
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
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 accompanying
index present fairly, in all material respects, the financial position of Parlux
Fragrances, Inc. and its subsidiaries (collectively the "Company") at March 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 8
to the consolidated financial statements, the Loan and Security Agreement (the
"Credit Agreement") expires on August 29, 2000. Management is currently
negotiating with other banks to obtain financing to replace the Credit
Agreement. As of June 30, 2000, the Company has not obtained financing from an
alternative source. Management believes that the Company will be able to obtain
financing from alternative sources to replace the Credit Agreement. However,
there is no assurance that alternative financing will be available in the
future, which creates substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with a related party.
PricewaterhouseCoopers LLP
Miami, Florida
June 30, 2000
F-2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, March 31,
ASSETS 2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 17,464 $ 184,148
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$3,320,000 and $2,113,000, respectively 6,066,149 7,222,951
Trade receivables from related parties 9,561,550 18,258,213
Note receivable from related party 2,500,000 --
Inventories, net 23,419,613 20,947,256
Prepaid expenses and other current assets 8,392,277 9,596,478
Investment in affiliate 8,034,657 --
Income tax receivable -- 140,000
------------ ------------
TOTAL CURRENT ASSETS 57,991,710 56,349,046
Equipment and leasehold improvements, net 2,289,159 1,692,732
Trademarks, licenses and goodwill, net 21,468,737 23,926,073
Other 112,422 112,949
------------ ------------
TOTAL ASSETS $ 81,862,028 $ 82,080,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 9,993,966 $ 10,885,068
Accounts payable 10,554,068 5,314,770
Accrued expenses 1,379,483 1,722,681
Income taxes payable 1,310,811 236,941
------------ ------------
TOTAL CURRENT LIABILITIES 23,238,328 18,159,460
Borrowings, less current portion 2,571,252 3,561,313
Deferred tax liability 2,407,664 505,783
------------ ------------
TOTAL LIABILITIES 28,217,244 22,226,556
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 2000 and 1999 -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 17,973,103 and 17,462,478 shares
issued at March 31, 2000 and March 31, 1999, respectively 179,731 174,625
Additional paid-in capital 73,977,590 73,030,586
Accumulated deficit (473,338) (4,345,949)
Accumulated other comprehensive income (loss) 1,834,607 (351,505)
Notes receivable from officer (899,105) (426,446)
------------ ------------
74,619,485 68,081,311
Less - 7,704,798 and 3,655,031 shares of common stock in
treasury, at cost, at March 31, 2000 and March 31, 1999, respectively (20,974,701) (8,227,067)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 53,644,784 59,854,244
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,862,028 $ 82,080,800
============ ============
See notes to consolidated financial statements.
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended March 31,
---------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net sales:
Unrelated customers $ 35,958,199 $ 33,623,124 $ 40,429,288
Related parties 30,426,952 22,527,451 21,939,235
------------ ------------ ------------
66,385,151 56,150,575 62,368,523
Cost of goods sold 28,652,201 22,046,197 35,729,618
------------ ------------ ------------
Gross margin 37,732,950 34,104,378 26,638,905
------------ ------------ ------------
Operating expenses:
Advertising and promotional 15,307,913 15,612,506 17,887,892
Selling and distribution 6,050,583 5,644,923 7,425,800
General and administrative, net of licensing
fees of $637,500 in 2000 and $575,000 in 1999 4,442,578 4,570,055 7,295,236
Depreciation and amortization 3,542,225 2,461,093 2,887,550
Royalties 1,790,347 1,584,483 2,684,441
------------ ------------ ------------
Total operating expenses 31,133,646 29,873,060 38,180,919
------------ ------------ ------------
Operating income (loss) 6,599,304 4,231,318 (11,542,014)
Gain on sale of securities 541,013 -- --
Interest income 504,944 86,651 --
Interest expense and bank charges (1,376,863) (1,886,800) (2,241,170)
Exchange (loss) gain (30,143) (117,334) 108,289
------------ ------------ ------------
Income (loss) before income taxes 6,238,255 2,313,835 (13,674,895)
Income taxes (provision) benefit (2,365,644) (895,380) 4,987,972
------------ ------------ ------------
Net income (loss) $ 3,872,611 $ 1,418,455 ($ 8,686,923)
============ ============ ============
Income (loss) per common share:
Basic $ 0.32 $ 0.10 ($ 0.53)
============ ============ ============
Diluted $ 0.31 $ 0.10 ($ 0.53)
============ ============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
COMMON STOCK RETAINED
ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------ ------------ ------------ ------------
BALANCE at April 1, 1997 17,447,478 $ 174,475 $ 73,007,949 $ 2,922,519
Comprehensive loss:
Net loss -- -- -- (8,686,923)
Foreign currency translation adjustment
Total comprehensive loss
Purchase of 2,069,700 shares of treasury stock, at cost
Notes receivable from officer
------------ ------------ ------------ ------------
BALANCE at March 31, 1998 17,447,478 174,475 73,007,949 (5,764,404)
Comprehensive income:
Net income -- -- -- 1,418,455
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise of employee options 15,000 150 22,637 --
Purchase of 1,165,276 shares of treasury stock, at cost -- -- -- --
Notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 1999 17,462,478 174,625 73,030,586 (4,345,949)
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on investment in affiliate, net -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise of:
Employee stock options 10,625 106 14,504
Warrants 500,000 5,000 932,500
Purchase of 4,049,767 shares of treasury stock, at cost -- -- -- --
Notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 2000 17,973,103 $ 179,731 $ 73,977,590 $ (473,338)
============ ============ ============ ============
[RESTUBBED]
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE TREASURY FROM
(LOSS) INCOME (1) STOCK OFFICER TOTAL
------------ ------------ ------------ ------------
BALANCE at April 1, 1997 ($ 103,562) ($ 1,882,646) $ -- $ 74,118,735
Comprehensive loss:
Net loss -- -- -- (8,686,923)
Foreign currency translation adjustment (251,769) -- -- (251,769)
------------
Total comprehensive loss (8,938,692
Purchase of 2,069,700 shares of treasury stock, at cost -- (4,011,604) -- (4,011,604)
Notes receivable from officer -- -- (150,000) (150,000)
------------ ------------ ------------ ------------
BALANCE at March 31, 1998 (355,331) (5,894,250) (150,000) 61,018,439
Comprehensive income:
Net income -- -- -- 1,418,455
Foreign currency translation adjustment 3,826 -- -- 3,826
------------
Total comprehensive income 1,422,281
Issuance of common stock upon exercise of employee options -- -- -- 22,787
Purchase of 1,165,276 shares of treasury stock, at cost -- (2,332,817) -- (2,332,817)
Notes receivable from officer -- -- (276,446) (276,446)
------------ ------------ ------------ ------------
BALANCE at March 31, 1999 (351,505) (8,227,067) (426,446) 59,854,244
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on investment in affiliate, net
of income taxes of $1,340,521 2,187,166 -- -- 2,187,166
Foreign currency translation adjustment (1,054) -- -- (1,054)
------------
6,058,723
------------
Total comprehensive income
Issuance of common stock upon exercise of:
Employee stock options 14,610
Warrants 937,500
Purchase of 4,049,767 shares of treasury stock, at cost -- (12,747,634) (12,747,634)
Notes receivable from officer -- -- (472,659) (472,659)
------------ ------------ ------------ ------------
BALANCE at March 31, 2000 $ 1,834,607 $(20,974,701) $ (899,105) $ 53,644,784
============ ============ ============ ============
(1) Accumulated other comprehensive (loss) income includes foreign currency
translation adjustments and unrealized holding gains on investment in
affiliate.
