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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: December 31, 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
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( State or other jurisdiction ( IRS employer identification no. )
of incorporation or organization )
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
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( Address of principal executive offices ) ( Zip code )
Registrant's telephone number, including area code 954-316-9008
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Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 13, 2003, 10,028,459 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
See pages 8 to 20.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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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 entered into a confidentiality agreement which
permitted Quality King to conduct a due diligence review of the Company's
operations. On January 8, 2003, the Company announced that it had terminated the
discussions as the parties had not reached an agreement on the terms of a
possible acquisition.
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 condensed consolidated 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 (including a Reseller of the Customer's Products), 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.
2
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 and nine-month periods ended December 31, 2002,
gross margin has been decreased by $1,219,060 and $2,892,509, respectively,
offset by an equal decrease in advertising and promotional expenses.
Accordingly, $947,786 and $2,686,844 of such costs incurred during the three and
nine months ended December 31, 2001, respectively, have been reclassified from
advertising and promotional 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 December 31, 2002 with the
- ---------------------------------------------------------------------
three-month period ended December 31, 2001.
- -------------------------------------------
During the quarter ended December 31, 2002, net sales increased 21% to
$19,780,626 as compared to $16,280,479 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 $11,369,703 to $17,281,536, and launches of "Jockey" for men and
women in the Spring of 2002, which added gross sales of $352,701 in the current
period. These increases were offset by lower gross sales of Animale (which brand
was sold during January 2003) and Ocean Pacific brand products of $2,362,775 and
$664,053, respectively, as certain products were launched during the prior year
period.
Net sales to unrelated customers increased 67% to $14,734,673, compared to
$8,810,503 for the same period in the prior year, as a result of the launches
discussed above. Sales to related parties decreased 32% to $5,045,953 compared
to $7,469,976 for the same period in the prior year.
Cost of goods sold decreased as a percentage of net sales from 58% for the
quarter ended December 31, 2001 to 49% for the current comparable period. The
prior year period included the sale of certain close-out merchandise to
international customers at lower margins. Cost of goods sold on sales to
unrelated customers and related parties approximated 48% and 51%, respectively,
for the current period, as compared to 63% and 53%, respectively, for the same
period in the prior year.
Operating expenses, excluding the impairment loss on intangibles in the prior
year, increased by 6% compared to the same period in the prior year from
$9,179,033 to $9,754,360, and decreased as a percentage of net sales from 56% to
49%. Advertising and promotional expenses increased 9% to $5,641,440 compared to
$5,159,281 in the prior year period. Excluding the reclassification of GWP
activity in both periods, advertising and promotional expenses would have
increased by 12%. Selling and distribution costs increased 2% to $1,705,630 in
the current period compared to $1,679,982 for the same period of the prior year,
decreasing as a percentage of net sales from 10% to 9%. General and
administrative expenses decreased by 9% compared to the prior year period from
$1,340,677 to $1,226,365, decreasing as a percentage of net sales from 8% to 6%.
The decrease is mainly attributable to a reduction in bad debt expense of
$900,000, offsetting 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 $181,931 during the current period
3
from $525,492 to $343,561, 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. These brands
were previously licensed to third parties. In anticipation of the sale of the
ADM and BAV brands to their licensees during the prior year period, we recorded
an impairment charge on the applicable intangibles totaling $7,273,123
($5,499,092 and $1,774,031, respectively) (See Note C of the condensed
consolidated financial statements for further discussion). Royalties increased
by 77% 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 to $349,887 for the current
period, compared to an operating loss of $9,669,334 for the same period in the
prior year. Net interest expense decreased to $177,598 in the current period as
compared to $258,786 for the same period in the prior year. The decrease
reflects the reduction in interest rates on our line of credit due to a lower
prime rate.
Income before taxes for the current period was $172,289 compared to a loss of
$9,928,053 in the same period for the prior year. Giving effect to the tax
provision, we recorded net income of $106,820 for the current period, compared
to a net loss of $6,155,393 in the comparable period of the prior year.
