SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission file number: 0-15491
PARLUX FRAGRANCES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2562955
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(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 954-316-9008
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Former name, former address and former fiscal year, if changed since last report
Indicate with an "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate with an "X" whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate with an "X" whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 14, 2005, 9,130,590 shares of the issuer's common stock
were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages 10 to 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We may periodically release forward-looking statements pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, including those in this Form 10-Q, involve known and
unknown risks, uncertainties and other factors that may cause actual results,
performance or our achievements, or our industry, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These risks and uncertainties include, among
others, collectability of trade receivables from related parties, future trends
in sales and our ability to introduce new products in a cost-effective manner.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date thereof. We undertake no obligation
to publicly release the result of any revisions to those forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
As of December 8, 2004, we entered into an exclusive worldwide license agreement
with Mr. Andy Roddick, to develop, manufacture and distribute prestige
fragrances and related products under his name. The initial term of the
agreement expires on June 30, 2009 and is renewable for an additional three-year
period. We anticipate that the first fragrance under this agreement will be
launched during spring 2006.
On January 7, 2005, we entered into a purchase and sale agreement, effective
January 6, 2005, ( the "Purchase Agreement") with Victory International (USA),
LLC ("Victory"), whereby we acquired the exclusive worldwide licensing rights,
along with inventories, molds, designs and other assets, relating to the XOXO
fragrance brand. As consideration, we paid Victory approximately $7.46 million
($750,000 was advanced during December 2004), of which $2.55 million was in the
form of a 60-day promissory note payable in two equal installments on February 6
and March 6, 2005. The February 6th payment was made as scheduled.
On December 1, 2003, Victory had entered into a license agreement with Global
Brand Holdings, LLC (the "Fragrance License") to manufacture and distribute XOXO
branded fragrances. The first XOXO fragrances were introduced by Victory during
December 2004. Under the Purchase Agreement, Victory assigned its rights, and we
assumed the obligations, under the Fragrance License.
On January 26, 2005, we entered into an exclusive worldwide license agreement
with Paris Hilton Entertainment, Inc., to develop, manufacture and distribute
watches and other time pieces under the Paris Hilton name. The initial term of
the agreement expires on June 30, 2010 and is renewable for an additional
five-year period. We anticipate that the first watches under this agreement will
be launched prior to December 2005.
Under all of these license agreements, we must pay a fixed royalty percentage
and spend minimum amounts for advertising based on sales volume.
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.
2
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 Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results of operations and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company has not made any changes in these 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.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment,
(SFAS 123(R)). This Statement requires companies to expense the estimated fair
value of stock options and similar equity instruments issued to employees.
Currently, companies are required to calculate the estimated fair value of these
share-based payments and can elect to either include the estimated cost in
earnings or disclose the pro forma effect in the footnotes to their financial
statements. We have chosen to disclose the pro forma effect. The fair value
concepts were not changed significantly in SFAS 123(R); however, in adopting
this Standard, companies must choose among alternative valuation models and
amortization assumptions. The valuation model and amortization assumption we
have used continues to be available, but we have not yet completed our
assessment of the alternatives. The new Standard will be effective for us
beginning with the quarter ending September 30, 2005. Transition options allow
companies to choose whether to adopt prospectively, restate results to the
beginning of the year, or to restate prior periods with the amounts that have
been included in the footnotes. We have not yet concluded on which transition
option we will select. See note B to the accompanying condensed consolidated
financial statements for the pro forma effect for the three and nine months
ended December 31, 2004 and 2003, using our existing valuation and amortization
assumptions.
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 is subject to rapidly changing 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
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.
3
Comparison of the three-month period ended December 31, 2004 with the
three-month period ended December 31, 2003.
During the quarter ended December 31, 2004, net sales increased 12% to
$28,748,499 as compared to $25,763,661 for the same period for the prior year.
The increase was mainly attributable to the introduction of our new Paris Hilton
fragrance, which commenced shipping in November 2004 and achieved gross sales of
$4,312,531. The increase was partially offset by a reduction in gross sales of
Perry Ellis and Ocean Pacific brand products of $1,282,565 and $746,303,
respectively.
