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, 2000
------------------
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
-------------------------------------------------------------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
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( Address of principal executive offices ) ( Zip code )
Registrant's telephone number, including area code 954-316-9008
---------------------------
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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 ____
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 13, 2000, 9,969,184 shares of the issuer's common stock
were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See pages 7 to 17.
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
The Company may periodically release forward-looking statements pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements, including those in this Form 10-Q, involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company or its industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These risks and
uncertainties include, among others, collectability of trade receivables from
related parties, future trends in sales and the Company's ability to introduce
new products in a cost-effective manner. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date thereof. The Company undertakes no obligation to publicly release the
result of any revisions to those forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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
-------------------
On August 18, 2000 and September 28, 2000, the Company entered into amended and
restated forbearance and amendment agreements with General Electric Credit
Corporation. See "Liquidity and Capital Resources" for further discussion.
On June 29, 2000, the Company entered into a barter agreement for which it
received $1.2 million of advertising credits in exchange for all of its
remaining finished goods inventory of Baryshnikov products. See Note G to the
accompanying Consolidated Financial Statements for further discussion.
Results of Operations
---------------------
Comparison of the three-month period ended September 30, 2000 with the
----------------------------------------------------------------------
three-month period ended September 30, 1999.
--------------------------------------------
During the quarter ended September 30, 2000, net sales decreased 8% to
$18,199,377 as compared to $19,701,502 for the same period for the prior year.
The decrease is mainly attributable to the decrease in sales to related parties.
Sales to related parties decreased 47% to $4,715,675 in the current quarter
compared to $8,938,164 in the same period in the prior fiscal year. Sales to
unrelated customers increased 25% to $13,483,702 in the current period, compared
to $10,763,338 in the same period in the prior year, reflecting the continued
launch of the Perry Ellis "Portfolio" products and the improvement in
international sales.
2
<PAGE>
International gross sales increased from $5,646,286 to $9,307,105. Approximately
$2,433,000 of the total sales increase is related to the initial launch of the
"Portfolio for Women" (March 2000) fragrance, which is expected to continue its
roll-out through the Fall 2000 season.
Cost of goods sold decreased as a percentage of net sales from 46% for the
quarter ended September 30, 1999 to 38% for the current quarter. The decrease
was mainly attributable to the sale of certain closeout merchandise to
international customers at below cost during the prior year period. Cost of
goods sold on sales to unrelated customers and related parties approximated 40%
and 34%, respectively, during the quarter ended September 30, 2000, as compared
to 46% and 45%, respectively, in the prior year comparable quarter.
Operating expenses increased by 4% compared to the prior fiscal year from
$7,736,395 to $8,070,144, increasing as a percentage of net sales from 39% to
44%. Advertising and promotional expenses decreased 1% to $3,589,318 compared to
$3,612,416 in the prior year period. Selling and distribution costs increased
10% to $1,610,193 in the current fiscal period as compared to $1,461,583 in the
same period of the prior fiscal year, increasing as a percentage of net sales
from 7% to 9%. General and administrative expenses increased by 89% compared to
the prior year period from $983,923 to $1,862,885, which was mainly attributable
to an increase of approximately $800,000 in bad debt expense for international
customers. Depreciation and amortization decreased by $402,860 or 41% during the
current period from $982,709 to $579,849, reflecting the full amortization as of
March 31, 2000 of goodwill in connection with the cancelled Baryshnikov license
agreement. Royalties decreased to $427,899 for the current period compared to
$695,764 in the prior year period, decreasing as a percentage of sales from 4%
to 2% as guaranteed minimum royalties for the Baryshnikov brand during the prior
year period are no longer required as the license was cancelled.
As a result of the above, the Company had operating income of $3,132,302 or 17%
of net sales for the three-month period ended September 30, 2000, compared to
$2,964,309 or 15% of net sales for the comparable period in the prior year. Net
interest expense decreased to $227,583 in the current fiscal year as compared to
$353,802 in the same period in the prior year, reflecting interest earned on
notes receivable during the current period. Income before taxes for the current
fiscal year was $2,907,825 or 16% of net sales compared to $2,610,507 or 13% of
net sales in the same period in the prior year.
Giving effect to the tax provision, net income amounted to $1,802,851 or 10% of
net sales for the current quarter ended September 30, 2000, as compared to
$1,618,514 or 8% of net sales for the same quarter in the prior fiscal year.
