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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
( Mark One )
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2003
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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.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2562955
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(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 954-316-9008
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Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 16, 2004, 7,982,770 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages 9 to 22
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.
Under the GUESS? Agreement, we must pay a fixed royalty percentage and spend
minimum amounts for advertising based on sales volume. We anticipate that the
first GUESS? fragrance will be marketed during Fall 2005.
No other material change in our contractual obligations, outside the ordinary
course of business, has occurred during the periods covered by this report.
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.
2
Results of Operations
- ---------------------
Comparison of the three-month period ended December 31, 2003 with the
three-month period ended December 31, 2002.
During the quarter ended December 31, 2003, net sales increased 30% to
$25,763,661 as compared to $19,780,626 for the same period for the prior year.
The increase is mainly attributable to (1) the launch of "Perry m", "Perry f",
and "360 Red" for men and women under the Perry Ellis line of fragrances, which
resulted in an increase of $5,097,625 in total Perry Ellis brand gross sales
from $17,281,535 to $22,379,160, and, (2) the launch of "Ocean Pacific" for men
and "OP Blend" for men and women, which resulted in an increase in total Ocean
Pacific brand gross sales of $1,630,374. These increases were offset by the
reduction in gross sales of Animale and Fred Hayman Beverly Hills ("FHBH") brand
products of $826,769 and $549,742, respectively (which brands were sold and
sublicensed during January and March 2003, respectively), and a $244,942
reduction in gross sales of Jockey brand products which were launched during the
prior year period. The Jockey license agreement expires on December 31, 2004,
and we do not anticipate significant sales of such products during the remaining
term.
Net sales to unrelated customers decreased 18% to $12,009,892, compared to
$14,734,673 for the same period in the prior year mainly, as a result of the
reductions discussed above. Additionally, the prior year period included the
launch of "Perry Man" and "Perry Woman". Sales to related parties increased 173%
to $13,753,769 compared to $5,045,953 for the same period in the prior year, as
brands, which were originally launched in the U.S. department store market over
the last few years 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. We anticipate that this trend in
distribution channels will continue until the launch of a new Perry Ellis brand
fragrance product, and the launch of the initial GUESS? fragrance product, both
of which are anticipated during the Fall and Winter 2005 season.
Our overall cost of goods sold remained relatively stable as a percentage of net
sales at 50% for the quarter ended December 31, 2003 compared to 49% for the
prior year comparable period. Cost of goods sold on sales to unrelated customers
and related parties approximated 47% and 53%, respectively, for the current
period, as compared to 48% and 51%, respectively, for the same period in the
prior year. The increase in cost of goods sold to related customers for the
current period was due to the sale of certain close-out merchandise to related
parties at lower margins.
Operating expenses increased by 3% compared to the same period in the prior year
from $9,754,360 to $10,008,656, decreasing as a percentage of net sales from 49%
to 39%. However, individual components of our operating expenses experienced
more significant changes. Advertising and promotional expenses decreased 11% to
$5,030,498 compared to $5,641,440 in the prior year period, decreasing as a
percentage of net sales from 29% to 20%. The prior year period included
promotional costs for "Perry Man" and "Perry Woman", which launched during the
Fall of 2002. No such major launches occurred during the current year period.
Selling and distribution costs increased 8% to $1,840,649 in the current period
compared to $1,705,630 for the same period of the prior year, decreasing as a
percentage of net sales from 9% to 7%. The increase was mainly attributable to a
decrease in inventory overhead absorption of approximately $90,000 during the
current year period resulting from a reduction in the overhead capitalization
rate coupled with a reduction in total on-hand inventory. General and
administrative expenses increased by 23% compared to the prior year period from
$1,226,365 to $1,507,916, remaining at a relatively constant 6% of net sales.
The increase was mainly attributable to increases in employee salaries and a
decrease in overhead absorption of approximately $125,000, as discussed above.
3
Depreciation and amortization decreased by 11% during the current period from
$343,561 to $307,167. Royalties increased by 58% in the current period,
increasing as a percentage of net sales from 4% to 5% as a result of minimum
royalty requirements on Jockey brand products.
