Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------
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, 1998
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.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2562955
--------------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
--------------------------------------- --------
(Address of principal executive offices (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
-------------- ------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
-------------------------------------------------------
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______
----
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, 1998
------------------------- ----------------------------
Common Stock, $ .01 par value 14,755,319
----------
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $24,557,730 based on a
closing price of $1.875 for the Common Stock as of June 30, 1998 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).
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 and national department stores. The fragrance market is
generally divided into a prestige segment (distributed primarily through
department and specialty stores) and a mass market segment. The Company's
products are positioned primarily in the prestige segment. Additionally, the
Company manufactures and distributes certain brands through Perfumania Inc., a
related party national chain which is a leading specialty retailer of
fragrances. Currently, the Company engages in the manufacture (through
sub-contractors), distribution and sale of PERRY ELLIS, FRED HAYMAN BEVERLY
HILLS, BARYSHNIKOV and PHANTOM fragrances and grooming items on an exclusive
worldwide basis as a licensee. See "Licensing Agreements" on pages 5 and 6 for
further discussion. Additionally, the Company manufactures, distributes and
sells four of its own brands, including ANIMALE fragrance, on a worldwide basis.
Restatement of Net Income and Net Income Per Share to Reflect SEC Announcement
and for Debt Extinguishment
- ------------------------------------------------------------------------------
In a 1997 announcement discussed in Topic No. D-60 by the Emerging
Issues Task Force, the staff of the Securities and Exchange Commission
("S.E.C.") indicated that when debt is convertible at a discount from the then
current common stock market price, the discounted amount reflects at that time
an incremental yield, e.g. a "beneficial conversion feature" which should be
recognized as a return to the debt holders from the date the debt is issued to
the date it first becomes convertible. Based on the market price of the
Company's common stock on the date of issuance of the convertible debt, the
convertible debentures issued by the Company during the period November 1995
through July 1996 had a beneficial conversion feature of $7,156,001. Although
management believes that the Company followed generally accepted accounting
principles in existence at the time of the issuances, it has complied with the
SEC announcement, restating its net income and per share information for the
year ended March 31, 1997 ("fiscal 1997") and fiscal 1996, to reflect such
accounting treatment for this non-cash charge, which has been recorded as
additional interest expense in the accompanying restated consolidated financial
statements. In addition, the October 1996 redemption of certain debentures no
longer results in a loss of $901,648 as previously reported as an extraordinary
item during the year ended March 31, 1997, since the price paid in excess of the
carrying value of the debentures was charged to additional paid-in capital to
offset the beneficial conversion feature originally recorded at the date of
issuance. The effect of the restatement was to decrease net income for fiscal
1997 by $3,454,143, resulting in a net loss of ($3,277,920), and to decrease net
income for fiscal 1996 by $2,800,210, resulting in net income of $4,972,481.
2
Recent Developments
- -------------------
In January 1998, the Company completed the third phase of its common
stock buy-back program involving 1,000,000 shares, and the Board of Directors
authorized the repurchase of an additional 1,250,000 shares. As of March
31,1998, the Company has repurchased under all phases a total of 2,450,755
shares at a cost of $5,760,777 (2,653,159 shares at a cost of $6,198,288 through
June 30, 1998). The accompanying consolidated balance sheets also include
treasury stock transactions prior to fiscal 1996.
On March 3, 1998, the Company entered into a long-term agreement to
license the worldwide cosmetic/fragrance rights for the Alexandra de Markoff
(AdM) brand to Cosmetic Essence, Inc. See Note 6 to the accompanying
consolidated financial statements for further discussion.
In March 1998, with the licensing of AdM, the further intent to license
BAL A VERSAILLES and the discontinuation of TODD OLDHAM and certain other
marginal brands and products, the Company announced that the costs related to
these brand and product discontinuations of approximately $9,224,000 would be
recorded in the quarter ended March 31, 1998. The charge relates mainly to
write-offs of inventory and advertising material. See Note 2 to the accompanying
consolidated financial statements for further discussion.
On June 10, 1998, the Company entered into a long-term agreement to
license the worldwide fragrance rights to the BAL A VERSAILLES/JEAN DESPREZ
brands to Genesis International Marketing Corporation. See Note 6 to the
accompanying consolidated financial statements 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 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 1998, the Company completed the design
process for FRED HAYMAN'S "HOLLYWOOD" for women, which was launched in the fall
of 1997. The Company is currently developing FRED HAYMAN'S "HOLLYWOOD For Men"
for a launch prior to Christmas 1998, as well as PERRY ELLIS "PORTFOLIO" for a
1999 launch.
During the last three fiscal years, the following brands have accounted
for 10% or more of the Company's gross sales:
3
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
PERRY ELLIS 56% 48% 39%
FRED HAYMAN 17% 13% 20%
ALEXANDRA DE MARKOFF 12% 14% 3%
ANIMALE 11% 15% 15%
MARKETING AND SALES
In the United States, the Company has established its own sales and
marketing staff, and also utilizes independent sales representatives for certain
channels of distribution. The Company sells directly to retailers, primarily
national and regional department stores and specialty stores, which it believes
will maintain the image of its products as prestige fragrances. The Company's
products are sold in over 1,800 retail outlets in the United States.
Additionally, the Company sells products to Perfumania, Inc., a related party,
which is a leading specialty retailer of fragrances with over 250 retail outlets
principally located in manufacturers' outlet malls and regional malls.
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors. The Company has established
relationships for the marketing of its fragrances with distributors in Canada,
Europe, the Middle East, the Far East, Latin America, the Caribbean and Russia.
The Company advertises both directly and through a cooperative
advertising program in association with major retailers in the fashion media on
a national basis and through retailers' statement enclosures and catalogues. The
Company is required to spend certain minimum amounts for advertising under
certain licensing agreements. See "Licensing Agreements" and Note 9 (B) to the
Consolidated Financial Statements.
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 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 assurances that this will
continue.
SEASONALITY
Typical of the fragrance industry, the Company has its highest sales
during the calendar year end holiday season. Lower than projected sales during
this period could have a material adverse affect on the Company's operating
results.
4
INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that
market cosmetics and fragrances to department stores to provide the department
stores with rights to return merchandise. The Company's products are subject to
such return rights. It is the Company's practice to establish reserves and
provide allowances for product returns at the time of sale. The Company believes
that such reserves and allowances are adequate based on past experience;
however, no assurances can be made that reserves and allowances will continue to
be adequate. Consequently, if product returns are in excess of the reserves and
allowances made by the Company, sales will be reduced when such fact becomes
known.
CUSTOMERS
The Company concentrates its sales efforts in the United States in
specialty stores, such as Nordstrom's and Neiman Marcus and a number of regional
department store retailers including, among others, Lord & Taylor, Mercantile,
Macy's, Foley's, J.L. Hudson, and Bloomingdales. Retail distribution has been
targeted by brand to maximize potential and minimize overlap between each of
these distribution channels.
Sales to Perfumania, a company in which the Company's Chairman of the
Board and Chief Executive Officer has an ownership interest, amounted to
$21,939,235 for the fiscal year ended March 31, 1998. Net amounts owed by
Perfumania to the Company amounted to $17,973,197 at March 31, 1998. The loss of
Perfumania as a customer could have a material adverse effect on the operations
of the Company.
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,
$12,776,773 and $9,101,611 for fiscal years ended March 31, 1998, 1997, and
1996, respectively. As of March 31, 1998, all of S.A.'s operations have been
transitioned to the Company's South Florida location.
LICENSING AGREEMENTS
PERRY ELLIS: The Company acquired the Perry Ellis license from Sanofi Beaute in
December 1994. The Perry Ellis license is entering its thirteenth year, and is
renewable every two years if the average annual sales in the completed period
exceed 75% of the average sales of the previous four years. All minimum sales
levels have been met, 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
5
net sales as net sales volume increases, and the spending of certain minimum
amounts for advertising based upon net sales levels achieved in the prior year.
FRED HAYMAN: In June 1994, the Company entered into an Asset Purchase Agreement
with Fred Hayman Beverly Hills, Inc. (FHBH), pursuant to which the Company
purchased substantially all of the assets and liabilities of the FHBH fragrance
division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year
license to use FHBH's United States Class 3 trademarks Fred Hayman(R), 273(R),
Touch(R), With Love(R) and Fred Hayman Personal Selections(R) and the
corresponding international registrations. There are no minimum sales or
advertising requirements.
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 has recently been renewed through March
31, 2001 and is 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.
PHANTOM: In 1998, the Company entered into an exclusive worldwide agreement with
Creative Fragrances, Inc. for the worldwide manufacturing and distribution
rights to PHANTOM covering men's and women's fragrances and beauty related
products. The agreement expires in April 2003. Royalties are payable at 5% of
net sales. There are no minimum sales or advertising requirements.
VICKY TIEL: In September 1992, the Company entered into an exclusive worldwide
license agreement with VICKY TIEL S.A. in which the Company secured the rights
to manufacture and distribute fragrances and beauty care products using the
VICKY TIEL trademark for an initial five-year period, renewable for a subsequent
five-year period upon achieving specified sales or minimum royalty levels.
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.
TODD OLDHAM: In December 1992, the Company entered into an exclusive worldwide
licensing agreement with L-7 Designs, Inc. in which the Company secured the
rights to manufacture and distribute fragrances and beauty care products using
the TODD OLDHAM trademark for an initial contract period ending March 31, 1997,
renewable for subsequent three-year and four-year periods upon achieving
specified sales or minimum royalty levels. The license required the payment of
royalties and the spending of certain minimum amounts for advertising based upon
net sales levels.
6
The initial three-year period expired March 31, 1997, and the Company informed
the Licensor that it would not renew the agreement. In accordance with the
licensing agreement, the Company produced and sold the TODD OLDHAM trademarked
products until March 31, 1998, with no sales or advertising minimums. 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% and 2% of total Company net sales for the
fiscal years ended March 31, 1998 and 1997, respectively. The Company incurred a
loss of approximately $3,200,000 as a result of terminating the agreement.
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, DANIEL DE FASSON, DECADENCE and LIMOUSINE fragrances,
and ALEXANDRA de MARKOFF for products other than fragrances and cosmetics.
Accordingly, there are no licensing agreements requiring the payment of
royalties by the Company on these trademarks. Additionally, royalties are
payable to the Company by the licensees of the ALEXANDRA de MARKOFF and BAL A
VERSAILLES brands. See Note 6 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.
