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, 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 (IRS employer identification no.)
of 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, 1998, 14,554,419 shares of the issuer's common stock
were outstanding.
1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
- ------ --------------------
See pages 7 to 10.
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 September 30,
1998, the Company has repurchased, under all phases, a total of 2,844,259 shares
at a cost of $6,509,722, or 15% of the outstanding shares at the inception of
the program, which is ongoing. At September 30, 1998, there were 14,579,219
shares outstanding.
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 September 30, 1998 with the
- ----------------------------------------------------------------------
three-month period ended September 30, 1997.
- -------------------------------------------
During the quarter ended September 30, 1998, net sales increased 8% to
$16,136,121 as compared to $14,937,956 for the same period for the prior year.
The prior year period included sales of $2,090,017 of Alexandra de Markoff (AdM)
cosmetics and Bal a Versailles (BAV) fragrances, which were licensed to third
parties during March and June 1998, respectively. The comparable period increase
excluding these two brands was 26%. The increase is due to the continuing
strength of Perry Ellis brand products, with total sales of all Perry Ellis
brands increasing 22% compared to the same period in the prior year from
$8,014,971 to $9,817,096 and sales of Fred Hayman brand products which increased
by 73% to $4,122,658 compared to $2,383,098 in the prior year period.
2
<PAGE>
Sales of the Company's own trademark, Animale, decreased by 14% compared to the
same prior year period from $3,011,034 to $2,577,475.
Sales to unrelated customers increased 9% to $10,364,161 in the current period,
compared to $9,475,994 in the same period in the prior year. Without the effect
of AdM, which products were only sold to unrelated customers, sales to unrelated
customers increased 37%. Sales to related parties increased 6% to $5,771,960 in
the current quarter compared to $5,461,962 in the same period in the prior
fiscal year.
Cost of goods sold decreased as a percentage of net sales from 43% for the
quarter ended September 30, 1997 to 41% for the current quarter. The decrease
was mainly attributable to the increase in the percentage of net sales to
unrelated customers as compared to total net sales. Cost of goods sold on sales
to unrelated customers and related parties approximated 39% and 45%,
respectively, during the quarter ended September 30, 1998, as compared to 36%
and 55%, respectively, during the quarter ended September 30, 1997.
Operating expenses increased by 3% compared to the prior fiscal period from
$7,722,811 to $7,990,429, decreasing as a percentage of net sales from 52% to
50%. Advertising and promotional expenses increased 30% to $4,067,212 compared
to $3,118,864 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 17% to
$1,608,594 in the current fiscal period as compared to $1,927,974 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 25% compared to the
prior year period from $1,615,051 to $1,202,289, decreasing as a percentage of
net sales from 11% to 7%. The above decreases reflect cost reductions as a
result of the Company's restructuring during the quarter ended March 31, 1998,
the support previously required for the AdM cosmetic line and licensing fees
generated from the AdM and BAV license agreements. Royalties increased to
$503,494 for the current period compared to $340,131 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 $111,951 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 $1,528,143 or 9%
of net sales for the three-month period ended September 30, 1998, compared to
$756,197 or 5% of net sales for the comparable period in the prior year.
Interest expense decreased to $505,260 in the current fiscal year as compared to
$691,255 in the same period in the prior year, reflecting the reduction in
borrowings of approximately $4,800,000 as compared to September 30, 1997.
Exchange losses were $105,577 in the current year as compared to $36,874 in the
same period in the prior year. Income before taxes for the current fiscal year
was $917,306 or 6% of net sales compared to $28,068 in the same period in the
prior year.
3
<PAGE>
Giving effect to the tax provision, net income amounted to $568,729 or 4% of net
sales for the current quarter ended September 30, 1998, as compared to $16,949
for the same quarter in the prior fiscal year.
Comparison of the six-month period ended September 30, 1998 with the six-month
- ------------------------------------------------------------------------------
period ended September 30, 1997.
- -------------------------------
During the six months ended September 30, 1998, net sales increased 11% to
$31,443,731 as compared to $28,235,268 for the same period for the prior year.
The prior year period included sales of $4,340,145 of AdM cosmetics and BAV
fragrances, which were licensed to third parties during March and June 1998,
respectively. The comparable period increase excluding these two brands was 32%.
