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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------
FORM 10-Q
( Mark One )
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
-------------
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 of ( IRS employer identification no. )
incorporation or organization )
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
- --------------------------------------------------------------------------------
( Address of principal executive offices ) ( Zip code )
Registrant's telephone number, including area code 954-316-9008
------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 14, 2002, 9,976,896 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
See pages 6 to 15.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ ------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
We 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 our achievements, or our 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 our 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. We undertake 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 our 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.
Critical Accounting Policies and Estimates
- ------------------------------------------
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
position in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. The Company has included in its Annual Report on
Form 10-K for the year ended March 31, 2002 a discussion of the Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results of operations and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. Except for the Company's adoption of Emerging Issues Task
Force ("EITF") 01-09, Accounting for Consideration Given by a Vendor to a
Customer, described below, the Company has not made any changes of these
critical accounting policies during the first quarter of 2002, nor has it made
any material changes in any of the critical accounting estimates underlying
these accounting policies during the first quarter 2002.
Effective April 1, 2002, the Company adopted EITF 01-09, which codified and
reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF
No. 00-14 provides guidance on accounting for discounts, coupons, rebates and
free products, as well as the income statement classification of these
discounts, coupons, rebates and free products. Upon adoption of this
pronouncement, the Company has classifed gift-with-purchase ("GWP") activities,
which were previously reported as advertising and promotional expenses, as cost
of goods sold. The adoption of EITF 01-09 did not have any impact on operating
2
income; however, for the three-month period ended June 30, 2002, gross margin
has been decreased by $1,214,429 offset by an equal decrease in advertising and
promotional expenses. Additionally, $941,821 of such costs incurred during the
three months ended June 30, 2001 have been reclassified to cost of goods sold
for comparative purposes. All discussions below include the effect of the
adoption and reclassification.
Results of Operations
- ---------------------
Comparison of the three-month period ended June 30, 2002 with the three-month
period ended June 30, 2001.
During the quarter ended June 30, 2002, net sales increased 10% to $19,825,736
as compared to $18,013,373 for the same period for the prior year. The increase
is mainly attributable to the launch of Perry Ellis "Reserve for Women"
fragrance, which resulted in an increase in total Perry Ellis brand gross sales
from $12,920,488 to $14,209,259, and the launches of "Ocean Pacific" for women
in the Fall of 2001, and "Jockey" for men and women in the Spring of 2002, which
added gross sales of $1,325,702 and $1,083,287, respectively, during the current
period.
Net sales to unrelated customers increased 22% to $14,275,667 in the current
period, compared to $11,665,256 for the same period in the prior year,
reflecting the launches discussed above. Sales to related parties decreased 13%
to $5,550,069 in the current period compared to $6,348,117 for the same period
in the prior year.
Cost of goods sold increased as a percentage of net sales from 47% for the
quarter ended June 30, 2001 to 51% for the current period. The increase was
mainly attributable to the change in sales mix whereby all customer groups
purchased a higher percentage of value sets than in the prior year comparable
period. These value sets have a higher cost of goods. Cost of goods sold on
sales to unrelated customers and related parties approximated 48% and 61%,
respectively, for the current period, as compared to 49% and 43%, respectively,
for the same period in the prior year.
Operating expenses decreased by 1% compared to the same period in the prior year
from $7,716,793 to $7,640,049, decreasing as a percentage of net sales from 43%
to 39%. Advertising and promotional expenses decreased 15% to $3,273,356
compared to $3,846,888 in the prior year period, as the previous period
reflected the necessary investment to fund the launch costs for "Ocean Pacific"
for men. Without the reclassification of GWP activity in both periods, the
decrease would have been 6%. Selling and distribution costs decreased 1% to
$1,711,454 in the current period as compared to $1,722,191 for the same period
of the prior year, decreasing as a percentage of net sales from 10% to 9%.
General and administrative expenses increased by 40% compared to the prior year
period from $1,060,167 to $1,481,302, increasing as a percentage of net sales
from 6% to 7%. The increase is mainly attributable to an increase in legal fees
in connection with our lawsuit against a supplier, and the reduction in
licensing fees of $162,500 which offset expenses in the prior year. Depreciation
and amortization decreased by $172,436 during the current period from $521,427
to $348,991, as approximately $141,000 of amortization on intangibles from the
Alexandra de Markoff ("ADM") and Bal a Versailles ("BAV") brands was no longer
required during the current period (See Note C for further discussion).