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended March 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,872,611 $ 1,418,455 ($ 8,686,923)
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,542,225 2,461,092 2,898,227
Provision for doubtful accounts 1,143,790 400,000 1,413,699
Reserve for prepaid promotional supplies and inventory obsolescence 1,400,000 853,545 7,519,105
Gain on sale of securities (541,013) -- --
Loss on disposal of equipment -- 13,416 8,707
Provision (benefit) for deferred taxes 75,426 863,836 (214,081)
Changes in assets and liabilities net of effect of acquisitions:
Decrease in trade receivables - customers 13,012 1,630,595 3,622,594
Decrease (increase) in note and trade receivables - related parties 1,689,693 (285,016) 4,889,138
(Increase) decrease in inventories (3,272,357) 2,223,878 (818,885)
Decrease (increase) in prepaid expenses and other current assets
and income tax receivable 1,230,135 4,116,263 (4,040,774)
Decrease in other non-current assets 527 2,026,513 22,931
Increase (decrease) in accounts payable 5,239,298 (4,359,637) (2,230,401)
Increase (decrease) in accrued expenses and income taxes payable 730,672 (697,575) (4,657,769)
------------ ------------ ------------
Total adjustments 11,251,408 9,246,910 8,412,491
------------ ------------ ------------
Net cash provided by (used in) operating activities 15,124,019 10,665,365 (274,432)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of securities 2,276,018
Purchase of securities (1,735,005)
Purchases of equipment and leasehold improvements (1,543,340) (287,688) (473,655)
Purchases of trademarks (137,976) (106,306) (76,489)
Cash received from brand licensing/sales:
Bal a Versailles -- 200,000 --
Alexandra de Markoff -- -- 202,000
Vicky Tiel -- -- 680,553
------------ ------------ ------------
Net cash (used in) provided by investing activities (1,140,303) (193,994) 332,409
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - GE Capital Corporation, net (936,471) (6,956,867) 16,818,951
Payments - Fred Hayman Beverly Hills (594,953) (553,466) (514,873)
Payments - Lyon Credit Corporation (183,508) (164,360) (320,869)
Payments - Bankers Capital Leasing (122,117) -- --
Payments - International Finance Bank -- (185,472) (567,653)
Payments - S.A. overdraft facilities -- -- (1,128,946)
Payments - S.A. financing facilities -- -- (1,981,820)
Payments - Finova Capital Corp. -- -- (7,878,091)
Payments - other notes payable (44,114) (50,169) (79,604)
Notes receivable from officer (472,659) (276,446) (150,000)
Purchases of treasury stock (12,747,634) (2,332,817) (4,011,604)
Proceeds from issuance of common stock, net 952,110 22,787 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (14,149,346) (10,496,810) 185,491
------------ ------------ ------------
Effect of exchange rate changes on cash (1,054) 3,827 (229,194)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (166,684) (21,612) 14,274
Cash and cash equivalents, beginning of year 184,148 205,760 191,486
------------ ------------ ------------
Cash and cash equivalents, end of year $ 17,464 $ 184,148 $ 205,760
============ ============ ============
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999, AND 1998
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, on a worldwide basis.
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. Accounting estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 carrying value of accounts
receivable from related parties, reserve for doubtful accounts, sales
returns and advertising allowances, inventory obsolescence and periods
of depreciation and amortization for trademarks, licenses, goodwill,
and equipment. Actual results could differ from those estimates.
D. Basis of presentation
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Management is currently negotiating with other banks to obtain
financing to replace the Company's current credit agreement. As of
June 30, 2000, the Company has not obtained financing from an
alternative source.
Management's plan initially consists of obtaining sufficient financing
from alternative sources to replace the Company's current credit
agreement and management believes that funds from operations and any
new financing will be sufficient to meet the Company's operating
needs. There is no assurance, however, that alternative financing will
be available in the future, and if available, at terms and conditions
agreeable to the Company.
This factor among others indicates that the Company may be unable to
continue as a going concern for a reasonable period of time. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
E. 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.
F-7
Licensing income, which is included as an offset to general and
administrative expenses, is recognized ratably over the terms of the
contractual license agreements.
F. Inventories and cost of goods sold
Inventories are stated at the lower of cost or market using the
first-in, first-out method. The cost of inventories includes product
costs and handling charges, including an allocation of the Company's
applicable overhead in an amount of $1,845,000 and $2,830,000 at March
31, 2000 and 1999, respectively.
During April 2000, the Emerging Issues Task Force ("EITF") issued
ruling 00-10 which requires that all costs incurred for shipping and
handling be classified as cost of goods sold and that prior period
financial statements be reclassified to conform to this presentation.
Accordingly, the Company has reclassified $237,652 and $501,618 of
shipping charges to cost of goods sold for the years ended March 31,
1999 and 1998, respectively, which were previously recorded as selling
and distribution expenses.
G. Investment in Affiliate
Investment in Affiliate consists of marketable equity securities that
are considered available-for-sale and are recorded at fair value.
Changes in unrealized gains and losses of the company's investment in
E Com Ventures, Inc., the parent company of Perfumania, Inc. which are
available-for-sale securities are charged or credited as a component
of accumulated other comprehensive income, net of tax, and are
included in the accompanying statements of stockholders' equity. A
decline in the fair value of an available-for-sale security below cost
that is deemed other than temporary would be charged to earnings.
H. 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.
I. 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. The cost of assets and related
accumulated depreciation is removed from the accounts when such assets
are disposed of, and any related gains or losses are reflected in
current earnings.