PRODUCT LIABILITY
The Company has insurance coverage for product liability in the amount
of $5 million per incident. The Company maintains an additional $5 million of
coverage under an "umbrella" policy. In addition, the Company believes that the
manufacturers of the products sold by the Company also carry product liability
coverage and that the Company effectively is protected thereunder.
There are no pending and, to the best of the Company's knowledge, no
threatened product liability claims. Over the past 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
7
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, 1998, the Company had 136 full-time and part-time
employees, which reflects the reduction in staffing requirements resulting from
the licensing of the AdM cosmetic line. Of these, 21 were engaged in worldwide
sales activities, 66 in operations, administrative and finance functions and 49
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.
During June 1993, the Company established a 401-K Plan covering
substantially all of its U.S. employees. Commencing on April 1, 1996, the
Company matched 25% of the first 6% of employee contributions, within annual
limitations established by the Internal Revenue Code.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system hardware consists of an IBM
AS 400, coupled with networked personal computer work stations. The Company is
currently upgrading its JD Edwards software to the latest release, which will be
"year 2000" compliant. In addition, the Company is upgrading its hardware to
support the new release and other business applications. Management anticipates
that the upgrades will be completed no later than September 30, 1998, and costs
to complete the project are estimated at $300,000. The Company plans to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner. Nevertheless, if the Company, its customers or vendors are unable to
resolve such processing issues in a timely manner, it could result in a material
financial risk.
Item 2. PROPERTIES
In November 1995, the Company moved its corporate headquarters and
domestic operations from a 38,500 square foot leased facility in Pompano Beach,
Florida to a new 100,000 square foot leased facility in Fort Lauderdale,
Florida. The annual lease cost of the facility is approximately $600,000, with
the lease covering a ten-year period.
8
On February 10, 1997, the Company consummated an agreement with
Cosmetic Essence, Inc., one of the Company's third-party fillers, to sublease
the manufacturing and distribution areas (78,000 square feet), and purchase
certain fixed assets, at its 90,000 square foot facility in Orange, Connecticut,
which lease was assumed as part of the Richard Barrie Fragrances, Inc. ("RBF")
acquisition. The Company's aggregate liability, net of the sublease, was
approximately $262,500 during the remaining period of the lease, which was
recorded as part of the Company's restructuring charge during the quarter ended
March 31, 1997. The Company is actively seeking to sublease the remaining 12,000
square feet of office space under this lease, which expires on December 31,
1998.
All of the remaining distribution and warehousing activities previously
performed at the Connecticut facility were consolidated in Fort Lauderdale. In
connection therewith, the Company 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 and paid
$155,000 to cancel the lease and has no further liability under this lease.
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 for the remaining lease commitment at the same
rental rates included in the Company's original lease.
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, the Company vacated the premises and paid
$20,000 to cancel the lease and has no further liability under this lease.
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, 1998 and through June 30, 1998.
9
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 5,000.
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 1998. 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
-------------- ------------
High Low
---- ---
First (April/June) 1996 $15.250 $9.000
Second (July/Sept.) 1996 11.250 4.125
Third (Oct./Dec.) 1996 4.563 3.063
Fourth (Jan./Mar.) 1997 4.750 2.313
First (April/June) 1997 3.313 2.938
Second (July/Sept.) 1997 2.938 1.875
Third (Oct./Dec.) 1997 2.313 1.313
Fourth (Jan./Mar.) 1998 2.000 1.500
First (April/June) 1998 2.969 1.750
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, 1997 and 1998 and the related
consolidated statements of operations and of cash flows for the three years
ended March 31, 1998 and notes thereto appear elsewhere in this Annual Report on
Form 10-K.
10
For the Year Ended March 31, (in thousands of dollars, except per share data)
- ----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net sales $ 62,369 $ 87,640 $ 67,727 $ 38,209 $ 25,366
Costs/operating exp 73,911 84,321 53,539 31,208 23,071
Operating income (loss) (11,542) 3,319 14,188 7,001 2,295
Net income (loss) (1) (8,687) (3,278) 4,972 4,231 1,362
Income (loss) per share (1):
Basic (2) ($ 0.53) ($ 0.22) $ 0.57 $ 0.63 $ 0.24
Diluted (2)(3) $ 0.48 $ 0.54 $ 0.22
(1) As disclosed in Note 8 to the consolidated financial statements, the net
income and net income per share information for 1997 and 1996 has been
restated to account for the value attributable to the beneficial conversion
feature on certain convertible debentures issued during fiscal 1996 and
1997.
(2) Years 1994-1997 have been restated to reflect the provisions of Statement of
Financial Accounting Standards No. 128.
(3) The calculation of diluted loss per share was not required for fiscal 1998
and 1997 since it would be antidilutive.
At March 31, 1998 1997 1996 1995 1994
- ------------ ---- ---- ---- ---- ----
Current assets $66,509 $81,205 $67,666 $31,955 $18,514
Current liabilities 30,185 31,885 36,866 27,113 14,679
Working capital 36,324 49,320 30,800 4,842 3,835
Trademarks, licenses and
goodwill, net 25,378 26,784 24,623 11,380 1,342
Long-term debt 4,108 4,949 4,694 5,281 0
Total assets 95,881 111,385 95,239 45,477 20,746
Total liabilities 34,713 37,266 51,641 32,394 14,678
Stockholders' equity 61,168 74,119 43,598 13,083 6,068
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto appearing elsewhere
in this annual report. Except for the historical matters contained herein,
statements made in this annual report are forward looking and are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Investors are cautioned that forward looking statements involve risks and
uncertainties which may affect the Company's business and prospects, including
economic, competitive, governmental, technological and other factors discussed
in this annual report and in the Company's filings with the Securities and
Exchange Commission.
Comparison of the twelve-month period ended March 31, 1998 with the
twelve-month period ended March 31, 1997
- ---------------------------------------------------------------------
During the fiscal year ended March 31, 1998, net sales decreased 29% to
$62,368,523 as compared to $87,640,006 in the same period in the prior year. The
11
decrease was primarily due to: 1) a decrease of $12,689,213 (75%) in Perry Ellis
"America" brand fragrance and Perry Ellis brand cosmetics gross sales, which
were initially launched in the prior year. Net sales were further impacted by
$1,933,264 in returns accepted in the current period for these brands; 2) gross
sales of Alexandra de Markoff (AdM) brand cosmetics decreased 40% to $7,813,381,
as compared to $12,951,646 in the prior year, due mainly to out-of-stock
situations relating to the transfer of manufacturing from Revlon (from whom the
Company purchased the AdM brand) to third party manufacturers (effective March
3, 1998, the Company has licensed the AdM brand to an unrelated third party); 3)
gross sales of discontinued brands (Francesco Smalto, Todd Oldham and Vicky
Tiel) decreased $5,030,551 during the period; and 4) a 3% decrease in gross
sales of all brands other than those noted above from $57,525,949 in the prior
year to $55,960,523 in the current year.
Net sales to unrelated customers (which were directly affected by the
out-of-stock situation discussed above) decreased 32% to $40,429,288 in the
current period compared to $59,799,669 in the same period in the prior year,
while sales to related parties decreased 21% to $21,939,235 compared to
$27,840,337 in accordance with the Company's strategic plan to reduce its
dependence on sales to related parties.
Cost of goods sold for the fiscal year ended March 31, increased to 56%
of net sales as compared to 45% of net sales in the same period in the prior
year. The current fiscal year includes approximately $8,195,000 in costs related
to discontinuing certain brands and products, and to the closeout of Todd Oldham
merchandise at below cost. The year ended March 31, 1997 included approximately
$5,243,000 in costs involved with discontinuing certain brands and closing
distribution centers. See Note 2 to the accompanying consolidated financial
statements for further discussion of the restructuring charges. Without the
effect of these restructuring charges in both years, cost of goods sold would
have been 43% and 39%, respectively. The increase in fiscal 1998 was mainly
attributable to the sale of Todd Oldham merchandise at below cost during the
final year of the license agreement. Cost of goods sold for sales to unrelated
customers and related parties approximated 38% and 52%, respectively, during the
fiscal year ended March 31, 1998, as compared to 33% and 51%, respectively in
the prior year, excluding the effect of special charges.
Operating expenses decreased by 14% compared to the prior fiscal year
from $45,138,306 to $38,682,537 but increased as a percentage of sales from 51%
to 62%. Advertising and promotional expenses decreased 26% to $17,887,892
compared to $24,245,502 in the prior year period, reflecting a reduction in
print advertising and promotional expenses for the U.S. department and specialty
store business resulting mainly from Perry Ellis and AdM brand activities. The
prior year period included increased promotional activity related to the launch
of the Perry Ellis "America" brand fragrances. Selling and distribution costs
decreased by 15% to $7,927,418 in the current fiscal period as compared to
$9,381,306 in the same period of the prior fiscal year, but increased as a
percentage of net sales from 11% to 13%. This percentage of sales increase was
mainly attributable to the reduction in sales previously discussed, which
resulted in a lower sales base to absorb these relatively fixed costs, and
approximately $147,000 in
12
severance costs relating to significant staff reductions in connection with
discontinuing certain brands and products coupled with the licensing of AdM.
General and administrative expenses increased by 13% compared to the prior year
period from $6,468,586 to $7,295,236, increasing as a percentage of net sales
from 7% to 12%. The increase was attributable to 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 increased by $257,751 which was
mainly attributable to a full period amortization of the goodwill from the
Richard Barrie Fragrances, Inc. acquisition which occurred on June 28, 1996.
Royalties increased to $2,684,441 for the current period compared to $2,413,113
in the prior year, and increased as a percent of sales from 3% in the prior year
to 4% in the current year. The increase was due to a higher mix of PERRY ELLIS
brand sales in the current period.
As a result of the above, the Company incurred an operating loss of
$11,542,014 for the fiscal year ended March 31, 1998, compared to operating
income of $3,318,535 for the comparable period in the prior year.
Interest expense decreased by 66% to $2,241,170 in the current fiscal
year as compared to $6,531,419 in the same period in the prior year due to the
non-cash interest charge in the prior year of $4,355,791 to account for the
beneficial conversion feature of convertible debt (See Note 8 to the
consolidated financial statements). Exchange gains were $108,289 in the current
year as compared to a gain of $595,045 in the same period in the prior year.
