SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
Or______
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 0-15491
PARLUX FRAGRANCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 22-2562955 | |||
(State or other jurisdiction of | (IRS employer identification no.) | |||
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3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code 954-316-9008
Former name, former address and former fiscal year, if changed since last report
Indicate with an X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate with an X whether the registrant is an accelerated filer (As defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an X whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 12, 2004, 8,908,590 shares of the issuers common stock were outstanding.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
See pages 10 to 22
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
We may periodically release forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, including those in this Form 10-Q, involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or our achievements, or our industry, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, among others, collectability of trade receivables from related parties, future trends in sales and our ability to introduce new products in a cost-effective manner. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release t he result of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
On September 15, 2004, we entered into an exclusive worldwide license agreement with Ms. Maria Sharapova, to develop, manufacture and distribute prestige fragrances and related products under her name. The initial term of the agreement expires on June 30, 2008 and is renewable for an additional three-year period.
Under the license agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first fragrance under this agreement will be launched prior to March 31, 2006.
No other material change in our contractual obligations, outside the ordinary course of business, has occurred during the periods covered by this report.
The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements and notes. This discussion and analysis should be read in conjunction with such condensed consolidated financial statements and notes.
The accompanying managements discussion and analysis of financial condition and results of operations gives effect to the restatement of the condensed consolidated financial statements for the three and six month periods ended September 30, 2003 as described in Note L to the condensed consolidated financial statements.
Critical Accounting Policies and Estimates
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company has included in its Annual Report on Form 10-K for the year ended March 31, 2004 a discussion of the Companys most critical accounting policies, which are those that are most important to the portrayal of the Companys financial condition and results of operations and require managements most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently un certain. The Company has not made any changes in these
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critical accounting policies, nor has it made any material change in any of the critical accounting estimates underlying these accounting policies, since the Form 10-K filing, discussed above.
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 pattern 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.
Results of Operations
Comparison of the three-month period ended September 30, 2004 with the three-month period ended September 30, 2003.
During the quarter ended September 30, 2004, net sales increased 24% to $22,723,357 as compared to $18,251,732 for the same period for the prior year. The increase was mainly attributable to the sale of Perry m and Perry f products under the Perry Ellis line of fragrances, which were launched in the quarter ended December 31, 2003, and the launch of 360 BLUE for men and women in September 2004, resulting in an increase of $5,667,604 in total Perry Ellis brand gross sales from $15,092,972 to $20,760,576. The increase was partially offset by a reduction in gross sales of Chaleur dAnimale and Fred Hayman 273 Indigo brand products of $519,527 and $304,150, respectively. We sold the Animale brand in January 2003 and retained the rights to manufacture and distribute Chaleur dAnimale until January 16, 2005. We sublicens ed the Fred Hayman brand in March 2003, but retained the rights to the 273 Indigo brand.
Net sales to unrelated customers increased 7% to $7,931,474, compared to $7,391,521 for the same period in the prior year, mainly as a result of the Perry Ellis brand increase, as discussed above. Sales to related parties increased 36% to $14,791,883 compared to $10,860,211 for the same period in the prior year. The increase in Perry Ellis brand sales was partially offset by the reduction in Chaleur dAnimale product sales. We expect that this pattern in distribution channels will continue until the launch of our initial Paris Hilton fragrance product (commenced shipping in November 2004), and our initial GUESS? fragrance product (which is anticipated during the Summer 2005 season), and will initially only be sold to unrelated customers.
Our gross margins may not be comparable to other entities that include all the costs related to their distribution network in costs of goods sold insofar as we allocate only a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses.
Cost of goods sold decreased as a percentage of net sales to 50% for the quarter ended September 30, 2004 compared to 52% for the prior year comparable period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 49% and 50%, respectively, for the current period, as compared to 54% and 50%, respectively, for the same period in the prior year. For the prior two fiscal years, the cost of goods sold to unrelated customers has increased, and consequently gross margins decreased, due to a higher percentage of value sets being sold. Value sets have a higher cost of goods when compared to basic stock items. The prior year comparable period included a higher percentage of value set sales to unrelated customers. For the near future, we anticipate the percentage of value sets sold
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to unrelated customers will remain constant and that the overall cost of goods sold to unrelated customers will also remain relatively constant.
Operating expenses increased by 17% compared to the same period in the prior year from $6,481,407 to $7,600,417, decreasing as a percentage of net sales from 36% to 33%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 38% to $3,373,558 compared to $2,438,576 in the prior year period, increasing as a percentage of net sales from 13% to 15%. Selling and distribution costs increased 9% to $1,682,724 in the current period compared to $1,549,550 for the same period of the prior year, decreasing as a percentage of net sales from 8% to 7%. General and administrative expenses increased by 6% compared to the prior year period from $1,390,626 to $1,480,223, decreasing as a percentage of net sales from 8% to 7%. The increase was mainly attributable to increases in salaries, health insurance costs and legal and professional fees. Depreciation and amortization decreased by 22% during the current period from $316,500 to $245,997, as molds used in production for certain Ocean Pacific brand products became fully depreciated. Royalties increased by 4% in the current period, remaining relatively constant at 4% of net sales. The prior year period included minimum royalties payable under the Jockey license agreement, which are no longer required. The Jockey license expires on December 31, 2004.
