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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For Fiscal Year Ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________to _______________
Commission File Number 0-15491
Parlux Fragrances, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2562955
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
(Address of principal executive offices (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
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, 1999
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Common Stock, $ .01 par value 13,329,497
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The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $17,557,961 based on a
closing price of $1.750 for the Common Stock as of June 30, 1999 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).
2
Item 1. BUSINESS
Parlux Fragrances, Inc. (the Company), was incorporated in Delaware in
1984 and is engaged in the creation, design, manufacture, distribution and sale
of prestige fragrances and beauty related products marketed primarily through
specialty stores 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 7 and 8 for
further discussion. Additionally, the Company manufactures, distributes and
sells its own brand, ANIMALE fragrance, on a worldwide basis.
Recent Developments
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During the fiscal year ended March 31, 1999, the Company sold
approximately $22.5 million to a related party, Perfumania Inc. ("Perfumania"),
a publicly held company trading on NASDAQ ("PRFM"), which owns and operates 290
discount fragrance stores in the U.S. and perfumania.com, a wholly-owned
subsidiary of Perfumania, retailing fragrances on the Internet. At March 31,
1999 and 1998, the Company had trade receivables of $18.3 million and $18.0
million, respectively, from Perfumania.
The report of Perfumania's independent certified public accountants
that accompanied its audited financial statements as of January 30, 1999 and for
the year then ended expressed substantial doubt about Perfumania's ability to
continue as a going concern. Perfumania incurred net losses of approximately
$18,900,000 for its fiscal year 1999 and $4,100,000 (unaudited) for its
thirteen-week period ended May 1, 1999. Also, Perfumania had a working capital
deficit of approximately $3,800,000 and $5,600,000 (unaudited) at January 30,
1999 and May 1, 1999, respectively. In addition, Perfumania was in violation of
certain debt covenants contained in its bank line of credit agreement at both
January 30, 1999 and May 1, 1999. The bank has subsequently waived these debt
violations for a period of 90 days through September 30, 1999; however, there is
no assurance that Perfumania will be in compliance with the debt covenants at
the end of the waiver period.
During the fiscal years ended March 31, 1999 and 1998, the Company sold
a total of approximately $44.6 million to Perfumania, and received payments of
approximately $49.1 million during the same two-year period. During the period
from April 1, 1999 through June 30, 1999, the Company collected $5.2 million or
30% of the total of its outstanding receivable at March 31, 1999, and sold an
additional $8.3 million in merchandise to Perfumania, leaving a trade receivable
balance at June 30, 1999 of $21.3 million, in line with historical and
anticipated seasonal payment patterns.
The Company has developed a plan to reduce the balance due from
Perfumania. Management's plan initially consists of converting $8 million into a
short-term note receivable due the earlier of the completion of perfumania.com's
proposed public offering in which Perfumania would generate sufficient funds to
pay down the short term note, or May 31, 2000. In addition, on July 1, 1999,
Perfumania and the Company's Board of Directors approved the transfer of
1,512,406 shares of Perfumania treasury stock with a value of approximately $4.5
million, based on a per share price of $2.98, which approximates 90% of the
closing price of Perfumania's common stock for the previous 20 business days. As
indicated in various public press releases, Perfumania has reported both
aggregate and comparative store sales increases for each of the months during
the period February 1999 through June 1999. Based on the factors described
above, management believes that the receivables from Perfumania is fully
collectible.
As of July 13, 1999 management believes that the company will receive
additional cash payments in the amount of $2,700,000 and treasury stock referred
to above no later than July 31, 1999.
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In January 1999, Mr. Zalman Lekach, President and Chief Operating
Officer, resigned to pursue other activities unrelated to the fragrance
industry. Mr. Zalman Lekach will remain a member of the Board; his
responsibilities have been reassigned to Mr. Frank A. Buttacavoli, Executive
Vice-President, CFO and Mr. Ruben Lisman, Vice-President of International Sales.
Mr. Ilia Lekach, Chairman and CEO assumed the title of President.
In December 1998, the Company completed the third phase of its common
stock buy-back program involving 1,250,000 shares. In January 1999, the Board of
Directors (the "Board") authorized the repurchase of an additional 2,000,000
shares. As of March 31, 1999, the Company has repurchased under all phases a
total of 3,616,031 shares at a cost of $8,093,595 (4,108,981 shares at a cost of
$9,042,617 through June 30, 1999). The accompanying consolidated balance sheets
also include an additional 39,000 shares of treasury stock purchased at a cost
of $133,472 prior to fiscal 1996.
Restatement of Net Income and Net Income Per Share to Reflect SEC Announcement
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and for Debt Extinguishment
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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.
4
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 1999, the Company completed the design
process for FRED HAYMAN'S "HOLLYWOOD" for men, which was launched in the fall of
1998. The Company is currently developing PERRY ELLIS "PORTFOLIO" for men for a
launch prior to Christmas 1999, as well as PERRY ELLIS "PORTFOLIO" for women for
a spring 2000 launch.
During the last three fiscal years, the following brands have accounted
for 10% or more of the Company's gross sales:
Fiscal 1999 Fiscal 1998 Fiscal 1997
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PERRY ELLIS 65% 56% 48%
FRED HAYMAN 21% 17% 13%
ANIMALE 12% 11% 15%
ALEXANDRA DE MARKOFF 0% 12% 14%
On March 2, 1998, the Company entered into an exclusive agreement to
license the Alexandra de Markoff ("AdM") rights to Cosmetic Essence, Inc. for an
annual fee of $500,000. The initial term of the agreement is ten years,
automatically renewable for additional ten and five year terms. The annual fee
reduces to $100,000 after the third renewal.
MARKETING AND SALES
In the United States, the Company has its own sales and marketing
staff, and also utilizes independent sales representatives for certain channels
of distribution. The Company sells directly to retailers, primarily national and
regional department stores and specialty stores, which it believes will maintain
the image of its products as prestige fragrances. The Company's products are
sold in over 1,900 retail outlets in the United States. Additionally, the
Company sells products to Perfumania, Inc., a related party, which is a leading
specialty retailer of fragrances with 290 retail outlets principally located in
manufacturers' outlet malls and regional malls. (See "RECENT DEVELOPMENTS"
section for further discussion).
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors. The Company has established
relationships
5
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 10 (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 assurance that this will
continue.
SEASONALITY
Typical of the fragrance industry, the Company has its highest sales
during the calendar year end holiday season. Lower than projected sales during
this period could have a material adverse affect on the Company's operating
results.
INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that
market cosmetics and fragrances to department stores to provide the department
stores with rights to return merchandise. The Company's products are subject to
such return rights. It is the Company's practice to establish reserves and
provide allowances for product returns at the time of sale. The Company believes
that such reserves and allowances are adequate based on past experience;
however, no assurance can be made that reserves and allowances will continue to
be adequate. Consequently, if product returns are in excess of the reserves and
allowances made by the Company, sales will be reduced when such fact becomes
known.
CUSTOMERS
The Company concentrates its sales efforts in the United States in
specialty stores and a number of regional department store retailers including,
among others, Famous Barr, Foley's, J.L. Hudson, Lord & Taylor, Macy's,
Parisian, Proffitts, Rich's/Lazarus,
6
and Robinson May. 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 and holds identical
management positions, amounted to $22,527,451 for the fiscal year ended March
31, 1999. Net amounts owed by Perfumania to the Company amounted to $18,258,213
at March 31, 1999. The loss of Perfumania as a customer could have a material
adverse effect on the Company's operating results.
See "Recent Developments" section for further discussion.
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 and
$12,776,773 for fiscal years ended March 31, 1998 and 1997, respectively. As of
March 31, 1998, all of S.A.'s operations were 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 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 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.
7
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.
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 for these trademarks. Additionally, royalties are
payable to the Company by the licensees of the ALEXANDRA de MARKOFF and BAL A
VERSAILLES brands. See Note 7 to the accompanying consolidated financial
statements for further discussion. The Company has the rights to license certain
of these trademarks for all classes of merchandise.
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 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
8
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, 1999, the Company had 113 full-time and part-time
employees, which reflects the reduction in staffing requirements resulting from
the licensing of the AdM cosmetic line in March 1998. Of these, 25 were engaged
in worldwide sales activities, 50 in operations, administrative and finance
functions and 38 in warehousing and distribution activities. None of the
Company's employees are covered by a collective bargaining agreement and the
Company believes that its relationship with its employees is satisfactory. The
Company also uses the services of independent contractors in various capacities,
including sales representatives.