J. 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 of trademarks, licenses and goodwill was
$5,179,533 and $4,444,124 at March 31, 2000 and 1999, respectively.
Amortization expense was $2,595,311, $1,558,496, and $1,467,034 for
the years ended March 31, 2000, 1999, and 1998, respectively.
Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. Impairment losses are recognized if
expected undiscounted future cash flows of the related assets are less
than their carrying values. The impairment loss is determined based on
the difference between the carrying value of the assets and
anticipated future cash flows discounted at a value commensurate with
the risk involved. Management does not believe that there are any
impairment losses as of March 31, 2000 and 1999.
F-8
K. Advertising costs
Advertising and promotional expenditures are expensed to operations as
incurred. These expenditures include print and media advertising, as
well as in-store cooperative advertising and promotions.
L. 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.
M. Foreign currency translation
The French franc denominated assets and liabilities of S.A., whose
operations were closed during 1998, 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. Gains and losses arising from foreign currency
transactions are recorded in the statement of income.
N. Fair value of financial instruments
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, note receivable
from Perfumania, Inc., notes receivable from officer, accounts payable
and borrowings, approximate fair value due to either the short-term
maturity of the instruments or borrowings with similar interest rates
and maturities.
O. Basic and diluted earnings per share
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128"), which
supersedes Accounting Principles Board Opinion No. 15, Earnings per
Share. Basic earnings per common share calculations are determined by
dividing earnings available to common stockholders by the weighted
average number of shares of common stock outstanding during the year.
Diluted earnings per common share calculations are determined by
dividing earnings available to common stockholders by the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding during the year.
P. Stock based compensation
Statement of Financial Accounting Standards No. 123, Accounting For
Stock Based Compensation ("SFAS No. 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
retained the intrinsic value method of accounting for stock based
compensation, which it previously used.
In calculating the potential effect for proforma presentation, the
fair market value on the date of grant was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
F-9
2000 1999 1998
---- ---- ----
Expected life (years) 5 5 3
Interest rate 5% 5% 6%
Volatility 75% 76% 71%
Dividend Yield - - -
If compensation cost had been determined based on the fair value at
the grant date under SFAS No. 123, the Company net income (loss) and
income (loss) per share would have been as follows:
For the years ended March 31,
-----------------------------
2000 1999 1998
---- ---- ----
Net income (loss):
As reported $3,872,611 $1,418,455 $(8,686,923)
Proforma $3,853,610 $ 548,455 $(8,704,066)
Basic net income (loss) per share:
As reported $0.32 $0.10 ($0.53)
Proforma $0.32 $0.04 ($0.53)
Diluted net income (loss) per share:
As reported $0.31 $0.10 ($0.53)
Proforma $0.31 $0.04 ($0.53)
Q. 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:
2000 1999 1998
---- ---- ----
Cash paid for:
Interest $1,334,769 $1,839,569 $2,263,000
========== ========== ==========
Income taxes $1,216,348 $ 518,447 $4,641,000
=========== ========= ==========
In addition to the conversion of trade accounts receivable during the
year ended March 31, 2000, in the amounts of $4,506,970 and $8,000,000
discussed in Note 2, the following non-cash transactions were entered
into:
Year ended March 31, 1999:
o The consideration received for the sale of inventory relating to
the license of the Bal a Versailles brand included a non-interest
bearing receivable from the licensee in the amount of $500,000.
o The Company acquired computer equipment in the amount of $395,325
through capital lease agreements.
Year ended March 31, 1998:
o The consideration received for the sale of inventory relating to
the licensing of the Alexandra de Markoff (AdM) brand included a
non-interest bearing receivable from the licensee in the amount
of $4,000,000, which has been recorded at its present value of
$3,659,753.
F-10
R. New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. Management has not determined the
effect, if any, of adopting SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that
its current revenue recognition policies comply with SAB 101.
S. Reclassifications
Certain amounts in the consolidated financial statements for prior
years have been reclassified to conform to the 2000 presentation.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
As of March 31, 2000, the Company had loaned a total of approximately
$875,000 ($390,000 at March 31, 1999) to its Chairman/CEO, which is
recorded as a component of stockholders' equity in the accompanying
consolidated balance sheets. All of the notes bear interest at 10% per
annum, and unless indicated, are not collateralized. The composition of the
notes is as follows:
March 31,
--------
2000 1999
---- ----
Note receivable, due May 31, 2000 $ 240,000 $390,000
Note receivable, collateralized by 100,000 shares of the
Company's common stock, due May 31, 2000 230,000 ----
Note receivable, due May 31, 2000 405,000 ----
Accrued interest receivable 24,105 36,446
--------- --------
$ 899,105 $426,446
========= ========
In February 2000, the Company received a payment on the notes in the amount
of $182,764, representing interest due through December 31, 1999, and a
$139,287 principal reduction. The balance of the remaining notes originally
due December 31, 1999, were extended to May 31, 2000. All of the notes have
subsequently been refinanced under a master note in the amount of $875,000,
which bears interest at 10% per annum, is not collateralized and matures on
March 31, 2001.
The Company had net sales of $30,426,952, $22,527,451 and $21,939,235
during the fiscal years ended March 31, 2000, 1999 and 1998, respectively,
to Perfumania, Inc. ("Perfumania") a wholey-owned subsidiary of E Com
Ventures, Inc. ("ECMV) a company in which the Company's Chairman and Chief
Executive Officer has an ownership interest and holds identical management
positions. Net trade accounts receivable and note receivable owed by
Perfumania to the Company amounted to $9,561,550 and $2,500,000,
respectively, (after giving effect to the stock transaction discussed
below) at March 31, 2000 and trade accounts receivable of $18,258,313 at
March 31, 1999. Amounts due from related parties are non-interest bearing
and are realizable in less than one year, except for the subordinated note
receivable discussed below.
During the period from April 1, 1999 through March 31, 2000, the Company
collected $32.1 million from Perfumania, including 100% of the total of the
outstanding receivable at March 31, 1999, excluding the effect of the stock
transaction discussed below.