As a result of the above factors, operating income increased to $3,803,497 or 17% of net sales for the current period, compared to $2,310,827 or 13% of net sales for the same period in the prior year. Net interest income was $28,715 as compared to net interest expense of $49,780 for the same period in the prior year. We did not borrow during the current period and invested our excess cash in money market deposit accounts.
Income before taxes for the current period was $3,832,212 compared to $2,261,047 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $2,375,971 or 10% of net sales for the current period compared to $1,401,849 or 8% of net sales in the comparable period of the prior year.
Comparison of the six-month period ended September 30, 2004 with the six-month period ended September 30, 2003.
During the six months ended September 30, 2004, net sales increased 30% to $45,684,560 as compared to $35,193,521 for the same period for the prior year. The increase was mainly attributable to (1) the sale of Perry m, Perry f, and 360 Red for men and women products under the Perry Ellis line of fragrances, which were launched in the quarter ended December 31, 2003, the launch of 360 BLUE for men and women in September 2004, and an increase in sales of Reserve for men and women resulting in an increase of $11,188,979 in total Perry Ellis brand gross sales from $28,860,223 to $40,049,202, and, (2) the sale of Ocean Pacific for men and women, which were also launched during the quarter ended December 31, 2003, resulting in an increase in total Ocean Pacific brand gross sales of $1,772,667. The increase was partially offset by a reduction in gross sales of Chaleur dAnimale and Fred Hayman 273 Indigo brand products of $706,303 and $1,463,175, respectively.
Net sales to unrelated customers decreased 7% to $17,037,126, compared to $18,233,124 for the same period in the prior year. The prior year period included the continued roll out of Perry Man and Perry Woman, and OP Blend for Men and Women, for which current period gross sales decreased $1,549,685 and $803,591, respectively, from the prior period. Sales to related parties increased 69% to $28,647,434 compared to $16,960,397 for the same period in the prior year. Brands launched in the U.S. department store market over the last few years (including Perry Man and Woman and OP Blend for Men and Women, which accounted for $2,072,440 of the increase in sales to related parties) are now being sold through all of our distribution channels. In addition, the products launched during the current period (360 BLUE and Ocean Pacific for men and women) were developed for immediate distribution in all of
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the Companys channels. We expect that this pattern in distribution channels will continue until the launch of our initial Paris Hilton brand fragrance product (commenced shipping during November 2004), and our initial GUESS? fragrance product (which is anticipated during the Summer 2005 season), and will only initially be sold to unrelated customers.
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 insofar as we allocate only a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses.
Cost of goods sold decreased as a percentage of net sales to 50% for the six months ended September 30, 2004 compared to 52% for the prior year comparable period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 51% and 50%, respectively, for the current period, as compared to 52% for both groups during the same period in the prior year. For the prior two fiscal years, the cost of goods sold to unrelated customers have increased, and consequently gross margins decreased, due to a higher percentage of value sets being sold. Value sets have a higher cost of goods when compared to basic stock items. 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 than in the prior year comparable period, which results in higher margins.
Operating expenses increased by 16% compared to the same period in the prior year from $13,304,538 to $15,375,399, decreasing as a percentage of net sales from 38% to 34%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 31% to $6,778,853 compared to $5,168,595 in the prior year period, remaining relatively constant at 15% of net sales. Selling and distribution costs increased 9% to $3,375,349 in the current period compared to $3,087,974 for the same period of the prior year, decreasing as a percentage of net sales from 9% to 7%. General and administrative expenses increased by 5% compared to the prior year period from $2,909,400 to $3,046,444, decreasing as a percentage of net sales from 8% to 7%. The increase was mainly attributable to increases in salaries, health insurance c osts and legal and professional fees, partially offset by a decrease in non-recurring charitable contributions. Depreciation and amortization decreased by 25% during the current period from $661,211 to $495,046, as molds used in production for certain Ocean Pacific brand products became fully depreciated. Royalties increased by 14% in the current period, remaining relatively constant at 4% of net sales. The prior year period included minimum royalties payable under the Jockey license agreement, which are no longer required.
As a result of the above factors, operating income increased to $7,299,252 or 16% of net sales for the current period, compared to $3,533,456 or 10% of net sales for the same period in the prior year. Net interest income was $64,963 in the current period as compared to net interest expense of $115,402 for the same period in the prior year. The increase reflects a lower average balance outstanding under our line of credit as compared to the prior year. We did not borrow during the current period and invested excess cash in money market deposit accounts.
Income before taxes for the current period was $7,364,215 compared to $3,418,054 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $4,565,813 or 10% of net sales for the current period compared to $2,119,193 or 6% of net sales in the comparable period of the prior year.
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Liquidity and Capital Resources
Working capital increased to $57,073,819 as of September 30, 2004, compared to $53,879,645 at March 31, 2004, primarily as a result of the current periods net income offset by the purchase of treasury stock discussed below.
During the six months ended September 30, 2004, net cash provided by operating activities was $134,674 compared to a use of cash of $3,686,907 during the prior year comparable period. The improvement between the comparable periods was mainly attributable to the increase in net income of over $2.4 million and a $2.2 million increase in accrued expenses and income taxes payable.
