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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
-------------
Or______
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( d ) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission file number: 0-15491
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PARLUX FRAGRANCES, INC.
- --------------------------------------------------------------------------------
( Exact name of registrant as specified in its charter )
DELAWARE 22-2562955
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization )
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 954-316-9008
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 13, 2003, 8,554,259 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
See pages 7 to 18.
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 May 20, 2003, we received a Tender Offer Proposal (the "Proposal"), dated May
19, 2003, from Quality King Distributors, Inc. ("Quality King") and Ilia Lekach,
our Chairman and Chief Executive Officer, to form a new entity to acquire all of
our outstanding shares of common stock at a price of $4.00 per share in cash,
which was a premium of approximately 60% over the closing price of the common
stock of $2.50 on that day. The Proposal was conditional upon the approval of
Quality King's lenders and the approval of our Board of Directors under Section
203 of the Delaware General Corporation Law.
On May 22, 2003, at a special Board of Directors meeting, our Board appointed a
Special Committee of Independent Directors to evaluate and negotiate the
Proposal, and to ultimately vote to approve or disapprove the proposed Tender
Offer. The Independent Committee consists of Messrs. Glenn Gopman and David
Stone, and Ms. Esther Egozi Choukroun. The Independent Committee had engaged
legal counsel and was interviewing investment bankers to assist in this matter.
On June 13, 2003, the Board of Directors received a letter from Quality King
withdrawing its Proposal due to its inability to obtain approval of the proposed
transaction from its lenders.
In addition, see Legal Proceedings on page 5 for further discussion.
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, 2003 a
2
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. 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 the Form 10-K filing, discussed above.
Results of Operations
- ---------------------
Comparison of the three-month period ended June 30, 2003 with the three-month
- -----------------------------------------------------------------------------
period ended June 30, 2002.
- ---------------------------
During the quarter ended June 30, 2003, net sales decreased 15% to $16,941,789
as compared to $19,825,736 for the same period for the prior year. The decrease
is mainly attributable to the $1,799,902 reduction in gross sales of Animale
brand products (which brand was sold during January 2003) and $1,062,815
reduction in gross sales of Jockey brand products which were launched during the
prior year period.
Net sales to unrelated customers decreased 24% to $10,841,603, compared to
$14,275,667 for the same period in the prior year, as a result of the reductions
discussed above. Sales to related parties increased 10% to $6,100,186 compared
to $5,550,069 for the same period in the prior year.
Cost of goods sold increased as a percentage of net sales from 51% for the
quarter ended June 30, 2002 to 53% for the current comparable period. The
increase was mainly attributable to the increase in sales to related parties as
a percentage of total net sales, as these sales have a higher cost of goods.
Cost of goods sold on sales to unrelated customers and related parties
approximated 51% and 56%, respectively, for the current period, as compared to
48% and 61%, respectively, for the same period in the prior year.
Operating expenses decreased by 11% compared to the same period in the prior
year from $7,640,049 to $6,823,131, increasing as a percentage of net sales from
39% to 40%. Advertising and promotional expenses decreased 17% to $2,730,019
compared to $3,273,356 in the prior year period, decreasing as a percentage of
net sales from 17% to 16%. Selling and distribution costs decreased 10% to
$1,538,424 in the current period compared to $1,711,454 for the same period of
the prior year, remaining relatively constant at 9% of net sales. General and
administrative expenses increased by 3% compared to the prior year period from
$1,481,302 to $1,518,774, increasing as a percentage of net sales from 7% to 9%.
The increase is mainly attributable to an increase in health insurance premiums
and non-recurring charitable contributions, offset by a reduction in legal fees
and bad debt expense. Depreciation and amortization decreased slightly during
the current period from $348,991 to $344,711. Royalties decreased by 16% in the
current period, in line with the decrease in net sales, remaining relatively
constant at 4% of net sales.
As a result of the above, operating income decreased to $1,222,629 or 7% of net
sales for the current period, compared to $1,993,415 or 10% of net sales for the
same period in the prior year. Net interest expense decreased to $65,622 in the
current period as compared to $193,348 for the same period in the prior year.
The decrease reflects the reduction in average amounts outstanding under on our
line of credit as compared to the prior year.
Income before taxes for the current period was $1,157,007 compared to $1,800,067
in the same period for the prior year. Giving effect to the tax provision, we
earned net income of $717,344 or 4% of net sales for the current period,
compared to $1,116,042 or 6% of net sales in the comparable period of the prior
year.