Comparison of the six-month period ended September 30, 2000 with the six-month
------------------------------------------------------------------------------
period ended September 30, 1999.
-------------------------------
During the six-month period ended September 30, 2000, net sales increased 1% to
$35,110,562 as compared to $34,631,335 for the same period for the prior year.
The increase is mainly attributable to the $1,200,000 barter sale of Baryshnikov
brand products discussed above. Excluding comparative sales of Baryshnikov brand
products, net sales decreased 1% during the current period.
Sales to related parties decreased 30% to $12,031,341 in the current period
compared to $17,244,674 in the same period in the prior fiscal year. Sales to
unrelated customers increased 33% to $23,079,221 in the current period, compared
to $17,386,661 in the same period in the prior year, reflecting the continued
launch of the Perry Ellis "Portfolio" products and the improvement in
international sales.
3
<PAGE>
Approximately $1,101,000 and $3,908,000 of the total gross sales increase is
related to the initial launches of the Perry Ellis "Portfolio for Men" (August
1999) and "Portfolio for Women" (March 2000) fragrances, respectively, which are
expected to continue their roll-out through the Fall 2000 season. International
gross sales increased 55% from $9,486,131 to $14,663,896 reflecting the economic
difficulties encountered during the prior year period. U.S. domestic gross sales
also increased 5% during the six-month period, from $9,415,394 to $9,886,040.
Cost of goods sold decreased as a percentage of net sales from 45% for the
six-month period ended September 30, 1999 to 41% for the current period,
including the effect of the barter transaction. Without the effect of the barter
transaction, cost of goods sold for the current period would have been 39%. The
decrease was mainly attributable to the sale of certain closeout merchandise to
international customers at below cost during the prior year period. Cost of
goods sold on sales to unrelated customers and related parties approximated 41%
and 39%, respectively, during the six months ended September 30, 2000, as
compared to 46% and 45%, respectively, in the prior year comparable period,
excluding the effect of the barter transaction.
Operating expenses for the current six-month period increased by 11% compared to
the prior fiscal year from $14,636,246 to $16,185,155, increasing as a
percentage of net sales from 42% to 46%. Advertising and promotional expenses
increased 13% to $7,989,530 compared to $7,066,536 in the prior year period,
reflecting the launch costs for "Portfolio". Selling and distribution costs
increased 14% to $3,166,288 in the current fiscal period as compared to
$2,786,342 in the same period of the prior fiscal year, increasing as a
percentage of net sales from 8% to 9%. General and administrative expenses
increased by 52% compared to the prior year period from $1,914,152 to
$2,913,109, which was mainly attributable to an increase of approximately
$900,000 in bad debt expense for international customers. Depreciation and
amortization decreased by $484,838 or 30% during the current period from
$1,602,939 to $1,118,101, reflecting the full amortization as of March 31, 2000
of goodwill in connection with the cancelled Baryshnikov license agreement.
Royalties decreased to $998,127 for the current period compared to $1,266,277 in
the prior year period, decreasing as a percentage of sales from 4% to 3%, as
guaranteed minimum royalties for the Baryshnikov brand during the prior year
period are no longer required as the license was cancelled.
As a result of the above, the Company had operating income of $4,653,704 or 13%
of net sales for the six-month period ended September 30, 2000, compared to
$4,291,316 or 12% of net sales for the comparable period in the prior year. Net
interest expense decreased to $457,234 in the current fiscal year as compared to
$586,577 in the same period in the prior year, reflecting interest earned on
notes receivable during the current period. Income before taxes for the current
fiscal year was $4,199,576, or 12% of net sales compared to $3,704,739 or 11% of
net sales in the same period in the prior year.
Giving effect to the tax provision, net income amounted to $2,603,737 or 7% of
net sales for the six months ended September 30, 2000, as compared to $2,296,938
or 7% of net sales for the same period in the prior fiscal year.
Liquidity and Capital Resources
-------------------------------
Working capital decreased to $30,834,482 as of September 30, 2000, compared to
$34,753,382 at March 31, 2000, reflecting the current period's net income,
offset by the unrealized holding loss on investment in affiliate and the
purchase of approximately $1,142,000 in treasury stock as discussed below.
