UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For Fiscal Year Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 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
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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Title of Class
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO |X|
Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at June 25, 2004
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Common Stock, $ .01 par value 9,059,420
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $16,901,000 based on a
closing price of $3.38 for the Common Stock as of September 30, 2003 as reported
on the National Association of Securities Dealers Automated Quotation System on
such date. For purposes of the foregoing calculation, only the Directors and 5%
beneficial owners of the registrant are deemed to be affiliates.
Documents incorporated by Reference: The information required by Part III (Items
10, 11, 12 & 13) is incorporated by reference from the registrant's definitive
proxy statement (to be filed pursuant to Regulation 14A).
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Stock and Related Security
Holder Matters 13
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7.A Quantitative and Qualitative Disclosures About Market Risks 26
8. Financial Statements and Supplementary Data 26
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 26
9.A Controls and Procedures 27
PART III
10. Directors and Executive Officers of the Registrant 28
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial
Owners and Management 28
13. Certain Relationships and Related Transactions 28
14. Principal Accountant Fees and Services 28
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
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FORWARD-LOOKING STATEMENTS
Certain statements within this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward-looking statements are based on current expectations
regarding important risk factors. Investors are cautioned that forward-looking
statements involve such risks and uncertainties, which may affect our business
and prospects, including economic, competitive, governmental, technological and
other factors discussed in this Annual Report and in our filings with the
Securities and Exchange Commission. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved.
ITEM 1. BUSINESS
Parlux Fragrances, Inc. (the "Company"), was incorporated in Delaware
in 1984 and is engaged in the creation, design, manufacture, distribution and
sale of prestige fragrances and beauty related products marketed primarily
through specialty stores, national department stores and perfumeries on a
worldwide basis. The fragrance market is generally divided into a prestige
segment (distributed primarily through department and specialty stores) and a
mass market segment (primarily smaller perfumeries and pharmacies). Our products
are positioned primarily in the prestige segment. Additionally, we distribute
certain brands through Perfumania Inc. ("Perfumania"), a wholly-owned subsidiary
of E Com Ventures, Inc. ("ECMV"), a company in which our Chairman and Chief
Executive Officer had an ownership interest and held identical management
positions until February 2004. We currently maintain an approximate 13%
ownership interest in ECMV. Perfumania is a specialty retailer of fragrances in
the United States and Puerto Rico.
During the fiscal year ended March 31, 2004, we engaged in the
manufacture (through sub-contractors), distribution and sale of PERRY ELLIS,
OCEAN PACIFIC, FRED HAYMAN BEVERLY HILLS ("FHBH") "273 Indigo", and JOCKEY
fragrances and grooming items on an exclusive basis as a licensee. Additionally,
we have rights to distribute ROYAL COPENHAGEN fragrances in the U.S. department
store market. See "LICENSING AGREEMENTS" on pages 8-10 for further discussion.
Additionally, we manufactured, distributed and sold our own brand, CHALEUR
D'ANIMALE ("Animale") fragrance, on a worldwide basis. See page 9 and 11
respectively, for further discussions of transactions relating to the FHBH and
Animale brands.
Recent Developments
On May 4, 2004, we entered into a letter of intent with Ms. Paris
Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and
related products, on an exclusive basis, under her name. Effective June 1, 2004,
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we entered into a definitive license agreement with Paris Hilton Entertainment,
Inc. ("PHEI"), the initial term of which expires on June 30, 2009. The agreement
is renewable for an additional five-year period.
Under the PHEI Agreement, we must pay a fixed royalty percentage and
spend minimum amounts for advertising based on sales volume. We anticipate that
the first PH fragrance will be launched prior to March 31, 2005.
On February 4, 2004, we filed with the Securities and Exchange
Commission ("SEC") a registration statement on Form S-3 (file number 333-112472)
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. As of June 25, 2004, 1,096,000 of these warrants had been exercised
and we received proceeds of $2,126,499 (1,048,000 and $1,992,624 as of March 31,
2004). The registration statement was declared effective by the SEC on April 26,
2004.
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 on a worldwide basis. 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 launched during July 2005.
No other material changes in our contractual obligations, outside the
ordinary course of business, has occurred during the period covered by this
report.
THE PRODUCTS
Our principal products are fragrances, which are distributed in a
variety of sizes and packaging. In addition, beauty-related products such as
soaps, shower gels, deodorants, body lotions, creams and dusting powders
complement the fragrance line. Our basic fragrance products generally retail at
prices ranging from $20 to $65 per item.
We design and create fragrances using our own staff and independent
contractors. We also supervise the design of our packaging by independent
contractors. During fiscal 2004, we completed the design process for PERRY m for
men and PERRY f for women, as well as 360 RED, for both men and women, which
launched in Fall 2003, (new brands under the PERRY ELLIS line), and OCEAN
PACIFIC for men and women, which launched in Spring 2004.
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During the last three fiscal years, the following brands have accounted
for 10% or more of our gross sales in a given year:
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
PERRY ELLIS 81% 75% 67%
OCEAN PACIFIC 13% 10% 12%
ANIMALE 2% 7% 13%
MARKETING AND SALES
In the United States, we have our own sales and marketing staff, and
also utilize independent commission sales representatives for mail order
distribution and sales to the U.S. military. We sell directly to retailers,
primarily national and regional department stores, which we believe will
maintain the image of our products as prestige fragrances. Our products are sold
in over 2,000 retail outlets in the United States. Additionally, we sell some of
our products to Perfumania, which is a specialty retailer of fragrances with
over 230 retail outlets principally located in manufacturers' outlet malls and
regional malls (see "CUSTOMERS" section for further discussion).
Marketing and sales activities outside the United States are conducted
through distribution agreements with independent distributors, whose activities
are administered by our international sales staff. We presently market our
fragrances through distributors in Canada, Europe, the Middle East, the Far
East, Latin America, the Caribbean and Russia, covering over 70 countries. Sales
to unrelated international customers amounted to 75%, 76% and 67% of our total
net sales to unrelated customers during the fiscal years ended March 31, 2004,
2003 and 2002, respectively.
We advertise directly, and through a cooperative advertising program in
association with major retailers, in fashion media on a national basis and
through retailers' statement enclosures and catalogues. We are required to spend
certain minimum amounts for advertising under certain licensing agreements. See
"Licensing Agreements" and Note 8 (B) to the Consolidated Financial Statements.
RAW MATERIALS
Raw materials and components ("raw materials") for our products are
available from sources in the United States and Europe. We source the raw
materials directly from independent suppliers, which are delivered directly to
third party contract manufacturers who produce and package the finished
products. As is customary in our industry, we do not have long-term agreements
with our contract manufacturers. We believe we have good relationships with
these manufacturers and that there are alternative sources available should one
or more of these manufacturers be unable to produce at competitive prices.
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To date, we have had little difficulty obtaining raw materials at
competitive prices. There is no reason to believe that this situation will
change in the near future, but there can be no assurance this will continue.
SEASONALITY
Typical of the fragrance industry, we have our highest sales during the
Mother's and Father's Day periods and the calendar yearend holiday season. Lower
than projected sales during these periods could have a material adverse effect
on our operating results.
INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that
market fragrances to department stores to provide the department stores with
rights to return merchandise. Our products are subject to such return rights. It
is our practice to establish reserves and provide allowances for product returns
at the time of sale. We believe that such reserves and allowances are adequate
based on past experience; however, no assurance can be made that reserves and
allowances will continue to be adequate. Consequently, if product returns are in
excess of the reserves and allowances provided, net sales will be reduced when
such fact becomes known.
CUSTOMERS
We concentrate our sales efforts in the United States in a number of
regional department store retailers including, among others, Burdines, Carson's,
Elder Beerman, Famous Barr, Foley's, Hecht's, J.C. Penney, J.L. Hudson, Lord &
Taylor, Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. We also
sell directly to perfumery and cosmetic retailers, including Perfumania and
Ulta. Retail distribution has been targeted by brand to maximize potential and
minimize overlap between each of these distribution channels.
Our international sales efforts are carried out through distributors in
over 70 countries, the main focus of which is in Latin America, Canada, the
Middle East and the Caribbean. These distributors sell our products to the
department stores as well as to numerous perfumeries in the local markets.
During the fiscal years ended March 31, 2004 and 2003, we had net sales
of $31,964,407 and $12,823,696, respectively, to Perfumania, which represented
40% and 18%, respectively, of our net sales for the periods. Perfumania, a
related party, is our largest customer and transactions with them are closely
monitored by our Audit Committee and Board of Directors to ensure that we deal
with Perfumania at arms length. Perfumania offers us the opportunity to sell our
products in over 230 retail outlets and our terms with Perfumania take into
consideration our over 15 year relationship. Pricing and terms with Perfumania
reflect (a) the volume of Perfumania's purchases, (b) a policy of no returns
from Perfumania, (c) minimal spending for advertising and promotion, (d) free
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exposure of our products provided in Perfumania's store windows and (e) minimal
distribution costs to fulfill Perfumania orders.
While our invoice terms to Perfumania appear as net ninety (90) days,
for over ten years, the Board of Directors has granted longer payment terms
taking into consideration the factors discussed above. Our Board evaluates the
credit risk involved and imposes a specific dollar limit, which is determined
based on Perfumania's reported results and comparable store sales performance.
Management monitors the account activity to ensure compliance with the Board
limit.
Net trade accounts receivable owed by Perfumania to us amounted to
$10,890,338 and $11,426,977 at March 31, 2004 and 2003, respectively. Trade
accounts receivable from Perfumania are non-interest bearing, and are paid in
accordance with the terms established by the Board.
As reported in ECMV's latest public filing, on May 12, 2004, Perfumania
entered into a new three-year amended and restated senior secured revolving
credit facility with its then current lender and a new participant, increasing
its borrowing capabilities from $40 million to $60 million. We continue to
evaluate our credit risk and assess the collectibility of the Perfumania
receivables. Perfumania's reported financial information, as well as our 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. We have, in the past, received significant payments from Perfumania
during the last three months of the calendar year, and have no reason to believe
that this will not continue. Based on our evaluation, no allowances have been
recorded as of March 31, 2004. We 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, our Board of Directors approved accepting 1,512,406
shares of Perfumania treasury stock in consideration for a partial reduction of
the outstanding trade receivable balance from Perfumania in the amount of
$4,506,970. The transfer price was based on a per share price of $2.98 ($11.92
post reverse stock split described 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 were registered in
June 2000. Effective February 1, 2000, ECMV was formed as a holding company and
the Company's shares of Perfumania common stock were converted into shares of
common stock in ECMV. As described in Note 2 of the notes to consolidated
financial statements, if the quoted market price of ECMV's common stock remained
below the recorded cost per share of $2.98 ($11.92 post reverse stock split,
described below) for an extended period of time, we would be required to record
a charge to earnings as opposed to treating such amount as an unrealized loss
and presenting it as a reduction directly within stockholders' equity. During
the first quarter of the fiscal year ended March 31, 2002, we recorded a
non-cash charge to earnings of $2,858,447, which reflected an
other-than-temporary decline in value of the investment based on a sustained
reduction in the quoted market price of $1.09 per share ($4.36 post reverse
stock split described below) as of June 30, 2001, compared to the original cost
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per share of $2.98 ($11.92 post reverse stock split described below). As a
result of this non-cash reduction of the cost basis of the Company's investment,
we 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,
and we now own 378,101 shares. As of March 31, 2004, the fair market value of
the investment in ECMV had increased to $4,839,693 ($12.80 per share after the
reverse split).
As of June 25, 2004, the fair market value of the investment in ECMV is
$2,816,852 ($7.45 per share after the reverse split).
FOREIGN AND EXPORT SALES
During the three years ended March 31, 2004, gross sales to unrelated
international customers were approximately $28,356,000, $38,364,000, and
$31,329,000, respectively. During the fiscal year ended March 31, 2004, we
increased our focus on the Mexican marketplace and engaged a distributor for
Mexico in lieu of a commissioned representative. The Mexican distributor is
owned and operated by individuals related to our Chairman and Chief Executive
Officer. Sales to this distributor, which are included in related party sales,
amounted to approximately $3,966,000 and are in addition to the sales to
unrelated international customers noted above.
LICENSING AGREEMENTS
See "THE PRODUCTS" on page 4 for further discussion of the relative
importance of our license agreements.
PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license
renews automatically every two years if average annual sales in the two-year
license period exceed 75% of the average sales of the previous four years. All
minimum sales levels have been met; based on our current sales projections,
management believes that this will continue. The license requires the payment of
royalties, which decline as a percentage of net sales as net sales volume
increases, and the spending of certain minimum amounts for advertising based
upon net sales levels achieved in the prior year.
FRED HAYMAN: In June 1994, we entered into an Asset Purchase Agreement with Fred
Hayman Beverly Hills, Inc. (FHBH), purchasing substantially all of the assets
and liabilities of the FHBH fragrance division. In addition, FHBH granted to
Parlux an exclusive royalty free 55-year license to use FHBH's United States
Class 3 trademarks Fred Hayman(R), 273(R), Touch(R), With Love(R) and Fred
Hayman Personal Selections(R) and the corresponding international registrations.
There are no minimum sales or advertising requirements.
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On March 28, 2003, we 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, we 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 in the amount
of $2,032,272 due in twelve monthly installments of approximately $169,356, plus
interest at prime plus 1%, commencing January 2004.
The Sublicense Agreement excluded the rights to "273 Indigo" for men and women,
the latest fragrance introduction for the FHBH brand. Such rights, as well as
the rights to any other new FHBH fragrance addition, 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 new 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. 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 we may continue to manufacture and distribute "273 Indigo"
products.