As a result of the above factors, operating income increased to $2,800,630 or
11% of net sales for the current period, compared to $349,887 or 2% of net sales
for the same period in the prior year. Net interest expense decreased to $79,266
in the current period as compared to $177,598 for the same period in the prior
year. The decrease reflects a lower average balance outstanding under our line
of credit as compared to the prior year.
Income before taxes for the current period was $2,721,364 compared to $172,289
in the same period for the prior year. Giving effect to the tax provision, we
earned net income of $1,687,246 or 7% of net sales for the current period
compared to $106,820 or 1% of net sales in the comparable period of the prior
year.
Comparison of the nine-month period ended December 31, 2003 with the nine-month
period ended December 31, 2002.
During the nine months ended December 31, 2003, net sales increased 6% to
$60,957,182 as compared to $57,613,990 for the same period for the prior year.
The increase is mainly attributable to (1) the launch of "Perry m", Perry f",
and "360 Red" for men and women under the Perry Ellis line of fragrances, which
resulted in an increase of $6,000,772 in total Perry Ellis brand gross sales
from $45,238,610 to $51,239,382, and, (2) the launch of Ocean Pacific for men
and "OP Blend" for men and women, which resulted in an increase in total Ocean
Pacific brand gross sales of $2,630,127. These increases were offset by the
reduction in gross sales of Animale and FHBH brand products of $3,592,295 and
$2,192,242, respectively (which brands were sold and sublicensed during January
and March 2003, respectively) and a $1,683,348 reduction in gross sales of
Jockey brand products which were launched during the prior year period. The
Jockey license agreement expires on December 31, 2004, and we do not anticipate
significant sales of such products during the remaining term.
Net sales to unrelated customers decreased 25% to $30,243,016, compared to
$40,418,550 for the same period in the prior year, as a result of the reductions
discussed above. Additionally, the prior year period included the launch of
"Perry Man" and "Perry Woman". Sales to related parties increased 79% to
$30,714,166 compared to $17,195,440 for the same period in the prior year, as
brands, which were originally launched in the U.S. department store market over
the last few years 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. We anticipate that this trend in
distribution channels will continue until the launch of a new Perry Ellis brand
fragrance product, and the launch of the initial GUESS? fragrance product, both
of which are anticipated during the Fall and Winter 2005 season.
Our overall cost of goods sold remained relatively stable as a percentage of net
sales, increasing from 50% for the nine months ended December 31, 2002 to 51%
for the current comparable period. Cost of goods sold on sales to unrelated
customers and related parties approximated 50% and 53%, respectively, for the
current period, as compared to 48% and 57%, 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 by unrelated parties 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 current year period also
includes the sale of a higher percentage of basic stock items to related
parties, which result in higher margins.
Operating expenses decreased by 5% compared to the same period in the prior year
from $24,465,562 to $23,313,194, decreasing as a percentage of net sales from
42% to 38%. However, individual components of our operating expenses experienced
4
more significant changes. Advertising and promotional expenses decreased 15% to
$10,199,093 compared to $11,942,627 in the prior year period, decreasing as a
percentage of net sales from 21% to 17%. The prior year period included
promotional costs for "Perry Man" and "Perry Woman", which launched during the
Fall of 2002. No such major launches occurred during the current year period.
Selling and distribution costs decreased 4% to $4,928,623 in the current period
compared to $5,127,565 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. These reductions will not continue to effect
future periods. 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. This distributor is owned and operated by relatives
of our Chairman and Chief Executive Officer. General and administrative expenses
increased by 15% compared to the prior year period from $3,844,095 to
$4,417,316, remaining at a relatively constant 7% of net sales. The increase is
mainly attributable to increases in employee salaries, health insurance
premiums, legal fees, and non-recurring charitable contributions, offset by a
reduction in bad debt expense. Depreciation and amortization decreased by 7%
during the current period from $1,036,880 to $968,378. Royalties increased by
11% in the current period, increasing as a percentage of net sales from 4% to 5%
as a result of minimum royalty requirements on Jockey brand products.
As a result of the above factors, operating income increased to $6,334,086 or
10% of net sales for the current period, compared to $4,059,446 or 7% of net
sales for the same period in the prior year. Net interest expense decreased to
$194,668 in the current period as compared to $612,441 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 $6,139,418 compared to $6,989,088
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 $3,806,439 for the current period, compared to $4,333,235 in the
comparable period of the prior year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $48,249,337 as of December 31, 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,
offset by the purchase of treasury stock, as discussed below.