As a result of the above, the loss before income taxes increased to
$13,674,895 for the current period compared to a loss of $2,617,839 in the same
period in the prior year. The Company recorded a tax benefit of $4,987,972 in
the current fiscal year as compared to a tax expense of $660,081 in the prior
year, which reflects the non-deductible nature of the non-cash interest charge
in fiscal 1997. As a result, the Company reported a net loss of $8,686,923 for
the fiscal year ended March 31, 1998, as compared to a loss of $3,277,920 for
fiscal year ended March 31, 1997.
Comparison of the twelve-month period ended March 31, 1997 with the twelve-month
period ended March 31, 1996
- -------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 net sales increased 29% to
$87,640,006 as compared to $67,726,926 in the prior fiscal year. This increase
was primarily due to continued growth of Perry Ellis brand products, the full
year effect of Alexandra de Markoff (AdM) brand cosmetics, and Bal a Versailles
(BAV) brand products in fiscal 1997, compared to a partial year of operations in
the prior year, and licensed sales of Baryshnikov brand products acquired in
connection with the RBF acquisition in June 1996. Gross sales of Perry Ellis
increased 64% to $43,807,624 as compared to $26,663,302 in the prior year. Gross
sales of Parlux house brands (brands which the
13
Company owns) increased 34% to $41,209,043, as compared to $30,759,544 in the
prior year, due to significant increases in AdM and BAV which are included in
this category. AdM and BAV increased to $12,951,646 and $2,137,682,
respectively, as compared to $2,095,035 and $1,542,138, respectively, in the
prior year. Baryshnikov brand product gross sales totaled $2,147,781 in its
initial period of operations by the Company. These increases were partially
offset by a decrease in gross sales of $3,933,695 of Francesco Smalto brand
fragrances, which license was terminated on September 30, 1996.
Net sales to unrelated customers increased by 44% to $59,799,669, while
net sales to related parties increased by 6% to $27,840,337. The percentage of
net sales to related parties in relation to total net sales decreased from 39%
in the prior year to 32% in fiscal 1997. Approximately 85% of total net sales in
the fiscal year ended March 31, 1997 came from operations in, or supplied by,
the United States, and 15% from the Company's French subsidiary.
Cost of goods sold increased as a percentage of net sales from 42% for
the fiscal year ended March 31, 1996 to 45% for the fiscal year ended March 31,
1997, which was mainly attributable to the costs involved in discontinuing
certain brands and closing distribution centers in the last quarter of the
fiscal year. These costs totaled approximately $5,243,000. Without the effects
of the restructuring costs, cost of goods sold in the fiscal year ended March
31, 1997 would have been 39%. Cost of goods sold on sales to unrelated customers
and related parties approximated 33% and 51%, respectively, excluding the effect
of the restructuring costs. All of the Company's products are manufactured by
third parties. For fiscal 1997, approximately 2% of the Company's products were
manufactured in France, and the Company has consolidated its manufacturing,
warehousing and shipping in the United States, to achieve cost reductions
through consolidation.
Operating expenses increased 80% to $45,138,306 for the year ended
March 31, 1997 compared to $25,099,294 in the prior year, and as a percentage of
sales were 51% in fiscal 1997 compared to 37% in the prior year. Management does
not expect this adverse trend to continue as significant expenses were incurred
in fiscal 1997 to promote goodwill with certain of the Company's U.S. department
and specialty store customers. The major portion of the increase was due to
advertising and promotional expenses which increased by 87% to $24,245,502
compared to $12,942,647 in fiscal 1996, reflecting the investments required to
launch new brands, particularly Perry Ellis "America", the full year support
costs for AdM and increased promotional expenses in connection with the U.S.
department and specialty store business. Selling and distribution costs
increased by 84%, and as a percentage of sales increased from 8% in the prior
fiscal year to 11% currently. This was partially due to costs of approximately
$522,000 in connection with terminating warehousing and distribution operations
in Connecticut and France and certain duplicate costs from maintaining two
domestic facilities until March 1997. General and administrative costs increased
by 53% in fiscal 1997 compared to the prior year, and increased as a percentage
of net sales from 6% to 7%. The increases were mainly attributable to the full
year's effect of staff additions during the last quarter of fiscal 1996 and
increased support required for the AdM cosmetic line. Depreciation and
14
amortization almost doubled in fiscal 1997 compared to the prior year reflecting
a full period amortization of goodwill from the AdM and BAV acquisitions which
occurred in December 1995 an March 1996, respectively. Royalty expense increased
by 61% in fiscal 1997 compared to the prior year, principally due to the
royalties required on the sale of Perry Ellis brand products, and increased to
3% of net sales as compared to 2% in the prior year.
As a result of the above, operating income decreased by 77% to
$3,318,535 or 4% of net sales for the year ended March 31, 1997, compared to
$14,187,843 or 21% of net sales in the prior year.
Interest expense increased by 39% to $6,531,419 for fiscal 1997
compared to $4,685,622 for fiscal 1996 due to increased borrowing levels and an
increase in the non-cash charge to account for the beneficial conversion feature
of convertible debt to $4,355,791 for fiscal 1997 compared to $2,800,210 in the
prior year (See Note 8 to the consolidated financial statements). Excluding the
effect of the non-cash interest charges, interest decreased from 3% of net sales
in the prior year to 2% in the current year. Exchange gains were $595,045 for
fiscal 1997 compared to exchange gains of $234,074 in the prior year, due to the
weakening of the French franc against the U.S. dollar and the Company's net
French franc liability position.
As a result of the above, loss before taxes increased to $2,617,839 in
fiscal 1997 compared to income of $9,736,295 in fiscal 1996. As a result of the
non-cash interest charges discussed above, which are not deductible for income
tax purposes, the Company reported a net loss of $3,277,920 in the fiscal year
ended March 31, 1997, compared to net income of $4,972,481 for the fiscal year
ended March 31, 1996.
Liquidity and Capital Resources
- -------------------------------
Working capital decreased to $36,323,891 at March 31, 1998 from
$49,320,272 at March 31, 1997. The decrease was mainly attributable to the net
loss incurred during the period as a result of the fourth quarter restructuring
charge of approximately $9,224,000, coupled with the purchase of approximately
$4,000,000 in treasury stock as discussed below. In addition, the Company sold
the AdM inventory to the new licensee. Approximately $1,853,000 of the
receivable is classified as long-term as of March 31, 1998.
In January 1998, the Company completed the third phase of its common
stock buy-back program involving 1,000,000 shares, and the Board of Directors
authorized the repurchase of an additional 1,250,000 shares. As of March
31,1998, the Company has repurchased under all phases a total of 2,450,755
shares at a cost of $5,760,777 (2,653,159 shares at a cost of $6,198,288 through
June 30, 1998). The accompanying consolidated balance sheets also include
additional treasury stock transactions prior to fiscal 1996.
15
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. Proceeds from the Credit Agreement
were used, in part, to repay the Company's previous $10,000,000 credit facility
with Finova Capital Corporation and Merrill Lynch Financial Services, Inc.
GECC has taken a security interest in substantially all of the domestic
assets of the Company. The Credit Agreement contains customary events of default
and covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating liens,
and engaging in mergers and acquisitions without the prior consent of GECC. The
Credit Agreement also contains certain financial covenants relating to net
worth, interest coverage and other financial ratios. During the fiscal year
ended March 31, 1998, the Company was not in compliance with certain financial
covenants relating to "Earnings Before Interest, Taxes, Depreciation and
Amortization" (EBITDA), minimum tangible net worth and minimum fixed charge
coverage ratio, as well as a restricted payment covenant concerning the amount
of treasury stock which can be purchased by the Company. GECC has agreed to
waive this noncompliance through June 30, 1998, and has amended the Credit
Agreement to reflect changes in certain covenants going forward.
The Company had overdraft and trade financing facilities aggregating
18,150,000 French francs (approximately $3,220,000 as of March 31, 1997), which
were fully utilized at March 31, 1997. These credit facilities were repaid
during fiscal 1998.
The Company incurred a loss of approximately $8,686,923 during the
fiscal year ended March 31, 1998. As indicated above, the Company, as part of
its Credit Agreement, is subject to certain financial covenants among others,
regarding EBITDA and tangible net worth, as defined. If the Company is not able
to return to profitability and be able to meet the newly revised covenants, the
Credit Agreement may become payable on demand, and if unable to secure
alternative financing, the Company's operations and possibly the realization of
certain of its assets may be impaired. Management believes that, based on
current circumstances and the recent restructuring activities which will reduce
future overhead, the Company will be able to meet the revised covenants and
funds from operations, the income tax refund and the Credit Agreement will be
sufficient to fund the Company's operating needs.
New Accounting Pronouncements
- -----------------------------
During June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") and Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131") effective for fiscal years beginning after
December 1997.
16
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Management does not expect SFAS No.
130 and 131 to have a significant impact on the Company's reporting and
disclosure requirements in fiscal 1999.
Impact of Currency Exchange and Inflation
- -----------------------------------------
The Company's business operations were positively affected in the
amount of $108,289, $595,045 and $234,074 in the fiscal years ended March 31,
1998, 1997 and 1996, respectively, 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 monitors exchange rates on a daily basis and regularly
seeks to evaluate long-term expectations for the French franc in order to
minimize its exchange rate risk.
The Company has completed the centralization of manufacturing in the
United States and closed its French operations which will minimize the currency
exchange impact in the future.
Item 8. FINANCIAL STATEMENTS
The financial statements are included herein commencing on page F-1.
The financial statement schedules are listed in the Index to Financial
Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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.
17
Item 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements beginning on page F-1 of this annual
report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1 of this annual
report.
3. Exhibit Index
The following exhibits are attached:
4.24 Amendment No. 1 dated July 9, 1998 to Credit Agreement, dated May 23,
1997, between the Company and General Electric Capital Corporation.
10.46 Licensing Agreement dated as of March 3, 1998 between the Company and
Cosmetic Essence, Inc.
10.47 Licensing Agreement dated as of June 9, 1998 between the Company and
Genesis International Marketing Corporation.
18
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule ( for SEC use only )
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended
March 31, 1998.
