-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jnm8tVUPBhhbt0yXOnz5puL+Ej0PW7TNwvkYWirojPmkD0OnNsCsnPJzhGa4+sHD T5twAzZzJBbxRCqEABYCJQ== 0001042910-98-000089.txt : 19980218 0001042910-98-000089.hdr.sgml : 19980218 ACCESSION NUMBER: 0001042910-98-000089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARLUX FRAGRANCES INC CENTRAL INDEX KEY: 0000802356 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 222562955 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15491 FILM NUMBER: 98537425 BUSINESS ADDRESS: STREET 1: 3725 S W 30TH AVE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 BUSINESS PHONE: 3059467700 MAIL ADDRESS: STREET 1: 3725 S W 30TH AVENUE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------------------- FORM 10-Q ( Mark One ) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 1997 ----------------- Or______ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _____________________ Commission file number: 0-15491 PARLUX FRAGRANCES, INC. - -------------------------------------------------------------------------------- ( Exact name of registrant as specified in its charter ) DELAWARE 22-2562955 - -------------------------------------------------------------------------------- ( State or other jurisdiction of ( IRS employer identification no. ) incorporation or organization ) 3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312 - -------------------------------------------------------------------------------- ( Address of principal executive offices ) ( Zip code ) Registrant's telephone number, including area code 954-316-9008 - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate with an "X" 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 ____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate with an "X" whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15( d ) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: As of February 12, 1998, 15,109,123 shares of the issuer's common stock were outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 8 to 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Registrant's (the Company's) financial position and operating results during the periods included in the accompanying financial statements and notes. This discussion and analysis should be read in conjunction with such financial statements and notes. Recent Developments In January 1998, the Company completed the third phase of its common stock buy-back program involving 1,000,000 shares, and the Board of Directors authorized the repurchase of 1,250,000 additional shares. As of February 12, 1998, the Company has repurchased under all phases a total of 2,299,355 shares at a cost of $5,512,851 (1,769,698 shares at a cost of $4,556,539 as of December 31, 1997). Book value per outstanding common share was $4.55 as of December 31, 1997, compared to $4.35 per share as of March 31, 1997. On November 25, 1997, the Company received correspondence from the Securities and Exchange Commission (the "SEC") requesting, among other items, the revision of the Company's March 31, 1996 and 1997 financial statements relating to the accounting for the issuance of convertible debentures. The SEC is questioning whether the 15% discount upon conversion should be treated as additional interest expense. The Company has responded to the SEC and has indicated that it believes such issuances were properly accounted for in accordance with generally accepted accounting principles. However, there can be no assurance that the SEC will ultimately concur with the Company's position. See Note E to the accompanying consolidated financial statements for further discussion on convertible debentures. Results of Operations Comparison of the three-month period ended December 31, 1997 with the three-month period ended December 31, 1996. During the quarter ended December 31, 1997, net sales decreased 25% to $20,375,443 as compared to $27,019,820 in the same period in the prior year. The decrease was primarily due to: 1) a $3,412,833 decrease (76%) in Perry Ellis "America" brand fragrance gross sales, as this brand was initially launched during the prior year. Net sales were further impacted by $143,142 in returns accepted in the current period for this brand; 2) gross sales of Alexandra de Markoff (AdM) brand cosmetics decreased 20% to $2,302,231, as compared to $2,862,477 in the prior year, due to out-of-stock situations 2 relating to the transfer of manufacturing from Revlon (from whom the Company purchased the AdM brand) to third party manufacturers. The Company believes that production is now substantially in line; 3) gross sales of discontinued brands (Francesco Smalto, Todd Oldham and Vicky Tiel) decreased $2,112,431 during the three months ended December 31, 1997; and 4) a 3% decrease in gross sales of all brands other than those noted above from $19,426,717 in the prior year to $18,871,356 in the current year. Sales to unrelated customers decreased 20% to $14,617,374 in the current period compared to $18,173,040 in the same period in the prior year, while sales to related parties decreased 35% to $5,758,069 compared to $8,846,780, in accordance with the Company's strategic plan. Cost of goods sold increased as a percentage of net sales from 39% for the quarter ended December 31, 1996 to 46% for the current quarter. The increase was mainly attributable to the closeout of Todd Oldham merchandise at below cost. Cost of goods sold for sales to unrelated customers and related parties approximated 42% and 56%, respectively, during the quarter ended December 31, 1997. Operating expenses decreased by 27% compared