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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: September 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
-------
PARLUX FRAGRANCES, INC.
- --------------------------------------------------------------------------------
( Exact name of registrant as specified in its charter )
DELAWARE 22-2562955
- --------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS employer identification no.)
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 14, 2002, 9,994,109 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(unaudited)
-----------
September 30, March 31,
ASSETS 2002 2002
- ------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 117,002 $ 164,793
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,676,000 and $1,430,000, respectively 7,090,617 5,527,522
Trade receivable from related parties 15,007,234 12,788,320
Note receivables from related parties 3,000,000 --
Receivable from litigation settlement 4,000,564 --
Income tax receivable -- 1,745,401
Inventories, net 34,796,222 31,102,875
Prepaid expenses and other current assets, net 8,025,350 8,045,933
Investment in affiliate 1,531,309 907,442
------------ ------------
TOTAL CURRENT ASSETS 73,568,298 60,282,286
Equipment and leasehold improvements, net 2,100,723 2,361,659
Trademarks, licenses and goodwill, net 9,519,369 9,534,937
Other 77,458 69,609
------------ ------------
TOTAL ASSETS $ 85,265,848 $ 72,248,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 15,271,622 $ 11,493,461
Accounts payable 13,699,631 10,118,080
Income taxes payable 820,954 --
Accrued expenses 1,437,729 1,008,686
------------ ------------
TOTAL CURRENT LIABILITIES 31,229,936 22,620,227
Borrowings, less current portion 508,926 962,275
Deferred tax liability 742,214 742,214
------------ ------------
TOTAL LIABILITIES 32,481,076 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 September 30, 2002 and
March 31, 2002 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
17,995,027 and 17,993,277 shares issued at September 30, 2002
and March 31, 2002, respectively 179,950 179,933
Additional paid-in capital 74,013,610 74,011,221
Retained earnings (accumulated deficit) 2,023,335 (2,203,080)
Accumulated other comprehensive loss (485,529) (1,110,139)
Notes receivable from officer (829,599) (837,165)
------------ ------------
74,901,767 70,040,770
Less - 8,017,131 shares of common stock in treasury,
at cost, at September 30, 2002 and March 31, 2002 (22,116,995) (22,116,995)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 52,784,772 47,923,775
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,265,848 $ 72,248,491
============ ============
See notes to condensed consolidated financial statements.
1
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
-----------
Three Months Ended September 30, Six Months Ended September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales:
Unrelated customers $ 11,408,210 $ 13,746,089 $ 25,683,877 $ 25,411,345
Related parties 6,599,418 5,295,297 12,149,487 11,643,414
------------ ------------ ------------ ------------
18,007,628 19,041,386 37,833,364 37,054,759
Cost of goods sold, including $459,020 and $1,673,449
of promotional items for the three and six months ended
September 30, 2002, respectively ($797,237 and
$1,739,058, respectively, in 2001) 9,321,881 9,856,166 19,412,603 18,314,680
------------ ------------ ------------ ------------
Gross margin 8,685,747 9,185,220 18,420,761 18,740,079
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 3,027,831 2,955,092 6,301,187 6,801,980
Selling and distribution 1,710,481 1,627,515 3,421,935 3,349,706
General and administrative, net of licensing fees of
$162,500 and $325,000 for the three and six months
ended September 30, 2001, respectively 1,358,729 1,049,554 2,617,730 2,109,721
Depreciation and amortization 344,328 537,039 693,319 1,058,466
Royalties 852,085 539,119 1,677,031 1,105,239
------------ ------------ ------------ ------------
Total operating expenses 7,293,454 6,708,319 14,711,202 14,425,112
------------ ------------ ------------ ------------
Operating income 1,392,293 2,476,901 3,709,559 4,314,967
Interest income 16,474 73,814 32,258 89,591
Interest expense and bank charges (257,969) (282,991) (467,101) (630,626)
Exchange gain -- 12,477 -- 12,477
Other-than-temporary decline in value
of investment in affiliate -- -- -- (2,858,447)
Litigation settlement, net of expenses 3,865,934 -- 3,542,083 --
------------ ------------ ------------ ------------
Income before income taxes 5,016,732 2,280,201 6,816,799 927,962