Consistent with the prior year comparable period, our operations for the nine
months ended December 31, 2003, resulted in positive cash from operations, which
was used to pay down debt, purchase treasury stock, as well as for other general
corporate purposes.
On February 4, 2004, we filed with the Securities and Exchange Commission a
registration statement on Form S-3, in order to register 1,306,000 shares of our
common stock on behalf of certain selling shareholders. All of the shares are
shares issuable, or that were already issued, upon the exercise of warrants held
by the selling shareholders. Although we will not receive any of the proceeds
from any subsequent resale of the shares, we would receive approximately
$2,800,000 if all of the warrants are exercised.
5
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 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 nine months ended December 31, 2003, we repurchased an
additional 560,850 shares at a cost of $1,982,183. The accompanying condensed
consolidated balance sheets also reflect 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 previous $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 funded debt to "Earnings Before
Interest, Taxes, and Depreciation (EBITDA)", as defined in the Loan Agreement.
At December 31, 2003, based on the borrowing base at that date, the credit line
amounted to $16,731,000 and, accordingly, we had approximately $6,588,000
available under the credit line excluding the effect of restricted cash of
$7,434,000.
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 were 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. As
of December 31, 2003, we were in compliance with the loan covenants.
Management believes that funds from operations and our existing financing will
be sufficient to meet our operating needs for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended December 31, 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-15(e) and 15d-15(e) under the
6
Securities Exchange Act of 1934) as of the filing date of this Quarterly Report
on Form 10-Q (the "Evaluation Date"). They have concluded that, as of such date,
the Company's disclosure controls and procedures were adequate and effective.
There were no changes in the Company's internal controls or procedures or in
other factors during the fiscal period covered by this report that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 8, 2003, we were served with a complaint (the" Complaint") filed in
the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade County, which
was amended on January 26, 2004. The Complaint is a derivative action, in which
the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham,
Partners I, LP, purport to be suing for the benefit of the Company itself and
all of its public shareholders. The Complaint names Parlux Fragrances, Inc. as
the nominal defendant and all of the current members of the Board of Directors
as the defendants. It seeks damages allegedly arising out of breaches of
fiduciary duties in connection with transactions involving the Company and Mr.
Ilia Lekach, its Chief Executive Officer or companies in which he has an
ownership interest.
The Complaint seeks to enjoin the Company from continuing to enter into such
transactions, seeks payment of costs and fees to Plaintiffs' counsel and other
unstated relief.
Based on its preliminary investigation of allegations asserted by the
Plaintiffs, the Company believes that the claims in the Complaint are without
merit. The Company and the Board members have engaged experienced Florida
securities counsel and intend to defend the action vigorously. We expect to file
our initial response at the end of February.
On June 4, 2003, we were served with a shareholder's class action complaint (the
"June 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 June Complaint named Parlux Fragrances, Inc. as a defendant along
with all of the Company's Board of Directors, except Mr. David Stone. The June
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
June 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.
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.
7
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 votes as follows:
Nominee For Against Withheld Abstain Broker Non-Votes
------- --- ------- -------- ------- ----------------
Ilia Lekach 7,432,515 401,862 -0- -0- -0-
Frank A.Buttacavoli 7,437,355 397,022 -0- -0- -0-
Frederick Purches 7,436,355 398,022 -0- -0- -0-
Glenn Gopman 7,744,722 89,655 -0- -0- -0-
Esther Egozi Choukroun 7,745,322 89,055 -0- -0- -0-
David Stone 7,741,822 92,555 -0- -0- -0-
Jaya Kader Zebede 7,743,202 91,175 -0- -0- -0-
Ratification of Deloitte & Touche LLP, as Independent Auditors
- --------------------------------------------------------------
Votes were cast on the proposal as follows:
For Against Withheld Abstain Broker Non-Votes
--- ------- -------- ------- ----------------
7,825,922 4,425 -0- 4,030 -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit # Description
--------- -----------
31.1 Certification of Chief Executive Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to ss.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 November 13, 2003, relating to the Company's
earnings release for the quarter ended September 30, 2003.
