<PAGE> 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: September 30, 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 November 12, 1997, 16,493,923 shares of the issuer's common stock
were outstanding.
<PAGE> 2
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 October 1997, the Company completed the first two phases of its common stock
buy-back program involving 850,000 shares, and the Board of Directors authorized
a third phase of 1,000,000 additional shares. As of November 12, 1997, the
Company has repurchased under all phases a total of 914,555 shares at a cost of
$2,929,817 (778,255 shares at a cost of $2,652,818 as of September 30, 1997).
On May 23, 1997, the Company entered into an agreement with General Electric
Capital Corporation for a $25 million senior secured revolving credit facility.
See "Liquidity and Capital Resources" for further discussion.
On August 8, 1997, the Company consummated the sale of certain assets relating
to the Vicky Tiel brands to Five Star Fragrances Company, Inc. See Note I to the
consolidated financial statements for further discussion.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 WITH THE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996.
During the quarter ended September 30, 1997, net sales decreased 41% to
$14,937,956 as compared to $25,503,173 in the same period in the prior year. The
decrease was primarily due to: 1) the decrease in Perry Ellis "America" brand
fragrance gross sales of $2,471,345, as this brand was launched during the six
months ended September 30, 1996, and net sales were further impacted by returns
of $626,670 accepted in the current period for this brand; 2) gross sales of
Alexandra de Markoff (AdM) brand cosmetics decreased 51% to $1,895,075, as
compared to $3,855,524 in the prior year, due to out-of-stock situations
relating to the transition 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 $1,621,861 to $84,469,
as compared to $1,706,330 during the six months ended September 30, 1996; and 4)
gross
2
<PAGE> 3
sales of all brands other than those noted above decreased by 22% from
$17,102,246 in the prior year to $13,318,414 in the current year.
Sales to unrelated customers, which were directly affected by the out-of-stock
situation discussed above, decreased 40% to $9,475,994 in the current period
compared to $15,912,920 in the same period in the prior year. Sales to related
parties decreased 43% to $5,461,962 in the current quarter compared to
$9,590,253 in the same period in the prior fiscal year, in accordance with the
Company's strategic plan.
Cost of goods sold decreased as a percentage of net sales from 45% for the
quarter ended September 30, 1996 to 43% for the current quarter. The decrease
was mainly attributable to the closeout of the remaining Francesco Smalto
merchandise in accordance with the Transition and Termination Agreement which
terminated on September 30, 1996, and to the closeout of ancillary brands
purchased as part of the Richard Barrie Fragrances acquisition. Cost of goods
sold for sales to unrelated customers and related parties approximated 36% and
55%, respectively, during the quarter ended September 30, 1997.
Operating expenses decreased by 23% compared to the prior fiscal year from
$10,021,525 to $7,722,811, but increased as a percentage of net sales from 39%
to 52%. Advertising and promotional expenses decreased 47% to $3,118,864
compared to $5,847,568 in the prior year period, reflecting a reduction in print
advertising and promotional expenses in connection with 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 increased by 9% to $1,971,540 in the current
fiscal period as compared to $1,802,910 in the same period of the prior fiscal
year, increasing as a percentage of net sales from 7% to 13%. This increase was
mainly attributable to the reduction in sales previously discussed, which
resulted in a lower sales base to absorb these fixed costs. General and
administrative expenses increased by 27% compared to the prior year period from
$1,801,133 to $2,292,276, increasing as a percentage of net sales from 7% to
15%, reflecting the full period's effect of staff additions during the first six
months of fiscal 1997 and additional support required for manufacturing of the
AdM cosmetic line. Royalties decreased to $340,131 for the current period
compared to $569,914 in the prior year, but remained relatively constant at 2%
of net sales.
As a result of the above, the Company had operating income of $756,197 or 5% of
net sales for the three-month period ended September 30, 1997, compared to
$3,965,342 or 16% of net sales for the comparable period in the prior year.
Interest expense increased to $691,255 in the current fiscal year as compared to
$578,192 in the same period in the prior year, reflecting increased borrowings.
Exchange losses were $36,874 in the current year as compared to exchange gains
of $77,793 in the same period in the prior year. Income before taxes for the
current fiscal year was $28,068 compared to $3,464,943 or 14% of net sales, in
the same period in the prior year.