The Company has established a 401-K Plan covering substantially all of
its U.S. employees. Commencing on April 1, 1996, the Company matched 25% of the
first 6% of employee contributions, within annual limitations established by the
Internal Revenue Code.
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.
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 lease on the total facility expired 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.
9
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 in December 1997, 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, 1999 and through June 25, 1999.
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 30, 1999. The prices represent quotations by the
dealers without adjustments for retail mark-ups, mark-downs or commissions and
may not represent actual transactions.
10
Fiscal Quarter Common Stock
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High Low
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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
Second (July/Sept.) 1998 2.250 1.313
Third (Oct./Dec.) 1998 2.094 0.875
Fourth (Jan./Mar.) 1999 2.625 1.063
First (April/June) 1999 2.156 1.000
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, 1998 and 1999 and the related
consolidated statements of operations and of cash flows for the three years
ended March 31, 1999 and notes thereto appear elsewhere in this Annual Report on
Form 10-K.
For the Year Ended March 31, (in thousands of dollars, except per share data)
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1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $ 56,151 $ 62,369 $ 87,640 $ 67,727 $ 38,209
Costs/operating expenses 51,920 73,911 84,321 53,539 31,208
Operating income (loss) 4,231 (11,542) 3,319 14,188 7,001
Net income (loss) (1) 1,418 (8,687) (3,278) 4,972 4,231
Income (loss) per share (1):
Basic (2) $ 0.10 $ (0.53) $ (0.22) $ 0.57 $ 0.63
Diluted (2) (3) $ 0.10 $ 0.48 $ 0.54
(1) As disclosed in Note 9 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 1995-1997 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.
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At March 31, 1999 1998 1997 1996 1995
- ------------ ---- ---- ---- ---- ----
Current assets $56,775 $66,509 $81,205 $67,666 $31,955
Current liabilities 18,159 30,185 31,885 36,866 27,113
Working capital 38,616 36,324 49,320 30,800 4,842
Trademarks, licenses and
goodwill, net 23,926 25,378 26,784 24,623 11,380
Long-term debt 3,561 4,108 4,949 4,694 5,281
Total assets 82,507 95,881 111,385 95,239 45,477
Total liabilities 22,227 34,713 37,266 51,641 32,394
Stockholders' equity 60,281 61,168 74,119 43,598 13,083
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, 1999 with the twelve-month
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period ended March 31, 1998
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During the fiscal year ended March 31, 1999, net sales decreased 10% to
$56,150,575 as compared to $62,368,523 in the same period in the prior year. The
prior year period included $8,608,270 in sales of Alexandra de Markoff (AdM)
cosmetics and Bal a Versailles (BAV) fragrances, both of which were licensed to
third parties during March and June 1998, respectively. The comparable period
increase, excluding prior year sales of AdM and BAV brand products, was 4%. The
decrease in total sales, which was anticipated, was also partially attributable
to the global economic difficulties which resulted in a 17% decline in
international gross sales to $20,120,885 in the current period as compared to
$24,100,980 in the prior year comparable period. Sales of Perry Ellis brand
products decreased 3% compared to the same period in the prior year from
$37,890,727 to $36,850,017 and sales of Fred Hayman brand products increased by
4% to $12,272,031 compared to $11,810,856 in the prior year period. Sales of the
Company's own trademark, Animale, decreased by 4% compared to the same prior
year period from $7,581,412 to $7,261,850.
Net sales to unrelated customers decreased 17% to $33,623,124 in the
current period compared to $40,429,288 in the same period in the prior year.
Without the effect of
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prior year sales of AdM brand products, which products were sold only to
unrelated customers, sales to unrelated customers increased 3%. Sales to related
parties increased 3% to $22,527,451 in the current year compared to $21,939,235
in the prior year period.
Cost of goods sold for the fiscal year ended March 31, 1999 decreased
to $21,808,545 or 39% of net sales, as compared to $35,228,000 or 56% of net
sales in the same period in the prior year. The year ended March 31, 1998
included approximately $8,195,000 in costs related to discontinuing certain
brands and products, and to the closeout of Todd Oldham merchandise at below
cost. See Note 3 to the accompanying consolidated financial statements for
further discussion of the restructuring charge. Without the effect of the
restructuring charge, cost of goods sold for the year ended March 31, 1998 would
have been 43%. The decrease in fiscal 1999 was mainly attributable to the sale
of Todd Oldham merchandise at below cost during fiscal 1998, the final year of
the license agreement, coupled with a reduction in costs of certain components
utilized in production. Cost of goods sold for sales to unrelated customers and
related parties approximated 36% and 43%, respectively, during the fiscal year
ended March 31, 1999, as compared to 38% and 52%, respectively in the prior
year, excluding the effect of the special charge.
Operating expenses decreased by 22% compared to the prior fiscal year
from $38,682,537 to $30,110,712 and decreased as a percentage of net sales from
62% to 54%. Advertising and promotional expenses decreased 13% to $15,612,506
compared to $17,887,892 in the prior year period, as a result of controlled
expenditures for print advertising and promotional expenses in connection with
the launch of Fred Hayman's "Hollywood" for women and men. Selling and
distribution costs decreased by 26% to $5,882,575 in the current fiscal period
as compared to $7,927,418 in the same period of the prior fiscal year,
decreasing a percentage of net sales from 13% to 10%. General and administrative
expenses decreased by 37% compared to the prior year period from $7,295,236 to
$4,570,055, decreasing as a percentage of net sales from 12% to 8%. The above
decreases reflect cost reductions as a result of the Company's restructuring
during the quarter ended March 31, 1998, the support previously required for the
AdM cosmetic line, and licensing fees generated from the AdM and BAV licensing
agreements. In addition, the fiscal year ended March 31, 1998 included
approximately $900,000 in bad debts relating to the bankruptcy of two customers,
approximately $125,000 of costs in connection with the closing of the Company's
French operations, and approximately $154,000 in severance costs relating to the
previously mentioned staff reductions. Depreciation and amortization decreased
by $426,457 reflecting the reduction in depreciation of molds and equipment
relating to discontinued and licensed brands. Royalties decreased to $1,584,483
for the current period compared to $2,684,441 in the prior year, and decreased
as a percent of sales from 4% in the prior year to 3% primarily due to minimum
royalties due in fiscal 1998 on discontinued brands.
As a result of the above, the Company had operating income of
$4,231,318 for the fiscal year ended March 31, 1999, compared to an operating
loss of $11,542,014 for the comparable period in the prior year.
13
Interest expense decreased by 20% to $1,800,149 in the current fiscal
year as compared to $2,241,170 in the same period in the prior year, reflecting
the reduction in average borrowings and lower interest rates. Exchange losses
were $117,334 in the current year as compared to a gain of $108,289 in the same
period in the prior year, reflecting the strengthening of the French franc
against the U.S. dollar.
Income before taxes increased to $2,313,835 for the current period
compared to a loss of $13,674,895 in the same period in the prior year. Giving
effect to the tax provision (benefit), net income amounted to $1,418,455 for the
fiscal year ended March 31, 1999, as compared to a net loss of $8,686,923 for
fiscal year ended March 31, 1998.
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
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, 1998, 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 3 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
14
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 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.
15
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.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $38,616,032 at March 31, 1999 compared to
$36,323,891 at March 31, 1998, reflecting the current period's net income and
the current maturity of notes receivable from the March 1998 sale of inventory
and fixed assets relating to the AdM brand previously classified as long-term
assets. These increases were offset by the purchase of approximately $2,333,000
in treasury stock as discussed below.
In December 1998, the Company completed the third phase of its common
stock buy-back program involving 1,250,000 shares. In January 1999, the Board
authorized the repurchase of an additional 2,000,000 shares, as the Company
continues to believe that its shares are undervalued. As of March 31,1999, the
Company has repurchased under all phases a total of 3,616,031 shares at a cost
of $8,093,595 (4,108,981 shares at a cost of $9,042,617 through June 30, 1999).
The accompanying consolidated balance sheets also include an additional 39,000
shares of treasury stock purchased at a cost of $133,472 prior to fiscal 1996.
In May 1997, the Company entered into a three-year loan and Security
Agreement ( the Credit Agreement ) with General Electric Capital Corporation
(GECC). Under the Credit Agreement, the Company is able to borrow, depending on
the availability of a borrowing base, on a revolving basis, up to $25,000,000 at
an interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street
Journal prime rate, at the Company's option. 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.