OCEAN PACIFIC: In August 1999, we entered into an exclusive worldwide licensing
agreement with Ocean Pacific Apparel Corp. ("OP"), to manufacture and distribute
men's and women's fragrances and other related products under the OP label. The
initial term of the agreement extended through December 31, 2003, but has
automatically renewed for an additional three-year period. We have six (6)
additional three-year renewal options, of which the last four require the
achievement of certain minimum net sales. The license requires the payment of
royalties, which decline as a percentage of net sales as net sales volume
increases, and the spending of certain minimum amounts for advertising based
upon annual net sales of the products.
JOCKEY INTERNATIONAL: On March 23, 2001, we entered into an exclusive worldwide
licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture
and distribute men's and women's fragrances and other related products under the
Jockey(R) label. The initial term of the agreement extends through December 31,
2004, with three (3) three-year renewal options. The license required the
payment of royalties, which decline as a percentage of net sales as net sales
volume increases, and the spending of certain minimum amounts for advertising
based upon annual net sales of the products. We launched Jockey fragrances for
women and men during the first calendar quarter of 2002. We did not exercise the
renewal option as market penetration of the brand did not meet our expectations.
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ROYAL COPENHAGEN: 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 royalties, sales minimums or advertising commitments under
this agreement.
GUESS: 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 on a worldwide basis. The
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 launched during July 2005.
PARIS HILTON: On May 4, 2004, we entered into a letter of intent with Ms. Paris
Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and
related products, on an exclusive basis, under her name. Effective June 1, 2004,
we entered into a definitive license agreement with Paris Hilton Entertainment,
Inc. ("PHEI"), which expires on June 30, 2009. The agreement is renewable for an
additional five-year period.
Under the PHEI Agreement, we must pay a fixed royalty percentage and spend
minimum amounts for advertising based on sales volume. We anticipate that the
first PH fragrance will be launched prior to March 31, 2005.
We believe we are in compliance with all material obligations under the above
agreements. There can be no assurance that we will be able to continue to comply
with the terms of these agreements in the future.
TRADEMARKS
We have exclusive licenses, as discussed above, to use trademark and
tradename rights in connection with the packaging, marketing and distribution of
our products, both in the United States and internationally where such products
are sold. See "THE PRODUCTS" on page 4 for further discussion of the relative
importance of these licenses.
In addition, we own the worldwide trademark and distribution rights to
LIMOUSINE fragrances. There are no licensing agreements requiring the payment of
royalties to us for this trademark. We have not distributed fragrance products
under the LIMOUSINE brand since fiscal 1998, nor do we anticipate distribution
in the near future.
On January 16, 2003, we entered into an agreement with the Animale
Group, S.A., to sell the inventory, promotional materials, molds, and trademarks
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relating to the Animale brand (we owned the worldwide trademarks and
distribution rights prior to the sale) for $4,000,000, which closely
approximated 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. The note has been paid in full in accordance with its
terms.
As part of the agreement we did not include the inventory of Chaleur
d'Animale, the Animale brand's newest product introduction, and maintain the
rights to manufacture and distribute this product line, on a royalty-free basis,
until January 2005.
Prior to Fiscal 2003, we owned the worldwide trademarks and
distribution rights to the ALEXANDRA de MARKOFF and BAL A VERSAILLES brands.
Royalties were payable to us by the licensees of these brands. See Note 6 to the
accompanying Consolidated Financial Statements for discussion of the sale of
these two brands to the previous licensees.
PRODUCT LIABILITY
We have insurance coverage for product liability in the amount of $5
million per incident. We maintain an additional $5 million of coverage under an
"umbrella" policy. We believe that the manufacturers of the products sold by us
also carry product liability coverage and that we effectively are protected
thereunder.
There are no pending and, to the best of our knowledge, no threatened
product liability claims of a material nature. Over the past ten years, we have
not been presented with any significant product liability claims. Based on this
historical experience, management believes that its insurance coverage is
adequate.
COMPETITION
The market for fragrances and beauty related products is highly
competitive and sensitive to changing consumer preferences and demands. We
believe that the quality of our fragrance products, as well as our ability to
develop, distribute and market new products, will enable us to continue to
compete effectively in the future and to continue to achieve positive product
reception, position and inventory levels in retail outlets. We believe we
compete primarily on the basis of product recognition and emphasis on providing
in-store customer service. However, there are products, which are better known
than the products distributed by us. There are also companies, which are
substantially larger and more diversified (the October 2003 issue of "WWD Beauty
Biz" lists the 75 largest companies in the world ranked by total beauty sales.
The top 26 companies in the listing have sales levels exceeding $1 billion, with
the 75th largest at $90 million) and which have substantially greater financial
and marketing resources than us, as well as greater name recognition, with the
ability to develop and market products similar to, and competitive with, those
distributed by us.
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EMPLOYEES
As of March 31, 2004, we had a total of 120 full-time and part-time
employees. Of these, 44 were engaged in worldwide sales activities, 51 in
operations, marketing, administrative and finance functions and 25 in
warehousing and distribution activities. None of our employees are covered by a
collective bargaining agreement and we believe that our relationship with our
employees is satisfactory. We also use the services of independent contractors
in various capacities, including sales representatives.
We have a 401-K Plan covering substantially all of our employees. We
match 25% of the first 6% of employee contributions, within annual limitations
established by the Internal Revenue Code.
ITEM 2. PROPERTIES
In November 1995, we moved our corporate headquarters and distribution
center to a new 100,000 square foot leased facility in Fort Lauderdale, Florida.
The current annual lease cost of the facility is approximately $714,000, with
the lease covering the ten-year period ending November 2005. We have an option
to extend the lease for an additional five-year period with minimal rent
escalation.
In July 2002, we leased an additional 13,000 square feet of warehouse
space at a monthly cost of approximately $7,800. This lease expired on January
31, 2004.
In May 2004, we leased an additional 38,000 square feet of warehouse
space in Fort Lauderdale at a monthly cost of approximately $23,300. This lease
expires December 31, 2005.
ITEM 3. 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 unspecified 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.
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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 filed a Motion
to Dismiss the action on February 27, 2004. A hearing on the Motion was held on
April 14, 2004, and the Complaint was dismissed, without prejudice. The Court
encouraged the Plaintiffs to serve a demand upon the Company to examine the
issues alleged in the Complaint rather than file an Amended Complaint, but gave
the Plaintiffs thirty (30) days to file an Amended Complaint if they chose to do
so. Following the order granting dismissal, the Company voluntarily furnished
detailed information to Plaintiff's counsel demonstrating the Company's view
that there was no legitimate basis for the claims previously asserted. Based on
that submission, Plaintiffs requested additional time to consider their
amendment. Additional exchanges of correspondence have followed and additional
extensions of time have been granted. As of the date of this filing, no amended
complaint has been served.
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 defend
the action, and the action was voluntarily dismissed on September 11, 2003. In
addition, the tender offer proposal, which precipitated the Complaint, was
withdrawn.
To the best of our knowledge, 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 operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any actions for shareholders' approval during the
quarter ended March 31, 2004 or through June 27, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Our Common Stock, par value $0.01 per share, has been listed on the
National Association of Securities Dealers Automatic Quotation System ("NASDAQ")
National Small Cap List market since February 26, 1987 and commenced trading on
the NASDAQ National Market on October 24, 1995.
13
We believe that the number of beneficial owners of our common stock is
approximately 4,000, including owners of common stock whose shares are held in
the names of banks, brokers, nominees or other fiduciaries.
The following chart, as reported by the National Association of
Securities Dealers, Inc., shows the high and low bid prices for our securities
available for each quarter of the last two years and the interim period from
April 1, 2004 through June 25, 2004. The prices represent quotations by the
dealers without adjustments for retail mark-ups, markdowns or commissions and
may not represent actual transactions.
Fiscal Quarter Common Stock
-------------- ---------------
High Low
---- ---
First (April/June) 2002 2.850 1.660
Second (July/Sept.) 2002 2.700 1.430
Third (Oct./Dec.) 2002 2.900 1.640
Fourth (Jan./Mar.) 2003 3.100 1.900
First (April/June) 2003 3.890 2.200
Second (July/Sept.) 2003 3.750 2.910
Third (Oct./Dec.) 2003 5.360 3.120
Fourth (Jan./Mar.) 2004 13.730 4.560
First (April/June) 2004 12.090 7.150
We have not paid a cash dividend on our common stock nor do we
contemplate paying any dividends in the near future. Our loan agreement
restricts payment of dividends without prior approval.
The following chart outlines the Company's equity compensation plan
information as of March 31, 2004.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation plans
be issued upon exercise exercise price of (exclusing securities
of outstanding options, outstanding options, reflected
Plan Category warrants and rights warrants and rights in column (a))
- ------------- ----------------------- -------------------- --------------------------
Equity compensation
plans approved by
security holders(1) 11,000 $2.81 315,863
Equity compensation
plans not approved by
security holders(2) 2,038,000 $2.32 --
--------- -------
Total 2,049,000 $2.33 315,863
========= =======
- ----------
(1) See note 10 to the Company's consolidated financial statements included with
this filing for a discussion of the Company's stock option plans.
(2) See note 8(D) to the Company's consolidated financial statements included
with this filing for a discussion of the Company's options and warrants
granted in connection with employment and consulting arrangements.
14
The following chart outlines the Company's repurchases of its common
stock, all of which were purchased on the open market.
Issuer Purchases of Equity Securities
-------------------------------------
Period (a) Total Number (b) Average Price (c) Total Number of Shares (d) Maximum Number (or
of Shares Paid Per Share Purchased as Part of Approximate Dollar
Purchased (1) Publicly Announced Value) of Shares that
Plans or Programs May Yet Be Purchased
Under the Plans or
Programs (2)
- ----------------------------------------------------------------------------------------------------------
Month #1
1/1/2004-1/31/2004
80,000 $5.14 80,000 $637,000
Month #2
2/1/2004-
2/29/2004 45,014 $5.48 45,014 $390,000
Month #3
3/1/2004-
3/31/2004 - - - $390,000
- ----------
(1) Purchased in accordance with the Company's common stock buy-back program
announced on February 14, 2003. See page 23 of "Liquidity and Capital
Resources" for further discussion.
(2) Represents the remaining amount approved by the Company's lender for
repurchase of common stock. On February 6 ,2003, the Company received
approval to repurchase up to $7.5 million inshare value.
15
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from audited consolidated financial
statements. Consolidated balance sheets at March 31, 2004 and 2003, and the
related consolidated statements of operations and of cash flows for each of the
three years in the period ended March 31, 2004 and notes thereto appear
elsewhere in this Annual Report on Form 10-K.
For the Year Ended March 31, (in thousands of dollars, except per share data)
- ----------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net sales $80,581 $72,254 $ 70,489 $69,525 $67,022
Costs/operating expenses 70,268 66,409 74,356 62,145 60,423
Operating income (loss) 10,313 5,845 (3,867) 7,380 6,599
Net income (loss) 6,268 5,474 (5,655) 3,926 3,873
Income (loss) per share:
Basic $ 0.75 $ 0.56 ($ 0.57) $ 0.39 $ 0.32
Diluted (1) $ 0.63 $ 0.54 ($ 0.57) $ 0.38 $ 0.31
- ----------
(1) The calculation of diluted loss per share was the same as the basic loss per
share for fiscal 2002 since inclusion of potential common stock in the
computation would be antidilutive.
At March 31, (in thousands of dollars)
------------
2004 2003(2) 2002(2) 2001(2) 2000(2)
------- ------- ------- ------- -------
Current assets $63,385 $54,875 $61,531 $52,793 $60,460
Current liabilities 9,505 15,219 23,869 22,257 25,706
Working capital 53,880 39,656 37,662 30,536 34,754
Trademarks, licenses and
goodwill, net 7,945 8,231 9,535 20,464 21,469
Long-term borrowings, net -- 102 962 1,686 2,571
Total assets 72,467 66,672 73,497 75,995 84,330
Total liabilities 11,226 16,379 25,573 25,121 30,685
Stockholders' equity 61,240 50,293 47,924 50,874 53,645
- ----------
(2) Amounts as of March 31, 2003, 2002, 2001 and 2000 have been restated. See
Note 15 to the Company's consolidated financial statements for further
discussion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto appearing elsewhere
in this annual report. Except for the historical matters contained herein,
statements made in this annual report are forward looking and are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The accompanying management's discussion and analysis of financial
condition and results of operations gives effect to the restatement of the
consolidated financial statements for the years ended March 31, 2003 and 2002
as described in Note 15 to the consolidated financial statements.
16
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
SEC Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies
provide additional disclosure and commentary on those accounting policies
considered most critical. FRR 60 considers an accounting policy to be critical
if it is important to the Company's financial condition and results, and
requires significant judgment and estimates on the part of management in its
application. We believe the accounting policies described below represent our
critical accounting policies as contemplated by FRR 60. See Note 1 to
Consolidated Financial Statements for a detailed discussion on the application
of these and other accounting policies.
Accounting for Intangible Assets. The value of our intangible assets,
including brand licenses and trademarks, is exposed to future adverse changes if
we experience declines in operating results or experience significant negative
industry or economic trends. We review intangible assets for impairment using
the guidance of applicable accounting literature. Indefinite-lived intangible
assets are reviewed annually during the Company's fourth quarter of each fiscal
year for impairment under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. The identification and measurement of impairment of
indefinite-lived intangible assets involves the estimation of the fair value of
the related asset. The estimates of fair value are based on the best information
available as of the date of the assessment, which primarily incorporate
management assumptions about discounted expected future cash flows. Future cash
flows can be affected by changes in industry or market conditions.
Allowance for Sales Returns. As is customary in the prestige fragrance
industry, we grant certain of our unrelated U.S. department store customers the
right to return product which does not "sell-through" to consumers. At the time
of sale, we record a provision for estimated product returns based on our
historical "sell-through" experience, economic trends and changes in customer
demand. Based upon this information, we provide an allowance for sales returns.
It is only after the specific gift-giving season (Mother's Day, Christmas, etc.)
that the customer requests approval of the return for unsold items. We decide to
accept returns on a case-by-case basis. There is considerable judgment used in
evaluating the factors influencing the allowance for returns and additional
allowances in any particular period may be needed, reducing net income or
increasing net loss.
