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: June 30, 1998
-------------
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
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PARLUX FRAGRANCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-2562955
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(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 August 12, 1998, 14,755,319 shares of the issuer's common stock
were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
- ------ --------------------
See pages 6 to 9.
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 an additional 1,250,000 shares. As of June 30,
1998, the Company has repurchased, under all phases, a total of 2,653,159 shares
at a cost of $6,198,288, or 15% of the outstanding shares at the inception of
the program, which is ongoing. At June 30, 1998, there were 14,760,319 shares
outstanding.
On June 10, 1998, the Company entered into a long-term agreement to license the
worldwide fragrance rights to the BAL A VERSAILLES/JEAN DESPREZ brands to
Genesis International Marketing Corporation. See Note C to the accompanying
consolidated financial statements for further discussion.
In July 1998, the Company filed an amendment to its Form 10-K for the years
ended March 31, 1996 and 1997, complying with a 1997 announcement by the SEC to
account for the value attributable to the beneficial conversion feature on
convertible debentures issued during fiscal 1997 and 1996. The effect of the
restatement was to decrease net income for fiscal 1997 by $3,454,143, resulting
in a net loss of ($3,277,920), and to decrease net income for fiscal 1996 by
$2,800,210, resulting in net income of $4,972,481. The total stockholders'
equity balance at March 31, 1997, as previously reported, was not affected by
the restatement. See Note E to the accompanying consolidated financial
statements for further discussion.
Results of Operations
- ---------------------
Comparison of the three-month period ended June 30, 1998 with the three-month
- -----------------------------------------------------------------------------
period ended June 30, 1997.
- --------------------------
During the quarter ended June 30, 1998, net sales increased 15% to $15,307,610
as compared to $13,297,312 for the same period for the prior year. The prior
year period included sales of $2,250,129 of Alexandra de Markoff (AdM) cosmetics
and Bal a Versailles (BAV) fragrances, which were licensed to third parties
during March and June
2
<PAGE>
1998, respectively. The comparable period increase excluding these two brands
was 38%. The increase is due to the continuing strength of the Perry Ellis brand
products, with total sales of all Perry Ellis brands increasing 46% compared to
the same period in the prior year from $7,223,438 to $10,518,386. Sales of the
Company's own trademark, Animale, also increased by 41% compared to the same
prior year period from $1,493,162 to $2,110,322.
Sales to unrelated customers decreased 1% to $9,084,467 in the current period,
compared to $9,174,121 in the same period in the prior year, reflecting the
licensing of the AdM brand in March 1998, which products were only sold to
unrelated customers. Without the affect of AdM, sales to unrelated customers
increased 27%. Sales to related parties increased 49% to $6,223,143 in the
current quarter compared to $4,123,191 in the same period in the prior fiscal
year.
Cost of goods sold increased as a percentage of net sales from 37% for the
quarter ended June 30, 1997 to 41% for the current quarter. The increase was
mainly attributable to the increase in the percentage of net sales to related
parties as compared to total net sales. Cost of goods sold on sales to unrelated
customers and related parties approximated 36% and 48%, respectively, during the
quarter ended June 30, 1998.
Operating expenses decreased by 2% compared to the prior fiscal year from
$8,005,285 to $7,882,831, decreasing as a percentage of net sales from 60% to
52%. Advertising and promotional expenses increased 9% to $4,309,402 compared to
$3,963,291 in the prior year period, reflecting an increase in print advertising
and promotional expenses in connection with the launch of Fred Hayman's
"Hollywood" for women. Selling and distribution costs decreased 15% to
$1,458,425 in the current fiscal period as compared to $1,714,878 in the same
period of the prior fiscal year, decreasing as a percentage of net sales from
13% to 10%. General and administrative expenses decreased by 22% compared to the
prior year period from $1,283,061 to $1,000,421, decreasing as a percentage of
net sales from 10% to 7%. The above decreases reflect cost reductions as a
result of the Company's restructuring during the quarter ended March 31, 1998
and the support previously required for the AdM cosmetic line. Royalties
increased to $481,039 for the current period compared to $284,548 in the prior
year, and increased as a percentage of sales from 2% to 3%, primarily due to the
increase in sales of Perry Ellis brand products as a percentage of total sales.
Depreciation and amortization decreased by $125,963 reflecting the reduction in
depreciation of molds and equipment relating to discontinued and licensed
brands.
As a result of the above, the Company had operating income of $1,169,756 or 8%
of net sales for the three-month period ended June 30, 1998, compared to
$335,985 or 3% of net sales for the comparable period in the prior year.