19
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 Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
FORM 10-K SCHEDULES:
Schedule VIII - Valuation and Qualifying Accounts F-26
Schedule IX - Short-term Bank Borrowings F-27
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 index
referred to under Item 14(a)(1) and (2) on page 18 and appearing on page F-1
present fairly, in all material respects, the financial position of Parlux
Fragrances, Inc. and its subsidiaries at March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Miami, Florida
July 20, 1998
F-2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
ASSETS 1998 1997
- --------------------------------------------------------- ----------------- ---------------------
(As Restated, Note 8)
CURRENT ASSETS:
Cash and cash equivalents $205,760 $191,486
Receivables, net of allowance for
doubtful accounts, sales returns and
allowances of approximately $2,170,000 and $2,494,000
in 1998, and 1997, respectively 9,403,548 14,289,841
Trade receivables from related parties 17,973,197 22,862,335
Inventories, net 24,629,669 35,595,323
Prepaid expenses and other current assets 9,949,959 8,266,126
Income tax receivable 4,347,134 -
------------ -------------
TOTAL CURRENT ASSETS 66,509,267 81,205,111
Equipment and leasehold improvements, net 2,020,741 3,253,800
Trademarks, licenses and goodwill, net 25,378,263 26,783,807
Other 1,972,794 142,526
------------ -------------
TOTAL ASSETS $95,881,065 $111,385,244
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $17,853,772 $12,665,065
Accounts payable 9,674,407 11,904,808
Accrued expenses 2,033,090 1,622,966
Income taxes payable 624,107 5,692,000
------------ -------------
TOTAL CURRENT LIABILITIES 30,185,376 31,884,839
Borrowings, less current portion 4,107,618 4,949,230
Deferred tax liability 419,632 432,440
------------ -------------
TOTAL LIABILITIES 34,712,626 37,266,509
------------ -------------
COMMITMENTS AND CONTINGENCIES - -
------------ -------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 0 issued and outstanding
Common stock, $0.01 par value, 30,000,000
shares authorized, 17,447,478 shares issued 174,475 174,475
Additional paid-in capital 73,007,949 73,007,949
Retained earnings (accumulated deficit) (5,764,404) 2,922,519
Cumulative translation adjustment (355,331) (103,562)
------------ -------------
67,062,689 76,001,381
Less - 2,489,755 and 420,055 shares of common stock in treasury,
at cost, in 1998 and 1997, respectively (5,894,250) (1,882,646)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 61,168,439 74,118,735
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,881,065 $111,385,244
============ =============
See notes to consolidated financial statements.
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(As Restated, Note 8)
Net sales:
Unrelated customers $40,429,288 $59,799,669 $41,539,466
Related parties 21,939,235 27,840,337 26,187,460
-------------------------------------------
62,368,523 87,640,006 67,726,926
Cost of goods sold 35,228,000 39,183,165 28,439,789
-------------------------------------------
Gross margin 27,140,523 48,456,841 39,287,137
-------------------------------------------
Operating expenses:
Advertising and promotional 17,887,892 24,245,502 12,942,647
Selling and distribution 7,927,418 9,381,306 5,101,897
General and administrative 7,295,236 6,468,586 4,228,257
Depreciation and amortization 2,887,550 2,629,799 1,324,361
Royalties 2,684,441 2,413,113 1,502,132
-------------------------------------------
Total operating expenses 38,682,537 45,138,306 25,099,294
-------------------------------------------
Operating income (loss) (11,542,014) 3,318,535 14,187,843
Interest expense and bank charges 2,241,170 6,531,419 4,685,622
Exchange gains (108,289) (595,045) (234,074)
-------------------------------------------
Income (loss) before income taxes (13,674,895) (2,617,839) 9,736,295
Income tax provision (benefit) (4,987,972) 660,081 4,763,814
-------------------------------------------
Net income (loss) ($8,686,923) ($3,277,920) $4,972,481
-------------------------------------------
Earnings (loss) per common share:
Basic ($0.53) ($0.22) $0.57
-------------------------------------------
Diluted ($0.53) ($0.22) $0.48
-------------------------------------------
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(As Restated, Note 8)
COMMON STOCK RETAINED
------------------- ADDITIONAL EARNINGS
NUUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------- -------------- ------------- -------------
BALANCE at April 1, 1995 3,490,214 $34,902 $11,563,537 $1,271,947
Net income - - - 4,972,481
Issuance of common stock upon exercise of:
Employee stock options 11,175 112 33,910 -
Warrants 1,056,916 10,569 3,006,022 -
Sale of stock in private placements 1,001,514 10,015 7,605,570 -
Stock issued in connection with the acquisition of assets 424,000 4,240 3,739,760 -
Conversion of debentures, net of unamortized debt -
issuance costs 1,073,688 10,737 6,932,408
Beneficial conversion feature of debentures 4,303,320
Adjustment for stock split 4,398,919 43,989 - (43,989)
Foreign currency translation adjustment - - - -
------------- -------------- ------------- -------------
BALANCE at March 31, 1996 (As Restated, Note 8) 11,456,426 114,564 37,184,527 6,200,439
Net loss - - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options 14,500 145 18,448 -
Options 176,000 1,760 1,406,240 -
Warrants 60,000 600 415,650 -
Stock issued in connection with the acquisition of assets 370,000 3,700 3,002,550 -
Conversion of debentures, net of unamortized debt
issuance costs 5,370,552 53,706 29,029,501 -
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
Foreign currency translation adjustment - - - -
Purchase of 381,055 shares of treasury stock, at cost - - - -
------------- -------------- ------------- -------------
BALANCE at March 31, 1997 (As Restated, Note 8) 17,447,478 174,475 73,007,949 2,922,519
Net loss - - - (8,686,923)
Foreign currency translation adjustment
Purchase of 2,069,700 shares of treasury stock, at cost
============= ============== ============= =============
Balance at March 31, 1998 17,447,478 $174,475 $73,007,949 ($5,764,404)
============= ============== ============= =============
(re-stubbed table)
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
------------- -------------- -------------
BALANCE at April 1, 1995 $345,753 ($133,472) $13,082,667
Net income - - 4,972,481
Issuance of common stock upon exercise of:
Employee stock options - - 34,022
Warrants - - 3,016,591
Sale of stock in private placements - - 7,615,585
Stock issued in connection with the acquisition of assets - - 3,744,000
Conversion of debentures, net of unamortized debt - -
issuance costs 6,943,145
Beneficial conversion feature of debentures 4,303,320
Adjustment for stock split - - -
Foreign currency translation adjustment (163,506) - (163,506)
------------- ------------- --------------
BALANCE at March 31, 1996 (As Restated, Note 8) 182,247 (133,472) 43,548,305
Net loss - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options - - 18,593
Options - - 1,408,000
Warrants - - 416,250
Stock issued in connection with the acquisition of assets - - 3,006,250
Conversion of debentures, net of unamortized debt
issuance costs - - 29,083,207
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
Foreign currency translation adjustment (285,809) - (285,809)
Purchase of 381,055 shares of treasury stock, at cost - (1,749,174) (1,749,174)
------------- ------------- --------------
BALANCE at March 31, 1997 (As Restated, Note 8) (103,562) (1,882,646) 74,118,735
Net loss - - (8,686,923)
Foreign currency translation adjustment (251,769) (251,769)
Purchase of 2,069,700 shares of treasury stock, at cost (4,011,604) (4,011,604)
============= ============= ==============
Balance at March 31, 1998 ($355,331) ($5,894,250) $61,168,439
============= ============= ==============
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(As Restated, Note 8)
Cash flows from operating activities:
Net income (loss) ($8,686,923) ($3,277,920) $4,972,481
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,898,227 2,784,790 1,563,673
Loss on disposal of equipment 8,707 137,971 -
Net deferred tax benefit (12,808) (1,103,817) (4,184)
Beneficial conversion feature of debentures - 3,454,143 2,800,210
Changes in assets and liabilities net of effect of acquisitions:
Decrease (increase) in trade receivables - customers 4,886,293 (4,107,535) (7,900,097)
Decrease (increase) in trade receivables - related parties 4,889,138 (9,379,912) (8,588,713)
Decrease (increase) in inventories 6,700,220 1,451,721 (15,371,203)
Decrease (increase) in prepaid expenses and other current assets 105,087 954,549 (1,032,135)
Increase in income taxes receivable (4,347,134) - -
Decrease (increase) in other non-current assets 22,931 296,061 (376,504)
(Decrease) increase in accounts payable (2,230,401) (7,989,864) 11,401,204
(Decrease) increase in accrued expenses and income taxes payable (4,657,769) 1,296,895 2,726,637
(Decrease) increase in advances from customers - - (2,451,059)
------------ ------------ ------------
Total adjustments 8,262,491 (12,204,998) (17,232,171)
------------ ------------ ------------
Net cash used in operating activities (424,432) (15,482,918) (12,259,690)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (473,655) (1,579,912) (1,168,386)
Purchases of trademarks (76,489) (19,309) (82,122)
Cash received from brand licensing/sales:
Alexandra de Markoff 202,000
Vicky Tiel 680,553
Cash paid in acquisitions:
Alexandra de Markoff - - (8,608,000)
Richard Barrie Fragrances, Inc. - (694,707) -
Bal a Versailles - - (1,697,500)
------------ ------------ ------------
Net cash provided by (used in) investing activities 332,409 (2,293,928) (11,556,008)
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - S.A. overdraft facilities (1,128,946) (646,368) 145,450
(Payments) proceeds - S.A. financing facilities (1,981,820) 1,188,890 579,731
(Payments) proceeds - notes payable Distr. de Perfumes Senderos 0 (674,722) 674,722
(Payments) proceeds - notes payable related parties (400,000) 300,000
Proceeds - note payable to GE Capital Corp. 16,818,951
(Payments) proceeds - revolving credit facility with Finova Capital Corp. (7,878,091) 3,989,713 (127,352)
Payments to National Bank of Kuwait - - (560,000)
(Payments) proceeds from Eagle Bank - (482,392) 401,378
Payments to Sanofi Beaute, Inc. - - (5,501,535)
Payments to Fred Hayman Beverly Hills (514,873) (478,510) (202,480)
(Payments) proceeds - International Finance Bank (567,653) 753,125 -
Payments - Parfums Jean Desprez (2,553,360) -
(Payments) proceeds - Lyon Credit Corporation (320,869) 984,858 -
Payments - note payable to stockholder (148,545) -
(Payments) proceeds - other notes payable (79,604) 122,450 -
Proceeds - 7% debentures, net - - 3,666,000
Proceeds - 5% debentures, net 16,451,774 14,614,500
Purchases of treasury stock (4,011,604) (1,749,174) -
Proceeds from issuance of common stock, net 1,489,520 9,771,094
------------ ------------ ------------
Net cash provided by financing activities 335,491 17,847,259 23,761,508
------------ ------------ ------------
Effect of exchange rate changes on cash (229,194) (218,350) 91,500
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 14,274 (147,937) 37,310
Cash and cash equivalents, beginning of year 191,486 339,423 302,113
------------ ------------ ------------
Cash and cash equivalents, end of year $205,760 $191,486 $339,423
============ ============ ============
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
more significant estimates relate to the Company's reserve for doubtful
accounts, sales returns and allowances, inventory obsolescence and periods of
amortization for trademarks, licenses and goodwill. Actual results could differ
from those estimates.