to the prior fiscal year from $14,156,122 to $10,285,187, and as a percentage of net sales from 52% to 50%. Advertising and promotional expenses decreased 42% to $5,177,263 compared to $8,958,317 in the prior year period, reflecting a reduction in print advertising and promotional expenses for the U.S. domestic department and specialty store business resulting mainly from Perry Ellis and AdM brand activities. The prior year period included increased promotional activity related to the launch of the Perry Ellis "America" brand fragrances. Selling and distribution costs decreased by 6% to $2,105,189 in the current fiscal period as compared to $2,244,973 in the same period of the prior fiscal year, but increased as a percentage of net sales from 8% to 10%. This percentage increase was mainly attributable to the reduction in sales previously discussed, which resulted in a lower sales base to absorb these relatively fixed costs. General and administrative expenses increased by 12% compared to the prior year period from $1,552,679 to $1,732,616, increasing as a percentage of net sales from 6% to 9%, reflecting approximately $200,000 of costs in connection with the closing of the Company's French operations in December 1997. Depreciation and amortization decreased slightly from $748,890 in the prior year period to $732,031 in the current fiscal year period. Royalties decreased to $538,088 for the current period compared to $651,263 in the prior year, but remained relatively constant as a percentage of net sales. As a result of the above, operating income decreased by 66% to $748,860 or 4% of net sales, compared to $2,222,377 or 8% of net sales for the comparable quarter in the prior year. Interest expense remained relatively constant at $613,376 in the current fiscal year as compared to $611,473 in the same period in the prior year. Exchange losses were $66,936 in the current year as compared to a loss of $49,225 in the same period in the prior year. As a result, income before extraordinary item and taxes decreased to $68,548 for the current period compared to $1,561,679 or 6% of net sales, in the prior year. Giving effect to the tax provision which reflects the non-deductible nature of the loss on the convertible debenture redemption in 1996, the Company reported net income of 3 $42,909 for the current quarter ended December 31, 1997, as compared to $87,705 for the same quarter in the prior fiscal year. Comparison of the nine-month period ended December 31, 1997 with the nine-month period ended December 31, 1996. During the nine months ended December 31, 1997, net sales decreased 32% to $48,610,711 as compared to $71,262,620 in the same period in the prior year. The decrease was primarily due to: 1) a $10,011,941 decrease (71%) in Perry Ellis "America" brand fragrance and Perry Ellis brand cosmetics gross sales, as these brands were initially launched in the prior year. Net sales were further impacted by $1,173,719 in returns accepted in the current period for these brands; 2) gross sales of Alexandra de Markoff (AdM) brand cosmetics decreased 40% to $6,195,197, as compared to $10,369,048 in the prior year, due to out-of-stock situations relating to the transfer of manufacturing from Revlon (from whom the Company purchased the AdM brand) to third party manufacturers. The Company believes that production is now substantially in line; 3) gross sales of discontinued brands (Francesco Smalto, Todd Oldham and Vicky Tiel) decreased $4,642,800 during the nine months ended December 31, 1997; and 4) a 7% decrease in gross sales of all brands other than those noted above from $45,689,989 in the prior year to $42,416,305 in the current year. Sales to unrelated customers (which were directly affected by the out-of-stock situation discussed above) decreased 31% to $33,267,489 in the current period compared to $48,471,824 in the same period in the prior year, while sales to related parties decreased 33% to $15,343,222 compared to $22,790,796, in accordance with the Company's strategic plan. Cost of goods sold for the nine months ended December 31, 1997 increased to 43% of net sales as compared to 40% of net sales in the same period in the prior year. The increase was mainly attributable to the closeout of Todd Oldham merchandise at below cost.. Cost of goods sold for sales to unrelated customers and related parties approximated 38% and 54%, respectively, during the nine months ended December 31, 1997. Operating expenses decreased by 21% compared to the prior fiscal year from $33,049,841 to $26,013,283 but increased as a percentage of sales from 46% to 54%. Advertising and promotional expenses decreased 38% to $12,259,418 compared to $19,679,049 in the prior year period, reflecting a reduction in print advertising and promotional expenses for the U.S. department and specialty store business resulting mainly from Perry Ellis and AdM brand activities. The prior year period included increased promotional activity related to the launch of the Perry Ellis "America" brand fragrances. Selling and distribution costs decreased by 2% to $5,748,041 in the current fiscal period as compared to $5,843,892 in the same period of the prior fiscal year, increasing as a percentage of net sales from 8% to 12%. This percentage increase was mainly attributable to the reduction in sales previously discussed, which resulted in a lower sales base to absorb these relatively fixed costs. General and administrative expenses increased by 20% compared to the prior year period from $3,859,898 to $4,638,643, increasing as a percentage of net sales from 5% to 10%, reflecting the