Substantially all of the domestic assets of the Company collateralize
this borrowing. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios. As of March 31, 1999, the Company
was not in compliance with financial covenants relating to "Earnings Before
Interest, Taxes, Depreciation and Amortization" (EBITDA), minimum fixed charge
coverage ratio, maximum accounts receivable from related parties and employees,
minimum unrelated customer net sales, as well as a restricted payment covenant
concerning the amount of treasury stock which can be purchased by the Company.
GECC has waived the violations of these debt covenants for
16
the year ended March 31, 1999 and through June 30, 1999, and is in the process
of amending the Credit Agreement to reflect changes in certain covenants going
forward.
The Company has reduced its total outstanding borrowings by
approximately $7,500,000 since the prior year end. Management believes that,
based on current circumstances, the Company will be able to negotiate revised
covenants and funds from operations and the Credit Agreement will be sufficient
to meet the Company's operating needs.
During the fiscal year ended March 31, 1999, the Company sold
approximately $22.5 million to a related party, Perfumania, which owns and
operates 290 discount fragrance stores in the U.S. and perfumania.com, a
wholly-owned subsidiary of Perfumania retailing fragrances on the Internet. At
March 31, 1999 and 1998, the Company had trade receivables of $18.3 million and
$18.0 million, respectively, from Perfumania.
The report of Perfumania's independent certified public accountants
that accompanied its audited financial statements as of January 30, 1999 and for
the year then ended expressed substantial doubt about Perfumania's ability to
continue as a going concern. Perfumania incurred net losses of approximately
$18,900,000 for its fiscal year 1999 and $4,100,000 (unaudited) for its
thirteen-week period ended May 1, 1999. Also, Perfumania had a working capital
deficit of approximately $3,800,000 and $5,600,000 (unaudited) at January 30,
1999 and May 1, 1999, respectively. In addition, Perfumania was in violation of
certain debt covenants contained in its bank line of credit agreement at both
January 30, 1999 and May 1, 1999. The bank has subsequently waived these debt
violations for a period of 90 days through September 30, 1999; however, there is
no assurance that Perfumania will be in compliance with the debt covenants at
the end of the waiver period.
The Company has developed a plan to reduce the balance due from
Perfumania. Management's plan initially consists of converting $8 million into a
short-term note receivable due the earlier of the completion of perfumania.com's
proposed public offering in which Perfumania would generate sufficient funds to
pay down the short term note, or May 31, 2000. In addition, on July 1, 1999,
Perfumania and the Company's Board of Directors approved the transfer of
1,512,406 shares of Perfumania treasury stock with a value of approximately $4.5
million, based on a per share price of $2.98, which approximates 90% of the
closing price of Perfumania's common stock for the previous 20 business days. As
indicated in various public press releases, Perfumania has reported both
aggregate and comparative store sales increases for each of the months during
the period February 1999 through June 1999. As of June 30, 1999, the receivable
balance due from Perfumania was approximately 21.3 million, which management
believes is in line with historical and anticipated seasonal payment patterns.
Based on the factors described above, management believes that the receivables
from Perfumania is fully collectible.
As of July 13, 1999 management believes that the company will receive
additional cash payments in the amount of $2,700,000 and treasury stock referred
to above no later than July 31, 1999.
Year 2000 ("Y2K") Issues
- ------------------------
As of March 1999, the Company's management information system hardware
consists of an IBM AS 400, coupled with networked personal computer
workstations. The Company has upgraded its JD Edwards software to the latest
release, which is Y2K compliant. JD Edwards is releasing its final Y2K upgrade
during July 1999 which the Company anticipates implementing by August 31, 1999.
In connection therewith, a hardware upgrade has been completed on its 9406
processor from a model 310 to a model 620, which more than doubles the
commercial processing workload (CPW) to support the new release and other
business applications. In addition, the upgrade of the Company's Pitney Bowes
shipping system should be completed by July 31, 1999. The new upgrade will
interface fully with the AS400 and JD Edwards software. The costs incurred in
connection with the upgrades, including outside consultants, amounted to
approximately $300,000.
The Company continues to devote the necessary internal resources to
resolve all significant Y2K issues in a timely manner. Internal modifications to
all personnel computer operating systems have been completed. Testing of
electronic data interchange (EDI) modifications with all major customers has
also been completed. Verification of Y2K compliance with major suppliers
continues.
Management believes that any such processing issues will be resolved.
Nevertheless, if the Company, its customers or suppliers are unable to resolve
such processing issues, it could result in material financial risks such as the
inability to produce and distribute the Company's products. Contingency plans
for order processing are already in place.
New Accounting Pronouncements
- -----------------------------
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. In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative
17
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999.
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, which was adopted by the
Company during fiscal 1999.
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. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management does not expect
SFAS No. 131 and 133 to have a significant impact on the Company's reporting and
disclosure requirements in fiscal 2000.
Impact of Currency Exchange and Inflation
- ------------------------------------------
The Company's business operations were negatively affected in the
amount of $117,334 in the fiscal year ended March 31, 1999 and positively
affected in the amount of $108,289 and $595,045 in the fiscal years ended March
31, 1998 and 1997, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
- ------------------
The Company's exposure to market risk for changes in interest rates
relates primarily to the Credit Agreement as discussed above under "Liquidity
and Capital Resources." The Company mitigates interest rate risk by continually
monitoring interest
18
rates and electing the lower of the fixed rate LIBOR or prime rate option
available under the Credit Agreement.
The table below presents the outstanding principal amount and the
related fair values (in thousands), together with the maturity date as of March
31, 1999 and the weighted average interest rate for the Company's Credit
Agreement:
Outstanding Weighted
Principal Average Maturity
Amount Fair Value Interest Rate Date
------ ---------- ------------- ----
Credit Agreement (prime option elected) $ 2,521 $ 2,521 8.5% May 2000
Credit Agreement (LIBOR option elected) 11,000 11,000 7.7% May 2000
------- -------
Total borrowings subject to variable rates (1) $13,521 $13,521
======= =======
(1) Amount has not been reduced by restricted cash of $3,659.
Based on the borrowing rate available to the Company for debt with
similar terms and average maturities, the fair value of the Company's borrowing
approximates carrying value.
Item 8. FINANCIAL STATEMENTS
- -----------------------------
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.
Item 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
19
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements beginning on page F-1 of this annual
report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1 of this annual
report.
3. Exhibit Index
The following exhibits are attached:
27 Financial Data Schedule ( for SEC use only )
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended March 31,
1999.
20
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
FORM 10-K SCHEDULES:
Schedule II - Valuation and Qualifying Accounts F-24
Schedule IX - Short-term Bank Borrowings F-25
All other Schedules are omitted as the required information is not
applicable or the information is presented in the financial statements
or the related notes thereto.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Parlux Fragrances, Inc.
In our opinion, the consolidated financial statements and financial statement
schedules listed in the index appearing 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these 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.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with a related party.
PricewaterhouseCoopers LLP
Miami, Florida
July 13, 1999
F-2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 184,148 $ 205,760
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$2,113,000 and $2,170,000 in 1999 and 1998 respectively 7,649,397 9,403,548
Trade receivables from related parties 18,258,213 17,973,197
Inventories, net 20,947,256 24,629,669
Prepaid expenses and other current assets 9,596,478 9,949,959
Income tax receivable 140,000 4,347,134
------------ ------------
TOTAL CURRENT ASSETS 56,775,492 66,509,267
Equipment and leasehold improvements, net 1,692,732 2,020,741
Trademarks, licenses and goodwill, net 23,926,073 25,378,263
Other 112,949 1,972,794
------------ ------------
TOTAL ASSETS $ 82,507,246 $ 95,881,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ 10,885,068 $ 17,853,772
Accounts payable 5,314,770 9,674,407
Accrued expenses 1,722,681 2,033,090
Income taxes payable 236,941 624,107
------------ ------------
TOTAL CURRENT LIABILITIES 18,159,460 30,185,376
Borrowings, less current portion 3,561,313 4,107,618
Deferred tax liability 505,783 419,632
------------ ------------
TOTAL LIABILITIES 22,226,556 34,712,626
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 1999 and 1998 -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 17,462,478 and 17,447,478 shares
issued at March 31, 1999 and 1998, respectively 174,625 174,475
Additional paid-in capital 73,030,586 73,007,949
Accumulated deficit (4,345,949) (5,764,404)
Accumulated other comprehensive income (351,505) (355,331)
------------ ------------
68,507,757 67,062,689
Less - 3,655,031 and 2,489,755 shares of common stock in
treasury, at cost, at March 31, 1999 and 1998, respectively (8,227,067) (5,894,250)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 60,280,690 61,168,439
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,507,246 $ 95,881,065
============ ============
See notes to consolidated financial statements.