Income tax provision (1,906,359) (866,476) (2,590,384) (1,231,475)
------------ ------------ ------------ ------------
Net income (loss) $ 3,110,373 $ 1,413,725 $ 4,226,415 ($ 303,513)
============ ============ ============ ============
Income (loss) per common share:
Basic $ 0.31 $ 0.14 $ 0.42 ($ 0.03)
============ ============ ============ ============
Diluted $ 0.31 $ 0.13 $ 0.42 ($ 0.03)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------
(Unaudited)
-----------
COMMON STOCK (ACCUMULATED ACCUMULATED
--------------------------- ADDITIONAL DEFICIT) OTHER
NUMBER PAR PAID-IN RETAINED COMPREHENSIVE
ISSUED VALUE CAPITAL EARNINGS (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 -- -- -- 4,226,415 --
Unrealized holding gain on
investment in affiliate -- -- -- -- 623,867
Foreign currency translation adjustment -- -- -- -- 743
Total comprehensive income -- -- -- -- --
Issuance of common stock upon exercise of
employee stock options 1,750 17 2,389 -- --
Net decrease in notes receivable from officer -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE at September 30, 2002 17,995,027 $ 179,950 $ 74,013,610 $ 2,023,335 $ (485,529)
============ ============ ============ ============ ============
[RESTUBBED]
NOTES
RECEIVABLE
FROM TREASURY
OFFICER STOCK TOTAL
------------ ------------ ------------
BALANCE at March 31, 2002 $ (837,165) $(22,116,995) $ 47,923,775
Comprehensive income:
Net income -- -- 4,226,415
Unrealized holding gain on
investment in affiliate -- -- 623,867
Foreign currency translation adjustment -- -- 743
-----------
Total comprehensive income -- -- 4,851,025
Issuance of common stock upon exercise of
employee stock options -- -- 2,406
Net decrease in notes receivable from officer 7,566 -- 7,566
------------ ------------ ------------
BALANCE at September 30, 2002 $ (829,599) $(22,116,995) $ 52,784,772
============ ============ ============
(1) Accumulated other comprehensive (loss) income includes foreign currency
translation adjustments and unrealized holding gains and losses on
investment in affiliate.
See notes to condensed consolidated financial statements.
3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Six months ended September 30,
------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 4,226,415 ($ 303,513)
------------ ------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 693,319 1,058,466
Other-than-temporary decline in market value of investment in affiliate -- 2,858,447
Deferred income tax benefit -- (207,360)
Provision for doubtful accounts 120,000 120,000
Reserve for prepaid promotional supplies and inventory obsolescence 692,154 350,000
Changes in assets and liabilities:
(Increase) decrease in trade receivables - customers (1,683,095) 36,899
Increase in note and trade receivables - related parties (5,218,914) (4,918,458)
Increase in receivable from litigation settlement (4,000,564) --
Increase in inventories (4,185,501) (13,036,523)
Increase in prepaid expenses and other
current assets (179,417) (1,670,699)
(Increase) decrease in other non-current assets (7,849) 5,818
Increase in accounts payable 3,581,551 8,633,969
Increase in accrued expenses and income taxes payable 2,995,398 667,524
------------ ------------
Total adjustments (7,192,918) (6,101,917)
------------ ------------
Net cash used in operating activities (2,966,503) (6,405,430)
------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (416,815) (617,592)
Purchase of trademarks -- (6,974)
------------ ------------
Net cash used in investing activities (416,815) (624,566)
------------ ------------
Cash flows from financing activities:
Proceeds - note payable to GMAC Commercial Credit 3,785,848 14,475,811
Payments - note payable to GE Capital -- (6,782,973)
Payments - note payable to Fred Hayman Beverly Hills (362,835) (337,534)
Payments - note payable to United Credit Corp. -- (111,231)
Payments - notes payable to Bankers Capital Leasing (98,201) (102,067)
Payments - other notes payable -- (18,869)
Net decrease (increase) notes receivable from officer 7,566 (14,715)
Proceeds from issuance of common stock 2,406 9,229
------------ ------------
Net cash provided by financing activities 3,334,784 7,117,651
------------ ------------
Effect of exchange rate changes on cash 743 (12,260)
------------ ------------
Net (decrease) increase in cash and cash equivalents (47,791) 75,395
Cash and cash equivalents, beginning of period 164,793 30,214
------------ ------------
Cash and cash equivalents, end of period $ 117,002 $ 105,609
============ ============
See notes to condensed consolidated financial statements.