8
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
ASSETS 2003 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 683,728 $ 137,023
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$2,866,000 and $1,734,000, respectively 4,073,994 3,751,570
Trade receivable from related parties 14,586,179 11,933,952
Note receivable, related party 500,000 --
Notes receivable, current portion 2,374,459 2,182,135
Note receivable, officer -- 742,884
Inventories 29,874,394 26,281,297
Prepaid expenses and other current assets, net 5,651,345 7,007,410
Investment in affiliate 5,728,203 1,361,164
------------ ------------
TOTAL CURRENT ASSETS 63,472,302 53,397,435
Equipment and leasehold improvements, net 1,278,810 1,668,284
Trademarks, licenses and other intangibles, net 8,017,952 8,231,145
Notes receivable, less current portion -- 1,524,204
Other 69,645 373,666
------------ ------------
TOTAL ASSETS $ 72,838,709 $ 65,194,734
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ 3,135,266 $ 4,858,378
Accounts payable 9,883,205 7,420,405
Income taxes payable 1,159,913 279,610
Accrued expenses 1,044,581 1,182,471
------------ ------------
TOTAL CURRENT LIABILITIES 15,222,965 13,740,864
Borrowings, less current portion -- 102,096
Deferred tax liability 1,522,547 1,058,479
------------ ------------
TOTAL LIABILITIES 16,745,512 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 December 31, 2003 and
March 31, 2003 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
18,083,840 and 18,046,840 shares issued at December 31,
2003 and March 31, 2003, respectively 180,838 180,468
Additional paid-in capital 74,156,183 74,084,335
Retained earnings 7,077,818 3,271,379
Accumulated other comprehensive income (loss) 3,247,129 (656,299)
------------ ------------
84,661,968 76,879,883
Less - 10,054,681 and 9,493,831 shares of common stock in
treasury, at cost, at December 31, 2003 and March 31, 2003,
respectively (28,568,771) (26,586,588)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 56,093,197 50,293,295
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,838,709 $ 65,194,734
============ ============
See notes to condensed consolidated financial statements.
9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Unrelated customers $ 12,009,892 $ 14,734,673 $ 30,243,016 $ 40,418,550
Related parties 13,753,769 5,045,953 30,714,166 17,195,440
------------ ------------ ------------ ------------
25,763,661 19,780,626 60,957,182 57,613,990
Cost of goods sold, including $1,082,352 and
$2,512,939 of promotional items for the
three and nine months ended December 31,
2003, respectively ($1,219,060 and
$2,892,509, respectively, in 2002) 12,954,375 9,676,379 31,309,902 29,088,982
------------ ------------ ------------ ------------
Gross margin 12,809,286 10,104,247 29,647,280 28,525,008
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 5,030,498 5,641,440 10,199,093 11,942,627
Selling and distribution 1,840,649 1,705,630 4,928,623 5,127,565
General and administrative 1,507,916 1,226,365 4,417,316 3,844,095
Depreciation and amortization 307,167 343,561 968,378 1,036,880
Royalties 1,322,426 837,364 2,799,784 2,514,395
------------ ------------ ------------ ------------
Total operating expenses 10,008,656 9,754,360 23,313,194 24,465,562
------------ ------------ ------------ ------------
Operating income 2,800,630 349,887 6,334,086 4,059,446
Interest income 55,628 55,363 168,752 87,621
Interest expense and bank charges (134,894) (232,961) (363,420) (700,062)
Litigation settlement, net of expenses -- -- -- 3,542,083
------------ ------------ ------------ ------------
Income before income taxes 2,721,364 172,289 6,139,418 6,989,088
Income tax provision (1,034,118) (65,469) (2,332,979) (2,655,853)
------------ ------------ ------------ ------------
Net income $ 1,687,246 $ 106,820 $ 3,806,439 $ 4,333,235
============ ============ ============ ============
Income per common share:
Basic $ 0.21 $ 0.01 $ 0.45 $ 0.43
============ ============ ============ ============
Diluted $ 0.18 $ 0.01 $ 0.40 $ 0.43
============ ============ ============ ============
See notes to condensed consolidated financial statements.