3
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $42,591,233 as of June 30, 2003, compared to
$39,656,571 at March 31, 2003, primarily 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 three months ended June 30,
2003, 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.
As of June 30, 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 under the last program. On July
25, 2001, the Board of Directors, at that date, authorized an additional
2,500,000 share repurchase, subject to the restrictions and covenants in our new
loan agreement discussed below. Through January 31, 2003, no shares were
purchased under the latest authorization. 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. As of March 31, 2003, we repurchased an additional 1,476,700 shares
at a cost of $4,469,593. No shares were purchased during the current quarter.
The accompanying consolidated balance sheets also include an additional 39,000
shares of treasury stock purchased at a cost of $133,472 prior to fiscal 1996.
On July 20, 2001, we entered into a three-year Loan and Security Agreement (the
Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). 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
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 "Earnings Before
Interest, Taxes, and Depreciation (EBITDA)", as defined in the Loan Agreement.
At June 30, 2003, based on the borrowing base at that date, the credit line
amounted to $13,703,000 and, accordingly, we had approximately $5,032,000
available under the credit line excluding the effect of restricted cash of
$2,024,000.
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.
4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------- ------------------------------------------------------------
During the quarter ended June 30, 2003, there have been no material changes in
the information about the Company's market risks as of March 31, 2003, as set
forth in Item 7A of the Company's Annual Report on Form 10-K for the year ended
March 31, 2003.
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
- ------- -----------------
On June 4, 2003, we were served with a shareholder's class action complaint (the
"Complaint"), filed in the Delaware Court of Chancery by Judy Altman, purporting
to act on behalf of herself and other public stockholders of the Company. The
Complaint names Parlux Fragrances, Inc. as a defendant along with all of our
Board of Directors, except Mr. David Stone. The Complaint seeks to enjoin the
defendants from consummating the Tender Offer Proposal discussed on Page 2, and
seeks to have the acquisition rescinded if it is consummated. In addition, the
Complaint seeks unspecified damages, plus the fees, costs and disbursements of
Ms. Altman's attorneys. The defendants are currently scheduled to file a written
response to the Complaint on August 23, 2003.
The Company and the named defendants have engaged Delaware counsel to vigorously
defend the action. We believe that the Complaint is without merit. The Tender
Offer Proposal, which precipitated the Complaint, has been withdrawn;
nevertheless, there can be no assurance of the ultimate outcome.
There are no other proceedings pending against us or any of our properties
which, if determined adversely to us, would have a material effect on our
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibit No. Description
----------- -----------
10.65 Subordinated Secured Note Agreement, dated June 30, 2003,
between the Company and Perfumania, Inc.
32.1 Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
5
(b) The following reports on Form 8-K have been issued during the period:
o Report dated May 28, 2003, relating to the Proposal Letter from
Ilia Lekach and Quality King Distributors, Inc.
o Report dated June 17, 2003, relating to the Letter of Withdrawal
from Quality King Distributors, Inc.
6
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
June 30, March 31,
ASSETS 2003 2003
- --------------------------------------------- ------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 271,776 $ 137,023
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,771,000 and $1,734,000, respectively 4,877,370 3,751,570
Trade receivable from related parties 10,201,134 11,933,952
Notes receivable, related party 5,000,000 --
Notes receivable, current portion 2,182,803 2,182,135
Notes receivable, officer 760,045 742,884
Inventories 28,451,354 26,281,297
Prepaid expenses and other current assets, net 6,015,142 7,007,410
Investment in affiliate 2,820,633 1,361,164
------------ ------------
TOTAL CURRENT ASSETS 60,580,257 53,397,435
Equipment and leasehold improvements, net 1,470,544 1,668,284
Trademarks, licenses and other intangibles, net 8,161,803 8,231,145
Notes receivable, less current portion 1,023,536 1,524,204
Other 283,504 373,666
------------ ------------
TOTAL ASSETS $ 71,519,644 $ 65,194,734
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 7,874,098 $ 4,858,378
Accounts payable 9,676,916 7,420,405
Income taxes payable -- 279,610
Accrued expenses 438,010 1,182,471
------------ ------------
TOTAL CURRENT LIABILITIES 17,989,024 13,740,864
Borrowings, less current portion -- 102,096
Deferred tax liability 1,058,479 1,058,479
------------ ------------
TOTAL LIABILITIES 19,047,503 14,901,439
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at June 30, 2003 and
March 31, 2003 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
18,048,090 and 18,046,840 shares issued at June 30, 2003
and March 31, 2003, respectively 180,481 180,468
Additional paid-in capital 74,086,041 74,084,335
Retained earnings 3,988,723 3,271,379
Accumulated other comprehensive income (loss) 803,484 (656,299)
------------ ------------
79,058,729 76,879,883
Less - 9,493,831 shares of common stock in treasury,
at cost, at June 30, 2003 and March 31, 2003 (26,586,588) (26,586,588)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 52,472,141 50,293,295
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,519,644 $ 65,194,734
============ ============
See notes to condensed consolidated financial statements.