Giving effect to the tax provision, the Company reported net income of $16,949
for the current quarter ended September 30, 1997, as compared to $2,148,680 for
the same quarter in the prior fiscal year.
3
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COMPARISON OF THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1997 WITH THE SIX-MONTH
PERIOD ENDED SEPTEMBER 30, 1996.
During the six months ended September 30, 1997, net sales decreased 36% to
$28,235,268 as compared to $44,242,800 in the same period in the prior year. The
decrease was primarily due to: 1) the decrease in Perry Ellis "America" brand
fragrance and Perry Ellis brand cosmetics gross sales of $6,580,262, as these
brands were launched during the six months ended September 30, 1996, and net
sales were further impacted by returns of $1,030,577 accepted in the current
period for these brands; 2) gross sales of Alexandra de Markoff (AdM) brand
cosmetics decreased 48% to $3,892,967, as compared to $7,506,571 in the prior
year, due to out-of-stock situations relating to the transition 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 $2,530,369 to $373,108, as compared to $2,903,477 during
the six months ended September 30, 1996; and 4) gross sales of all brands other
than those noted above decreased by 10% from $26,282,120 in the prior year to
$23,549,848 in the current year.
Sales to unrelated customers, which were directly affected by the out-of-stock
situation discussed above, decreased 38% to $18,650,115 in the current period
compared to $30,298,784 in the same period in the prior year. Sales to related
parties decreased 31% to $9,585,153 in the current period compared to
$13,944,016 in the same period in the prior fiscal year.
Cost of goods sold for the six months ended September 30, 1997 remained
relatively constant at 40% of net sales. Cost of goods sold for sales to
unrelated customers and related parties approximated 34% and 53%, respectively,
during the six months ended September 30, 1997.
Operating expenses decreased by 17% compared to the prior fiscal year from
$18,893,719 to $15,728,096 but increased as a percentage of sales from 43% to
56%. Advertising and promotional expenses decreased 34% to $7,082,155 compared
to $10,720,732 in the prior year period, reflecting a reduction in print
advertising and promotional expenses in connection with 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 increased by 2% to $3,728,706 in the current fiscal period as
compared to $3,654,518 in the same period of the prior fiscal year, increasing
as a percentage of net sales from 8% to 13%. This increase was mainly
attributable to the reduction in sales previously discussed, which resulted in a
lower sales base to absorb these fixed costs. General and administrative
expenses increased by 23% compared to the prior year period from $3,501,193 to
$4,292,556, increasing as a percentage of net sales from 8% to 15%, reflecting
the full period's effect of staff additions during the first six months of
fiscal 1997 and increased support required for manufacturing of the AdM cosmetic
line. Royalties decreased to $624,679 for the current
4
<PAGE> 5
period compared to $1,017,276 in the prior year, but remained relatively
constant at 2% of net sales.
As a result of the above, the Company had operating income of $1,092,182 or 4%
of net sales for the six-month period ended September 30, 1997, compared to
$7,547,281 or 17% of net sales for the comparable period in the prior year.
Interest expense increased by 4%, with $1,106,313 in the current fiscal year as
compared to $1,066,065 in the same period in the prior year, increasing to 4% of
net sales as compared to 3% in the prior year. Exchange gains were $67,139 in
the current year as compared to $103,585 in the same period in the prior year.
Income before taxes for the current fiscal year was $53,008 compared to
$6,584,801 or 15% of net sales, in the same period in the prior year.
Giving effect to the tax provision, the Company reported net income of $32,456
for the six months ended September 30, 1997, as compared to $4,082,755 for the
same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital remained relatively constant at $49,185,652 as of September 30,
1997, compared to $49,320,272 at March 31, 1997.
During July 1996 and January 1997, the Board of Directors authorized the
repurchase of up to 350,000 and 500,000 shares of the Company's common stock,
respectively. Phases one and two of the repurchase were completed during October
1997, at which time the Board of Directors authorized a third phase for the
repurchase of an additional 1,000,000 shares. As of November 12, 1997, the
Company has repurchased under all phases a total of 914,555 shares at a cost of
$2,929,817 (778,255 shares at a cost of $2,652,818 as of September 30, 1997).
