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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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________to _______________
Commission File Number 0-15491
Parlux Fragrances, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2562955
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at June 28, 2001
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Common Stock, $ .01 par value 9,969,434
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $14,330,000 based on a
closing price of $2.52 for the Common Stock as of June 28, 2001 as reported on
the National Association of Securities Dealers Automated Quotation System on
such date. For purposes of the foregoing calculation, only the Directors and
beneficial owners of the registrant are deemed to be affiliates.
Documents incorporated by Reference: The information required by Part III (Items
10, 11, 12 & 13) is incorporated by reference from the registrant's definitive
proxy statement (to be filed pursuant to Regulation 14A).
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Registrant's Common Stock and Related Security Holder Matters
8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
7. A Quantitative and Qualitative Disclosures About Market Risks 15
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on Accounting 15
and Financial Disclosures
PART III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial Owners and Management 16
13. Certain Relationships and Related Transactions 16
PART IV
14. Exhibits, Financial Statements Schedule and Reports on Form 8-K 17
2
Item 1. BUSINESS
Parlux Fragrances, Inc. (the "Company"), was incorporated in Delaware
in 1984 and is engaged in the creation, design, manufacture, distribution and
sale of prestige fragrances and beauty related products marketed primarily
through specialty stores, national department stores and perfumeries on a
worldwide basis. The fragrance market is generally divided into a prestige
segment (distributed primarily through department and specialty stores) and a
mass market segment. Our products are positioned primarily in the prestige
segment. Additionally, we manufacture and distribute certain brands through
Perfumania Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures,
Inc. ("ECMV"), a company in which our Chairman and Chief Executive Officer has
an ownership interest and holds identical management positions. Perfumania is a
leading specialty retailer of fragrances in the United States and Puerto Rico.
Currently, we engage in the manufacture (through sub-contractors), distribution
and sale of PERRY ELLIS, FRED HAYMAN BEVERLY HILLS, and OCEAN PACIFIC fragrances
and grooming items on an exclusive basis as a licensee, and have recently signed
a license agreement for JOCKEY fragrances and grooming items. See "LICENSING
AGREEMENTS" on pages 7 and 8 for further discussion. Additionally, we
manufacture, distribute and sell our own brand, ANIMALE fragrance, on a
worldwide basis.
THE PRODUCTS
Our principal products are fragrances, which are distributed in a
variety of sizes and packaging. In addition, the fragrance line is complemented
by beauty-related products such as soaps, shower gels, deodorants, body lotions,
creams and dusting powders. Our basic fragrance products generally retail at
prices ranging from $20 to $215 per item.
We design and create fragrances using our own staff and independent
contractors. We also supervise the design of our packaging by independent
contractors. During fiscal 2001, we completed the design process for OCEAN
PACIFIC for men, which was launched in Spring 2001. We are currently developing
OCEAN PACIFIC for women and JOCKEY for men and women for launch in the current
fiscal year.
During the last three fiscal years, the following brands have accounted
for 10% or more of our gross sales:
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- -----------
PERRY ELLIS 69% 73% 65%
ANIMALE 16% 11% 12%
FRED HAYMAN 11% 16% 21%
3
MARKETING AND SALES
In the United States, we have our own sales and marketing staff, and
also utilize independent sales representatives for certain channels of
distribution. We sell directly to retailers, primarily national and regional
department stores and specialty stores, which we believe will maintain the image
of our products as prestige fragrances. Our products are sold in over 2,000
retail outlets in the United States. Additionally, we sell some of our products
to Perfumania/ECMV, which is a leading specialty retailer of fragrances with
approximately 250 retail outlets principally located in manufacturers' outlet
malls and regional malls (see "CUSTOMERS" section for further discussion).
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors, which are administered by
our international sales staff. We have established relationships for the
marketing of our fragrances with distributors in Canada, Europe, the Middle
East, the Far East, Latin America, the Caribbean and Russia.
We advertise 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. We are
required to spend certain minimum amounts for advertising under certain
licensing agreements. See "Licensing Agreements" and Note 8 (B) to the
Consolidated Financial Statements.
RAW MATERIALS
Raw materials and components for our products are available from
sources in the United States and Europe. We use third party contract
manufacturers to produce finished products.
To date, we have had little difficulty obtaining raw materials at
competitive prices. There is 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, we have our highest sales during the
calendar year end holiday season. Lower than projected sales during this period
could have a material adverse affect on our 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. Our products are subject to such
return rights. It is our practice to establish reserves and provide allowances
for product returns at the time of sale. We believe 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 provided, net sales
will be reduced when such fact becomes known.
4
CUSTOMERS
We concentrate our sales efforts in the United States in specialty
stores and a number of regional department store retailers including, among
others, Burdines, Dillard's, Famous Barr, Foley's, J.L. Hudson, Lord & Taylor,
Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. Retail
distribution has been targeted by brand to maximize potential and minimize
overlap between each of these distribution channels.
During the fiscal years ended March 31, 2001 and 2000, we had net sales
of $22,362,294 and $30,426,952, respectively, to Perfumania. Net trade accounts
receivable owed by Perfumania to us amounted to $13,006,178 at March 31, 2001
and trade accounts receivable and note receivable (after giving effect to the
stock transaction discussed below) were $9,561,550 and $2,500,000, respectively,
at March 31, 2000. Amounts due from related parties are non-interest bearing and
are due in less than one year, except for a subordinated note receivable, which
carried an interest rate of prime plus 1% on the outstanding balance.
On July 1, 1999, our Board of Directors approved accepting 1,512,406
shares of Perfumania treasury stock in consideration for a partial reduction of
the outstanding trade receivable balance from Perfumania in the amount of
$4,506,970. The exchange price was based on a per share price for the stock of
$2.98, which approximated 90% of the closing price of Perfumania's common stock
for the previous 20 business days. The agreement was consummated on August 31,
1999, and the shares were registered in June 2000. Effective February 1, 2000,
ECMV was formed as a holding company and accordingly, the Company now holds
common stock in ECMV. As of March 31, 2001 and 2000, the fair market value of
the investment in ECMV was $803,390 ($0.53 per share), and $8,034,657 ($5.31 per
share), respectively. As described in Note 1 G of the notes to the consolidated
financial statements, a continuing decline in fair value below cost could be
deemed to be "other than temporary" and require a charge to earnings rather than
being presented as a component of accumulated other comprehensive loss and
charged directly to stockholders' equity. Although management believes that as
of March 31, 2001 the decline in fair value is temporary, market conditions and
other factors could mandate such a charge to earnings in the near future. At
June 28, 2001, the fair market value is $1,542,654 ($1.02 per share).
FOREIGN AND EXPORT SALES
During the three years ended March 31, 2001, gross sales to
international customers were approximately $30,726,000, $20,007,000, and
$20,121,000, respectively. All of these sales were shipped directly from our
distribution center in South Florida.
5
LICENSING AGREEMENTS
PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license
is renewable every two years if the average annual sales in the two-year license
period exceed 75% of the average sales of the previous four years. All minimum
sales levels have been met, and based on our 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, we entered into an Asset Purchase Agreement with Fred
Hayman Beverly Hills, Inc. (FHBH), purchasing substantially all of the assets
and liabilities of the FHBH fragrance division. In addition, FHBH granted to
Parlux an exclusive royalty free 55-year license to use FHBH's United States
Class 3 trademarks Fred Hayman(R), 273(R), Touch(R), With Love(R) and Fred
Hayman Personal Selections(R) and the corresponding international registrations.
There are no minimum sales or advertising requirements.
OCEAN PACIFIC: On August 20, 1999, we entered into an exclusive worldwide
licensing agreement with Ocean Pacific Apparel Corp. ("OP"), to manufacture and
distribute men's and women's fragrances and other related products under the OP
label. The initial term of the agreement extends through December 31, 2003, with
seven (7) three-year renewal options, of which the last four require the
achievement of certain minimum net sales. The license requires the payment of
royalties, which decline as a percentage of net sales as net sales volume
increases, and the spending of certain minimum amounts for advertising based
upon the annual net sales of the products. OP for men was launched last Spring
2001 and we anticipate launching the OP for women fragrance for this coming Fall
2001.
JOCKEY INTERNATIONAL: On March 23, 2001, we entered into an exclusive worldwide
licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture
and distribute men's and women's fragrances and other related products under the
Jockey(R) label. The initial term of the agreement extends through December 31,
2004, with three (3) three-year renewal options. The license requires the
payment of royalties, which decline as a percentage of net sales as net sales
volume increases, and the spending of certain minimum amounts for advertising
based upon the annual net sales of the products. We anticipate launching the
Jockey fragrances for women and men during Winter 2001.
We believe we are presently in compliance with all material obligations under
the above agreements. There can be no assurance that we will be able to continue
to comply with the terms of these agreements in the future.
6
TRADEMARKS
We own the worldwide trademarks and distribution rights to ANIMALE, BAL
A VERSAILLES, DECADENCE and LIMOUSINE fragrances, and ALEXANDRA de MARKOFF for
products other than fragrances and cosmetics. There are no licensing agreements
requiring the payment of royalties by us for these trademarks. Additionally,
royalties are payable to us by the licensees of the ALEXANDRA de MARKOFF and BAL
A VERSAILLES brands. See Note 6 to the accompanying Consolidated Financial
Statements for further discussion. We have the rights to license certain of
these trademarks for all classes of merchandise.