4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
-----------
A. BASIS OF PRESENTATION
The accompanying condensed 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 condensed 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
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the interim unaudited
consolidated financial statements. It is suggested that these condensed
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, Accounting for
Consideration Given by a Vendor to a Customer, 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 and six-month periods ended September 30, 2002, gross
margin has been decreased by $459,020 and $1,673,449, respectively, offset by an
equal decrease in advertising and promotional expenses. Additionally, $797,237
and $1,739,058 of such costs incurred during the three and six months ended
September 30, 2001, respectively, 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:
September 30, 2002 March 31, 2002
------------------ --------------
Finished products $19,564,797 $17,532,428
Components and packaging material 10,981,515 9,616,274
Raw material 4,249,910 3,954,173
----------- -----------
$34,796,222 $31,102,875
=========== ===========
5
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the approximate amount of
$2,444,000 and $2,409,000 at September 30, 2002 and March 31, 2002,
respectively. The above amounts are net of reserves for estimated inventory
obsolescence of approximately $2,129,000 and $2,140,000 at September 30, 2002
and March 31, 2002, respectively.
C. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
September 30, 2002 March 31, 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 (3,363,465) (3,347,897)
------------ ------------
$ 9,519,369 $ 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.
On November 4, 2002, after a lengthy period of negotiations, the Company
entered into an agreement to sell the Bal A Versailles Trademarks to Genesis for
$300,000, to be paid in three equal monthly installments through January 2003.
As a result of the ongoing negotiations, 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:
September 30, 2002 March 31, 2002
------------------ --------------
Revolving credit facility payable to GMAC Commercial Credit,
interest at LIBOR plus 3.75% or prime (4.75% at September 30,
2002) plus 1% at the Company's option, net of restricted cash of
$1,435,808 and $1,248,477 at September 30, 2002 and March 31,
2002, respectively $ 14,345,762 $ 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 1,341,533 1,704,368
6
Capital lease payable to Bankers Leasing, collateralized by
certain warehouse equipment, payable in quarterly installments of
$33,992, including interest, through July 2003 93,253 155,889
Capital lease payable to Bankers Leasing, collateralized by
certain shipping equipment, payable in quarterly installments of
$18,249, including interest, through October 2002 -- 35,565
------------ ------------
15,780,548 12,455,736
Less: long-term borrowings (508,926) (962,275)
------------ ------------
Short-term borrowings $ 15,271,622 $ 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 September 30, 2002, based on the borrowing base at that date, the credit line
amounted to $20,000,000 and, accordingly, the Company had approximately
$4,303,000 available under the credit line excluding the effect of restricted
cash of $1,436,000.
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 September 30, 2002, the Company had loaned a total of $829,599 ($837,165
at March 31, 2002) to its Chairman/CEO, which is recorded as a component of
stockholders' equity in the accompanying condensed 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 $8,041,778 and $9,645,600 during the six-month
periods ended September 30, 2002 and September 30, 2001 ($4,120,354 and
$4,283,073 during the three-months ended September 30, 2002 and September 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 and note receivable owed by Perfumania to the
Company amounted to $13,996,158 and $3,000,000, respectively, at September 30,
2002 ($12,491,993 and $0, respectively at March 31, 2002). Amounts due from
related parties are non-interest bearing and are due in less than one year,
except for the subordinated note receivable discussed below which bears interest
at prime plus 1%.
7
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 September 30, 2002, the
fair market value of the investment in ECMV was $1,531,309 ($4.05 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
November 13, 2002, the fair market value of the investment in ECMV was
$1,565,338 ($4.14 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. The loan was repaid in accordance with its terms.
As of September 30, 2002, the Company and Perfumania had entered into another $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 is repayable in installments of $50,000 on October 31, 2002, $300,000
on November 30, 2002, $2,500,000 on December 31, 2002, and $50,000 on each of
January 31, 2003, February 28, 2003, and March 31, 2003. Accrued interest is
paid with each principal installment.
The Company had net sales of $4,107,709 and $1,997,814 during the six months
ended September 30, 2002 and 2001 ($2,479,064 and $1,012,224 during the three
months ended September 30, 2002 and 2001), respectively, to fragrance
distributors owned/operated by individuals related to the Company's
Chairman/CEO, including $3,030,055 and $912,773, respectively, to a director of
the Company. These sales are included as related party sales in the accompanying
condensed consolidated statements of operations. As of September 30, 2002 and
March 31, 2002, trade receivables from related parties includes $1,011,076 and
$296,327, respectively, from these customers, including $627,528 and 286,488,
from the director.