The Company has overdraft and trade financing facilities aggregating 16,300,000
French francs (approximately $2,749,000 as of September 30, 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.
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
5
<PAGE> 6
ratios. Due mainly to the out-of-stock situation previously discussed which
resulted in lost revenues and profits, 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 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 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) There were no filings on Form 8-K during the period.
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
<PAGE> 7
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.
7
<PAGE> 8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, March 31,
1997 1997
--------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 523,364 $ 191,486
Receivables, net of allowance for
doubtful accounts, sales returns and
allowances of approximately $1,783,000 and $2,494,000
at September 30, 1997 and March 31, 1997, respectively 12,104,489 14,289,841
Trade receivables from related parties, net of allowance for
doubtful accounts of $350,000 at September 30, 1997 23,647,969 22,862,335
Inventories, net 36,027,438 35,595,323
Prepaid expenses and other current assets 9,275,054 8,266,126
------------- -------------
TOTAL CURRENT ASSETS 81,578,314 81,205,111
Equipment and leasehold improvements, net 2,637,716 3,253,800
Trademarks, licenses and goodwill, net 26,081,416 26,783,807
Other 134,419 142,526
------------- -------------
TOTAL ASSETS $ 110,431,865 $ 111,385,244
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ 21,213,448 $ 12,665,065
Accounts payable 8,907,490 11,904,808
Accrued expenses 840,246 1,622,966
Income taxes payable 1,431,478 5,692,000
------------- -------------
TOTAL CURRENT LIABILITIES 32,392,662 31,884,839
Borrowings, less current portion 4,501,431 4,949,230
Deferred tax liability 432,440 432,440
------------- -------------
TOTAL LIABILITIES 37,326,533 37,266,509
------------- -------------
COMMITMENTS -- --
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 0 shares 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 9,209,328 9,176,872
Cumulative translation adjustment (245,777) (103,562)
------------- -------------
75,891,622 76,001,381
Less - 817,255 and 420,055 shares of common stock in treasury, at cost,
at September 30, 1997 and March 31, 1997, respectively (2,786,290) (1,882,646)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 73,105,332 74,118,735
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,431,865 $ 111,385,244
============= =============
</TABLE>
See notes to consolidated financial statements.
8
<PAGE> 9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended September30, Six months ended September 30,
------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Unrelated customers $ 9,475,994 $ 15,912,920 $ 18,650,115 $ 30,298,784
Related parties 5,461,962 9,590,253 9,585,153 13,944,016
------------ ------------ ------------ ------------
14,937,956 25,503,173 28,235,268 44,242,800
Cost of goods sold 6,458,948 11,516,306 11,414,990 17,801,800
------------ ------------ ------------ ------------
Gross margin 8,479,008 13,986,867 16,820,278 26,441,000
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 3,118,864 5,847,568 7,082,155 10,720,732
Selling and distribution 1,971,540 1,802,910 3,728,706 3,654,518
General and administrative 2,292,276 1,801,133 4,292,556 3,501,193
Royalties 340,131 569,914 624,679 1,017,276
------------ ------------ ------------ ------------
Total operating expenses 7,722,811 10,021,525 15,728,096 18,893,719
------------ ------------ ------------ ------------
Operating income 756,197 3,965,342 1,092,182 7,547,281
Interest expense and bank charges 691,255 578,192 1,106,313 1,066,065
Exchange losses (gains) 36,874 (77,793) (67,139) (103,585)
------------ ------------ ------------ ------------
Income before income taxes 28,068 3,464,943 53,008 6,584,801
Income taxes 11,119 1,316,263 20,552 2,502,046
------------ ------------ ------------ ------------
Net income $ 16,949 $ 2,148,680 $ 32,456 $ 4,082,755
============ ============ ============ ============
Earnings per common and common
equivalent share $ 0.00 $ 0.12 $ 0.00 $ 0.25
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 10
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
NUMBER PAR PAID-IN RETAINED
ISSUED VALUE CAPITAL EARNINGS
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
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 issued in connection with the acquisition
of assets 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 -- -- -- 32,456
Foreign currency translation adjustment -- -- -- --
Purchase of 397,200 shares of treasury stock,