Net cash provided by investing activities increased from $500,455 to $839,384 as a greater amount of notes receivable from unrelated parties was collected, in accordance with their terms, during the current period, and a lesser amount of equipment was purchased during the current year period.
Net cash provided by financing activities decreased by approximately $765,000, mainly as a result of an approximate $606,000 increase in treasury stock purchases as discussed below.
As of September 30, 2004 and 2003, our ratios of the number of days sales in accounts receivable and inventory, on an annualized basis, were as follows:
September 30, | |||||||||
2004 | 2003 | ||||||||
| Trade accounts receivable: |
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| Unrelated (1) | 46 | 59 | ||||||
| Related | 105 | 144 | ||||||
| Total | 81 | 100 | ||||||
Inventories | 130 | 165 |
(1) Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $1,617,000 and $1,375,000 in 2004 and 2003, respectively.
The improvement from 2003 to 2004 for unrelated customers is attributable to certain international distributors for whom a portion of their trade receivable balance was in excess of 90 days as of September 30, 2003. These receivables were subsequently collected in full.
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 seasonal cash flow of Perfumania (See Note F to the accompanying condensed consolidated financial statements for further discussion of our relationship with Perfumania). We anticipate an improvement in the days outstanding based on published information concerning Perfumanias increased borrowing capability and same store sales.
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 gross margins on our products outweigh the additional carrying costs. The improvement in turnover from 2004 to 2003 is attributable to the 30% increase in sales for the comparable six-month period, which resulted in a 25% increase in cost of goods sold, while inventories increased only 6% during the current six-month period.
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On February 4, 2004, we filed with the Securities and Exchange Commission (SEC) a registration statement on Form S-3 (file number 333-112472), to register 1,306,000 shares of our common stock on behalf of certain selling shareholders. All of the shares are issuable, or have already been issued, upon the exercise of warrants held by the selling shareholders. Although we do not receive any of the proceeds from any subsequent resale of the shares, we expect to receive approximately $2,800,000 if all of the warrants are exercised. The registration statement was declared effective by the SEC on April 26, 2004. Through September 30, 2004, 1,112,000 of these warrants have been exercised and we have received proceeds of $2,164,499 (1,048,000 and $1,992,624 through March 31, 2004).
As of December 31, 2002, we had repurchased, under all phases of our common stock buy-back program, a total of 8,017,131 shares at a cost of $22,116,995. On February 6, 2003, we received approval from our lender to purchase an additional 2,500,000 shares not to exceed $7,500,000, which was ratified on February 14, 2003, by our Board of Directors. As of March 31, 2004, we had repurchased, in the open market, an additional 2,162,564 shares at a cost of $7,109,305 under this approval.
On August 6, 2004, the Companys Board of Directors approved the repurchase of an additional 1,000,000 shares of our common stock, subject to certain limitations, including approval from our lender, which was subsequently received, for up to $8,000,000, on August 16, 2004. As of September 30, 2004, we repurchased, in the open market, 166,830 shares at a cost of $1,424,765.
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. 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 Yorks 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 September 30, 2004, based on the borrowing base at that date, the credit line amounted to $19,117,000, none of which was utilized.
Substantially all of our domestic assets collateralize the Loan Agreement. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios.
As of September 30, 2004, we do not have any off balance sheet arrangements as that term is defined in Regulation S-K item 303(a)4, nor do we 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 financing. There is no assurance that we could obtain such financing or what the terms of such financing, if available, would be.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risks
During the quarter ended September 30, 2004, there have been no material changes in the information about the Companys market risks as of March 31, 2004, as set forth in Item 7A of the Companys Annual Report on Form 10-K for the year ended March 31, 2004.
Item 4.
Controls and Procedures
Parlux Fragrances, Incs Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have evaluated the effectiveness of the Companys 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 Companys disclosure controls and procedures were adequate and effective.
There were no changes in the Companys 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 Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
On December 8, 2003, we were served with a complaint (the Complaint) filed in the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade County, which was amended on January 26, 2004. The Complaint is a derivative action, in which the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham, Partners I, LP, purport to be suing for the benefit of the Company itself and all of its public shareholders. The Complaint names Parlux Fragrances, Inc. as the nominal defendant and all of the current members of the Board of Directors as the defendants. It seeks damages allegedly arising out of breaches of fiduciary duties in connection with transactions involving the Company and Mr. Ilia Lekach, its Chief Executive Officer or companies in which he has an ownership interest.
The Complaint seeks to enjoin the Company from continuing to enter into such transactions, seeks payment of costs and fees to Plaintiffs counsel and other unstated relief.
The Company and the Board members have engaged experienced Florida securities counsel and intend to defend the action vigorously. A Motion to Dismiss the action was filed on February 27, 2004. A hearing on the Motion was held on April 14, 2004, and the Complaint was dismissed, without prejudice. The Court suggested that the Plaintiffs serve a demand upon the Corporation to examine the issues alleged in the Complaint rather than file an Amended Complaint, and 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 Plaintiffs counsel supporting the Companys view that there was no legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Addition al exchanges of correspondence followed and additional extensions of time were granted. On June 25, 2004, the Plaintiffs filed an Amended Complaint, which was received by the Companys counsel on June 29, 2004. The Amended Complaint, for the most part, contains similar allegations and requests for relief as included in the original Complaint. On August 12, 2004, the Company responded to the Amended Complaint denying the allegations and requesting dismissal as well as reimbursement of legal fees and costs. The Plaintiffs initial deposition occurred on October 21, 2004. The Company believes that the claims are without merit and intends to continue defending the action vigorously.