PRODUCT LIABILITY
We have insurance coverage for product liability in the amount of $5
million per incident. We maintain an additional $5 million of coverage under an
"umbrella" policy. We believe that the manufacturers of the products sold by us
also carry product liability coverage and that we effectively are protected
thereunder.
There are no pending and, to the best of our knowledge, no threatened
product liability claims. Over the past ten years, we have 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. We
believe that the quality of our fragrance products, as well as our ability to
develop, distribute and market new products, will enable us 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 us. There are
also companies which are substantially larger and more diversified, and which
have substantially greater financial and marketing resources than us, as well as
greater name recognition, and the ability to develop and market products similar
to, and competitive with, those distributed us.
EMPLOYEES
As of March 31, 2001, we had 121 full-time and part-time employees. Of
these, 43 were engaged in worldwide sales activities, 46 in operations,
administrative and finance functions and 32 in warehousing and distribution
activities. None of our employees are covered by a collective bargaining
agreement and we believe that our relationship with our employees is
satisfactory. We also use the services of independent contractors in various
capacities, including sales representatives.
We have established a 401-K Plan covering substantially all of our U.S.
employees. Commencing on April 1, 1996, we matched 25% of the first 6% of
employee contributions, within annual limitations established by the Internal
Revenue Code.
7
Item 2. PROPERTIES
In November 1995, we moved our corporate headquarters and domestic
operations to a new 100,000 square foot leased facility in Fort Lauderdale,
Florida. The annual lease cost of the facility is approximately $640,000, with
the lease covering a ten-year period through 2005.
Item 3. LEGAL PROCEEDINGS
To the best of our knowledge, there are no proceedings pending against
us or any of our properties which, if determined adversely to us, would have a
material effect on our financial position or results of operation.
On May 8, 2001, and amended on June 8, 2001, we filed a legal complaint
against a component supplier to recover out-of-pocket costs and damages
resulting from the supplier having delivered faulty components for two of our
new fragrances. Out-of-pocket costs to refurbish the products of approximately
$1.5 million have been included in cost of goods sold for the year ended March
31, 2001. We are awaiting the supplier's response to the complaint.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any actions for shareholders' approval during the
quarter ended March 31, 2001 and through June 28, 2001.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Our 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.
We believe that the number of beneficial owners of our common stock is
approximately 4,000.
The following chart, as reported by the National Association of
Securities Dealers, Inc., shows the high and low bid prices for our securities
available for each quarter of the last two years and the interim period from
April 1, 2001 through June 28, 2001. The prices represent quotations by the
dealers without adjustments for retail mark-ups, mark-downs or commissions and
may not represent actual transactions.
8
Fiscal Quarter Common Stock
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High Low
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First (April/June) 1999 $ 2.156 $1.000
Second (July/Sept.) 1999 2.594 1.625
Third (Oct./Dec.) 1999 4.625 2.000
Fourth (Jan./Mar.) 2000 4.250 3.250
First (April/June) 2000 4.125 2.500
Second (July/Sept.) 2000 3.500 2.125
Third (Oct./Dec.) 2000 2.625 1.281
Fourth (Jan./Mar.) 2001 2.453 1.438
First (April/June) 2001 2.730 1.469
We have not paid a cash dividend on our common stock nor do we
contemplate paying any dividends in the near future. Our new loan agreement
restricts payment of dividends without prior approval.
Item 6. SELECTED FINANCIAL DATA
The following data has been derived from audited financial
statements. Consolidated balance sheets at March 31, 2001 and 2000, and the
related consolidated statements of income and of cash flows for the three years
ended March 31, 2001 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)
- ----------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $ 68,875 $ 66,385 $ 56,151 $ 62,369 $ 87,640
Costs/operating expenses 61,495 59,786 51,920 73,911 84,321
Operating income (loss) 7,380 6,599 4,231 (11,542) 3,319
Net income (loss) 3,926 3,873 1,418 (8,687) (3,278)
Income (loss) per share:
Basic $ 0.39 $ 0.32 $ 0.10 ($ 0.53) ($ 0.22)
Diluted (1) $ 0.38 $ 0.31 $ 0.10
(1) The calculation of the diluted loss per share was the same as the basic loss
per share for fiscal 1998 and 1997 since inclusion of potential common stock in
the computation would be antidilutive.
9
At March 31, (in thousands of dollars)
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2001 2000 1999 1998 1997
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Current assets $ 50,810 $ 57,992 $ 56,349 $ 66,359 $ 81,205
Current liabilities 20,274 23,238 18,159 30,185 31,885
Working capital 30,536 34,754 38,190 36,174 49,320
Trademarks, licenses and
goodwill, net 20,464 21,469 23,926 25,378 26,784
Long-term debt 1,686 2,571 3,561 4,108 4,949
Total assets 74,012 81,862 82,081 95,731 111,385
Total liabilities 23,138 28,217 22,227 34,713 37,266
Stockholders' equity 50,874 53,645 59,854 61,018 74,119
The fiscal 2001 financial statements have been prepared assuming we
will continue as a going concern. Our current credit agreement expires on July
31, 2001. We have not obtained financing from an alternative source as of June
30, 2001, although we have received a non-binding commitment letter from GMAC
Commercial Credit LLC, for a $20 million line of credit, and are currently
negotiating a final agreement.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 our business and prospects, including economic,
competitive, governmental, technological and other factors discussed in this
annual report and in our filings with the Securities and Exchange Commission.
Comparison of the year ended March 31, 2001 with the year ended March 31, 2000
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During the fiscal year ended March 31, 2001, net sales increased 4% to
$68,875,110 as compared to $66,385,151 for the fiscal year ended March 31, 2000.
The increase is mainly attributable to the launch of "Chaleur d'Animale" men's
and women's fragrances during the current year, which resulted in an increase in
total Animale brand gross sales of 62%, from $7,368,886 to $11,901,783, and the
launch of "OCEAN PACIFIC" for men in the Spring of 2001, which added gross sales
of $2,071,292. These increases were offset by a $2,815,667 reduction in gross
sales of Fred Hayman brand products, mainly "Hollywood" for men and women, from
$11,021,573 to $8,205,906. Total gross sales of all Perry Ellis brand products
also decreased slightly compared to the same period in the prior year from
$50,683,562 to $50,034,796. The decrease results from a faulty component on both
"Portfolio" men and women, which caused us to cease shipments and accept
returns. The quality problem, which posed no product safety issues, has been
rectified, and we have initiated legal action to recover damages from the
component supplier. Out-of-pocket costs to refurbish the products of
approximately $1.5 million have been included in cost of goods sold for the year
ended March 31, 2001.
10
Net sales to unrelated customers increased 29% to $46,512,816 in the
current period, compared to $35,958,199 in the same period in the prior year.
Sales to related parties decreased 27% to $22,362,294 in the current period
compared to $30,426,952 in the same period in the prior fiscal year. For further
information with respect to transactions with the related party, see "Business -
Customers" elsewhere herein.
Cost of goods sold decreased as a percentage of net sales from 43% for
the fiscal year ended March 31, 2000 to 40% for the current period. Without the
Portfolio refurbishing costs discussed above, the costs of goods sold percentage
for the current period would have been 38%. The decrease was mainly attributable
to the significant increase in sales to unrelated parties that have a lower cost
of goods. Cost of goods sold on sales to unrelated customers and related parties
approximated 38% and 45%, respectively, during the fiscal year ended March 31,
2001, compared to 43% and 42%, respectively, in the prior year period.
Operating expenses for the current fiscal year period increased 8%
compared to the prior year period from $31,133,646 to $33,768,345, increasing as
a percentage of net sales from 47% to 49%. Advertising and promotional expenses
increased 14% to $17,484,616 compared to $15,307,913 in the prior year period,
reflecting a renewed emphasis on in-store spending as well as print advertising
in support of program launches. Selling and distribution costs increased 8% to
$6,534,583 in the current fiscal period as compared to $6,050,583 in the same
period of the prior fiscal year, remaining relatively constant at 9% of net
sales. General and administrative expenses increased by 22% compared to the
prior year period from $4,442,578 to $5,415,061, increasing as a percentage of
net sales from 7% to 8%. The increase was mainly attributable to an increase of
approximately $423,000 in bad debt expense for certain international receivables
and increased salaries and bonuses. Depreciation and amortization decreased
$1,233,432 as a result of the increased amortization of goodwill due to the
cancellation of the Baryshnikov license agreement in the prior year. Royalties
increased to $2,025,292 for the current period compared to $1,790,347 in the
prior year, remaining relatively constant at 3% of net sales.
As a result of the above, we had operating income of $7,380,319 or 11%
of net sales for the fiscal year period ended March 31, 2001, compared to
$6,599,304 or 10% of net sales for the comparable period prior year period. The
fiscal year ended March 31, 2000, includes a $541,013 gain on the sale of
perfumania.com common stock, which was originally purchased during October 1999.
Net interest expense increased by 32% to $1,100,777 in the current fiscal year
as compared to $871,919 in the same period in the prior year, reflecting
penalties and increased interest rates paid on our previous line of credit. See
Liquidity and Capital Resources on pages 13 and 14 for further discussion. There
were exchange gains of $5,274 in the current year as compared to losses of
$30,143 in the same period in the prior year.
Income before taxes increased to $6,284,816 or 9% of net sales for the
current fiscal year compared to $6,238,555 or 9% of net sales in the same period
in the prior year. Giving effect to the tax provision, net income amounted to
$3,925,659 or 6% of net sales for the fiscal year ended March 31, 2001, as
compared to $3,872,611 or 6% of net sales for the same period in the prior
fiscal year.