Net sales to unrelated customers increased 25% to $14,963,501, compared to
$12,009,892 for the same period in the prior year, mainly as a result of the
Paris Hilton brand sales discussed above. Sales to related parties increased
slightly to $13,784,998 compared to $13,753,769 for the same period in the prior
year. We expect that this pattern in distribution channels will continue with
the further roll out of our Paris Hilton fragrance product, and our initial
GUESS? fragrance product (which is anticipated during the Summer 2005 season)
which will initially be sold mainly to unrelated customers.
Our overall cost of goods sold decreased as a percentage of net sales to 44% for
the quarter ended December 31, 2004 compared to 50% for the prior year
comparable period. Cost of goods sold as a percentage of net sales to unrelated
customers and related parties approximated 39% and 50%, respectively, for the
current period, as compared to 48% and 53%, respectively, for the same period in
the prior year. For the prior two fiscal years, the cost of goods sold to
unrelated customers had 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.
Additionally, the current year period sales of Paris Hilton brand products
included only 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, increasing slightly from the current quarter's level.
Operating expenses increased by 15% compared to the same period in the prior
year from $10,008,656 to $11,463,536, decreasing as a percentage of net sales
from 39% to 40%. However, individual components of our operating expenses
experienced more significant changes. Advertising and promotional expenses
increased 29% to $6,482,954 compared to $5,030,498 in the prior year period,
increasing as a percentage of net sales from 20% to 23%. The current year period
includes approximately $2,066,000 of promotional costs for the recently
introduced Paris Hilton fragrance. Selling and distribution costs increased 14%
to $2,097,689 in the current period compared to $1,840,649 for the same period
of the prior year, remaining relatively constant at 7% of net sales. The
increase was mainly attributable to additional costs for temporary warehouse
employees and warehouse storage space to handle the increased order flow.
General and administrative expenses decreased slightly compared to the prior
year period from $1,507,916 to $1,501,899, decreasing as a percentage of net
sales from 6% to 5%. Depreciation and amortization decreased by 13% during the
current period from $307,167 to $267,728, as molds used in production for
certain Ocean Pacific brand products became fully depreciated. Royalties
decreased by 16% in the current period from $1,322,426 to $1,113,266, decreasing
as a percentage of net sales from 5% to 4%. The prior year period included
approximately $341,000 in minimum royalties payable under the Jockey license
agreement, which are no longer required. The Jockey license expired on December
31, 2004 and was not renewed.
As a result of the above factors, operating income increased to $4,589,125 or
16% of net sales for the current period, compared to $2,800,630 or 11% of net
sales for the same period in the prior year. Net interest income was $38,359 as
compared to net interest expense of $79,266 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.
4
Income before taxes for the current period was $4,625,397 compared to $2,721,364
in the same period for the prior year. Giving effect to the tax provision, we
earned net income of $2,867,746 or 10% of net sales for the current period
compared to $1,687,246 or 7% of net sales in the comparable period of the prior
year.
Comparison of the nine-month period ended December 31, 2004 with the nine-month
period ended December 31, 2003.
During the nine months ended December 31, 2004, net sales increased 22% to
$74,433,059 as compared to $60,957,182 for the same period for the prior year.
The increase was mainly attributable to (1) the gross sales of $4,312,531 for
our new Paris Hilton fragrance, (2) 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 $9,906,414 in total Perry Ellis brand
gross sales from $51,239,382 to $61,145,796, and, (3) 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 $1,026,363. The increase was partially offset by a reduction in gross
sales of Chaleur d'Animale and Fred Hayman 273 Indigo brand products of $648,640
and $1,407,728, respectively. We sold the Animale brand in January 2003 and
retained the rights to manufacture and distribute Chaleur d'Animale until
January 16, 2005. We sublicensed the Fred Hayman brand in March 2003, but
retained the rights to the "273 Indigo" brand.
Net sales to unrelated customers increased 6% to $32,000,627, compared to
$30,243,016 for the same period in the prior year, the result of the Paris
Hilton brand sales increase discussed above. 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 $2,178,441 and $1,156,507,
respectively, from the prior period. Sales to related parties increased 38% to
$42,432,432 compared to $30,714,166 for the same period in the prior year.
Brands launched in the U.S. department store market over the last few years 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, which accounted for $4,284,159 and $1,884,762, respectively, of
the increase in sales to related parties) were developed for immediate
distribution in all of the Company's channels. We expect that this pattern in
distribution channels will change with the further roll out 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), which will initially be sold to mainly unrelated customers.