10
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 2003
(Unaudited)
COMMON STOCK ACCUMULATED
-------------------------- ADDITIONAL OTHER
NUMBER PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
ISSUED VALUE CAPITAL EARNINGS (LOSS) INCOME (1) STOCK TOTAL
------------ ------------ ----------- ------------ ----------------- ------------ -----------
BALANCE at March 31, 2003 18,046,840 $ 180,468 $74,084,335 $ 3,271,379 $ (656,299) $(26,586,588) $50,293,295
-----------
Comprehensive income:
Net income -- -- -- 3,806,439 -- -- 3,806,439
Unrealized holding gain on
investment in affiliate -- -- -- -- 3,902,971 -- 3,902,971
Foreign currency translation
adjustment -- -- -- -- 457 -- 457
-----------
Total comprehensive income 7,709,867
-----------
Issuance of common stock
upon exercise of warrants 30,000 300 61,575 -- -- -- 61,875
Issuance of common stock
upon exercise of
employee stock options 7,000 70 10,273 -- -- -- 10,343
Purchase of 560,850 shares
of treasury stock, at cost -- -- -- -- -- (1,982,183) (1,982,183)
------------ ------------ ----------- ------------ ------------ ------------ -----------
BALANCE at December 31, 2003 18,083,840 $ 180,838 $74,156,183 $ 7,077,818 $ 3,247,129 $(28,568,771) $56,093,197
============ ============ =========== ============ ============ ============ ===========
(1) Accumulated other comprehensive (loss) income includes unrealized holding
gains and losses on investment in affiliate and foreign currency
translation adjustments.
See notes to condensed consolidated financial statements.
11
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended December 31,
------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 3,806,439 $ 4,333,235
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 968,378 1,036,880
Provision for doubtful accounts 90,000 180,000
Provision for prepaid promotional supplies and inventory obsolescence 1,160,000 740,000
Changes in assets and liabilities:
Increase in trade receivables - customers (412,424) (841,696)
(Increase) decrease in note and trade receivables - related parties (3,152,227) 693,366
Decrease in notes receivable 1,331,880 --
Increase in inventories (4,463,097) (1,945,971)
Decrease (increase) in prepaid expenses and other current assets 1,066,065 (432,025)
Decrease (increase) in other non-current assets 304,021 (2,136)
Increase (decrease) in accounts payable 2,462,800 (1,748,087)
Increase in accrued expenses and income taxes payable 742,413 2,896,871
----------- -----------
Total adjustments 97,809 577,202
----------- -----------
Net cash provided by operating activities 3,904,248 4,910,437
----------- -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (365,711) (559,642)
Cash received from Bal a Versailles brand sale -- 200,000
----------- -----------
Net cash used in investing activities (365,711) (359,642)
----------- -----------
Cash flows from financing activities:
Payments - note payable to GMAC Commercial Credit, net (1,206,810) (3,955,394)
Payments - note payable to Fred Hayman Beverly Hills (590,399) (549,230)
Payments - notes payable to Bankers Capital Leasing (27,999) (130,493)
Net decrease (increase) in note receivable from officer 742,884 (8,359)
Purchases of treasury stock (1,982,183) --
Proceeds from issuance of common stock, net 72,218 64,230
----------- -----------
Net cash used in financing activities (2,992,289) (4,579,246)
----------- -----------
Effect of exchange rate changes on cash 457 943
----------- -----------
Net increase (decrease) in cash and cash equivalents 546,705 (27,508)
Cash and cash equivalents, beginning of period 137,023 164,793
----------- -----------
Cash and cash equivalents, end of period $ 683,728 $ 137,285
=========== ===========
See notes to condensed consolidated financial statements.
12
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.
13
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:
For the three months For the nine months
ended December 31, ended December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported $ 1,687,246 $ 106,820 $ 3,806,439 $ 4,333,235
Proforma $ 1,589,596 $ 88,359 $ 3,585,032 $ 4,305,380
Basic net income per share:
As reported $ 0.21 $ 0.01 $ 0.45 $ 0.43
Proforma $ 0.19 $ 0.01 $ 0.43 $ 0.43
Diluted net income per share:
As reported $ 0.18 $ 0.01 $ 0.40 $ 0.43
Proforma $ 0.17 $ 0.01 $ 0.38 $ 0.42
During October 2003, the Company granted to its independent directors, a total
of 40,000 warrants to purchase the Company's common stock at a price of $3.60
per share, the closing price on the date of grant. The warrants are immediately
exercisable into restricted stock and expire ten years from the grant date.