D. 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.
E. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The cost of inventories includes product costs and handling charges,
including the allocation of the Company's applicable overhead in an amount of
$3,409,000 and $4,300,000 at March 31, 1998 and 1997, respectively.
F. Barter sales and credits
The Company has sold certain of its products to a barter broker in exchange for
advertising that the Company will use. The Company defers the gross margin on
barter sales until the advertising is used.
The estimated value of the advertising is recorded as a prepaid expense on the
Company's balance sheet at the time such inventory is sold, net of unearned
income equal to the amount of advertising credits minus the related cost of
goods sold. As advertising credits are used by the Company, advertising and
promotional expense is charged for the advertising credits used, unearned income
is debited and cost of
F-7
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.
G. Equipment and leasehold improvements
Equipment and leasehold improvements are carried at cost. Equipment is
depreciated using the straight-line method over the estimated useful life of the
asset. Leasehold improvements are amortized over the lesser of the estimated
useful life or the lease period. Repairs and maintenance charges are expensed as
incurred, while betterments and major renewals are capitalized.
H. Trademarks, licenses and goodwill
Trademarks, licenses and goodwill are recorded at cost and amortized over the
estimated periods of benefit, principally 25 years. Accumulated amortization at
March 31, 1998 of trademarks, licenses and goodwill was $3,827,407 ($2,360,373
at March 31, 1997).
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of" (SFAS 121), which requires a review of the
carrying value of intangibles whenever events or changes in circumstances
indicate that the carrying value amount of the asset may not be recoverable. Any
such determination would require a charge to income for the estimated reduction
in carrying value.
I. Advertising costs
Advertising and promotional expenditures are charged to operations as incurred.
These expenditures include print and media advertising, as well as in-store
cooperative advertising and promotions.
J. Income taxes
The Company follows the liability method in accounting for income taxes. The
liability method provides that deferred tax assets and liabilities are recorded,
using currently enacted tax rates, based upon the difference between the tax
bases of assets and liabilities and their carrying amounts for financial
statement purposes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
K. Foreign currency translation
The assets and liabilities of S.A. are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at weighted average
rates of exchange prevailing during the year. Translation adjustments are
accumulated as a separate component of stockholders' equity.
Both realized and unrealized gains and losses arising from foreign currency
transactions are recorded in the statement of income.
During 1998, the Company closed its operations in France which will minimize the
currency exchange impact in the future.
L. Fair value of financial instruments
The Company's financial instruments consist primarily of instruments whose fair
value approximates their carrying value.
F-8
M. Basic and diluted earnings per share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS128). SFAS 128 replaces primary and fully diluted EPS with basic and
diluted EPS. Basic EPS no longer reflects dilution from common stock equivalents
and diluted EPS utilizes the average market price of the Company's common stock
during the period as compared to the higher of the average price or period end
price. The Company adopted the provisions of SFAS 128 for the year ended March
31, 1998, and has restated all prior periods presented as required under the
statement.
On October 26, 1995, the Company announced a two-for-one stock split effected in
the form of a dividend to shareholders of record as of November 3, 1995 (the
stock split). All references to share and per share data within the financial
statements and notes thereto have been retroactively adjusted to reflect the
stock split.
N. Stock based compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, Accounting For Stock Based
Compensation (SFAS123). SFAS 123 establishes a fair value based method of
accounting for stock based compensation plans, the effect of which can either be
disclosed or recorded. The Company adopted the provisions of SFAS 123 for the
year ended March 31, 1997. Upon adoption, the Company retained the intrinsic
value method of accounting for stock based compensation, which it previously
used. Had the fair value based provisions of SFAS 123 been adopted, the effect
would be insignificant for fiscal 1998, 1997 and 1996 as the number of options
or warrants granted were not significant. Accordingly, no proforma disclosures
have been presented.
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.
1998 1997 1996
---- ---- ----
Expected life (years) 3 4 4
Interest rate 6% 6% 6%
Volatility 71% 74% 74%
Dividend Yield 0 0 0
O. Cash flow information
The Company considers temporary investments with an original maturity of three
months or less to be cash equivalents.
Supplemental disclosures of cash flow information follow:
1998 1997 1996
---- ---- ----
Cash paid for:
Interest $2,263,000 $2,210,000 $1,940,000
========== ========== ==========
Income taxes $4,641,000 $ 840,000 $1,390,000
========== ========== ==========
F-9
In addition to the barter transactions discussed in Note 9 (D), the following
non-cash transactions were entered into:
Year ended March 31, 1998:
The consideration received for the sale of inventory relating to the
licensing of the ALEXANDRA DE MARKOFF 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.
Year ended March 31, 1997:
Notes payable and accrued interest in the amount of $300,000 and $53,323,
respectively, were repaid from the proceeds of the issuance of common stock
in connection with the exercise of certain warrants.
Acquisition of Richard Barrie Fragrances, Inc. was partially funded
through the issuance of common stock, as discussed in Note 6.
Year ended March 31, 1996:
Acquisition of the Alexandra de Markoff cosmetic line and the Bal A
Versailles fragrance lines were partially funded through the issuance of
common stock and notes payable, respectively, as discussed in Note 6.
Notes payable and accrued interest in the amount of $792,603 and $178,750,
respectively, were repaid through the issuance of common stock in
connection with the exercise of certain warrants and options.
P. Reclassifications
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform to the 1998 presentation.
2. 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, 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 has completed personnel layoffs
relating to the restructuring as well as certain brand and product
discontinuations and estimates that the remaining brand and product
discontinuations will be completed within one year. The costs relating to this
restructuring of approximately $9,224,000 have been recorded in the current
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. 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.
In November of 1996, the Company engaged investment bankers to explore a
potential sale or merger of the Company, or other alternatives which would lead
to the maximization of shareholder value. In March of 1997, the Company
announced that such exploration had not resulted in alternatives which should be
pursued. Accordingly, the Company announced that it would independently
restructure the Company by terminating warehousing and distribution operations
in Connecticut and France, discontinuing certain brands, and
F-10
consolidating operations in South Florida. Costs related to this restructuring
of approximately $5,765,000 were recorded in the quarter ended March 31, 1997,
increasing costs of goods sold and selling and distribution expenses by
approximately $5,243,000 and $522,000, respectively. As of March 31, 1997, the
Company had completed the restructuring of warehousing and distribution
operations and approximately $1,633,000 and $262,000 of restructuring charges
remained in the reserve for inventory obsolescence and accrued expenses,
respectively. As of March 31, 1998, the restructuring has been completed and no
further liabilities or reserves, relating to the restructuring, are included in
the accompanying balance sheet at March 31, 1998.
3. INVENTORIES
The components of inventories are as follows:
March 31,
---------
1998 1997
---- ----
Finished products $13,509,636 $16,075,376
Components and packaging material 8,386,879 14,944,196
Raw material 2,733,154 4,575,751
----------- -----------
$24,629,669 $35,595,323
=========== ===========
The above amounts are net of reserves for potential inventory obsolescence of
$4,671,000 and $2,833,000 at March 31, 1998 and 1997, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
---------
1998 1997
----- ----
Promotional supplies $4,314,398 $4,313,083
Deferred tax assets 2,370,218 2,168,945
Account receivable-current portion Adm 1,806,554 ---
Prepaid advertising 684,667 534,686
Advertising barter credits, net 233,296 723,263
Other 540,826 526,149
---------- ----------
$9,949,959 $8,266,126
========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
March 31, Estimated useful
--------- ----------------
1998 1997 lives (in years)
---- ---- ----------------
Molds and equipment $4,975,903 $6,113,025 3-7
Furniture and fixtures 1,024,408 966,149 3-5
Leasehold improvements 569,960 460,411 5-7
Vehicles - 5,617 3
----------- ----------- -----
6,570,271 7,545,202
Less: accumulated depreciation and amortization (4,549,530) (4,291,402)
----------- -----------
$2,020,741 $3,253,800
=========== ===========
F-11
Depreciation and amortization expense on equipment and leasehold improvements
for the years ended March 31, 1998, 1997 and 1996 was $1,421,599, $1,407,916,
and $1,007,522, respectively.
6. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
March 31,
---------
1998 1997
---- ----
Owned Brands:
Alexandra de Markoff $11,179,839 $11,187,059
Fred Hayman Beverly Hills 2,747,434 2,729,382
Bal A Versailles 3,227,406 3,219,492
Animale 1,431,332 1,420,225
Other 209,078 201,685
Licensed Brands:
Perry Ellis 7,940,340 7,916,096
Barishnikov 2,470,241 2,470,241
--------- ---------
29,205,670 29,144,180
Less: accumulated amortization (3,827,407) (2,360,373)
------------ ------------
$25,378,263 $26,783,807
============ ============
On June 28, 1996, the Company consummated the acquisition of substantially all
of the assets and assumption of certain liabilities of Richard Barrie
Fragrances, Inc. (RBF), pursuant to an asset purchase agreement entered into on
January 31, 1996.
Parlux acquired from RBF certain inventories, fixed assets and licenses relating
to the brands Baryshnikov and Melrose Place, as well as fixed assets located in
RBF's office and distribution center in Orange, Connecticut.
Parlux provided as consideration $750,000 in cash which was paid on July 1,
1996, and 370,000 shares of common stock. The common stock was valued at
$3,006,250, the average price of the shares on January 30, 1996, the date of the
original asset purchase agreement, which in management's opinion, better
reflected the acquisition price, since the average price of the common stock at
the date of closing was affected by matters unrelated to the acquisition or the
regular operations of the Company.
The estimated fair value of the net assets acquired is summarized as follows:
Molds and other fixed assets $ 893,856
Inventories, net 1,784,474
Other assets 141,518
Goodwill and licenses 2,417,957
Accounts payable and other liabilities (1,481,555)
-----------
Fair value of net assets acquired $3,756,250
===========
On March 19, 1996, the Company consummated the acquisition of the trademarks and
certain inventory for the Bal A Versailles (BAV) fragrance and beauty products
brand name from Parfums Jean Desprez, S.A., pursuant to a letter of intent
entered into on January 11, 1996.