The increase is due to the continuing strength of Perry Ellis brand products,
with total sales of all Perry Ellis brands increasing 33% compared to the same
period in the prior year from $15,238,409 to $20,335,482, and sales of Fred
Hayman brand products which increased by 37% to $6,774,483 compared to
$4,942,718 in the prior year period. Sales of the Company's own trademark,
Animale, also increased by 4% compared to the same prior year period from
$4,504,197 to $4,687,797.
Sales to unrelated customers increased 4% to $19,448,628 in the current period,
compared to $18,650,115 in the same period in the prior year, including the
effect of the licensing of the AdM brand in March 1998, which products were only
sold to unrelated customers. Without the effect of AdM, sales to unrelated
customers increased 32%. Sales to related parties increased 25% to $11,995,103
in the current period compared to $9,585,153 in the same period in the prior
fiscal year.
Cost of goods sold increased as a percentage of net sales from 40% for the six
months ended September 30, 1997 to 41% for the current period. 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 38% and 46%, respectively, during the
six months ended September 30, 1998, as compared to 34% and 53%, respectively,
during the six months ended September 30, 1997.
Operating expenses increased by 1% compared to the prior fiscal year from
$15,728,096 to $15,873,260, decreasing as a percentage of net sales from 56% to
51%. Advertising and promotional expenses increased 18% to $8,376,614 compared
to $7,082,155 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 16% to
$3,067,019 in the current fiscal period as compared to $3,642,852 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 24% compared to the
prior year period from $2,898,112 to $2,202,710, 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,
the support previously required for the AdM cosmetic line and licensing fees
generated from the AdM and BAV license agreements. Royalties increased to
$984,533 for the current period compared to $624,679 in the prior year, and
increased as a percentage of sales
4
<PAGE>
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 $237,914 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 $2,697,899 or 9%
of net sales for the six-month period ended September 30, 1998, compared to
$1,092,182 or 4% of net sales for the comparable period in the prior year.
Interest expense decreased to $1,009,719 in the current fiscal year as compared
to $1,106,313 in the same period in the prior year, reflecting the reduction in
average borrowings outstanding. Exchange losses were $97,039 in the current year
as compared to exchange gains of $67,139 in the same period in the prior year.
Income before taxes for the current fiscal year was $1,591,141 or 5% of net
sales compared to $53,008 in the same period in the prior year.
Giving effect to the tax provision, net income amounted to $986,507 or 3% of net
sales for the six months ended September 30, 1998, as compared to $32,456 for
the same period in the prior fiscal year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $38,246,414 as of September 30, 1998, compared to
$36,323,891 at March 31, 1998, reflecting the reduction in other long-term
assets coupled with 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 September 30,
1998, the Company has repurchased under all phases a total of 2,844,259 shares
at a cost of $6,509,722. 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, which were amended on July 9,
1998.
5
<PAGE>
As of September 30, 1998, the Company was not in compliance with certain of
these financial covenants. In light of the global economic difficulties and the
uncertainties surrounding the domestic marketplace, management is currently
negotiating a waiver of this non-compliance with GECC and a modification of the
covenants for future periods, in anticipation of a slowdown in sales.
Management believes that, based on current circumstances, it will be able to
amend the financial covenants and funds will be sufficient to meet 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.
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 15, 1998, the Company held its annual meeting. The following is a
summary of the proposals and corresponding votes.
Item No. 1 Nomination and Election of Directors
------------------------------------
The seven nominees named in the proxy statement were elected,
with each director receiving more than 98% of the votes cast.
Item No. 2 Ratification of PricewaterhouseCoopers 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.