These grants have been included in the above calculation and are a part of the
compensation for independent directors.
C. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
December 31, 2003 March 31, 2003
----------------- --------------
Finished products $17,857,609 $15,873,033
Components and packaging material 8,958,027 7,642,649
Raw material 3,058,757 2,765,615
----------- -----------
$29,874,394 $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
$2,081,000 and $2,255,000 at December 31, 2003 and March 31, 2003, respectively.
D. TRADEMARKS, LICENSES AND OTHER INTANGIBLES
Trademarks, licenses and other intangibles are attributable to the following
brands:
December 31, 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 (3,105,480) (2,892,287)
----------- -----------
$ 8,017,952 $ 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
14
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 stored and controlled certain component and raw material inventory until
the balance of the note was reduced below $500,000. As of December 31, 2003,
notes receivable in the accompanying condensed consolidated balance sheet
includes $334,787 ($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, the 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 December 31, 2003, notes receivable in
the accompanying condensed consolidated balance sheet includes $2,039,672 and $0
($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 its 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:
December 31, 2003 March 31, 2003
----------------- --------------
Revolving credit facility payable to GMAC Commercial Credit
LLC, interest at LIBOR plus 3.75% or prime (4.0% at December
31, 2003) plus 1% at the Company's option, net of restricted
cash of $7,434,643 and $1,477,841 at December 31, 2003 and
March 31, 2003, respectively $ 2,760,320 $ 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 374,946 965,345
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
----------- -----------
3,135,266 4,960,474
Less: long-term borrowings -- (102,096)
----------- -----------
Borrowings, current portion $ 3,135,266 $ 4,858,378
=========== ===========
15
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 December 31, 2003, based on the borrowing base at that date, the credit line
amounted to $16,731,000 and, accordingly, the Company had approximately
$6,588,000 available under the credit line excluding the effect of restricted
cash of $7,434,000.
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. As of December 31, 2003, the Company was in
compliance with its loan covenants.
Management believes that 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.
16
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.
The Company had net sales of $24,466,509 and $10,787,906 during the nine-month
periods ended December 31, 2003 and December 31, 2002 ($10,758,138 and
$2,746,127 during the three months ended December 31, 2003 and December 31,
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 $13,464,885 and $500,000, respectively, at December 31, 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 suffered some deterioration which was explained by Perfumania's
management in its public reports as resulting from, among other factors, general
economic and industry conditions. In public press releases for the last
three-month period, Perfumania indicated that it had positive comparable store
sales for the months of November 2003 through January 2004 of 6%, 7.9% and
17.8%, respectively. 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, as in the past, recently 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. In
addition, on February 2, 2004, ECMV reported that Mr. Ilia Lekach had entered
into an agreement with the second largest shareholder group of ECMV, to divest
of all of his shares in ECMV. Management continues to evaluate its credit risk
and assess the collectibility of the Perfumania receivables. Based on
management's evaluation, no allowances have been recorded as of December 31,
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 December 31,
2003, the fair market value of the investment in ECMV was $5,728,203 ($15.15 per
share after the reverse split).
17
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 at the rate of prime plus 1%. As of December 31,
2003, all payments have been received as scheduled.
During the nine months ended December 31, 2003 and 2002, the Company had net
sales of $6,247,657 and $6,407,534 ($2,995,631 and $2,299,826 during the
three-months ended December 31, 2003 and 2002), respectively, to fragrance
distributors owned/operated by individuals related to the Company's
Chairman/CEO, including a recent distributorship for the Mexican market. These
sales are included as related party sales in the accompanying condensed
consolidated statements of income. As of December 31, 2003 and March 31, 2003,
trade receivables from related parties include $1,121,294 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 December 31,
-------------------------------
2003 2002
----------- -----------
Net income $ 1,687,246 $ 106,820
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,193,026 9,993,911
=========== ===========
Basic net income per common share $ 0.21 $ 0.01
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,193,026 9,993,911
Effect of dilutive securities:
Stock options and warrants 1,274,583 267,915
----------- -----------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 9,467,609 10,261,826
=========== ===========
Diluted net income per common share $ 0.18 $ 0.01
=========== ===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 36,000 1,100,886
=========== ===========
Exercise Price $4.00-$8.00 $2.44-$8.00
=========== ===========
Nine Months Ended December 31,
------------------------------
2003 2002
----------- -----------
Net income $ 3,806,439 $ 4,333,235
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,405,689 9,982,478
=========== ===========
Basic net income per common share $ 0.45 $ 0.43
=========== ===========
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,405,689 9,982,478
Effect of dilutive securities:
Stock options and warrants 1,091,550 185,624
----------- -----------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 9,497,239 10,168,102
=========== ===========
Diluted net income per common share $ 0.40 $ 0.43
=========== ===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 76,000 1,252,025
=========== ===========
Exercise Price $3.60-$8.00 $2.25-$8.00
=========== ===========
18
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:
Nine-months ended December 31,
------------------------------
Cash paid for: 2003 2002
---------- ----------
Interest $ 284,827 $ 701,151
Income taxes $1,452,676 $ 36,644
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Nine months ended December 31, 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 $3,902,971 on the investment in
affiliate.
