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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------
FORM 10-Q
( Mark One )
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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
PARLUX FRAGRANCES, INC.
- --------------------------------------------------------------------------------
( Exact name of registrant as specified in its charter )
DELAWARE 22-2562955
- -------------------------------- -----------------------------------
( State or other jurisdiction of ( IRS employer identification no. )
incorporation or organization )
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
- ------------------------------------------ ------------
( Address of principal executive offices ) ( Zip code )
Registrant's telephone number, including area code: 954-316-9008
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 13, 2003, 8,208,559 shares of the issuer's common stock were
outstanding.
1
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
- ------- --------------------
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
September 30, March 31,
ASSETS 2003 2003
- ------------------------------------------------------------ ------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 454,639 $ 137,023
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,375,000 and $1,734,000, respectively 4,519,022 3,751,570
Trade receivable from related parties 13,353,993 11,933,952
Note receivable, related party 4,250,000 --
Notes receivable, current portion 2,360,714 2,182,135
Note receivable, officer -- 742,884
Inventories 31,767,301 26,281,297
Prepaid expenses and other current assets, net 6,977,896 7,007,410
Investment in affiliate 5,024,962 1,361,164
------------ ------------
TOTAL CURRENT ASSETS 68,708,527 53,397,435
Equipment and leasehold improvements, net 1,476,940 1,668,284
Trademarks, licenses and other intangibles, net 8,090,980 8,231,145
Notes receivable, less current portion 515,468 1,524,204
Other 201,700 373,666
------------ ------------
TOTAL ASSETS $ 78,993,615 $ 65,194,734
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 8,535,618 $ 4,858,378
Accounts payable 12,562,826 7,420,405
Income taxes payable 667,792 279,610
Accrued expenses 906,574 1,182,471
------------ ------------
TOTAL CURRENT LIABILITIES 22,672,810 13,740,864
Borrowings, less current portion -- 102,096
Deferred tax liability 1,255,315 1,058,479
------------ ------------
TOTAL LIABILITIES 23,928,125 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 September
30, 2003 and March 31, 2003 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
18,049,590 and 18,046,840 shares issued at
September 30, 2003 and March 31, 2003, respectively 180,496 180,468
Additional paid-in capital 74,088,807 74,084,335
Retained earnings 5,390,572 3,271,379
Accumulated other comprehensive income (loss) 2,810,896 (656,299)
------------ ------------
82,470,771 76,879,883
Less - 9,727,131 and 9,493,831 shares of common stock in
treasury, at cost, at September 30, 2003 and March 31,
2003, respectively (27,405,281) (26,586,588)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 55,065,490 50,293,295
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,993,615 $ 65,194,734
============ ============
See notes to condensed consolidated financial statements.
2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Unrelated customers $ 7,391,521 $ 11,408,210 $ 18,233,124 $ 25,683,877
Related parties 10,860,211 6,599,418 16,960,397 12,149,487
------------ ------------ ------------ ------------
18,251,732 18,007,628 35,193,521 37,833,364
Cost of goods sold, including $339,714 and $1,430,587 of
promotional items for the three and six months ended
September 30, 2003, respectively ($459,020 and $1,673,449,
respectively, in 2002) 9,459,498 9,321,881 18,355,527 19,412,603
------------ ------------ ------------ ------------
Gross margin 8,792,234 8,685,747 16,837,994 18,420,761
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 2,438,576 3,027,831 5,168,595 6,301,187
Selling and distribution 1,549,550 1,710,481 3,087,974 3,421,935
General and administrative 1,390,626 1,358,729 2,909,400 2,617,730
Depreciation and amortization 316,500 344,328 661,211 693,319
Royalties 786,155 852,085 1,477,358 1,677,031
------------ ------------ ------------ ------------
Total operating expenses 6,481,407 7,293,454 13,304,538 14,711,202
------------ ------------ ------------ ------------
Operating income 2,310,827 1,392,293 3,533,456 3,709,559
Interest income 76,300 16,474 113,124 32,258
Interest expense and bank charges (126,080) (257,969) (228,526) (467,101)
Litigation settlement, net of expenses 0 3,865,934 -- 3,542,083
------------ ------------ ------------ ------------
Income before income taxes 2,261,047 5,016,732 3,418,054 6,816,799
Income tax provision (859,198) (1,906,359) (1,298,861) (2,590,384)
------------ ------------ ------------ ------------
Net income $ 1,401,849 $ 3,110,373 $ 2,119,193 $ 4,226,415
============ ============ ============ ============
Income per common share:
Basic $ 0.17 $ 0.31 $ 0.25 $ 0.42
============ ============ ============ ============
Diluted $ 0.15 $ 0.31 $ 0.22 $ 0.42
============ ============ ============ ============
See notes to condensed consolidated financial statements.