Allowances for Doubtful Accounts Receivable. We maintain allowances for
doubtful accounts to cover uncollectable accounts receivable, and we evaluate
our accounts receivable to determine if they will ultimately be collected. This
evaluation includes significant judgments and estimates, including a
customer-by-customer review for large accounts. If the financial condition of
our customers, or any one customer, deteriorates resulting in an impairment of
their ability to pay, additional allowances may be required.
Inventory Write-downs. We record inventory write-downs for estimated
obsolescence and shrinkage of inventory. Our estimates consider the cost of
inventory, the estimated market value, the shelf life of the inventory and our
historical experience. If there are changes to these estimates, or changes in
consumer preferences, additional inventory write-downs may be necessary.
Income Taxes and Valuation Reserves. We record a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not to be
17
realized. We consider projected future taxable income and ongoing tax planning
strategies in assessing the valuation allowance. In the event we determine that
we may not be able to realize all or part of our deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to earnings in
the period of such determination.
Since April 2003 we have not made any changes of these critical
accounting policies, nor have we made any material changes in any of the
critical accounting estimates underlying these accounting policies.
Significant Trends.
Over the last few years, a significant number of new prestige fragrance
products have been introduced on a worldwide basis. The beauty industry in
general is highly competitive and rapidly changing with consumer preferences.
The initial appeal of these new fragrances, launched for the most part in U.S.
department stores, has fueled the growth of our industry. Department stores
continue to lose sales to the mass market as a product matures. To counter the
effect of lower department store sales, companies are required to introduce new
products more quickly, which requires additional spending for development and
advertising and promotional expenses. We believe this trend will continue. If
one or more of our new product introductions would be unsuccessful, it could
result in a reduction in profitability and operating cash flows.
Comparison of the year ended March 31, 2004 with the year ended March 31, 2003.
During the fiscal year ended March 31, 2004, net sales increased 12% to
$80,580,709 compared to $72,253,699 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 $10,615,473 in total Perry Ellis brand gross sales
from $57,354,411 to $67,969,884, and, (2) the launch of Ocean Pacific for men
and women, which resulted in an increase in total Ocean Pacific brand gross
sales of $3,374,117. These increases were offset by the reduction in gross sales
of Animale and FHBH brand products of $3,762,730 and $2,662,933, respectively
(which brands were sold and sublicensed during January and March 2003,
respectively) and a $1,406,830 reduction in gross sales of Jockey brand
products. 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 24% to $38,138,631, compared
to $50,505,473 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", for which current period gross sales
decreased $5,350,155 compared to the prior launch year period. Net sales to
related parties increased 95% to $42,442,078, compared to $21,748,266 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
18
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 gross margins may not be comparable to other entities that include
all of the costs related to their distribution network in costs of goods sold as
compared to our allocating only a portion of these distribution costs to costs
of goods sold and including the remaining unallocated amounts as selling and
distribution expenses.
Our overall cost of goods sold remained relatively stable as a
percentage of net sales, decreasing from 50% for the fiscal year ended March 31,
2003 to 49% for the current comparable period. Cost of goods sold on sales to
unrelated customers and related parties both approximated 49% for the current
period, as compared to 47% 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. For the last two fiscal years,
the cost of goods sold to unrelated customers has increased, and consequently
gross margins have decreased, due to a greater number of value sets sold as
discussed above. For the near future, we anticipate the percentage of value sets
sold to unrelated customers will remain constant and that the overall cost of
goods sold to unrelated customers will also remain relatively constant. 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 increased slightly compared to the same period in
the prior year from $30,536,582 to $30,659,884, decreasing as a percentage of
net sales from 42% to 38%. However, individual components of our operating
expenses experienced more significant changes. Advertising and promotional
expenses decreased 11% to $12,714,825 compared to $14,244,338 in the prior year
period, decreasing as a percentage of net sales from 20% to 16%. 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 slightly to
$6,560,973 in the current period compared to $6,545,221 for the same period of
the prior year, decreasing as a percentage of net sales from 9% to 8%. The
increase was mainly attributable to increases in employee salaries and health
insurance premiums offset by 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 commission
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 Mexico in lieu of a commissioned representative. This
distributor is owned and operated by individuals related to our Chairman and
Chief Executive Officer. General and administrative expenses increased by 19%
compared to the prior year period from $5,188,592 to $6,162,926, increasing as a
percentage of net sales from 7% to 8%. The increase is mainly attributable to
19
increases in employee salaries, health insurance premiums, legal and
professional 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 $1,356,597 to $1,256,593. Royalties increased by
24% 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. This trend
should not continue as the Jockey license expires in December 2004.
As a result of the above factors, operating income increased to
$10,312,629 or 13% of net sales for the current period, compared to $5,845,289
or 8% of net sales for the same period in the prior year. Net interest expense
decreased to $224,368 in the current period as compared to $694,317 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, coupled with
increased interest income generated on notes receivable. The current year period
includes foreign exchange gains of $20,796 relating to the sales and collection
activities with our Canadian distributor, the only country where we assume
foreign exchange risk, due to the strengthening of the Canadian currency against
the U.S. dollar. The prior year period includes other income of $3,542,083
relating to the settlement of a lawsuit we filed in 2001 against a supplier (See
Note 12 to the Company's consolidated financial statements for further
discussion of the litigation settlement).
Income before taxes for the current period was $10,109,057 compared to
$8,692,922 in the same period for the prior year. Giving effect to the tax
provision, we earned net income of $6,267,615 for the current period, compared
to $5,474,459 in the prior year period.
Comparison of the year ended March 31, 2003 with the year ended March 31, 2002.
During the fiscal year ended March 31, 2003, net sales increased 3% to
$72,253,699 as compared to $70,488,563 for the same period for the prior year.
The increase is mainly attributable to the launch of "Perry" by Perry Ellis for
men and women, which resulted in an increase in total Perry Ellis brand gross
sales from $49,434,433 to $57,354,411, and launches of "Jockey" for men and
women in the Spring of 2002, which added gross sales of $1,325,960 in the
current period. These increases were offset by reductions in gross sales of
Animale (which brand was sold during January 2003) and Ocean Pacific brand
products of $4,689,844 and $1,154,883, respectively, as certain products were
launched during the prior year period.
Net sales to unrelated customers increased 9% to $50,505,473 in the
current period, compared to $46,459,196 for the same period in the prior year,
as a result of the launches discussed above. Sales to related parties decreased
9% to $21,748,226 in the current period compared to $24,029,367 for the same
period in the prior year, which was mainly attributable to a $1,782,447
reduction in gross sales of Animale brand products, which brand was sold as
discussed above.
20
Cost of goods sold decreased as a percentage of net sales from 51% for
the fiscal year ended March 31, 2002 to 50% for the current period. Cost of
goods sold on sales to unrelated customers and related parties approximated 47%
and 57%, respectively, for the current period, as compared to 51% for each, for
the same period in the prior year. The prior year period included the sale of
certain close-out merchandise to international customers at lower margins. The
increase in cost of goods sold to related parties for the current period was due
to the purchase of a higher percentage of value sets for holiday seasons than in
the prior year. These value sets have a higher cost of goods when compared to
basic stock items. For the last two fiscal years, the cost of goods sold to
related parties has increased, and consequently gross margins have decreased,
due to a greater number of value sets sold as discussed above.
Operating expenses decreased by 21% compared to the same period in the
prior year from $38,594,100 to $30,536,582, decreasing as a percentage of net
sales from 55% to 42%. Advertising and promotional expenses decreased 2% to
$14,244,338 compared to $14,598,130 in the prior year period, decreasing as a
percentage of net sales from 21% to 20%. The prior year period includes
approximately $728,000 in charges relating to the bankruptcy filing by an
advertising firm that owed us barter advertising credits. Selling and
distribution costs decreased 1% to $6,545,221 in the current period as compared
to $6,644,561 for the same period of the prior year, remaining relatively
constant at 9% of net sales. General and administrative expenses decreased 9%
compared to the prior year period from $5,668,973 to $5,188,592, decreasing as a
percentage of net sales from 8% to 7%. The decrease was mainly attributable to
reductions in bad debt expense and legal fees of approximately $390,000 and
$309,000, respectively, offset by an increase in health and other insurance
costs. Depreciation and amortization decreased by 32% during the current period
from $1,995,096 to $1,356,597, as approximately $564,000 of amortization on
intangibles relating to the Alexandra de Markoff ("ADM") and Bal a Versailles
("BAV") brands was no longer required during the current period. Royalties
increased by 43% in the current period, increasing as a percentage of net sales
from 3% to 4% due to minimum royalty requirements for the Jockey license. During
the prior period, we recorded an impairment charge on the intangibles relating
to the ADM and BAV brands, which were being licensed to unrelated third parties,
totaling $7,441,554. This charge was recorded as a result of our decision to
sell these two brands to their respective licensees (See Note 6 to the Company's
consolidated financial statements for further discussion of these brands and the
impairment charge).
As a result of the above, operating income increased to $5,845,289 or
8% of net sales for the current period, compared to an operating loss of
$3,866,540 for the same period in the prior year. The current year period
includes other income of $3,542,083 relating to the settlement of our lawsuit
with a supplier (See Note 12 to the Company's consolidated financial statements
for further discussion of the litigation settlement). Net interest expense
decreased to $694,317 in the current period as compared to $1,032,975 for the
same period in the prior year. The decrease was mainly attributable to the
substantial reduction in interest rates compared to the prior year, reflecting
the terms of our new line of credit, coupled with a reduced prime rate and lower
average balance outstanding. The Company recorded a $2,858,447 non-cash charge
21
during the prior period, representing a writedown for an other-than-temporary
decline in the value of our investment in affiliate, based upon a sustained
reduction in the quoted market price of the investment compared to its original
cost (See Note 2 to the Company's consolidated financial statements for further
discussion of this non-cash charge).
Income before taxes for the current period was $8,692,922 or 12% of net
sales, compared to a loss of $7,745,449 in the same period for the prior year.
Giving effect to the tax provision and the deferred tax benefit of $207,360 in
2002 related to the non-cash charge in the prior year, we recorded net income of
$5,474,459 for the current period, compared to a net loss of $5,665,401 in the
prior year.
Liquidity and Capital Resources
Working capital increased to $53,879,645 at March 31, 2004 compared to
$39,656,571 at March 31, 2003, the result of current period's net income, the
collection on notes receivable and proceeds of $2,212,904 from the exercise of
warrants (See Item 1, "Business", for further discussion) and employee stock
options, offset by the purchase of treasury stock discussed below.
During the fiscal year ended March 31, 2004, net cash provided by
operating activities was $7,537,136 compared with $7,855,720 in the prior year.
Net cash provided by investing activities decreased to $1,615,786 in
the current year period, compared to $3,913,317 in the prior year, the result of
cash generated from brand sales/licensing in the prior year period. The current
period includes collection on notes receivable in connection with the brand
sales/licensing.
The cash provided by operating and investing activities during the
current year was used to reduce debt, both long-term and under our line of
credit, as well as repurchase approximately $2.6 million of our common stock
(see below). The prior year period also used cash generated from operating and
investing activities to reduce debt as well as repurchase approximately $4.5
million of our common stock. Additionally, during the current year period, we
generated approximately $2.2 million of cash from the issuance of common stock
in connection with the exercise of certain warrants and employee options. See
Note 8D for further discussion.
22
As of March 31, 2004 and 2003, our ratios of the number of days sales
in accounts receivable and inventory, on a 365-day basis, were as follows:
March 31,
----------
2004 2003
---- ----
Trade accounts receivable (1):
Unrelated 43 40
=== ===
Related 99 200
=== ===
Total: 73 88
=== ===
Inventories 143 133
=== ===
- ----------
(1) Calculated on gross trade receivables excluding allowances for doubtful
accounts, sales returns and advertising allowances of approximately
$1,756,000 and $1,734,000 in 2004 and 2003, respectively.
Consistent with prior year periods, the number of days sales in trade
receivables from related parties exceed those of unrelated customers, due mainly
to the highly seasonal cash flow of Perfumania (See Item 1 "CUSTOMERS" for
further discussion of our relationship with Perfumania). Although we expect this
trend to continue, based on current information and published information
concerning Perfumania's increased borrowing capability, we anticipate a
continuing improvement in the days outstanding.
Due to the lead time for certain of our raw materials and components
inventory (up to 120 days), we are required to maintain a three to six month
supply of some items in order to ensure production schedules. In addition, when
we launch a new brand or Stock Keeping Unit ("SKU"), we often produce a
six-month supply to ensure adequate inventories if the new products exceed our
forecasted expectations. We believe that the significant gross margins on our
products outweigh the additional carrying costs. The increase between 2004 and
2003 is attributable to recent product introductions, which did not have a full
year's sales activity.
As of June 30, 2001, we had repurchased, under all phases of our common
stock buy-back program, a total of 7,978,131 shares at a cost of $21,983,523,
with 121,869 shares still available for repurchase under the last program. On
July 25, 2001, the Board of Directors, at that date, authorized an additional
2,500,000 share repurchase, subject to the restrictions and covenants in our new
loan agreement discussed below. Through January 31, 2003, no shares were
purchased under the latest authorization. On February 6, 2003, we received
approval from our lender to proceed with the latest phase of our repurchase
program up to a maximum of $7.5 million, which was ratified on February 14,
2003, by our current Board of Directors. During the fiscal year ended March 31,
2003, we had repurchased, in the open market, an additional 1,476,700 shares at
a cost of $4,469,593. During the fiscal year ended March 31, 2004, we
repurchased an additional 685,864 shares in the open market at a cost of
$2,639,712. The accompanying consolidated balance sheets also include an
additional 39,000 shares of treasury stock purchased at a cost of $133,472 prior
to fiscal 1996.