full period's effect of staff additions during the first six months of fiscal 1997, increased 4 support required for manufacturing of the AdM cosmetic line and approximately $200,000 of costs in connection with the closing of the Company's French operations. Depreciation and amortization increased by $205,951 which was mainly attributable to a full period amortization of the goodwill from the Richard Barrie Fragrance, Inc. acquisition which occurred on June 28, 1996. Royalties decreased to $1,162,767 for the current period compared to $1,668,539 in the prior year, but remained relatively constant at 2% of net sales. As a result of the above, operating income decreased 81% to $1,841,042 or 4% of net sales for the nine-month period ended December 31, 1997, compared to $9,769,658 or 14% of net sales for the comparable period in the prior year. Interest expense increased by 3% to $1,719,689 in the current fiscal year as compared to $1,677,538 in the same period in the prior year, increasing to 4% of net sales as compared to 2% in the prior year. Exchange gains were $203 in the current year as compared to a gain of $54,360 in the same period in the prior year. As a result, income before extraordinary item and taxes decreased to $121,556 for the current period compared to $8,146,480 or 11% of net sales, in the same period in the prior year. Giving effect to the tax provision, which reflects the non-deductible nature of the loss on the convertible debenture redemption in 1996, the Company reported net income of $75,365 for the nine months ended December 31, 1997, as compared to $4,170,460 for the same period in the prior fiscal year. Liquidity and Capital Resources Working capital decreased to $47,567,752 as of December 31, 1997, compared to $49,320,272 at March 31, 1997, which was mainly attributable to approximately $2,807,000 in treasury stock purchased during the period April 1, 1997 through December 31, 1997, as outlined below. In January 1998, the Company completed the third phase of its common stock buy-back program involving 1,000,000 shares, and the Board of Directors authorized the repurchase of 1,250,000 additional shares. As of February 12, 1998, the Company has repurchased under all phases a total of 2,299,355 shares at a cost of $5,512,851 (1,769,698 shares at a cost of $4,556,539 as of December 31, 1997). The Company has overdraft and trade financing facilities aggregating 16,300,000 French francs (approximately $2,749,000 as of December 31, 1997). These credit facilities are reviewed annually. In May 1997, the Company entered into a three-year loan and Security Agreement (the Credit Agreement) with General Electric Capital Corporation (GECC). Under the Credit Agreement, the Company is able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $25,000,000 at an interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street Journal prime rate, at the Company's option. Proceeds from the Credit Agreement were used, in part, to repay the Company's previous $10,000,000 credit facility with Finova Capital Corporation and Merrill Lynch Financial Services, Inc. 5 GECC has taken a security interest in substantially all of the domestic assets of the Company. The Credit Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GECC. The Credit Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. The Company is not in compliance with certain of these financial covenants. Management is currently negotiating a waiver of this non-compliance with GECC and a modification of the covenants for future periods. Management believes that, based on current circumstances, it will be able to restructure the financial covenants after the completion of the fiscal year ending March 31, 1998, and funds will be sufficient to meet the Company's operating needs. Impact of Currency Exchange The Company's sales and purchases are virtually all in U.S. dollars or French francs. A strengthening of the French franc vis-a-vis the U.S. dollar results in exchange rate losses for the Company. Conversely, a weakening of the French franc vis-a-vis the U.S. dollar results in exchange rate gains for the Company. The Company monitors exchange rates on a daily basis and regularly seeks to evaluate long-term expectations for the French franc in order to minimize its exchange rate risk. From time to time, the Company has engaged in French franc hedging to protect foreign exchange gains. The Company has completed the centralization of manufacturing in the United States and closed its French operations, which will minimize the currency exchange impact on intercompany transactions for the future. PART II. OTHER INFORMATION Item 1. Legal Proceedings There are no legal proceedings of any significance. Item 4. Submission of Matters to a Vote of Security Holders On October 14, 1997, the Company held its annual meeting. The following is a summary of the proposals and corresponding votes. Item No. 1 Amendment to the Company's Certificate of Incorporation to Create a Classified Board of Directors FOR AGAINST ABSTAINED --- ------- --------- 4,104,019 2,913,502 57,492 6 An amendment to the Company's certificate of incorporation requires a vote of a majority of the issued and outstanding common stock of the Company (8,353,912 shares). Although 58% of the votes cast were in favor of the amendment, a majority of the issued and outstanding shares was not obtained. Accordingly, the proposal was not ratified. Item No.2 Nomination and Election of Directors The seven nominees named in the proxy statement were elected, with each director receiving more than 90% of the votes cast. Item No. 3 Ratification of Price Waterhouse LLP as Independent Accountants Over 99% of the votes were cast in favor of the proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None. (b) There were no filings on Form 8-K during the period. 7