On July 1, 1999, Perfumania and the Company's Board of Directors approved
the transfer of 1,512,406 shares of Perfumania treasury stock to the
Company in consideration for a partial reduction of the outstanding trade
F-11
receivable balance in the amount of $4,506,970. The transfer price was
based on a per share price of $2.98, which approximated 90% of the closing
price of Perfumania's common stock for the previous 20 business days. (In
accordance with generally accepted accounting principles, these securities
are considered available-for-sale securities and must be recorded at fair
value. Changes in unrealized gains and losses are charged or credited as a
component of accumulated other comprehensive income, net of tax, and are
included in the accompanying consolidated statement of changes in
stockholders' equity at March 31, 2000). In connection with the agreement
for the transfer of the shares, the parties executed a registration rights
agreement whereby the Company would be able to demand registration of the
shares with the Securities and Exchange Commission at any time after
February 29, 2000. Both agreements were consummated on August 31, 1999, and
the demand registration was requested on March 3, 2000. Effective February
1, 2000, ECMV was formed as a holding company and accordingly, former
Perfumania shareholders now hold common stock in ECMV. A registration
statement was filed by ECMV during April 2000. As of June 30, 2000, the
fair market of the investment in ECMV is $3,886,883 ($2.57 per share).
In addition, on October 4, 1999, the parties entered into an agreement
which converted $8 million of the outstanding trade receivable into a
subordinated secured note receivable. The note bears interest at prime plus
one percent and is repayable in installments of $3,000,000 in October 1999,
six equal monthly installments of $500,000 from November 1999 through April
2000, with the balance of $2,000,000 due on May 31, 2000. As of March 31,
2000, $5,500,000 of the note receivable had been repaid in accordance with
its terms.
During the period of April 1, 2000 through June 30, 2000, the Company
received cash payments of $4.72 million from Perfumania, including the
April installment and May interest payment due under the note receivable.
On June 1, 2000, the parties entered into a new subordinated $5 million
note agreement which refinanced the remaining $2 million under the October
4, 1999 note, as well as converted $3 million of the outstanding trade
receivable due from Perfumania to the Company. The new note is repayable in
six equal monthly installments of $500,000, plus interest, from July 2000
through December 2000, with the balance of $2 million due on December 29,
2000. The terms and conditions of the new note are identical to the October
4, 1999 note.
As indicated in various public press releases, Perfumania has reported both
aggregate and comparative store sales increases for each of the months
during the period February 1999 through May 2000. In addition, during
September 1999, its subsidiary, perfumania.com, successfully completed a
public offering in which Perfumania also sold one million of its
perfumania.com shares, subsequently selling an additional two million shares
and five hundred thousand shares in January 2000 and May 2000, respectively,
generating over $25 million in cash from the four transactions.
Additionally, during May 2000, Perfumania entered into a new $40 million
line of credit agreement with General Motors Commercial Credit Corporation.
Based on the factors described above, management believes that the
receivable from Perfumania is fully collectible.
In October 1999, the Company purchased, in the open market, 250,000 shares
of perfumania.com common stock for $1,735,005. These shares were sold
during November 1999, resulting in a gain of $541,013, which is included in
the accompanying consolidated statement of operations for the fiscal year
ended March 31, 2000.
On August 13, 1997, L. Luria & Son, Inc. ("Luria's"), a company in which the
Company's Chairman and Chief Executive Officer had an ownership interest and
held identical management positions, filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code, which has subsequently
resulted in a Chapter 7 liquidation. At the time of the filing, Luria's owed
the Company $690,886, which was fully reserved as of March 31, 1998. The
Company filed its claim and was characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by Luria's in the
United States Bankruptcy Court, Southern District of Florida. The committee
of unsecured creditors in Luria's bankruptcy proceedings threatened
potential actions to recover substantial funds from alleged insiders of
Luria's and their affiliates, which included actions against the Company to
recover amounts paid for merchandise sold to Luria's. On May 17, 1999, the
Company settled this claim and recorded a liability of $215,000 in the
accompanying March 31, 1999 consolidated balance sheet in connection with
this matter. The agreed-upon settlement was paid in six equal monthly
installments, without interest.
F-12
3. CORPORATE RESTRUCTURINGS
In March of 1998, with the agreement to license the fragrance and cosmetics
rights for the AdM brand, and the further intent to license the fragrance
rights for Bal a Versailles ("BAV"), which agreement was executed in June
1998, the Company announced that it would discontinue certain marginal
brands and products to complete its reconfiguration process to concentrate
on its core fragrance business. As of March 31, 1998, the Company had
completed personnel layoffs relating to the restructuring as well as
certain brand and product discontinuations and estimated that the remaining
brand and product discontinuations would be completed within one year. The
costs relating to this restructuring of approximately $9,224,000 were
recorded in the quarter ended March 31, 1998, increasing cost of goods
sold, advertising and promotional expenses, selling and distribution
expenses and general and administrative expenses by approximately
$8,195,000, $844,000, $75,000 and $110,000, respectively.
The following is a breakdown of the costs included in the $9.224 million
restructuring charge during the fourth quarter of fiscal 1998:
Obsolescence write-offs and reserves for inventory charged to cost of goods sold $8,195,000 (1)
Obsolescense write-offs and reserves for advertising and in-store promotional
materials charged to advertising and promotional expenses 844,000 (1)
Accrued employment contracts:
Charged to selling and distribution expenses 75,000 (2)
Charged to general and administrative expenses 110,000 (2)
---------
Total reported restructuring charge $9,224,000
==========
(1) The above items relate to brands/products which the Company has
discontinued in accordance with its restructuring plan.
(2) Represents the remaining amounts due under employment agreements
for employees whose services were no longer required and were
terminated in connection with the restructuring.
At March 31, 1998, approximately $3,671,000 and $185,000 of restructuring
charges remained in the reserve for potential inventory obsolescence and
accrued expenses, respectively. As of March 31, 1999, the restructuring had
been completed and no further liabilities or reserves relating to the
restructuring were included in the accompanying balance sheets at March 31,
2000 and 1999.
4. INVENTORIES
The components of inventories are as follows:
March 31,
--------
2000 1999
---- ----
Finished products $13,616,034 $10,609,272
Components and packaging material 6,780,534 7,033,339
Raw material 3,023,045 3,304,645
---------- ----------
$23,419,613 $20,947,256
=========== ===========
The above amounts are net of reserves for potential inventory obsolescence
of approximately $1,520,000 and $976,000 at March 31, 2000 and 1999,
respectively.
F-13
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
---------
2000 1999
---- ----
Promotional supplies, net $4,532,582 $4,058,900
Deferred tax assets 2,078,467 1,592,533
Notes receivable-current portion AdM/BAV 541,104 2,413,990
Prepaid advertising 601,856 429,894
Other 638,268 1,101,161
---------- ----------
$8,392,277 $9,596,478
========== ==========
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
March 31,
----------------------- Estimated useful
2000 1999 lives (in years)
---- ---- ----------------
Molds and equipment $5,402,667 $4,889,030 3-7
Furniture and fixtures 1,244,695 1,212,355 3-5
Leasehold improvements 426,745 599,474 5-7
------- -------
7,074,107 6,700,859
Less: accumulated depreciation and amortization (4,784,948) (5,008,127)
----------- -----------
$2,289,159 $1,692,732
========== ==========
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended March 31, 2000, 1999, and 1998 was
$946,913, $902,596, and $1,421,599, respectively. Amounts subject to
capital leases at March 31, 2000, included in molds and equipment above,
totaled $395,325, net of accumulated amortization of $164,154.
7. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
March 31, Estimated useful
------------------- ----------------
2000 1999 lives (in years)
---- ---- ----------------
Owned Brands:
Alexandra de Markoff $11,191,171 $11,190,926 25
Fred Hayman Beverly Hills 2,804,864 2,753,027 25
Bal A Versailles 2,948,942 3,243,855 25
Animale 1,523,824 1,452,929 25
Other 215,714 243,431 25
Licensed Brands:
Perry Ellis 7,963,755 7,957,567 25
Baryshnikov, net 0 1,528,462 5
----------- -----------
26,648,270 28,370,197
Less: accumulated amortization (5,179,533) (4,444,124)
----------- -----------
$21,468,737 $23,926,073
=========== ===========
On June 9, 1998, the Company entered into an exclusive agreement to license
the Bal a Versailles ("BAV") rights to Genesis International Marketing
Corporation for an annual licensing fee of $100,000 during the initial year
of the agreement, increasing to $150,000 for subsequent years for the
remainder of the initial term, and to $200,000 each year thereafter. The
initial term of the agreement is for ten years, automatically renewable
every five years. As part of the agreement, the Company sold the inventory,
promotional materials and molds relating to BAV for its approximate book
value. At closing, the purchaser provided as consideration, $200,000 in
cash and a $500,000 non-interest bearing note due in quarterly installments
of $83,333 through December 1999, which has been paid in full in accordance
with its original terms.
F-14
On March 2, 1998, the Company entered into an exclusive agreement to
license the Alexandra de Markoff ("AdM") rights to Cosmetic Essence, Inc.
for an annual fee of $500,000. The initial term of the agreement is ten
years, automatically renewable for additional ten and five year terms. The
annual fee reduces to $100,000 after the third renewal. As part of the
agreement, the Company sold the inventory, promotional material and molds
relating to AdM which resulted in a loss of approximately $923,000 which is
reflected in the accompanying consolidated statement of operations for the
year ended March 31, 1998. At closing, the purchaser provided as
consideration, $202,000 in cash and a $4,000,000 non-interest bearing
receivable due in periodic installments based on the purchaser's use of the
inventory, with any remaining balance due on January 1, 2000, but
subsequently extended to June 30, 2000. In accordance with generally
accepted accounting principles and based on the Company's then borrowing
cost of 9.25%, the original note was reduced to a present value of
$3,659,753.
At March 31, 2000, $541,104 ($2,413,990 at March 31, 1999) relating to the
AdM and BAV receivables is included in other current assets.
8. BORROWINGS
The composition of borrowings is as follows:
March 31, 2000 March 31, 1999
------------- --------------
Revolving credit facility payable to General Electric Capital
Corporation, interest at LIBOR plus 2.50% or prime (9.00% at March 31,
2000) plus .75%, at the Company's option, net of restricted cash of
$2,468,377 and $3,658,593 at March 31, 2000 and 1999,respectively. $8,925,613 $9,862,084
Note payable to FHBH, collateralized by the acquired licensed
trademarks, interest at 7.25%, payable in equal monthly installments
of $69,863, including interest, through June 2004 3,031,407 3,626,360
Note payable to Lyon Credit Corporation, collateralized by certain
equipment, interest at 11%, payable in equal monthly installments of
$19,142, including interest, through September 2001. 316,121 499,629
Capital lease payable to Bankers Leasing, collateralized by certain
computer hardware and software, payable in quarterly installments of
$36,878, including interest, through January 2002. 273,208 395,325
Other notes payable 18,869 62,983
---------- -----------
12,565,218 14,446,381
Less: long-term borrowings (2,571,252) (3,561,313)
---------- -----------
Short-term borrowings $9,993,966 $10,885,068
========== ===========
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, on a revolving basis for a
three-year period, depending on the availability of a borrowing base, 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. At March 31,
2000, based on the borrowing base at that date, the credit line amounted to
approximately $11,988,000, and accordingly, the Company had approximately
$594,000 available under the credit line, excluding the effect of
restricted cash of approximately $2,468,000.
F-15
Substantially all of the domestic assets of the Company collateralize this
borrowing. 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.
Due principally to the significant treasury stock purchases under the
Company's stock buy back program, as of March 31, 2000, the Company was not
in compliance with financial covenants relating to tangible net worth,
current ratio and minimum fixed charge coverage ratio as well as the
restricted payment covenants exceeding the amount of fixed assets and
treasury stock which can be purchased as well as advances to related
parties and employees. GECC has waived the violations of these debt
covenants through May 31,2000, and has agreed to extend the maturity of the
Credit Agreement until August 29, 2000, while reducing the borrowing limit
to $15 million, more in line with the Company's current needs.
The Company has reduced its total outstanding borrowings by approximately
$9,396,000 over the last two fiscal years. Management believes that, based
on current circumstances, the Company will be able to obtain sufficient
financing from alternative sources to replace the Credit Agreement and
management believes that funds from operations and any new financing will
be sufficient to meet the Company's operating needs. However, there can be
no assurance that alternative financing will be available in the future,
and if available, at terms and conditions agreeable to the Company.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
2001 $9,994
2002 926
2003 744
2004 799
2005 102
-------
Total $12,565
=======
9. COMMITMENTS AND CONTINGENCIES
A. Leases:
The Company leases its office space and certain equipment under
certain operating and capital leases expiring on various dates through
October 31, 2005. Total rent expense charged to operations for the
years ended March 31, 2000, 1999 and 1998 was approximately $924,000,
$1,110,000, and $854,000, respectively.
At March 31, 2000, the future minimum annual rental commitments under
operating and capital leases are as follows (in 000's ):
For the year ending March 31, Capital Leases Operating Leases
----------------------------- -------------- ----------------
2001 $147 $ 853
2002 148 804
2003 --- 641
2004 --- 641
2005 --- 641
Thereafter --- 427
---- ------
Total 295 $4,007
======
Less: amount representing interest (22)
----
Present value of net minimum lease payments $273
====
F-16
The Company has entered into a non-cancelable sublease agreement for its
previous corporate headquarters and distribution center. This agreement
covers the remaining lease commitment through November 2000, with the
sub-lessee remitting payment directly to the landlord at the same rental
rate as the Company's original lease. The Company has agreed to guarantee
such sublease payments of approximately $20,000 per month.