11
Comparison of the year ended March 31, 2000 with the year ended March 31, 1999
- ------------------------------------------------------------------------------
During the fiscal year ended March 31, 2000, net sales increased 18% to
$66,385,151 as compared to $56,150,575 for the same period for the prior year.
The increase is mainly attributable to the continuing strength of Perry Ellis
brand products. Approximately $7,451,000 and $2,115,000 of the increase is
related to the initial launches of the Perry Ellis "Portfolio for Men" (August
1999) and "Portfolio for Women" (March 2000) fragrances, which are expected to
continue their roll-out through the Fall 2000 season. Total gross sales of all
Perry Ellis brands increased 38% compared to the same period in the prior year
from $36,850,017 to $50,683,564.
Net sales to unrelated customers increased 7% to $35,958,199 in the
current period, compared to $33,623,124 in the same period in the prior year.
Sales to related parties increased 35% to $30,426,952 in the current period
compared to $22,527,451 in the same period in the prior fiscal year.
Cost of goods sold increased as a percentage of net sales from 39% for
the fiscal year ended March 31, 1999 to 43% for the current period. The increase
was mainly attributable to the sale of certain close-out merchandise to
international customers at or below cost. Cost of goods sold on sales to
unrelated customers and related parties approximated 43% and 42%, respectively,
during the fiscal year ended March 31, 2000, compared to 37% and 43%,
respectively, in the prior year period.
Operating expenses for the current fiscal year period increased 4%
compared to the prior year period from $29,873,060 to $31,133,646, decreasing as
a percentage of net sales from 53% to 47%. Advertising and promotional expenses
decreased 2% to $15,307,913 compared to $15,612,506 in the prior year period,
reflecting a strategic emphasis on point-of-sale and in-store spending in lieu
of heavy print advertising. Selling and distribution costs increased 7% to
$6,050,583 in the current fiscal period as compared to $5,644,923 in the same
period of the prior fiscal year, decreasing as a percentage of net sales from
10% to 9%. General and administrative expenses decreased by 3% compared to the
prior year period from $4,570,055 to $4,442,578, decreasing as a percentage of
net sales from 8% to 7%. The above decreases reflect the effect of our
restructuring during the quarter ended March 31, 1998, which was fully
implemented during the first quarter of fiscal 1999, coupled with certain
non-recurring professional and consulting fees which were incurred during the
prior year period. Depreciation and amortization increased $1,081,132 as a
result of the increased amortization of goodwill due to the cancellation of the
Baryshnikov license agreement. Royalties increased to $1,790,347 for the current
period compared to $1,584,483 in the prior year, remaining relatively constant
at 3% of net sales.
12
As a result of the above, we had operating income of $6,599,304 or 10%
of net sales for the fiscal year period ended March 31, 2000, compared to
$4,231,318 or 8% of net sales for the comparable period in the prior year. Net
interest expense decreased by 52% to $871,919 in the current fiscal year as
compared to $1,800,149 in the same period in the prior year, reflecting the
reduction in average borrowings outstanding coupled with interest earned on
notes receivable during the current period. There were exchange losses of
$30,143 in the current year as compared to losses of $117,334 in the same period
in the prior year. The current period includes a $541,013 gain on the sale of
perfumania.com common stock, which was originally purchased during October 1999.
Income before taxes increased to $6,238,255 or 9% of net sales for the
current fiscal year compared to $2,313,835 or 4% of net sales in the same period
in the prior year. Giving effect to the tax provision, net income amounted to
$3,872,611 or 6% of net sales for the fiscal year ended March 31, 2000, as
compared to $1,418,455 or 3% of net sales for the same period in the prior
fiscal year.
Liquidity and Capital Resources
- -------------------------------
Working capital decreased to $30,535,978 at March 31, 2001 compared to
$34,753,382 at March 31, 2000, reflecting the unrealized loss of $7,231,267 on
our investment in affiliate during the period and the purchase of approximately
$1,142,000 in treasury stock as discussed below, partially offset by a reduction
in short-term borrowings of approximately $2,131,000, and the current period's
net income.
In September 1999, we completed the fourth phase of our common stock
buy-back program involving 2,000,000 shares. In connection therewith, the Board
of Directors authorized the repurchase of an additional 2,500,000 shares. As of
March 31, 2001, we had repurchased under all phases a total of 7,978,131 shares
at a cost of $21,983,523, with 121,869 shares still available for repurchase
under the last program. 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, we entered into a three-year $25 million Loan and Security
Agreement (the Credit Agreement) with General Electric Capital Corporation
(GECC). Due principally to the significant treasury stock purchases under our
stock buy back program, as of March 31, 2000, we were not in compliance with
financial covenants relating to tangible net worth, current ratio and minimum
fixed charge coverage ratio. GECC has extended, through various short-term
agreements, the maturity of the Credit Agreement through July 31, 2001, while
reducing the borrowing limit to $14 million, more in line with the Company's
current needs.
The fiscal 2001 financial statements have been prepared assuming we
will continue as a going concern. Our current credit agreement expires on July
31, 2001. We have not obtained financing from an alternative source as of June
30, 2001, although we have received a non-binding commitment letter from GMAC
Commercial Credit LLC, for a $20 million line of credit, and are currently
negotiating a final agreement. We believe that funds from operations and any new
financing will be sufficient to meet our operating needs. There is no assurance,
however, that alternative financing will be available in the future, and if
available, at terms and conditions agreeable to us.
13
This factor among others indicates that we may be unable to continue as
a going concern for a reasonable period of time. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment to SFAS No. 133. SFAS No. 137 deferred the effective date of adoption
of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of
SFAS No. 133 on April 1, 2001 did not have a material impact on our financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and is effective for our fourth fiscal quarter ending March 31, 2001.
We believe that our current revenue recognition policies comply with SAB 101.
14
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-14, Accounting for Certain Sales Incentives, which provides
guidance on accounting for discounts, coupons, rebates and free products, as
well as the income statement classification of these discounts, coupons, rebates
and free products. The adoption of EITF 00-14 did not have a material impact on
the Company's operations or financial statement presentation.
In April 2001, the EITF reached a consensus on EITF 00-25, Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendors Products, which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective April 1, 2001, for the
Company. The Company is currently evaluating the impact of this new guidance.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We conduct business in the United States where the functional currency
of the country is the United States dollar. As a result, we are not at risk to
any foreign exchange translation exposure on a prospective basis.
Our exposure to market risk for changes in interest rates relates
primarily to our bank line of credit. The bank line of credit bears interest at
a variable rate, as discussed above under "Liquidity and Capital Resources". We
mitigate interest rate risk by continuously monitoring the interest rates. As a
result of borrowings associated with our operating and investing activities, we
are exposed to interest rate risk. As of March 31, 2001 and 2000, primary source
of funds for working capital and other needs is a line of credit totaling $14.0
million and $25.0 million, respectively.
Of the of $9.5 million and $12.6 million of short-term and long-term
borrowings on the Company's balance sheet as of March 31, 2001 and 2000,
respectively, approximately 29% represented fixed rate instruments. The line of
credit bears interest at a floating rate of prime plus 4% (prime plus .75% at
March 31, 2000). A hypothetical 10% adverse move in interest rates would
increase fiscal year 2001 and 2000 interest expense by approximately $0.1
million in each year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are included herein
commencing on page F-1. The financial statement schedule is listed in the
Index to Financial Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As disclosed in a Form 8-K filed with the Securities and Exchange
Commission on October 10, 2000, we engaged Deloitte & Touche LLP ("D&T") as our
independent public accountants, approved by our Audit Committee.
15
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated by
reference to our 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 our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required in response to this item is incorporated by
reference to our 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 our 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.
16
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements beginning on page F-1 of this
annual report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1 of this
annual report.
3. Exhibit Index
The following exhibits are attached:
4.29 Tenth Forebearance and Amendment Agreement, dated May 31,
2001, between the Company and General Electric Capital
Corporation.
23.1 Consent of Deloitte & Touche, LLP, Independent Auditors
23.2 Consent of Pricewaterhouse Coopers, LLP, Independent Certified
Public Accountants
(b) Reports on Form 8-K
On October 10, 2000, we filed a report on Form 8-K. See Item 9 above
for further discussion.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/ Ilia Lekach
- -----------------------------------------
Ilia Lekach, Chief Executive Officer, President and Chairman
Dated: July 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
/s/ Frank A. Buttacavoli
- -------------------------------------------
Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director
/s/ Frederick E. Purches
- -------------------------------------------
Frederick E. Purches, Vice Chairman and Director
/s/ Albert F. Vercillo
- --------------------------------------------
Albert F. Vercillo, Director
/s/ Zalman Lekach
- --------------------------------------------
Zalman Lekach, Director
/s/ Glenn Gopman
- ---------------------------------------------
Glenn Gopman, Director
/s/ Esther Egozi Choukroun
- ---------------------------------------------
Esther Egozi Choukroun, Director
18
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
FINANCIAL STATEMENTS:
Report of Independent Auditors F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Income F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
FORM 10-K SCHEDULE:
Schedule II - Valuation and Qualifying Accounts F-23
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
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Parlux Fragrances, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of Parlux
Fragrances, Inc. and subsidiaries (the "Company") as of March 31, 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended. Our audit also included the financial
statement schedule for the year ended March 31, 2001 listed in Item 14. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audit
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 2001, and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has not been in compliance with
certain financial covenants of the Loan and Security Agreement, which has been
extended through various short-term agreements, and currently expires on July
31, 2001. As of June 22, 2001, the Company has not obtained financing from an
alternative source. Management believes that the Company will be able to obtain
financing from alternative sources, and is currently in negotiations with a
lender. However, there is no assurance that alternative financing will be
obtained, which raises substantial doubt about the Company's ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with a related party.