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, March 31, ASSETS 1997 1997 - ------ ----------- --------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $462,369 $191,486 Receivables, net of allowance for doubtful accounts, sales returns and allowances of approximately $2,554,799 and $2,494,000 at December 31, 1997 and March 31, 1997, respectively 12,996,006 14,289,841 Trade receivables from related parties, net of allowance for doubtful accounts of $500,000 at December 31, 1997 18,097,985 22,862,335 Inventories, net 34,895,196 35,595,323 Prepaid expenses and other current assets 8,947,855 8,266,126 ------------- ------------ TOTAL CURRENT ASSETS 75,399,411 81,205,111 Equipment and leasehold improvements, net 2,452,382 3,253,800 Trademarks, licenses and goodwill, net 25,724,573 26,783,807 Other 207,382 142,526 ------------- ------------ TOTAL ASSETS $103,783,748 $111,385,244 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Borrowings, current portion $17,990,754 $12,665,065 Accounts payable 7,847,214 11,904,808 Accrued expenses 728,324 1,622,966 Income taxes payable 1,265,367 5,692,000 ------------- ------------ TOTAL CURRENT LIABILITIES 27,831,659 31,884,839 Borrowings, less current portion 4,306,513 4,949,230 Deferred tax liability 432,440 432,440 ------------- ------------ TOTAL LIABILITIES 32,570,612 37,266,509 ------------- ------------ COMMITMENTS AND CONTINGENCIES - - ------------- ------------ STOCKHOLDERS' EQUITY : Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 issued and outstanding Common stock, $0.01 par value, 30,000,000 shares authorized, 17,447,478 shares issued 174,475 174,475 Additional paid-in capital 66,753,596 66,753,596 Retained earnings 9,252,238 9,176,872 Cumulative translation adjustment (277,161) (103,562) ------------- ------------ 75,903,148 76,001,381 Less - 1,808,698 and 420,055 shares of common stock in treasury, at cost, at December 31, 1997 and March 31, 1997, respectively (4,690,012) (1,882,646) ------------- ------------ TOTAL STOCKHOLDERS' EQUITY 71,213,136 74,118,735 ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,783,748 $111,385,244 ============= ============
See notes to consolidated financial statements. 8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three months ended December 31, Nine months ended December 31, 1997 1996 1997 1996 ----------- --------- -------- --------- (Unaudited) (Unaudited) Net sales: Unrelated customers $14,617,374 $18,173,040 $33,267,489 $48,471,824 Related parties 5,758,069 8,846,780 15,343,222 22,790,796 ----------- ----------- ----------- ----------- 20,375,443 27,019,820 48,610,711 71,262,620 Cost of goods sold 9,341,396 10,641,321 20,756,386 28,443,121 ----------- ----------- ----------- ----------- Gross margin 11,034,047 16,378,499 27,854,325 42,819,499 ----------- ----------- ----------- ----------- Operating expenses: Advertising and promotional 5,177,263 8,958,317 12,259,418 19,679,049 Selling and distribution 2,105,189 2,244,973 5,748,041 5,843,892 General and administrative 1,732,616 1,552,679 4,638,643 3,859,898 Depreciation and amortization 732,031 748,890 2,204,414 1,998,463 Royalties 538,088 651,263 1,162,767 1,668,539 ----------- ----------- ----------- ----------- Total operating expenses 10,285,187 14,156,122 26,013,283 33,049,841 ----------- ----------- ----------- ----------- Operating income 748,860 2,222,377 1,841,042 9,769,658 Interest expense and bank charges 613,376 611,473 1,719,689 1,677,538 Exchange losses (gains) 66,936 49,225 (203) (54,360) ----------- ----------- ----------- ----------- Income before extraordinary item and income taxes 68,548 1,561,679 121,556 8,146,480 Income taxes 25,639 572,326 46,191 3,074,372 ----------- ----------- ----------- ----------- Income before extraordinary item 42,909 989,353 75,365 5,072,108 Extraordinary item - loss on conversion of debt - 901,648 - 901,648 ----------- ----------- ----------- ----------- Net income $42,909 $87,705 $75,365 $4,170,460 =========== =========== =========== =========== Earnings per common and common equivalent share: Income before extraordinary item $0.00 $0.06 $0.00 $0.30 Extraordinary item - loss on conversion of debt - ($0.05) - ($0.05) ----------- ----------- ----------- ----------- Net income $0.00 $0.01 $0.00 $0.25 =========== =========== =========== ===========
9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY COMMON STOCK ------------------------ ADDITIONAL NUMBER PAR PAID-IN RETAINED ISSUED VALUE CAPITAL EARNINGS ---------- -------- ------------- ----------- BALANCE at April 1, 1995 3,490,214 $34,902 $11,563,537 $1,271,947 Net income - - - 7,772,691 Issuance of common stock upon exercise of: Employee stock options 11,175 112 33,910 - Warrants 1,056,916 10,569 3,006,022 - Sale of stock in private placements 1,001,514 10,015 7,605,570 - Stock issued in connection with the acquisition of assets 424,000 4,240 3,739,760 - Conversion of debentures, net of unamortized debt issuance costs 1,073,688 10,737 6,932,408 Adjustment for stock split 4,398,919 43,989 - (43,989) Foreign currency translation adjustment - - - - ----------- ----------- ----------- ---------- BALANCE at March 31, 1996 11,456,426 114,564 32,881,207 9,000,649 Net income - - - 176,223 Issuance of common stock upon exercise of: Employee stock options 14,500 145 18,448 - Options 176,000 1,760 1,406,240 - Warrants 60,000 600 415,650 - Stock