B. License and Distribution Agreements:
During the year ended March 31, 2000, the Company held exclusive worldwide
licenses to manufacture and sell fragrance and other related products for
Perry Ellis, Ocean Pacific ("OP"), Baryshnikov, and Phantom.
Effective January 1, 2000, the Company entered into an exclusive licensing
agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and distribute men's
and women's fragrances and other related products under the PEZ trademark
throughout the Western Hemisphere. The Company anticipates launching the
first PEZ fragrances for the Summer 2001 season.
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 and are subject to
renewal.
As discussed above, the Company is required to pay royalties under the
Perry Ellis ("Licensor") license agreement. The Licensor had asserted,
through its legal counsel, that the Company was in default of the license
agreement in that the sales of Perry Ellis brand products by an affiliate
of the Company were not properly included in sales for the purposes of
calculating royalties. On August 12, 1999, a settlement was reached between
the Company and the Licensor amending the license agreement to redefine net
sales for royalty calculation purposes. The Company paid the Licensor
$500,000, which had been fully accrued for as of March 31, 1999.
On October 13, 1999, the Company was notified by the Baryshnikov licensor
of its intent to immediately terminate the license agreement with the
Company, which was to expire on March 31, 2001, due to the Company's
unwillingness to develop and distribute a new women's fragrance by October
31, 1999, as stipulated in the license agreement. On January 11, 2000, a
settlement was reached which entitles the Company to continue producing and
selling Baryshnikov brand products until April 30, 2000, at which time all
remaining unsold inventory and advertising material would be destroyed. On
April 28, 2000, the parties agreed to extend the sales period until June
30, 2000. Sales of Baryshnikov products represented less than 2% of total
Company net sales for each of the three years ended March 31, 2000.
Management believes that the effect of this matter will not have a material
adverse effect on the Company's financial position or results of
operations.
In 1997, the Company informed the Todd Oldham licensor of its intent not to
renew the license. In accordance with the licensing agreement, the Company
produced and sold the Todd Oldham trademarked products until March 31,
1998. In addition, the Company was required to destroy all remaining unsold
inventory and advertising material relating to the trademarked products.
Sales of Todd Oldham products represented less than 1% of total Company net
sales for the year ended March 31, 1998. The Company incurred a loss of
approximately $3,200,000 as a result of terminating the agreement.
On August 8, 1997, the Company consummated the sale of certain assets
relating to the VICKY TIEL brands to Five Star Fragrances Company, Inc.
("FSF") for approximately $680,000, which approximated the net book value
of assets sold. The Company sold to FSF all inventories, fixed assets and
licenses related to the brands, and FSF assumed certain liabilities for
purchase orders issued prior to August 8, 1997.
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, 2001 2002 2003 2004 2005
---------------------------- ---- ---- ---- ---- ----
Advertising $8,994 $8,994
Royalties $645 $653 $287 $254 $ 98
F-17
C. Trademarks:
Through various acquisitions since 1991, the Company acquired worldwide
trademarks and distribution rights to ANIMALE, 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 by the Company on these trademarks. Additionally,
royalties are payable to the Company from the licensees of ALEXANDRA DE
MARKOFF and BAL A VERSAILLES brands, and the Company has the rights to
license all of these trademarks, other than FHBH, for all classes of
merchandise.
D. Barter Arrangements:
The following table sets forth the balances and transactions included in
the accompanying financial statements related to the Barter Agreement (in
000's):
2000 1999 1998
---- ---- ----
Prepaid advertising at March 31, net of deferred
income of $137 in 1999 and 1998, respectively $ --- $233 $233
===== ==== ====
Advertising credits expensed during the year
ended March 31 $233 $--- $463
==== ==== ====
Deferred income recognized for the year ended
March 31 $ --- $ --- $208
===== ===== ====
E. Employment and Consulting Agreements:
The Company has contracts with certain officers, employees and consultants
which expire during March 2003. Minimum commitments under these contracts
total approximately $3,468,600. In addition, warrants to purchase 330,000
shares of common stock at prices ranging from $2.25 to $2.44 were granted.
These warrants are exercisable for a ten-year period from the date of
grant, vest over the three-year term of the applicable contract and double
in the event of a change in control.
In connection with previous employment contracts, warrants to purchase
1,690,000 shares of common stock, at prices ranging from $1.50 to $7.50
were granted between 1989 and 1995. These warrants are exercisable for a
ten-year period from the date of grant and vested over the term of the
applicable contracts. During the year ended March 31, 2000, 500,000 of
such warrants were exercised. As of March 31, 2000, 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 granted
to key employees would double in the event of a change in control.
On January 18, 1999, the Compensation Committee of the Board of Directors
authorized the grant to the Company's Chairman and Chief Executive Officer
of 1,000,000 warrants to acquire shares of common stock at $8.00 per share
for a five year period.
On April 1, 1994, the Company entered into a consulting agreement with a
former executive, which provided for monthly payments of $16,667 through
September 30, 1997. In addition, the former executive had previously
received warrants to purchase 500,000 shares of common stock, at an
exercise price of $1.875 per share, which are included in the 1,690,000
warrants discussed above. These warrants were exercised during March 2000,
and the Company repurchased these shares at $4.00 per share, the closing
price of the shares on March 23, 2000.
F-18
All of the previously described warrants were granted at or in excess of
the market value of the underlying shares at the date of grant and, where
applicable, 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.
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,
--------------------------------------
2000 1999 1998
---- ---- ----
Total assets $2,272,325 $2,487,440 $2,985,155
========== ========== ==========
Working capital $2,272,325 $2,439,522 $2,506,732
========== ========== ==========
Equity $2,272,325 $2,439,522 $2,506,732
========== ========== ==========
Net Sales:
Trade $ --- $ --- $2,128,698
Affiliates --- --- 175,600
Intercompany --- 455,011
------------ ------------- -----------
Total $ --- $ --- $ 2,759,309
============ ============= ===========
Net loss $ (217,610) $ (71,036) $ (3,053)
============ ============= ===========
Prior to fiscal 1996, foreign sales were principally made by Parlux S.A. As of
March 31, 1998, the Company ceased operations in France, and all international
sales activities are performed from the Company's domestic subsidiary.