3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 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 -- -- -- 2,119,193
Unrealized holding gain on
investment in affiliate -- -- -- --
Foreign currency translation adjustment 233 233
Total comprehensive income 5,586,388
Issuance of common stock upon exercise of
employee stock options 2,750 28 4,472 4,500
Purchase of 233,300 shares of treasury
stock, at cost (818,693) (818,693)
------------ ------------ ------------ ------------
BALANCE at September 30, 2003 18,049,590 $ 180,496 $ 74,088,807 $ 5,390,572
============ ============ ============ ============
[Restubbed]
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 -- -- 2,119,193
Unrealized holding gain on
investment in affiliate 3,466,962 -- 3,466,962
Foreign currency translation adjustment 233 233
------------
Total comprehensive income 5,586,388
------------
Issuance of common stock upon exercise of
employee stock options 4,500
Purchase of 233,300 shares of treasury stock, at cost (818,693) (818,693)
------------ ------------ ------------
BALANCE at September 30, 2003 $ 2,810,896 $(27,405,281) $ 55,065,490
============ ============ ============
(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.
4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Six Months Ended September 30,
------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 2,119,193 $ 4,226,415
----------- -----------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 661,211 693,319
Provision for doubtful accounts 60,000 120,000
Provision for prepaid promotional supplies
and inventory obsolescence 1,130,000 692,154
Changes in assets and liabilities:
Increase in trade receivables - customers (827,452) (1,683,095)
Increase in note and trade receivables - related parties (5,670,041) (5,218,914)
Decrease (increase) in notes receivable 830,157 (4,000,564)
Increase in inventories (6,356,004) (4,185,501)
Increase in prepaid expenses and other current assets (230,486) (179,417)
Decrease (increase) in other non-current assets 171,966 (7,849)
Increase in accounts payable 5,142,421 3,581,551
Increase in accrued expenses and income taxes payable 112,285 2,995,398
----------- -----------
Total adjustments (4,975,943) (7,192,918)
----------- -----------
Net cash used in operating activities (2,856,750) (2,966,503)
----------- -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (329,702) (416,815)
----------- -----------
Net cash used in investing activities (329,702) (416,815)
----------- -----------
Cash flows from financing activities:
Proceeds - note payable to GMAC Commercial Credit, net 3,993,175 3,785,848
Payments - note payable to Fred Hayman Beverly Hills (390,032) (362,835)
Payments - notes payable to Bankers Capital Leasing (27,999) (98,201)
Net decrease in note receivable from officer 742,884 7,566
Purchases of treasury stock (818,693) --
Proceeds from issuance of common stock, net 4,500 2,406
----------- -----------
Net cash provided by financing activities 3,503,835 3,334,784
----------- -----------
Effect of exchange rate changes on cash 233 743
----------- -----------
Net increase (decrease) in cash and cash equivalents 317,616 (47,791)
Cash and cash equivalents, beginning of period 137,023 164,793
----------- -----------
Cash and cash equivalents, end of period $ 454,639 $ 117,002
=========== ===========
See notes to condensed consolidated financial statements.