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There are no other proceedings pending against us or any of our properties which, if determined adversely to us, would have a material effect on our financial position, or results of operations.
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibit #
Description
4.31
Amendment No. 3 to Revolving Credit and Security Agreement, dated as of August 16, 2004, between the Company and GMAC Commercial Finance LLC.
10.68
License Agreement, dated September 15, 2004, between the Company and Maria Sharapova (Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.)
31.1
Certification of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended September 30, 2004.
Item 4.
Submission of Matters to a Vote of Security Holders
On September 21, 2004, the Company held its Annual Meeting. The following is a summary of the proposals and corresponding votes.
Nomination and Election of Directors
The seven nominees named in the proxy statement were elected with each director receiving votes as follows:
Nominee | For | Withheld | ||
Ilia Lekach | 8,154,340 | 196,819 | ||
Frank A.Buttacavoli | 8,254,910 | 96,249 | ||
Frederick Purches | 8,255,140 | 96,019 | ||
Glenn Gopman | 8,240,870 | 110,289 | ||
Esther Egozi Choukroun | 8,240,870 | 110,289 | ||
David Stone | 8,240,070 | 111,089 | ||
Jaya Kader Zebede | 7,455,608 | 895,551 | ||
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With respect to Proposal #2, the appointment of Deloitte & Touche LLP as independent auditors, has been ratified as follows:
For | Against | Abstain | ||
8,340,725 | 559 | 9,8759 | ||
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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS | September 30, 2004 | March 31, 2004 | |||||
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CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 4,367,457 | $ | 654,633 | |||
Restricted cash | | 4,162,669 | |||||
Receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $1,617,000 and $1,756,000, respectively | 3,018,788 | 2,747,845 | |||||
Trade receivables from related parties | 16,369,281 | 11,504,472 | |||||
Income tax receivable | | 231,366 | |||||
Note receivable | 691,314 | 1,708,511 | |||||
Inventories | 33,479,658 | 31,561,553 | |||||
Prepaid expenses and other current assets, net | 7,288,214 | 5,973,937 | |||||
Investment in affiliate | 4,423,781 | 4,839,693 | |||||
TOTAL CURRENT ASSETS | 69,638,493 | 63,384,679 | |||||
Equipment and leasehold improvements, net | 908,749 | 1,079,954 | |||||
Trademarks and licenses, net | 7,798,896 | 7,944,924 | |||||
Other | 77,123 | 57,139 | |||||
TOTAL ASSETS | $ | 78,423,261 | $ | 72,466,696 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Borrowings, current portion |
| | $ | 170,927 | |||
Accounts payable | $ | 9,588,476 | 8,457,127 | ||||
Income taxes payable | 1,778,931 | | |||||
Accrued expenses | 1,197,267 | 876,980 | |||||
TOTAL CURRENT LIABILITIES | 12,564,674 | 9,505,034 | |||||
Deferred tax liability | 1,594,794 | 1,721,229 | |||||
TOTAL LIABILITIES |
| 14,159,468 |
| 11,226,263 | |||
COMMITMENTS AND CONTINGENCIES | |||||||
STOCKHOLDERS' EQUITY : | |||||||
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2004 and March 31, 2004 | | | |||||
Common stock, $0.01 par value, 30,000,000 shares authorized, 19,255,115 and 19,191,115 shares issued at September 30, 2004 and March 31, 2004, respectively | 192,551 | 191,911 | |||||
Additional paid-in capital | 78,210,440 | 78,039,205 | |||||
Retained earnings | 14,104,807 | 9,538,994 | |||||
Accumulated other comprehensive income | 2,407,060 | 2,696,623 | |||||
94,914,858 | 90,466,733 | ||||||
Less - 10,346,525 and 10,179,695 shares of common stock in treasury, at cost, at September 30, 2004 and March 31, 2004 | (30,651,065 | ) | (29,226,300 | ) | |||
TOTAL STOCKHOLDERS' EQUITY | 64,263,793 | 61,240,433 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 78,423,261 | $ | 72,466,696 |
See notes to condensed consolidated financial statements.