Royalties increased by 46% in the current period, increasing as a percentage of
net sales from 3% to 4% due to minimum royalty requirements for the Jockey
license.
As a result of the above, operating income increased by 8% to $1,993,415
remaining at 10% of net sales for the current period, compared to $1,838,066 for
the same period in the prior year. Net interest expense decreased to $193,348 in
the current period as compared to $331,858 for the same period in the prior
year. The decrease was mainly attributable to the substantial
3
reduction in interest rates compared to the prior year, reflecting the terms of
our new line of credit coupled with a reduced prime rate. The Company recorded a
$2,858,447 non-cash charge during the prior period, representing a writedown for
an other-than-temporary decline in the value of our investment in affiliate.
Income before taxes for the current period was $1,800,067 compared to a loss
before taxes of $1,352,239 in the same period for the prior year. Giving effect
to the tax provision and the deferred tax benefit of $207,360 related to the
non-cash charge in the prior year, we recorded net income of $1,116,042 for the
current period, compared to a net loss of $1,717,238 in the prior year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $39,506,879 as of June 30, 2002, compared to
$37,662,059 at March 31, 2002, reflecting the current period's net income and
the increase in the market value of our investment in affiliate.
Consistent with prior years, our operations for the three months ended June 30,
2002, resulted in a use of cash which is mainly attributable to the increases in
inventories and receivables from related parties, typical of the seasonality of
our business. The use of cash was funded by increased borrowings under our line
of credit.
In September 1999, we completed the fourth phase of our common stock buy-back
program involving 2,000,000 shares. In connection therewith, the Board of
Directors authorized the repurchase of an additional 2,500,000 shares. As of
June 30, 2001, the Company had repurchased under all phases a total of 7,978,131
shares at a cost of $21,983,523, with 121,869 shares still available for
repurchase under the last program. On July 25, 2001, the Board of Directors
authorized a new 2,500,000 share repurchase, subject to the restrictions and
covenants in our new loan agreement discussed below. The accompanying
consolidated balance sheets also include an additional 39,000 shares of treasury
stock purchased at a cost of $133,472 prior to fiscal 1996.
On July 20, 2001, we entered into a three-year Loan and Security Agreement (the
Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Proceeds from the Loan
Agreement were used, in part, to repay amounts outstanding under the Company's
$14 million credit facility with General Electric Capital Corporation (GECC).
Under the Loan Agreement, we are able to borrow, depending upon the availability
of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate
of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at
our option. The Loan Agreement contains provisions to reduce both rates by a
maximum of 1% or increase both rates by a maximum of .5% based on a ratio of
funded debt to EBITDA.
Substantially all of our domestic assets collateralize this borrowing. The Loan
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 GMACCC. The Loan Agreement also
contains certain financial covenants relating to net worth, interest coverage
and other financial ratios.
Management believes that, based on current circumstances, funds from operations
and our new financing will be sufficient to meet our operating needs for the
foreseeable future.
4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------- -----------------------------------------------------------
During the quarter ended June 30, 2002, there have been no material changes in
the information about the Company's market risks as of March 31, 2002, as set
forth in Item 7A of the Form 10-K for the year ended March 31, 2002.
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
To the best of our knowledge, there are no legal proceedings pending against us
which, if determined adversely to us, would have a material effect on our
financial position or results of operations.
On May 8, 2001, and amended on June 8, 2001, we filed a legal complaint against
a component supplier to recover out-of-pocket costs and damages resulting from
the supplier having delivered faulty components for two of our fragrances.
Out-of-pocket costs to refurbish the products were included in cost of goods for
the years ended March 31, 2002 and 2001. We are still in the discovery phase of
the legal action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits - None
(b) There were no filings on Form 8-K during the period.