issued in connection with the acquisition of assets 370,000 3,700 3,002,550 - Conversion of debentures, net of unamortized debt issuance costs 5,370,552 53,706 29,029,501 - Foreign currency translation adjustment - - - - Purchase of 381,055 shares of treasury stock, at cost - - - - ----------- ----------- ----------- ---------- BALANCE at March 31, 1997 17,447,478 174,475 66,753,596 9,176,872 Net income - - - 75,366 Foreign currency translation adjustment Purchase of 1,388,643 shares of treasury stock, at cost ----------- ----------- ----------- ---------- Balance at December 31, 1997 (Unaudited) 17,447,478 $174,475 $66,753,596 $9,252,238 =========== =========== =========== ========== (TABLE CONTINUED) CUMULATIVE TRANSLATION TREASURY ADJUSTMENT STOCK TOTAL ------------ --------- ---------- BALANCE at April 1, 1995 $345,753 ($133,472) $13,082,667 Net income - - 7,772,691 Issuance of common stock upon exercise of: Employee stock options - - 34,022 Warrants - - 3,016,591 Sale of stock in private placements - - 7,615,585 Stock issued in connection with the acquisition of assets - - 3,744,000 Conversion of debentures, net of unamortized debt - - issuance costs 6,943,145 Adjustment for stock split - - - Foreign currency translation adjustment (163,506) - (163,506) ----------- --------- ----------- BALANCE at March 31, 1996 182,247 (133,472) 42,045,195 Net income - - 176,223 Issuance of common stock upon exercise of: Employee stock options - - 18,593 Options - - 1,408,000 Warrants - - 416,250 Stock issued in connection with the acquisition of assets - - 3,006,250 Conversion of debentures, net of unamortized debt issuance costs - - 29,083,207 Foreign currency translation adjustment (285,809) - (285,809) Purchase of 381,055 shares of treasury stock, at cost - (1,749,174) (1,749,174) ----------- --------- ----------- BALANCE at March 31, 1997 (103,562) (1,882,646) 74,118,735 Net income - - 75,366 Foreign currency translation adjustment (173,599) (173,599) Purchase of 1,388,643 shares of treasury stock, at cost (2,807,366) (2,807,366) ----------- --------- ----------- Balance at December 31, 1997 (Unaudited) ($277,161) ($4,690,012) $71,213,136 =========== ========= ===========
See notes to consolidated financial statements. 10
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended December 31, ----------------------------- (Unaudited) 1997 1996 ------------ ------------- Cash flows from operating activities: Net income $75,366 $4,170,460 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,204,414 1,998,463 Changes in assets and liabilities net of effect of acquisitions: Decrease (increase) in trade receivables - customers 1,293,835 (4,031,515) Decrease (Increase) in trade receivables - related parties 4,764,350 (9,882,635) Decrease (Increase) in inventories 94,446 (3,527,479) Increase in prepaid expenses and other current assets (699,363) (1,225,236) (Increase) decrease in other non-current assets (64,856) 287,474 Decrease in accounts payable (4,057,594) (4,070,883) Decrease in accrued expenses (894,642) (301,786) (Decrease) increase in income taxes payable (4,426,633) 2,968,472 ------------ ------------ Total adjustments (1,786,043) (17,785,125) ------------ ------------ Net cash used by operating activities (1,710,677) (13,614,665) ------------ ------------ Cash flows from investing activities: Purchases of equipment and leasehold improvements (308,523) (1,247,655) Purchase of trademarks (55,225) (49,060) Cash received from sale of Vicky Tiel brand 680,553 Cash payments for acquisition of Richard Barrie Fragrances, Inc. - (694,707) ------------ ------------ Net cash provided (used) by investing activities 316,805 (1,991,422) ------------ ------------ Cash flows from financing activities: (Payments) proceeds - receivable financing and overdraft facilities (2,362,201) 250,451 Payments - note payable (63,785) (13,483) (Payments) proceeds - note payable to Finova Capital Corp. (7,878,091) 1,617,686 Proceeds - note payable to GE Capital Corp. 15,663,595 - Proceeds - note payable Eagle Bank - 17,608 (Payments) proceeds - note payable to Lyon Credit Corp. (295,194) 1,443,035 Proceeds - note payable to Popular Bank 203,400 - Payments - note payable to Fred Hayman Beverly Hills (382,645) (355,502) Payments - note payable to International Finance Bank (202,107) - Payments - note payable to Parfums Jean Desprez - (2,535,135) Payments - note payable to Distr. de Perfumes Senderos - (674,722) Payments - note payable to stockholder - (148,545) Payments - note payable to related parties - (50,000) Proceeds - 5% convertible debentures, net - 16,451,774 Purchases of treasury stock (2,807,366) (1,494,764) Proceeds from issuance of common stock - 1,489,520 ------------ ------------ Net cash provided by financing activities 1,875,606 15,997,923 ------------ ------------ Effect of exchange rate changes on cash (210,851) (220,138) ------------ ------------ Net increase in cash and cash equivalents 270,883 171,698 Cash and cash equivalents, beginning of period 191,486 339,423 ------------ ------------ Cash and cash equivalents, end of period $462,369 $511,121 ============ ============