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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
(As restated see note L) | (As restated see note L) | ||||||||||||
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Net sales: | |||||||||||||
Unrelated customers, including licensing fees of $37,500 and $18,750 in 2004 | $ | 7,931,474 | $ | 7,391,521 | $ | 17,037,126 | $ | 18,233,124 | |||||
Related parties | 14,791,883 | 10,860,211 | 28,647,434 | 16,960,397 | |||||||||
22,723,357 | 18,251,732 | 45,684,560 | 35,193,521 | ||||||||||
Cost of goods sold: | |||||||||||||
Unrelated customers | 3,923,798 | 3,993,303 | 8,742,201 | 9,534,172 | |||||||||
Related parties | 7,395,645 | 5,466,195 | 14,267,708 | 8,821,355 | |||||||||
11,319,443 | 9,459,498 | 23,009,909 | 18,355,527 | ||||||||||
Gross margin | 11,403,914 | 8,792,234 | 22,674,651 | 16,837,994 | |||||||||
Operating expenses: | |||||||||||||
Advertising and promotional | 3,373,558 | 2,438,576 | 6,778,853 | 5,168,595 | |||||||||
Selling and distribution | 1,682,724 | 1,549,550 | 3,375,349 | 3,087,974 | |||||||||
General and administrative | 1,480,223 | 1,390,626 | 3,046,444 | 2,909,400 | |||||||||
Depreciation and amortization | 245,997 | 316,500 | 495,046 | 661,211 | |||||||||
Royalties | 817,915 | 786,155 | 1,679,707 | 1,477,358 | |||||||||
Total operating expenses | 7,600,417 | 6,481,407 | 15,375,399 | 13,304,538 | |||||||||
Operating income | 3,803,497 | 2,310,827 | 7,299,252 | 3,533,456 | |||||||||
Interest income | 29,234 | 76,300 | 67,604 | 113,124 | |||||||||
Interest expense and bank charges | (519 | ) | (126,080 | ) | (2,641 | ) | (228,526 | ) | |||||
Income before income taxes | 3,832,212 | 2,261,047 | 7,364,215 | 3,418,054 | |||||||||
Income tax provision | (1,456,241 | ) | (859,198 | ) | (2,798,402 | ) | (1,298,861 | ) | |||||
Net income | $ | 2,375,971 | $ | 1,401,849 | $ | 4,565,813 | $ | 2,119,193 | |||||
Income per common share: | |||||||||||||
Basic | $ | 0.26 | $ | 0.17 | $ | 0.51 | $ | 0.25 | |||||
Diluted | $ | 0.23 | $ | 0.15 | $ | 0.43 | $ | 0.22 |
See notes to condensed consolidated financial statements.
11
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
THREE MONTHS ENDED JUNE 30, 2004
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||
Number Issued | Par Value | Number Of Shares | Cost | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
BALANCE at | 19,191,115 | $ | 191,911 | $ | 78,039,205 | $ | 9,538,994 | $ | 2,696,623 | 10,179,695 | $ | (29,226,300 | ) | $ | 61,240,433 | ||||||||||
Comprehensive | |||||||||||||||||||||||||
Net income | | | | 4,565,813 | | | 4,565,813 | ||||||||||||||||||
Unrealized holding | (289,477 | ) | (289,477 | ) | |||||||||||||||||||||
Foreign currency | | | | | (86 | ) | | (86 | ) | ||||||||||||||||
Total | 4,276,250 | ||||||||||||||||||||||||
Issuance of common | 64,000 | 640 | 171,235 | | | 171,875 | |||||||||||||||||||
Purchase of treasury | 166,830 | (1,424,765 | ) | (1,424,765 | ) | ||||||||||||||||||||
BALANCE at | 19,255,115 | $ | 192,551 | $ | 78,210,440 | $ | 14,104,807 | $ | 2,407,060 | 10,346,525 | $ | (30,651,065 | ) | $ | 64,263,793 |
See notes to condensed consolidated financial statements.
12
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended September 30, | ||||||||
2004 | 2003 | |||||||
(As restated, see note L) | ||||||||
|
|
|
|
| ||||
Cash flows from operating activities: | ||||||||
Net income | $ | 4,565,813 | $ | 2,119,193 | ||||
Adjustments to reconcile net income to | ||||||||
net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 495,046 | 661,211 | ||||||
Provision for doubtful accounts | 60,000 | 60,000 | ||||||
Write-downs of prepaid promotional supplies and inventories | 1,769,000 | 1,130,000 | ||||||
Changes in assets and liabilities: | ||||||||
Increase in trade receivables customers | (330,943) | (827,452) | ||||||
Increase in note and trade receivables - related parties | (4,864,809 | ) | (5,670,041 | ) | ||||
Increase in inventories | (3,327,105 | ) | (6,356,004 | ) | ||||
Increase in prepaid expenses and other current assets | (1,674,277 | ) | (230,486 | ) | ||||
(Increase) decrease in other non-current assets | (19,984 | ) | 171,966 | |||||
Increase in accounts payable | 1,131,349 | 5,142,421 | ||||||
Increase in accrued expenses and income taxes payable | 2,330,584 | 112,285 | ||||||
Total adjustments | (4,431,139 | ) | (5,806,100 | ) | ||||
Net cash provided by (used in) operating activities | 134,674 | (3,686,907 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of equipment and leasehold improvements | (177,813 | ) | (329,702 | ) | ||||
Collections on notes receivable from unrelated parties | 1,017,197 | 830,157 | ||||||
Net cash provided by investing activities | 839,384 | 500,455 | ||||||
Cash flows from financing activities: | ||||||||
Net decrease (increase) in restricted cash | 4,162,669 | (3,113,596 | ) | |||||
Proceeds - note payable to GMAC Commercial Credit, net | | 7,106,771 | ||||||
Payments - note payable to Fred Hayman Beverly Hills | (170,927 | ) | (390,032 | ) | ||||
Payments - notes payable to Bankers Capital Leasing | | (27,999 | ) | |||||
Net decrease in notes receivable from officer | | 742,884 | ||||||
Purchase of treasury stock | (1,424,765 | ) | (818,693 | ) | ||||
Proceeds from issuance of common stock, net | 171,875 | 4,500 | ||||||
Net cash provided by financing activities | 2,738,852 | 3,503,835 | ||||||
Effect of exchange rate changes on cash | (86 | ) | 233 | |||||
Net increase in cash and cash equivalents | 3,712,824 | 317,616 | ||||||
Cash and cash equivalents, beginning of period | 654,633 | 137,023 | ||||||
Cash and cash equivalents, end of period | $ | 4,367,457 | $ | 454,639 |
See notes to condensed consolidated financial statements.