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
---------------------------------------------------
(As restated,
Note 9)
1999 1998 1997
---------------------------------------------------
Net sales:
Unrelated customers $ 33,623,124 $ 40,429,288 $ 59,799,669
Related parties 22,527,451 21,939,235 27,840,337
------------ ------------ ------------
56,150,575 62,368,523 87,640,006
Cost of goods sold 21,808,545 35,228,000 39,183,165
------------ ------------ ------------
Gross margin 34,342,030 27,140,523 48,456,841
------------ ------------ ------------
Operating expenses:
Advertising and promotional 15,612,506 17,887,892 24,245,502
Selling and distribution 5,882,575 7,927,418 9,381,306
General and administrative, net of licensing
fees of $575,000 in 1999 4,570,055 7,295,236 6,468,586
Depreciation and amortization 2,461,093 2,887,550 2,629,799
Royalties 1,584,483 2,684,441 2,413,113
------------ ------------ ------------
Total operating expenses 30,110,712 38,682,537 45,138,306
------------ ------------ ------------
Operating income (loss) 4,231,318 (11,542,014) 3,318,535
Interest expense and bank charges 1,800,149 2,241,170 6,531,419
Exchange loss (gain) 117,334 (108,289) (595,045)
------------ ------------ ------------
Income (loss) before income taxes 2,313,835 (13,674,895) (2,617,839)
Income taxes provision (benefit) 895,380 (4,987,972) 660,081
------------ ------------ ------------
Net income (loss) $ 1,418,455 $ (8,686,923) $ (3,277,920)
============ ============ ============
Income (loss) per common share:
Basic $ 0.10 $ (0.53) $ (0.22)
============ ============ ============
Diluted $ 0.10 $ (0.53) $ $(0.22)
============ ============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED
------------------------ ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
---------- --------- ----------- ------------
BALANCE at April 1, 1996 11,456,426 $ 114,564 $37,184,527 $ 6,200,439
Comprehensive loss:
Net loss -- -- -- (3,277,920)
Foreign currency translation adjustment -- -- -- --
Total comprehensive loss
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)
Purchase of 381,055 shares of treasury stock, at cost -- -- -- --
---------- --------- ----------- -----------
BALANCE at March 31, 1997 (As restated, Note 9) 17,447,478 174,475 73,007,949 2,922,519
Comprehensive loss:
Net loss -- -- -- (8,686,923)
Foreign currency translation adjustment
Total comprehensive loss
Purchase of 2,069,700 shares of treasury stock, at cost
---------- --------- ----------- -----------
BALANCE at March 31, 1998 17,447,478 174,475 73,007,949 (5,764,404)
Comprehensive income:
Net income -- -- -- 1,418,455
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise of employee options 15,000 150 22,637 --
Purchase of 1,165,276 shares of treasury stock, at cost -- -- -- --
---------- --------- ----------- -----------
BALANCE at March 31, 1999 17,462,478 $ 174,625 $73,030,586 $(4,345,949)
========== ========= =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME (LOSS)(1) STOCK TOTAL
---------------- ----------- ----------
BALANCE at April 1, 1996 $ 182,247 $ (133,472) 43,548,305
Comprehensive loss:
Net loss -- -- (3,277,920)
Foreign currency translation adjustment (285,809) -- (285,809)
----------
Total comprehensive loss (3,563,729)
----------
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)
Purchase of 381,055 shares of treasury stock, at cost -- (1,749,174) (1,749,174)
--------- ----------- ----------
BALANCE at March 31, 1997 (As restated, Note 9) (103,562) (1,882,646) 74,118,735
Comprehensive loss:
Net loss -- -- (8,686,923)
Foreign currency translation adjustment (251,769) (251,769)
----------
Total comprehensive loss (8,938,692)
----------
Purchase of 2,069,700 shares of treasury stock, at cost (4,011,604) (4,011,604)
--------- ----------- ----------
BALANCE at March 31, 1998 (355,331) (5,894,250) 61,168,439
Comprehensive income:
Net income -- -- 1,418,455
Foreign currency translation adjustment 3,826 3,826
----------
Total comprehensive income -- -- 1,422,281
----------
Issuance of common stock upon exercise of employee options -- -- 22,787
Purchase of 1,165,276 shares of treasury stock, at cost -- (2,332,817) (2,332,817)
--------- ----------- ----------
BALANCE at March 31, 1999 $(351,505) $(8,227,067) 60,280,690
========= =========== ==========
(1) Accumulated other comprehensive income (loss) includes foreign currency
translation adjustments.
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(As Restated,
Note 9)
Cash flows from operating activities:
Net income (loss) $ 1,418,455 $ (8,686,923) $ (3,277,920)
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 2,461,092 2,898,227 2,784,790
Provision for doubtful accounts 400,000 1,413,699 557,502
Reserve for potential inventory obsolescence 853,545 7,519,105 3,857,483
Loss on disposal of equipment 13,416 8,707 137,971
Net deferred tax liability (benefit) 86,151 (12,808) (1,103,817)
Beneficial conversion feature of debentures -- -- 3,454,143
Changes in assets and liabilities net of effect of acquisitions:
Decrease (increase) in trade receivables - customers 1,354,149 3,472,594 (4,665,037)
(Increase) decrease in trade receivables - related parties (285,016) 4,889,138 (9,379,912)
Decrease (increase) in inventories 2,223,878 (818,885) (2,405,762)
Decrease in prepaid expenses and other current assets 686,814 105,087 954,549
Decrease (increase) in income taxes receivable 4,207,134 (4,347,134) --
Decrease in other non-current assets 2,026,513 22,931 296,061
Decrease in accounts payable (4,359,637) (2,230,401) (7,989,864)
(Decrease) increase in accrued expenses and income taxes payable (697,575) (4,657,769) 1,296,895
------------ ------------ ------------
Total adjustments 8,970,464 8,262,491 (12,204,998)
------------ ------------ ------------
Net cash provided by (used in) operating activities 10,388,919 (424,432) (15,482,918)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (287,688) (473,655) (1,579,912)
Purchases of trademarks (106,306) (76,489) (19,309)
Cash received from brand licensing/sales:
Bal a Versailles 200,000 -- --
Alexandra de Markoff -- 202,000 --
Vicky Tiel -- 680,553 --
Cash paid in acquisitions:
Richard Barrie Fragrances, Inc. -- -- (694,707)
------------ ------------ ------------
Net cash (used in) provided by investing activities (193,994) 332,409 (2,293,928)
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - GE Capital Corporation, net (6,956,867) 16,818,951 --
Payments to Fred Hayman Beverly Hills (553,466) (514,873) (478,510)
Payments (proceeds) - Lyon Credit Corporation (164,360) (320,869) 984,858
(Payments) proceeds - International Finance Bank (185,472) (567,653) 753,125
Payments - S.A. overdraft facilities -- (1,128,946) (646,368)
(Payments) proceeds - S.A. financing facilities -- (1,981,820) 1,188,890
(Payments) proceeds - Finova Capital Corp. -- (7,878,091) 3,989,713
Payments - notes payable Distr. de Perfumes Senderos -- -- (674,722)
Payments - notes payable related parties -- -- (400,000)
Payments - Eagle Bank -- -- (482,392)
Payments - Parfums Jean Desprez -- -- (2,553,360)
Payments - note payable to stockholder -- -- (148,545)
(Payments) proceeds - other notes payable (50,169) (79,604) 122,450
Proceeds - 5% debentures, net -- -- 16,451,774
Purchases of treasury stock (2,332,817) (4,011,604) (1,749,174)
Proceeds from issuance of common stock, net 22,787 -- 1,489,520
------------ ------------ ------------
Net cash (used in) provided by financing activities (10,220,364) 335,491 17,847,259
------------ ------------ ------------
Effect of exchange rate changes on cash 3,827 (229,194) (218,350)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (21,612) 14,274 (147,937)
Cash and cash equivalents, beginning of year 205,760 191,486 339,423
------------ ------------ ------------
Cash and cash equivalents, end of year $ 184,148 $ 205,760 $ 191,486
============ ============ ============
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
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
carrying value of accounts receivable from related parties, reserve for
doubtful accounts, sales returns and advertising 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.