at cost -- -- -- --
----------- ----------- ----------- ------------
BALANCE at September 30, 1997 (Unaudited) 17,447,478 $ 174,475 $66,753,596 $ 9,209,328
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
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 issued in connection with the acquisition
of assets -- -- 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 -- -- 32,456
Foreign currency translation adjustment (142,215) -- (142,215)
Purchase of 397,200 shares of treasury stock,
at cost -- (903,644) (903,644)
------------ ------------ -----------
BALANCE at September 30, 1997 (Unaudited) $ (245,777) $ (2,786,290) $73,105,332
============ ============ ===========
</TABLE>
See notes to consolidated financial statements
10
<PAGE> 11
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
(Unaudited)
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $32,456 $4,082,755
------------ ------------
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 1,480,298 1,156,287
Changes in assets and liabilities net of effect of acquisitions:
Decrease (increase) in trade receivables - customers 2,185,352 (4,043,956)
Increase in trade receivables - related parties (785,634) (8,216,650)
Increase in inventories (1,037,797) (6,398,685)
Increase in prepaid expenses and other current assets (1,026,562) (2,382,774)
Decrease in other non-current assets 8,107 223,644
Decrease in accounts payable (2,997,318) (7,786,633)
(Decrease) increase in accrued expenses (782,719) 207,488
(Decrease) increase in income taxes payable (4,260,522) 1,602,638
------------ ------------
Total adjustments (7,216,795) (25,638,641)
------------ ------------
Net cash used by operating activities (7,184,339) (21,555,886)
------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (142,473) (472,019)
Purchase of trademarks (30,294) (52,723)
Cash received in sale of Vicky Tiel brand 680,553
Cash paid in acquisition of Richard Barrie Fragrances, Inc. - (694,707)
------------ ------------
Net cash provided (used) by investing activities 507,786 (1,219,449)
------------ ------------
Cash flows from financing activities:
Payments - receivable financing and overdraft facilities (1,672,821) (400,881)
Payments - note payable (34,942) (8,796)
(Payments) proceeds - note payable to Finova Capital Corp. (7,878,091) 982,231
Proceeds - note payable to GE Capital Corp. 17,845,461 -
Proceeds - note payable Eagle Bank - 12,608
(Payments) proceeds - note payable to Lyon Credit Corp. (245,238) 1,481,186
Proceeds - note payable to Popular Bank 149,000 -
Payments - note payable to Fred Hayman Beverly Hills (252,785) (234,698)
Proceeds - note payable to International Finance Bank 190,000 -
Payments - note payable to Parfums Jean Desprez - (1,685,135)
Payments - note payable to Distr. de Perfumes Senderos - (674,722)
Payments - note payable to stockholder - (148,545)
Proceeds - 5% convertible debentures, net - 22,691,500
Purchases of treasury stock (903,644) (479,913)
Proceeds from issuance of common stock - 1,426,593
------------ ------------
Net cash provided by financing activities 7,196,940 22,961,428
------------ ------------
Effect of exchange rate changes on cash (188,509) (91,211)
------------ ------------
Net increase in cash and cash equivalents 331,878 94,882
Cash and cash equivalents, beginning of period 191,486 339,423
------------ ------------
Cash and cash equivalents, end of period $523,364 $434,305
============ ============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 12
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. The Consolidated Balance Sheet as of September 30, 1997, the Consolidated
Statements of Income for the three-month and six-month periods ended September
30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the
six-month periods ended September 30, 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 September 30,
1997 and the results of their operations and their cash flows for the
three-month and six-month periods ended September 30, 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 September 30, 1996 financial
statements to conform with the presentation of the September 30, 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:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------- --------------
<S> <C> <C>
Finished products $15,444,204 $16,075,376
Components and packaging material 15,326,909 14,944,196
Raw material 5,256,325 4,575,751
----------- -----------
$36,027,438 $35,595,323
=========== ===========
</TABLE>
The above amounts are net of reserves for potential inventory obsolescence of
approximately $1,606,000 and $2,833,000 at September 30, 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.
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.