6
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1998 1998
- ----------------------------------------------------- --------------------- ---------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $110,245 $205,760
Receivables, net of allowance for doubtful
accounts, sales returns and allowances of
approximately $2,785,000 and $2,170,000 at
September 30, 1998 and March 31, 1998, respectively 9,286,255 9,403,548
Trade receivables from related parties 23,353,551 17,973,197
Inventories, net 23,373,773 24,629,669
Prepaid expenses and other current assets 11,126,734 9,949,959
Income tax receivable 185,875 4,347,134
--------------------- ---------------------
TOTAL CURRENT ASSETS 67,436,433 66,509,267
Equipment and leasehold improvements, net 1,514,276 2,020,741
Trademarks, licenses and goodwill, net 24,676,288 25,378,263
Other 1,056,403 1,972,794
--------------------- ---------------------
TOTAL ASSETS $94,683,400 $95,881,065
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $17,236,204 $17,853,772
Accounts payable 8,967,212 9,674,407
Accrued expenses 2,070,491 2,033,090
Income taxes payable 916,112 624,107
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 29,190,019 30,185,376
Borrowings, less current portion 3,668,605 4,107,618
Deferred tax liability 419,632 419,632
--------------------- ---------------------
TOTAL LIABILITIES 33,278,256 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, 17,462,478 and 17,447,478 shares issued
at September 30, 1998 and March 31, 1998, respectively 174,625 174,475
Additional paid-in capital 73,030,586 73,007,949
Accumulated deficit (4,777,897) (5,764,404)
Cumulative translation adjustment (378,976) (355,331)
--------------------- ---------------------
68,048,338 67,062,689
Less - 2,883,259 and 2,489,755 shares of
common stock in treasury, at cost, at
September 30, 1998 and March 31, 1998, respectively (6,643,194) (5,894,250)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 61,405,144 61,168,439
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $94,683,400 $95,881,065
===================== =====================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Three months ended September, Six months ended September 30,
------------------------------------- ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Unrelated customers $10,364,161 $9,475,994 $19,448,628 $18,650,115
Related parties 5,771,960 5,461,962 11,995,103 9,585,153
---------------- ---------------- ---------------- ---------------
16,136,121 14,937,956 31,443,731 28,235,268
Cost of goods sold 6,617,549 6,458,948 12,872,572 11,414,990
---------------- ---------------- ---------------- ---------------
Gross margin 9,518,572 8,479,008 18,571,159 16,820,278
---------------- ---------------- ---------------- ---------------
Operating expenses:
Advertising and promotional 4,067,212 3,118,864 8,376,614 7,082,155
Selling and distribution 1,608,594 1,927,974 3,067,019 3,642,852
General and administrative, net of licensing
fees of $141,667 and $275,000 in 1998 1,202,289 1,615,051 2,202,710 2,898,112
Depreciation and amortization 608,840 720,791 1,242,384 1,480,298
Royalties 503,494 340,131 984,533 624,679
---------------- ---------------- ---------------- ---------------
Total operating expenses 7,990,429 7,722,811 15,873,260 15,728,096
---------------- ---------------- ---------------- ---------------
Operating income 1,528,143 756,197 2,697,899 1,092,182
Interest expense and bank charges 505,260 691,255 1,009,719 1,106,313
Exchange losses (gains) 105,577 36,874 97,039 (67,139)
---------------- ---------------- ---------------- ---------------
Income before income taxes 917,306 28,068 1,591,141 53,008
Income taxes 348,577 11,119 604,634 20,552
---------------- ---------------- ---------------- ---------------
Net income $568,729 $16,949 $986,507 $32,456
================ ================ ================ ===============
Earnings per common share:
Basic $0.04 $0.00 $0.07 $0.00
================ ================ ================ ===============
Diluted $0.04 $0.00 $0.07 $0.00
================ ================ ================ ===============
</TABLE>
See notes to consolidated financial statements.
8
<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> <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 - - - 986,507
Issuance of common stock upon exercise of employee options 15,000 150 22,637 -
Foreign currency translation adjustment - - - -
Purchase of 393,504 shares of treasury stock, at cost - - - -
------------- ------------- ---------------- ---------------
BALANCE at September 30, 1998 (unaudited) 17,462,478 $ 174,625 $ 73,030,586 $ (4,777,897)
============= ============= ================ ===============
(RESTUBBED TABLE)
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
--------------- --------------- -------------
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 - - 986,507
Issuance of common stock upon exercise of employee options - - 22,787
Foreign currency translation adjustment (23,645) (23,645)
Purchase of 393,504 shares of treasury stock, at cost - (748,944) (748,944)
--------------- --------------- ---------------
BALANCE at September 30, 1998 (unaudited) $ (378,976) $ (6,643,194) $ 61,405,144
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Six months ended September 30,
----------------------------------
(Unaudited)
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $986,507 $32,456