8
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 (loss) per common share calculations:
Three Months Ended September 30,
--------------------------------
2002 2001
------------ ------------
Net income $ 3,110,373 $ 1,413,725
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,977,179 9,973,520
============ ============
Basic net income per common share $ 0.31 $ 0.14
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,977,179 9,973,520
Effect of dilutive securities(1):
Stock options and warrants 163,973 542,615
------------ ------------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,141,152 10,516,135
============ ============
Diluted net income per common share $ 0.31 $ 0.13
============ ============
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,240,475 216,000
============ ============
Exercise Price $2.25-$8.00 $3.13-$8.00
============ ============
Six Months Ended September 30,
-----------------------------
2002 2001
------------ ------------
Net income (loss) $ 4,226,415 $ (303,513)
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,976,731 9,971,488
============ ============
Basic net (loss) income per common share $ 0.42 ($ 0.03)
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,976,731
Effect of dilutive securities(1):
Stock options and warrants 143,689
------------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,120,420
============
Diluted net income per common share $ 0.42
============
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,240,475
============
Exercise Price $2.25-$8.00
============
Excluding the effect of the proceeds from the settlement of the litigation with
a supplier of $4,000,564 discussed in Note J, both basic and diluted earnings
per share would have been $0.06 and $0.17 for the three and six-month periods
ended September 30, 2002, respectively.
Excluding the effect of the non-cash charge discussed in Note E, both basic and
diluted earnings per share would have been $0.23 for the six-month period ended
September 30, 2001.
(1) The calculation of diluted loss per share was the same as the basic loss per
share for the six-month period ended September 30, 2001, since the inclusion
of potential common stock in the computation would be antidilutive.
9
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,
------------------------------
2002 2001
---- ----
Cash paid for:
Interest $467,719 $714,300
Income taxes $ 24,029 $557,491
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Six months ended September 30, 2002:
- The conversion of trade accounts receivable from Perfumania in the
amount of $3,000,000, as discussed in Note E.
- The Company incurred an unrealized holding gain of $623,867 on the
investment in affiliate
Six months ended September 30, 2001:
- The conversion of trade accounts receivable from Perfumania in the
amount of $3,000,000, as discussed in Note E.
- The Company incurred an other-than-temporary decline in value of
$2,858,847 on the investment in affiliate, with a corresponding
deferred tax benefit of $207,360.
- The Company incurred an unrealized holding loss of $741,079 on the
investment in affiliate.
H. INCOME TAXES
The provision for income taxes for the periods ended September 30, 2002 and 2001
reflects an effective tax rate of approximately 38%, reduced in 2001 by a
$207,360 deferred tax benefit relating to the other-than-temporary decline in
value of investment in affiliate.
I. LICENSE AND DISTRIBUTION AGREEMENTS
As of September 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.
10
J. LITIGATION SETTLEMENT
On May 8, 2001, and amended on June 8, 2001, the Company 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 its
fragrances. Out-of-pocket costs to refurbish the products were included in cost
of goods for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement whereby
the Company would receive cash consideration of $3,958,000 from the supplier's
insurance carrier, plus an additional $42,564 from the supplier. These funds
were received on October 7, 2002, and the suit has been dismissed.
The Company has recorded the settlement in the accompanying condensed
consolidated statements of operations for the periods ended September 30, 2002,
net of certain expenses as follows:
Three Months Ended Six Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Proceeds from settlement $4,000,564 $4,000,564
Less expenses directly related to the claim
and incurred during the period April
1, 2002 through September 30, 2002:
Legal fees 104,026 326,327
Refurbishing costs 30,604 132,154
---------- ----------
Net litigation settlement recorded: $3,865,934 $3,542,083
========== ==========
Refurbishing expenses and legal fees incurred prior to April 1, 2002, have been
expensed directly to cost of goods sold and general and administrative expenses,
respectively.
The above expenses do not include other general and administrative costs such as
employee travel in connection with the lawsuit discovery process.
K. 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
11
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.
L. SUBSEQUENT EVENT
On October 21, 2002, the Company announced that it had received a preliminary
expression of interest from Quality King Distributors, Inc. ("Quality King"), a
privately held corporation based in Ronkonkoma, New York, regarding the possible
acquisition of the Company. In order to explore the feasibility of a
transaction, the Company has entered into a confidentiality agreement which
permits Quality King to conduct a due diligence review of the Company's
operations. There can be no assurance that any transaction will result from such
a review.