Overall cost of goods sold decreased as a percentage of net sales to 48% for the
nine months ended December 31, 2004 compared to 51% for the prior year
comparable period. Cost of goods sold as a percentage of net sales to unrelated
customers and related parties approximated 45% and 50%, respectively, for the
current period, as compared to 50% and 52%, respectively, for 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. Additionally, the current year
period sales of Paris Hilton brand products included only 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 15% compared to the same period in the prior
year from $23,313,194 to $26,838,935, decreasing as a percentage of net sales
from 38% to 36%. However, individual components of our operating expenses
experienced more significant changes. Advertising and promotional expenses
increased 30% to $13,261,807 compared to $10,199,093 in the prior year period,
5
increasing as a percentage of net sales from 17% to 18%. The increase was mainly
attributable to approximately $2,066,000 of promotional costs for the new Paris
Hilton fragrance. Selling and distribution costs increased 11% to $5,473,038 in
the current period compared to $4,928,623 for the same period of the prior year,
decreasing as a percentage of net sales from 8% to 7%. The increase was mainly
attributable to additional costs for temporary employees and warehouse storage
space to handle the increased order flow. General and administrative expenses
increased by 3% compared to the prior year period from $4,417,316 to $4,548,343,
decreasing as a percentage of net sales from 7% to 6%. The increase was mainly
attributable to increases in salaries, health insurance costs and legal and
professional fees, partially offset by a decrease in non-recurring charitable
contributions. Depreciation and amortization decreased by 21% during the current
period from $968,378 to $762,774, as molds used in production for certain Ocean
Pacific brand products became fully depreciated. Royalties decreased slightly in
the current period from $2,799,784 to $2,792,973, decreasing as a percentage of
net sales from 5% to 4%. The prior year period included approximately $553,000
in minimum royalties payable under the Jockey license agreement, which are no
longer required.
As a result of the above factors, operating income increased to $11,888,377 or
16% of net sales for the current period, compared to $6,334,086 or 10% of net
sales for the same period in the prior year. Net interest income was $103,322 in
the current period as compared to net interest expense of $194,668 for the same
period in 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 $11,989,612 compared to
$6,139,418 in the same period for the prior year. Giving effect to the tax
provision, we earned net income of $7,433,559 or 10% of net sales for the
current period compared to $3,806,439 or 6% of net sales in the comparable
period of the prior year.
Liquidity and Capital Resources
Working capital increased to $60,275,831 as of December 31, 2004, compared to
$53,879,645 at March 31, 2004, primarily as a result of the current period's net
income offset by the purchase of treasury stock discussed below.
During the nine months ended December 31, 2004, net cash provided by operating
activities was $6,790,137 compared to $2,572,368 during the prior year
comparable period. The improvement between the comparable periods was mainly
attributable to the increase in net income of over $3.6 million.
Net cash provided by investing activities decreased from $966,169 to $431,136 as
we advanced $750,000 under the Purchase Agreement for XOXO during December 2004.
Additionally, a greater amount of notes receivable from unrelated parties was
collected, in accordance with their terms, during the current period, and a
slightly lesser amount of equipment was purchased during the current year
period.
Net cash provided by financing activities was $2,807,602 compared to a use of
$2,992,289 in the prior year comparable period. The increase was attributable to
the release of approximately $4,162,669 in restricted cash resulting from our
full pay down on our line of credit. We also purchased $557,418 less of treasury
stock during the current year period.
As of December 31, 2004 and 2003, our ratios of the number of days sales in
accounts receivable and inventory, on an annualized basis, were as follows:
December 31,
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2004 2003
Trade accounts receivable:
Unrelated (1) 73 64
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Related 62 131
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Total 67 97
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Inventories 115 135
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(1) Calculated on gross trade receivables excluding allowances for doubtful
accounts, sales returns and advertising allowances of approximately
$3,029,000 and $2,866,000 in 2004 and 2003, respectively.
6
The increase in the number of days 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 December 31, 2004. These
receivables were collected in full during January and February 2005.
During prior year periods, the number of days sales in trade receivables from
related parties have exceeded 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). There has been a significant improvement in the days
outstanding as a result of Perfumania's increased borrowing capability and same
store sales as indicated in published information.
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 nine-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 22% increase in sales for the comparable nine-month period,
which resulted in a 14% increase in cost of goods sold, while inventories
actually decreased by 2% during the current nine-month period.