Comparison of the nine-month period ended December 31, 2002 with the nine-month
- -------------------------------------------------------------------------------
period ended December 31, 2001.
- -------------------------------
During the nine months ended December 31, 2002, net sales increased 8% to
$57,613,990 as compared to $53,335,238 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 $36,748,713 to $45,238,610, and launches of "Jockey" for men and
women in the Spring of 2002, which added gross sales of $1,861,662 in the
current period. These increases were offset by lower gross sales of Animale
(which brand was sold during January 2003) and Ocean Pacific brand products of
$3,545,175 and $1,415,128, respectively, as certain products were launched
during the prior year period.
Net sales to unrelated customers increased 18% to $40,418,550 in the current
period, compared to $34,221,848 for the same period in the prior year, as a
result of the launches discussed above. Sales to related parties decreased 10%
to $17,195,440 in the current period compared to $19,113,390 for the same period
in the prior year.
Cost of goods sold decreased as a percentage of net sales from 52% for the nine
months ended December 31, 2001 to 50% for the current period. Cost of goods sold
on sales to unrelated customers and related parties approximated 48% and 57%,
respectively, for the current period, as compared to 53% and 51%, respectively,
for the same period in the prior year. The prior year period included the sale
of certain close-out merchandise to international customers at lower margins.
The increase in cost of goods sold to related parties for the current period was
due to the purchase of a higher percentage of value sets for holiday seasons
than in the prior year. These value sets have a higher cost of goods when
compared to basic stock items.
Operating expenses, excluding the impairment loss on intangibles in the prior
year, increased by 4% compared to the same period in the prior year from
$23,604,145 to $24,465,562, decreasing as a percentage of net sales from 44% to
42%. Advertising and promotional expenses decreased slightly to $11,942,627
compared to $11,961,261 in the prior year period, decreasing as a percentage of
net sales from 22% to 21%. Excluding the reclassification of GWP activity in
both periods, advertising and promotional expenses would have increased by 1%.
4
Selling and distribution costs increased 2% to $5,127,565 in the current period
as compared to $5,029,688 for the same period of the prior year, remaining
relatively constant at 9% of net sales. General and administrative expenses
increased by 11% compared to the prior year period from $3,450,398 to
$3,844,095, 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 $487,500 which offset expenses in the prior
year. Depreciation and amortization decreased by $547,078 during the current
period from $1,583,958 to $1,036,880, as approximately $423,000 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 to
the condensed consolidated financial statements for further discussion).
Royalties increased by 59% 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 to $4,059,446 or 7% of net
sales for the current period, compared to an operating loss of $5,354,367 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 $612,441 in the current period as compared to
$799,821 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 $6,989,088 or 12% of net sales,
compared to a loss of $9,000,091 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 $4,333,235 for
the current period, compared to a net loss of $6,458,906 in the prior year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $42,690,283 as of December 31, 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.
As of December 31, 2001, we had repurchased under all phases of our common stock
buy-back program 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 at that date authorized a new 2,500,000 share repurchase, subject to
the restrictions and covenants in our new loan agreement discussed below. On
February 6, 2003, we received approval from our lender to proceed with the
latest phase of our repurchase program, which was ratified on February 14, 2003
by our current Board of Directors. 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). (On February 6, 2003,
the Loan Agreement was extended for an additional year through July 20, 2005.)
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
5
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 existing 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 December 31, 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
- ------- -----------------
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 as 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.
6
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.
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) Exhibit No. Description
10.63 Agreement, dated January 16, 2003, between the Company
and Animale Group, S.A.
99.3 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
99.4 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.