See notes to consolidated financial statements. 11 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. The Consolidated Balance Sheet as of December 31, 1997, the Consolidated Statements of Income for the three-month and nine-month periods ended December 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 1997 and 1996, have been prepared without audit. In the opinion of management, the statements reflect all adjustments consisting of normal recurring adjustments necessary to present fairly the financial position of Parlux Fragrances, Inc., and subsidiaries at December 31, 1997 and the results of their operations and their cash flows for the three-month and nine-month periods ended December 31, 1997 and 1996. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's March 31, 1997 Form 10-K as filed with the Securities and Exchange Commission on June 28, 1997. Certain reclassifications were made to the December 31, 1996 financial statements to conform with the presentation of the December 31, 1997 financial statements. B. Inventories Inventories are stated at the lower of cost ( first-in, first-out method ) or market. The components of inventories are as follows: December 31, 1997 March 31, 1997 ------------------ -------------- Finished products $15,724,398 $16,075,376 Components and packaging material 14,660,966 14,944,196 Raw material 4,509,832 4,575,751 ------------ ------------ $34,895,196 $35,595,323 ============ ============ The above amounts are net of reserves for potential inventory obsolescence of approximately $650,000 and $2,833,000 at December 31, 1997 and March 31, 1997, respectively. C. Acquisitions On June 28, 1996, the Company consummated the acquisition of substantially all of the assets and assumption of certain liabilities of Richard Barrie Fragrances, Inc. (RBF), pursuant to an asset purchase agreement entered into on January 31, 1996. 12 Parlux acquired from RBF certain inventories, fixed assets and licenses relating to the brands Baryshnikov and Melrose Place, as well as fixed assets located in RBF's office and distribution center in Orange, Connecticut. Parlux provided as consideration $750,000 in cash which was paid on July 1, 1996, and 370,000 shares of common stock. The common stock was valued at $3,006,250, the average price of the shares on January 30, 1996, the date of the original asset purchase agreement, which in management's opinion, better reflected the acquisition price, since the average price of the common stock at the date of closing was affected by matters unrelated to the acquisition or the regular operations of the Company. The estimated fair value of the net assets acquired is summarized as follows: Molds and other fixed assets $ 893,856 Inventories, net 1,784,474 Other assets 141,518 Goodwill and licenses 2,417,957 Accounts payable and other liabilities (1,481,555) ---------- Fair value of net assets acquired $3,756,250 ========== D. Borrowings - Banks and Others The composition of debt is as follows:
December 31, 1997 March 31, 1997 ----------------- -------------- Revolving credit facility payable to General Electric Capital Corporation, interest at LIBOR plus 2.50% or prime (8.50% at December 31, 1997) plus .75%, at the Company's option, net of restricted cash of $3,653,363 $15,663,595 $ - Note payable to FHBH, secured by the acquired licensed trademarks, interest at 7.25%, payable in equal monthly installments of $69,863, including interest, through June 2004 4,312,054 4,694,699 Revolving credit facility payable to Finova Capital Corporation, interest at Citibank N.A. prime (8.25% at March 31, 1997) plus 1 3/4 %, repaid in May 1997, net of restricted cash of $884,464 - 7,878,090 Note payable to Lyon Credit Corporation, secured by certain equipment, interest at 11%, payable in equal monthly installments of $19,142, including interest, through September 2001 689,664 984,858 Unsecured $1,000,000 line of credit payable to International Finance Bank, interest at the bank's prime rate plus 2%, due in January 1998 551,018 753,125 Letter of credit refinancing facility of $500,000 payable to Popular Bank of Florida, interest at the bank's prime rate plus 2%, due April 1998 203,400 - Receivable financing and overdraft facilities, interest at 8.75% to 10.75%, payable on demand (1) 748,565 3,110,766 13 Other notes payable 128,971 92,757 ----------- ----------- 22,297,267 17,614,295 Less: long-term borrowings (4,306,513) (4,949,230) ----------- ----------- Short-term borrowings $17,990,754 $12,665,065 =========== ===========
(l) Denominated in French francs In May 1997, the Company entered into a Loan and Security Agreement ( the Credit Agreement ) with General Electric Capital Corporation (GECC), pursuant to which the Company is able to borrow, depending on the availability of a borrowing base, on a revolving basis for a three-year period, up to $25,000,000 at an interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street Journal prime rate, at the Company's option. GECC has taken a security interest in substantially all of the domestic assets of the Company. Proceeds from the Credit Agreement were used, in part, to repay the Company's previous $10,000,000 credit facility with Finova Capital Corporation and Merrill Lynch Financial Services, Inc. The Credit Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GECC. The Credit Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. The Company is not in compliance with certain of these financial covenants. Management is currently negotiating a waiver of this non-compliance with GECC and a modification of the covenants for future periods. The Company has overdraft and trade financing facilities aggregating 16,300,000 French francs (approximately $2,749,000 as of December 31, 1997). These credit facilities are reviewed annually. E. Convertible Debentures During the period November 2, 1995 through March 31, 1996, the Company issued $3,700,000 of 7% convertible debentures and $15,000,000 of 5% convertible debentures (the Debentures), pursuant to Regulation S. The Debentures were convertible into shares of the Company's common stock at 85% of the closing price of the stock as listed on NASDAQ over specific time frames. As of March 31, 1996, $7,000,000 of the Debentures, plus accrued interest of $48,146, had been converted into 1,073,688 shares of common stock. Subsequent to March 31, 1996, the remaining $11,700,000 were converted into 1,348,058 shares of common stock. During April and May 1996, the Company issued an additional $13,000,000 of 5% convertible debentures, $3,000,000 pursuant to Regulation S and $10,000,000 pursuant to Regulation D with the same conversion features and terms as those issued above, of which $9,355,324, plus accrued interest of $130,916, were converted into 1,868,272 shares of common stock. 