7
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
Three Months Ended June 30,
---------------------------------
2003 2002
--------------- ---------------
Net sales:
Unrelated customers $ 10,841,603 $ 14,275,667
Related parties 6,100,186 5,550,069
------------ ------------
16,941,789 19,825,736
Cost of goods sold, including $1,090,873 and $1,214,429
of promotional items in 2003 and 2002, respectively 8,896,029 10,192,272
------------ ------------
Gross margin 8,045,760 9,633,464
------------ ------------
Operating expenses:
Advertising and promotional 2,730,019 3,273,356
Selling and distribution 1,538,424 1,711,454
General and administrative 1,518,774 1,481,302
Depreciation and amortization 344,711 348,991
Royalties 691,203 824,946
------------ ------------
Total operating expenses 6,823,131 7,640,049
------------ ------------
Operating income 1,222,629 1,993,415
Interest income 36,824 15,784
Interest expense and bank charges (102,446) (209,132)
------------ ------------
Income before income taxes 1,157,007 1,800,067
Income taxes provision (439,663) (684,025)
------------ ------------
Net income $ 717,344 $ 1,116,042
============ ============
Income per common share:
Basic $ 0.08 $ 0.11
============ ============
Diluted $ 0.08 $ 0.11
============ ============
See notes to condensed consolidated financial statements.
8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------
(Unaudited)
COMMON STOCK
------------------------------ ADDITIONAL
NUMBER PAR PAID-IN RETAINED
ISSUED VALUE CAPITAL EARNINGS
------------ ------------ ------------ ------------
BALANCE at March 31, 2003 18,046,840 $ 180,468 $ 74,084,335 $ 3,271,379
Comprehensive income:
Net income -- -- -- 717,344
Unrealized holding gain on
investment in affiliate -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive income -- -- -- --
Issuance of common stock upon exercise of
employee stock options 1,250 13 1,706 --
------------ ------------ ------------ ------------
BALANCE at June 30, 2003 18,048,090 $ 180,481 $ 74,086,041 $ 3,988,723
============ ============ ============ ============
[RESTUB]
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
(LOSS) INCOME (1) STOCK TOTAL
------------ ------------ ------------
BALANCE at March 31, 2003 $ (656,299) $(26,586,588) $ 50,293,295
------------
Comprehensive income:
Net income -- -- 717,344
Unrealized holding gain on
investment in affiliate 1,459,469 -- 1,459,469
Foreign currency translation adjustment 314 -- 314
------------
Total comprehensive income -- -- 2,177,127
------------
Issuance of common stock upon exercise of
employee stock options -- -- 1,719
------------ ------------ ------------
BALANCE at June 30, 2003 $ 803,484 $(26,586,588) $ 52,472,141
============ ============ ============
(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.