Interest expense increased to $504,459 in the current fiscal year as compared to
$415,058 in the same period in the prior year, remaining relatively constant at
3% of net sales. Exchange gains were $8,538 in the current year as compared to
$104,013 in the same period in the prior year. Income before taxes for the
current fiscal year was $673,835, or 4% of net sales compared to $24,940 in the
same period in the prior year.
3
<PAGE>
Giving effect to the tax provision, net income amounted to $417,778 or 3% of net
sales for the current quarter ended June 30, 1998, as compared to $15,507 for
the same quarter in the prior fiscal year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $36,844,681 as of June 30, 1998, compared to
$36,323,891 at March 31, 1998, reflecting the current period's net income.
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 an additional 1,250,000 shares. As of June 30,1998,
the Company has repurchased under all phases a total of 2,653,159 shares at a
cost of $6,198,288. The accompanying consolidated balance sheets also include
treasury stock transactions prior to fiscal 1996.
In May 1997, the Company entered into a three-year loan and Security Agreement
(the Credit Agreement) with General Electric Capital Corporation (GECC). Under
the Credit Agreement, the Company is able to borrow, on a revolving basis,
depending on the availability of a borrowing base, 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 ratios. During the fiscal year ended March
31, 1998, the Company was not in compliance with certain financial covenants
relating to "Earnings Before Interest, Taxes, Depreciation and Amortization"
(EBITDA), minimum tangible net worth and minimum fixed charge coverage ratio, as
well as a restricted payment covenant concerning the amount of treasury stock
which can be purchased by the Company. GECC has agreed to waive this
noncompliance through June 30, 1998, and has amended the Credit Agreement to
reflect changes in certain covenants going forward.
Management believes that, based on current circumstances, and the recent
restructuring activities which have reduced overhead, funds from operations, the
income tax refund and the Credit Agreement will be sufficient to fund the
Company's operating needs.
Impact of Currency Exchange
- ---------------------------
The Company has completed the centralization of manufacturing in the United
States and closed its French operations which will minimize the currency
exchange impact in the future.
4
<PAGE>
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 - None.
(b) There were no filings on Form 8-K during the period.
5
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1998 1998
- --------------------------------------------------- -------------------- --------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $170,111 $205,760
Receivables, net of allowance for
doubtful accounts, sales returns and
allowances of approximately $2,141,000 and $2,170,000
at June 30, 1998 and March 31, 1998, respectively 6,712,922 9,403,548
Trade receivables from related parties 21,126,345 17,973,197
Inventories, net 25,736,883 24,629,669
Prepaid expenses and other current assets 10,046,031 9,949,959
Income tax receivable 4,347,134 4,347,134
-------------------- --------------------
TOTAL CURRENT ASSETS 68,139,426 66,509,267
Equipment and leasehold improvements, net 1,692,665 2,020,741
Trademarks, licenses and goodwill, net 25,000,208 25,378,263
Other 1,934,423 1,972,794
-------------------- --------------------
TOTAL ASSETS $96,766,722 $95,881,065
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $18,918,345 $17,853,772
Accounts payable 9,880,239 9,674,407
Accrued expenses 1,871,918 2,033,090
Income taxes payable 624,243 624,107
-------------------- --------------------
TOTAL CURRENT LIABILITIES 31,294,745 30,185,376
Borrowings, less current portion 3,904,752 4,107,618
Deferred tax liability 419,632 419,632
-------------------- --------------------
TOTAL LIABILITIES 35,619,129 34,712,626
-------------------- --------------------
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, 17,452,478 and 17,447,478 shares issued
at June 30, 1998 and March 31, 1998, respectively 174,525 174,475
Additional paid-in capital 73,015,087 73,007,949
Accumulated deficit (5,346,626) (5,764,404)
Cumulative translation adjustment (363,631) (355,331)
-------------------- --------------------
67,479,355 67,062,689
Less - 2,692,159 and 2,489,755 shares of
common stock in treasury, at cost, at
June 30, 1998 and March 31, 1998, respectively (6,331,762) (5,894,250)
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 61,147,593 61,168,439
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,766,722 $95,881,065
==================== ====================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Net sales:
Unrelated customers $9,084,467 $9,174,121
Related parties 6,223,143 4,123,191
----------------- -----------------
15,307,610 13,297,312
Cost of goods sold 6,255,023 4,956,042
----------------- -----------------
Gross margin 9,052,587 8,341,270
----------------- -----------------
Operating expenses:
Advertising and promotional 4,309,402 3,963,291
Selling and distribution 1,458,425 1,714,878
General and administrative, net of
licensing fees of $133,333 in 1998 1,000,421 1,283,061
Depreciation and amortization 633,544 759,507
Royalties 481,039 284,548
----------------- -----------------
Total operating expenses 7,882,831 8,005,285
----------------- -----------------
Operating income 1,169,756 335,985
Interest expense and bank charges 504,459 415,058
Exchange gains (8,538) (104,013)
----------------- -----------------
Income before income taxes 673,835 24,940
Income taxes 256,057 9,433
----------------- -----------------
Net income $ 417,778 $ 15,507