Deloitte and Touche LLP
Miami, Florida
June 22, 2001
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Parlux Fragrances, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Parlux
Fragrances, Inc. and its subsidiaries (collectively the "Company") at March 31,
2000, and the results of their operations and their cash flows for the two years
then ended, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 8
to the consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended March 31, 2000, the Loan and Security Agreement
(the "Credit Agreement") expires on August 29, 2000. Management is currently
negotiating with other banks to obtain financing to replace the Credit
Agreement. As of June 30, 2000, the Company has not obtained financing from an
alternative source. Management believes that the Company will be able to obtain
financing from alternative sources to replace the Credit Agreement. However,
there is no assurance that alternative financing will be available in the
future, which creates substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with a related party.
PricewaterhouseCoopers LLP
Miami, Florida
June 30, 2000
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
ASSETS 2001 2000
- --------------------------------------------------------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 30,214 $ 17,464
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,922,000 and $3,320,000, respectively 6,640,616 6,066,149
Trade receivables from a related party 13,006,178 9,561,550
Note receivable from a related party -- 2,500,000
Inventories, net 22,174,181 23,419,613
Prepaid expenses and other current assets 8,155,477 8,392,277
Investment in affiliate 803,390 8,034,657
------------ ------------
TOTAL CURRENT ASSETS 50,810,056 57,991,710
Equipment and leasehold improvements, net 2,649,347 2,289,159
Trademarks, licenses and goodwill, net 20,464,254 21,468,737
Other 88,366 112,422
------------ ------------
TOTAL ASSETS $ 74,012,023 $ 81,862,028
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 7,862,607 $ 9,993,966
Accounts payable 11,363,779 10,554,068
Accrued expenses 880,673 1,379,483
Income taxes payable 167,019 1,310,811
------------ ------------
TOTAL CURRENT LIABILITIES 20,274,078 23,238,328
Borrowings, less current portion 1,686,142 2,571,252
Deferred tax liability 1,177,329 2,407,664
------------ ------------
TOTAL LIABILITIES 23,137,549 28,217,244
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 2001 and 2000 -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 17,986,565 and 17,973,103 shares
issued at March 31, 2001 and March 31, 2000, respectively 179,866 179,731
Additional paid-in capital 74,002,059 73,977,590
Retained earnings (accumulated deficit) 3,452,321 (473,338)
Accumulated other comprehensive (loss) income (3,851,830) 1,834,607
Notes receivable from officer (790,947) (899,105)
------------ ------------
72,991,469 74,619,485
Less - 8,017,131 and 7,704,798 shares of common stock in
treasury, at cost, at March 31, 2001 and March 31, 2000, respectively (22,116,995) (20,974,701)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 50,874,474 53,644,784
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,012,023 $ 81,862,028
============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net sales:
Unrelated customers $ 46,512,816 $ 35,958,199 $ 33,623,124
Related parties 22,362,294 30,426,952 22,527,451
------------ ------------ ------------
68,875,110 66,385,151 56,150,575
Cost of goods sold 27,726,446 28,652,201 22,046,197
------------ ------------ ------------
Gross margin 41,148,664 37,732,950 34,104,378
------------ ------------ ------------
Operating expenses:
Advertising and promotional 17,484,616 15,307,913 15,612,506
Selling and distribution 6,534,583 6,050,583 5,644,923
General and administrative, net of licensing fees
of $650,000 in 2001, $637,500 in 2000 and
of $575,000 in 1999 5,415,061 4,442,578 4,570,055
Depreciation and amortization 2,308,793 3,542,225 2,461,093
Royalties 2,025,292 1,790,347 1,584,483
------------ ------------ ------------
Total operating expenses 33,768,345 31,133,646 29,873,060
------------ ------------ ------------
Operating income 7,380,319 6,599,304 4,231,318
Gain on sale of securities -- 541,013 --
Interest income 376,605 504,944 86,651
Interest expense and bank charges (1,477,382) (1,376,863) (1,886,800)
Exchange (loss) gain 5,274 (30,143) (117,334)
------------ ------------ ------------
Income before income taxes 6,284,816 6,238,255 2,313,835
Income taxes provision (2,359,157) (2,365,644) (895,380)
------------ ------------ ------------
Net income $ 3,925,659 $ 3,872,611 $ 1,418,455
============ ============ ============
Income per common share:
Basic $ 0.39 $ 0.32 $ 0.10
============ ============ ============
Diluted $ 0.38 $ 0.31 $ 0.10
============ ============ ============
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-----------------------------------------------------------
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
------------------------------------------
COMMON STOCK RETAINED ACCUMULATED
--------------------------- ADDITIONAL EARNINGS OTHER
NUMBER PAR PAID-IN (ACCUMULATED COMPREHENSIVE
ISSUED VALUE CAPITAL DEFICIT) (LOSS) INCOME (1)
----------- ----------- -------------- ------------ ------------------
BALANCE at March 31, 1998 17,447,478 $174,475 $73,007,949 ($5,764,404) ($355,331)
Comprehensive income:
Net income -- -- -- 1,418,455 --
Foreign currency translation adjustment -- -- -- -- 3,826
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 -- -- -- -- --
Net increase in notes receivable from officer -- -- -- -- --
---------- --------- ------------ ----------- ------------
BALANCE at March 31, 1999 17,462,478 174,625 73,030,586 (4,345,949) (351,505)
Comprehensive income:
Net income -- -- -- 3,872,611 --
Unrealized holding gains on investment
in affiliate, net of taxes of $1,340,521 -- -- -- 2,187,166
Foreign currency translation adjustment -- -- -- -- (1,054)
Total comprehensive income
Issuance of common stock upon exercise of:
Employee stock options 10,625 106 14,504
Warrants 500,000 5,000 932,500
Purchase of 4,049,767 shares of treasury
stock, at cost -- -- -- -- --
Net increase in notes receivable from officer -- -- -- -- --
---------- --------- -------------- ----------- ------------
BALANCE at March 31, 2000 17,973,103 179,731 73,977,590 (473,338) 1,834,607
Comprehensive income:
Net income -- -- -- 3,925,659 -
Unrealized holding loss on investment in
affiliate, net of a tax benefit of $1,547,881 -- -- -- -- (5,683,386)
Foreign currency translation adjustment -- -- -- -- (3,051)
Total comprehensive loss
Issuance of common stock upon exercise of:
Employee stock options 13,462 135 24,469 -- --
Purchase of 312,333 shares of treasury stock,
at cost -- -- -- -- --
Net decrease in notes receivable from officer -- -- -- -- --
---------- --------- -------------- ----------- ------------
BALANCE at March 31, 2001 17,986,565 $179,866 $ 74,002,059 $ 3,452,321 $ (3,851,830)
========== ======== ============== =========== ============
[RESTUBBED TABLE]
NOTES
RECEIVABLE
TREASURY FROM
STOCK OFFICER TOTAL
--------------- ------------- -------------
BALANCE at March 31, 1998 ($5,894,250) ($150,000) $61,018,439
Comprehensive income:
Net income -- -- 1,418,455
Foreign currency translation adjustment -- -- 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)
Net increase in notes receivable from officer -- (276,446) (276,446)
------------ ------------ ------------
BALANCE at March 31, 1999 (8,227,067) (426,446) 59,854,244
Comprehensive income:
Net income -- -- 3,872,611
Unrealized holding gains on investment in
affiliate, net of taxes of $1,340,521 -- -- 2,187,166
Foreign currency translation adjustment -- -- (1,054)
------------
Total comprehensive income 6,058,723
-------------
Issuance of common stock upon exercise of:
Employee stock options 14,610
Warrants 937,500
Purchase of 4,049,767 shares of treasury
stock, at cost (12,747,634) (12,747,634)
Net increase in notes receivable from officer -- (472,659) (472,659)
------------ ------------ ------------
BALANCE at March 31, 2000 (20,974,701) (899,105) 53,644,784
Comprehensive income:
Net income -- -- 3,925,659
Unrealized holding loss on investment in
affiliate, net of a tax benefit of $1,547,881 -- -- (5,683,386)
Foreign currency translation adjustment -- -- (3,051)
-------------
Total comprehensive loss (1,760,778)
-------------
Issuance of common stock upon exercise of:
Employee stock options -- -- 24,604
Purchase of 312,333 shares of treasury stock,
at cost (1,142,294) -- (1,142,294)
Net decrease in notes receivable from officer -- 108,158 108,158
------------ ------------ ------------
BALANCE at March 31, 2001 $ (22,116,995) $ (790,947) $ 50,874,474
============= ========== ============
(1) Accumulated other comprehensive (loss) income includes foreign currency
translation adjustments and unrealized holding gains and losses on investment in
affiliate.