5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, March 31,
ASSETS 2002 2002
- ------------------------------------------------------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 101,490 $ 164,793
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$2,117,000 and $1,430,000, respectively 6,396,132 5,527,522
Trade receivables from related parties 16,403,644 12,788,320
Income tax receivable 1,080,367 1,745,401
Inventories, net 34,017,509 31,102,875
Prepaid expenses and other current assets, net 7,076,070 8,045,933
Investment in affiliate 1,569,119 907,442
------------ ------------
TOTAL CURRENT ASSETS 66,644,331 60,282,286
Equipment and leasehold improvements, net 2,065,810 2,361,659
Trademarks, licenses and goodwill, net 9,527,345 9,534,937
Other 78,741 69,609
------------ ------------
TOTAL ASSETS $ 78,316,227 $ 72,248,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 14,722,288 $ 11,493,461
Accounts payable 11,175,432 10,118,080
Accrued expenses 1,239,732 1,008,686
------------ ------------
TOTAL CURRENT LIABILITIES 27,137,452 22,620,227
Borrowings, less current portion 734,892 962,275
Deferred tax liability 742,214 742,214
------------ ------------
TOTAL LIABILITIES 28,614,558 24,324,716
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at June 30, 2002 and
March 31, 2002 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
17,994,027 and 17,993,277 shares issued at
June 30, 2002 and March 31, 2002, respectively 179,940 179,933
Additional paid-in capital 74,012,245 74,011,221
Accumulated deficit (1,087,038) (2,203,080)
Accumulated other comprehensive loss (447,808) (1,110,139)
Notes receivable from officer (838,675) (837,165)
------------ ------------
71,818,664 70,040,770
Less - 8,017,131 shares of common stock in treasury,
at cost, at June 30, 2002 and March 31, 2002 (22,116,995) (22,116,995)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 49,701,669 47,923,775
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,316,227 $ 72,248,491
============ ============
See notes to consoldiated financial statements.
6
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
----------------------------
2002 2001
------------ ------------
Net sales:
Unrelated customers $ 14,275,667 $ 11,665,256
Related parties 5,550,069 6,348,117
------------ ------------
19,825,736 18,013,373
Cost of goods sold, including $1,214,429 and $941,821
of promotional items in 2002 and 2001, respectively 10,192,272 8,458,514
------------ ------------
Gross margin 9,633,464 9,554,859
------------ ------------
Operating expenses:
Advertising and promotional 3,273,356 3,846,888
Selling and distribution 1,711,454 1,722,191
General and administrative, net of licensing
fees of $162,500 in 2001 1,481,302 1,060,167
Depreciation and amortization 348,991 521,427
Royalties 824,946 566,120
------------ ------------
Total operating expenses 7,640,049 7,716,793
------------ ------------
Operating income 1,993,415 1,838,066
Interest income 15,784 15,777
Interest expense and bank charges (209,132) (347,635)
Other-than-temporary decline in value
of investment in affiliate (2,858,447)
------------ ------------
Income (loss) before income taxes 1,800,067 (1,352,239)
Income taxes provision (684,025) (364,999)
------------ ------------
Net income (loss) $ 1,116,042 ($ 1,717,238)
============ ============
Income (loss) per common share:
Basic $ 0.11 ($ 0.17)
============ ============
Diluted $ 0.11 ($ 0.17)
============ ============
See notes to consolidated financial statements.
7
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2002
(Unaudited)
COMMON STOCK
ACCUMULATED
--------------------- ADDITIONAL OTHER
NUMBER PAR PAID-IN ACCUMULATED COMPREHENSIVE
ISSUED VALUE CAPITAL DEFICIT (LOSS) INCOME (1)
---------- --------- ------------ ------------ ------------
BALANCE at March 31, 2002 17,993,277 $ 179,933 $ 74,011,221 $ (2,203,080) $ (1,110,139)
Comprehensive income:
Net income -- -- -- 1,116,042 --
Unrealized holding gain on
investment in affiliate -- -- -- -- 661,677
Foreign currency translation adjustment -- -- -- -- 654
Total comprehensive income
Issuance of common stock upon exercise of
employee stock options 750 7 1,024
Net increase in notes receivable from officer -- -- -- -- --
---------- --------- ------------ ------------ ------------
BALANCE at June 30, 2002 17,994,027 $ 179,940 $ 74,012,245 $ (1,087,038) $ (447,808)
========== ========= ============ ============ ============
[RESTUB]
NOTES
RECEIVABLE
FROM TREASURY
OFFICER STOCK TOTAL
------------ ------------ ------------
BALANCE at March 31, 2002 $ (837,165) $(22,116,995) $ 47,923,775
Comprehensive income:
Net income -- -- 1,116,042
Unrealized holding gain on
investment in affiliate -- -- 661,677
Foreign currency translation adjustment -- -- 654
------------
Total comprehensive income 1,778,373
Issuance of common stock upon exercise of
employee stock options 1,031
Net increase in notes receivable from officer (1,510) -- (1,510)
------------ ------------ ------------
BALANCE at June 30, 2002 $ (838,675) $(22,116,995) $ 49,701,669
============ ============ ============
(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.