5
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 condensed 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:
6
For the three months For the six months
ended September 30, ended September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income:
As reported $1,401,849 $3,110,373 $2,119,193 $4,226,415
Proforma $1,358,088 $3,105,675 $1,995,087 $4,217,019
Basic net income per share:
As reported $0.17 $0.31 $0.25 $0.42
Proforma $0.16 $0.31 $0.23 $0.42
Diluted net income per share:
As reported $0.15 $0.31 $0.22 $0.42
Proforma $0.14 $0.31 $0.21 $0.42
C. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
September 30, 2003 March 31, 2003
------------------ --------------
Finished products $19,725,805 $15,873,033
Components and packaging material 8,656,126 7,642,649
Raw material 3,385,370 2,765,615
----------- -----------
$31,767,301 $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
$2,160,000 and $2,409,000 at September 30, 2003 and March 31, 2003,
respectively.
D. Trademarks, Licenses and Other Intangibles
Trademarks, licenses and other intangibles are attributable to the following
brands:
September 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 (3,032,452) (2,892,287)
------------ ------------
$ 8,090,980 $ 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
September 30, 2003, notes receivable
7
in the accompanying condensed consolidated balance sheet includes $836,510
($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 $170,000, plus interest at prime
plus 1%, commencing January 2004. As of September 30, 2003, notes receivable in
the accompanying condensed consolidated balance sheet includes $1,524,204 and
$515,468 ($515,468 and $1,524,204 at March 31, 2003) of current and long-term
receivables respectively, relating to this transaction.
The Sublicense Agreement excluded 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, were to transfer to the sublicensee
after twelve (12) months from the date of launch. The sublicensee would have
been 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.
On October 17, 2003, the parties amended the Sublicense Agreement, granting new
FHBH product development rights to the sublicensee. In addition, the guaranteed
minimum annual royalty increased to $75,000 and the royalty percentage on sales
of new FHBH products was increased to 3% of net sales. The sublicensee is no
longer required to purchase inventory and promotional materials relating to "273
Indigo", and the Company may continue to manufacture and distribute "273"
Indigo" products.
E. Borrowings - Banks and Others
The composition of borrowings is as follows:
September 30, March 31,
2003 2003
------------- -----------
Revolving credit facility payable to GMAC Commercial Credit
LLC, interest at LIBOR plus 3.75% or prime (4.0% at September
30, 2003) plus 1% at the Company's option, net of restricted
cash of $4,591,438 and $1,477,841 at September 30, 2003 and
March 31, 2003, respectively $ 7,960,305 $ 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 575,313 965,345
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
----------- -----------
8,535,618 4,960,474
Less: long-term borrowings -- (102,096)
----------- -----------
Borrowings, current portion $ 8,535,618 $ 4,858,378
=========== ===========
8
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 September 30, 2003, based on the borrowing base at that date, the credit line
amounted to $17,773,000 and, accordingly, the Company had approximately
$5,270,000 available under the credit line excluding the effect of restricted
cash of $4,591,000.
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.
As of September 30, 2003, the Company was not in compliance with the financial
covenant relating to minimum EBITDA for the trailing twelve-month period, and
requested a waiver of this non compliance from GMACCC. On November 7, 2003, the
waiver was granted by GMACCC.
Management believes that the Company will be able to comply with the loan
covenants, and 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 March 31, 2003 has been reclassified for comparative
purposes from a reduction in stockholders' equity, as previously presented, to a
current asset.
9
The Company had net sales of $13,708,371 and $8,041,778 during the six-month
periods ended September 30, 2003 and September 30, 2002 ($9,695,015 and
$4,120,354 during the three months ended September 30, 2003 and September 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 $12,904,428 and $4,250,000, respectively, at September 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 subordinated note receivable discussed below which bears interest
at prime plus 1%.
During the first half 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 through August 2003, but attained
negative comparable store sales during September 2003, the result, in part, of
problems encountered with the relocation of its distribution center.