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,925,659 $ 3,872,611 $ 1,418,455
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,308,793 3,542,225 2,461,093
Provision for doubtful accounts 1,567,000 1,143,790 400,000
Provision for prepaid promotional supplies and inventory obsolescence 1,500,000 1,400,000 853,545
Gain on sale of securities -- (541,013) --
Loss on disposal of equipment -- -- 13,416
Provision for deferred taxes 869,568 75,426 863,836
Changes in assets and liabilities net of effect of acquisitions:
(Increase) decrease in trade receivables - customers (2,141,467) 13,012 1,630,595
(Increase) decrease in note and trade receivables - related parties (944,628) 1,689,693 (285,016)
Decrease (increase) in inventories 473,251 (3,272,357) 2,223,878
(Increase) decrease in prepaid expenses and other
current assets and income tax receivable (1,043,041) 1,230,135 4,116,263
Decrease in other non-current assets 24,056 527 2,026,512
Increase (decrease) in accounts payable 809,711 5,239,298 (4,359,637)
(Decrease) increase in accrued expenses and income taxes payable (1,642,602) 730,672 (697,575)
------------ ------------ ------------
Total adjustments 1,780,641 11,251,408 9,246,910
------------ ------------ ------------
Net cash provided by operating activities 5,706,300 15,124,019 10,665,365
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of securities -- 2,276,018 --
Purchase of securities -- (1,735,005) --
Purchases of equipment and leasehold improvements, net (1,596,742) (1,543,340) (287,688)
Purchases of trademarks (67,756) (137,976) (106,306)
Cash received from brand licensing/sales:
Bal a Versailles -- -- 200,000
------------ ------------ ------------
Net cash used in investing activities (1,664,498) (1,140,303) (193,994)
------------ ------------ ------------
Cash flows from financing activities:
Payments - note payable to GE Capital Corporation, net (2,142,640) (936,471) (6,956,867)
Payments - note payable to Fred Hayman Beverly Hills (639,550) (594,953) (553,466)
Payments - note payable to Lyon Credit Corporation (204,890) (183,508) (164,360)
Payments - notes payable to Bankers Capital Leasing (29,389) (122,117) --
Payments - notes payable to International Finance Bank (185,472)
Payments - other notes payable -- (44,114) (50,169)
Net decrease (increase) in notes receivable from officer 108,158 (472,659) (276,446)
Purchases of treasury stock (1,142,294) (12,747,634) (2,332,817)
Proceeds from issuance of common stock, net 24,604 952,110 22,787
------------ ------------ ------------
Net cash used in financing activities (4,026,001) (14,149,346) (10,496,810)
------------ ------------ ------------
Effect of exchange rate changes on cash (3,051) (1,054) 3,827
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,750 (166,684) (21,612)
Cash and cash equivalents, beginning of year 17,464 184,148 205,760
------------ ------------ ------------
Cash and cash equivalents, end of year $ 30,214 $ 17,464 $ 184,148
============ ============ ============
See notes to consolidated financial statements.
F-7
PARLUX FRAGRANCES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
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 and beauty
related products, on a worldwide basis.
B. Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of Parlux
Fragrances, Inc., Parlux S.A., a wholly-owned French subsidiary
("S.A.") and Parlux, Ltd. (jointly referred to as the "Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation.
C. Accounting estimates
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("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 depreciation and amortization for
trademarks, licenses, goodwill, and equipment. Actual results could
differ from those estimates.
D. Basis of presentation
---------------------
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Management is currently negotiating with other banks to obtain
financing to replace the Company's current credit agreement. As of June
22, 2001, the Company has not obtained financing from an alternative
source.
Management's plan initially consists of obtaining sufficient financing
from alternative sources to replace the Company's current credit
agreement and management believes that funds from operations and any
new financing will be sufficient to meet the Company's operating needs.
The Company has received a non-binding commitment letter from GMAC
Commercial Credit, LLC for a $20 million line of credit, and is
currently negotiating a final agreement, see Note 7. There is no
assurance, however, that alternative financing will be available in the
future, and if available, at terms and conditions agreeable to the
Company.
This factor among others indicates that the Company may be unable to
continue as a going concern for a reasonable period of time. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
E. Revenue recognition
-------------------
Revenue is recognized when the product is shipped to a customer.
Estimated amounts for sales returns and allowances are recorded at the
time of sale.
F-8
Licensing income, which is included as an offset to general and
administrative expenses, is recognized ratably over the terms of the
contractual license agreements.
F. Inventories and cost of goods sold
----------------------------------
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. The cost of inventories includes product
costs and handling charges, including an allocation of the Company's
applicable overhead in an amount of $2,275,000 and $1,845,000 at March
31, 2001 and 2000, respectively.
G. Investment in Affiliate
-----------------------
Investment in Affiliate consists of an investment in common stock of E
Com Ventures, Inc., the parent company of Perfumania, Inc. Such
securities are considered available-for-sale and are recorded at fair
value. Changes in unrealized gains and losses of the Company's
investment are charged or credited as a component of accumulated other
comprehensive income (loss), net of tax, and are included in the
accompanying statements of stockholders' equity. A decline in the fair
value of an available-for-sale security below cost that is deemed other
than temporary would be charged to earnings.
H. Barter sales and credits
------------------------
The Company has sold certain of its products to a barter broker in
exchange for advertising that the Company will use. The Company does
not record the transfer of such products as sales, nor does it record a
profit on such transactions. The advertising credits received, which
are recorded as a prepaid expense on the Company's balance sheet at the
time such inventory is shipped, are valued at the cost of goods
bartered.
I. Equipment and leasehold improvements
------------------------------------
Equipment and leasehold improvements are carried at cost. Equipment is
depreciated using the straight-line method over the estimated useful
life of the asset. Leasehold improvements are amortized over the lesser
of the estimated useful life or the lease period. Repairs and
maintenance charges are expensed as incurred, while betterments and
major renewals are capitalized. The cost of assets and related
accumulated depreciation is removed from the accounts when such assets
are disposed of, and any related gains or losses are reflected in
current earnings.
J. Trademarks, licenses and goodwill
---------------------------------
Trademarks, licenses and goodwill are recorded at cost and amortized
over the estimated periods of benefit, principally 25 years.
Accumulated amortization of trademarks, licenses and goodwill was
$6,251,772 and $5,179,533 at March 31, 2001 and 2000, respectively.
Amortization expense was $1,072,239, $2,595,311 and $1,558,496 for the
years ended March 31, 2001, 2000, and 1999, respectively.
Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. Impairment losses are recognized if
expected undiscounted future cash flows of the related assets are less
than their carrying values. The impairment loss is determined based on
the difference between the carrying value of the assets and anticipated
future cash flows discounted at a value commensurate with the risk
involved, which is management's estimate of fair value. Management does
not believe that there are any impairment losses as of March 31, 2001
and 2000.
K. Advertising costs
-----------------
Advertising and promotional expenditures are expensed to operations as
incurred. These expenditures include print and media advertising, as
well as in-store cooperative advertising and promotions.
F-9
L. Income taxes
------------
The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and
liabilities are recorded, using currently enacted tax rates, based upon
the difference between the tax bases of assets and liabilities and
their carrying amounts for financial statement purposes.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense
is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
M. Foreign currency translation
----------------------------
The Company's functional currency for its foreign subsidiary is the
U.S. dollar. Other income and expense includes foreign currency gains
and losses, which are recognized as incurred.
N. Fair value of financial instruments
-----------------------------------
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, note receivable
from related party, notes receivable from officer, accounts payable and
borrowings, approximate fair value due to either the short-term
maturity of the instruments or borrowings with similar interest rates
and maturities.
O. Basic and diluted earnings per share
------------------------------------
Basic earnings per common share calculations are determined by dividing
earnings attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the year. Diluted
earnings per common share calculations are determined by dividing
earnings attributable to common stockholders by the weighted average
number of shares of common stock and dilutive potential common stock
equivalents outstanding during the year.
P. Stock based compensation
------------------------
Statement of Financial Accounting Standards No. 123, Accounting For
Stock Based Compensation ("SFAS No. 123") establishes a fair value
based method of accounting for stock based compensation plans, the
effect of which can either be disclosed or recorded. The Company
retained the intrinsic value method of accounting for stock based
compensation, which it previously used.
In calculating the potential effect for proforma presentation, the fair
market value on the date of grant was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000 1999
---- ---- ----
Expected life (years) 5 5 5
Interest rate 5% 5% 5%
Volatility 75% 75% 76%
Dividend Yield - - -
If compensation cost had been determined based on the fair value at the grant
date under SFAS No. 123, the Company's net income and income per share would
have been as follows:
F-10
For the years ended March 31,
-----------------------------
2001 2000 1999
---- ---- ----
Net income:
As reported $3,925,659 $3,872,611 $1,418,455
Proforma $3,895,617 $3,853,610 $ 548,455
Basic net income per share:
As reported $0.39 $0.32 $0.10
Proforma $0.39 $0.32 $0.04
Diluted net income per share:
As reported $0.38 $0.31 $0.10
Proforma $0.37 $0.31 $0.04
Q. Cash flow information
---------------------
The Company considers temporary investments with an original maturity
of three months or less to be cash equivalents. Supplemental
disclosures of cash flow information are as follows:
2001 2000 1999
---- ---- ----
Cash paid for:
Interest $1,546,029 $1,334,769 $1,839,569
========== ========== ==========
Income taxes $2,633,381 $ 1,216,348 $ 518,447
========== =========== ==========
Supplemental disclosures of noncash investing and financing activities
are as follows:
Year ended March 31, 2001:
o The Company incurred an unrealized holding loss of
$5,683,386 on the investment in affiliate, net of tax
benefits.
o The Company entered into a barter agreement for which it
exchanged inventory of Baryshnikov brand products with a
cost of approximately $728,000 in exchange for advertising
credits.
Year ended March 31, 2000:
o The Company incurred an unrealized holding gain of
$2,187,166 on the investment in affiliate, net of taxes.
o The conversion of trade accounts receivable in the amounts
of $4,506,970 and $8,000,000 discussed in Note 2.
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.