Prior to the effectiveness of the Sarbanes-Oxley Act
("Sarbanes-Oxley"), which prohibits the Company from renewing or amending loans,
as well as issuing new loans to Company officers and directors, we had made
several personal loans to Mr. Ilia Lekach, our chairman and chief executive
officer. These loans were consolidated into one note agreement on April 1, 2002,
which bore interest at 8% per annum and became due on March 31, 2003 in
accordance with the note's terms. On March 31, 2003, Mr. Lekach repaid $46,854
23
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.
On July 15, 2003, Mr. Lekach repaid the entire unpaid loan balance of
$742,884, plus accrued interest through that date at the default rate of prime
plus 5% (9.25%) as stipulated in the note. Accordingly, the note receivable from
officer balance as of March 31, 2003 has been classified as a current asset.
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 a 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 March 31, 2004, based on the borrowing base at that date, the credit
line amounted to approximately $16,137,000, none of which was utilized.
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 March 31, 2004, we do not have any material commitments for
capital expenditures.
Management believes that funds from operations and our existing
financing will be sufficient to meet our current operating needs. However, if we
would expand operations through acquisitions, new licensing arrangements or
both, we may need to obtain additional financing. There is no assurance that we
could obtain such additional financing or what the terms of such financing, if
available, would be.
24
The following table sets forth information regarding our contractual obligations
as of March 31, 2004 (in 000's):
For the Year Ending March 31,
-------------------------------------------------------------
Type of Obligation 2005 2006 2007 2008 2009 Thereafter Total
- ------------------ ------- ------ ------ ------ ------ ---------- -----
Long-term debt $ 171 $ -- $ -- $ -- $ -- $ -- $ 171
Capital lease obligations -- -- -- -- -- -- --
Operating leases 1,001 696 17 -- -- -- 1,714
Purchase obligations (1) 18,000 -- -- -- -- -- 18,000
Other long-term obligations (2) 634 1,696 1,819 1,687 1,938 1,312 9,086
------ ------ ------ ------ ------ ------- -------
$19,806 $2,392 $1,836 $1,687 $1,938 $ 1,312 $28,971
======= ====== ====== ====== ====== ======= =======
- ----------
(1) Represents purchase orders issued in the normal course of business for
components, raw materials and promotional supplies.
(2) Consists of minimum royalty requirements under our licensing agreements.
As of March 31, 2004 we do not have any "off-balance sheet arrangements" as that
term is defined in Regulation S-K Item 303(a)(4).
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("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 2003. The Company adopted
the requirements of FIN 45 which did not have a significant impact on its
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of APB No. 51 which was revised
in December 2003 ("FIN 46-R"). FIN 46-R 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-R 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-R must
be applied for the first interim or annual period beginning after June 15, 2003.
The Company has not invested in any entities that it believes are variable
interest entities for which it is the primary beneficiary. The adoption of FIN
46-R 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.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We sell our products worldwide with all such sales being denominated in
United States dollars. As a result, we are not at risk to any foreign exchange
translation exposure, other than with our Canadian distributor where we assume
such risk, but could be subject to changes in political and economic conditions
in many of these countries. We closely monitor such conditions and are able, for
the most part, to adjust our sales strategies accordingly. During the fiscal
year ended March 31, 2004, we recorded foreign exchange gains of $20,796
relating to sales/collection activity with our Canadian distribution.
Our exposure to market risk for changes in interest rates relates
primarily to our bank line of credit. The bank line of credit bears interest at
a variable rate, as discussed above under "Liquidity and Capital Resources". We
mitigate interest rate risk by continuously monitoring the interest rates and
electing the lower of the fixed rate LIBOR or prime rate option available under
the line of credit. As a result of borrowings associated with our operating and
investing activities, we are exposed to interest rate risk. As of March 31, 2004
and 2003, primary source of funds for working capital and other needs was our
$20 million line of credit.
Of the approximate $0.2 million and $6.4 million of short-term and
long-term borrowings on the Company's balance sheet as of March 31, 2004 and
2003, respectively, approximately 100% and 20%, respectively, represented fixed
rate instruments. The line of credit, which was not utilized as of March 31,
2004, bears interest at a floating rate of prime plus 1%. A hypothetical 10%
adverse move in interest rates would increase fiscal year 2004 and 2003 interest
expense by approximately $0.1 million in each year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are included herein
commencing on page F-1. The financial statement schedule is listed in the Index
to Financial Statements on page F-1 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
26
ITEM 9.A CONTROLS AND PROCEDURES
Parlux Fragrances, Inc's Chief Executive Officer (its principal
executive officer) and Chief Financial Officer (its principal financial officer)
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), as of the end of the period covered by this report, based on the
evaluation required by paragraph (b) of Rule 13a-15 under the Securities Act of
1934. They have concluded that, as of such date, the Company's disclosure
controls and procedures were adequate and effective.
However, the Company has restated portions of this report, including
portions of Part I, Item 15 (certain line items in the consolidated financial
statements as of March 31, 2003 and for the fiscal years ended Mach 31, 2003 and
2002, certain related footnote disclosures) and Part II, Item 7 (certain
changes, some of which are related to the financial statement changes, to
Management's Discussion and Analysis of Financial Condition and Results of
Operations). These changes were made in response to comments received from the
Securities and Exchange Commission in connection with its review of the
Company's recent filing of a registration statement on Form S-3 (file number
333-112473).
Please see Note 15 to the consolidated financial statements included
with this report. The Company has treated restricted cash as a reduction in its
revolving line of credit balance since fiscal 1996, as the funds in the relevant
depository accounts are under the dominion of the Company's lender under the
terms of the Revolving Credit and Security Agreement. However, in this report
and in the future, the Company will record such restricted cash and line of
credit balances at their gross amounts.
The restatements contained in the report do not affect the Company's
earnings or earnings per share for the years ended March 31, 2003 and 2002, nor
do they change the conclusion of the Chief Executive Officer and Chief Financial
Officer that the Company's disclosure controls and procedures were adequate and
effective as of March 31, 2004.
There were no changes in the Company's internal controls or procedures
or in other factors during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
See Index to Financial Statements beginning on page F-1
of this annual report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1
of this annual report.
28
3. Exhibit Index
2.1 Asset Purchase Agreement, dated June 15, 1994, by and
between Fred Hayman Beverly Hills Inc. and the
Company (incorporated by reference to Exhibit 1 to
the Company's Report on Form 8-K, filed with the
Securities and Exchange Commission (the "SEC") on
June 15, 1994 and as amended on June 29, 1994 and
August 26, 1994)
2.2 Asset Purchase Agreement, dated November 2, 1994, by
and between Sanofi Beaute and the Company
(incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K, filed with the SEC on
January 11, 1995 (the "1995" Form 8-K)
3(a) Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibits 3.1
through 3.5 to the Registration Statement on Form S-3
(File No. 33-89806), declared effective on March 13,
1995 and Exhibit 4.6 of Registration Statement on
Form S-3, declared effective on October 2, 1996 (File
No. 333-11953)
3(b) By-Laws of the Company (incorporated by reference to
Exhibit 3.6 to the Company's Registration Statement
on Form S-3, declared effective on March 13, 1995
(File No. 33-89806)
10.1 Stock Option Plan (incorporated by reference to Annex
A to the Company's Preliminary Proxy Statement, filed
on August 16, 1996
10.2 Employee Stock Option Plan 2000 (incorporated by
reference to Annex "A" to the Company's Definitive
Proxy Statement, filed on August 25, 2000)
10.37 Facility lease agreement, dated June 21, 1995 between
the Company and Port 95-2, Ld. (incorporated by
reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995, filed on August 11, 1995)
10.48 Stock Purchase Agreement, dated as of August 31,
1999, between the Company and Perfumania, Inc.,
(incorporated by reference to Exhibit 10.48 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, filed on November
12, 1999)
10.58 Employment Agreement, with Ilia Lekach, dated as of
March 31, 2002, (incorporated by reference to Exhibit
10.58 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2002, filed on July 1, 2002
("the March 31, 2002 Form 10-K"))
10.59 Employment Agreement, with Frank A. Buttacavoli,
dated as of March 31, 2002, (incorporated by
reference to Exhibit 10.59 to the Company's March 31,
2002 Form 10-K)
29
10.60 Consulting Agreement, with Cosmix, Inc., dated as of
March 31, 2002, (incorporated by reference to Exhibit
10.60 to the Company's March 31, 2002 Form 10-K)
10.61 Consulting Agreement, with Cambridge Development
Corp., dated as of March 31, 2002, (incorporated by
reference to Exhibit 10.61 to the Company's March 31,
2002 Form 10-K)
10.62 Agreement, dated November 4, 2002, between the
Company and Genesis International Marketing
Corporation, (incorporated by reference to Exhibit
10.62 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, filed on
November 14, 2002)
10.63 Agreement, dated January 16, 2003, between the
Company and Animale Group, S.A. (incorporated by
reference to Exhibit 10.63 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December
31, 2002, filed on February 14, 2003)
10.64 Agreement, dated March 28, 2003, between the Company
and Victory International (USA) LLC (incorporated by
reference to Exhibit 10.64 to the Company's Annual
Report on Form 10-K for the year ended March 31,
2003, filed on June 30, 2003)
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") (incorporated by reference to Exhibit
10.66 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, filed on
November 14, 2003)
The following exhibits are attached:
10.67 License Agreement, dated as of June 1, 2004, between
the Company and Paris Hilton Entertainment, Inc.
("Portions of this exhibit have been omitted pursuant
to a request for confidential treatment filed with
the Securities and Exchange Commission.)
14.1 Parlux Fragrances, Inc.'s Code of Business Conduct
and Ethics, adopted by the Board of Directors on
April 30, 2004
23.1 Consent of Deloitte & Touche LLP, an independent
registered public accounting firm
31.1 Certification of Chief Executive Officer Pursuant
to ss.302 of the Sarbanes-Oxley Act of 2002
30
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, as
amended
32.2 Certification of Chief Financial Officer Pursuant
to ss.906 of the Sarbanes-Oxley Act of 2002, as
amended
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 2004.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, Chief Executive Officer, President and Chairman
(Principal Executive Officer)
Dated: June 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
/s/ Frank A. Buttacavoli
- ------------------------------------------------------
Frank A. Buttacavoli, Executive Vice President,
Chief Operating Officer,
Chief Financial Officer and Director
(Principal Financial and Principal Accounting Officer)
/s/ Frederick E. Purches
- ------------------------------------------------------
Frederick E. Purches, Vice Chairman and Director
/s/ Glenn Gopman
- ------------------------------------------------------
Glenn Gopman, Director
/s/ Esther Egozi Choukroun
- ------------------------------------------------------
Esther Egozi Choukroun, Director
/s/ Jaya Kader Zebede
- ------------------------------------------------------
Jaya Kader Zebede, Director
/s/ David Stone
- ------------------------------------------------------
David Stone, Director
32
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
FORM 10-K SCHEDULES:
Schedule II - Valuation and Qualifying Accounts F-26
All other Schedules are omitted as the required information is not
applicable or the information is presented in the financial statements
or the related notes thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Parlux Fragrances, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Parlux
Fragrances, Inc. and subsidiaries (the "Company") as of March 31, 2004 and 2003,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended March 31,
2004. Our audits also included the financial statement schedule listed in the
accompanying index. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 2004 and
2003, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the formation set forth therein.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with related parties. In addition, as
discussed in Note 15, the accompanying 2003 and 2002 financial statements have
been restated.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
June 25, 2004
F-2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
ASSETS 2004 2003
------------ ------------
(As restated see note 15)
CURRENT ASSETS:
Cash and cash equivalents $ 654,633 $ 137,023
Restricted cash 4,162,669 1,477,841
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,756,000 and $1,734,000, respectively 2,747,845 3,751,570
Trade receivable from related parties 11,504,472 11,933,952
Income tax receivable 231,366 --
Notes receivable, current portion 1,708,511 2,182,135
Note receivable, officer -- 742,884
Inventories 31,561,553 26,281,297
Prepaid expenses and other current assets, net 5,973,937 7,007,410
Investment in affiliate 4,839,693 1,361,164
------------ ------------
TOTAL CURRENT ASSETS 63,384,679 54,875,276
Equipment and leasehold improvements, net 1,079,954 1,668,284
Trademarks and licenses, net 7,944,924 8,231,145
Notes receivable, less current portion -- 1,524,204
Other 57,139 373,666
------------ ------------
TOTAL ASSETS $ 72,466,696 $ 66,672,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ 170,927 $ 6,336,219
Accounts payable 8,457,127 7,420,405
Income taxes payable -- 279,610
Accrued expenses 876,980 1,182,471
------------ ------------
TOTAL CURRENT LIABILITIES 9,505,034 15,218,705
Borrowings, less current portion -- 102,096
Deferred tax liability 1,721,229 1,058,479
------------ ------------
TOTAL LIABILITIES 11,226,263 16,379,280
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 2004 and 2003 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
19,191,115 and 18,046,840 shares issued at March 31, 2004
and 2003, respectively 191,911 180,468
Additional paid-in capital 78,039,205 74,084,335
Retained earnings 9,538,994 3,271,379
Accumulated other comprehensive income (loss) 2,696,623 (656,299)
------------ ------------
90,466,733 76,879,883
Less - 10,179,695 and 9,493,831 shares of common stock in treasury,
at cost, at March 31, 2004 and 2003, respectively (29,226,300) (26,586,588)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 61,240,433 50,293,295
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,466,696 $ 66,672,575
============ ============
See notes to consolidated financial statements.