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 September 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 September 30,
2003, the fair market value of the investment in ECMV was $5,024,962 ($13.29 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
10
January 31, 2004, and February 29, 2004. Accrued interest is paid with
each principal installment. As of September 30, 2003, all payments have been
received as scheduled.
During the six months ended September 30, 2003 and 2002, the Company had net
sales of $3,252,026 and $4,107,709 ($1,165,196 and $2,479,064 during the
three-months ended September 30, 2003 and 2002), 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 September 30,
2003 and March 31, 2003, trade receivables from related parties includes
$449,565 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:
Three Months Ended September 30,
--------------------------------
2003 2002
----------- -----------
Net income $ 1,401,849 $ 3,110,373
=========== ===========
Weighted average number of shares
outstanding used in basic earnings
per share calculation 8,472,362 9,977,179
=========== ===========
Basic net income per common share $ 0.17 $ 0.31
=========== ===========
Weighted average number of shares
outstanding used in basic earnings
per share calculation 8,472,362 9,977,179
Effect of dilutive securities:
Stock options and warrants 1,116,227 163,973
----------- -----------
Weighted average number of shares
outstanding used in diluted earnings
per share calculation 9,588,585 10,141,152
=========== ===========
Diluted net income per common share $ 0.15 $ 0.31
=========== ===========
Antidilutive securities not included in
diluted earnings per share
computation:
Options and warrants to purchase common
stock 36,000 1,240,475
=========== ===========
Exercise Price $4.00-$8.00 $2.25-$8.00
=========== ===========
Six Months Ended September 30,
--------------------------------
2003 2002
----------- -----------
Net income $ 2,119,193 $ 4,226,415
=========== ===========
Weighted average number of shares
outstanding used in basic earnings
per share calculation 8,512,602 9,976,731
=========== ===========
Basic net income per common share $ 0.25 $ 0.42
=========== ===========
Weighted average number of shares
outstanding used in basic earnings
per share calculation 8,512,602 9,976,731
Effect of dilutive securities:
Stock options and warrants 985,803 143,689
----------- -----------
Weighted average number of shares
outstanding used in diluted earnings
per share calculation 9,498,405 10,120,420
=========== ===========
Diluted net income per common share $ 0.22 $ 0.42
=========== ===========
Antidilutive securities not included in
diluted earnings per share
computation:
Options and warrants to purchase common
stock 216,000 1,240,475
=========== ===========
Exercise Price $3.13-$8.00 $2.25-$8.00
=========== ===========
11
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:
Six-months ended September 30,
------------------------------
2003 2002
-------- --------
Cash paid for:
Interest $229,852 $467,719
Income taxes $910,679 $ 24,029
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Six months ended September 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 $3,466,962 on the investment in
affiliate.
Six months ended September 30, 2002:
- The conversion of trade accounts receivable from Perfumania in the
amount of $3,000,000.
- An unrealized holding gain of $623,867 on the investment in affiliate.
I. Income Taxes
The provision for income taxes for the periods ended September 30, 2003 and 2002
reflects an effective tax rate of approximately 38%.
J. License and Distribution Agreements
As of September 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.
Effective November 1, 2003, the Company entered into an exclusive license
agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and
distribute prestige fragrances and related products under the GUESS? Trademarks
on a worldwide basis. The initial term of the agreement
12
continues through December 2009, and is renewable for an additional five years
if certain sales levels are met.
Under the GUESS? Agreement, the Company must pay a fixed royalty percentage and
spend minimum amounts for advertising based on sales volume. The Company
anticipates that the first GUESS? Fragrance will be marketed during Spring 2005.
K. New Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishment of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with earlier adoption encouraged. The 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 adoption of FIN 45
did not have a significant impact on the Company's 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 adoption of FIN 46 did not
have an impact on the Company's results of operations and financial condition.
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.