--------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,242,384 1,480,298
Changes in assets and liabilities net of effect of sold brands:
Decrease in trade receivables - customers 117,293 2,185,352
Increase in trade receivables - related parties (5,380,354) (785,634)
Decrease (increase) in inventories 650,906 (1,037,797)
Increase in prepaid expenses and other current assets (843,442) (1,026,562)
Decrease in income tax receivable 4,161,259 -
Decrease in other non-current assets 1,083,058 8,107
Decrease in accounts payable (707,195) (2,997,318)
Increase (decrease) in accrued expenses 37,401 (782,719)
Increase (decrease) in income taxes payable 292,005 (4,260,522)
--------------- ---------------
Total adjustments 653,315 (7,216,795)
--------------- ---------------
Net cash provided (used) by operating activities 1,639,822 (7,184,339)
--------------- ---------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (52,383) (142,473)
Purchase of trademarks (76,571) (30,294)
Cash received on brand licensing of Bal a Versailles 200,000
Cash received in sale of Vicky Tiel brand 680,553
--------------- ---------------
Net cash provided by investing activities 71,046 507,786
--------------- ---------------
Cash flows from financing activities:
Payments - receivable financing and overdraft facilities - (1,672,821)
Payments - other notes payable (37,470) (34,942)
Payments - note payable to Finova Capital Corp. - (7,878,091)
(Payments) proceeds - note payable to GE Capital (481,990) 17,845,461
Payments - note payable to Lyon Credit Corp. (79,916) (245,238)
Proceeds - note payable to Popular Bank - 149,000
Payments - note payable to Fred Hayman Beverly Hills (271,733) (252,785)
(Payments) proceeds - note payable to International Finance Bank (185,472) 190,000
Purchases of treasury stock (748,944) (903,644)
Proceeds from issuance of common stock 22,787 -
--------------- ---------------
Net cash (used) provided by financing activities (1,782,738) 7,196,940
--------------- ---------------
Effect of exchange rate changes on cash (23,645) (188,509)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (95,515) 331,878
Cash and cash equivalents, beginning of period 205,760 191,486
--------------- ---------------
Cash and cash equivalents, end of period $110,245 $523,364
=============== ===============
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A. The Consolidated Balance Sheet as of September 30, 1998, the Consolidated
Statements of Income for the three-month and six-month periods ended September
30, 1998 and 1997, and the Consolidated Statements of Cash Flows for the
six-month periods ended September 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 September 30,
1998 and the results of their operations and their cash flows for the
three-month and six-month periods ended September 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 September 30, 1997 financial
statements to conform with the presentation of the September 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:
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------- --------------
<S> <C> <C>
Finished products $12,406,288 $13,509,636
Components and packaging material 7,377,516 8,386,879
Raw material 3,589,969 2,733,154
----------- -----------
$23,373,773 $24,629,669
=========== ===========
</TABLE>
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the amount of $3,230,000 and
$3,409,000 at September 30, 1998 and March 31, 1998, respectively. The above
amounts are net of reserves for potential inventory obsolescence of
approximately $3,149,000 and $4,671,000 at September 30, 1998 and March 31,
1998, respectively.
11
<PAGE>
C. Trademarks, Licenses and Goodwill
Trademarks, licenses and goodwill are attributable to the following brands:
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
Owned Brands:
Alexandra de Markoff $11,190,150 $11,179,839
Fred Hayman Beverly Hills 2,750,396 2,747,434
Bal A Versailles 3,240,694 3,227,406
Animale 1,448,308 1,431,332
Other 235,692 209,078
Licensed Brands:
Perry Ellis 7,946,760 7,940,340
Barishnikov 2,470,241 2,470,241
------------- -------------
29,282,241 29,205,670
Less: accumulated amortization (4,605,953) (3,827,407)
-------------- --------------
$24,676,288 $25,378,263
============= =============
</TABLE>
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 consolidated 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 September 30, 1998, $2,139,887 and $924,915 ($1,806,544 and $1,853,199 at
March 31, 1998) are included in other current assets and other assets,
respectively, relating to the AdM and BAV receivables.
12
<PAGE>
D. Borrowings - Banks and Others
The composition of debt is as follows:
<TABLE>
<CAPTION>
September 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 (8.25% at September 30, 1998) plus .75%,
at the Company's option, net of restricted cash of
$525,282 and $1,209,955, respectively
$16,336,961 $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 3,908,093 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 584,073 663,989
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 - 185,472
Other notes payable 75,682 113,152
------------ -------------
20,904,809 21,961,390
Less: long-term borrowings (3,668,605) (4,107,618)
------------ -------------
Short-term borrowings $17,236,204 $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
September 30, 1998, based on the borrowing base at that date, the credit line
amounted to approximately $18,693,000.