In September 1999, the Company completed the fourth phase of its common stock
buy-back program and the Board of Directors authorized the repurchase of an
additional 2,500,000 shares. As of September 30, 2000, the Company has
repurchased under all phases a total of 7,978,131 shares at a cost of
$21,983,523. The accompanying consolidated balance sheets also reflect an
additional 39,000 shares of treasury stock purchased at a cost of $133,472 prior
to fiscal 1996.
4
<PAGE>
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 was 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.
Substantially all of the domestic assets of the Company collateralize this
borrowing. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios.
Due principally to the significant treasury stock purchases under the Company's
stock buy back program, as of March 31, 2000, the Company was not in compliance
with financial covenants relating to tangible net worth, current ratio and
minimum fixed charge coverage ratio as well as the restricted payment covenants
exceeding the amount of fixed assets and treasury stock which can be purchased
as well as advances to related parties and employees. GECC originally extended
the maturity of the Credit Agreement until August 29, 2000, while reducing the
borrowing limit to $15 million, more in line with the Company's current needs.
On August 18, 2000, GECC extended the maturity until September 29, 2000, reduced
the borrowing limit to $14 million and increased the interest rate to LIBOR plus
3.0% or 2.0% in excess of the prime rate. On September 28, 2000, GECC extended
the maturity until November 30, 2000, and increased the interest rate to prime
plus 4%.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Management is currently
negotiating with other banks to obtain financing to replace the Credit
Agreement. As of September 30, 2000, the Company has not obtained financing from
an alternative source.
Management's plan initially consists of obtaining sufficient financing from
alternative sources to replace the Credit Agreement and management believes that
funds from operations and any new financing will be sufficient to meet the
Company's operating needs. There is no assurance, however, that alternative
financing will be available in the future, and if available, at terms and
conditions agreeable to the Company.
This factor among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
------- -----------------------------------------------------------
During the quarter ended September 30, 2000, there have been no material changes
in the information about the Company's market risks as of March 31, 2000, as set
forth in Item 7A of the 2000 Form 10-K.
5
<PAGE>
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 12, 2000, the Company held its annual meeting. The following is a
summary of the proposals and corresponding votes.
(a) Nomination and Election of Directors
------------------------------------
The seven nominees named in the proxy statement were
elected, with each director receiving more than 99%
of the votes cast.
(b) Adoption of Parlux Fragrances, Inc. Employee
--------------------------------------------
Stock Option Plan - 2000
------------------------
Over 89% of the votes were cast in favor of the
proposal.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. Description
----------- ------------
4.27 Third Forbearance and Amendment
Agreement, dated September 28, 2000,
between the Company and General
Electric Capital Corporation.
27 Financial Data Schedule (for
(SEC use only)
(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,
2000 2000
------------ ------------
(Unaudited)
ASSETS
-------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,703 $ 17,464
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$3,753,000 and $3,320,000, respectively 6,890,108 6,066,149
Trade receivables from related parties 12,687,712 9,561,550
Note receivable from related party 3,531,184 2,500,000
Inventories, net 24,508,520 23,419,613
Prepaid expenses and other current assets 8,995,200 8,392,277
Investment in affiliate 1,512,406 8,034,657
------------ ------------
TOTAL CURRENT ASSETS 58,149,833 57,991,710
Equipment and leasehold improvements, net 2,332,776 2,289,159
Trademarks, licenses and goodwill, net 20,994,929 21,468,737
Other 61,276 112,422
------------ ------------
TOTAL ASSETS $ 81,538,814 $ 81,862,028
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 12,856,196 $ 9,993,966
Accounts payable 11,205,516 10,554,068
Accrued expenses 817,469 1,379,483
Income taxes payable 2,436,170 1,310,811
------------ ------------
TOTAL CURRENT LIABILITIES 27,315,351 23,238,328
Borrowings, less current portion 2,069,041 2,571,252
Deferred tax liability 1,067,143 2,407,664
------------ ------------
TOTAL LIABILITIES 30,451,535 28,217,244
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at September 30, and March 31 -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 17,986,315 and 17,973,103 shares
issued at September 30, and March 31, 2000, respectively 179,863 179,731
Additional paid-in capital 74,001,718 73,977,590
Retained earnings (accumulated deficit) 2,130,399 (473,338)
Accumulated other comprehensive income (loss) (2,210,789) 1,834,607
Notes receivable from officer (896,917) (899,105)
------------ ------------
73,204,274 74,619,485
Less - 8,017,131 and 7,856,798 shares of common stock in
treasury, at cost, at September 30, and March 31, 2000, respectively (22,116,995) (20,974,701)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 51,087,279 53,644,784