13
This Statement is effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS 149 did not have an 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 did not have an 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 named Parlux Fragrances, Inc. as a defendant along
with all of the Company's Board of Directors, except Mr. David Stone. The
Complaint sought 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
sought to have the acquisition rescinded if it was consummated. In addition, the
Complaint sought unspecified damages, plus the fees, costs and disbursements of
Ms. Altman's attorneys.
The Company and the named defendants engaged Delaware counsel to vigorously
defend the action, and the action was voluntarily dismissed on September 11,
2003.
On May 8, 2001, and amended on June 8, 2001, the Company filed a legal complaint
against a component supplier to recover out-of-pocket costs and damages
resulting from the supplier having delivered faulty components for two of its
fragrances. Out-of-pocket costs to refurbish the products were included in cost
of goods for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement whereby
the Company would receive cash consideration of $3,958,000 from the supplier's
insurance carrier, plus an additional $42,564 from the supplier. These funds
were received on October 7, 2002, and the suit was dismissed.
The Company has recorded the settlement in the accompanying condensed
consolidated statements of income for the periods ended September 30, 2002, net
of certain expenses as follows:
Three Months Ended Six Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Proceeds from settlement $4,000,564 $4,000,564
Less expenses directly
related to the claim
and incurred during the
period April 1, 2002
through September 30,
2002:
Legal fees 104,026 326,327
Refurbishing costs 30,604 132,154
---------- ----------
Net litigation settlement
recorded: $3,865,934 $3,542,083
========== ==========
14
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.
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.
* * * *
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.
Effective November 1, 2003, we entered into an exclusive license agreement with
GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute
prestige fragrances and related products under the GUESS? Trademarks on a
worldwide basis. The initial term of the agreement continues through December
2009, and is renewable for an additional five years if certain sales levels are
met.
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 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 on 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 September 30, 2003 with the
- ----------------------------------------------------------------------
three-month period ended September 30, 2002.
- --------------------------------------------
15
During the quarter ended September 30, 2003, net sales increased 1% to
$18,251,732 as compared to $18,007,628 for the same period for the prior year.
The increase is mainly attributable to the launch of "360 Red" for men and women
under the Perry Ellis line of fragrances, which resulted in an increase of
$1,345,158 in total Perry Ellis brand gross sales from $13,747,815 to
$15,092,973, and the launch of "OP Blend", which resulted in an increase in
total Ocean Pacific brand gross sales of $1,379,259. These increases were offset
by the reduction in gross sales of Animale and Fred Hayman Beverly Hills
("FHBH") brand products of $965,623 and $1,578,208, respectively (which brands
were sold and sublicensed during January and March 2003, respectively), and a
$375,591 reduction in gross sales of Jockey brand products which were launched
during the prior year period.
Net sales to unrelated customers decreased 35% to $7,391,521, compared to
$11,408,210 for the same period in the prior year, as a result of the reductions
discussed above. Sales to related parties increased 65% to $10,860,211 compared
to $6,599,418 for the same period in the prior year, as brands which were
originally launched in the U.S. department store market reached full
distribution potential. In addition, the products launched during the current
period have been developed for immediate distribution in all of the Company's
channels.
Cost of goods sold remained relatively constant at 52% of net sales for the
quarter ended September 30, 2003 compared to the prior year comparable period.
Cost of goods sold on sales to unrelated customers and related parties
approximated 53% and 51%, respectively, for the current period, as compared to
48% and 58%, respectively, for the same period in the prior year. The increase
in cost of goods sold to unrelated customers for the current period was due to
the purchase of a higher percentage of value sets than in the prior year. These
value sets have a higher cost of goods when compared to basic stock items. The
prior year period also included the sale of certain close-out merchandise to
related parties at lower margins.