R. Segment Information
-------------------
As of March 31, 2001, the Company operates solely in one segment, the
marketing and manufacture of prestige fragrances and beauty related
products.
F-11
S. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an amendment to SFAS No. 133.
SFAS No. 137 deferred the effective date of adoption of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The adoption of SFAS No.
133 on April 1, 2001 did not have a material impact on our financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements and is effective for our
fourth fiscal quarter ending March 31, 2001. We believe that our
current revenue recognition policies comply with SAB 101.
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-14, Accounting for Certain Sales Incentives, which
provides guidance on accounting for discounts, coupons, rebates and
free products, as well as the income statement classification of these
discounts, coupons, rebates and free products. The adoption of EITF
00-14 did not have a material impact on the Company's operations or
financial statement presentation.
In April 2000, the EITF reached a consensus on EITF 00-25, Accounting
for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendors Products, which provides guidance
on the income statement classification of consideration from a vendor
to a retailer in connection with the retailer's purchase of the
vendor's products or to promote sales of the vendor's products. EITF
00-25 is effective April 1, 2001, for the Company. The Company is
currently evaluating the impact of this new guidance.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
----------------------------------------------------
As of March 31, 2001, the Company had a loan receivable of approximately
$790,947 ($875,000 at March 31, 2000) from its Chairman/CEO, which is
recorded as a component of stockholders' equity in the accompanying
consolidated balance sheets. All of the notes bear interest at 8% per
annum, and unless indicated, are not collateralized. The composition of the
notes are as follows:
March 31,
---------
2001 2000
---- ----
Note receivable, due March 31, 2001 $ 790,947 $240,000
Note receivable, collateralized by 100,000 shares of
the Company's common stock, due March 31, 2001 --- 230,000
Note receivable, due March 31, 2001 --- 405,000
Accrued interest receivable --- 24,105
--------- ---------
$ 790,947 $ 899,105
========= =========
All of the notes were refinanced under a master note in the amount of
$875,000, which bears interest at 8% per annum, is not collateralized and
matured on March 31, 2001. As of March 31, 2001, amounts due the officer
totaling $147,100 were offset against the loan, covering interest due
through March 2001 and a $99,053 principal reduction,with the remaining
principal extended until March 31, 2002.
F-12
The Company had net sales of $22,362,294, $30,426,952, and $22,527,451
during the fiscal years ended March 31, 2001, 2000, and 1999, respectively,
to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com
Ventures, Inc. ("ECMV"), a company in which the Company's Chairman and
Chief Executive Officer has an ownership interest and holds identical
management positions. Net trade accounts receivable and note receivable
owed by Perfumania to the Company totaled $13,006,178 at March 31, 2001 and
trade accounts receivable and note receivable (after giving effect to the
stock transaction discussed below), were $9,561,550 and $2,500,000,
respectively, at March 31, 2000. Amounts due from related parties are
non-interest bearing and are due in less than one year, except for the
subordinated note receivable below, which carried an interest rate of prime
plus 1% of the outstanding balance, and which was repaid in accordance with
its terms.
On July 1, 1999, Perfumania and the Company's Board of Directors approved
the transfer of 1,512,406 shares of Perfumania treasury stock to the
Company in consideration for a partial reduction of the outstanding trade
receivable balance in the amount of $4,506,970. The transfer price was
based on a per share price of $2.98, which approximated 90% of the closing
price of Perfumania's common stock for the previous 20 business days. The
agreement was consummated on August 31, 1999, and the shares registered in
June 2000. Effective February 1, 2000, ECMV was formed as a holding company
and accordingly, former Perfumania shareholders now hold common stock in
ECMV. As of June 22, 2001, the fair market value of the investment in ECMV
is $1,542,654 ($1.02 per share). Management believes, based on its
evaluation of ECMV's operations, that the decline in the market price is
temporary.
In addition, on October 4, 1999, the parties entered into an agreement
which converted $8 million of the outstanding trade receivable into a
subordinated secured note receivable. The note bore interest at prime plus
one percent and was repayable in installments of $3,000,000 in October
1999, six equal monthly installments of $500,000 from November 1999 through
April 2000, with the balance of $2,000,000 due on May 31, 2000. As of March
31, 2000, $5,500,000 of the note receivable had been repaid in accordance
with its terms.
On June 1, 2000, the parties entered into a new subordinated $5 million
note agreement which refinanced the remaining $2 million under the October
4, 1999 note, as well as converted $3 million of the outstanding trade
receivable due from Perfumania to the Company. The new note was repayable
in six equal monthly installments of $500,000, plus interest, from July
2000 through December 2000, with the balance of $2 million due on December
29, 2000. The terms and conditions of the new note was identical to the
October 4, 1999 note and the entire note was repaid in accordance with its
terms.
In October 1999, the Company purchased, in the open market, 250,000 shares
of perfumania.com common stock for $1,735,005. These shares were sold
during November 1999, resulting in a gain of $541,013, which is included in
the accompanying consolidated statement of income for the fiscal year ended
March 31, 2000.
3. INVENTORIES
-----------
The components of inventories are as follows:
March 31,
---------
2001 2000
---- ----
Finished products $11,485,963 $13,616,034
Components and packaging material 6,959,423 6,780,534
Raw material 3,728,795 3,023,045
----------- -----------
$22,174,181 $23,419,613
=========== ===========
The above amounts are net of reserves for estimated inventory obsolescence
of approximately $2,805,000 and $1,520,000 at March 31, 2001 and 2000,
respectively.
F-13
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid expenses and other current assets are as follows:
March 31,
---------
2001 2000
---- ----
Promotional supplies, net $4,036,834 $4,532,582
Deferred tax assets 1,526,445 2,078,467
Prepaid advertising (including unused barter credits 1,491,060 601,856
of $728,000 in 2001)
Notes receivable-current portion AdM/BAV -- 541,104
Other 1,101,138 638,268
--------- -------
$8,155,477 $8,392,277
========= =========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
------------------------------------
Equipment and leasehold improvements are comprised of the following:
March 31,
------------------ Estimated useful
2001 2000 lives (in years)
---- ---- ----------------
Molds and equipment $6,910,493 $5,402,667 3-7
Furniture and fixtures 1,314,997 1,244,695 3-5
Leasehold improvements 328,702 426,745 5-7
---------- ----------
8,554,192 7,074,107
Less: accumulated depreciation and amortization (5,904,845) (4,784,948)
---------- ----------
$2,649,347 $2,289,159
========== ==========
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended March 31, 2001, 2000 and 1999 was
$1,236,555, $946,913, and $902,596, respectively. Amounts subject to
capital leases at March 31, 2001 and 2000, included in molds and equipment
above, totaled $528,589 and $395,325, respectively, net of accumulated
amortization of $284,500 and $164,154.
6. TRADEMARKS, LICENSES AND GOODWILL
---------------------------------
Trademarks, licenses and goodwill are attributable to the following brands:
March 31,
---------- Estimated useful
2001 2000 lives (in years)
---- ---- ----------------
Owned Brands:
Alexandra de Markoff $11,191,174 $11,191,171 25
Fred Hayman Beverly Hills ("FHBH") 2,820,361 2,804,864 25
Bal A Versailles 2,948,942 2,948,942 25
Animale 1,574,693 1,523,824 25
Other 216,546 215,714 25
Licensed Brands:
Perry Ellis 7,964,310 7,963,755 25
--------- ---------
26,716,026 26,648,270
Less: accumulated amortization (6,251,772) (5,179,533)
----------- -----------
$20,464,254 $21,468,737
=========== ==========
On June 9, 1998, the Company entered into an exclusive agreement to license
the Bal a Versailles ("BAV") rights to Genesis International Marketing
Corporation for an annual licensing fee of $100,000 during the initial year
of the agreement, increasing to $150,000 for subsequent years for the
remainder of the initial term, and to $200,000 each year thereafter. The
initial term of the agreement is for ten years, automatically renewable
every five years. As part of the agreement, the Company sold the inventory,
promotional materials and molds relating to BAV for its approximate book
value. At closing, the purchaser provided as consideration, $200,000 in
cash and a $500,000 non-interest bearing note due in quarterly installments
of $83,333 through December 1999, which has been paid in full in accordance
with its original terms.
F-14
On March 2, 1998, the Company entered into an exclusive agreement to
license the Alexandra de Markoff ("AdM") rights to Cosmetic Essence, Inc.
("CEI") 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. The license was
assigned by CEI to an affiliate, Irving W. Rice & Co. However, CEI
guarantees payment for the annual licensing fee for the entire term of the
agreement, including renewals. At closing, the purchaser provided as
consideration, $202,000 in cash and a $4,000,000 non-interest bearing
receivable due in periodic installments based on the purchaser's use of the
inventory, with any remaining balance due on January 1, 2000, but
subsequently extended to June 30, 2000. The note has been paid in full.
At March 31, 2000, $541,104 relating to the AdM and BAV notes receivable
was included in prepaid expenses and other current assets.