13
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries, Parlux, S.A., a French company (S.A.) and Parlux Ltd. (jointly referred to as the Company). All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information presented not misleading. The financial information presented herein, which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments (consisting only of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the interim unaudited conde nsed consolidated financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2004 as filed with the Securities and Exchange Commission on June 28, 2004.
B.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of our stock at the date of the grant (using the Black-Scholes option-pricing model), over the amount an employee must pay to acquire the stock. No stock-based compensation cost is reflected in the accompanying condensed consolidated statements of income, as all warrants and options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.
14
The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation:
For the three months ended September 30, | For the six months ended September 30 | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Net income, as reported | $ | 2,375,971 | $ | 1,401,849 | $ | 4,565,813 | $ | 2,119,193 | ||||
Add: Stock-based employee compensation | | | | | ||||||||
Deduct: Total stock-based employee compensation | 43,586 | 43,761 | 87,172 | 124,106 | ||||||||
Pro forma net income | $ | 2,332,385 | $ | 1,358,088 | $ | 4,478,641 | $ | 1,995,087 | ||||
Basic net income per share: | ||||||||||||
As reported | $ | 0.26 | $ | 0.17 | $ | 0.51 | $ | 0.25 | ||||
Proforma | $ | 0.26 | $ | 0.16 | $ | 0.50 | $ | 0.23 | ||||
Diluted net income per share: | ||||||||||||
As reported | $ | 0.23 | $ | 0.15 | $ | 0.43 | $ | 0.22 | ||||
Proforma | $ | 0.22 | $ | 0.14 | $ | 0.42 | $ | 0.21 |
C.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. The components of inventories are as follows:
September 30,2004 | March 31, 2004 | ||||||
|
|
| |||||
Finished products |
| $ | 23,381,384 |
| $ | 18,000,231 | |
Components and packaging material | 7,055,272 | 9,094,932 | |||||
Raw material | 3,043,002 | 4,466,390 | |||||
$ | 33,479,658 | $ | 31,561,553 |
The cost of inventories includes product costs and handling charges, including an allocation of the Companys applicable overhead in the approximate amount of $2,207,000 and $2,307,000 at September 30, 2004 and March 31, 2004, respectively.
15
D.
Trademarks and Licenses
Trademarks and licenses are attributable to the following brands:
September 30, 2004 | March 31, 2004 | Estimated Life (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 | (1,361,786 | ) | (1,215,758 | ) | |||||
Subtotal of amortizable intangibles | 1,910,646 | 2,056,674 | |||||||
Perry Ellis | 5,888,250 | 5,888,250 | indefinite | ||||||
$ | 7,798,896 | $ | 7,944,924 |
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 sublicensees 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 in the amount of $2,032,272 due in twelve monthly installments of approximately $170,000, plus interest at prime plus 1%, commencing January 2004. As of September 30, 2004, note receivable in the accompanying condensed consolidated balance sheet includes $691,314 ($1,708,511 at March 31, 2004), relating to this transa ction.
The Sublicense Agreement excluded the rights to 273 Indigo, the latest fragrance introduction for the FHBH brand. Such rights, as well as the rights to any other new FHBH fragrance additions, were to transfer to the sublicensee after twelve (12) months from the date of launch. The sublicensee would have been required to purchase the inventory and promotional materials relating to the new fragrance additions for a price equal to its book value, up to $500,000.
On October 17, 2003, the parties amended the Sublicense Agreement, granting new FHBH product development rights to the sublicensee. The guaranteed minimum annual royalty increased to $75,000 and the royalty percentage on sales of new FHBH products was increased to 3% of net sales. The sublicensee is no longer required to purchase inventory and promotional materials relating to 273 Indigo, and the Company may continue to manufacture and distribute 273 Indigo products.
E.
Borrowings - Banks and Others
The composition of borrowings is as follows:
September 30, 2004 | March 31, 2004 | |||||
Revolving credit facility payable to GMAC Commercial |
| |
| $ | | |
Note payable to Fred Hayman Beverly Hills, collateralized by the | | 170,927 | ||||
| | 170,927 | ||||
Less: long-term borrowings | | | ||||
Borrowings, current portion | | $ | 170,927 |
16
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 Yorks prime rate, at the Companys option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to Earnings Before Interest, Taxes, and Depreciation (EBITDA), as defined in the Loan Agreement.
At September 30, 2004, based on the borrowing base at that date, the credit line amounted to $19,117,000, 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.
On August 16, 2004, GMACCC approved a continuation of the Companys common stock buyback program not to exceed $8,000,000.
Management believes that funds from operations and its existing financing will be sufficient to meet the Companys current operating needs.
F.