11. INCOME TAXES
Income tax expense (benefit) is as follows:
Years Ended March 31,
----------------------
2000 1999 1998
---- ---- ----
Current taxes (benefit):
U.S. Federal $ 2,271,211 $ 0 ($4,634,263)
U.S. state and local 0 15,552 (440,239)
Foreign income taxes 36,500 15,992 232,998
----------- ----------- -----------
2,307,711 31,544 (4,841,504)
US Federal deferred tax (benefit) 57,933 863,836 (146,468)
----------- ----------- -----------
Income tax expense (benefit) $ 2,365,644 $ 895,380 ($4,987,972)
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate follows:
2000 1999 1998
---- ---- ----
Tax at statutory rate 35.0% 35.0% (35.0)
Other 2.9% 3.7% (1.5)
--- --- ----
37.9% 38.7% (36.5)
==== ==== =====
F-19
Deferred tax assets, which are included in other current assets, and
deferred tax liabilities, are comprised of the following:
March 31, 2000 1999
--------- ---- ----
Allowance for doubtful accounts, sales returns and allowances $ 1,186,216 $ 563,858
State net operating loss carry forwards 30,464 463,449
Reserve for inventory obsolescence 861,787 385,622
Other, net 0 179,604
----------- -----------
Total deferred tax assets 2,078,467 1,592,533
Deferred tax liabilities related to depreciation and
amortization ( 995,044) (505,783)
Unrealized gains on investments (1,340,521) 0
Other (72,099) 0
----------- -----------
Total deferred tax liabilities (2,407,664) (505,783)
----------- -----------
Net ($ 329,197) $ 1,086,750
=========== ===========
The net deferred tax liability in the amount of $.3 million is based upon
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and amounts used
for income tax purposes.
The Company has a State NOL carry forward of approximately $.5 million
which begins to expire in the year 2012.
12. COMMON STOCK
The following table summarizes the activity and related information for the
options and warrants outstanding, including the warrants discussed under
commitments in Note 9 (E):
Weighted Average
----------------
Amount Exercise Price
------ --------------
Balance at March 31, 1997 1,823,978 $ 2.24
Granted --
Exercised --
Canceled/Expired (53,978) $ 8.11
---------- -----
Balance at March 31, 1998 1,770,000 $ 2.06
Granted 1,000,000 $ 8.00
Exercised --
Canceled/Expired --
---------
Balance at March 31, 1999 2,770,000 $ 4.21
Granted 366,000 $ 2.43
Exercised (500,000) $ 1.88
Cancelled/Expired -- --
--------- --------
Balance at March 31, 2000 2,636,000 $ 4.41
========= ========
On January 18, 1999, the Compensation Committee of the Board of Directors
authorized the grant to the Company's Chairman and Chief Executive Officer
of 1,000,000 warrants to acquire shares of common stock at $8.00 per share
for a five year period.
F-20
The following table summarizes information about options and warrants
outstanding at March 31, 2000:
Options And Options And
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Amount Exercise Price Remaining Life Amount Exercise Price
--------------- ------ -------------- -------------- ------ --------------
$1.50-$2.44 1,420,000 $2.03 5 1,090,000 $1.90
$3.13-$4.56 202,000 $3.23 6 202,000 $3.23
$6.75 10,000 $6.75 7 10,000 $6.75
$8.00 1,004,000 $8.00 4 1,004,000 $8.00
--------- ----- - --------- -----
2,636,000 $4.41 5 2,306,000 $4.69
========= ===== = ========= =====
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 granted under the Plan
are not exercisable after the expiration of five years from the date of
grant and vest 25% after each of the first two years, and 50% after the
third year. 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.
As of March 31, 2000, and since the inception of the Plan, options have
been granted, net of cancellations, to purchase 199,092 shares at exercise
prices ranging from $1.06 to $5.75 per share. No further options are
issuable under the Plan. Through March 31, 2000, 189,092 options had been
exercised under the Plan and the remaining 10,000 shares are exercisable
through June 30, 2000.
In October 1996, the Company's shareholders ratified the establishment of a
new stock option plan (the "1996 Plan") which reserved 250,000 shares of
its Common Stock for issue thereunder with the same expiration and vesting
terms as the Plan. Only employees who are not officers or directors of the
Company shall be eligible to receive options under the 1996 Plan. During
January 2000, the shares were registered with the Securities and Exchange
Commission via a Form S-8 registration statement.
As of March 31, 2000, and since the inception of the 1996 Plan, options
have been granted net of cancellations, to purchase 138,650 shares at an
exercise price of $1.375 per share. Through March 31, 2000, 10,625 options
had been exercised and 16,375 options were vested with a remaining
contractual life for such options of three years.
The following table summarizes the activity for options covered under all
plans:
Plan 1996 Plan
------------------------------- ------------------------------
Weighted Average Weighted Average
Amount Exercise Price Amount Exercise Price
------ -------------- ------ --------------
Balance at March 31, 1997 67,000 $3.15 -
Granted --- --- 79,000 $1.38
Exercised --- ---
Canceled/Expired (12,000) $5.75 (7,750) $1.38
------- ------
Balance at March 31, 1998 55,000 $2.59 71,250 $1.38
Granted --- --- --- ---
Exercised (15,000) $1.52 --- ---
Canceled/Expired (30,000) --- (9,000) $1.38
-------- ------
Balance at March 31, 1999 10,000 $3.08 62,250 $1.38
Granted - 96,600 $1.38
Exercised - (10,625)
Canceled/Expired - (20,200)
------- -------
Balance at March 31, 2000 10,000 $3.08 128,025 $1.38
======= =======
F-21
On May 16, 2000, the Company granted to various employees, options under
the 1996 Plan to acquire 88,975 shares of common stock at $2.8125 per
share, the closing bid price of the stock on May 15, 2000.
The Company has 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. The cost of the matching program totaled
approximately $56,000, $53,000, and $57,000 for the years ended March 31,
2000, 1999, and 1998, respectively.
14. BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted net income per common share calculations,
retroactively adjusted for the adoption of the provisions of SFAS No. 128:
2000 1999 1998
---- ---- ----
Net income ( loss) $3,872,611 $1,418,455 ($8,686,923)
========== ========== ============
Weighted average number of shares outstanding used in basic
earnings per share calculation 11,965,713 14,541,306 16,300,060
========== ========== ==========
Basic net income ( loss ) per common share $0.32 $0.10 ($0.53)
===== ===== =======
Weighted average number of shares outstanding used in basic
earnings per share calculation 11,965,713 14,541,306
Affect of dilutive securities (1):
Stock options and warrants, net of treasury shares acquired 547,260 67,759
---------- ----------
Weighted average number of shares outstanding used in
diluted earnings per share calculation 12,512,973 14,609,065
========== ==========
Diluted net income per common share $0.31 $0.10
===== =====
Antidilutive securities not included in diluted earnings (loss)
per share computation:
Options and warrants to purchase common stock 1,218,500 2,592,000 1,896,250
========= ========= =========
Exercise Price $3.13-$8.00 $1.75-$8.00 $1.38-$6.75
=========== =========== ===========
(1) The calculation of diluted loss per share was not required for fiscal
1998 since it would be antidilutive.
15. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS:
During the last three fiscal years, the following brands have accounted for
10% or more of the Company's gross sales:
2000 1999 1998
---- ---- ----
PERRY ELLIS 73% 65% 56%
FRED HAYMAN 16% 21% 17%
ANIMALE 11% 12% 11%
ALEXANDRA DE MARKOFF - % - % 12%
F-22
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade receivables from department and specialty stores
in the United States, distributors throughout the world, and Perfumania. To
reduce credit risk for trade receivables from unaffiliated parties, the
Company performs ongoing evaluations of its customers' financial condition
but does not generally require collateral. Management has established an
allowance for doubtful accounts for potential losses. The allowances for
doubtful accounts are considered adequate to cover potential credit losses.
No unrelated customer accounted for more than 10% of the Company's net
sales during the years ended March 31, 2000, 1999, and 1998.
Revenues from Perfumania represented 46%, 40%, and 35% of the Company's net
sales during the years ended March 2000, 1999 and 1998 respectively. To
reduce credit risk, the Company based on its reviews of Perfumania's
financial condition, converted certain trade receivables into a
subordinated note receivable. Due to the improved financial condition of
Perfumania, management believes that the note and trade receivable are
fully collectible. (See Note 2 for a detailed discussion of the conversion
of trade receivables into a note receivable and improved financial
condition of Perfumania.)
Sales to international customers totaled approximately $20,007,000,
$20,121,000, and $24,101,000 for the years ended March 31, 2000, 1999, and
1998, respectively. At March 31, 2000 and 1999, trade receivables from
foreign customers (all payable in U.S. dollars) amounted to approximately
$5,377,000 and 6,710,000, respectively.
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, 2000 and 1999 (in thousands,
except per share amounts).
------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 1999 2000
---- ---- ---- ----
Net sales $14,930 $19,702 $16,631 $15,303
Gross margin 8,279 10,728 9,683 9,372
Net income 678 1,619 625 1,177
Income per common share:
Basic $0.05 $0.12 $0.05 $0.11
Diluted $0.05 $0.12 $0.05 $0.10
------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
---- ---- ---- ----
Net sales $15,308 $16,136 $11,910 $12,797
Gross margin 9,053 9,519 8,245 7,525
Net income 418 569 80 351
Income per common share:
Basic $0.03 $0.04 $0.01 $0.02
Diluted $0.03 $0.04 $0.01 $0.02
F-23
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Balance at beginning Additions charged to Balance at
Description of period costs and expenses Deductions end of period
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000
--------------
Reserves for:
Doubtful accounts $ 750,273 $ 1,543,790 $ 372,834 $1,921,229
Sales returns 411,320 3,512,170 3,502,328 421,162
Demonstration and co-op
advertising allowances 951,343 4,484,795 4,458,723 977,415
---------- ------------ ---------- ----------
$2,112,936 $ 9,540,755 $8,333,885 $3,319,806
========= ============ ========= =========
Reserve for inventory
shrinkage and obsolescence $ 976,259 $ 800,000 $ 256,565 $1,519,694
========== ============ ========== ==========
Year ended March 31, 1999
--------------
Reserves for:
Doubtful accounts $ 704,860 $ 400,000 354,587 $ 750,273
Sales returns 300,000 1,254,069 1,142,749 411,320
Demonstration and co-op
advertising allowances 1,165,592 4,801,789 5,016,038 951,343
---------- ------------ ---------- ----------
$2,170,452, $ 6,455,858 $6,513,374 $2,112,936
========= =========== ========== =========
Reserve for inventory
shrinkage and obsolescence $4,671,393 $ 853,545 $4,548,679(1) $ 976,259
========== =========== ========== ==========
Year ended March 31, 1998
--------------
Reserves for:
Doubtful accounts $ 542,749 $1,413,699 $1,251,568 $ 704,860
Sales returns 383,401 4,998,031 5,081,432 300,000
Demonstration and co-op
advertising allowances 1,567,750 5,624,955 6,027,113 1,165,592
---------- ----------- ---------- ----------
$2,493,880 $12,036,685 $12,360,113 $2,170,452
========== =========== =========== ==========
Reserve for inventory shrinkage
and obsolescence $2,833,000 $ 7,519,105 $ 5,680,712 $4,671,393
========== ============ =========== ==========
(1) Deductions pertain to the disposal of excess component inventory during
fiscal year 1999 which were included in the reserve as of the beginning of
the period.
F-24
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE IX - SHORT-TERM BANK BORROWINGS
----------------------------------------
Col. A Col. B. Col.C Col.D Col.E Col.F
Category of Balance at end Weighted Maximum amount Average amount Weighted
aggregate of period average outstanding outstanding average
short-term interest during the period during the interest
borrowings rate (4) period during the
period (5)
- -------------------------------------------------------------------------------------------------------------------
March 31, 2000
Notes Payable Banks (1) $8,925,613 9.0% $14,670,052 $12,411,395 8.6%
March 31, 1999
Notes Payable Banks (2) $9,862,084 7.7% $18,037,811 $14,552,194 9.8%
March 31, 1998
Notes Payable Banks (3) $17,004,432 8.4% $20,375,531 $17,279,332 10.2%
(1) Loan from GECC.
(2) Loan of $9,862,084 from GECC and loan from International Finance Bank which
was repaid during fiscal 1999.
(3) Loans of $16,818,951 from GECC, $ 185,472 from International Finance Bank,
and French facilities which were repaid during fiscal 1998.
(4) The weighted average interest rate was computed by dividing the estimated
annual interest costs (based on the applicable March 31 rates) by the
actual borrowings outstanding at March 31.
(5) The weighted average interest rate during the period was computed by
dividing the actual interest costs (based on the applicable March 31 rates)
by the actual borrowings outstanding at March 31.
F-25
Exhibit Index
-------------
4.26 Forbearance and Amendment Agreement, dated May 25, 2000, between the
Company and General Electric Capital Corporation.
10.56 Subordinated Secured Note Agreement, dated June 1, 2000, between the
Company and Perfumania, Inc.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule (for SEC use only)