12
<PAGE> 13
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:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
D. BORROWINGS - BANKS AND OTHERS
The composition of debt is as follows:
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Revolving credit facility payable to General Electric
Capital Corporation, interest at LIBOR plus 2.50% or
prime (8.50% at September 30, 1997) plus .75%, at the
Company's option, net of restricted cash of $568,134 $17,845,461 $ -
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 4,441,914 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 739,620 984,858
Unsecured $1,000,000 line of credit payable to
International Finance Bank, interest at the bank's
prime rate plus 2%, due January 1, 1998 943,125 753,125
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 149,000 -
Receivable financing and overdraft facilities, interest at
8.75% to 10.75%, payable on demand(1) 1,437,945 3,110,766
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
Other notes payable 157,814 92,757
----------- -----------
25,714,879 17,614,295
Less: long-term borrowings (4,501,431) (4,949,230)
----------- -----------
Short-term borrowings $21,213,448 $12,665,065
=========== ===========
</TABLE>
(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. Due mainly to the out-of-stock situation previously
discussed which resulted in lost revenues and profits, 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 September 30, 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
<PAGE> 15
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 $9,585,153 and $13,944,016 during the six-month
periods ended September 30, 1997 and September 30, 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 $23,307,083 and
$22,136,106 at September 30, 1997 and March 31, 1997, respectively. Amounts due
from Luria totaled $690,886 and $726,229 at September 30, 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 September 30, 1997, a reserve for
uncollectible accounts totaling $350,000 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:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996
---- ----
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Net income $ 16,949 (1) $ 2,148,680 (1)
Add-reduction of interest expense - 112,877 (2)
----------- -----------
Adjusted for per share computation $ 16,949 $ 2,261,557
=========== ===========
Number of shares:
Weighted average shares outstanding 16,713,282 13,803,867
Add-net additional shares issuable(3) 102,583 4,695,492
----------- -----------
Weighted average shares used in the per
share computation 16,815,864 18,499,349
=========== ===========
Earnings per common and common
equivalent share $0.00 $0.12
===== =====
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996
---- ----
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Net income $ 32,456 (1) $ 4,082,775 (1)
Add-reduction of interest expense - 189,736(2)
----------- -----------
Adjusted for per share computation $ 32,456 $ 4,272,481
=========== ===========
Number of shares:
Weighted average shares outstanding 16,807,423 13,079,576
Add-net additional shares issuable(3) 235,165 3,967,958
----------- -----------
Weighted average shares used in the per
share computation 17,042,588 17,047,534
=========== ===========
Earnings per common and common
equivalent share $0.00 $0.25
===== =====
</TABLE>
(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:
<TABLE>
<CAPTION>
SIX-MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash paid for:
Interest $1,070,848 $955,842
Income taxes $4,296,074 $179,040
</TABLE>
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 $149,000 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
<PAGE> 17
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 periods ended September
30, 1997 and 1996 reflects an effective tax rate of approximately 38%.
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 initial term of the license expires on December 31,
1997, renewable for subsequent three and four-year periods upon achieving
specified sales or minimum royalty levels. The license requires the payment of
royalties, and the spending of certain minimum amounts for advertising based
upon the annual net sales of the products.
PHANTOM 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 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,
17
<PAGE> 18
1997, and the Company has informed the Licensor that it will 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 3% of total Company net sales for the six-month periods ended
September 30, 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 September 30, 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 six-month period ended September 30, 1996.
* * * * * * * * * *
18
<PAGE> 19
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: November 12, 1997
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 523,364
<SECURITIES> 0
<RECEIVABLES> 13,887,804
<ALLOWANCES> (1,783,315)
<INVENTORY> 36,027,438
<CURRENT-ASSETS> 81,578,314
<PP&E> 7,617,190
<DEPRECIATION> (4,979,474)
<TOTAL-ASSETS> 110,431,865
<CURRENT-LIABILITIES> 32,392,662
<BONDS> 0
0
0
<COMMON> 174,475
<OTHER-SE> 72,930,857
<TOTAL-LIABILITY-AND-EQUITY> 110,431,865
<SALES> 28,235,268
<TOTAL-REVENUES> 28,235,268
<CGS> 11,414,990
<TOTAL-COSTS> 11,414,990
<OTHER-EXPENSES> 15,600,957
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 1,106,313
<INCOME-PRETAX> 53,008
<INCOME-TAX> 20,552
<INCOME-CONTINUING> 32,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,456
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