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 certain financial covenants relating to net worth,
interest coverage and other financial ratios, which were amended on July 9,
1998.
13
<PAGE>
As of September 30, 1998, the Company was not in compliance with certain of
these financial covenants. In light of the global economic difficulties and the
uncertainties surrounding the domestic marketplace, management is currently
negotiating a waiver of this non-compliance with GECC and a modification of the
covenants for future periods, in anticipation of a slowdown in sales.
Management believes that, based on current circumstances, it will be able to
amend the financial covenants and funds will be sufficient to meet 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 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
14
<PAGE>
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. 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 September 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 568,729 $ 16,949
=========== ==========
Weighted average number of shares outstanding used
in basic earnings per share calculation
14,722,421 16,898,357
=========== ==========
Basic net income per common share $0.04 $0.00
=========== ==========
Weighted average number of shares outstanding used
in basic earnings per share calculation
14,722,421 16,898,357
Affect of dilutive securities:
Stock options and warrants, net of treasury shares
acquired 26,972 167,435
----------- ----------
Weighted average number of shares outstanding used
in diluted earnings per share calculation
14,749,393 17,065,792
=========== ==========
Diluted net income per common share $0.04 $0.00
=========== ==========
Antidilutive securities not included in diluted
earnings per share computation:
Options and warrants to purchase common stock
1,662,478 286,478
=========== ===========
Exercise Price $1.75-$8.11 $3.13-$8.11
=========== ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 986,507 $ 16,949
============ ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation
14,796,826 16,898,357
============ ===========
Basic net income per common share $0.07 $0.00
============ ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation
14,796,826 16,898,357
Affect of dilutive securities:
Stock options and warrants, net of treasury shares
acquired 64,358 167,435
------------ -----------
Weighted average number of shares outstanding used
in diluted earnings per share calculation
14,861,184 17,065,792
============ ===========
Diluted net income per common share $0.07 $0.00
============ ===========
Antidilutive securities not included in diluted earnings
per share computation:
Options and warrants to purchase common stock
1,068,478 286,478
============ ===========
Exercise Price $2.00-$8.11 $3.13-$8.11
============ ===========
</TABLE>
G. Transactions With Related Parties
The Company had net sales of $11,995,103 and $9,585,153 during the six-month
periods ended September 30, 1998 and September 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 $23,353,551 and $17,973,197 at September 30, 1998 and March
31, 1998, respectively. Amounts due from related parties are non-interest
bearing and are realizable in less than one year.
As of September 30, 1998, the Company has loaned a total of $190,000 ($150,000
as of March 31, 1998) to its Chairman/CEO, which is included in other current
assets. The loan is unsecured, bears interest at 10% per annum and is due in one
balloon payment on December 31, 1998.
16
<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:
Six-months ended September 30,
------------------------------
1998 1997
---- ----
Cash paid for:
Interest $988,245 $1,070,848
Income taxes $152,594 $4,296,074
The following non-cash transaction was entered into during the six-months ended
September 30, 1998:
The consideration received for the sale of inventory relating to the license of
the Bal a Versailles brand included a non-interest bearing receivable from the
licensee in the amount of $500,000.
I. Income Taxes
The provision for income taxes for the periods ended September 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
17
<PAGE>
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 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.
* * * * * * * * * *
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: November 12, 1998
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 110,245
<SECURITIES> 0
<RECEIVABLES> 35,424,410
<ALLOWANCES> (2,784,604)
<INVENTORY> 23,373,773
<CURRENT-ASSETS> 67,436,434
<PP&E> 6,364,951
<DEPRECIATION> (4,850,675)
<TOTAL-ASSETS> 95,683,400
<CURRENT-LIABILITIES> 29,190,019
<BONDS> 0
0
0
<COMMON> 174,625
<OTHER-SE> 61,230,519
<TOTAL-LIABILITY-AND-EQUITY> 94,683,400
<SALES> 31,443,731
<TOTAL-REVENUES> 31,443,731
<CGS> 12,872,572
<TOTAL-COSTS> 12,872,572
<OTHER-EXPENSES> 15,810,299
<LOSS-PROVISION> 160,000
<INTEREST-EXPENSE> 1,009,719
<INCOME-PRETAX> 1,591,141
<INCOME-TAX> 604,634
<INCOME-CONTINUING> 986,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 986,507
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