================= =================
Earnings per common share:
Basic $0.03 $0.00
================= =================
Diluted $0.03 $0.00
================= =================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------------- ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
BALANCE at April 1, 1996 11,456,426 $ 114,564 $ 37,184,527 $ 6,200,439
Net loss - - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options 14,500 145 18,448 -
Options 176,000 1,760 1,406,240 -
Warrants 60,000 600 415,650 -
Stock issued in connection with the acquisition of assets 370,000 3,700 3,002,550 -
Conversion of debentures, net of unamortized debt
issuance costs 5,370,552 53,706 29,029,501 -
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
Foreign currency translation adjustment - - - -
Purchase of 381,055 shares of treasury stock, at cost - - - -
------------- ------------ -------------- -------------
BALANCE at March 31, 1997 17,447,478 174,475 73,007,949 2,922,519
Net loss - - - (8,686,923)
Foreign currency translation adjustment
Purchase of 2,069,700 shares of treasury stock, at cost
============= ============ ============== =============
Balance at March 31, 1998 17,447,478 174,475 73,007,949 (5,764,404)
============= ============ ============== =============
Net income - - - 417,778
Issuance of common stock upon exercise of employee options 5,000 50 7,138 -
Foreign currency translation adjustment - - - -
Purchase of 202,404 shares of treasury stock, at cost - - - -
============= ============ ============== =============
Balance at June 30, 1998 (unaudited) 17,452,478 $ 174,525 $ 73,015,087 $ (5,346,626)
============= ============ ============== =============
(table continued)
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
---------------------------- -------------
<S> <C> <C> <C>
BALANCE at April 1, 1996 $ 182,247 $ (133,472) $ 43,548,305
Net loss - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options - - 18,593
Options - - 1,408,000
Warrants - - 416,250
Stock issued in connection with the acquisition of assets - - 3,006,250
Conversion of debentures, net of unamortized debt
issuance costs - - 29,083,207
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
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 loss - - (8,686,923)
Foreign currency translation adjustment (251,769) (251,769)
Purchase of 2,069,700 shares of treasury stock, at cost (4,011,604) (4,011,604)
============= ============= =============
Balance at March 31, 1998 (355,331) (5,894,250) 61,168,439
============= ============= =============
Net income - - 417,778
Issuance of common stock upon exercise of employee options - - 7,188
Foreign currency translation adjustment (8,300) (8,300)
Purchase of 202,404 shares of treasury stock, at cost - (437,512) (437,512)
============= ============= =============
Balance at June 30, 1998 (unaudited) $ (363,631) $ (6,331,762) $ 61,147,593
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------
(Unaudited)
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $417,778 $15,507
--------------- ---------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 633,543 759,507
Changes in assets and liabilities net of effect of sold brands:
Decrease in trade receivables - customers 2,690,626 4,088,137
Increase in trade receivables - related parties (3,153,148) (551,946)
(Increase) decrease in inventories (1,712,204) 41,651
Decrease in prepaid expenses and other current assets 237,261 289,733
Decrease in other non-current assets 205,038 7,724
Increase (decrease) in accounts payable 205,832 (6,882,140)
Decrease in accrued expenses (161,172) (520,256)
Increase (decrease) in income taxes payable 136 (4,186,000)
--------------- ---------------
Total adjustments (1,054,088) (6,953,590)
--------------- ---------------
Net cash used by operating activities (636,310) (6,938,083)
--------------- ---------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (11,420) (19,679)
Purchase of trademarks (11,002) (46,661)
Cash received on brand licensing of Bal a Versailles 200,000
--------------- ---------------
Net cash (used) provided by investing activities 177,578 (66,340)
--------------- ---------------
Cash flows from financing activities:
Payments - receivable financing and overdraft facilities - (912,921)
Payments - other notes payable (8,004) (18,309)
(Payments) proceeds - note payable to Finova Capital Corp. - (7,878,091)
Proceeds - note payable to GE Capital 1,138,233 16,818,175
Payments - note payable to Lyon Credit Corp. (39,408) (206,823)
Proceeds - note payable to Popular Bank 11,070 149,000
Payments - note payable to Fred Hayman Beverly Hills (134,639) (125,249)
Payments (proceeds) - note payable to International Finance Bank (105,545) 190,000
Purchases of treasury stock (437,512) (506,931)
Proceeds from issuance of common stock 7,188 -
--------------- ---------------
Net cash provided by financing activities 431,383 7,508,851
--------------- ---------------
Effect of exchange rate changes on cash (8,300) (111,066)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (35,649) 393,362
Cash and cash equivalents, beginning of period 205,760 191,486
--------------- ---------------
Cash and cash equivalents, end of period $170,111 $584,848
=============== ===============
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A. The Consolidated Balance Sheet as of June 30, 1998, the Consolidated
Statements of Income for the three-month period ended June 30, 1998 and 1997,
and the Consolidated Statements of Cash Flows for the three-month period ended
June 30, 1998 and 1997, 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 June 30, 1998 and the results of
their operations and their cash flows for the three-month period ended June 30,
1998 and 1997.