Licensing income, which is included as an offset to general and
administrative expenses, is recognized over the terms of the contractual
license agreements.
E. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. The cost of inventories includes product costs and
handling charges, including an allocation of the Company's applicable
overhead in an amount of $2,830,000 and $3,409,000 at March 31, 1999 and
1998, 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
F-7
related cost of goods sold. As advertising credits are used by the
Company, advertising and promotional expense is charged for the
advertising credits used, unearned income is debited and cost of goods
sold is credited. As a result, as the advertising credits are used,
aggregate cost of goods sold as a percentage of net sales decreases and
gross margin as a percentage of net sales increases.
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. The cost of assets and related accumulated depreciation is
removed from the accounts when such assets are disposed of, and any
related gains or losses are reflected in current earnings.
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 of trademarks, licenses and goodwill was $5,385,903 and
$3,827,407 at March 31, 1999 and 1998, respectively. Amortization expense
was $1,558,496, $1,467,034, and $1,379,448 for the years ended March 31,
1999, 1998, and 1997, respectively.
Long-lived assets are reviewed for impairment whenever events or changes
in business circumstances indicate that the carrying value of the assets
may not be recoverable. Impairment losses are recognized if expected
undiscounted future cash flows of the related assets are less than their
carrying values. Management does not believe that there are any impairment
losses as of March 31, 1999 and 1998.
I. Advertising costs
Advertising and promotional expenditures are expensed to operations as
incurred. These expenditures include print and media advertising, as well
as in-store cooperative advertising and promotions.
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 French franc denominated 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. 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.
F-8
L. Fair value of financial instruments
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, accounts payable
and borrowings, approximate fair value due to either the short-term
maturity of the instruments or borrowings with similar interest rates and
maturities.
M. Basic and diluted earnings per share
Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS No. 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 has restated all prior
periods presented as required under the statement.
N. Stock based compensation
Statement of Financial Accounting Standards No. 123, Accounting For Stock
Based Compensation ("SFAS No. 123") establishes a fair value based method
of accounting for stock based compensation plans, the effect of which can
either be disclosed or recorded. The Company retained the intrinsic value
method of accounting for stock based compensation, which it previously
used.
In calculating the potential effect for proforma presentation, the fair
market value on the date of grant was calculated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1999 1998 1997
---- ---- ----
Expected life (years) 5 3 4
Interest rate 5% 6% 6%
Volatility 76% 71% 74%
Dividend Yield -- -- --
If compensation cost for the plan had been determined based on the fair
value at the grant date under SFAS No. 123, the Company net income (loss)
and income (loss) per share would have been as follows:
For the years ended March 31,
----------------------------------------
1999 1998 1997
---------- ------------- -----------
Net income (loss):
As reported $1,418,455 $(8,686,923) $(3,277,920)
Proforma $ 548,455 $(8,704,066) $(3,300,857)
Net income (loss) per share:
As reported $0.10 ($0.53) ($0.22)
Proforma $0.04 ($0.53) ($0.22)
Diluted net income (loss) per share:
As reported $0.10 ($0.53) ($0.22)
Proforma $0.04 ($0.53) ($0.22)
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:
1999 1998 1997
---------- ---------- ---------
Cash paid for:
Interest $1,839,569 $2,263,000 $2,210,000
========== ========== ==========
Income taxes $ 518,447 $4,641,000 $ 840,000
========== ========== ==========
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, 1999:
o The consideration received for the sale of inventory relating to the
license of the Bal a Versailles brand included a non-interest bearing
receivable from the licensee in the amount of $500,000.
o The Company acquired computer equipment in the amount of $395,325
through capital lease agreements.
Year ended March 31, 1998:
o The consideration received for the sale of inventory relating to the
licensing of the Alexandra de Markoff (AdM) brand included a
non-interest bearing receivable from the licensee in the amount of
$4,000,000, which has been recorded at its present value of $3,659,753.
Year ended March 31, 1997:
o 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.
o Acquisition of Richard Barrie Fragrances, Inc. was partially funded
through the issuance of common stock.
P. Reclassifications
Certain amounts in the consolidated financial statements for prior years
have been reclassified to conform to the 1999 presentation.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
As of March 31, 1999, the Company has loaned a total of $390,000 ($150,000 as of
March 31, 1998) to its Chairman/CEO, which is included in accounts receivable.
The loans are unsecured, bear interest at 10% per annum, were renewed and are
due in one balloon payment on December 31, 1999. Interest payments are current
through March 31, 1999. During April 1999, the Company advanced an additional
$230,000 to the Chairman under the same terms and conditions for the previous
loans, except that the new advance is collateralized by 100,000 shares of the
Company's common stock owned by the Chairman.
As of March 31, 1999, the Company has loaned a total of $30,000 to its former
President and Chief Operating Officer, Mr. Zalman Lekach, who resigned in
January 1999. The loan is payable in equal bi-weekly installments, without
interest, through December 1999.
The Company had sales of approximately $22,527,000, $21,939,000, and $26,568,000
during the fiscal years ended March 31, 1999, 1998 and 1997, 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 and
holds/held identical management positions. Net amounts due from Perfumania
amounted to $18,258,000, and $17,973,000 at March 31, 1999 and 1998,
respectively.
The report of Perfumania's independent certified public accountants that
accompanied its audited financial statements as of January 30, 1999 and for the
year then ended expressed substantial doubt about Perfumania's ability to
continue as a going concern. Perfumania incurred net losses of approximately
$18,900,000 for its fiscal year 1999 and $4,100,000 (unaudited) for its
thirteen-week period ended May 1, 1999. Also, Perfumania had a working capital
deficit of approximately $3,800,000 and $5,600,000 (unaudited) at January 30,
1999 and May 1, 1999, respectively. In addition, Perfumania was in violation of
certain debt covenants contained in its bank line of credit agreement at both
January 30, 1999 and May 1, 1999. The bank has subsequently waived these debt
violations for a period of 90 days through September 30, 1999; however, there is
no assurance that Perfumania will be in compliance with the debt covenants at
the end of the waiver period.
The Company has developed a plan to reduce the balance due from Perfumania.
Management's plan initially consists of converting $8 million into a short-term
note receivable due the earlier of the completion of perfumania.com's proposed
public offering in which Perfumania would generate sufficient funds to pay down
the short term note, or May 31, 2000. In addition, on July 1, 1999, Perfumania
and the Company's Board of Directors approved the transfer of 1,512,406 shares
of Perfumania treasury stock with a value of approximately $4.5 million, based
on a per share price of $2.98, which approximates 90% of the closing price of
Perfumania's common stock for the previous 20 business days. As indicated in
various public press releases, Perfumania has reported both aggregate and
comparative store sales increases for each of the months during the period
February 1999 through June 1999 as of June 30, 1999. As of June 30, 1999, the
receivable balance due from Perfumania was approximately 21.3 million, which
management believes is in line with historical and anticipated seasonal payment
patterns. Based on the factors described above, management believes that the
receivables from Perfumania is fully collectible.
As of July 13, 1999 management believes that the company will receive additional
cash payments in the amount of $2,700,000 and treasury stock referred to above
no later than July 31, 1999.
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, which
was fully reserved as of March 31, 1998. The Company filed its claim and was
characterized as an insider in the liquidating plan of reorganization filed on
April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern
District of Florida. The committee of unsecured creditors in Luria's bankruptcy
proceedings threatened potential actions to recover substantial funds from
F-10
alleged insiders of Luria's and their affiliates, which included actions against
the Company to recover amounts paid for merchandise sold to Luria's. On May 17,
1999, the Company settled this claim and recorded a liability of $215,000 in the
accompanying March 31, 1999 consolidated balance sheet in connection with this
matter. The agreed-upon settlement is payable in six equal monthly installments,
without interest.
3. CORPORATE RESTRUCTURINGS
In March of 1998, with the agreement to license the fragrance and cosmetics
rights for the AdM brand, and the further intent to license the fragrance rights
for Bal a Versailles (BAV), which agreement was executed in June 1998, the
Company announced that it would discontinue certain marginal brands and products
to complete its reconfiguration process to concentrate on its core fragrance
business. As of March 31, 1998, the Company had completed personnel layoffs
relating to the restructuring as well as certain brand and product
discontinuations and estimated that the remaining brand and product
discontinuations would be completed within one year. The costs relating to this
restructuring of approximately $9,224,000 were recorded in the quarter ended
March 31, 1998, increasing cost of goods sold, advertising and promotional
expenses, selling and distribution expenses and general and administrative
expenses by approximately $8,195,000, $844,000, $75,000 and $110,000,
respectively.