7. BORROWINGS
The composition of borrowings is as follows:
March 31,
---------
2001 2000
---- ----
Revolving credit facility payable to General Electric
Capital Corporation, interest at prime (8.00% at March 31,
2001) plus 4%, net of restricted cash of $1,983,334 and
$2,468,377 at March 31, 2001 and 2000, respectively. $6,782,973 $8,925,613
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 2,391,857 3,031,407
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. 141,692 273,208
Note payable to United Capital Corporation, collateralized
by certain equipment, interest at 11%, payable in equal
monthly installments of $19,142, including interest, through
September 2001. 111,231 316,121
Capital lease payable to Bankers Leasing, collateralized by
certain shipping equipment, payable in quarterly
installments of $18,249, including interest, through October 2002. 102,127 --
Other notes payable 18,869 18,869
------ ------
9,548,749 12,565,218
Less: long-term borrowings (1,686,142) (2,571,252)
---------- ----------
Short-term borrowings $7,862,607 $9,993,966
========== ==========
In May 1997, the Company entered into a three-year Loan and Security
Agreement (the Credit Agreement) with General Electric Capital Corporation
(GECC). Substantially all of the domestic assets of the Company
collateralize this borrowing.
Due principally to the significant treasury stock purchases under the
Company's stock buy back program, as of March 31, 2000, the Company was not
in compliance with financial covenants relating to tangible net worth,
current ratio and minimum fixed charge coverage ratio as well as the
restricted payment covenants exceeding the amount of fixed assets and
treasury stock which can be purchased as well as advances to related
parties and employees. GECC has extended, through various short-term
agreements, the maturity of the Credit Agreement through July 31, 2001,
increasing the interest rate to prime plus 4%, while reducing the borrowing
limit to $14 million, more in line with the Company's current needs.
The fiscal 2001 financial statements have been prepared assuming the
Company will continue as a going concern. The current Credit Agreement
expires on July 31, 2001. The Company has not obtained financing from an
alternative source as of June 30, 2001, although it has received a
non-binding commitment letter from GMAC Commercial Credit LLC, for a $20
million line of credit, and is currently negotiating a final agreement.
F-15
Management believes that, based on current circumstances, the funds from
operations and any new financing will be sufficient to meet the Company's
operating needs. However, there can be no assurance that alternative
financing will be available in the future, and if available, at terms and
conditions agreeable to the Company.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
2002 $7,863
2003 785
2004 799
2005 102
------
Total $9,549
======
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. Leases:
-------
The Company leases its office space and certain equipment under
certain operating leases expiring on various dates through October 31,
2005. Total rent expense charged to operations for the years ended
March 31, 2001, 2000 and 1999 was approximately $963,000, $924,000 and
$1,110,000, respectively.
At March 31, 2001, the future minimum annual rental commitments under
noncancellable operating leases are as follows (in 000's):
For the year ending March 31, Amount
----------------------------- ------
2002 $804
2003 641
2004 641
2005 641
2006 427
------
Total $3,154
======
The Company had entered into a non-cancelable sublease agreement for
its previous corporate headquarters and distribution center. This
agreement covered the remaining lease commitment through November
2000, with the sub-lessee remitting payment directly to the landlord
at the same rental rate as the Company's original lease. The Company
had agreed to guarantee such sublease payments of approximately
$20,000 per month. The lease expired and the Company has no further
liability.
B. License and Distribution Agreements:
-----------------------------------
During the year ended March 31, 2001, the Company held exclusive
worldwide licenses to manufacture and sell fragrance and other related
products for Perry Ellis, Ocean Pacific ("OP"), and Baryshnikov.
F-16
On March 26, 2001, the Company entered into an exclusive worldwide
licensing agreement with Jockey International, Inc. ("Jockey"), to
manufacture and distribute men's and women's fragrances and other
related products under the Jockey trademark. The Company anticipates
launching both fragrances lines for the Spring 2002 season.
Under each of these arrangements, the Company must pay royalties at
various rates based on net sales, and spend minimum amounts for
advertising based on sales volume. The agreements expire on various
dates and are subject to renewal.
On October 13, 1999, the Company was notified by the Baryshnikov
licensor of its intent to terminate the license agreement, which was
to expire on March 31, 2001, due to the Company's unwillingness to
develop and distribute a new women's fragrance, as stipulated in the
license agreement. A settlement was reached which entitled the Company
to continue producing and selling Baryshnikov brand products until
June 30, 2000, at which time all remaining unsold inventory and
advertising material would be destroyed. On June 29, 2000, the Company
entered into a barter agreement exchanging all of its remaining
Baryshnikov finished goods inventory for advertising credits. Sales of
Baryshnikov products represented less than 2% of total Company net
sales for each of the three years ended March 31, 2000.
Effective January 1, 2000, the Company entered into an exclusive
licensing agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and
distribute men's and women's fragrances and other related products
under the PEZ trademark throughout the Western Hemisphere. Effective
April 1, 2001, the Company and PEZ agreed to terminate the agreement
with no further liability to either party.
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, 2002 2003 2004 2005 2006
---------------------------- ---- ---- ---- ---- ----
Advertising $11,712 $11,412 $11,612 $11,112 $11,312
Royalties $ 1,100 $ 1,260 $ 1,296 $ 1,245 $ 1,325
C. Trademarks:
-----------
Through various acquisitions since 1991, the Company acquired
worldwide trademarks and distribution rights to ANIMALE, DECADENCE,
LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de MARKOFF
cosmetics and fragrances. In addition, FHBH granted the Company an
exclusive 55-year royalty free license. Accordingly, there are no
licensing agreements requiring the payment of royalties by the Company
on these trademarks. Additionally, royalties are payable to the
Company from the licensees of ALEXANDRA DE MARKOFF and BAL A
VERSAILLES brands, and the Company has the rights to license all of
these trademarks, other than FHBH, for all classes of merchandise.
D. Barter Arrangements:
--------------------
The following table sets forth the balances and transactions included
in the accompanying financial statements related to barter agreements
(in 000's):
2001 2000 1999
---- ---- ----
Prepaid advertising at March 31, net of deferred income of $137
in 1999 $728 $ -- $233
==== ===== ====
Advertising credits received during the year $728 $ -- $ --
==== ===== ====
Advertising credits expensed during the year ended March 31 $--- $ 233 $ --
==== ===== ====
F-17
E. Employment and Consulting Agreements:
------------------------------------
The Company has contracts with certain officers, employees and
consultants which expire during March 2003. Minimum commitments under
these contracts total approximately $2,168,000. In addition, warrants
to purchase 330,000 shares of common stock at prices ranging from
$2.25 to $2.44 were granted. These warrants are exercisable for a
ten-year period from the date of grant, vest over the three-year term
of the applicable contract and double in the event of a change in
control.
In connection with previous employment contracts, warrants to purchase
1,690,000 shares of common stock, at prices ranging from $1.50 to
$7.50 were granted between 1989 and 1995. These warrants are
exercisable for a ten-year period from the date of grant and vested
over the term of the applicable contracts. During the year ended March
31, 2000, 500,000 of such warrants were exercised. As of March 31,
2001, all of the above mentioned warrants were vested. In addition,
during January 1996, the Board of Directors approved a resolution
whereby the number of warrants granted to key employees would double
in the event of a change in control.
On January 18, 1999, the Compensation Committee of the Board of
Directors authorized the grant to the Company's Chairman and Chief
Executive Officer of 1,000,000 warrants to acquire shares of common
stock at $8.00 per share for a five year period. The warrants were
cancelled during April 2001.
On April 1, 1994, the Company entered into a consulting agreement with
a former executive, which provided for monthly payments of $16,667
through September 30, 1997. In addition, the former executive had
previously received warrants to purchase 500,000 shares of common
stock, at an exercise price of $1.875 per share, which are included in
the 1,690,000 warrants discussed below. These warrants were exercised
during March 2000, and the Company repurchased these shares at $4.00
per share, the closing price of the shares on March 23, 2000.
All of the previously described warrants were granted at or in excess
of the market value of the underlying shares at the date of grant.
F. Contingencies:
-------------
The Company is a party to legal and administrative proceedings arising
in the ordinary course of business. The outcome of these actions are
not expected to have a material effect on the Company's financial
position or results of operations.
9. INCOME TAXES
------------
The components of the provision for income taxes for each of the years
ended March 31 are as follows:
Years Ended March 31,
----------- ---------
2001 2000 1999
---------- ---------- ----------
Current taxes:
U.S. Federal $1,311,059 $2,271,211 $ 0
U.S. state and local 121,440 0 15,552
Foreign 57,090 36,500 15,992
---------- ---------- ----------
1,489,589 2,307,711 31,544
Deferred tax 869,568 57,933 863,836
---------- ---------- ----------
Income tax expense $2,359,157 $2,365,644 $ 895,380
========== ========== ==========
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended March 31 as follows:
2001 2000 1999
---- ---- ----
Tax at statutory rate 35.0% 35.0% 35.0%
Other, primarily State income taxes 2.5% 2.9% 3.7%
---- ---- ----
37.5% 37.9% 38.7%
==== ==== ====
F-18
Deferred income taxes as of March 31 are provided for temporary differences
between financial reporting carrying value and the tax basis of the Company's
assets and liabilities under SFAS 109. The tax effects of temporary differences
are as follows:
March 31, 2001 2000
--------- ----------- -----------
Allowance for doubtful accounts, sales returns and allowances $ 557,529 $ 1,186,216
State net operating loss carry forwards -- 30,464
Reserve for inventory obsolescence 575,399 861,787
Unrealized loss on investment 207,360 --
Other, net 186,157 --
----------- -----------
Total deferred tax assets 1,526,445 2,078,467
=========== ===========
Deferred tax liabilities related to depreciation and
amortization (1,114,453) ( 995,044)
Unrealized gains on investments -- (1,340,521)
Other (62,876) (72,099)
----------- -----------
Total deferred tax liabilities (1,177,329) (2,407,664)
----------- -----------
Net deferred tax asset (liability) $ 349,116 ($ 329,197)
=========== ===========
10. 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, 2001, and since the inception of the Plan, options have
been granted, net of cancellations, to purchase 199,092 shares at exercise
prices ranging from $1.06 to $5.75 per share. No further options are
issuable under the Plan. Through March 31, 2001, 196,592 options had been
exercised under the Plan and no further shares are exercisable.
