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.
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
ASSETS 1997 1997
- ------ ----------- ---------
(Unaudited)
<S> <C> <C>
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
============= ============
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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 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
------------ --------- ----------
<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 - - 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
=========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended December 31,
-----------------------------
(Unaudited)
1997 1996
------------ -------------
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 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 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
<PAGE>
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
=========== ===========
</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. 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
<PAGE>
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:
<TABLE>
<CAPTION>
Three-Months Ended December 31,
------------------------------
1997 1996
---- ----
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
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
===== =====
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Nine-months Ended December 31,
-----------------------------
1997 1996
---- ----
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
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
===== =====
</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:
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 462,369
<SECURITIES> 0
<RECEIVABLES> 15,550,805
<ALLOWANCES> 2,554,799
<INVENTORY> 34,895,196
<CURRENT-ASSETS> 75,399,411
<PP&E> 3,533,341
<DEPRECIATION> 1,080,959
<TOTAL-ASSETS> 103,783,748
<CURRENT-LIABILITIES> 27,831,659
<BONDS> 0
0
0
<COMMON> 174,475
<OTHER-SE> 71,038,661
<TOTAL-LIABILITY-AND-EQUITY> 103,783,748
<SALES> 48,610,711
<TOTAL-REVENUES> 48,610,711
<CGS> 20,756,386
<TOTAL-COSTS> 27,732,769
<OTHER-EXPENSES> 25,773,080
<LOSS-PROVISION> 240,000
<INTEREST-EXPENSE> 1,719,689
<INCOME-PRETAX> 121,556
<INCOME-TAX> 46,191
<INCOME-CONTINUING> 75,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,365
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