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,538,814 $ 81,862,028
============ ============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Unrelated customers $ 13,483,702 $ 10,763,338 $ 23,079,221 $ 17,386,661
Related parties 4,715,675 8,938,164 12,031,341 17,244,674
------------ ------------ ------------ ------------
18,199,377 19,701,502 35,110,562 34,631,335
Cost of goods sold 6,996,931 9,000,798 14,271,703 15,703,773
------------ ------------ ------------ ------------
Gross margin 11,202,446 10,700,704 20,838,859 18,927,562
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 3,589,318 3,612,416 7,989,530 7,066,536
Selling and distribution 1,610,193 1,461,583 3,166,288 2,786,342
General and administrative, net of licensing
fees of $162,500 and $325,000 in 2000 and
fees of $162,500 and $315,500 in 1999 1,862,885 983,923 2,913,109 1,914,152
Depreciation and amortization 579,849 982,709 1,118,101 1,602,939
Royalties 427,899 695,764 998,127 1,266,277
------------ ------------ ------------ ------------
Total operating expenses 8,070,144 7,736,395 16,185,155 14,636,246
------------ ------------ ------------ ------------
Operating income 3,132,302 2,964,309 4,653,704 4,291,316
Interest income 130,795 593 233,706 92,976
Interest expense and bank charges (358,378) (354,395) (690,940) (679,553)
Exchange gains 3,106 -- 3,106 --
------------ ------------ ------------ ------------
Income before income taxes 2,907,825 2,610,507 4,199,576 3,704,739
Income taxes provision (1,104,974) (991,993) (1,595,839) (1,407,801)
------------ ------------ ------------ ------------
Net income $ 1,802,851 $ 1,618,514 $ 2,603,737 $ 2,296,938
============ ============ ============ ============
Income per common share:
Basic $ 0.18 $ 0.12 $ 0.26 $ 0.17
============ ============ ============ ============
Diluted $ 0.17 $ 0.12 $ 0.25 $ 0.17
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------------- ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE at March 31, 1998 17,447,478 $ 174,475 $ 73,007,949 ($ 5,764,404)
Comprehensive income:
Net income -- -- -- 1,418,455
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise of employee options 15,000 150 22,637 --
Purchase of 1,165,276 shares of treasury stock, at cost -- -- -- --
Notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 1999 17,462,478 174,625 73,030,586 (4,345,949)
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on investment in affiliate, net
of taxes of $1,340,521 -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise of:
Employee stock options 10,625 106 14,504 14,610
Warrants 500,000 5,000 932,500 --
Purchase of 4,049,767 shares of treasury stock, at cost -- -- -- --
Notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 2000 17,973,103 179,731 73,977,590 (473,338)
Comprehensive income:
Net income -- -- -- 2,603,737
Unrealized holding loss on investment in affiliate, net
of a tax benefit of $2,478,455 -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive loss (1,441,659)
Issuance of common stock upon exercise of:
Employee stock options 13,212 132 24,128
Purchase of 312,333 shares of treasury stock, at cost -- -- -- --
Notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at September 30, 2000 17,986,315 $ 179,863 $ 74,001,718 $ 2,130,399
============ ============ ============ ============
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE TREASURY FROM
(LOSS) INCOME(1) STOCK OFFICER TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE at March 31, 1998 ($ 355,331) ($ 5,894,250) ($ 150,000) $ 61,018,439
Comprehensive income:
Net income -- -- -- 1,418,455
Foreign currency translation adjustment 3,826 -- -- 3,826
------------
Total comprehensive income 1,422,281
------------
Issuance of common stock upon exercise of employee options -- -- -- 22,787
Purchase of 1,165,276 shares of treasury stock, at cost -- (2,332,817) -- (2,332,817)
Notes receivable from officer -- -- (276,446) (276,446)
------------ ------------ ------------ ------------
BALANCE at March 31, 1999 (351,505) (8,227,067) (426,446) 59,854,244
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on investment in affiliate, net
of taxes of $1,340,521 2,187,166 -- -- 2,187,166
Foreign currency translation adjustment (1,054) -- -- (1,054)
------------
Total comprehensive income 6,058,723
------------
Issuance of common stock upon exercise of:
Employee stock options 14,610
Warrants 937,500
Purchase of 4,049,767 shares of treasury stock, at cost -- (12,747,634) (12,747,634)
Notes receivable from officer -- -- (472,659) (472,659)
------------ ------------ ------------ ------------
BALANCE at March 31, 2000 1,834,607 (20,974,701) (899,105) 53,644,784
Comprehensive income:
Net income -- -- -- 2,603,737
Unrealized holding loss on investment in affiliate, net
of a tax benefit of $2,478,455 (4,043,796) -- -- (4,043,796)
Foreign currency translation adjustment (1,600) -- -- (1,600)
------------
Total comprehensive loss (1,441,659)
------------
Issuance of common stock upon exercise of:
Employee stock options 24,260
Purchase of 312,333 shares of treasury stock, at cost -- (1,142,294) (1,142,294)
Notes receivable from officer -- -- 2,188 2,188
------------ ------------ ------------ ------------
BALANCE at September 30, 2000 $ (2,210,789) $(22,116,995) $ (896,917) $ 51,087,279
============ ============ ============ ============
</TABLE>
(1) Accumulated other comprehensive (loss) income includes foreign currency
translation adjustments and unrealized holding gains and losses on
investment in affiliate.