14 On July 2, 1996, the Company issued an additional $10,000,000 of 5% Debentures, pursuant to Regulation D, with the same conversion features and terms as those issued above, except that the conversion rate was 86%. During October 1996, $8,412,236 of the debentures, plus accrued interest of $72,466, were converted into 2,154,222 shares of common stock. During October 1996, the Company entered into agreements to redeem $5,232,440 of the May and July Debentures which had not been converted, plus $105,638 of accrued interest thereon, by issuing $6,239,726 of 10% bonds which were repaid in accordance with their terms in December 1996. The redemption resulted in a one-time charge to net income of $901,648 during the quarter ended December 31, 1996, which was not deductible for income tax purposes. F. Transactions With Related Parties The Company had net sales of $15,343,222 and $22,790,796 during the nine-month periods ended December 31, 1997 and December 31, 1996, respectively, to Perfumania, Inc. (Perfumania), and no sales during the same periods to L.Luria & Son, Inc. (Luria), companies affiliated with the Company's Chairman and Chief Executive Officer. Net amounts due from Perfumania totaled $17,907,099 and $22,136,106 at December 31, 1997 and March 31, 1997, respectively. Amounts due from Luria totaled $690,886 and $726,229 at December 31, 1997 and March 31, 1997, respectively. Amounts due from related parties are non-interest bearing and are realizable in less than one year. On August 13, 1997, Luria filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Luria owed the Company $690,886. The Company has filed its claim, but it is too early to determine the ultimate outcome. As of December 31, 1997, a reserve for uncollectible accounts totaling $500,000 has been allocated against this receivable. G. Earnings Per Common and Common Equivalent Share Earnings per common and common equivalent share and the weighted average number of shares of common stock outstanding used in the computations, are summarized as follows:
Three-Months Ended December 31, ------------------------------ 1997 1996 ---- ---- Primary Fully Diluted Primary Fully Diluted ------- ------------- ------- ------------- Net income $ 42,909 (1) $87,705 (1) Add-reduction of interest expense - 10,853 (2) ---------- ---------- Adjusted for per share computation $ 42,909 $98,558 ========== ========== Number of shares: Weighted average shares outstanding 16,353,295 16,830,667 Add-net additional shares issuable (3) 39,775 1,206,359 ---------- ---------- Weighted average shares used in the per share computation 16,393,070 18,037,026 ========== ========== Earnings per common and common equivalent share $0.00 $0.01 ===== =====
15
Nine-months Ended December 31, ----------------------------- 1997 1996 ---- ---- Primary Fully Diluted Primary Fully Diluted ------- ------------- ------- ------------- Net income $ 75,365 (1) $4,170,460 (1) Add-reduction of interest expense - 199,491 (2) ----------- ---------- Adjusted for per share computation $ 75,365 $4,369,951 =========== ========== Number of shares: Weighted average shares outstanding 16,655,497 14,339,066 Add-net additional shares issuable (3) 199,948 3,181,786 ----------- ---------- Weighted average shares used in the per share computation 16,855,445 17,520,852 =========== ========== Earnings per common and common equivalent share $0.00 $0.25 ===== =====
(1) The calculation of fully diluted earnings per share was not required, since it would be antidilutive. (2) Reduction of interest expense assumes that the Debentures were converted into shares of common stock on the date of their issuance. Accordingly, no interest expense on the convertible debentures would have been incurred. (3) Assumes exercise or conversion of outstanding common stock equivalents (options, warrants and convertible debentures) at the beginning of the period, or at the date of issuance if issued during the period , net of the assumed repurchase of common stock from exercise proceeds. The assumed repurchase of common stock is based on the average price of the Company's common stock during the period for primary and, when dilutive, the end of period price for fully diluted. H. 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: Nine-months ended December 31, ----------------------------- 1997 1996 ---- ---- Cash paid for: Interest $1,697,691 $1,724,466 Income taxes $4,472,253 $264,129 In addition to the RBF acquisition discussed in Note C, which was partially funded through the issuance of common stock and notes, the Company used barter credits totaling $286,000 in payment of advertising expenses during 1996. Additionally, during 1996, notes payable and accrued interest in the amount of $300,000 and $53,323, respectively, were repaid through the issuance of common stock in connection with the exercise of certain warrants and options. 