7
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(unaudited)
December 31 March 31,
ASSETS 2002 2002
- ------------------------------------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 137,285 $ 164,793
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$3,325,000 and $1,430,000, respectively 6,289,218 5,527,522
Trade receivable from related parties 11,944,954 12,788,320
Note receivable from related party 150,000 --
Income tax receivable -- 1,745,401
Inventories, net 32,508,846 31,102,875
Prepaid expenses and other current assets, net 8,277,958 8,045,933
Investment in affiliate 1,425,441 907,442
------------ ------------
TOTAL CURRENT ASSETS 60,733,702 60,282,286
Equipment and leasehold improvements, net 1,907,773 2,361,659
Trademarks, licenses and goodwill, net 9,211,585 9,534,937
Other 71,745 69,609
------------ ------------
TOTAL ASSETS $ 71,924,805 $ 72,248,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 7,513,270 $ 11,493,461
Accounts payable 8,369,993 10,118,080
Income taxes payable 873,808 --
Accrued expenses 1,286,348 1,008,686
------------ ------------
TOTAL CURRENT LIABILITIES 18,043,419 22,620,227
Borrowings, less current portion 307,349 962,275
Deferred tax liability 742,214 742,214
------------ ------------
TOTAL LIABILITIES 19,092,982 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 December 31, 2002 and
March 31, 2002 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
18,039,990 and 17,993,277 shares issued at December 31, 2002
and March 31, 2002, respectively 180,400 179,933
Additional paid-in capital 74,074,984 74,011,221
Retained earnings (accumulated deficit) 2,130,155 (2,203,080)
Accumulated other comprehensive loss (591,197) (1,110,139)
Notes receivable from officer (845,524) (837,165)
------------ ------------
74,948,818 70,040,770
Less - 8,017,131 shares of common stock in treasury,
at cost, at December 31, 2002 and March 31, 2002 (22,116,995) (22,116,995)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 52,831,823 47,923,775
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,924,805 $ 72,248,491
============ ============
See notes to condensed consolidated financial statements.
8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales:
Unrelated customers $ 14,734,673 $ 8,810,503 $ 40,418,550 $ 34,221,848
Related parties 5,045,953 7,469,976 17,195,440 19,113,390
------------ ------------ ------------ ------------
19,780,626 16,280,479 57,613,990 53,335,238
Cost of goods sold, including $1,219,060 and $2,892,509
of promotional items for the three and nine months ended
December 31, 2002, respectively ($947,786 and
$2,686,844, respectively, in 2001) 9,676,379 9,497,657 29,088,982 27,812,337
------------ ------------ ------------ ------------
Gross margin 10,104,247 6,782,822 28,525,008 25,522,901
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 5,641,440 5,159,281 11,942,627 11,961,261
Selling and distribution 1,705,630 1,679,982 5,127,565 5,029,688
General and administrative, net of licensing fees of
$162,500 and $487,500 for the three and nine months
ended December 31, 2001, respectively 1,226,365 1,340,677 3,844,095 3,450,398
Depreciation and amortization 343,561 525,492 1,036,880 1,583,958
Royalties 837,364 473,601 2,514,395 1,578,840
Impairment loss on intangibles -- 7,273,123 -- 7,273,123
------------ ------------ ------------ ------------
Total operating expenses 9,754,360 16,452,156 24,465,562 30,877,268
------------ ------------ ------------ ------------
Operating income (loss) 349,887 (9,669,334) 4,059,446 (5,354,367)
Interest income 55,363 59,529 87,621 149,120
Interest expense and bank charges (232,961) (318,315) (700,062) (948,941)
Exchange gain -- 67 -- 12,544
Other-than-temporary decline in value
of investment in affiliate -- -- -- (2,858,447)
Litigation settlement, net of expenses -- -- 3,542,083 --
------------ ------------ ------------ ------------
Income (loss) before income taxes 172,289 (9,928,053) 6,989,088 (9,000,091)
Income tax (provision) benefit (65,469) 3,772,660 (2,655,853) 2,541,185
------------ ------------ ------------ ------------
Net income (loss) $ 106,820 ($ 6,155,393) $ 4,333,235 ($ 6,458,906)
============ ============ ============ ============
Income (loss) per common share:
Basic $ 0.01 ($ 0.62) $ 0.43 ($ 0.65)
============ ============ ============ ============