The following is a breakdown of the costs included in the $9.224 million
restructuring charge during the fourth quarter of fiscal 1998:
Obsolescence write-offs and reserves for inventory charged to cost of goods sold $8,195,000(1)
Obsolescense write-offs and reserves for advertising and in-store promotional
materials charged to advertising and promotional expenses 844,000(1)
Accrued employment contracts:
Charged to selling and distribution expenses 75,000(2)
Charged to general and administrative expenses 110,000(2)
----------
Total reported restructuring charge $9,224,000
==========
(1) The above items relate to brands/products which the Company has or will
discontinue in accordance with its restructuring plan.
(2) Represents the remaining amounts due under employment agreements for
employees whose services were no longer required and were terminated in
connection with the restructuring.
At March 31, 1998, approximately $3,671,000 and $185,000 of restructuring
charges remained in the reserve for potential inventory obsolescence and accrued
expenses, respectively. As of March 31, 1999, the restructuring has been
completed and no further liabilities or reserves relating to the restructuring
are included in the accompanying balance sheet at March 31, 1999.
In November of 1996, the Company engaged investment bankers to explore a
potential sale or merger of the Company, or other alternatives which would lead
to the maximization of shareholder value. In March of 1997, the Company
announced that such exploration had not resulted in alternatives which should be
pursued. Accordingly, the Company announced that it would independently
restructure the Company by terminating warehousing and distribution operations
in Connecticut and France, discontinuing certain brands, and consolidating
operations in South Florida. Costs related to this restructuring of
approximately $5,765,000 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 was completed and no
further liabilities or reserves, relating to the restructuring, were included in
the accompanying balance sheet at March 31, 1998.
F-11
4. INVENTORIES
The components of inventories are as follows:
March 31,
----------------------------
1999 1998
----------- -----------
Finished products $10,609,272 $13,509,636
Components and packaging material 7,033,339 8,386,879
Raw material 3,304,645 2,733,154
----------- -----------
$20,947,256 $24,629,669
=========== ===========
The above amounts are net of reserves for potential inventory obsolescence of
$976,000 and $4,671,000 at March 31, 1999 and 1998, respectively.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
----------------------------
1999 1998
---------- ----------
Promotional supplies $4,058,900 $4,314,398
Deferred tax assets 1,592,533 2,370,218
Notes receivable-current portion AdM/BAV 2,413,990 1,806,554
Prepaid advertising 429,894 684,667
Advertising barter credits, net 233,296 233,296
Other 867,865 540,826
---------- ----------
$9,596,478 $9,949,959
========== ==========
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
March 31,
---------------------------- Estimated useful
1999 1998 lives (in years)
---------- ---------- -----------------
Molds and equipment $4,889,030 $4,975,903 3-7
Furniture and fixtures 1,212,355 1,024,408 3-5
Leasehold improvements 599,474 569,960 5-7
---------- ----------
6,700,859 6,570,271
Less: accumulated depreciation and amortization (5,008,127) (4,549,530)
----------- ----------
$1,692,732 $2,020,741
========== ==========
Depreciation and amortization expense on equipment and leasehold improvements
for the years ended March 31, 1999, 1998 and 1997 was $902,596, $1,421,599, and
$1,407,916, respectively. Amounts subject to capital leases at March 31, 1999,
included in molds and equipment above, totaling $395,325, net of accumulated
amortization of $32,379.
7. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
F-12
March 31,
---------------------------- Estimated useful
1999 1998 lives (in years)
----------- ----------- ----------------
Owned Brands:
Alexandra de Markoff $11,190,926 $11,179,839 25
Fred Hayman Beverly Hills 2,753,027 2,747,434 25
Bal A Versailles 3,243,855 3,227,406 25
Animale 1,452,929 1,431,332 40
Other 243,431 209,078 25
Licensed Brands:
Perry Ellis 7,957,567 7,940,340 25
Barishnikov 2,470,241 2,470,241 5
----------- -----------
29,311,976 29,205,670
Less: accumulated amortization (5,385,903) (3,827,407)
----------- -----------
$23,926,073 $25,378,263
=========== ===========
On June 9, 1998, the Company entered into an exclusive agreement to license the
Bal a Versailles ("BAV") rights to Genesis International Marketing Corporation
for an annual licensing fee of $100,000 during the initial year of the
agreement, increasing to $150,000 for subsequent years for the remainder of the
initial term, and to $200,000 each year thereafter. The initial term of the
agreement is for ten years, automatically renewable every five years. As part of
the agreement, the Company sold the inventory, promotional materials and molds
relating to BAV for its approximate book value.
On March 2, 1998, the Company entered into an exclusive agreement to license the
Alexandra de Markoff ("AdM") rights to Cosmetic Essence, Inc. for an annual fee
of $500,000. The initial term of the agreement is ten years, automatically
renewable for additional ten and five year terms. The annual fee reduces to
$100,000 after the third renewal. As part of the agreement, the Company sold the
inventory, promotional material and molds relating to AdM which resulted in a
loss of approximately $923,000 which is reflected in the accompanying
consolidated statement of operations for the year ended March 31, 1998. At
closing, the purchaser provided as consideration, $202,000 in cash and a
$4,000,000 non-interest bearing receivable due in periodic installments based on
the purchaser's use of the inventory, with any remaining balance due on January
1, 2000. In accordance with generally accepted accounting principles and based
on the Company's then borrowing cost of 9.25%, the note was reduced to a present
value of $3,659,753.
At March 31, 1999, $2,413,990 and $0 ($1,806,544 and $1,853,199 at March 31,
1998) relating to the AdM and BAV receivables are included in other current
assets and other assets, respectively.
8. BORROWINGS
The composition of borrowings is as follows: March 31, 1999 March 31, 1998
-------------- --------------
Revolving credit facility payable to General Electric Capital Corporation,
interest at LIBOR plus 2.50% or prime (7.75% at March 31, 1999) plus .75%, at
the Company's option, net of restricted cash of $3,658,593 and $1,209,955 at
March 31, 1999 and 1998, respectively. $9,862,084 $16,818,951
Note payable to FHBH, collateralized by the acquired licensed trademarks,
interest at 7.25%, payable in equal monthly installments of $69,863, including
interest, through June 2004 3,626,360 4,179,826
Note payable to Lyon Credit Corporation, collateralized by certain equipment,
interest at 11%, payable in equal monthly installments of $19,142, including
interest, through September 2001. 499,629 663,989
F-13
Capital lease payable to Bankers Leasing, collateralized by certain computer
hardware and software, payable in quarterly installments of $36,878, including
interest, through January 2002. 395,325 --
$1,000,000 line of credit payable to International Finance Bank, interest at
the bank's prime rate plus 2%, repaid in August 1998. -- 185,472
Other notes payable 62,983 13,152
---------- ---------
14,446,381 21,961,389
Less: long-term borrowings (3,561,313) (4,107,618)
----------- -----------
Short-term borrowings $10,885,068 $17,853,771
=========== ===========
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, 1999, based on the borrowing base at that date, the
credit line amounted to approximately $15,859,000, and accordingly, the Company
had $5,997,000 available under the credit line.
Substantially all of the domestic assets of the Company collateralize this
borrowing. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios. As of March 31, 1999, the Company
was not in compliance with financial covenants relating to EBITDA, minimum fixed
charge coverage ratio, maximum accounts receivable from related parties and
employees, minimum unrelated customer net sales, as well as a restricted payment
covenant concerning the amount of treasury stock which can be purchased by the
Company. GECC has waived violations of these debt covenants for the year ended
March 31, 1999 and through June 30, 1999, and is in the process of amending the
Credit Agreement to reflect changes in certain covenants going forward.
The Company has reduced its total outstanding borrowings by approximately
$7,500,000 since the prior year end. Management believes that, based on current
circumstances, the Company will be able to meet the revised covenants and funds
from operations and the Credit Agreement will be sufficient to meet the
Company's operating needs.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
--------------------------------
2000 $10,885
2001 990
2002 926
2003 744
2004 799
Thereafter 102
-------
Total $14,446
=======
F-14
9. 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 were 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, were
converted into 1,868,272 shares of common stock.