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, 1998 Form 10-K as filed with the Securities and
Exchange Commission on July 21, 1998.
Certain reclassifications were made to the June 30, 1997 financial statements to
conform with the presentation of the June 30, 1998 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:
June 30, 1998 March 31, 1998
------------- --------------
Finished products $13,573,038 $13,509,636
Components and packaging material 8,088,233 8,386,879
Raw material 4,075,612 2,733,154
------------ -----------
$25,736,883 $24,629,669
============ ===========
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the amount of $3,330,000 and
$3,409,000 at June 30, 1998 and March 31, 1998, respectively. The above amounts
are net of reserves for potential inventory obsolescence of approximately
$3,344,000 and $4,671,000 at June 30, 1998 and March 31, 1998, respectively.
10
<PAGE>
C. Trademarks, Licenses and Goodwill
Trademarks, licenses and goodwill are attributable to the following brands:
June 30, 1998 March 31, 1998
------------- --------------
Owned Brands:
Alexandra de Markoff $11,178,803 $11,179,839
Fred Hayman Beverly Hills 2,748,616 2,747,434
Bal A Versailles 3,230,395 3,227,406
Animale 1,439,134 1,431,332
Other 209,143 209,078
Licensed Brands:
Perry Ellis 7,940,340 7,940,340
Barishnikov 2,470,241 2,470,241
------------- --------------
29,216,672 29,205,670
Less: accumulated amortization (4,216,464) (3,827,407)
------------- --------------
$25,000,208 $25,378,263
============= ==============
On March 2, 1998, the Company entered into an exclusive agreement to license the
AdM rights to Cosmetic Essence, Inc. for an annual fee of $500,000. The initial
term of the agreement is ten years, automatically renewable for additional ten
and five year terms. The annual fee reduces to $100,000 after the third renewal.
As part of the Agreement, the Company sold the inventory, promotional material
and molds relating to AdM which resulted in a loss of approximately $923,000
which was reflected in the statement of operations for the year ended March 31,
1998. At closing, the purchaser provided as consideration, $202,000 in cash and
a $4,000,000 non-interest bearing receivable due in periodic installments based
on the purchaser's use of the inventory, with any remaining balance due on
January 1, 2000. In accordance with generally accepted accounting principles and
based on the Company's current borrowing cost of 9.25%, the note was reduced to
a present value of $3,659,753.
On June 9, 1998, the Company entered into an exclusive agreement to license the
BAV rights to Genesis International Marketing Corporation for an annual
licensing fee of $100,000 during the initial year of the agreement, increasing
to $150,000 for subsequent years for the remainder of the initial term, and to
$200,000 each year thereafter. The initial term of the agreement is for ten
years, automatically renewable every five years. As part of the agreement, the
Company sold the inventory, promotional materials and molds relating to BAV for
its approximate book value. At closing, the purchaser provided as consideration,
$200,000 in cash and a $500,000 non-interest bearing note due in quarterly
installments of $83,333 through December 1999.
At June 30, 1998, $2,139,887 and $1,815,028 are included in other current assets
and other assets, respectively, relating to the AdM and BAV receivables.