***
12
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.
On October 21, 2002, the Company announced that it had received a preliminary
expression of interest from Quality King Distributors, Inc. ("Quality King"), a
privately held corporation based in Ronkonkoma, New York, regarding the possible
acquisition of the Company. In order to explore the feasibility of a
transaction, the Company has entered into a confidentiality agreement which
permits Quality King to conduct a due diligence review of the Company's
operations. There can be no assurance that any transaction will result from such
a review.
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 condensed consolidated 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, nor has it made any material changes in any of the
critical accounting estimates underlying these accounting policies, since April
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
13
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 and six-month periods ended September 30, 2002,
gross margin has been decreased by $459,020 and $1,673,449, respectively, offset
by an equal decrease in advertising and promotional expenses. Additionally,
$797,237 and $1,739,058 of such costs incurred during the three and six months
ended September 30, 2001, respectively, 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 September 30, 2002 with the
- ----------------------------------------------------------------------
three-month period ended September 30, 2001.
- --------------------------------------------
During the quarter ended September 30, 2002, net sales decreased 5% to
$18,007,628 as compared to $19,041,386 for the same period for the prior year.
The decrease is mainly attributable to lower Ocean Pacific brand gross sales of
$1,451,764, launched during the comparable prior year period, offset by Jockey
brand gross sales of $425,674, not sold during the comparable prior year period.
Net sales to unrelated customers decreased 17% to $11,408,210, compared to
$13,746,089 for the same period in the prior year, as a result of the timing of
launches discussed above. Sales to related parties increased 25% to $6,599,418
compared to $5,295,297 for the same period in the prior year.
Cost of goods sold as a percentage of net sales remained relatively constant at
52% for the quarter ended September 30, 2002 compared to the comparable prior
year period. Cost of goods sold on sales to unrelated customers and related
parties approximated 48% and 58%, respectively, for the current period, as
compared to 50% and 56%, respectively, for the same period in the prior year.
The increase in the cost of goods sold to related parties for the current period
was due to the sale of closeout merchandise at lower margins.
Operating expenses increased by 9% compared to the same period in the prior year
from $6,708,319 to $7,293,454, and increased as a percentage of net sales from
35% to 41%. Advertising and promotional expenses increased 2% to $3,027,831
compared to $2,955,092 in the prior year period. Excluding the reclassification
of GWP activity in both periods, advertising and promotional expenses would have
decreased by 7%. Selling and distribution costs increased 5% to $1,710,481 in
the current period compared to $1,627,515 for the same period of the prior year,
increasing as a percentage of net sales from 9% to 10%. General and
administrative expenses increased by 29% compared to the prior year period from
$1,049,554 to $1,358,729, increasing as a percentage of net sales from 6% to 8%.
The increase is mainly attributable to an increase in health and other insurance
costs, and the reduction in licensing fees of $162,500 which offset expenses in
the prior year. Depreciation and amortization decreased by $192,711 during the
current period from $537,039 to $344,328, as approximately $141,000 of
amortization on intangibles relating to the Alexandra de Markoff ("ADM") and Bal
a Versailles ("BAV") brands was no longer required during the current period
(See Note C of the condensed consolidated financial statements for further
discussion). Royalties increased by 58% in the current period, increasing as a
percentage of net sales from 3% to 5% due to minimum royalty requirements for
the Jockey license.
14
As a result of the above, operating income decreased by 44% to $1,392,293 for
the current period, compared to $2,476,901 for the same period in the prior
year. The current year period includes other income of $3,865,934 in connection
with the settlement of our lawsuit with a supplier. Net interest expense
increased to $241,495 in the current period as compared to $209,177 for the same
period in the prior year. The increase is the result of reduced interest income
from related parties as notes were outstanding during the entire comparable
prior year period and were only entered into on September 30, 2002, for the
current period.
Income before taxes for the current period was $5,016,732 or 28% of net sales
compared to $2,280,201 or 12% of net sales in the same period for the prior
year. Giving effect to the tax provision, we recorded net income of $3,110,373
or 17% of net sales for the current period, compared to net income of $1,413,725
or 7% of net sales in the comparable period of the prior year.
Comparison of the six-month period ended September 30, 2002 with the six-month
- ------------------------------------------------------------------------------
period ended September 30, 2001.
- --------------------------------
During the six months ended September 30, 2002, net sales increased 2% to
$37,833,364 as compared to $37,054,759 for the same period for the prior year.