16 I. Income Taxes As of March 31, 1995, the Company had utilized its remaining U.S. net operating loss carryovers. The provision for income taxes for the period ended December 31, 1997 reflects an effective tax rate of approximately 38%, while the provision for 1996 reflects the non-deductible nature of the loss on the convertible debenture redemption. J. License and Distribution Agreements PERRY ELLIS: The Company acquired the PERRY ELLIS license from Sanofi Beaute in December 1994. The PERRY ELLIS license is entering its twelfth year, and is renewable every two years if the average annual sales in the completed period exceed 75% of the average sales of the previous four years. All minimum sales levels have been met, and the Company believes that this will continue. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon net sales levels achieved in the prior year. FRED HAYMAN: In June 1994, the Company entered into an Asset Purchase Agreement with Fred Hayman Beverly Hills, Inc. (FHBH), pursuant to which the Company purchased substantially all of the assets and liabilities of the FHBH fragrance division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year license to use FHBH's United States Class 3 trademarks FRED HAYMAN(R), 273(R), TOUCH(R), WITH LOVE(R) and FRED HAYMAN PERSONAL SELECTIONS(R) and the corresponding international registrations. There are no minimum sales or advertising requirements. BARYSHNIKOV: The Company assumed the BARYSHNIKOV license as part of the RBF acquisition, pursuant to which the Company has the exclusive right to manufacture and distribute fragrances and personal care products using the BARYSHNIKOV trademark. The Company is currently negotiating a new four-year agreement as the initial term of the license expired on December 31, 1997. The license would require the payment of royalties, and the spending of certain minimum amounts for advertising based upon the annual net sales of the products. PHANTOM OF THE OPERA: In April 1993, the Company entered into an exclusive worldwide agreement with Creative Fragrances, Inc., for the worldwide distribution rights to PHANTOM OF THE OPERA covering men's and women's fragrances and beauty related products. The agreement expires in April 1998. Royalties are payable at 7% of net sales, and there are no minimum royalty requirements, nor are there minimum requirements for sales or advertising. TODD OLDHAM: In December 1992, the Company entered into an exclusive worldwide licensing agreement with L-7 Designs, Inc. in which the Company secured the rights to manufacture and distribute fragrances and beauty care products using the TODD OLDHAM trademark for an initial period of three-years, renewable for subsequent three-year and four-year periods upon achieving specified sales or minimum royalty levels. The license requires the payment of royalties, which decline as a percentage of net sales 17 as net sales volume increases, and the spending of certain minimum amounts for advertising based upon net sales levels. The initial three-year period expired March 31, 1997, and the Company has informed the Licensor that it would not renew the agreement. In accordance with the licensing agreement, the Company may produce and sell the TODD OLDHAM trademarked products until March 31, 1998, with no sales or advertising minimums. Sales of TODD OLDHAM products represented less than 1% and 2% of total Company net sales for the nine-month periods ended December 31, 1997 and 1996, respectively. VICKY TIEL: In September 1992, the Company entered into an exclusive worldwide license agreement with VICKY TIEL S.A. in which the Company secured the rights to manufacture and distribute fragrances and beauty care products using the VICKY TIEL trademark for an initial five-year period, renewable for a subsequent five-year period upon achieving specified sales or minimum royalty levels. On August 8, 1997, the Company consummated the sale of certain assets relating to the VICKY TIEL brands to Five Star Fragrances Company, Inc. ("FSF") for approximately $680,000, which closely approximates the net book value of assets sold. The Company sold to FSF all inventories, fixed assets and licenses related to the brands, and FSF assumed certain liabilities for purchase orders issued prior to August 8, 1997. FRANCESCO SMALTO: In May 1995, the Company terminated its license agreement with FRANCESCO SMALTO INTERNATIONAL (SMALTO) for breach of contract. On October 5, 1995, the Company entered into a transition and termination agreement with SMALTO which provided for the continued use of the FRANCESCO SMALTO trademark through December 31, 1996. The agreement contained certain production restrictions and required a fixed amount of royalties during the period. Sales of FRANCESCO SMALTO products represented approximately 2% of total Company net sales for the nine-month period ended December 31, 1996. * * * * * * * * * * 18 SIGNATURES Pursuant to the requirements 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, Chairman and Chief Executive Officer /s/ Frank A. Buttacavoli - ----------------------------------------- Frank A. Buttacavoli, Executive Vice President, Chief Financial Officer and Director Date: February 13, 1998 19 EX-27 2 FDS --
5 (Replace this text with the legend) 1,000 9-MOS MAR-31-1998 APR-01-1997 DEC-31-1997 462,369 0 15,550,805 2,554,799 34,895,196 75,399,411 3,533,341 1,080,959 103,783,748 27,831,659 0 0 0 174,475 71,038,661 103,783,748 48,610,711 48,610,711 20,756,386 27,732,769 25,773,080 240,000 1,719,689 121,556 46,191 75,365 0 0 0 75,365 0.00 0.00
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