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
(As restated see note 15)
Net sales:
Unrelated customers, including licensing fees
of $18,750 in 2004 and $487,500 in 2002 $ 38,138,631 $ 50,505,473 $ 46,459,196
Related parties 42,442,078 21,748,226 24,029,367
------------ ------------ ------------
80,580,709 72,253,699 70,488,563
------------ ------------ ------------
Cost of goods sold, including $2,919,266,
$3,203,485 and $3,611,060 of promotional
items in 2004, 2003 and 2002, respectively:
Unrelated customers 18,607,927 23,515,711 23,486,751
Related parties 21,000,269 12,356,117 12,274,252
------------ ------------ ------------
39,608,196 35,871,828 35,761,003
------------ ------------ ------------
Gross margin 40,972,513 36,381,871 34,727,560
------------ ------------ ------------
Operating expenses:
Advertising and promotional 12,714,825 14,244,338 14,598,130
Selling and distribution 6,560,973 6,545,221 6,644,561
General and administrative 6,162,926 5,188,592 5,668,973
Depreciation and amortization 1,256,593 1,356,597 1,995,096
Royalties 3,964,567 3,201,834 2,245,786
Impairment loss on intangibles -- -- 7,441,554
------------ ------------ ------------
Total operating expenses 30,659,884 30,536,582 38,594,100
------------ ------------ ------------
Operating income (loss) 10,312,629 5,845,289 (3,866,540)
Interest income 196,528 125,039 166,116
Interest expense and bank charges (420,896) (819,356) (1,199,091)
Exchange gain (loss) 20,796 (133) 12,513
Litigation settlement, net of expenses -- 3,542,083 --
Other-than-temporary decline in value
of investment in affiliate -- -- (2,858,447)
------------ ------------ ------------
Income (loss) before income taxes 10,109,057 8,692,922 (7,745,449)
Income taxes (provision) benefit (3,841,442) (3,218,463) 2,090,048
------------ ------------ ------------
Net income (loss) $ 6,267,615 $ 5,474,459 ($ 5,655,401)
============ ============ ============
Income (loss) per common share:
Basic $ 0.75 $ 0.56 $ ( 0.57)
============ ============ ============
Diluted $ 0.63 $ 0.54 $ (0.57)
============ ============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003, AND 2002
COMMON STOCK RETAINED
--------------------------- ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------ ------------ ------------ ------------
BALANCE at March 31, 2001 17,986,565 $ 179,866 $ 74,002,059 $ 3,452,321
Comprehensive income (loss):
Net loss -- -- -- (5,655,401)
Reversal of unrealized holding loss on
investment in affiliate, net of
taxes of $207,360 -- -- -- --
Unrealized holding loss on investment
in affiliate -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive loss
Issuance of common stock upon exercise
of employee stock options 6,712 67 9,162 --
------------ ------------ ------------ ------------
BALANCE at March 31, 2002 17,993,277 179,933 74,011,221 (2,203,080)
Comprehensive income:
Net income -- -- -- 5,474,459
Unrealized holding gain on investment
in affiliate -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise
of employee stock options 53,563 535 73,114 --
Purchase of treasury stock, at cost -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 2003 18,046,840 180,468 74,084,335 3,271,379
Comprehensive income:
Net income -- -- -- 6,267,615
Unrealized holding gain on investment in
affiliate, net of taxes of $126,435 -- -- -- --
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Issuance of common stock upon exercise
of warrants 1,048,000 10,480 1,982,144 --
Issuance of common stock upon exercise
of employee stock options 96,275 963 219,317 --
Tax benefit from exercise of warrants
and employee stock options -- -- 1,753,409 --
Purchase of treasury stock, at cost -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 2004 19,191,115 $ 191,911 $ 78,039,205 $ 9,538,994
============ ============ ============ ============
[RESTUBBED]
TREASURY STOCK
-------------------------
ACCUMULATED NUMBER
OTHER OF SHARES
COMPREHENSIVE AS RESTATED
(LOSS) INCOME SEE NOTE 15 COST TOTAL
------------ ------------ ------------ ------------
BALANCE at March 31, 2001 $ (3,851,830) 8,017,131 $(22,116,995) $ 51,665,421
Comprehensive income (loss):
Net loss -- -- -- (5,655,401)
Reversal of unrealized holding loss on
investment in affiliate, net of
taxes of $207,360 3,496,220 -- -- 3,496,220
Unrealized holding loss on investment
in affiliate (741,081) -- -- (741,081)
Foreign currency translation adjustment (13,448) -- -- (13,448)
------------
Total comprehensive loss (2,913,710)
------------
Issuance of common stock upon exercise
of employee stock options -- -- -- 9,229
------------ ------------ ------------ ------------
BALANCE at March 31, 2002 (1,110,139) 8,017,131 (22,116,995) 48,760,940
Comprehensive income:
Net income -- -- -- 5,474,459
Unrealized holding gain on investment
in affiliate 453,722 -- -- 453,722
Foreign currency translation adjustment 118 -- -- 118
------------
Total comprehensive income 5,928,299
------------
Issuance of common stock upon exercise
of employee stock options -- -- -- 73,649
Purchase of treasury stock, at cost -- 1,476,700 (4,469,593) (4,469,593)
------------ ------------ ------------ ------------
BALANCE at March 31, 2003 (656,299) 9,493,831 (26,586,588) 50,293,295
Comprehensive income:
Net income -- -- -- 6,267,615
Unrealized holding gain on investment in
affiliate, net of taxes of $126,435 3,352,094 -- -- 3,352,094
Foreign currency translation adjustment 828 -- -- 828
------------
Total comprehensive income 9,620,537
------------
Issuance of common stock upon exercise
of warrants -- -- -- 1,992,624
Issuance of common stock upon exercise
of employee stock options -- -- -- 220,280
Tax benefit from exercise of warrants
and employee stock options -- -- -- 1,753,409
Purchase of treasury stock, at cost -- 685,864 (2,639,712) (2,639,712)
------------ ------------ ------------ ------------
BALANCE at March 31, 2004 $ 2,696,623 10,179,695 $(29,226,300) $ 61,240,433
============ ============ ============ ============
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
(As restated see note 15)
Cash flows from operating activities:
Net income (loss) $ 6,267,615 $ 5,474,459 ($ 5,655,401)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,256,593 1,356,597 1,995,096
Other-than-temporary decline in market value of investment in affiliate -- -- 2,858,447
Impairment loss on intangibles -- -- 7,441,554
Provision for doubtful accounts 8,232 200,000 590,000
Write-downs of prepaid promotional supplies and inventory 2,290,000 920,000 1,970,000
Deferred income tax provision (benefit) 285,671 328,963 (801,520)
Changes in assets and liabilities net of effect of brand licensing/sales:
Decrease in trade receivables - customers 995,493 1,675,952 525,174
Decrease in note and trade receivables - related parties 429,480 854,368 217,858
(Increase) decrease in income tax receivable (231,366) 1,745,401 (1,745,401)
Increase in inventories (7,100,256) (2,239,646) (10,328,694)
Decrease (increase) in prepaid expenses and other current assets 814,117 87,962 (301,411)
Decrease (increase) in other non-current assets 316,527 (304,056) 18,757
Increase (decrease) in accounts payable 1,036,722 (2,697,675) (1,245,699)
Increase (decrease) in accrued expenses and income taxes payable 1,168,308 453,395 (39,006)
------------ ------------ ------------
Total adjustments 1,269,521 2,381,261 1,155,155
------------ ------------ ------------
Net cash provided by (used in) operating activities 7,537,136 7,855,720 (4,500,246)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (382,042) (620,016) (1,222,751)
Collections on notes receivable from unrelated parties 1,997,828 -- --
Purchases of trademarks -- -- (6,974)
Cash received from brand licensing/sales:
Animale -- 2,333,333 --
Fred Hayman -- 2,000,000 --
Bal a Versailles -- 200,000 --
AdM -- -- 3,008,000
------------ ------------ ------------
Net cash provided by investing activities 1,615,786 3,913,317 1,778,275
------------ ------------ ------------
Cash flows from financing activities:
Net (increase) decrease in restricted cash (2,684,828) (229,364) 734,857
(Payments) proceeds - note payable to GMACCC, net (5,444,971) (6,363,419) 11,808,391
Payments - note payable to GE Capital Corporation, net -- -- (8,766,307)
Payments - note payable to Fred Hayman Beverly Hills (794,418) (739,023) (687,489)
Payments - notes payable to Bankers Capital Leasing (27,999) (163,456) (52,365)
Payments - note payable to United Capital Corporation -- -- (111,231)
Payments - other notes payable -- -- (18,869)
Net decrease (increase) in notes receivable from officer 742,884 94,281 (46,218)
Purchases of treasury stock (2,639,712) (4,469,593) --
Proceeds from issuance of common stock, net 2,212,904 73,649 9,229
------------ ------------ ------------
Net cash (used in) provided by financing activities (8,636,140) (11,796,925) 2,869,998
------------ ------------ ------------
Effect of exchange rate changes on cash 828 118 (13,448)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 517,610 (27,770) 134,579
Cash and cash equivalents, beginning of year 137,023 164,793 30,214
------------ ------------ ------------
Cash and cash equivalents, end of year $ 654,633 $ 137,023 $ 164,793
============ ============ ============
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003, AND 2002
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
A. NATURE OF BUSINESS
------------------
Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984,
and is a manufacturer and distributor of prestige fragrances and beauty
related products, on a worldwide basis.
B. PRINCIPLES OF CONSOLIDATION
---------------------------
The 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 accounts and transactions have
been eliminated in consolidation.
C. ACCOUNTING ESTIMATES
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The more
significant estimates relate to the carrying value of accounts
receivable from related parties, reserve for doubtful accounts, sales
returns and advertising allowances, inventory obsolescence and periods
of depreciation and amortization for trademarks, licenses, and
equipment. Actual results could differ from those estimates.
D. REVENUE RECOGNITION
-------------------
Revenue is recognized when the product is shipped to a customer, or in
the limited circumstances, at destination, when terms provide that
title passes at destination. Estimated amounts for sales returns and
allowances are recorded at the time of sale.
Licensing income, which is included in sales to unrelated customers, is
recognized ratably over the terms of the contractual license
agreements.
E. RESTRICTED CASH
---------------
The Company had $4,162,669 and $1,477,841 of cash on deposit at March
31, 2004 and 2003, respectively, which represents collections on trade
accounts receivable pending transfer to its lender, as stipulated in
its revolving credit agreement discussed in Note 7. During April 2004,
these funds were released from restriction and transferred into the
Company's operating account since there were no amounts outstanding at
March 31, 2004 under the revolving credit facility.
F. INVENTORIES AND COST OF GOODS SOLD
----------------------------------
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. The cost of inventories includes product
costs, inbound freight and handling charges, including an allocation of
the Company's applicable overhead in an amount of $2,307,000 and
$2,255,000 at March 31, 2004 and 2003, respectively.
F-7
Cost of goods sold includes the cost of inventories discussed above, as
well as gift-with-purchase activities.
G. INVESTMENT IN AFFILIATE
-----------------------
Investment in Affiliate consists of an investment in common stock of E
Com Ventures, Inc. ("ECMV"), the parent company of Perfumania, Inc.
(see Note 2). Such securities are considered available-for-sale and are
recorded at fair value. Changes in unrealized gains and losses of the
Company's investment are charged or credited as a component of
accumulated other comprehensive income (loss), net of tax, and are
included in the accompanying statements of changes in stockholders'
equity. A decline in the fair value of an available-for-sale security
below cost that is deemed other than temporary is charged to earnings.
H. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
------------------------------------
Equipment and leasehold improvements are carried at cost. Equipment is
depreciated using the straight-line method over the estimated useful
life of the asset. Leasehold improvements are amortized over the lesser
of the estimated useful life or the lease period. Repairs and
maintenance charges are expensed as incurred, while betterments and
major renewals are capitalized. The cost of assets and related
accumulated depreciation is removed from the accounts when such assets
are disposed of, and any related gains or losses are reflected in
current earnings.
I. TRADEMARKS AND LICENSES
-----------------------
Trademarks and licenses are recorded at cost and those with a definite
life are amortized over the estimated periods of benefit, principally
10 years. Amortization expense was $286,221, $43,207 and $484,657 for
the years ended March 31, 2004, 2003, and 2002, respectively.
Indefinite-lived intangible assets are reviewed annually during the
Company's fourth quarter of each fiscal year for impairment under the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The
identification and measurement of impairment of indefinite-lived
intangible assets involves the estimation of the fair value of the
related asset. The estimates of fair value are based on the best
information available as of the date of the assessment, which primarily
incorporate management assumptions about discounted expected future
cash flows. Future cash flows can be affected by changes in industry or
market conditions.
J. LONG-LIVED ASSETS
-----------------
Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. Impairment losses are recognized if
expected undiscounted future cash flows of the related assets are less
than their carrying values. The impairment loss is determined based on
the difference between the carrying value of the assets and anticipated
future cash flows discounted at a value commensurate with the risk
involved, which is management's estimate of fair value. Management does
not believe that there are any unrecorded impairment losses as of March
31, 2004.
K. ADVERTISING AND PROMOTION COSTS
-------------------------------
Advertising and promotional expenditures are expensed to operations as
incurred. These expenditures include print and media advertising, as
well as in-store cooperative advertising and promotions.
Cooperative advertising, which is under the direct control of our
customer and includes a percentage rebate or deduction based on net
sales to the customer, is accrued and recorded as a reduction of net
sales at the time of sale. Cooperative advertising with our customers,
which is under the direct control of, and at the option of the Company,
including catalogue and other forms of print advertising, are included
in advertising and promotional expense. The costs associated with the
specific advertisements are recorded as incurred, and when applicable,
are offset against trade accounts receivable. Such cooperative
advertising costs under our direct control amounted to approximately
$2,240,000, $3,013,000 and $3,536,000, and have been included in
advertising and promotional expenses for the years ended March 31,
2004, 2003, and 2002, respectively, (including $50,000 and $35,000 to
Perfumania in 2004 and 2003, respectively).