Diluted $ 0.01 ($ 0.62) $ 0.43 ($ 0.65)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31, 2002
-----------------------------------
(Unaudited)
COMMON STOCK (ACCUMULATED
---------------------------- ADDITIONAL DEFICIT)
NUMBER PAR PAID-IN RETAINED
ISSUED VALUE CAPITAL EARNINGS
------------ ------------ ------------ ------------
BALANCE at March 31, 2002 17,993,277 $ 179,933 $ 74,011,221 $ (2,203,080)
Comprehensive income:
Net income -- -- -- 4,333,235
Unrealized holding gain on
investment in affiliate -- -- -- --
Foreign currency translation adjustment
Total comprehensive income
Issuance of common stock upon exercise of
employee stock options 46,713 467 63,763 --
Net increase in notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at December 31, 2002 18,039,990 $ 180,400 $ 74,074,984 $ 2,130,155
============ ============ ============ ============
[RESTUBBED]
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FROM TREASURY
(LOSS) INCOME (1) OFFICER STOCK TOTAL
---------------- ------------ ------------ ------------
BALANCE at March 31, 2002 $ (1,110,139) $ (837,165) $(22,116,995) $ 47,923,775
Comprehensive income:
Net income -- -- -- 4,333,235
Unrealized holding gain on
investment in affiliate 517,999 -- -- 517,999
Foreign currency translation adjustment 943 943
------------
Total comprehensive income 4,852,177
Issuance of common stock upon exercise of
employee stock options -- -- -- 64,230
Net increase in notes receivable from officer -- (8,359) -- (8,359)
------------ ------------ ------------ ------------
BALANCE at December 31, 2002 $ (591,197) $ (845,524) $(22,116,995) $ 52,831,823
============ ============ ============ ============
(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.
10
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended December 31,
-----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 4,333,235 ($ 6,458,906)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,036,880 1,583,958
Other-than-temporary decline in market value of investment in affiliate -- 2,858,447
Impairment loss on intangibles 7,273,123
Deferred income tax benefit -- (207,360)
Provision for doubtful accounts 180,000 1,157,819
Reserve for prepaid promotional supplies and inventory obsolescence 740,000 1,130,000
Changes in assets and liabilities:
(Increase) decrease in trade receivables - customers (841,696) 4,242,221
Decrease in note and trade receivables - related parties 693,366 290,073
Decrease (increase) in income tax receivable 1,745,401 (2,782,192)
Increase in inventories (1,945,971) (11,428,266)
Increase in prepaid expenses and other
current assets (432,025) (391,329)
(Increase) decrease in other non-current assets (2,136) 7,676
Decrease in accounts payable (1,748,087) (512,516)
Increase (decrease) in accrued expenses and income taxes payable 1,151,470 (419,579)
------------ ------------
Total adjustments 577,202 2,802,075
------------ ------------
Net cash provided by (used in) operating activities 4,910,437 (3,656,831)
------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (559,642) (689,996)
Purchase of trademarks -- (6,975)
Cash received from Bal a Versailles brand sale 200,000 --
------------ ------------
Net cash used in investing activities (359,642) (696,971)
------------ ------------
Cash flows from financing activities:
(Payments) proceeds - note payable to GMAC Commercial Credit (3,955,394) 11,821,267
Payments - note payable to GE Capital -- (6,782,973)
Payments - note payable to Fred Hayman Beverly Hills (549,230) (510,931)
Payments - note payable to United Credit Corp. -- (111,231)
(Payments) proceeds - notes payable to Bankers Capital Leasing (130,493) 31,627
Payments - other notes payable -- (18,869)
Net increase notes receivable from officer (8,359) (30,640)
Proceeds from issuance of common stock 64,230 9,229
------------ ------------
Net cash (used in) provided by financing activities (4,579,246) 4,407,479
------------ ------------
Effect of exchange rate changes on cash 943 (12,773)
------------ ------------
Net (decrease) increase in cash and cash equivalents (27,508) 40,904
Cash and cash equivalents, beginning of period 164,793 30,214
------------ ------------
Cash and cash equivalents, end of period $ 137,285 $ 71,118
============ ============
See notes to condensed consolidated financial statements.