Related Parties Transactions
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 notes 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 $20,916,723 and $13,708,371 during the six-month periods ended September 30, 2004 and 2003 ($10,189,204 and $9,695,015 during the three months ended September 30, 2004 and 2003), respectively, to Perfumania, Inc. (Perfumania), a wholly-owned subsidiary of E Com Ventures, Inc. (ECMV), a company in which the Companys Chairman and Chief Executive Officer has an ownership interest and held identical management positions until February 2004. Perfumania is the Companys largest customer, and transactions with them are closely monitored by the Companys 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 considerat ion the companies over 15 year relationship. Pricing and terms with Perfumania reflect (a) the volume of Perfumanias purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) free exposure of the Companys products provided in Perfumanias store windows and (e) minimal distribution costs to fulfill Perfumania orders.
While the Companys 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 Perfumanias reported results and comparable store sales performance. Management
17
monitors the account activity to ensure compliance with the Board limit. Net trade accounts receivable owed by Perfumania to the Company totaled $15,976,316 and $10,890,338 at September 30, 2004 and March 31, 2004, respectively. Amounts due from Perfumania are non-interest bearing and are being paid in accordance with the terms established by the Board.
As reported in ECMVs 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. Perfumanias reported financial information, as well as the Companys payment history with Perfumania, indicates that historically the first quarter is Perfumanias 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 managements evaluation, no allowances hav e been recorded as of September 30 or March 31, 2004. Management will continue to evaluate Perfumanias financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.
The Company owns 378,101 shares of ECMV common stock, which is reflected as an investment in affiliate in the accompanying condensed consolidated balance sheets. As of September 30, 2004, the fair market value of the investment was $4,423,781 or $11.70 per share ($4,839,693 or $12.80 per share as of March 31, 2004), based on the quoted market price of the shares. The Companys cost basis for the shares is $1,648,523 or $4.36 per share.
During the six months ended September 30, 2004 and 2003, the Company had net sales of $7,730,711 and $3,252,026 ($4,602,679 and $1,165,196 during the three months ended September 30, 2004 and 2003), respectively, to fragrance distributors owned/operated by individuals related to the Companys Chairman/CEO, including a recent distributorship for the Mexican market. These sales are included as related party sales in the accompanying condensed consolidated statements of income. As of September 30, 2004 and March 31, 2004, trade receivables from related parties include $392,965 and $614,134, respectively, from these customers, which were current in accordance with their sixty (60) or ninety (90) day terms.
During the six months ended September 30, 2004, the Company purchased $81,000 ($61,000 during the three months ended September 30, 2004) in television advertising on the Adrenalina show, which is broadcast in various U.S. markets and Latin American countries. The Companys Chairman/CEOs son has an ownership interest in a company which has the production rights to the show.
18
G.
Basic and Diluted Earnings Per Common Share
The following is the reconciliation of the numerators and denominators of the basic and diluted net income per common share calculations:
Three Months Ended September 30, | |||||||
2004 | 2003 | ||||||
|
| ||||||
Net income | $ | 2,375,971 | $ | 1,401,849 | |||
|
|
| |||||
Weighted average number of shares issued | 19,256,941 | 18,048,519 | |||||
Weighted average number of treasury shares | (10,251,409 | ) | (9,576,157 | ) | |||
Weighted average number of shares outstanding used in basic | 8,995,532 | 8,472,362 | |||||
Basic net income per common share | $ | 0.26 | $ | 0.17 | |||
Weighted average number of shares outstanding used in basic | 8,995,532 | 8,472,362 | |||||
Effect of dilutive securities: | |||||||
Stock options and warrants | 1,520,619 | 1,116,227 | |||||
Weighted average number of shares outstanding used in | 10,516,151 | 9,588,585 | |||||
Diluted net income per common share | $ | 0.23 | $ | 0.15 | |||
Antidilutive securities not included in diluted earnings per | |||||||
Options and warrants to purchase common stock | | 36,000 | |||||
Exercise Price | | $4.00-$8.00 |
Six Months Ended September 30, | |||||||
2004 | 2003 | ||||||
|
| ||||||
Net income | $ | 4,565,813 | $ | 2,119,193 | |||
|
|
| |||||
Weighted average number of shares issued | 19,231,607 | 18,047,821 | |||||
Weighted average number of treasury shares | (10,215,748 | ) | (9,535,219 | ) | |||
Weighted average number of shares outstanding used in basic | 9,015,859 | 8,512,602 | |||||
Basic net income per common share | $ | 0.51 | $ | 0.25 | |||
Weighted average number of shares outstanding used in basic | 9,015,859 | 8,512,602 | |||||
Effect of dilutive securities: | |||||||
Stock options and warrants | 1,524,561 | 985,803 | |||||
Weighted average number of shares outstanding used in | 10,540,420 | 9,498,405 | |||||
Diluted net income per common share | $ | 0.43 | $ | 0.22 | |||
Antidilutive securities not included in diluted earnings per | |||||||
Options and warrants to purchase common stock | | 216,000 | |||||
Exercise Price | | $3.13-$8.00 |
19
H.
Cash Flow Information
The Company considers temporary investments with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash flow information are as follows:
Six Months ended September 30, | |||||||
2004 | 2003 | ||||||
|
|
|
| ||||
Cash paid for: | |||||||
Interest | $ | 3,675 | $ | 229,852 | |||
Income taxes | $ | 788,105 | $ | 910,679 |
Supplemental disclosures of non-cash investing and financing activities are as follows:
Six months ended September 30, 2004:
-
An unrealized holding loss of $289,477 on the investment in affiliate, net of deferred taxes.