F-8
L. SELLING AND DISTRIBUTION EXPENSES
---------------------------------
Selling and distribution expenses include labor costs (wages and other
benefits) for employees directly involved in the selling and marketing
of the Company's products, sales commissions to independent sales
representatives, and the other overhead costs relating to these areas.
Additionally, this caption includes approximately $2,025,000,
$2,036,000 and $2,075,000 for the years ended March 31, 2004, 2003 and
2002, respectively, relating to the cost of warehouse operations not
allocated to inventories and other related distribution expenses
(excluding shipping expenses which are recorded as cost of goods sold).
A portion of these expenses is allocated to inventory in accordance
with generally accepted accounting principles.
M. GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses include labor costs (wages and
other benefits) for employees not directly involved in the selling and
distribution of the Company's products, professional service fees,
corporate activities and other overhead costs relating to these areas.
N. SHIPPING AND HANDLING FEES AND COSTS
------------------------------------
Amounts billed to customers for shipping and handling, which amount is
not significant, are included in net sales. The Company classifies the
cost related to shipping and handling in cost of goods sold.
O. RESEARCH AND DEVELOPMENT COSTS
------------------------------
Research and product development costs, which amounted to approximately
$120,000, $272,000 and $249,000 for the years ended March 31, 2004,
2003 and 2002, respectively, are expensed as incurred.
P. INCOME TAXES
------------
The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and
liabilities are recorded, using currently enacted tax rates, based upon
the difference between the tax bases of assets and liabilities and
their carrying amounts for financial statement purposes.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense
is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Q. FOREIGN CURRENCY TRANSLATION
----------------------------
The Company's functional currency for its foreign subsidiary is the
local currency. Other income and expense includes foreign currency
gains and losses, which are recognized as incurred.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, notes
receivable, accounts payable and borrowings, approximate fair value due
to either the short-term maturity of the instruments or borrowings with
similar interest rates and maturities.
F-9
S. BASIC AND DILUTED EARNINGS PER SHARE
------------------------------------
Basic earnings per common share calculations are determined by dividing
earnings attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the year. Diluted
earnings per common share calculations are determined by dividing
earnings attributable to common stockholders by the weighted average
number of shares of common stock and dilutive potential common stock
equivalents outstanding during the year.
T. STOCK BASED COMPENSATION
------------------------
Statement of Financial Accounting Standards No. 123, Accounting For
Stock Based Compensation ("SFAS No. 123") establishes a fair value
based method of accounting for stock based compensation plans, the
effect of which can either be disclosed or recorded. The Company
retained the intrinsic value method of accounting for stock based
compensation, which it previously used prior to the issuance of SFAS
No. 123.
In calculating the potential effect for proforma disclosure, the fair
market value on the date of grant was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2004 2003 2002
---- ---- ----
Expected life (years) 5 5 5
Interest rate 3% 3% 5%
Volatility 70% 70% 75%
Dividend Yield - - -
If compensation cost had been determined based on the fair value at the
grant date under SFAS No. 123, the Company's net income (loss) and
income (loss) per share would have been as follows:
For the years ended March 31,
2004 2003 2002
------------- ------------- -------------
Net income (loss), as reported $ 6,267,615 $ 5,474,459 $ (5,655,401)
Add: Stock-based employee compensation expense included in
net income, net of related tax effects -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 265,128 32,611 606,679
------------- ------------- -------------
Pro forma net income (loss) $ 6,002,487 $ 5,441,848 $ (6,262,080)
============= ============= =============
Basic net income (loss) per share:
As reported $ 0.75 $ 0.56 $ (0.57)
Proforma $ 0.72 $ 0.55 $ (0.63)
Diluted net income (loss) per share:
As reported $ 0.63 $ 0.54 $ (0.57)
Proforma $ 0.61 $ 0.53 $ (0.63)
F-10
U. 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:
2004 2003 2002
---------- ---------- ----------
Cash paid for:
Interest $ 424,665 $ 820,923 $1,288,250
========== ========== ==========
Income taxes $1,880,325 $ 853,728 $ 623,580
========== ========== ==========
Supplemental disclosures of non-cash investing and financing activities
are as follows:
Year ended March 31, 2004:
o The conversion of trade accounts receivable into a
subordinated note receivable from Perfumania in the amount of
$5,000,000 discussed in Note 2.
o The Company incurred an unrealized holding gain of $3,478,529
on the investment in affiliate, net of deferred taxes of
$126,435.
o The Company realized an income tax benefit of $1,753,409 in
connection with the exercise of warrants and employee stock
options.
Year ended March 31, 2003:
o The conversion of trade accounts receivable into a
subordinated note receivable from Perfumania in the amount of
$3,000,000.
o The Company incurred an unrealized holding gain of $453,722 on
the investment in affiliate.
o The consideration received for the sale of assets relating to
the sublicense of the Fred Hayman Beverly Hills brands
included an interest-bearing note from the sublicensee, as
discussed in Note 8 (C).
o The consideration received from the sale of the Animale brand
and assets related thereto, included an interest-bearing note
from the purchaser in the amount of $2,000,000 as discussed in
Note 8 (C).
Year ended March 31, 2002:
o The conversion of trade accounts receivable into a
subordinated note receivable from Perfumania in the amount of
$3,000,000.
o The Company incurred an unrealized holding loss of $741,081 on
the investment in affiliate.
o The Company acquired equipment in the amount of $249,989
through capital lease arrangements.
o The Company incurred an other-than-temporary decline in value
on the investment in affiliate of $2,858,447, with a
corresponding deferred tax benefit of $207,360.
o The Company reversed an unrealized holding loss of $3,496,220
on the investment in affiliate, net of tax benefits.
V. SEGMENT INFORMATION
-------------------
As of March 31, 2004, the Company operates solely in one segment, the
marketing and manufacture of prestige fragrances and beauty related
products.
F-11
W. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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.
The Company adopted the requirements of FIN 45 which did not have a
significant impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of APB No. 51 which
was revised in December 2003 ("FIN 46-R"). FIN 46-R 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-R 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-R must
be applied for the first interim or annual period beginning after June
15, 2003. The Company has not invested in any entities that it believes
are variable interest entities for which it is the primary beneficiary.
The adoption of FIN 46-R 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.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
----------------------------------------------------
Prior to the effectiveness of the Sarbanes-Oxley Act ("Sarbanes-Oxley"), which
prohibits the Company from renewing or amending loans, as well as issuing new
loans to Company officers and directors, the Company had made several personal
loans to its chairman and chief executive officer, Mr. Ilia Lekach. These loans
were consolidated into one note agreement on April 1, 2002, which bore interest
at 8% per annum and 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.
On July 15, 2003, Mr. Lekach repaid the entire loan balance of $742,884, plus
accrued interest at the default rate of prime plus 5%, through that date.
The Company had net sales of $31,964,407, $12,823,696, and $18,063,310 during
the fiscal years ended March 31, 2004, 2003 and 2002, respectively, to
Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures,
Inc. ("ECMV"), a company in which the Company's Chairman and Chief Executive
Officer had an ownership interest and held identical management positions until
February 2004. Perfumania is the Company's largest customer, and transactions
with them are closely monitored by the Company's Audit Committee and Board of
Directors to ensure that dealings with Perfumania are at arms length. Perfumania
offers the Company the opportunity to sell its products in over 230 retail
outlets and its terms with Perfumania take into consideration the companies'
over 15 year relationship. Pricing and terms with Perfumania reflect (a) the
volume of Perfumania's purchases, (b) a policy of no returns from Perfumania,
(c) minimal spending for advertising and promotion, (d) free exposure of the
Company's products provided in Perfumania's store windows and (e) minimal
distribution costs to fulfill Perfumania orders.
While the Company's invoice terms to Perfumania appear as net ninety (90) days,
for over ten years, the Board of Directors has granted longer payment terms,
taking into consideration the factors discussed above. The Board evaluates the
credit risk involved and imposes a specific dollar limit, which is determined
based on Perfumania's reported results and comparable store sales performance.
Management monitors the account activity to ensure compliance with the Board
limit. Net trade accounts receivable owed by Perfumania to the Company totaled
$10,890,338 and $11,426,977 at March 31, 2004 and 2003, respectively. Amounts
F-12
due from Perfumania are non-interest bearing and were paid in accordance with
the terms established by the Board (See Note 13 for further discussion of this
concentration of credit risk).
On July 1, 1999, Perfumania and the Company's Board of Directors approved the
transfer of 1,512,406 shares of Perfumania treasury stock to the Company in
consideration for a partial reduction of the outstanding trade receivable
balance in the amount of $4,506,970. The transfer price was based on a per share
price of $2.98 ($11.92 post reverse split discussed below), which approximated
90% of the closing price of Perfumania's common stock for the previous 20
business days. The agreement was consummated on August 31, 1999, and the shares
registered in June 2000. Effective February 1, 2000, ECMV was formed as a
holding company and accordingly, former Perfumania shareholders now hold common
stock in ECMV. During the first quarter of the fiscal year ended March 31, 2002,
the Company recorded a non-cash charge to earnings of $2,858,447 which reflected
an other-than-temporary decline in value of the investment in affiliate based
upon a sustained reduction in the quoted market price of $1.09 per share ($4.36
post reverse split discussed below), as of June 30, 2001, compared to the
original cost per share of $2.98 ($11.92 post reverse split discussed below). As
a result of this non-cash reduction of the cost basis of the Company's
investment, the Company reversed $3,496,220 of previously recorded unrealized
losses on the investment, net of taxes, which had been recorded as a component
of stockholders' equity as of March 31, 2001.
On March 21, 2002, ECMV effected a one-for-four reverse stock split;
accordingly, the Company now owns 378,101 shares. As of March 31, 2004, the fair
market value of the investment in ECMV had increased to $4,839,693 ($12.80 per
share after the reverse split).
As of June 25, 2004 the fair market value of the investment in ECMV is
$2,816,852 ($7.45 per share after the reverse split).
The following unaudited summarized financial data was obtained from ECMV's
public filings (in 000's):
Balance Sheet Data
---------------------------
January 31, 2004 February 1, 2003
---------------- ----------------
Current assets $ 65,405 $ 75,621
======== ========
Total assets $ 92,463 $103,423
======== ========
Current liabilities $ 74,495 $ 73,817
======== ========
Total liabilities $ 82,241 $ 81,569
======== ========
Stockholders' Equity $ 10,222 $ 21,853
======== ========
Statement of Operations Data
For the Fiscal Year Ended
-------------------------
January 31, February 1, February 2,
2004 2003 2002
--------- --------- ---------
Net Sales $ 212,568 $ 201,514 $ 193,352
Costs and operating expenses 217,012 195,722 186,817
Depreciation and amortization 6,103 6,024 6,825
--------- --------- ---------
Loss from operations (10,547) (232) (290)
========= ========= =========
Net loss $ (12,872) $ (2,826) $ (3,192)
========= ========= =========
During June 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 was
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
January 31, 2004 and February 29, 2004. Accrued interest was payable with each
principal installment. The loan was repaid in accordance with its terms.
The Company had net sales of $10,477,671, $8,924,530 and $5,966,057 during the
years ended March 31, 2004, 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 statements of operations. As of March 31, 2004 and 2003, trade
receivables from related parties include $614,134 and $506,975, respectively,
from these customers, which were current in accordance with their sixty (60) or
ninety (90) day terms.
F-13
3. INVENTORIES
-----------
The components of inventories are as follows:
March 31,
--------
2004 2003
----------- -----------
Finished products $18,000,231 $15,873,033
Components and packaging material 9,094,932 7,642,649
Raw material 4,466,390 2,765,615
----------- -----------
$31,561,553 $26,281,297
=========== ===========
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid expenses and other current assets are as follows:
March 31,
---------
2004 2003
---------- ----------
Promotional supplies, net $3,129,411 $3,665,465
Deferred tax assets 1,923,436 1,672,792
Prepaid advertising 484,145 728,029
Prepaid royalties 107,000 400,000
Other 329,945 541,124
---------- ----------
$5,973,937 $7,007,410
========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
------------------------------------
Equipment and leasehold improvements are comprised of the following:
March 31, Estimated useful
--------- ----------------
2004 2005 lives (in years)
---- ---- ----------------
Molds and equipment $6,251,775 $6,274,563 3-7
Furniture and fixtures 915,424 1,007,576 3-5
Leasehold improvements 658,215 588,986 5-7
---------- ----------
7,825,414 7,871,125
Less: accumulated depreciation and amortization (6,745,460) (6,202,841)
----------- -----------
$1,079,954 $1,668,284
========== ==========
Depreciation and amortization expense on equipment and leasehold improvements
for the years ended March 31, 2004, 2003 and 2002 was $970,372, $1,313,390 and
$1,510,439, respectively. There were no amounts subject to capital leases at
March 31, 2004; amounts subject to capital leases at March 31, 2003, included in
molds and equipment above, totaled $145,932, net of accumulated amortization of
$51,076.
6. TRADEMARKS AND LICENSES
-----------------------
Trademarks and licenses are attributable to the following brands:
March 31, Estimated life
--------- --------------
2004 2003 (in years)
---- ---- ----------
Fred Hayman Beverly Hills ("FHBH") $2,820,361 $2,820,361 10
Animale 122,965 122,965 1
Perry Ellis and Other 329,106 329,106 5-25
----------- -----------
3,272,432 3,272,432
Less - accumulated amortization (1,215,758) (929,537)
------------- ------------
Subtotal of amortizable intangibles 2,056,674 2,342,895
Perry Ellis 5,888,250 5,888,250 indefinite
----------- -----------
$ 7,944,924 $ 8,231,145
=========== ===========
F-14
Future amortization of licenses and trademarks is as follows (in 000's):
For the year ending March 31, Amount
----------------------------- ------
2005 $ 279
2006 $ 237
2007 $ 237
2008 $ 237
2009 $ 217
Thereafter $ 850
-------
$ 2,057
=======
See Note 8 (C) for further discussion of the FHBH and Animale brands. During the
year ended March 31, 2004, and as a result of the sublicensing of the FHBH
brand, the Company recorded amortization expense of $198,008 relating to the
FHBH license. As of April 1, 2001, amortization had been discontinued for this
intangible, as it was determined to have an indefinite life at that time.