Nine months ended December 31, 2002:
- The conversion of trade accounts receivable from Perfumania in the
amount of $3,000,000.
- An unrealized holding gain of $517,999 on the investment in affiliate.
I. INCOME TAXES
The provision for income taxes for the periods ended December 31, 2003 and 2002
reflects an effective tax rate of approximately 38%.
J. LICENSE AND DISTRIBUTION AGREEMENTS
As of December 31, 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.
19
On September 1, 2003, the Company entered into an agreement with Five Star
Fragrances Company, Inc., to market and distribute Royal Copenhagen fragrance
products to the U.S. department store market. The term of the agreement is for
three years, with an option to renew for one additional year. There are no
royalty sales minimums or advertising commitments under this agreement.
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 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 Fall 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.
The FASB issued Interpretation 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" in January 2003, and a revised interpretation of FIN 46 ("FIN
46-R"). FIN 46 requires certain variable interest entities ("VIEs") 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 sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all arrangements entered into after January
31, 2003. The Company has not invested in any entities that it believes are
20
variable interest entities for which it is the primary beneficiary. The adoption
of FIN-46 had no impact, and the Company does not expect the adoption of FIN
46-R to have an impact, on its financial position, results of operations or cash
flows.
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 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 December 8, 2003, the Company was served with a complaint (the" Complaint")
filed in the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade
County, which was amended on January 26, 2004. The Complaint is a derivative
action, in which the nominal plaintiffs, the Macatee Family Limited Partnership
and Chatham, Partners I, LP, purport to be suing for the benefit of the Company
itself and all of its public shareholders. The Complaint names Parlux
Fragrances, Inc. as the nominal defendant and all of the current members of the
Board of Directors as the defendants. It seeks damages allegedly arising out of
breaches of fiduciary duties in connection with transactions involving the
Company and Mr. Ilia Lekach, its Chief Executive Officer or companies in which
he has an ownership interest.
The Complaint seeks to enjoin the Company from continuing to enter into such
transactions, seeks payment of costs and fees to Plaintiffs' counsel and other
unstated relief.
Based on its preliminary investigation of allegations asserted by the
Plaintiffs, the Company believes that the claims in the Complaint are without
merit. The Company and the Board members have engaged experienced Florida
securities counsel and intend to defend the action vigorously. The Company
expects to file its initial response at the end of February.
On June 4, 2003, the Company was served with a shareholder's class action
complaint (the "June 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 June Complaint named Parlux Fragrances, Inc. as
a defendant along with all of the Company's Board of Directors, except Mr. David
Stone. The June 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 June 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
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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 period ended December 31, 2002, net of
certain expenses as follows:
Nine Months Ended
December 31, 2002
-----------------
Proceeds from settlement $ 4,000,564
Less expenses directly related to the claim and incurred
during the period April 1, 2002 through December 31, 2002:
Legal fees 326,327
Refurbishing costs 132,154
----------
Net litigation settlement recorded $3,542,083
==========
Refurbishing expenses and legal fees incurred prior to April 1, 2002, have been
expensed directly to cost of goods sold and general and administrative expenses,
respectively.
The above expenses do not include other general and administrative costs such as
employee travel in connection with the lawsuit discovery process.
There are no other proceedings pending against the Company, which, if determined
adversely, would have a material effect on the Company's 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: February 17, 2004
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