9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Three Months Ended June 30,
---------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 717,344 $ 1,116,042
----------- -----------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 344,711 348,991
Provision for doubtful accounts 30,000 60,000
Provision for prepaid promotional supplies and inventory obsolescence 180,000 481,550
Changes in assets and liabilities:
Increase in trade receivables - customers (1,146,800) (928,610)
Increase in note and trade receivables - related parties (3,276,182) (3,615,324)
Decrease in notes receivable 500,000 --
Decrease in income tax receivable -- 665,034
Increase in inventories (2,320,057) (3,196,183)
Decrease in prepaid expenses and other current assets 962,268 769,862
Decrease (increase) in other non-current assets 90,162 (9,132)
Increase in accounts payable 2,256,511 1,057,352
(Decrease) increase in accrued expenses and income taxes payable (1,024,070) 231,046
----------- -----------
Total adjustments (3,403,457) (4,135,414)
----------- -----------
Net cash used in operating activities (2,686,113) (3,019,372)
----------- -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (77,630) (45,550)
----------- -----------
Net cash used in investing activities (77,630) (45,550)
----------- -----------
Cash flows from financing activities:
Proceeds - note payable to GMAC Commercial Credit, net 3,106,878 3,229,804
Payments - note payable to Fred Hayman Beverly Hills (193,254) (179,778)
Payments - notes payable to Bankers Capital Leasing -- (48,582)
Net increase in notes receivable from officer (17,161) (1,510)
Proceeds from issuance of common stock, net 1,719 1,031
----------- -----------
Net cash provided by financing activities 2,898,182 3,000,965
----------- -----------
Effect of exchange rate changes on cash 314 654
----------- -----------
Net increase (decrease) in cash and cash equivalents 134,753 (63,303)
Cash and cash equivalents, beginning of period 137,023 164,793
----------- -----------
Cash and cash equivalents, end of period $ 271,776 $ 101,490
=========== ===========
See notes to condensed consolidated financial statements.
10
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 herein 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 Annual Report
on Form 10-K for the year ended March 31, 2003 as filed with the Securities and
Exchange Commission on June 30, 2003.
B. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. No stock-based
compensation cost is reflected in the accompanying condensed consolidated
statements of income, as all warrants and options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
compensation:
11
For the three months ended June 30,
2003 2002
---- ----
Net income:
As reported $717,344 $1,116,042
Proforma $636,998 $1,111,344
Basic net income per share:
As reported $0.08 $0.11
Proforma $0.07 $0.11
Diluted net income per share:
As reported $0.08 $0.11
Proforma $0.07 $0.11
C. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
June 30, 2003 March 31, 2003
------------- --------------
Finished products $15,430,086 $15,873,033
Components and packaging material 9,156,231 7,642,649
Raw material 3,865,037 2,765,615
----------- -----------
$28,451,354 $26,281,297
=========== ===========
The cost of inventories includes product costs and handling charges, including
allocation of the Company's applicable overhead in the approximate amount of
$2,213,000 and $2,409,000 at June 30, 2003 and March 31, 2003, respectively.
D. TRADEMARKS, LICENSES AND OTHER INTANGIBLES
Trademarks, licenses and other intangibles are attributable to the following
brands:
June 30, 2003 March 31, 2003
------------- --------------
Owned Brands:
Fred Hayman Beverly Hills ("FHBH") $2,820,361 $2,820,361
Animale 122,965 122,965
Other 216,546 216,546
Licensed Brands:
Perry Ellis 7,963,560 7,963,560
---------- ----------
11,123,432 11,123,432
Less: accumulated amortization (2,961,629) (2,892,287)
---------- ----------
$8,161,803 $8,231,145
========== ==========
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 paid $2,000,000 in cash and provided a $2,000,000 note payable in
twelve equal monthly installments of $166,667, plus interest at prime plus 1%,
through January 31, 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 of June 30,
2003, notes receivable in the
12
accompanying condensed consolidated balance sheet includes $1,166,667
($1,666,667 at March 31, 2003) relating to this transaction.
As part of the agreement the Company did not sell the inventory of Chaleur
d'Animale, Animale brand's newest product introduction. The Company maintains
the rights to manufacture and distribute Chaleur d'Animale on a royalty-free
basis, until January 2005.
On March 28, 2003, the Company entered into an exclusive agreement to sublicense
the FHBH rights to Victory International (USA), LLC, for a royalty of 2% of net
sales, with a guaranteed minimum annual royalty of $50,000. The initial term of
the agreement is for five years, renewable every five years at the sublicensee's
option. As part of the agreement, the Company sold the inventory, promotional
materials and molds relating to FHBH for its approximate book value. At closing,
the purchaser paid $2,000,000 in cash and provided a promissory note due in
twelve monthly installments of approximately $169,356, plus interest at prime
plus 1%, commencing January 2004. As of June 30, 2003, notes receivable in the
accompanying condensed consolidated balance sheet includes $1,016,136 and
$1,023,536 ($515,468 and $1,524,204 at March 31, 2003) of current and long-term
receivables respectively, relating to this transaction.