8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 1,116,042 ($1,717,238)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 348,991 521,427
Other-than-temporary decline in market value of investment in affiliate -- 2,858,447
Deferred income tax benefit -- (207,360)
Provision for doubtful accounts 60,000 60,000
Reserve for prepaid promotional supplies and inventory obsolescence 481,550 170,000
Changes in assets and liabilities:
(Increase) decrease in trade receivables - customers (928,610) 1,588,694
Increase in note and trade receivables - related parties (3,615,324) (3,587,942)
Decrease in income tax receivable 665,034 --
Increase in inventories (3,196,183) (5,130,577)
Decrease (increase) in prepaid expenses and other
current assets 769,862 (1,111,329)
(Increase) decrease in other non-current assets (9,132) 5,611
Increase in accounts payable 1,057,352 4,211,509
Increase in accrued expenses and income taxes payable 231,046 3,037
----------- -----------
Total adjustments (4,135,414) (618,483)
----------- -----------
Net cash used in operating activities (3,019,372) (2,335,721)
----------- -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (45,550) (291,624)
Purchase of trademarks -- (6,974)
----------- -----------
Net cash used in investing activities (45,550) (298,598)
----------- -----------
Cash flows from financing activities:
Proceeds - note payable to GMAC Commercial Credit, net 3,229,804
Proceeds - note payable to GE Capital -- 3,284,538
Payments - note payable to Fred Hayman Beverly Hills (179,778) (167,242)
Payments - note payable to Lyon Credit Corp. -- (54,850)
Payments - notes payable to Bankers Capital Leasing (48,582) (50,529)
Payments - other notes payable -- (18,869)
Net increase in notes receivable from officer (1,510) (15,776)
Proceeds from issuance of common stock, net 1,031 --
----------- -----------
Net cash provided by financing activities 3,000,965 2,977,272
----------- -----------
Effect of exchange rate changes on cash 654 (1,774)
----------- -----------
Net (decrease) increase in cash and cash equivalents (63,303) 341,179
Cash and cash equivalents, beginning of period 164,793 30,214
----------- -----------
Cash and cash equivalents, end of period $ 101,490 $ 371,393
=========== ===========
See notes to consolidated financial statements.
9
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 its wholly-owned subsidiaries, Parlux, S.A., a French company ("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 accounting principles
generally accepted in the United States of America 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, 2002
Form 10-K as filed with the Securities and Exchange Commission on July 1, 2002.
Effective April 1, 2002, the Company adopted EITF 01-09, which codified and
reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF
No. 00-14 provides guidance on accounting for discounts, coupons, rebates and
free products, as well as the income statement classification of these
discounts, coupons, rebates and free products. Upon adoption of this
pronouncement, the Company has classifed gift-with-purchase ("GWP") activities,
which were previously reported as advertising and promotional expenses, as cost
of goods sold. The adoption of EITF 01-09 did not have any impact on operating
income; however, for the three-month period ended June 30, 2002, gross margin
has been decreased by $1,214,429 offset by an equal decrease in advertising and
promotional expenses. Additionally, $941,821 of such costs incurred during the
three months ended June 30, 2001 have been reclassified to cost of goods sold
for comparative purposes.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
June 30, 2002 March 31, 2002
------------- --------------
Finished products $17,108,455 $17,532,428
Components and packaging material 11,910,974 9,616,274
Raw material 4,998,080 3,954,173
----------- -----------
$34,017,509 $31,102,875
=========== ===========
10
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the approximate amount of
$2,353,000 and $2,409,000 at June 30, 2002 and March 31, 2002, respectively. The
above amounts are net of reserves for estimated inventory obsolescence of
approximately $2,070,000 and $2,140,000 at June 30, 2002 and March 31, 2002,
respectively.
C. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
June 30, March 31,
2002 2002
---------- ---------
Owned Brands:
Fred Hayman Beverly Hills $2,820,361 $2,820,361
Animale 1,582,367 1,582,367
Bal A Versailles 300,000 300,000
Other 216,546 216,546
Licensed Brands:
Perry Ellis 7,963,560 7,963,560
---------- ----------
12,882,834 12,882,834
Less: accumulated amortization (3,355,489) (3,347,897)
----------- -----------
$9,527,345 $9,534,937
========== ==========
On June 9, 1998, the Company entered into an exclusive agreement to license the
Bal A Versailles (BAV) rights to Genesis International Marketing Corporation
("Genesis") 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, renewable every five years.
The Company is currently negotiating a sale whereby Genesis would purchase the
BAV trademark outright. In anticipation of such an agreement, an impairment
charge against the intangibles related to BAV in the amount of $1,942,462 was
recorded in the Company's statement of operations for the year ended March 31,
2002.
D. BORROWINGS - BANKS AND OTHERS
The composition of borrowings is as follows:
June 30, 2002 March 31, 2002
------------- --------------
Revolving credit facility payable to GMAC Commercial
Credit, interest at LIBOR plus 3.75% or prime (4.75% at
June 30, 2002) plus 1% at the Company's option, net of
restricted cash of $490,823 and $1,248,477 at June 30 and
March 31, 2002, respectively
$13,789,718 $10,559,914
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 1,524,590 1,704,368
11
Capital lease payable to Bankers Leasing, collateralized by
certain warehouse equipment, payable in quarterly
installments of $33,992, including interest, through July 2003.
124,892 155,889
Capital lease payable to Bankers Leasing, collateralized by
certain shipping equipment, payable in quarterly
installments of $18,249, including interest, through October 2002.
17,980 35,565
---------- ----------
15,457,180 12,455,736
Less: long-term borrowings (734,892) (962,275)
----------- -----------
Short-term borrowings $14,722,288 $11,493,461
=========== ===========
On July 20, 2001, the Company entered into a three-year Loan and Security
Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Under
the Loan Agreement, the Company is able to borrow, depending on the availability
of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate
of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at
the Company's option. The Loan Agreement contains provisions to reduce both
rates by a maximum of 1% or increase both rates by a maximum of .5% based on a
ratio of funded debt to EBITDA.
At June 30, 2002, based on the borrowing base at that date, the credit line
amounted to $19,197,000 and, accordingly, the Company had approximately
$4,916,000 available under the credit line excluding the effect of restricted
cash of $491,000.
Substantially all of the domestic assets of the Company collateralize this
borrowing. The Loan 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 GMACCC. The Loan Agreement also
contains certain financial covenants relating to net worth, interest coverage
and other financial ratios.
Management believes that, based on current circumstances, funds from operations
and its new financing will be sufficient to meet the Company's operating needs
for the foreseeable future.
E. RELATED PARTIES TRANSACTIONS
As of June 30, 2002, the Company had loaned a total of $838,675 ($837,165 at
March 31, 2002) to its Chairman/CEO, which is recorded as a component of
stockholders' equity in the accompanying consolidated balance sheets. The note
is unsecured, bears interest at 8% per annum, and is due in one balloon payment
on March 31, 2003. Interest payments are current through March 31, 2002.
The Company had net sales of $3,921,425 and $5,362,527 during the three-month
periods ended June 30, 2002 and June 30, 2001, respectively, to Perfumania, Inc.
("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a
company in which the Company's Chairman/CEO has an ownership interest and holds
identical management positions. Net trade accounts receivable owed by Perfumania
to the Company amounted to $15,594,781 and $12,491,993 at June 30, 2002 and
March 31, 2002, respectively. Amounts due from related parties are non-interest
bearing and are due in less than one year.
12
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 ($11.92 post reverse split discussed below), which approximated
90% of the closing price of Perfumania's common stock for the previous 20
business days. The agreement was consummated on August 31, 1999, and the shares
registered in June 2000. Effective February 1, 2000, ECMV was formed as a
holding company and accordingly, former Perfumania shareholders now hold common
stock in ECMV. During the quarter ended June 30, 2001, the Company recorded a
non-cash charge to earnings of $2,858,447 which reflected an
other-than-temporary decline in value of the investment in affiliate based upon
a sustained reduction in the quoted market price of $1.09 per share ($4.36 post
reverse split discussed below), as of June 30, 2001, compared to the original
cost per share of $2.98 ($11.92 post reverse split discussed below). As a result
of this non-cash reduction of the cost basis of the Company's investment, the
Company reversed $3,496,220 of previously recorded unrealized losses on the
investment, net of taxes, which had been recorded as a component of
stockholders' equity as of March 31, 2001.