11
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 (including a Reseller of the
Customer's Products), 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 nine-month periods ended December 31, 2002, gross margin has been decreased
by $1,219,060 and $2,892,509, respectively, offset by an equal decrease in
advertising and promotional expenses. Accordingly, $947,786 and $2,686,844 of
such costs incurred during the three and nine months ended December 31, 2001,
respectively, have been reclassified from advertising and promotional 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:
December 31, 2002 March 31, 2002
Finished products $19,387,718 $17,532,428
Components and packaging material 10,143,657 9,616,274
Raw material 2,977,471 3,954,173
----------- -----------
$32,508,846 $31,102,875
=========== ===========
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the approximate amount of
$2,659,000 and $2,409,000 at December 31, 2002 and March 31, 2002, respectively.
The above amounts are net of reserves for estimated inventory obsolescence of
approximately $1,675,000 and $2,140,000 at December 31, 2002 and March 31, 2002,
respectively.
12
C. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
December 31, 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
Other 216,546 216,546
Licensed Brands:
Perry Ellis 7,963,560 7,963,560
---------- ----------
12,582,834 12,882,834
Less: accumulated amortization (3,371,249) (3,347,897)
---------- ----------
$9,211,585 $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 was 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, payable in three equal monthly installments through February 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:
December 31, 2002 March 31, 2002
Revolving credit facility payable to GMAC Commercial Credit, interest at LIBOR
plus 3.75% or prime (4.25% at December 31, 2002) plus 1% at the Company's
option, net of restricted cash of $4,106,945 and $1,248,477 at December 31, 2002
and March 31, 2002,respectively $6,604,520 $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 1,155,138 1,704,368
13
Capital lease payable to Bankers Leasing, collateralized by certain warehouse
equipment, payable in quarterly installments of $33,992, including interest,
through July 2003. 60,961 155,889
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
---------- -----------
7,820,619 12,455,736
Less: long-term borrowings (307,349) (962,275)
---------- -----------
Borrowings, current portion $7,513,270 $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 December 31, 2002, based on the borrowing base at that date, the credit line
amounted to $18,436,000 and, accordingly, the Company had approximately
$7,795,000 available under the credit line excluding the effect of restricted
cash of $4,107,000.
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.
On February 6, 2003, GMACCC approved a continuation of the Company's common
stock buyback program not to exceed $7,500,000. In addition, the Loan Agreement
was extended for an additional year through July 20, 2005.
Management believes that, based on current circumstances, funds from operations
and its existing financing will be sufficient to meet the Company's operating
needs for the foreseeable future.
E. RELATED PARTIES TRANSACTIONS
As of December 31, 2002, the Company had loaned a total of $845,524 ($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.
14
The Company had net sales of $10,787,906 and $15,287,618 during the nine-month
periods ended December 31, 2002 and December 31, 2001 ($2,746,127 and $5,642,018
during the three-months ended December 31, 2002 and December 31, 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 $11,300,693 and $150,000, respectively, at December 31, 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%.
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 December 31, 2002, the
fair market value of the investment in ECMV was $1,425,441 ($3.77 per share
after the reverse split). The Company believes, based on the evaluation of
ECMV's operations, that this current change in market price is considered
temporary. As of February 13, 2002, the fair market value of the investment in
ECMV was $1,459,470 ($3.86 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 was 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. Payments through January 31, 2003, have
been received in accordance with the terms.