11
<PAGE>
D. Borrowings - Banks and Others
The composition of debt is as follows:
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Revolving credit facility payable to General Electric
Capital Corporation, interest at LIBOR plus 2.50%
or prime (8.50% at June 30, 1998) plus .75%, at the
Company's option, net of restricted cash of $144,753
and $1,209,955, respectively $17,957,184 $16,818,951
Note payable to FHBH, secured by the acquired licensed
trademarks, interest at 7.25%, payable in equal monthly
installments of $69,863 through June 2004 4,045,187 4,179,826
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 624,581 663,989
Unsecured $1,000,000 line of credit payable to
International Finance Bank, interest at the bank's prime
rate plus 2%, due August 1, 1998 79,927 185,472
Letter of credit refinancing facility of $500,000 payable
to Popular Bank of Florida, interest at the bank's prime
rate plus 2%, due July 1998 11,070 ---
Other notes payable 105,148 113,152
-------------- -------------
22,823,097 21,961,390
Less: long-term borrowings (3,904,752) (4,107,618)
-------------- -------------
Short-term borrowings $18,918,345 $17,853,772
============== =============
</TABLE>
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, on a revolving basis for a three-year period,
depending on the availability of a borrowing base, up to $25,000,000 at an
interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street Journal
prime rate, at the Company's option. Proceeds from the Credit Agreement were
used, in part, to repay the Company's previous $10,000,000 credit facility with
Finova Capital Corporation and Merrill Lynch Financial Services, Inc. At June
30, 1998, based on the borrowing base at that date, the credit line amounted to
approximately $19,200,000.
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
12
<PAGE>
certain financial covenants relating to net worth, interest coverage and other
financial ratios. During the fiscal year ended March 31, 1998, the Company was
not in compliance with certain financial covenants relating to EBITDA, minimum
tangible net worth and minimum fixed charge coverage ratio, as well as a
restricted payment covenant concerning the amount of treasury stock which can be
purchased by the Company. GECC has agreed to waive this noncompliance through
June 30, 1998, and has amended the Credit Agreement to reflect changes in
certain covenants going forward.
Management believes that, based on current circumstances, and the recent
restructuring activities which have reduced overhead, funds from operations, the
income tax refund and the Credit Agreement will be sufficient to fund the
Company's operating needs.
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.
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.
In a 1997 announcement discussed in Topic No. D-60 by the Emerging Issues Task
Force, the staff of the Securities and Exchange Commission ("S.E.C.") indicated
that when debt is convertible at a discount from the then current common stock
market price, the discounted amount reflects at that time an incremental yield,
e.g. a "beneficial conversion feature" which should be recognized as a return to
the debt holders from the date the debt is issued to the date it first becomes
convertible. Based on the market price of the Company's common stock on the date
of issuance of the convertible debt, the convertible debentures issued by the
Company during the period November 1995 through
13
<PAGE>
July 1996 had a beneficial conversion feature of $7,156,001. Although management
believes that the Company followed generally accepted accounting principles in
existence at the time of the issuances, it has complied with the SEC
announcement, restating its net income and per share information for the year
ended March 31, 1997 ("fiscal 1997") and fiscal 1996, to reflect such accounting
treatment for this non-cash charge, which has been recorded as additional
interest expense in the restated consolidated financial statements. In addition,
the October 1996 redemption of certain debentures no longer results in a loss of
$901,648 previously reported as an extraordinary item during the year ended
March 31, 1997, since the price paid in excess of the carrying value of the
debentures was charged to additional paid-in capital to offset the beneficial
conversion feature originally recorded at the date of issuance. The effect of
the restatement was to decrease net income for fiscal 1997 by $3,454,143,
resulting in a net loss of ($3,277,920), and to decrease net income for fiscal
1996 by $2,800,210, resulting in net income of $4,972,481. The total
stockholders' equity balance at March 31, 1997, as previously reported, was not
affected by the restatement.
F. Transactions With Related Parties
The Company had net sales of $6,223,143 and $4,123,191 during the three-month
periods ended June 30, 1998 and June 30, 1997, respectively, to Perfumania, Inc.
(Perfumania), a company in which the Company's Chairman and Chief Executive
Officer has an ownership interest. Net amounts due from Perfumania totaled
$21,126,345 and $17,973,197 at June 30, 1998 and March 31, 1998, respectively.
Amounts due from related parties are non-interest bearing and are realizable in
less than one year.