See notes to consolidated financial statements.
9
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Six months ended September 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,603,737 $ 2,296,938
----------- -----------
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization 1,118,101 1,602,939
Provision for doubtful accounts 1,147,000 245,000
Reserve for prepaid promotional supplies and inventory obsolescence 450,000 700,000
Changes in assets and liabilities:
Increase in trade receivables - customers (1,970,959) (2,912,637)
Increase in note and trade receivables - related parties (4,157,346) (5,828,782)
Increase in inventories (1,066,726) (2,634,052)
Decrease in prepaid expenses and other current assets 62,831 1,785,788
Decrease in other non-current assets 51,146 531
Increase in accounts payable 651,448 4,099,686
Increase in accrued expenses and income taxes payable 563,345 1,091,258
----------- -----------
Total adjustments (3,151,160) (1,850,269)
----------- -----------
Net cash (used in) provided by operating activities (547,423) 446,669
----------- -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (625,893) (594,878)
Purchase of trademarks (62,018) (51,424)
----------- -----------
Net cash used in investing activities (687,911) (646,302)
----------- -----------
Cash flows from financing activities:
Proceeds - note payable to GE Capital 2,838,175 3,779,055
Payments - note payable to Fred Hayman Beverly Hills (313,997) (292,101)
Payments - note payable to Lyon Credit Corp. (99,623) (89,226)
Payments - note payable to Bankers Capital Leasing (64,536) (59,930)
Payments - other notes payable -- (26,146)
Notes receivable from officer 2,188 (577,841)
Purchases of treasury stock (1,142,294) (2,565,596)
Proceeds from issuance of common stock 24,260 --
----------- -----------
Net cash provided by financing activities 1,244,173 168,215
----------- -----------
Effect of exchange rate changes on cash (1,600) 328
----------- -----------
Net increase (decrease) in cash and cash equivalents 7,239 (31,090)
Cash and cash equivalents, beginning of period 17,464 184,148
----------- -----------
Cash and cash equivalents, end of period $ 24,703 $ 153,058
=========== ===========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
A. Basis of Presentation
The consolidated financial statements include the accounts of Parlux Fragrances,
Inc. and Parlux, S.A., a wholly-owned inactive French subsidiary ("S.A.") and
Parlux Ltd. (jointly referred to as the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the
information presented not misleading. The financial information presented
herein, which is not necessarily indicative of results to be expected for the
current fiscal year, reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of the interim unaudited
consolidated financial statements. 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, 2000 Form 10-K as filed with
the Securities and Exchange Commission on July 14, 2000.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Management is currently
negotiating with other banks to obtain financing to replace the Credit
Agreement. As of September 30, 2000, the Company has not obtained financing from
an alternative source.
Management's plan initially consists of obtaining sufficient financing from
alternative sources to replace the Credit Agreement and management believes that
funds from operations and any new financing will be sufficient to meet the
Company's operating needs. There is no assurance, however, that alternative
financing will be available in the future, and if available, at terms and
conditions agreeable to the Company.