On July 2, 1996, the Company issued an additional $10,000,000 of 5% Debentures,
in private placements pursuant to Regulation D, with the same conversion
features and terms as those issued above, except that the conversion rate was
86%. During October 1996, $8,412,236 of the debentures, plus accrued interest of
$72,466, were converted into 2,154,222 shares of common stock.
During October 1996, the Company entered into agreements to redeem $5,232,440 of
the May and July 1996 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.
10. COMMITMENTS AND CONTINGENCIES
A. Leases:
The Company leases its office space and certain equipment under certain
operating and capital leases expiring on various dates through October 31, 2005.
Total rent expense charged to operations for the years ended March 31, 1999,
1998 and 1997 was approximately $1,110,000, $854,000 and $1,451,000,
respectively.
At March 31, 1999, the future minimum annual rental commitments under operating
and capital leases are as follows (in 000's ):
F-15
For the year ending March 31, Capital Operating
Leases Leases
------- --------
2000 $147 $ 665
2001 147 665
2002 148 648
2003 -- 525
2004 -- 495
Thereafter -- 1,061
---- ------
Total 442 $4,059
======
Less: amount representing interest (47)
----
Present value of net minimum lease payments $395
====
B. License and Distribution Agreements:
During the year ended March 31, 1999, the Company held exclusive worldwide
licenses to manufacture and sell fragrance and other related products for Perry
Ellis, Baryshnikov, and Phantom.
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 approximately $3,200,000 as a result of terminating the agreement.
On August 8, 1997, the Company consummated the sale of certain assets relating
to the VICKY TIEL brands to Five Star Fragrances Company, Inc. ("FSF") for
approximately $680,000, which approximated the net book value of assets sold.
The Company sold to FSF all inventories, fixed assets and licenses related to
the brands, and FSF assumed certain liabilities for purchase orders issued prior
to August 8, 1997.
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, 2000 2001
---------------------------- ---- ----
Advertising $7,400 $7,400
Royalties $515 $525
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 Company an exclusive 55-year royalty
free license. Accordingly, there are no licensing agreements requiring the
F-16
payment of royalties by the Company on these trademarks. Additionally, royalties
are payable to the Company from the licensees of ALEXANDRA DE MARKOFF and BAL A
VERSAILLES brands, and the Company has the rights to license all of these
trademarks, other than FHBH, for all classes of merchandise.
D. Barter Arrangements:
The following table sets forth the balances and transactions included in the
accompanying financial statements related to the Barter Agreement (in 000's):
1999 1998 1997
---- ---- ----
Prepaid advertising at March 31, net of deferred
income of $137, $137, and $345 in 1999,1998 and
1997, respectively $233 $233 $588
==== ==== ====
Advertising credits expensed during the year ended
March 31 $ -- $463 $161
===== ==== ====
Deferred income recognized for the year ended
March 31 $ -- $208 $89
===== ==== ===
E. Employment and Consulting Agreements:
The Company has contracts with certain officers, employees and consultants which
expire during March 2000. Minimum commitments under these contracts total
approximately $985,000.
In connection with previous employment contracts, warrants to purchase 1,690,000
shares of common stock, at prices ranging from $1.50 to $7.50 were issued
between 1989 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. During the
year ended March 31, 1996, 28,000 of such warrants were exercised. As of March
31, 1999, 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 January 18, 1999, the Compensation Committee of the Board of Directors
authorized the issuance to the Company's Chairman and Chief Executive Officer
1,000,000 warrants to acquire shares of common stock at $8.00 per share for a
five year period.
On April 1, 1994, the Company entered into a 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. 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
F-17
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, and in December 1998, was
increased to $7,000 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, which are included in the 1,690,000 warrants discussed above.
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, 1999 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.
11. 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,
------------------------------------------------
1999 1998 1997
---------- ---------- ------------
Total assets $2,487,440 $2,985,155 $10,443,117
========== ========== ===========
Working capital $2,439,522 $2,506,732 $2,731,167
========== ========== ==========
Equity $2,439,522 $2,506,732 $2,761,554
========== ========== ==========
Net Sales:
Trade $ -- $2,128,698 $12,776,773
Affiliates -- 175,600 409,557
Intercompany -- 455,011 2,760,856
---------- ---------- -----------
Total $ -- $2,759,309 $15,947,186
========== ========== ===========
Net income (loss) $ (71,036) $ (3,053) $ 817,649
========== ========== ===========
Prior to fiscal 1996, foreign sales were principally made by Parlux S.A. As of
March 31, 1998, the Company ceased operations in France, and all international
sales activities are performed from the Company's domestic subsidiary.
12. INCOME TAXES
Income tax expense (benefit) is as follows:
F-18
Years Ended March 31,
------------------------------------------
1999 1998 1997
-------- ------------ ----------
Current taxes (benefit):
U.S. Federal $ 0 ($4,634,263) $1,116,040
U.S. state and local 15,552 (440,239) 132,058
Foreign income taxes 15,992 232,998 515,800
-------- ----------- ----------
31,544 (4,841,505) 1,763,898
US Federal deferred tax (benefit) 863,836 (146,468) (1,103,817)
-------- ----------- ----------
Income tax expense (benefit) $895,380 ($4,987,972) $ 660,081
======== ============ ==========
A reconciliation of the U.S. Federal statutory rate to the Company's effective
tax rate follows:
1999 1998 1997
---- ---- ----
Tax at statutory rate 35.0% (35.0)% (35.0)%
Beneficial conversion feature
of debenture 0.0 0.0 58.2
Incremental foreign taxes 0.0 1.7 0.5
State and local taxes 3.7 (3.2) 1.7
Other (0.0) 0.0 (0.2)
---- ----- ----
38.7% (36.5)% 25.2%
==== ===== ====
Deferred tax assets, which are included in other current assets, and deferred
tax liabilities, are comprised of the following:
March 31, 1999 1998
--------- ---- ----
Allowance for doubtful accounts, sales returns
and allowances $ 563,858 $ 795,356
State net operating loss carry forwards 463,449 512,019
Reserve for inventory obsolescence 385,622 376,300
Federal net operating loss carry forwards 0 185,377
Other, net 179,604 501,166
---------- ----------
Total deferred tax assets 1,592,533 2,370,218
Deferred tax liabilities related to
depreciation and amortization (505,783) (419,632)
---------- ----------
Net $1,086,750 $1,950,586
========== ==========
The net deferred tax asset in the amount of $1.1 million is based upon expected
utilization of net operating loss ("NOL") carry forwards and reversal of certain
temporary differences. Although realization is not assured, management believes
it is more likely than not that all of the net deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carry forward period are reduced. The Company will continue to review the
assumptions used on a quarterly basis and make adjustments as appropriate.
The Company has a State NOL carry forward of approximately $9.3 million which
begins to expire in the year 2012.
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.
13. COMMON STOCK
The following table summarizes the activity and related information for the
options and warrants outstanding, including the warrants discussed under
commitments in Note 10(E):
F-19
Weighted Average
Amount Exercise Price
--------- ----------------
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/Expired (53,978) $8.11
---------
Balance at March 31, 1998 1,770,000 $2.06
Issued 1,000,000 $8.00
Exercised --
Canceled/Expired --
---------
Balance at March 31, 1999 2,770,000 $4.21
=========
On January 18, 1999, the Compensation Committee of the Board of Directors
authorized the issuance to the Company's Chairman and Chief Executive Officer
1,000,000 warrants to acquire shares of common stock at $8.00 per share for a
five year period.
The following table summarizes information about warrants outstanding at March
31, 1999:
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Amount Exercise Price Remaining Life Amount Exercise Price
- --------------- --------- ---------------- ---------------- ---------- ----------------
$1.50-$2.07 1,562,000 $1.89 4 1,562,000 $1.89
$3.13-$4.00 198,000 $3.20 7 188,667 $3.14
$6.75 10,000 $6.75 8 10,000 $6.75
$8.00 1,000,000 $8.00 5 1,000,000 $8.00
--------- ----- - --------- -----
2,770,000 $4.21 4 2,760,667 $4.21
========= ===== = ========= =====
14. STOCK OPTION AND OTHER PLANS
The Company has adopted a Stock Option Plan and a 1989 Stock Option Plan
(collectively, the "Plan") and has reserved and registered 250,000 shares of its
common stock for issue thereunder. Options granted under the Plan are not
exercisable after the expiration of five years from the date of grant and vest
25% after each of the first two years, and 50% after the third year. Options for
most of the shares in the Plan may qualify as "incentive stock options" under
the Internal Revenue Code. The shares are also available for distribution
pursuant to options which do not so qualify. Under the Plan, options can be
granted to eligible officers and key employees at not less than the fair market
value of the shares at the date of grant of the option (110% of the fair market
value for 10% or greater stockholders).