On March 2, 1998, the Company entered into an exclusive agreement to license the
Alexandra de Markoff (ADM) rights to Cosmetic Essence, Inc. ("CEI") for an
annual fee of $500,000. The initial term of the agreement is ten years,
automatically renewable for additional ten and five year terms. The annual fee
reduces to $100,000 after the third renewal. The license was assigned by CEI to
one of its affiliates, Irving W. Rice & Co. CEI guarantees payment of the annual
licensing fee for the entire term of the agreement, including renewals.
On February 27, 2002, the Company entered into an agreement to sell the ADM
trademark and assign the license agreement with CEI to the former owner of CEI
for $3,008,000 in cash, which closed on March 1, 2002. The net book value of the
intangibles associated with ADM was $8,507,092. In anticipation of the
agreement, an impairment charge against the intangibles in the amount of
$5,499,092 was recorded in the accompanying statement of operations for the year
ended March 31, 2002.
On June 9, 1998, the Company entered into an exclusive agreement to license the
Bal A Versailles (BAV) rights to Genesis International Marketing Corporation
("Genesis") for an annual licensing fee of $100,000 during the initial year of
the agreement, increasing to $150,000 for subsequent years for the remainder of
the initial term, and to $200,000 each year thereafter. The initial term of the
agreement was for ten years, renewable every five years.
On November 4, 2002, the Company entered into an agreement to sell the BAV
trademarks to Genesis for $300,000, of which $262,500 has been paid as of March
31, 2004. As part of the agreement, licensing fees due under the original
licensing agreement stopped accruing on December 31, 2001. As a result of the
ongoing negotiations, an impairment charge against the intangibles related to
BAV in the amount of $1,942,462 was recorded in the accompanying statements of
operations for the year ended March 31, 2002.
7. BORROWINGS
----------
The composition of borrowings is as follows:
March 31, 2004 March 31, 2003
-------------- --------------
Revolving credit facility payable to GMAC Commercial Credit, interest at LIBOR
plus 3.75%, or prime (4.0% at March 31, 2004) plus 1% at the Company's option,
excluding restricted cash of $4,162,669 and $1,477,841
at March 31, 2004 and 2003, respectively. $ -- $5,444,971
Note payable to Fred Hayman Beverly Hills (FHBH), collateralized by the acquired
licensed trademarks, interest at 7.25%, payable in equal monthly
installments of $69,863, including interest, through June 2004 170,927 965,345
Capital lease payable to Bankers Leasing, collateralized by certain warehouse
equipment, payable in quarterly installments of $33,992,
including interest, through July 2003. -- 27,999
---------- ----------
170,927 6,438,315
Less: long-term borrowings -- (102,096)
---------- ---------
Short-term borrowings $ 170,927 $6,336,219
========== ==========
F-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). On
February 6, 2003, the Loan Agreement was extended for an additional year through
July 20, 2005. Under the Loan Agreement, the Company is able to borrow,
depending on the availability of a borrowing base, on a revolving basis, up to
$20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the
Bank of New York's prime rate, at the Company's option. The Loan Agreement
contains provisions to reduce both rates by a maximum of 1% or increase both
rates by a maximum of .5% based on a ratio of funded debt to EBITDA.
At March 31, 2004, based on the borrowing base at that date, the credit line
amounted to approximately $16,137,000, none of which was utilized.
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.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. LEASES:
------
The Company leases its office space and certain equipment under certain
operating leases expiring on various dates through 2007. Total rent expense
charged to operations for the years ended March 31, 2004, 2003 and 2002 was
approximately $900,000, $1,000,000 and $891,000, respectively.
At March 31, 2004, the future minimum annual rental commitments under
noncancellable operating leases are as follows (in 000's):
For the year ending March 31, Amount
----------------------------- ------
2005 $1,001
2006 696
2007 17
------
Total $1,714
======
B. LICENSE AND DISTRIBUTION AGREEMENTS:
------------------------------------
During the year ended March 31, 2004, the Company held exclusive worldwide
licenses to manufacture and sell fragrance and other related products for Perry
Ellis, Ocean Pacific ("OP"), and Jockey.
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 on a worldwide basis. The
term of the agreement continues through December 2009, and is renewable for an
additional five years if certain sales levels are met.
F-16
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 launched during July 2005.
The Company believes it is presently in compliance with all material obligations
under the above agreements. The Company expects to incur continuing obligations
for advertising and royalty expense under these license agreements and the new
license agreement with GUESS? As of March 31, 2004, the minimum amounts of these
obligations derived from the aggregate minimum sales goals, set forth in the
agreements, over the remaining contract periods are as follows (in 000's):
Fiscal year ending March 31, 2005 2006 2007 2008 2009 After
---------------------------- ---- ---- ---- ---- ---- -----
Advertising $14,010 $17,460 $19,760 $17,889 $19,030 $8,050
Royalties $634 $1,696 $1,819 $1,687 $1,938 $1,313
On May 4, 2004, the Company entered into a letter of intent with Ms. Paris
Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and
related products, on an exclusive basis, under her name. Effective June 1, 2004,
the Company entered into a definitive license agreement with Paris Hilton
Entertainment, Inc. ("PHEI"), which expires on June 30, 2009. The agreement is
renewable for an additional five-year period.
Under the PHEI 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 PH fragrance will be launched prior to March 31,
2005.
C. TRADEMARKS:
-----------
Through various acquisitions since 1991, the Company acquired worldwide
trademarks and distribution rights to ANIMALE, LIMOUSINE and BAL A VERSAILLES
fragrances and ALEXANDRA de MARKOFF cosmetics and fragrances. In addition, FHBH
granted the Company an exclusive 55-year royalty free license. Accordingly,
there are no licensing agreements requiring the payment of royalties by the
Company on these trademarks and the Company had the rights to license all of
these trademarks, other than FHBH, for all classes of merchandise. Royalties
were payable to the Company from the licensees of ALEXANDRA DE MARKOFF and BAL A
VERSAILLES brands. Additionally, see Note 6 for further discussion of the sale
of these two brands to the previous licensees.
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, which was paid in accordance with its terms. As of
March 31, 2003, notes receivable in the accompanying consolidated balance sheet
included $1,666,667 relating to this transaction.
As part of the agreement the Company did not include the inventory of Chaleur
d'Animale, the Animale brand's newest product introduction, and maintains the
rights to manufacture and distribute this product line, on a royalty-free basis,
until January 2005.
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 March 31, 2004, notes receivable in the
accompanying consolidated balance sheet of $1,708,511 relates entirely to this
transaction ($515,468 and $1,524,204 of current and long-term notes receivable,
respectively, at March 31, 2003).
F-17
The Sublicense Agreement excluded the rights to "273 Indigo" for men and women,
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 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 royalty percentage on sales of
new FHBH products increased to 3% of net sales. The sublicensee is no longer
required to purchase inventory and promotional materials relating to "273
Indigao", and the Company may continue to manufacture and distribute "273
Indigo" products.
D. EMPLOYMENT AND CONSULTING AGREEMENTS:
-------------------------------------
The Company has contracts with certain officers, employees and consultants which
expire at different periods through March 2006. Minimum commitments under these
contracts total approximately $2,472,000 ($1,326,000 for the year ending March
31, 2005 and $1,146,000 for the year ending March 31, 2006). In addition,
warrants to purchase 760,000 shares of common stock at a price of $1.86 were
granted to officers and directors in connection with these contracts. These
warrants are exercisable for a ten-year period from the date of grant, vest over
the three-year term of the applicable contract starting on March 31, 2004 (end
of contract's initial year), and double in the event of a change in control. As
of March 31, 2004, 253,334 of these warrants were vested.
On June 8, 2001, the Compensation Committee of the Board of Directors authorized
grants to the Company's Chief Executive Officer and Chief Operating/Financial
Officer of 500,000 and 100,000 warrants, respectively, to acquire shares of
common stock at $2.44 per share. The warrants vested on the date of grant and
are exercisable for a ten-year period.
In connection with previous employment contracts and consulting agreements,
warrants to purchase shares of common stock, at prices ranging from $1.50 to
$7.50 were granted between 1989 and 2000. These warrants are exercisable for a
ten-year period from the date of grant and vested over the term of the
applicable contracts. As of March 31, 2004, all of the above mentioned warrants
were vested. In addition, during January 1996, the Board of Directors approved a
resolution whereby the number of warrants granted to key employees would double
in the event of a change in control.
On January 18, 1999, the Compensation Committee of the Board of Directors
authorized the grant to the Company's Chairman and Chief Executive Officer of
1,000,000 warrants to acquire shares of common stock at $8.00 per share for a
five year period. The warrants were cancelled during April 2001.
On February 4, 2004, the Company filed with the Securities and Exchange
Commission ("SEC") a registration statement on Form S-3 (file number 333-112472)
in order to register 1,306,000 shares of the Company's common stock on behalf of
certain selling shareholders, including 1,270,000 shares of common stock
relating to the warrants granted prior to 2000, as described below. All of the
shares are shares issuable, or that were already issued, upon the exercise of
warrants held by the selling shareholders. Although the Company will not receive
any of the proceeds from any subsequent resale of the shares, it would receive
approximately $2,800,000 if all of the warrants are exercised. As of June 25,
2004, 1,096,000 of these warrants have been exercised and the Company has
received proceeds of $2,126,499 (1,048,000 and $1,992,624 as of March 31, 2004).
The registration statement was declared effective by the SEC on April 26, 2004.
All of the previously described warrants were granted at or in excess of the
market value of the underlying shares at the date of grant.
E. PURCHASE COMMITMENTS AND CONTINGENCIES:
---------------------------------------
As of March 31, 2004, the Company is contingently liable in the amount of
approximately $18 million for purchase orders issued in the normal course of
business for components, raw materials and promotional supplies. The purchase
orders, for the most part, stipulate delivery dates ranging from thirty days to
periods exceeding one year, based on forecasted production needs.
F-18
The Company is a party to legal and administrative proceedings arising in the
ordinary course of business. The outcome of these actions is not expected to
have a material effect on the Company's financial position or results of
operations. See Note 12 to the consolidated financial statements for further
discussion.
9. INCOME TAXES
------------
The components of the provision for income taxes for each of the years ended
March 31 are as follows:
Years Ended March 31,
---------------------
2004 2003 2002
----------- ----------- -----------
Current taxes (benefit):
U.S. federal $ 3,024,049 $ 2,724,601 ($1,380,986)
U.S. state and local 531,722 164,899 85,941
Foreign -- -- 6,517
----------- ----------- -----------
3,555,771 2,889,500 (1,288,528)
Deferred tax (benefit) 285,671 328,963 (801,520)
----------- ----------- -----------
Income tax expense (benefit) $ 3,841,442 $ 3,218,463 ($2,090,048)
=========== =========== ===========
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended March 31 as follows:
2004 2003 2002
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% (35.0%)
Increase (decrease) resulting from:
Change in valuation allowance 0.1% 2.2% 10.4%
Other 2.9% (0.2%) (2.4%)
------ ------ ------
38.0% 37.0% (27.0%)
====== ====== ======
Deferred income taxes as of March 31 are provided for temporary differences
between financial reporting carrying value and the tax basis of the Company's
assets and liabilities under SFAS 109. The tax effects of temporary differences
are as follows:
2004 2003
----------- -----------
Deferred Tax Assets
Allowance for doubtful accounts,
sales returns and allowances $ 485,514 $ 441,925
State net operating loss carry forwards 9,656 9,656
Inventory write-downs 1,185,336 1,177,961
Other than temporary decline on investment
in affiliate 1,086,210 1,074,404
Other, net 242,930 43,250
Subtotal 3,009,646 2,747,196
----------- -----------
Deferred Tax Liabilities
Depreciation and amortization (1,594,794) (1,022,194)
Other -- (36,285)
----------- -----------
Subtotal (1,594,794) (1,058,479)
----------- -----------
Net deferred tax asset before valuation allowance
1,276,611 1,688,717
Less: valuation allowance (1,086,210) (1,074,404)
----------- -----------
Net deferred tax asset after valuation allowance $ 328,642 $ 614,313
=========== ===========
Net Deferred Tax Liability on
Available-For-Sale Securities
Unrealized (gain) loss on investment in affiliate (126,435) 109,196
Less: valuation allowance -- (109,196)
----------- -----------
Net deferred tax liability on unrealized gain (126,435) --
=========== ===========
F-19
A valuation allowance is provided since management can provide no assurance that
the Company will more likely than not generate sufficient capital gains to
completely offset the unrealized loss on investments.
10. STOCK OPTION AND OTHER PLANS
----------------------------
The Company had adopted a Stock Option Plan and a 1989 Stock Option Plan
(collectively, the "Plan") and had reserved and registered 250,000 shares of its
common stock for issue thereunder. Options granted under the Plan were not
exercisable after the expiration of five years from the date of grant and vested
25% after each of the first two years, and 50% after the third year. Options for
most of the shares in the Plan may qualify as "incentive stock options" under
the Internal Revenue Code. The shares were also available for distribution
pursuant to options which do not so qualify. Under the Plan, options could be
granted to eligible officers and key employees at not less than the fair market
value of the shares at the date of grant of the option (110% of the fair market
value for 10% or greater stockholders).
Options which did not qualify as "incentive stock options" may also be granted
to consultants. Options generally may be exercised only if the option holder
remains continuously associated with the Company or a subsidiary from the date
of grant to the date of exercise.
As of March 31, 2004, and since the inception of the Plan, options have been
granted, net of cancellations, to purchase 199,092 shares at exercise prices
ranging from $1.06 to $5.75 per share. No further options are issuable under the
Plan. Through March 31, 2004, 196,592 options had been exercised under the Plan
and no further shares are exercisable.