This factor among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Certain reclassifications were made to the September 30, 1999 financial
statements to conform with the presentation of the September 30, 2000 financial
statements.
11
<PAGE>
B. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
September 30, 2000 March 31, 2000
------------------ --------------
Finished products $14,081,803 $13,616,034
Components and packaging material 7,368,818 6,780,534
Raw material 3,057,899 3,023,045
----------- -----------
$24,508,520 $23,419,613
========== ==========
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the amount of $2,025,000 and
$1,845,000 at September 30, 2000 and March 31, 2000, respectively. The above
amounts are net of reserves for potential inventory obsolescence of
approximately $1,985,000 and $1,520,000 at September 30, 2000 and March 31,
2000, respectively.
C. Trademarks, Licenses and Goodwill
Trademarks, licenses and goodwill, which are being amortized over twenty-five
years, are attributable to the following brands:
September 30, 2000 March 31, 2000
------------------ --------------
Owned Brands:
Alexandra de Markoff $11,191,174 $11,191,171
Fred Hayman Beverly Hills 2,820,037 2,804,864
Bal A Versailles 2,948,942 2,948,942
Animale 1,570,121 1,523,824
Other 216,045 215,714
Licensed Brands:
Perry Ellis 7,963,969 7,963,755
----------- -----------
26,710,288 26,648,270
Less: accumulated amortization (5,715,359) (5,179,533)
----------- -----------
$20,994,929 $21,468,737
=========== ===========
On June 9, 1998, the Company entered into an exclusive agreement to license the
Bal A Versailles (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.
On March 2, 1998, the Company entered into an exclusive agreement to license the
Alexandra de Markoff (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.
12
<PAGE>
D. Borrowings - Banks and Others
The composition of borrowings is as follows:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------ --------------
<S> <C> <C>
Revolving credit facility payable to General Electric
Capital Corporation, interest at LIBOR plus 3% or
prime (9.50% at September 30, 2000) plus 4%, at the
Company's option, net of restricted cash of $537,403
and $2,468,377 at September 30 and March 31, 2000,
respectively $ 11,763,788 $ 8,925,613
Note payable to Fred Hayman Beverly Hills (FHBH),
collateralized by the acquired licensed trademarks,
interest at 7.25%, payable in equal monthly
installments of $69,863, including interest, through
June 2004 2,717,410 3,031,407
Note payable to Lyon Credit Corporation,
collateralized by certain equipment, interest at 11%,
payable in equal monthly installments of $19,142,
including interest, through September 2001 216,498 316,121
Capital lease payable to Bankers Leasing,
collateralized by certain computer hardware and
software, payable in quarterly installments of $36,378,
including interest, through January 2002 208,672 273,208
Other notes payable 18,869 18,869
------------ ------------
14,925,237 12,565,218
Less: long-term borrowings (2,069,041) (2,571,252)
------------ ------------
Short-term borrowings $ 12,856,196 $ 9,993,966
============ ============
</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 was 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.
Substantially all of the domestic assets of the Company collateralize this
borrowing. The Credit Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional indebtedness
in excess of a specified amount, paying dividends, creating liens, and engaging
in mergers and acquisitions without the prior consent of GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios.
Due principally to the significant treasury stock purchases under the Company's
stock buy back program, as of March 31, 2000, the Company was not in compliance
with financial covenants relating to tangible net worth, current ratio and
minimum fixed charge coverage ratio as well as the restricted payment covenants
exceeding the amount of fixed assets and treasury stock which can be purchased
as well as advances to related parties and employees. GECC originally extended
the maturity of the Credit Agreement until August 29, 2000, while reducing the
borrowing limit to $15 million, more in line with the Company's current needs.
13
<PAGE>
On August 18, 2000, GECC extended the maturity until September 29, 2000, reduced
the borrowing limit to $14 million and increased the interest rate to LIBOR plus
3.0% or 2.0% in excess of the prime rate. On September 28, 2000, GECC extended
the maturity until November 30, 2000, and increased the interest rate to prime
plus 4%.
At September 30, 2000, based on the borrowing base at that date, the credit line
amounted to approximately $14,000,000, and accordingly, the Company had
approximately $1,849,000 available under the credit line, excluding the effect
of restricted cash of approximately $537,000.
Management believes that, based on current circumstances, the Company will be
able to obtain sufficient financing from alternative sources to replace the
Credit Agreement and funds from operations and any new financing will be
sufficient to meet the Company's operating needs. However, there can be no
assurance that alternative financing will be available in the future, and if
available at terms and conditions agreeable to the Company.