The Company had net sales of $6,407,534 and $3,825,772 during the nine months
ended December 31, 2002 and 2001 ($2,299,826 and $1,827,958 during the three
months ended December 31, 2002 and 2001), respectively, to fragrance
distributors owned/operated by individuals related to the Company's
15
Chairman/CEO, including $4,818,258 and $2,381,746, respectively, to a former
director of the Company. These sales are included as related party sales in the
accompanying condensed consolidated statements of operations. As of December 31,
2002 and March 31, 2002, trade receivables from related parties includes
$644,261 and $296,327, respectively, from these customers, including $325,338
and 286,488, from the former 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 (loss) per common share calculations:
Three Months Ended December 31,
-------------------------------
2002 2001
---- ----
Net income (loss) $ 106,820 $(6,155,393)
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,993,911 9,976,146
=========== ===========
Basic net income (loss) per common share $ 0.01 $ (0.62)
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,993,911
Effect of dilutive securities(1):
Stock options and warrants 267,915
-----------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,261,826
===========
Diluted net income per common share $ 0.01
===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,100,886
===========
Exercise Price $2.44-$8.00
===========
Nine Months Ended December 31,
------------------------------
2002 2001
---- ----
Net income (loss) $ 4,333,235 $(6,458,906)
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,982,478 9,973,046
=========== ===========
Basic net (loss) income per common share $ 0.43 $( 0.65)
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 9,982,478
Effect of dilutive securities(1):
Stock options and warrants 185,624
-----------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,168,102
===========
Diluted net income per common share $ 0.43
===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,252,025
===========
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 $0.18 for the nine-month period ended December 31,
2002, respectively.
(1) The calculation of diluted loss per share was the same as the basic loss per
share for the three and nine-month periods ended December 31, 2001, since
the inclusion of potential common stock in the computation would be
antidilutive.
16
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:
Nine-months ended December 31,
------------------------------
2002 2001
---- ----
Cash paid for:
Interest $701,151 $1,037,774
Income taxes $ 36,644 $ 615,457
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Nine months ended December 31, 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 $517,999 on the
investment in affiliate
Nine months ended December 31, 2001:
- The conversion of trade accounts receivable from Perfumania in the
amount of $3,000,000, as discussed in Note E.
- The Company acquired equipment in the amount of $249,989 through
capital lease arrangements.
- 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 $619,633 on the
investment in affiliate.
H. INCOME TAXES
The provision for income taxes for the periods ended December 31, 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 December 31, 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.
17
J. LITIGATION SETTLEMENT
On May 8, 2001, and as 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 period ended December 31, 2002,
net of certain expenses as follows:
Nine Months Ended
December 31, 2002
Proceeds from settlement $4,000,564
Less expenses directly related to the claim
and incurred during the period April 1, 2002
through December 31, 2002:
Legal fees 326,327
Refurbishing costs 132,154
----------
Net litigation settlement recorded $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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 consolidated 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
18
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, the Company
cannot determine the potential effects that adoption of SFAS No. 146 will have
on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002 and adoption of the disclosure requirements are effective for
the Company during the fourth quarter ending March 31, 2003. The Company does
not expect that the adoption of FIN 45 will have a significant impact on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS 123". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the estimate of the
market value of our stock at the date of the grant over the amount an employee
must pay to acquire the stock. The Company will adopt the annual disclosure
provisions of SFAS No. 148 in our financial reports for the year ending March
31, 2003 and the Company will adopt the interim disclosure provisions for
financial reports for the quarter ending June 30, 2003. As the adoption of this
standard involves disclosures only, the Company does not expect a significant
impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of APB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition, but does not expect a significant impact.
L. SUBSEQUENT 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 entered into a confidentiality agreement which
permitted Quality King to conduct a due diligence review of the Company's
operations.
On January 8, 2003, the Company announced that it had terminated the discussions
as the parties had not reached an agreement on the terms of a possible
acquisition.
19
On January 16, 2003, the Company entered into an agreement with the Animale
Group, S.A., to sell the inventory, promotional materials, molds, and
intangibles, relating to the Animale brand for $4,000,000, which closely
approximates the brand's net book value at the date of sale. At Closing, the
purchaser provided as consideration $2,000,000 in cash and a $2,000,000 note
payable in twelve equal monthly installments, including interest at prime plus
1%, through February 28, 2004. In accordance with the note's security agreement,
the Company will continue to store and control certain component and raw
material inventory until the balance of the note is less than $500,000.
As part of the agreement the Company did not include the inventory of Chaleur
d'Animale, the Animale brand's newest product introduction, and maintains the
rights to manufacture and distribute this product line, on a royalty-free basis,
until January 2005.
* * * *
20
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 December 31, 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: February 14, 2003