The increase is mainly attributable to the launch of "Perry" by Perry Ellis for
men and women, which resulted in an increase in total Perry Ellis brand gross
sales from $25,379,013 to $27,957,074, and launches of "Jockey" for men and
women in the Spring of 2002, which added gross sales of $1,508,961 in the
current period. These increases were offset by lower gross sales of Animale
(mainly "Chaleur d'Animale") and Ocean Pacific brand products of $1,182,399 and
$751,076, respectively, as certain products were launched during the prior year
period.
Net sales to unrelated customers increased 1% to $25,683,877 in the current
period, compared to $25,411,345 for the same period in the prior year, as a
result of the launches discussed above. Sales to related parties increased 4% to
$12,149,487 in the current period compared to $11,643,414 for the same period in
the prior year.
Cost of goods sold increased as a percentage of net sales from 49% for the six
months ended September 30, 2001 to 51% for the current period. The increase was
mainly attributable to the continuing 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
59%, respectively, for the current period, as compared to 49% and 50%,
respectively, for the same period in the prior year. The increase in cost of
goods sold to related parties for the current period was also due to the sale of
closeout merchandise at lower margins.
Operating expenses increased by 2% compared to the same period in the prior year
from $14,425,112 to $14,711,202, remaining relatively constant at 39% of net
sales. Advertising and promotional expenses decreased 7% to $6,301,187 compared
to $6,801,980 in the prior year period, decreasing slightly as a percentage of
net sales from 18% to 17%. Selling and distribution costs increased 2% to
$3,421,935 in the current period as compared to $3,349,706 for the same period
of the prior year, remaining relatively constant at 9% of net sales. General and
administrative expenses increased by 24% compared to the prior year period from
$2,109,721 to $2,617,730, increasing as a percentage of net sales from 6% to 7%.
The increase is mainly attributable to an increase in health and other insurance
costs, and the reduction in licensing fees of $325,000 which offset expenses in
the prior year. Depreciation and amortization decreased by $365,147 during the
current period from $1,058,466 to $693,319, as approximately $282,000 of
amortization on intangibles relating to the Alexandra de Markoff ("ADM") and Bal
a Versailles ("BAV") brands was no longer required during the current period
15
(See Note C to the condensed consolidated financial statements for further
discussion). Royalties increased by 52% 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 decreased by 14% to $3,709,559 or 10%
of net sales for the current period, compared to $4,314,967 or 12% of net sales
for the same period in the prior year. The current year period includes other
income of $3,542,083 relating to the settlement of our lawsuit with a supplier.
Net interest expense decreased to $434,843 in the current period as compared to
$541,035 for the same period in the prior year. The decrease was mainly
attributable to the substantial 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 $6,816,799 or 18% of net sales,
compared to $927,962 or 3% of net sales 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
$4,226,415 for the current period, compared to a net loss of $303,513 in the
prior year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $42,338,362 as of September 30, 2002, compared to
$37,662,059 at March 31, 2002, as a result of 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 six months ended September
30, 2002, resulted in a use of cash, which was mainly attributable to the
increase 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. 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 condensed 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
16
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------- -----------------------------------------------------------
During the quarter ended September 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.
ITEM 4. CONTROLS AND PROCEDURES
- ------- -----------------------
Parlux Fragrances, Inc.'s (the "Company") Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-4(c) and 15d-14(c) under the
Securities Exchange Act of 1934) as of a date within 90 days of the filing date
of this Quarterly Report on Form 10-Q (the "Evaluation Date"). They have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date.
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.
On September 25, 2002, the parties entered into a settlement agreement whereby
we would receive cash consideration of $3,958,000 from the supplier's insurance
carrier, plus an additional $42,564 from the supplier. These funds were received
on October 7, 2002, and the suit has been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
On October 15, 2002, the Company held its Annual Meeting. The following is a
summary of the proposals and corresponding votes.
Nomination and Election of Directors
- ------------------------------------
The seven nominees named in the proxy statement were elected with each director
receiving more than 78% of the votes cast.
17
Ratification of Deloitte & Touche, LLP, as Independent Auditors
- ---------------------------------------------------------------
Over 87% of the votes were cast in favor of the proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
10.62 Agreement, dated November 4, 2002, between the Company and
Genesis International Marketing Corporation.
99.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(b) There were no filings on Form 8-K during the period.
18
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 September 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: November 14, 2002
19