E. Related Parties Transactions
As of September 30, 2000, the Company had loaned a total of $896,917 ($899,105
at March 31, 2000) to its Chairman/CEO, which is recorded as a component of
stockholders' equity in the accompanying consolidated balance sheets. The notes
are unsecured, bear interest at 10% per annum, and are due in one balloon
payment on March 31, 2001. As of this date, interest payments are current
through June 30, 2000.
The Company had net sales of $12,031,341 and $17,244,674 during the six-month
periods ended September 30, 2000 and September 30, 1999, respectively, to
Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures,
Inc. ("ECMV"), a company in which the Company's Chairman and Chief Executive
Officer has an ownership interest and holds identical management positions. Net
trade accounts receivable and note receivable owed by Perfumania to the Company
amounted to $12,687,712 and $3,531,184, respectively, at September 30, 2000
($9,561,550 and $2,500,000, respectively, at March 31, 2000). Amounts due from
related parties are non-interest bearing and are realizable in less than one
year, except for the subordinated note receivable discussed below.
On July 1, 1999, Perfumania and the Company's Board of Directors approved the
transfer of 1,512,406 shares of Perfumania treasury stock to the Company in
consideration for a partial reduction of the outstanding trade receivable
balance in the amount of $4,506,970. The transfer price was based on a per share
price of $2.98, which approximated 90% of the closing price of Perfumania's
common stock for the previous 20 business days. (In accordance with generally
accepted accounting principles, these securities are considered
available-for-sale securities and must be recorded at fair value. Changes in
unrealized gains and losses are charged or credited as a component of
accumulated other comprehensive income, net of tax, and are included in the
accompanying consolidated statement of changes in stockholders' equity at March
31, 2000). In connection with the agreement for the transfer of the shares, the
parties executed a registration rights agreement whereby the Company would be
able to demand registration of the shares with the Securities and Exchange
Commission at any time after February 29, 2000. Both agreements were consummated
on August 31, 1999, and the demand registration was requested on March 3, 2000.
Effective February 1, 2000, ECMV was formed as a holding company and
accordingly, former Perfumania shareholders now hold common stock in ECMV. A
registration statement was filed by ECMV during April 2000, which became
effective in June 2000. As of September 30, 2000, the fair market value of the
investment in ECMV is $1,512,406 ($1.00 per share).
14
<PAGE>
In addition, on October 4, 1999, the parties entered into an agreement, which
converted $8 million of the outstanding trade receivable into a subordinated
secured note receivable. The note bore interest at prime plus one percent and
was repayable in installments of $3,000,000 in October 1999, six equal monthly
installments of $500,000 from November 1999 through April 2000, with the balance
of $2,000,000 due on May 31, 2000. As of March 31, 2000, $5,500,000 of the note
receivable had been repaid in accordance with its terms.
On June 1, 2000, the parties entered into a new subordinated $5 million note
agreement which refinanced the remaining $2 million under the October 4, 1999
note, as well as converted $3 million of the outstanding trade receivable due
from Perfumania to the Company. The new note is repayable in six equal monthly
installments of $500,000, plus interest, from July 2000 through December 2000,
with the balance of $2 million due on December 29, 2000. The terms and
conditions of the new note are identical to the October 4, 1999 note.
During the period of April 1, 2000 through September 30, 2000, the Company
received cash payments of $7.79 million from Perfumania, including the April
installment and May interest payment due under the October 4, 1999 note, as well
as the July, August and September installments under the new note.
As indicated in various public press releases, Perfumania has reported both
aggregate and comparative store sales increases for each of the months during
the period February 1999 through October 2000. In addition, during September
1999, its subsidiary, perfumania.com, successfully completed a public offering
in which Perfumania also sold one million of its perfumania.com shares,
subsequently selling an additional two million shares and five hundred thousand
shares in January 2000 and May 2000, respectively, generating over $25 million
in cash from the four transactions. Additionally, during May 2000, Perfumania
entered into a new $40 million line of credit agreement with General Motors
Commercial Credit Corporation. Based on the factors described above, management
believes that the receivable from Perfumania is fully collectible.
During the period of October 1, 2000 through November 10, 2000, the Company
received additional cash payments of $1.27 million from Perfumania, including
the October and November installments due under the new note receivable.