In October 1996, the Company's shareholders ratified the establishment of a new
stock option plan (the "1996 Plan") which reserved 250,000 shares of its Common
Stock for issue thereunder with the same expiration and vesting terms as the
Plan. Only employees who are not officers or directors of the Company shall be
eligible to receive options under the 1996 Plan. During January 2000, the shares
were registered with the Securities and Exchange Commission via a Form S-8
registration statement.
As of March 31, 2004, and since the inception of the 1996 Plan, options have
been granted net of cancellations, to purchase 184,137 shares at exercise prices
ranging from $1.375 to $2.813 per share. Through March 31, 2004, 173,137 options
had been exercised and all options were vested.
The following table summarizes the activity for options covered under all of the
above plans:
1996 Plan
----------------------------
Weighted Average
Amount Exercise Price
Balance at March 31, 2001 205,350 $ 1.98
Granted -- --
Exercised (6,712) $ 1.38
Canceled/Expired (25,800) $ 1.38
--------
Balance at March 31, 2002 172,838 $ 2.26
Granted --
Exercised (53,563) $ 1.38
Canceled/Expired (8,550) $ 1.38
--------
Balance at March 31, 2003 110,725 $ 2.40
Granted --
Exercised (96,275) $ 2.29
Canceled/Expired (3,450) $ 2.10
--------
Balance at March 31, 2004 11,000 $ 2.81
========
F-20
In October 2000, the Company's shareholders ratified the establishment of a
third stock option plan (the "2000 Plan") which reserved an additional 250,000
shares of its Common Stock for issue thereunder with the same expiration and
vesting terms as the 1996 Plan. To date, no grants have been made under the 2000
Plan and the shares underlying the options have not been registered.
The following table summarizes the activity and related information for all
other options and warrants outstanding, including the warrants discussed under
commitments in Note 8 (D):
Amount
------
Balance at March 31, 2001 2,646,000 $4.41
Granted 620,000 2.43
Exercised -- --
Canceled/Expired (1,000,000) $8.06
---------- -----
Balance at March 31, 2002 2,266,000 $2.28
Granted 780,000 $1.86
Exercised -- --
Canceled/Expired -- --
---------- -----
Balance at March 31, 2003 3,046,000 $2.15
Granted 40,000 $3.60
Exercised (1,048,000) $1.90
Canceled/Expired -- --
---------- -----
Balance at March 31, 2004 2,038,000 $2.32
==========
The following table summarizes information about these options and warrants
outstanding at March 31, 2004:
Options And
Options and Warrants Outstanding Warrants Exercisable
-------------------------------- --------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Prices Amount Exercise Price Remaining Life Amount Exercise Price
- ----------------- ------ -------------- -------------- ------ --------------
$1.13-$2.81 1,795,000 $2.16 7 1,288,334 $2.28
$3.13-$4.56 240,000 $3.28 3 240,000 $3.28
$6.75 10,000 $6.75 3 10,000 $6.75
$8.00 $8.00 1 4,000 $8.00
--------- ----- -- --------- -----
4,000
2,049,000 $2.33 7 1,542,334 $2.48
========= ===== == ========= =====
The Company has established a 401-K plan covering substantially all of its U.S.
employees. Commencing on April 1, 1996, the Company matched 25% of the first 6%
of employee contributions, within annual limitations established by the Internal
Revenue Code. The cost of the matching program totaled approximately $43,000,
$54,000, and $54,000 for the years ended March 31, 2004, 2003 2002,
respectively.
F-21
11. 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:
2004 2003 2002
------------ ------------ ------------
Net income (loss) $ 6,267,615 $ 5,474,459 ($ 5,655,401)
============ ============ ============
Weighted average number of shares issued 18,092,796 18,011,046 17,990,177
Weighted average number of treasury shares (9,770,006) (8,161,890) (8,017,131)
------------ ------------ ------------
Weighted average number of shares outstanding used in
basic earnings per share calculation 8,322,790 9,849,156 9,973,046
============ ============ ============
Basic net income (loss) per common share $ 0.75 $ 0.56 $ ( 0.57)
============ ============ ============
Weighted average number of shares outstanding used in
basic earnings per share calculation 8,322,790 9,849,156 9,973,046
Effect of dilutive securities: (1)
Stock options and warrants 1,575,605 330,708 --
------------ ------------ ------------
Weighted average number of shares outstanding used in
diluted earnings per share calculation 9,898,395 10,179,864 9,973,046
============ ============ ============
Diluted net income per common share $ 0.63 $ 0.54 ($ 0.57)
============ ============ ============
Antidilutive securities not included in diluted earnings
per share computation:
Options and warrants to purchase common stock 16,000 1,171,072 1,255,566
============ ============ ============
Exercise Price $4.56-$8.00 $2.44-$8.00 $2.25-$8.00
============ ============ ============
(1) The calculation of diluted loss per share was the same as the basic loss per
share for the year ended March 31, 2002, since the inclusion of potential
common stock in the computation would be antidilutive.
12. 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 unspecified 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 filed
a Motion to Dismiss the action on February 27, 2004. A hearing on the Motion was
held on April 14, 2004 and the Complaint was dismissed, without prejudice. The
Court encouraged the Plaintiffs to serve a demand upon the Corporation to
examine the issues alleged in the Complaint rather than file an Amended
Complaint, but gave the Plaintiffs thirty (30) days to file an Amended Complaint
if they chose to do so. Following the order granting dismissal, the Company
voluntarily furnished detailed information to Plaintiff's counsel demonstrating
the Company's view that there was no legitimate basis for the claims previously
asserted. Based on that submission, Plaintiffs requested additional time to
consider their amendment. Additional exchanges of correspondence have followed
and additional extensions of time have been granted. As of the date of this
filing, no amended complaint has been served.
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.
F-22
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 the Company, which, if determined
adversely, would have a material effect on the Company's financial position or
results of operations.
On May 8, 2001, and as amended on June 8, 2001, the Company filed a legal
complaint against a component supplier to recover out-of-pocket costs and
damages resulting from the supplier having delivered faulty components for two
of its fragrances. Out-of-pocket costs to refurbish the products were included
in cost of goods for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement whereby
the Company would receive cash consideration of $3,958,000 from the supplier's
insurance carrier, plus an additional $42,564 from the supplier. These funds
were received on October 7, 2002, and the suit was dismissed.
The Company has recorded the settlement in the accompanying consolidated
statement of operations for the year ended March 31, 2003, net of certain
expenses as follows:
Proceeds from settlement $4,000,564
Less expenses directly related to the claim
and incurred during the period April 1, 2002
through March 31, 2003:
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.
13. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS:
--------------------------------------------------
During the last three fiscal years, the following brands have accounted for 10%
or more of the Company's gross sales:
2004 2003 2002
---- ---- ----
PERRY ELLIS 81% 75% 67%
OCEAN PACIFIC 13% 10% 12%
ANIMALE 2% 7% 13%
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade receivables from department and specialty stores in
the United States, distributors throughout the world, and Perfumania. To reduce
credit risk for trade receivables from unaffiliated parties, the Company
performs ongoing evaluations of its customers' financial condition but does not
generally require collateral. Management has established an allowance for
doubtful accounts for estimated losses. The allowances for doubtful accounts are
considered adequate to cover estimated credit losses.
No unrelated customer accounted for more than 10% of the Company's net sales
during the year ended March 31, 2004. During the years ended March 31, 2003 and
2002, one unrelated customer accounted for approximately 19% and 14%,
respectively, of the Company's net sales.
F-23
Revenues from Perfumania represented 40%, 18% and 26% of the Company's net sales
during the years ended March 31, 2004, 2003, and 2002, respectively. To reduce
credit risk, on occasion, the Company, based on its reviews of Perfumania's
financial condition, converts certain trade receivables into subordinated notes
receivable. (See Note 2 for a detailed discussion of a previous conversion of
trade receivables into notes receivable from Perfumania). During the years ended
March 31, 2004, 2003 and 2002, revenues from other related parties represented
approximately 13%, 12% and 9%, respectively, of the Company's net sales.
As reported in ECMV's latest public filing, on May 12, 2004, Perfumania entered
into a new three-year amended and restated senior secured revolving credit
facility with its then current lender and a new participant, increasing its
borrowing capabilities from $40 million to $60 million. Management continues to
evaluate its credit risk and assess the collectibility of the Perfumania
receivables. 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 March 31, 2004. 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.
Gross sales to unrelated international customers totaled approximately
$28,418,000, $38,364,000 and $31,329,000, for the years ended March 31, 2004,
2003 and 2002, respectively. At March 31, 2004 and 2003, trade receivables from
foreign customers (all payable in U.S. dollars) amounted to approximately
$2,118,000 and, $4,897,000 respectively.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
----------------------------------------------
The following is a summary of the Company's unaudited quarterly results of
operations for the years ended March, 31, 2004 and 2003 (in thousands, except
per share amounts).
Quarter Ended
----------------------------------------------
June 30, September 30, December 31, March 31,
2003 2003 2003 2004
------- ------- ------- -------
Net sales $16,942 $18,253 $25,764 $19,622
Gross margin 8,046 8,792 12,809 11,326
Net income 717 1,402 1,687 2,462
Income per common share:
Basic $ 0.08 $ 0.17 $ 0.21 $ 0.30
Diluted $ 0.08 $ 0.15 $ 0.18 $ 0.24
Quarter Ended
----------------------------------------------
June 30, September 30, December 31, March 31,
2002 2002 2002 2003
------- ------- ------- -------
Net sales $19,826 $18,007 $19,781 $14,640
Gross margin 9,633 8,686 10,104 7,959
Net income 1,116 3,110 107 1,141
Income per common share:
Basic $ 0.11 $ 0.31 $ 0.01 $ 0.12
Diluted $ 0.11 $ 0.31 $ 0.01 $ 0.12
F-24
15. RESTATEMENT
-----------
Subsequent to the filing of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2003 and in connection with a review by the staff of
the Securities and Exchange Commission ("SEC") of the Company's Registration
Statement on Form S-3 filed during February 2004, management determined that the
Company should present the amount of cash that the Company had on deposit
pending transfer to the Company's lender, as stipulated in the Company's
revolving credit agreement, as "Restricted Cash" on the accompanying
consolidated balance sheet instead of netting such cash against the outstanding
balance on the revolving credit facility. Such cash represents collections on
the Company's trade accounts receivable. As a result, the Company also
segregated the changes in restricted cash as a separate line item within "Cash
flows from financing activities" on the accompanying consolidated statement of
cash flows. As a result, the accompanying consolidated financial statements as
of March 31, 2003 and for the fiscal year ended March 31, 2003 and 2002 have
been restated from the amounts previously reported for the significant effects
of the restatements on the consolidated financial statements are shown in the
table below. In addition, previously reported amounts includes a
reclassification of a note receivable from officer in the amount of $742,884
that was previously classified within stockholders' equity and was reclassified
to a current asset as such was collected during July 2003. See Note 2 for
further discussion.
Consolidated Balance Sheet as of
March 31, 2003: As Previously Reported As Restated
---------------------- -----------
Restricted cash $ -- $ 1,477,841
Total current assets 53,397,435 54,875,276
Total assets 65,194,734 66,672,575
Borrowings, current portion 4,858,378 6,336,219
Total current liabilities 13,740,864 15,218,705
Total liabilities 14,901,439 16,379,280
Total liabilities and stockholders' equity 65,194,734 66,672,575
Consolidated Statements of Cash Flows for the fiscal years ended As Previously
Reported As Restated March 31, 2003 and 2002:
Cash flows from financing activities -
2003:
Net increase in restricted cash -- (229,364)
Proceeds (payments) - Note payable to GMACCC, net (6,592,793) (6,363,419)
2002:
Net decrease in restricted cash -- 734,857
Proceeds - Note payable to GMACCC, net 10,559,914 11,808,391
Payments - Note payable to G.E. Capital Corp., net (6,782,973) (8,766,307)
In addition, the Company segregated cost of goods sold, which was previously
presented as one line item in the condensed consolidated statements of income
into two separate captions, "unrelated customers" and "related parties". The
Company also added a column to the condensed consolidated statement of changes
in stockholders' equity titled "Treasury Stock - Number of Shares".
The adjustments discussed above did not result in any restatement of the
Company's net income, earnings per share or working capital amounts from those
that were previously reported.
F-25
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Balance at beginning Additions charged to Net Balance at
Description of period costs and expenses Deductions end of period
- ----------------------------------------------------------------------------------------------------------------
Year ended March 31, 2004
Reserves for:
Doubtful accounts $ 312,425 $ 8,232 $ 85,459 $ 235,198
Sales returns 600,686 2,660,459 2,502,658 758,487
Demonstration and co-op
advertising allowances 820,448 3,216,600 3,275,206 761,842
----------- ----------- ----------- -----------
$ 1,733,559 $ 5,885,291 $ 5,863,323 $ 1,755,527
=========== =========== =========== ===========
Year ended March 31, 2003
Reserves for:
Doubtful accounts $ 103,470 $ 200,000 $ (8,955) $ 312,425
Sales returns 648,236 4,534,429 4,581,979 600,686
Demonstration and co-op
advertising allowances 678,649 4,313,357 4,171,558 820,448
----------- ----------- ----------- -----------
$ 1,430,355 $ 9,047,786 $ 8,744,582 $ 1,733,559
=========== =========== =========== ===========
Year ended March 31, 2002
Reserves for:
Doubtful accounts $ 571,848 $ 590,000 $ 1,058,378 $ 103,470
Sales returns 537,195 4,229,790 4,118,749 648,236
Demonstration and co-op
advertising allowances 812,961 3,666,788 3,801,100 678,649
----------- ----------- ----------- -----------
$ 1,922,004 $ 8,486,578 $ 8,978,227 $ 1,430,355
=========== =========== =========== ===========
F-26