Operating expenses decreased by 11% compared to the same period in the prior
year from $7,293,454 to $6,481,407, decreasing as a percentage of net sales from
41% to 36%. Advertising and promotional expenses decreased 19% to $2,438,576
compared to $3,027,831 in the prior year period, decreasing as a percentage of
net sales from 17% to 13%. The prior year period included promotional costs for
"Perry" by Perry Ellis for men and women, which launched during the Fall of
2002. No such major launches occurred during the current year period. Selling
and distribution costs decreased 9% to $1,549,550 in the current period compared
to $1,710,481 for the same period of the prior year, decreasing as a percentage
of net sales from 9% to 8%. The decrease was mainly attributable to a reduction
in commissions paid to an international sales representative who previously sold
FHBH products in the Caribbean and to reduced commissions to a sales
representative in Mexico. During the current period, the Company increased its
focus on the Mexican marketplace and engaged a distributor for the region in
lieu of a commissioned representative. General and administrative expenses
increased by 2% compared to the prior year period from $1,358,729 to $1,390,626,
remaining relatively constant at 8% of net sales. Depreciation and amortization
decreased by 8% during the current period from $344,328 to $316,500. Royalties
decreased by 8% in the current period, decreasing as a percentage of net sales
from 5% to 4%, as a result of reaching sliding scale levels faster during the
current period.
As a result of the above, operating income increased to $2,310,827 or 13% of net
sales for the current period, compared to $1,392,293 or 8% of net sales for the
same period in the prior year. Net interest expense decreased to $49,780 in the
current period as compared to $241,495 for the same period in the prior year.
The decrease reflects the reduced prime rate and a lower average balance
outstanding under our line of credit as compared to the prior year, coupled with
increased interest income generated on notes receivable.
16
Income before taxes for the current period was $2,261,047 compared to $5,016,732
in the same period for the prior year. The prior year period includes other
income of $3,865,934 in connection with the settlement of a lawsuit with a
supplier, which was filed during 2001. Giving effect to the tax provision, we
earned net income of $1,401,849 for the current period compared to $3,110,373 in
the comparable period of the prior year.
Comparison of the six-month period ended September 30, 2003 with the six-month
- ------------------------------------------------------------------------------
period ended September 30, 2002.
- --------------------------------
During six months ended September 30, 2003, net sales decreased 7% to
$35,193,521 as compared to $37,833,364 for the same period for the prior year.
The decrease was mainly attributable to the reduction in gross sales of Animale
and FHBH brand products of $2,765,526 and $1,642,500, respectively (which brands
were sold and sublicensed during January and March 2003, respectively) and a
$1,438,406 reduction in gross sales of Jockey brand products which were launched
during the prior year period. These decreases were offset by the launch of "360
Red" for men and women under the Perry Ellis line of fragrances, which resulted
in an increase of $903,417 in total Perry Ellis brand gross sales from
$27,957,075 to $28,860,222, and the launch of "OP Blend", which resulted in an
increase in total Ocean Pacific brand gross sales of $999,753.
Net sales to unrelated customers decreased 29% to $18,233,124, compared to
$25,683,877 for the same period in the prior year, as a result of the reductions
discussed above. Sales to related parties increased 40% to $16,960,397 compared
to $12,149,487 for the same period in the prior year, as brands which were
originally launched in the U.S. department store market reached full
distribution potential. In addition, the products launched during the current
period have been developed for immediate distribution in all of the Company's
channels.
Cost of goods sold increased as a percentage of net sales from 51% for the six
months ended September 30, 2002 to 52% for the current comparable period. Cost
of goods sold on sales to unrelated customers and related parties approximated
52% and 53%, respectively, for the current period, as compared to 48% and 59%,
respectively, for the same period in the prior year. The increase in cost of
goods sold to unrelated customers for the current period was due to the purchase
of a higher percentage of value sets than in the prior year. These value sets
have a higher cost of goods when compared to basic stock items. The prior year
period also included the sale of certain close-out merchandise to related
parties at lower margins.