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:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net income $ 1,802,851 $ 1,618,514
============ ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,969,151 12,981,594
============ ===========
Basic net income per common share $ 0.18 $ 0.12
============ ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,969,151 12,981,594
Affect of dilutive securities:
Stock options and warrants, net of treasury shares acquired 428,940 105,476
------------ -----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,398,091 13,087,069
============ ===========
Diluted net income per common share $ 0.17 $ 0.12
============ ===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,304,975 2,014,500
============ ===========
Exercise Price $2.82-$8.00 $2.00-$8.00
============ ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------ -----------
2000 1999
------------ -----------
<S> <C> <C>
Net income $ 2,603,737 $ 2,296,938
============ ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 10,019,591 13,283,695
============ ===========
Basic net income per common share $ 0.26 $ 0.17
============ ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 10,019,591 13,283,695
Affect of dilutive securities:
Stock options and warrants, net of treasury shares acquired 528,517 81,156
------------ -----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,548,108 13,364,851
============ ===========
Diluted net income per common share $ 0.25 $ 0.17
============ ===========
Antidilutive securities not included in diluted earnings per share computation:
Options and warrants to purchase common stock 1,238,365 2,565,032
============ ===========
Exercise Price $3.13-$8.00 $1.88-$8.00
============ ===========
</TABLE>
G. 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,
2000 1999
---- ----
Cash paid for:
Interest $576,147 $ 577,893
Income taxes $470,480 $ 25,420
In addition to the conversion of trade accounts receivable in the amount of
$4,506,970, discussed in Note E, the following non-cash transaction was entered
into during the six months ended September 30, 2000:
During June 2000, the Company entered into a barter agreement for which it
received $1,200,000 of advertising credits in exchange for all of its remaining
finished goods inventory of Baryshnikov products.
The Company deferred the gross margin of $472,181 on the barter sale until the
advertising is used, and recorded the advertising credits, net of unearned
income, as a prepaid expense in the accompanying September 30, 2000 balance
sheet, while increasing cost of goods sold for an equal amount. As advertising
credits are used by the Company, advertising and promotional expense will be
charged, a pro-rata share of the unearned income debited, with a corresponding
credit to cost of goods sold. As a result, as the advertising credits are used,
cost of goods sold decreases and gross margin increases both in the aggregate
and as a percentage of net sales.
16
<PAGE>
H. Income Taxes
The provision for income taxes for the periods ended September 30, 2000 and 1999
reflects an effective tax rate of approximately 38%.
I. License and Distribution Agreements
As of September 30, 2000 and March 31, 2000, the Company held exclusive
worldwide licenses to manufacture and distribute fragrance and other related
products under the trademarks for Perry Ellis, Ocean Pacific ("OP"), and
Phantom.
Under each of these arrangements, the Company must pay royalties at various
rates based on net sales, and for the Perry Ellis and OP agreements, spend
minimum amounts for advertising based on sales volume. The agreements expire on
various dates and are subject to renewal. The Company believes that it is
presently in compliance with all material obligations under the above
agreements.
Effective January 1, 2000, the Company entered into an exclusive license
agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and distribute men's and
women's fragrances and other related products under the PEZ trademark throughout
the western hemisphere. The Company anticipates launching the first PEZ
fragrances for Summer 2001 season.
On October 13, 1999, the Company was notified by the Baryshnikov licensor of its
intent to immediately terminate the license agreement with the Company, which
was to expire on March 31, 2001, due to the Company's unwillingness to develop
and distribute a new women's fragrance by October 31, 1999, as stipulated in the
license agreement. On January 11, 2000, a settlement was reached which entitled
the Company to continue producing and selling Baryshnikov brand products until
April 30, 2000, at which time all remaining unsold inventory and advertising
material would be destroyed. On April 28, 2000, the parties agreed to extend the
sales period until September 30, 2000. Sales of Baryshnikov products represented
less than 2% of total Company net sales for each of the three years ended March
31, 2000. Management believes that the effect of this matter will not have a
material adverse effect on the Company's financial position or results of
operations. As discussed above, on June 29, 2000, the Company entered into a
barter agreement covering all of its remaining Baryshnikov finished goods
inventory.
* * * *
17
<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 Operating Officer,
Chief Financial Officer and Director
Date: November 13, 2000