F-12
At closing, the Company provided as consideration $1,697,500 in cash and
$2,553,360 in the form of non-interest bearing promissory notes due in varying
installments through August 1996.
The estimated fair value of the assets acquired is summarized as follows:
Goodwill, licenses and trademarks $2,872,500
Inventories 878,360
Covenant-not-to-compete 300,000
Molds and other fixed assets 200,000
----------
Fair value of assets acquired $4,250,860
==========
On June 9, 1998, the Company entered into an exclusive agreement to license the
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.
On December 27, 1995, the Company consummated the acquisition of substantially
all of the assets of Alexandra de Markoff (AdM), a prestige cosmetic line,
pursuant to an asset purchase agreement entered into on September 21, 1995
between the Company and Revlon Holdings, Inc. (Revlon).
Parlux acquired from Revlon certain inventories and fixed assets and the rights
in certain trademarks relating to AdM. Parlux provided as consideration
$8,608,000 in cash, 424,000 shares of common stock valued at $3,392,000 and
agreed to accept returns and allowances in excess of $100,000 related to sales
of AdM products by Revlon prior to December 27, 1995. In addition, the Company
granted Revlon an option to purchase 176,000 shares of the Company's common
stock, until June 30, 1996, at an exercise price of $8.00 per share;
management's estimate of the value of these options was $352,000 using the
Black-Scholes method.
The estimated fair value of the net assets acquired is summarized as follows:
Goodwill, licenses and trademarks $11,117,000
Advance for future inventory purchases 4,000,000
Molds and other fixed assets 85,000
Reserve for sales returns and allowances (2,850,000)
-----------
Fair value of net assets acquired $12,352,000
===========
On March 2, 1998, the Company entered into an exclusive agreement to license the
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. In accordance with generally
accepted accounting principles and based on the Company's current borrowing cost
of 9.25%, the note was reduced to a present value of $3,659,753, of which
$1,806,554 and $1,853,199 are included in other current assets and other assets,
respectively, in the accompanying March 31, 1998 consolidated balance sheet.
F-13
7. BORROWINGS
The composition of debt is as follows: March 31, March 31, 1997
---------- --------------
1998 1997
Revolving credit facility payable to General Electric Capital Corporation,
interest at LIBOR plus 2.50% or prime (8.50% at March 31, 1998) plus .75%, at
the Company's option, net of restricted cash of $1,209,955. $16,818,951 ---
Note payable to FHBH, secured by the acquired licensed trademarks, interest at
7.25%, payable in equal monthly installments of $69,863, including interest,
through June 2004 4,179,826 $4,694,699
Revolving credit facility payable to Finova Capital Corporation, interest at
Citibank N.A. prime rate (8.25% at March 31, 1997) plus 1 3/4%, repaid in May
1997, net of restricted cash of $884,464 ---- 7,878,090
Note payable to Lyon Credit Corporation, secured by certain equipment, interest
at 11%, payable in equal monthly installments through September 2001. 663,989 984,858
Unsecured $1,000,000 line of credit payable to International Finance Bank,
interest at the bank's prime rate plus 2%, due May 1, 1998. 185,472 753,125
Overdraft facilities, interest from 10.25% to 10.75%, repaid in March 1998(1) --- 1,128,946
Receivable financing facilities, interest at 9.25% to 10.25%, repaid in
March 1998 (1) --- 1,981,820
Other notes payable 113,152 192,757
----------- ------------
21,961,389 17,614,295
Less: long-term borrowings (4,107,618) (4,949,230)
------------ -----------
Short-term borrowings $17,853,771 $12,665,065
=========== ===========
(1) Denominated in French francs.
In May 1997, the Company entered into a Loan and Security Agreement ( the Credit
Agreement ) with General Electric Capital Corporation (GECC), pursuant to which
the Company is able to borrow, depending on the availability of a borrowing
base, on a revolving basis for a three-year period, up to $25,000,000 at an
interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street Journal
prime rate, at the Company's option. Proceeds from the Credit Agreement were
used, in part, to repay the Company's previous $10,000,000 credit facility with
Finova Capital Corporation and Merrill Lynch Financial Services, Inc. At March
31, 1998, based on the borrowing base at that date, the credit line amounted to
approximately $19,500,000.
F-14
GECC has taken a security interest in substantially all of the domestic assets
of the Company. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios. During the fiscal year ended March
31, 1998, the Company was not in compliance with certain financial covenants
relating to EBITDA, minimum tangible net worth and minimum fixed charge coverage
ratio, as well as a restricted payment covenant concerning the amount of
treasury stock which can be purchased by the Company. GECC has agreed to waive
this noncompliance through June 30, 1998, and has amended the Credit Agreement
to reflect changes in certain covenants going forward.
The Company incurred a loss of approximately $8,687,000 during the fiscal year
ended March 31, 1998. As indicated above, the Company, as part of its Credit
Agreement, is subject to certain financial covenants among others, regarding
EBITDA and tangible net worth, as defined. If the Company is not able to return
to profitability and be able to meet the newly revised covenants, the Credit
Agreement may become payable on demand, and if unable to secure alternative
financing, the Company's operations and possibly the realization of certain of
its assets may be impaired. Management believes that, based on current
circumstances and the recent restructuring activities which will reduce future
overhead, the Company will be able to meet the revised covenants and funds from
operations, the income tax refund and the Credit Agreement will be sufficient to
fund the Company's operating needs.
The Company had overdraft and trade financing facilities aggregating 18,150,000
French francs (approximately $3,220,000 as of March 31, 1997), which were fully
utilized at March 31, 1997. These credit facilities were repaid during fiscal
1998.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
1999 $17,854
2000 823
2001 855
2002 785
2003 743
Thereafter 901
-------
Total $21,961
=======
8. CONVERTIBLE DEBENTURES
During the period November 2, 1995 through March 31, 1996, the Company issued
$3,700,000 of 7% convertible debentures and $15,000,000 of 5% convertible
debentures (the Debentures), pursuant to Regulation S. The Debentures were
convertible into shares of the Company's common stock at 85% of the closing
price of the stock as listed on NASDAQ over specific time frames. As of March
31, 1996, $7,000,000 of the Debentures, plus accrued interest of $48,146, had
been converted into 1,073,688 shares of common stock. Subsequent to March 31,
1996, the remaining $11,700,000 have been converted into 1,348,058 shares of
common stock.
During April and May 1996, the Company issued an additional $13,000,000 of 5%
convertible debentures, $3,000,000 pursuant to Regulation S and $10,000,000
pursuant to Regulation D with the same conversion features and terms as those
issued above, of which $9,355,324, plus accrued interest of $130,916, have been
converted into 1,868,272 shares of common stock.
F-15
On July 2, 1996, the Company issued an additional $10,000,000 of 5% Debentures,
in private placements pursuant to Regulation D, with the same conversion
features and terms as those issued above, except that the conversion rate was
86%. During October 1996, $8,412,236 of the debentures, plus accrued interest of
$72,466, were converted into 2,154,222 shares of common stock.
During October 1996, the Company entered into agreements to redeem $5,232,440 of
the May and July Debentures which had not been converted, plus $105,638 of
accrued interest thereon, by issuing $6,239,726 of 10% bonds which were repaid
in accordance with their terms in December 1996.
In a 1997 announcement discussed in Topic No. D-60 by the Emerging Issues Task
Force, the staff of the Securities and Exchange Commission ("S.E.C.") indicated
that when debt is convertible at a discount from the then current common stock
market price, the discounted amount reflects at that time an incremental yield,
e.g. a "beneficial conversion feature" which should be recognized as a return to
the debt holders from the date the debt is issued to the date it first becomes
convertible. Based on the market price of the Company's common stock on the date
of issuance of the convertible debt, the convertible debentures issued by the
Company during the period November 1995 through July 1996 had a beneficial
conversion feature of $7,156,001. Although management believes that the Company
followed generally accepted accounting principles in existence at the time of
the issuances, it has complied with the SEC announcement, restating its net
income and per share information for the year ended March 31, 1997 ("fiscal
1997") and fiscal 1996, to reflect such accounting treatment for this non-cash
charge, which has been recorded as additional interest expense in the
accompanying restated consolidated financial statements. In addition, the
October 1996 redemption of certain debentures no longer results in a loss of
$901,648 previously reported as an extraordinary item during the year ended
March 31, 1997, since the price paid in excess of the carrying value of the
debentures was charged to additional paid-in capital to offset the beneficial
conversion feature originally recorded at the date of issuance. The effect of
the restatement was to decrease net income for fiscal 1997 by $3,454,143,
resulting in a net loss of ($3,277,920), and to decrease net income for fiscal
1996 by $2,800,210, resulting in net income of $4,972,481.
9. COMMITMENTS AND CONTINGENCIES
A. Leases:
The Company leases its office space and certain equipment under operating leases
expiring on various dates through October 31, 2005. Total rent expense charged
to operations for the years ended March 31, 1998, 1997 and 1996 was
approximately $853,687, $1,451,000 and $916,000, respectively.
At March 31, 1998, the minimum annual rental commitments are as follows (in
000's ):
For the year ending March 31,
-----------------------------
1999 $758
2000 731
2001 634
2002 585
2003 495
Thereafter 1, 556
------
Total $4,759
======
F-16
B. License and Distribution Agreements:
During the year ended March 31, 1998, the Company held the following exclusive
worldwide licenses to manufacture and sell fragrance and other related products:
Perry Ellis
Baryshnikov
Phantom
Vicky Tiel
Todd Oldham
Under each of these arrangements, the Company must pay royalties at various
rates based on net sales, and spend minimum amounts for advertising based on
sales volume. The agreements expire on various dates and are subject to renewal.
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% and 2% of total Company net sales for the
years ended March 31, 1998 and 1997, respectively. The Company incurred a loss
of $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.
In May 1995, the Company terminated its license agreement with Francesco Smalto
for breach of contract. On October 5, 1995, the Company entered into a
transition and termination agreement with SMALTO which provided for the
continued use of the Francesco Smalto trademark through September 30, 1996. The
agreement contained certain production restrictions and required a fixed amount
of royalties during the period, which approximated 5% of net sales of Smalto
fragrances. Sales of Francesco Smalto products represented approximately 1% of
total Company net sales for the year ended March 31, 1997.