Operating expenses decreased by 10% compared to the same period in the prior
year from $14,711,202 to $13,304,538, decreasing as a percentage of net sales
from 39% to 38%. Advertising and promotional expenses decreased 18% to
$5,168,595 compared to $6,301,187 in the prior year period, decreasing as a
percentage of net sales from 17% to 15%. The prior year period included
promotional costs for "Perry" by Perry Ellis for men and women, which launched
during the Fall of 2002. No such major launches occurred during the current year
period. Selling and distribution costs decreased 10% to $3,087,974 in the
current period compared to $3,421,935 for the same period of the prior year,
remaining relatively constant at 9% of net sales. The decrease was mainly
attributable to a reduction in commissions paid to an international sales
representative who previously sold FHBH products in the Caribbean and to reduced
commissions to a sales representative in Mexico. During the current period, the
Company increased its focus on the Mexican marketplace and engaged a distributor
for the region in lieu of a commissioned representative. General and
administrative expenses increased by 11% compared to the prior year period from
$2,617,730 to $2,909,400, increasing as a percentage of net sales from 7% to 8%.
The increase is
17
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 by 5% during the
current period from $693,319 to $661,211. Royalties decreased by 12% in the
current period as a result of the decrease in net sales, remaining relatively
constant at 4% of net sales.
As a result of the above, operating income decreased to $3,533,456 or 10% of net
sales for the current period, compared to $3,709,559 or 10% of net sales for the
same period in the prior year. Net interest expense decreased to $115,402 in the
current period as compared to $434,843 for the same period in the prior year.
The decrease reflects the reduced prime rate and a lower average balance
outstanding under our line of credit as compared to the prior year, coupled with
increased interest income generated on notes receivable.
Income before taxes for the current period was $3,418,054 compared to $6,816,799
in the same period for the prior year. The prior year period includes other
income of $3,542,083 in connection with the settlement of a lawsuit we filed in
2001 against a supplier. Giving effect to the tax provision, we earned net
income of $2,119,193 for the current period, compared to $4,226,415 in the
comparable period of the prior year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $46,035,717 as of September 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 six months ended September
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 had been
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. During the six months ended September 30, 2003, we
repurchased an additional 233,300 shares at a cost of $818,693. 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. 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
18
funded debt to "Earnings Before Interest, Taxes, and Depreciation (EBITDA)", as
defined in the Loan Agreement.
At September 30, 2003, based on the borrowing base at that date, the credit line
amounted to $17,773,000 and, accordingly, we had approximately $5,270,000
available under the credit line excluding the effect of restricted cash of
$4,591,000.
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.
As of September 30, 2003, we are not in compliance with the financial covenant
relating to minimum EBITDA for the trailing twelve-month period and we requested
a waiver from GMACCC. On November 7, 2003, the waiver was granted by GMACCC.
Management believes that it will be able to comply with the loan covenants and
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 September 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 named Parlux Fragrances, Inc. as a defendant along with all of our
Board of Directors, except Mr. David Stone. The Complaint sought to enjoin the
defendants from consummating a Tender Offer Proposal from Quality King
Distributors, Inc. and Ilia Lekach, our Chairman and Chief Executive Officer, to
acquire the Company's common stock, and sought to have the acquisition rescinded
if it was consummated. In addition, the Complaint sought unspecified damages,
plus the fees, costs and disbursements of Ms. Altman's attorneys.
19
The Company and the named defendants engaged Delaware counsel to vigorously
defend the action, and the action was voluntarily dismissed on September 11,
2003.
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 7, 2003, 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 95% of the votes cast.
Ratification of Deloitte & Touche LLP, as Independent Auditors
- --------------------------------------------------------------
Over 99% of the votes were cast in favor of the proposal.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. Description
----------- -----------
10.66 License Agreement, dated as of November 1, 2003, between the
Company and GUESS?, Inc. and GUESS? IP Holder L.P.
("Portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Securities
and Exchange Commission.")
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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.
(b) The following reports on Form 8-K have been issued during the period:
o Report dated August 13, 2003, relating to the Company's earnings
release for the quarter ended June 30, 2003.
o Report dated September 9, 2003, relating to the distribution agreement
with Five Star Fragrance Company, Inc.
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
Date: November 14, 2003