G. Basic and Diluted Earnings Per Common Share
The following is the reconciliation of the numerators and denominators of the
basic and diluted net income per common share calculations, retroactively
adjusted for the adoption of the provisions of SFAS 128:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 417,778 $ 15,507
============= ============
Weighted average number of shares outstanding used
in basic earnings per share calculation 14,871,902 16,898,357
============= ============
Basic net income per common share $0.03 $0.00
============= ============
Weighted average number of shares outstanding used
in basic earnings per share calculation 14,871,902 16,898,357
Affect of dilutive securities:
Stock options and warrants, net of treasury shares
acquired 187,819 167,435
------------- ------------
Weighted average number of shares outstanding used
in diluted earnings per share calculation 15,059,721 17,065,792
============= ============
Diluted net income per common share $0.03 $0.00
============= ============
Antidilutive securities not included in diluted
earnings per share computation:
Options and warrants to purchase common stock 288,478 286,478
============= ============
Exercise Price $2.19-$8.11 $3.13-$8.11
============= ============
</TABLE>
14
<PAGE>
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:
Three-months ended June 30,
---------------------------
1998 1997
---- ----
Cash paid for:
Interest $503,695 $ 475,386
Income taxes $ 18,320 $ 4,297,948
I. Income Taxes
The provision for income taxes for the periods ended June 30, 1998 and 1997
reflects an effective tax rate of approximately 38%.
I. 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 thirteenth 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 based on the Company's current sales projections,
management believes that this will continue. The license requires the payment of
royalties, which decline as a percentage of net sales as net sales volume
increases, and the spending of certain minimum amounts for advertising based
upon net sales levels achieved in the prior year.
FRED HAYMAN: In June 1994, the Company entered into an Asset Purchase Agreement
with Fred Hayman Beverly Hills, Inc. (FHBH), pursuant to which the Company
purchased substantially all of the assets and liabilities of the FHBH fragrance
division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year
license to use FHBH's United States Class 3 trademarks Fred Hayman(R), 273(R),
Touch(R), With Love(R) and Fred Hayman Personal Selections(R) and the
corresponding international registrations. There are no minimum sales or
advertising requirements.
BARYSHNIKOV: The Company assumed the Baryshnikov license as part of the Richard
Barrie Fragrances acquisition, pursuant to which the Company has the exclusive
right to manufacture and distribute fragrances and personal care products using
the Baryshnikov trademark. The license has recently been renewed through March
31, 2001 and is further renewable for a subsequent three-year period upon
achieving specified sales or minimum
15
<PAGE>
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: In 1998, the Company entered into an exclusive worldwide agreement with
Creative Fragrances, Inc. for the worldwide manufacturing and distribution
rights to PHANTOM covering men's and women's fragrances and beauty related
products. The agreement expires in April 2003. Royalties are payable at 5% of
net sales. There are no minimum sales or advertising requirements.
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 approximated the net book value of assets sold.
The Company sold to FSF all inventories, fixed assets and licenses related to
the brands, and FSF assumed certain liabilities for purchase orders issued prior
to August 8, 1997.
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 contract period ending March 31, 1997,
renewable for subsequent three-year and four-year periods upon achieving
specified sales or minimum royalty levels. The license required the payment of
royalties 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 informed
the Licensor that it would not renew the agreement. In accordance with the
licensing agreement, the Company produced and sold the TODD OLDHAM trademarked
products until March 31, 1998, with no sales or advertising minimums. In
addition, the Company was required to destroy all remaining unsold inventory and
advertising material relating to the trademarked products. Sales of TODD OLDHAM
products represented less than 1% and 2% of total Company net sales for the
fiscal years ended March 31, 1998 and 1997, respectively. The Company incurred a
loss of approximately $3,200,000 as a result of terminating the agreement.
* * * * * * * * * *
16
<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: August 13, 1998
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 170,111
<SECURITIES> 0
<RECEIVABLES> 29,980,553
<ALLOWANCES> (2,141,286)
<INVENTORY> 25,736,883
<CURRENT-ASSETS> 68,139,426
<PP&E> 6,323,988
<DEPRECIATION> (4,631,323)
<TOTAL-ASSETS> 96,766,722
<CURRENT-LIABILITIES> 31,294,745
<BONDS> 0
0
0
<COMMON> 174,525
<OTHER-SE> 60,973,068
<TOTAL-LIABILITY-AND-EQUITY> 96,766,722
<SALES> 15,307,610
<TOTAL-REVENUES> 15,307,610
<CGS> 6,255,023
<TOTAL-COSTS> 6,255,023
<OTHER-EXPENSES> 7,844,293
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 504,459
<INCOME-PRETAX> 673,835
<INCOME-TAX> 256,057
<INCOME-CONTINUING> 417,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 417,778
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