The Company 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, 1999 2000 2001
---------------------------- ---- ---- ----
Advertising $8,118 $8,118 $200
Royalties $500 $515 $150
C. Trademarks:
Through various acquisitions since 1991, the Company acquired worldwide
trademarks and distribution rights to ANIMALE, DANIEL DE FASSON, DECADENCE,
LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de MARKOFF cosmetics and
fragrances. In addition, FHBH granted the
F-17
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 these trademarks, other than FHBH, for all classes
of merchandise.
D. Barter Arrangements:
In June 1991, the Company entered into a barter arrangement (the Barter
Agreement ) for which the Company would receive advertising credits in exchange
for its inventory of JOAN COLLINS products. The final sale of these products was
completed in June 1993.
The following table sets forth the balances and transactions included in the
accompanying financial statements related to the Barter Agreement (in 000's):
1998 1997 1996
---- ---- ----
Prepaid advertising at March 31, net of deferred
income of $137, $345 and $434 in 1998, 1997 and
1996, respectively $233 $588 $660
==== ==== ====
Advertising credits expensed during the year
ended March 31 $463 $161 $684
==== ==== ====
Deferred income recognized for the year ended
March 31 $208 $89 $355
==== === ====
E. Employment and Consulting Agreements:
The Company has employment contracts with certain officers and employees which
expire through March 2000. Minimum commitments under these contracts are as
follows (in 000's):
For the year ending March 31,
-----------------------------
1999 $1,416
2000 970
------
$2,386
======
In connection with previous employment contracts, warrants to purchase 1,190,000
shares of common stock, at prices ranging from $1.50 to $7.50 were issued
between 1993 and 1995. These warrants are exercisable for a ten-year period from
the date of grant and vest over the term of the applicable contracts through
January 1998. During the year ended March 31, 1996, 28,000 warrants were
exercised. As of March 31, 1998, all of the above mentioned warrants were
vested. In addition, during January 1996, the Board of Directors approved a
resolution whereby the number of warrants issued to key employees would double
in the event of a change in control.
On April 1, 1994, the Company entered into a three-year consulting agreement
with Cosmix, Inc., a company owned by Mr. Frederick Purches, the Vice Chairman
of the Board, which provides for monthly payments of $8,333. The agreement calls
for Mr. Purches to assist the Company in the areas of banking, SEC and
stockholder relations, financial planning, assessment and coordination of
acquisitions and divestiture, and any other similar activities which may be
assigned by the Board of Directors. Mr.
F-18
Purches receives certain insurance benefits as a part of his agreement, and has
received 90,000 warrants to acquire shares of common stock at $2.06 over the
three-year period of the contract, of which 60,000 warrants have been exercised
during the year ended March 31, 1996. The consulting agreement was extended for
an additional three-year period until March 31, 2000, with no additional
warrants being provided.
On April 1, 1994, the Company entered into a three-year consulting agreement
commencing June 1, 1994, with Cambridge Development Corporation, a company owned
by Mr. Albert F. Vercillo, who is a director of the Company. The Agreement calls
for Mr. Vercillo to assist the Company in the areas of U.S. and international
financial analysis and planning. Cambridge Development Corporation receives
$4,500 a month and Mr. Vercillo receives certain insurance benefits, and has
received 30,000 warrants to acquire shares of common stock at $2.06 over the
three-year period of the contract. The consulting agreement was extended for an
additional three-year period until May 31, 2000, at a rate of $5,416 per month.
No additional warrants were provided.
On April 1, 1994, the Company entered into a consulting agreement with its
former President, which provided for monthly payments of $16,667 through
September 30, 1997. In addition, the former President had previously received
warrants to purchase 500,000 shares of common stock, at an exercise price of
$1.875 per share.
All of the previously described warrants were issued at the market value of the
underlying shares at the date of grant and reflect the two-for-one stock split
effected as of November 3, 1995.
F. Contingencies:
The Company is required to pay royalties under the Perry Ellis ( "Licensor" )
license agreement discussed in Note 9 (B) above. The Licensor has asserted,
through its legal counsel, that the Company is 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 purpose of calculating
royalties. For purposes of calculating such royalties, the Company has reported
and paid royalties to the Licensor on sales of approximately $40 million from
January 1, 1995 through March 31, 1998 based only on amounts invoiced to the
affiliate. This matter is presently under investigation. Management believes the
effect of this matter will not have a material adverse effect on the Company's
financial position or results of operations.
The Company is also 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,
-----------------------------------------
1998 1997 1996
---- ---- ----
Total assets $2,985,155 $10,443,117 $9,458,774
Working capital 2,506,732 2,731,167 2,115,755
Equity 2,506,732 2,761,554 2,229,714
F-19
Net Sales:
Trade 2,128,698 12,776,773 9,101,611
Affiliates 175,600 409,557 2,742,211
Intercompany 455,011 2,760,856 4,258,054
--------- --------- ---------
Total $2,759,309 $15,947,186 $16,101,876
========== =========== ===========
Net income (loss) $ (3,053) $ 817,649 $ 887,163
=============== ============= =============
Prior to fiscal 1996, foreign sales were principally made by Parlux S.A. During
the years ended March 31, 1998, 1997 and 1996, sales to foreign customers from
the Company's domestic subsidiary amounted to approximately $24,101,000,
$18,059,000 and 19,000,000, respectively. At March 31, 1998 and 1997, trade
receivables from foreign customers (all payable in U.S. dollars) amounted to
approximately $7,186,000 and $11,228,000, respectively.
At March 31, 1998, the Company has ceased operations in France.
11. INCOME TAXES
Income tax expense ( benefit ) is as follows:
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
Current taxes (benefit):
U.S. Federal ($4,634,263) $ 1,116,040 $ 3,764,477
U.S. state and local (440,239) 132,058 472,360
Foreign income taxes 232,998 515,800 531,161
----------- ----------- -----------
(4,841,505) 1,763,898 4,767,998
U.S. Federal deferred tax benefit (146,468) (1,103,817) (4,184)
----------- ----------- -----------
Income tax expense ( benefit ) ($4,987,972) $ 660,081 $ 4,763,814
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the Company's effective
tax rate follows:
1998 1997 1996
---- ---- ----
Tax at statutory rate (35.0)% (35.0)% 35.0%
Beneficial conversion feature of debenture - 58.2% 10.9%
Incremental foreign taxes 1.7% .5% .3%
State and local taxes (3.2)% 1.7% 2.4%
Other -% (.2)% .3%
---- ---- ----
(36.5)% 25.2% 48.9%
==== ==== ====
Deferred tax assets, which are included in other current assets, and deferred
tax liabilities, are comprised of the following:
March 31, 1998 1997
--------- ---- ----
Allowance for doubtful accounts, sales returns and
allowances $ 795,356 $ 961,118
State net operating loss carry forwards 512,019 ---
Reserve for inventory obsolescence 376,300 1,076,540
Federal net operating loss carry forwards 185,377 ---
F-20
Other, net 501,166 131,287
---------- ---------
Total deferred tax assets $2,370,218 $2,168,945
========== ==========
Deferred tax liabilities related to
depreciation and amortization $ 419,632 $ 432,440
=========== ==========
In fiscal 1997, the Internal Revenue Service audited the Company's federal
income tax return for the year ended March 31, 1994. The audit resulted in no
changes to taxes due.
12. COMMON STOCK
At various dates since April 1989, the Company has issued, in addition to the
warrants described in Note 9 (E), a total of 688,000 warrants to key employees
and/or consultants to purchase the Company's common stock at an average exercise
price of $1.87 per share. In March 1993, Mr. Gerard Semhon, in exchange for an
amount due him of $180,000, exercised warrants to acquire 96,000 registered
shares and Mr. Fred Purches exercised warrants for the acquisition of 28,000
unregistered shares in exchange for cash and amounts due him of $47,000. In
September 1993, Mr. Semhon exercised his remaining warrants to acquire 24,000
registered shares in exchange for amounts due him of $45,000. Accordingly, as of
March 31, 1995, 540,000 of these warrants remained outstanding. The underlying
shares related to the unexercised warrants had not been registered.
In September 1990, in connection with a long-term loan, the Company issued
100,000 warrants to Mr. Boris Lekach which were exercisable at $2.00 per share.
Mr. Boris Lekach is related to Mr. Ilia Lekach, the Company's Chairman and Chief
Executive Officer.
In March 1991, the Company issued warrants to Deco Distribution Group, Inc.
(Deco) to acquire 1,100,000 shares of common stock in accordance with an Asset
Acquisition Agreement of the same date. The warrants were exercisable through
March 1, 2001 at an exercise price of $2.00 per share.
In May 1995, the Company extended a discount of $0.75 per share to those holders
of warrants issued in connection with the FHBH and Deco acquisitions, as well as
the loan to Mr. Boris Lekach, if the holders would exercise by May 31, 1995. The
exercise period was subsequently extended to July 31, 1995. These warrant
holders exercised all of their warrants into 1,400,000 shares of common stock,
increasing stockholders' equity by approximately $2,300,000.
In June 1993, in recognition of continuing financial support, personal
guarantees and pledged deposits in connection with the NBK loan, the Company
issued 52,916 warrants to Mr. Zouheir Beidoun, a Director of the Company, at an
exercise price of $1.75. These warrants, along with an additional 200,000
warrants issued during 1991, were exercised during February 1996, whereby a
portion of the note payable to Mr. Beidoun, including accrued interest payable,
was partially converted to equity.
The following table summarizes the activity and related information for the
warrants outstanding under the commitments disclosed in Note 9 (E) and the
warrants described above after the retroactive effect of the stock split:
F-21
Weighted Average
----------------
Amount Exercise Price
------ --------------
Balance at March 31, 1995 3,572,916 $ 1.99
Issued 307,978 $ 7.78
Exercised (1,830,916) $ 1.97
---------
Balance at March 31, 1996 2,049,978 $ 2.88
Issued 10,000 $ 6.75
Exercised (236,000) $ 7.73
---------
Balance at March 31, 1997 1,823,978 $ 2.24
Issued --
Exercised --
Canceled (53,978) $ 8.11
---------
Balance at March 31, 1998 1,770,000 $ 2.06
=========
The following table summarizes information about warrants outstanding at
March 31, 1998:
Range of Warrants Outstanding Warrants Exercisable
Exercise -------------------- --------------------
---------- Weighted Average Weighted Average Weighted Average
Prices Amount Exercise Price Remaining Life Amount Exercise Price
------ ------ --------------- -------------- ------ ---------------
$1.50-$2.07 1,562,000 $1.89 5 1,562,000 $1.89
$3.13-$4.00 198,000 $3.20 8 182,667 $3.14
$6.75 10,000 $6.75 9 6,666 $6.75
--------- ----- - --------- -----
1,770,000 $2.07 5 1,751,333 $2.03
========= ===== = ========= =====
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.