On March 21, 2002, ECMV effected a one-for-four reverse stock split;
accordingly, the Company now owns 378,101 shares. As of June 30, 2002, the fair
market value of the investment in ECMV was $1,569,119 ($4.15 per share after the
reverse split). The Company believes that, based on the evaluation of ECMV's
operations, that this current decline in market price is temporary. As of August
12, 2002, the fair market value of the investment in ECMV is $1,697,673 ($4.49
per share after the reverse split).
As of June 30, 2001, the Company and Perfumania had entered into a $3 million
subordinated note agreement which converted $3 million of the outstanding trade
receivable due from Perfumania to the Company as of that date. The note was
repayable in installments of $50,000 on October 31, 2001, $300,000 on November
30, 2001, $2,500,000 on December 31, 2001, and $50,000 on each of January 31,
2002, February 28, 2002, and March 31, 2002. Accrued interest is paid with each
principal installment. As of March 31, 2002, the loan had been repaid in
accordance with its terms.
The Company had net sales of $1,628,644 and $985,590 during the three months
ended June 30, 2002 and 2001, respectively, to fragrance distributors
owned/operated by individuals related to the Company's Chairman/CEO, including
$1,067,739 and $372,934, respectively, to a director of the Company. These sales
are included as related party sales in the accompanying statements of
operations. As of June 30, 2002 and March 31, 2002, trade receivables from
related parties includes $808,863 and $296,327, respectively, from these
customers, including $457,266 and 286,488, from the director.
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:
Three Months Ended June 30,
----------------------------
2002 2001
---------- -----------
Net income (loss) $1,116,042 ($1,717,238)
========== ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,976,276 9,969,434
========== ==========
Basic net (loss) income per common share $0.11 ($0.17)
========== ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,976,276
13
Effect of dilutive securities(1):
Stock options and warrants 125,352
----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,101,628
==========
Diluted net (loss) income per common share $0.11
==========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,274,450 1,315,850
========= =========
Exercise Price $2.08-$8.00 $2.06-$8.00
========== ==========
Excluding the effect of the non-cash charge discussed in Note E, both basic and
diluted earnings per share would have been $0.09 for the prior year period.
(1) The calculation of diluted loss per share was the same as the basic loss per
share for the period ended June 30, 2001, since the inclusion of potential
common stock in the computation would be antidilutive.
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:
Three-months ended June 30,
---------------------------
2002 2001
---- ----
Cash paid for:
Interest $209,000 $344,000
Income taxes $ 19,000 $525,225
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Three months ended June 30, 2002:
o The Company incurred an unrealized holding gain of $661,677 on the investment
in affiliate
Three months ended June 30, 2001:
o The conversion of trade accounts receivable from Perfumania in the amount of
$3,000,000, as discussed in Note E.
o The Company incurred an unrealized loss of $2,858,847 on the investment in
affiliate, with a corresponding deferred tax benefit of $207,360.
H. INCOME TAXES
The provision for income taxes for the periods ended June 30, 2002 and 2001
reflects an effective tax rate of approximately 38%, reduced in 2001 by a
$207,360 deferred tax benefit in the prior year period relating to the
other-than-temporary decline in value of investment in affiliate.
14
I. LICENSE AND DISTRIBUTION AGREEMENTS
As of June 30, 2002 and March 31, 2002, the Company held exclusive worldwide
licenses to manufacture and distribute fragrance and other related products for
Perry Ellis, Ocean Pacific ("OP"), and Jockey.
Under each of these arrangements, the Company must pay royalties at various
rates based on net sales, and 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.
J. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishment of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with earlier adoption encouraged. The Company does not expect the
adoption of SFAS No. 145 to have a material effect on its financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activities. SFAS No. 146 is
effective prospectively for exit or disposal activities initiated after December
31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146
are required to be applied prospectively after the adoption date, we cannot
determine the potential effects that adoption of SFAS No. 146 will have on our
consolidated financial statements.
* * * *
15
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
Each of the undersigned hereby certifies in his capacity as an officer of Parlux
Fragrances, Inc. (the "Company") that the Quarterly Report of the Company on
Form 10-Q for the period ended June 30, 2002, fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at the end of such period and
the results of operations of the Company for such period.
/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: August 14, 2002