In October 1996, the Company's shareholders ratified the establishment of a
new stock option plan (the "1996 Plan") which reserved 250,000 shares of
its Common Stock for issue thereunder with the same expiration and vesting
terms as the Plan. Only employees who are not officers or directors of the
Company shall be eligible to receive options under the 1996 Plan. During
January 2000, the shares were registered with the Securities and Exchange
Commission via a Form S-8 registration statement.
On May 16, 2000, the Company granted to various employees, options under
the 1996 Plan to acquire 88,975 shares of common stock at $2.8125 per
share, the closing bid price of the stock on May 15, 2000.
As of March 31, 2001, and since the inception of the 1996 Plan, options
have been granted net of cancellations, to purchase 247,437 shares at
exercise prices ranging from $1.375 to $2.813 per share. Through March 31,
2001, 16,587 options had been exercised and 40,406 options were vested with
a remaining contractual life for such options of three years.
F-19
The following table summarizes the activity for options covered under all of the
above plans:
Plan 1996 Plan
--------------------------- -----------------------------
Weighted Average Weighted Average
Amount Exercise Price Amount Exercise Price
------- -------------- ------- ----------------
Balance at March 31, 1998 55,000 $ 2.59 71,250 $ 1.38
Granted -- -- -- --
Exercised (15,000) $ 1.52 -- --
Canceled/Expired (30,000) -- (9,000) $ 1.38
------- -------
Balance at March 31, 1999 10,000 $ 3.08 62,250 $ 1.38
Granted -- 96,600 $ 1.38
Exercised -- (10,625) $ 1.38
Canceled/Expired -- (20,200) $ 1.38
------- ------- -----
Balance at March 31, 2000 10,000 $ 3.08 128,025 $ 1.38
Granted -- 88,975 $ 2.82
Exercised (7,500) $ 2.19 (5,962) $ 1.38
Canceled/Expired (2,500) $ 5.75 (5,688) $ 1.38
------- -------
Balance at March 31, 2001 -- 205,350 $1.98
======= =======
In October 2000, the Company's shareholders ratified the establishment of a
third stock option plan (the "2000 Plan") which reserved an additional 250,000
shares of its Common Stock for issue thereunder with the same expiration and
vesting terms as the 1996 Plan. To date, no grants have been made under the 2000
Plan.
The following table summarizes the activity and related information for all
other options and warrants outstanding, including the warrants discussed under
commitments in Note 8 (E):
Weighted Average
----------------
Amount Exercise Price
---------- --------------
Balance at March 31, 1998 1,770,000 $ 2.06
Granted 1,000,000 $ 8.00
Exercised -- --
-- --
----------
Balance at March 31, 1999 2,770,000 $ 4.21
Granted 366,000 $ 2.43
Exercised (500,000) $ 1.88
Cancelled/Expired -- --
----------
Balance at March 31, 2000 2,636,000 $ 4.41
Granted -- --
Exercised -- --
Cancelled/Expired -- --
----------
Balance at March 31, 2001 2,636,000 $ 4.41
==========
On January 18, 1999, the Compensation Committee of the Board of Directors
authorized the grant to the Company's Chairman and Chief Executive Officer of
1,000,000 warrants to acquire shares of common stock at $8.00 per share for a
five year period. The warrants were cancelled during April 2001.
F-20
The following table summarizes information about these options and warrants
outstanding at March 31, 2001:
Options And Options And
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Range of Weighted Average Weighted Average Weighted Average
Exercises Prices Amount Exercise Price Remaining Life Amount Exercise Price
------ ------ -------------- -------------- ------ --------------
$1.50-$2.44 1,420,000 $2.03 4 1,200,000 $1.95
$3.13-$4.56 202,000 $3.23 5 202,000 $3.23
$6.75 10,000 $6.75 6 10,000 $6.75
$8.00 1,004,000 $8.00 3 1,004,000 $8.00
--------- ----- - --------- -----
2,636,000 $4.41 4 2,416,000 $4.59
========= ===== = ========= =====
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 $52,922,
$56,000, and $53,000 for the years ended March 31, 2001, 2000, and 1999,
respectively.
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
-------------------------------------------
The following is the reconciliation of the numerators and denominators of
the basic and diluted net income per common share calculations:
2001 2000 1999
---- ---- ----
Net income $3,925,659 $3,872,611 $1,418,455
========== ========== ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 10,068,422 11,965,713 14,541,306
========== ========== ==========
Basic net income per common share $0.39 $0.32 $0.10
========== ========== ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 10,068,422 11,965,713 14,541,306
Effect of dilutive securities:
Stock options and warrants, net of treasury shares acquired 320,630 547,260 67,759
---------- ---------- ----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,389,052 12,512,973 14,609,065
========== ========== ==========
Diluted net income per common share $0.38 $0.31 $0.10
========== ========== ==========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,301,850 1,218,500 2,592,000
========== ========== ==========
Exercise Price $2.81-$8.00 $3.13-$8.00 $1.75-$8.00
=========== =========== ===========
12. 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:
2001 2000 1999
---- ---- ----
PERRY ELLIS 69% 73% 65%
ANIMALE 16% 11% 12%
FRED HAYMAN 11% 16% 21%
F-21
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade receivables from department and specialty stores
in the United States, distributors throughout the world, and Perfumania. To
reduce credit risk for trade receivables from unaffiliated parties, the
Company performs ongoing evaluations of its customers' financial condition
but does not generally require collateral. Management has established an
allowance for doubtful accounts for estimated losses. The allowances for
doubtful accounts are considered adequate to cover estimated credit losses.
No unrelated customer accounted for more than 10% of the Company's net
sales during the years ended March 31, 2001, 2000, and 1999.
Revenues from Perfumania represented 32%, 46%, and 40%, of the Company's
net sales during the years ended March 31, 2001, 2000, and 1999,
respectively. To reduce credit risk, on occasion, the Company, based on its
reviews of Perfumania's financial condition, convert certain trade
receivables into subordinated notes receivable. (See Note 2 for a detailed
discussion of the previous conversions of trade receivables into notes
receivable from Perfumania).
Gross sales to international customers totaled approximately $30,726,000,
$20,007,000, and $20,121,000, for the years ended March 31, 2001, 2000, and
1999, respectively. At March 31, 2001 and 2000, trade receivables from
foreign customers (all payable in U.S. dollars) amounted to approximately
$4,580,000 and $5,377,000, respectively.
13. 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, 2001 and 2000 (in thousands,
except per share amounts).
Quarter Ended
-----------------------------------------------------------------
June 30, September 30, December 31, March 31,
2000 2000 2000 2001
-------- ------------- ----------- ----------
Net sales $15,711 $18,199 $20,150 $14,815
Gross margin 9,636 11,202 11,891 8,420
Net income 801 1,803 702 620
Income per common share:
Basic $ 0.08 $ 0.18 $0.07 $ 0.06
Diluted $ 0.07 $ 0.17 $0.07 $ 0.06
Quarter Ended
-----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 1999 2000
-------- ------------- ----------- ----------
Net sales $14,930 $19,702 $16,631 $15,122
Gross margin 8,279 10,728 9,683 9,043
Net income 678 1,619 625 951
Income per common share:
Basic $ 0.05 $ 0.12 $ 0.05 $ 0.10
Diluted $ 0.05 $ 0.12 $ 0.05 $ 0.09
F-22
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Balance at beginning Additions charged to Net Balance at
Description of period costs and expenses Deductions end of period
----------- -------------------- ------------------- ----------- -------------
Year ended March 31, 2001
--------------
Reserves for:
Doubtful accounts $ 1,921,229 $ 1,567,000 $ 2,916,381 $ 571,848
Sales returns 421,162 3,127,030 3,010,997 537,195
Demonstration and co-op
advertising allowances 977,415 5,228,315 5,392,769 812,961
----------- ----------- ----------- -----------
$ 3,319,806 $ 9,922,345 $11,320,147 $ 1,922,004
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 1,519,694 $ 1,500,000 $ 214,921 $ 2,804,773
=========== =========== =========== ===========
Year ended March 31, 2000
Reserves for:
Doubtful accounts $ 750,273 $ 1,543,790 $ 372,834 $ 1,921,229
Sales returns 411,320 3,512,170 3,502,328 421,162
Demonstration and co-op
advertising allowances 951,343 4,484,795 4,458,723 977,415
----------- ----------- ----------- -----------
$ 2,112,936 $ 9,540,755 $ 8,333,885 $ 3,319,806
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 976,259 $ 800,000 $ 256,565 $ 1,519,694
=========== =========== =========== ===========
Year ended March 31, 1999
Reserves for:
Doubtful accounts $ 704,860 $ 400,000 $ 354,587 $ 750,273
Sales returns 300,000 1,254,069 1,142,749 411,320
Demonstration and co-op
advertising allowances 1,165,592 4,801,789 5,016,038 951,343
----------- ----------- ----------- -----------
$ 2,170,452 $ 6,455,858 $ 6,513,374 $ 2,112,936
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 4,671,393 $ 853,545 $ 4,548,679 (1) $ 976,259
=========== =========== =========== ===========
(1) Deductions pertain to the disposal of excess component inventory during
fiscal year 1999 which were included in the reserve as of the beginning of the
period.
F-23