On June 20, 1995, the Company granted to various employees additional options to
acquire 24,500 shares of common stock at $5.75, the closing bid price of the
stock on June 19, 1995. These options are exercisable at the rate of 25% per
annum beginning June 20, 1996. Concurrently, 5,500 options were canceled through
employee resignations.
As of March 31, 1998, and since the inception of the Plan, options have been
issued, net of cancellations, to purchase 241,092 shares at exercise prices
ranging from $1.06 to $5.75 per share. No
F-22
further options are issuable under the Plan. Through March 31, 1998, 174,092
options had been exercised under the Plan.
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. As of this date, these shares have not been registered. Only employees who
are not officers or directors of the Company shall be eligible to receive
options under the 1996 Plan.
On January 2, 1998, the Company granted to various employees, options to acquire
79,000 shares of common stock at $1.375 per share, the closing bid price of the
stock on December 31, 1997. None of these options are exercisable as of March
31, 1998.
The following table summarizes the activity for options covered under all plans:
Plan 1996 Plan
----------------------------- -------------------------------
.
Weighed Average Weighed Average
Amount Exercise Price Amount Exercise Price
------ -------------- ------ --------------
Balance at March 31, 1996 81,500 $2.82
Issued --- ---
Exercised (14,500) $1.28
Canceled --- ---
-------
Balance at March 31, 1997 67,000 $3.15 -
Issued --- --- 79,000 $1.38
Exercised --- ---
Canceled (12,000) $5.75 (7,750) $1.38
------ ------
Balance at March 31, 1998 55,000 $2.59 71,250 $1.38
====== ======
As of March 31, 1998, options to purchase 55,000 shares are outstanding under
the Plan, of which 48,750 are currently exercisable at a weighted average
exercise price of $2.18 and 6,250 become exercisable during the year ending
March 31, 1999.
During June 1993, the Company established a 401-K plan covering substantially
all of its U.S. employees. No Company contribution was made during the year.
Commencing on April 1, 1996, the Company matched 25% of the first 6% of employee
contributions, within annual limitations established by the Internal Revenue
Code. The cost of the matching program totaled approximately $57,000 and $54,000
for the years ended March 31, 1998 and 1997, 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 stock split, and the adoption of the provisions of SFAS 128:
1998 1997 (1) 1996 (1)
------------------------------------------------
Net income ( loss) ($8,686,923) ($3,277,920) $4,972,481
============ ============ ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 16,300,060 15,013,931 8,791,479
============ ============ ==========
Basic net income ( loss ) per common share ($0.53) ($0.22) $0.57
======= ======= =====
F-23
Weighted average number of shares outstanding used in basic
earnings per share calculation 8,791,749
Affect of dilutive securities (2):
Stock options and warrants, net of treasury shares acquired
1,500,631
Convertible debentures (3): ----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,292,380
==========
Diluted net income per common share $0.48
=====
Antidilutive securities not included in diluted earnings (loss)
per share computation:
Options and warrants to purchase common stock 1,896,250 1,890,978 630,847
Exercise price $1.38 - $6.75 $1.44 - $8.11 $5.75 - $8.11
(1) As disclosed in Note 8, the net income ( loss ) and the net income per share
for fiscal 1997 and 1996 was restated to account for the value attributable
to the beneficial conversion feature on convertible debentures issued during
fiscal 1997 and 1996.
(2) The calculation of diluted loss per share was not required for fiscal
1998 and 1997 since it would be antidilutive.
(3) The 1,300,195 share effect of conversion of debentures in fiscal 1996 was
not assumed since it would be antidilutive.
15. RELATED PARTY TRANSACTIONS, SIGNIFICANT CUSTOMERS AND CONCENTRATION OF
CREDIT RISK
On September 3, 1997, the Company loaned $150,000 to its Chairman/CEO, which is
included in other current assets. The loan is unsecured, bears interest at 10%
per annum and is due on December 31, 1998.
The Company had sales of approximately $21,940,000, $26,568,000, and $26,187,000
during the fiscal years ended March 31, 1998, 1997 and 1996, respectively, to
Perfumania, Inc. (Perfumania), and sales of $1,272,000 during the fiscal year
ended March 31, 1997, to L. Luria & Son, Inc. (Luria), companies in which the
Company's Chairman and Chief Executive Officer has an ownership interest. Net
amounts due from Perfumania amounted to $17,973,000, and $22,136,000 at March
31, 1998 and 1997, respectively. Amounts due from Luria totaled $726,000 at
March 31, 1997. Amounts due from related parties are non-interest bearing and
are realizable in less than one year.
On August 13, 1997, Luria 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 owed the Company $690,886. The
Company has filed its claim and has been 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 is investigating potential
actions to recover substantial funds from alleged insiders of Luria's and their
affiliates, which might include actions against the Company to recover amounts
paid for merchandise sold to Luria's. Management cannot presently predict the
outcome of these matters, although management believes, upon the advice of legal
counsel, these matters should not have a materially adverse effect on the
Company's financial position or result of operations. As of March 31, 1998,
this receivable was fully reserved.
F-24
No unrelated customer accounted for more than 10% of the Company's sales during
the years ended March 31, 1998, 1997 and 1996.
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, 1998 and 1997 (in thousands, except
per share amounts). Certain of the quarterly information has been restated as
described below.
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998 (1)
------------------------------------------------------------------------
Net sales $13,297 $14,938 $20,375 $13,758
Gross margin 8,341 8,479 11,034 (714)
Net income (loss) 16 17 43 (8,763)
Earnings (loss) per common share
Basic $0.00 $0.00 $0.00 ($0.58)
Diluted (4)
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 (3) 1996 (3) 1996 (3) 1997 (2)
------------------------------------------------------------------------
Net sales $18,740 $25,503 $27,020 $16,377
Gross margin 12,454 13,987 16,378 5,638
Net income (loss) (746) 473 990 (3,995)
Earnings (loss) per common share
Basic $0.12 $0.12 $0.01 ($0.23)
Diluted (4)
(1) Includes charge of approximately $9,224,000 relating to the discontinuation
of certain brands and products. See Note 2 for further discussion.
(2) Includes restructuring charge of approximately $5,765,000. See Note 2 for
further discussion.
(3) As discussed in Note 8 to the consolidated financial statements, the net
income and net income per share for fiscal 1997 has been restated to
account for the value attributable to the beneficial conversion feature on
convertible debentures issued during fiscal 1997 and 1996.
(4) The calculation of diluted earnings per share was not required for 1998
since it would be antidilutive.
F-25
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE VIII - 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, 1998
Reserves for:
Doubtful accounts $ 542,729 $ 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
========= =========== ========= =========
Year ended March 31, 1997
Reserves for:
Doubtful accounts $ 472,561 $ 557,502 $ 487,334 $ 542,729
Sales returns 637,221 3,915,488 4,169,308 383,401
Demonstration and co-op
advertising allowances 1,011,463 7,368,791 6,812,504 1,567,750
--------- --------- --------- ---------
$2,121,245 $11,841,781 (1) $11,469,146 $2,493,880
========= ========== ========== =========
Reserve for inventory
shrinkage and obsolescence $1,200,000 $ 3,857,483 (2) $ 2,224,483 $2,833,000
========= ========= ========= =========
Year ended March 31, 1996
Reserves for:
Doubtful accounts $1,231,522 $ 123,936 $ 882,897 $ 472,561
Sales returns 318,972 780,342 462,093 637,221
Demonstration and co-op
advertising allowances 504,919 4,144,166 3,637,622 1,011,463
------- --------- --------- ---------
$2,055,413 $ 5,048,444 (3) $ 4,982,612 $2,121,245
========= ========= ========= =========
Reserve for inventory
shrinkage and obsolescence $ 685,629 $ 688,626 (4) $ 174,255 $1,200,000
======= ======= ======= =========
(1) Net of reserves of $630,562 recorded in connection with the RBFI
acquisition.
(2) Net of reserves recorded in connection with:
RBFI acquisition: $833,433 BAV acquisition: $100,000
AdM acquisition: $1,000,000
(3) Net of reserves of $1,500,000 recorded in connection with the AdM
acquisition.
(4) Includes $600,000 recorded in connection with the AdM acquisition.
F-26
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 period interest
borrowings rate (4) during the
period (5)
- -----------------------------------------------------------------------------------------------------------------
March 31, 1998 Notes
Payable
Banks (1) $17,004,432 8.4% $20,375,531 $17,279,332 10.2%
March 31, 1997 Notes
Payable
Banks (2) $12,459,266 10.2% $12,459,266 $9,861,542 11.0%
March 31, 1996
Notes Payable
Banks (3) $6,939,014 10.2% $7,823,478 $7,361,251 12.1%
(1) Loans of $16,818,951 from GECC, $ 185,472 from International Finance Bank,
and French facilities which were repaid during fiscal 1998.
(2) Loans of $8,595,375 from Finova, $753,125 for International Finance Bank
and $3,110,766 in overdraft and receivable facilities granted by French
banks.
(3) Loans of $3,888,378 from Finova, $482,392 from Eagle National Bank, as well
as overdraft and receivable facilities of $2,568,244 granted by French
banks.
(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 ased on the applicable March 31 rates) by the
actual borrowings outstanding at March 31.
F-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/Ilia Lekach
- -----------------------------------------
Ilia Lekach, Chief Executive Officer and Chairman
Dated: July 21, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
/s/Zalman Lekach
- ------------------------------------------
Zalman Lekach, President, Chief Operating Officer and Director
/s/Frank A. Buttacavoli
- -------------------------------------------
Frank A. Buttacavoli, Executive Vice President, Chief Financial Officer and
Director
/s/Frederick E. Purches
- -------------------------------------------
Frederick E. Purches, Vice Chairman and Director
/s/Albert F. Vercillo
- --------------------------------------------
Albert F. Vercillo, Director
/s/Mayi de la Vega
- ---------------------------------------------
Mayi de la Vega, Director
/s/Glenn Gopman
- ---------------------------------------------
Glenn Gopman, Director