Six months ended September 30, 2003:
-
The conversion of trade accounts receivable from Perfumania in the amount of $5,000,000.
-
An unrealized holding gain of $3,466,962 on the investment in affiliate.
I.
Income Taxes
The provision for income taxes for the periods ended September 30, 2004 and 2003 reflects an effective tax rate of approximately 38%.
J.
License and Distribution Agreements
As of September 30, 2004 and March 31, 2004, the Company held exclusive worldwide licenses to manufacture and distribute fragrance and other related products for Perry Ellis, Ocean Pacific (OP), and Jockey.
Under each of these arrangements, the Company must pay royalties at various rates based on net sales, and spend minimum amounts for advertising based on sales volume. The agreements expire on various dates and are subject to renewal. The Company believes that it is presently in compliance with all material obligations under the above agreements.
On September 1, 2003, the Company entered into an agreement with Five Star Fragrances Company, Inc., to market and distribute Royal Copenhagen fragrance products to the U.S. department store market. The term of the agreement is for three years, with an option to renew for one additional year. There are no royalty sales minimums or advertising commitments under this agreement.
Effective November 1, 2003, the Company entered into an exclusive worldwide license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products under the GUESS? Trademarks. The initial term of the agreement continues through December 2009, and is renewable for an additional five years if certain sales levels are met.
Under the GUESS? Agreement, the Company must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. The Company anticipates that the first GUESS? fragrance will be marketed during Summer 2005.
20
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 worldwide 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 first PH fragrance was shipped during November 2004, and we expect the launch period to continue through March 2005.
On September 15, 2004, we entered into an exclusive worldwide license agreement with Ms. Maria Sharapova, to develop, manufacture and distribute prestige fragrances and related products under her name. The initial term of the agreement expires on June 30, 2008 and is renewable for an additional three-year period. Under the license agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first fragrance under this agreement will be launched prior to March 31, 2006.
K.
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.
The Company and the Board members have engaged experienced Florida securities counsel and intend to defend the action vigorously. A Motion to Dismiss the action was filed on February 27, 2004. A hearing on the Motion was held on April 14, 2004, and the Complaint was dismissed, without prejudice. The Court suggested that the Plaintiffs serve a demand upon the Corporation to examine the issues alleged in the Complaint rather than file an Amended Complaint, and 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 Plaintiffs counsel supporting the Companys view that there was no legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Addition al exchanges of correspondence have followed and additional extensions of time were granted. On June 25, 2004, the Plaintiffs filed an Amended Complaint, which was received by the Companys counsel on June 29, 2004. The Amended Complaint, for the most part, contains similar allegations and requests for relief as included in the original Complaint. On August 12, 2004, the Company responded to the Amended Complaint denying the allegations and requesting dismissal as well as reimbursement of legal fees and costs. The Plaintiffs initial deposition occurred on October 21, 2004. Based on its preliminary investigation of the allegations asserted by the Plaintiffs, the Company believes that the claims are without merit and intends to continue defending the action vigorously.
There are no other proceedings pending against the Company, which, if determined adversely, would have a material effect on the Companys financial position or results of operations.
21
L.
Restatement
Subsequent to the filing of the Companys Quarterly Report on Form 10-Q for the three-months ended September 30, 2003 and in connection with a review by the staff of the Securities and Exchange Commission (SEC) of the Companys 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 Companys lender, as stipulated in the Companys revolving credit agreement, as Restricted Cash instead of netting such cash against the outstanding balance on the revolving credit facility. Such cash represents collections on the Companys 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 activ ities on the accompanying consolidated statement of cash flows. The Company also presented changes in notes receivable from unrelated parties as an investing activity, which changes have previously been presented as an operating activity on the accompanying condensed consolidated statement of cash flows. As a result, the accompanying consolidated financial statements for the six months ended September 30, 2003 have been restated from the amounts previously reported for the significant effects of the restatements on the condensed consolidated financial statements and are shown in the table below.
As Previously Reported | As Restated | |||||
|
|
| ||||
Condensed consolidated Statements of Cash Flows | ||||||
Cash flows from operating activities 2003: | ||||||
Decrease in notes receivable | 830,157 | | ||||
Net cash used in operating activities | (2,856,750 | ) | (3,686,907 | ) | ||
Cash flows from investing activities 2003: | ||||||
Collections on notes receivable from unrelated parties | | 830,157 | ||||
Net cash provided by (used in) investing activities | (329,702 | ) | 500,455 | |||
Cash flows from financing activities 2003: | ||||||
Net increase in restricted cash | | (3,113,596 | ) | |||
Proceeds (payments) - Note Payable to GMACCC, Net | 3,993,175 | 7,106,771 |
In addition, for the three and six-month periods ended September 30, 2004, 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 adjustments discussed above did not result in any restatement of the Companys net income, earnings per share or working capital amounts from those that were previously reported.
* * * *
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/ ILIA LEKACH |
Ilia Lekach, Chairman and Chief Executive Officer |
(Principal Executive Officer) |
/s/ FRANK A. BUTTACAVOLI |
Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, |
Chief Financial Officer and Director |
(Principal Financial and Principal Accounting Officer) |
Date:
November 12, 2004
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