The Sublicense Agreement excludes the rights to "273 Indigo", the latest
fragrance introduction for the FHBH brand. Such rights, as well as the rights to
any other new FHBH fragrance additions, will transfer to the sublicensee after
twelve (12) months from the date of launch. The sublicensee is required to
purchase the inventory and promotional materials relating to the new fragrance
additions for a price equal to our book value, up to $500,000.
E. BORROWINGS - BANKS AND OTHERS
The composition of borrowings is as follows:
June 30, 2003 March 31, 2003
------------- --------------
Revolving credit facility payable to GMAC Commercial Credit LLC,
interest at LIBOR plus 3.75% or prime (4.0% at June 30, 2003) plus 1%
at the Company's option, net of restricted cash of $2,023,705 and
$1,477,841 at June 30, 2003 and March 31, 2003, respectively. $7,074,008 $3,967,130
Note payable to Fred Hayman Beverly Hills, collateralized by the
acquired licensed trademarks, interest at 7.25%, payable in equal
monthly installments of $69,863, including interest, through June
2004. 772,091 965,345
Capital lease payable to Bankers Leasing, collateralized by certain
warehouse equipment, payable in quarterly installments of $33,992,
including interest, with the final payment made in July 2003. 27,999 27,999
---------- ---------
7,874,098 4,960,474
Less: long-term borrowings -- (102,096)
---------- ---------
Borrowings, current portion $7,874,098 $4,858,378
========== ==========
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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 "Earnings Before Interest, Taxes, and Depreciation
(EBITDA)", as defined in the Loan Agreement..
At June 30, 2003, based on the borrowing base at that date, the credit line
amounted to $13,703,000 and, accordingly, the Company had approximately
$5,032,000 available under the credit line excluding the effect of restricted
cash of $2,024,000.
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.
F. RELATED PARTIES TRANSACTIONS
Prior to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the Company had made
several personal loans to its chairman and chief executive officer, Mr. Ilia
Lekach. These loans, which were consolidated into one note agreement on April 1,
2002, became due on March 31, 2003 in accordance with the note's terms. On March
31, 2003, Mr. Lekach repaid $46,854 in principal and $71,364 of accrued
interest, through that date. The repayment was effected via an offset of amounts
due Mr. Lekach under his regular compensation arrangement. Sarbanes-Oxley
prohibits the Company from renewing or amending the loan, as well as issuing new
loans to Company officers and directors.
On July 15, 2003, Mr. Lekach repaid the entire loan balance of $742,884, plus
accrued interest through that date. Accordingly, the note receivable from
officer balance as of June 30, 2003 has been recorded as a current asset in the
accompanying condensed consolidated balance sheet, and the corresponding balance
as of March 31, 2003 has been reclassified for comparative purposes from a
reduction in stockholders' equity, as previously presented, to a current asset.
The Company had net sales of $4,013,355 and $3,921,425 during the three-month
periods ended June 30, 2003 and June 30, 2002, 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 $9,412,112 and
$5,000,000, respectively, at June 30, 2003 ($11,426,977 and $0, respectively at
March 31, 2003). Amounts due from related parties are non-interest bearing and
are due in less than one year, except for the $5,000,000 subordinated note
receivable discussed below which bears interest at prime plus 1%.
14
During the first quarter of 2003, Perfumania's reported operations and liquidity
position have suffered some deterioration which is explained by Perfumania's
management in its public reports as resulting from, among other factors, general
economic and industry conditions. Management continues to evaluate its credit
risk and assess the collectibility of the Perfumania receivables. In recent
public press releases, Perfumania indicated that it had returned to positive
comparable store sales for the months of June and July, 2003. Perfumania's
reported financial information, as well as the Company's payment history with
Perfumania, indicates that the first quarter historically is Perfumania's most
difficult quarter as is the case with most U.S. based retailers. The Company
has, in the past, received significant payments from Perfumania during the last
three months of the calendar year, and has no reason to believe that this will
not continue. Based on management's evaluation, no allowances have been recorded
as of June 30, 2003. Management will continue to evaluate Perfumania's financial
condition on an ongoing basis and consider the possible alternatives and
effects, if any, on the Company.
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 of 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 of ECMV. As of June 30, 2003,
the fair market value of the investment in ECMV was $2,820,633 ($7.46 per share
after the reverse split).