Options which do not qualify as "incentive stock options" may also be granted to
consultants. Options generally may be exercised only if the option holder
remains continuously associated with the Company or a subsidiary from the date
of grant to the date of exercise.
As of March 31, 1999, 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 further options are issuable under the
Plan. Through March 31, 1999, 189,092 options had been exercised under the Plan
and the remaining shares are exercisable to the extent of 7,500 through
September 30, 1999 and 2,500 through June 25, 2000.
In October 1996, the Company's shareholders ratified the establishment of a new
stock option plan (the "1996 Plan") which reserved 250,000 shares of its Common
Stock for issue thereunder with the same expiration and vesting terms as the
F-20
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 under the
1996 Plan to acquire 79,000 shares of common stock at $1.375 per share, the
closing bid price of the stock on December 31, 1997. As of March 31, 1999,
15,625 of these options are exercisable and the weighted average remaining
contractual life for all such options is three years.
The following table summarizes the activity for options covered under all plans:
Plan 1996 Plan
------------------------------- ------------------------------
Weighted Average Weighted Average
Amount Exercise Price Amount Exercise Price
------- ---------------- ------ ----------------
Balance at March 31, 1996 81,500 $2.82 -- --
Issued -- --
Exercised (14,500) $1.28
Canceled/Expired -- --
-------
Balance at March 31, 1997 67,000 $3.15 --
Issued -- -- 79,000 $1.38
Exercised -- --
Canceled/Expired (12,000) $5.75 (7,750) $1.38
------- -------
Balance at March 31, 1998 55,000 $2.59 71,250 $1.38
Issued -- -- -- --
Exercised (15,000) $1.52 -- --
Canceled/Expired (30,000) -- (9,000) $1.38
------- -------
Balance at March 31, 1999 10,000 $3.08 62,250 $1.38
======= =======
On April 1, 1999, the Company granted to various employees, options under the
1996 Plan to acquire 97,350 shares of common stock at $1.375 per share, the
closing bid price of the stock on March 31, 1999.
The Company has established a 401-K plan covering substantially all of its U.S.
employees. Commencing on April 1, 1996, the Company matched 25% of the first 6%
of employee contributions, within annual limitations established by the Internal
Revenue Code. The cost of the matching program totaled approximately $53,000,
$57,000, and $54,000 for the years ended March 31, 1999, 1998, and 1997,
respectively.
15. BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
The following is the reconciliation of the numerators and denominators of the
basic and diluted net income per common share calculations, retroactively
adjusted for the adoption of the provisions of SFAS No. 128:
1999 1998 1997(1)
---------- ----------- -----------
Net income (loss) $1,418,455 ($8,686,923) ($3,277,920)
========== ============ ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 14,541,306 16,300,060 15,013,931
========== =========== ===========
Basic net income (loss) per common share $0.10 ($0.53) ($0.22)
===== ====== ======
Weighted average number of shares outstanding used in basic
earnings per share calculation 14,541,306
Affect of dilutive securities(2):
Stock options and warrants, net of treasury shares acquired 67,759
----------
F-21
Weighted average number of shares outstanding used in diluted
earnings per share calculation 14,609,065
===========
Diluted net income per common share $0.10
=====
Antidilutive securities not included in diluted earnings (loss)
per share computation:
Options and warrants to purchase common stock 2,592,000 1,896,250 1,890,978
========= ========= =========
Exercise Price $1.75-$8.00 $1.38-$6.75 $1.44-$8.11
=========== =========== ===========
(1) As disclosed in Note 9, the net loss per share for fiscal 1997 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.
16. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS:
During the last three fiscal years, the following brands have accounted for 10%
or more of the Company's gross sales:
1999 1998 1997
---- ---- ----
PERRY ELLIS 65% 56% 48%
FRED HAYMAN 21% 17% 13%
ANIMALE 12% 11% 15%
ALEXANDRA DE MARKOFF - % 12% 14%
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade receivables from department and specialty stores in
the United States and distributors throughout the world. To reduce credit risk,
the Company performs ongoing evaluations of its customers financial condition
but does not generally require collateral. Management has established an
allowance for doubtful accounts for potential losses. The allowances for
doubtful accounts are considered adequate to cover potential credit losses (See
Note 2).
No unrelated customer accounted for more than 10% of the Company's net sales
during the years ended March 31, 1999, 1998, and 1997.
Sales to international customers totaled approximately $20,121,000, $24,101,000
and $18,059,000 for the years ended March 31, 1999, 1998, and 1997,
respectively. At March 31, 1999 and 1998, trade receivables from foreign
customers (all payable in U.S. dollars) amounted to approximately $6,710,000 and
$7,186,000, respectively.
F-22
17. 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, 1999 and 1998 (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,
1998 1998 1998 1999
-------- ------------- ------------ ---------
Net sales $15,308 $16,136 $11,910 $12,797
Gross margin 9,053 9,519 8,245 7,525
Net income (loss) 418 569 80 351
Income (loss) per common share:
Basic $ 0.03 $ 0.04 $ 0.01 $ 0.02
Diluted $ 0.03 $ 0.04 $ 0.01 $ 0.02
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)
Income (loss) per common share:
Basic $0.00 $0.00 $0.00 $(0.58)
Diluted(2)
(1) Includes charge of approximately $9,224,000 relating to the discontinuation
of certain brands and products. See Note 2 for further discussion.
(2) The calculation of diluted earnings per share was not required for 1998
since it would be antidilutive.
F-23
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
----------- ----------- ----------- ----------- ----------
Year ended March 31, 1999
Reserves for:
Doubtful accounts $ 704,860 $ 400,000 $ 354,587 $ 750,273
Sales returns 300,000 1,254,069 1,142,749 411,320
Demonstration and co-op
advertising allowances 1,165,592 4,801,789 5,016,038 951,343
----------- ----------- ----------- ----------
$ 2,170,452 $ 6,455,858 $ 6,513,374 $2,112,936
=========== =========== =========== ==========
Reserve for inventory shrinkage
and obsolescence $ 4,671,393 $ 853,545 $ 4,548,679(3) $ 976,259
=========== =========== =========== ==========
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
=========== =========== =========== ==========
- ----------
(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) Deductions pertain to the disposal of excess component inventory during
fiscal year 1999 which were included in the reserve as of the beginning of
the period.
F-24
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BANK BORROWINGS
Col. A Col. B. Col.C Col.D Col.E Col.F
Weighted
Category of Weighted Maximum amount Average amount average
aggregate Balance average outstanding outstanding interest
short-term at end of interest during the during the during the
borrowings period rate(4) period period period (5)
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March 31, 1999
Notes Payable Banks(1) $ 9,862,084 7.7% $18,037,811 $14,552,194 9.8%
March 31, 1998
Notes Payable Banks(2) $17,004,432 8.4% $20,375,531 $17,279,332 10.2%
March 31, 1997
Notes Payable Banks(3) $12,459,266 10.2% $12,459,266 $ 9,861,542 11.0%
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(1) Loan of $9,862,084 from GECC and loan from International Finance Bank which
was repaid during fiscal 1999.
(2) Loans of $16,818,951 from GECC, $ 185,472 from International Finance Bank,
and French facilities which were repaid during fiscal 1998.
(3) 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.
(4) The weighted average interest rate was computed by dividing the estimated
annual interest costs (based on the applicable March 31 rates) by the
actual borrowings outstanding at March 31.
(5) The weighted average interest rate during the period was computed by
dividing the actual interest costs (based on the applicable March 31 rates)
by the actual borrowings outstanding at March 31.
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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
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Ilia Lekach, Chief Executive Officer, President and Chairman
Dated: July 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
/s/ Frank A. Buttacavoli
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Frank A. Buttacavoli, Executive Vice President,
Chief Financial Officer and Director
/s/ Frederick E. Purches
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Frederick E. Purches, Vice Chairman and Director
/s/ Albert F. Vercillo
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Albert F. Vercillo, Director
/s/ Zalman Lekach
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Zalman Lekach, Director
/s/ Mayi de la Vega
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Mayi de la Vega, Director
/s/ Glenn Gopman
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Glenn Gopman, Director
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