As of June 30, 2003, the Company and Perfumania entered into a $5 million
subordinated note agreement which converted $5 million of the outstanding trade
receivable due from Perfumania to the Company as of that date. The note is
repayable in installments of $250,000 each month from July through October 2003,
$500,000 on November 30, 2003, $3,000,000 on December 31, 2003, and $250,000 on
each of January 31, 2004, and February 29, 2004. Accrued interest is paid with
each principal installment.
During the three months ended June 30, 2003 and 2002, the Company had net sales
of $2,086,831 and $1,628,644, respectively, to fragrance distributors
owned/operated by individuals related to the Company's Chairman/CEO. These sales
are included as related party sales in the accompanying condensed consolidated
statements of income. As of June 30, 2003 and March 31, 2003, trade receivables
from related parties includes $789,022 and $506,975, respectively, from these
customers.
G. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The following is the reconciliation of the numerators and denominators of the
basic and diluted net income per common share calculations:
15
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Net income $ 717,344 $ 1,116,042
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,553,284 9,976,276
=========== ===========
Basic net income per common share $ 0.08 $ 0.11
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,553,284 9,976,276
Effect of dilutive securities:
Stock options and warrants 849,841 125,352
----------- -----------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 9,403,125 10,101,628
=========== ===========
Diluted net income per common share $ 0.08 $ 0.11
=========== ===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 216,000 1,274,450
=========== ===========
Exercise Price $3.13-$8.00 $2.08-$8.00
=========== ===========
H. CASH FLOW INFORMATION
The Company considers temporary investments with an original maturity of three
months or less to be cash equivalents. Supplemental disclosures of cash flow
information are as follows:
Three-months ended June 30,
---------------------------
Cash paid for: 2003 2002
---- ----
Interest $102,583 $209,000
Income taxes $803,092 $ 19,000
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Three months ended June 30, 2003:
- The conversion of trade accounts receivable from Perfumania in the
amount of $5,000,000, as discussed in Note F.
- An unrealized holding gain of $1,459,469 on the investment in
affiliate
Three months ended June 30, 2002:
- An unrealized holding gain of $661,677 on the investment in affiliate.
I. INCOME TAXES
The provision for income taxes for the periods ended June 30, 2003 and 2002
reflects an effective tax rate of approximately 38%.
16
J. LICENSE AND DISTRIBUTION AGREEMENTS
As of June 30, 2003 and March 31, 2003, 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.
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 adoption of SFAS No. 145 did not
have a material effect on the Company's condensed consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activities. SFAS No. 146 is
effective prospectively for exit or disposal activities initiated after June 30,
2003, 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
June 30, 2003 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 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
17
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.
In April 2003 the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. This
Statement is effective for contracts entered into or modified after June 30,
2003. The Company does not expect the adoption of SFAS 149 to have a significant
impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that an issuer classify financial instruments that are within its scope
as a liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 is not expected to have a significant impact on
the Company's consolidated financial statements.
L. LEGAL PROCEEDINGS
On June 4, 2003, the Company was served with a shareholder's class action
complaint (the "Complaint"), filed in the Delaware Court of Chancery by Judy
Altman, purporting to act on behalf of herself and other public stockholders of
the Company. The Complaint names Parlux Fragrances, Inc. as a defendant along
with all of the Company's Board of Directors, except Mr. David Stone. The
Complaint seeks to enjoin the defendants from consummating a Tender Offer
Proposal from Quality King Distributors, Inc. and Ilia Lekach, the Company's
Chairman and Chief Executive Officer, to acquire the Company's common stock, and
seeks to have the acquisition rescinded if it is consummated. In addition, the
Complaint seeks unspecified damages, plus the fees, costs and disbursements of
Ms. Altman's attorneys. The defendants are currently scheduled to file a written
response to the Complaint on August 23, 2003.
The Company and the named defendants have engaged Delaware counsel to vigorously
defend the action. Management believes that the Complaint is without merit. The
Tender Offer Proposal, which precipitated the Complaint, has been withdrawn;
nevertheless, there can be no assurance of the ultimate outcome.
There are no other proceedings pending against the Company which, if determined
adversely to us, would have a material effect on our financial position or
results of operations.
* * * *
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/ Ilia Lekach
- -------------------------------------------------
Ilia Lekach, Chairman and Chief Executive Officer
/s/ Frank A. Buttacavoli
- -------------------------------------------------
Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director
Date: August 14, 2003
19