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 December 31, 2004, 1,122,000 of these warrants have been exercised and
we have received proceeds of $2,233,249 (1,048,000 and $1,992,624 through March
31, 2004). During January 2005, an additional 182,000 warrants were exercised
providing proceeds of $578,000. Only 2,000 of these warrants remain unexercised.
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 Company's 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 December 31, 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 Loan and Security Agreement (the "Loan
Agreement") with GMAC Commercial Credit LLC ("GMACCC"). On January 4, 2005, the
Loan Agreement was extended through July 20, 2006. 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
the Bank of New York's prime rate, at our option.
7
At December 31, 2004, based on the borrowing base at that date, the credit line
amounted to $19,016,000, 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 December 31, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended December 31, 2004, there have been no material changes
in the information about the Company's market risks as of March 31, 2004, as set
forth in Item 7A of the Company's Annual Report on Form 10-K for the year ended
March 31, 2004.
ITEM 4. 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.
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.
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 was a derivative action, in which
the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham,
Partners I, LP, purported to be suing for the benefit of the Company itself and
all of its public shareholders. The Complaint named Parlux Fragrances, Inc. as
the nominal defendant and all of the current members of the Board of Directors
as the defendants. It sought 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 had an
ownership interest. The Complaint sought to enjoin the Company from continuing
to enter into such transactions, sought payment of costs and fees to Plaintiffs'
counsel and other unstated relief.
The Company and the Board members engaged experienced Florida securities counsel
to vigorously defend the action. 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
8
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 Plaintiff's counsel supporting 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 followed and additional extensions of
time were granted. On June 25, 2004, the Plaintiffs filed an Amended Complaint,
which was received by the Company's counsel on June 29, 2004. The Amended
Complaint, for the most part, contained 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.
On December 8, 2004, Plaintiff's filed a Motion for an Interim Award of $168,824
in attorneys' fees and reimbursement of expenses. Plaintiffs also noticed the
depositions of three of our Board members, who agreed and provided dates for
their appearances. Plaintiff's counsel was informed of our rejection of their
claim, which we believe was without merit.
On December 22, 2004, Plaintiffs filed for voluntary dismissal of the action
against us, without prejudice. No payment was made to the Plaintiffs or
Plaintiffs' counsel by us or our insurance carrier.
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
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4.32 Amendment No. 4 to Revolving Credit and Security Agreement,
dated as of January 4, 2005, between the Company and GMAC
Commercial Finance LLC.
10.69 License Agreement, dated as of December 8, 2004, between the
Company and Andy Roddick. ("Portions of this exhibit have been
omitted pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission.).
10.70 Asset Purchase Agreement, dated January 6, 2005, between the
Company and Victory International (USA) LLC.
10.71 License Agreement, dated January 26, 2005, 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.)
31.1 Certification of Chief Executive Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended December
31, 2004.
9
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
2004 2004
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,685,924 $ 654,633
Restricted cash -- 4,162,669
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$3,029,000 and $1,756,000, respectively 5,425,893 2,747,845
Trade receivables from related parties 9,638,107 11,504,472
Income tax receivable -- 231,366
Note receivable 170,255 1,708,511
Inventories 31,003,879 31,561,553
Prepaid expenses and other current assets, net 7,437,739 5,973,937
Investment in affiliate 4,593,927 4,839,693
------------ ------------
TOTAL CURRENT ASSETS 68,955,724 63,384,679
Equipment and leasehold improvements, net 893,341 1,079,954
Trademarks and licenses, net 7,725,883 7,944,924
Other 72,676 57,139
------------ ------------
TOTAL ASSETS $ 77,647,624 $ 72,466,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings, current portion $ -- $ 170,927
Accounts payable 7,493,044 8,457,127
Income taxes payable 27,654 --
Accrued expenses 1,159,195 876,980
------------ ------------
TOTAL CURRENT LIABILITIES 8,679,893 9,505,034
Deferred tax liability 1,627,838 1,721,229
------------ ------------
TOTAL LIABILITIES 10,307,731 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 December 31, 2004 and March 31, 2004 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
19,265,115 and 19,191,115 shares issued at December 31, 2004
and March 31, 2004, respectively 192,651 191,911
Additional paid-in capital 78,279,090 78,039,205
Retained earnings 16,972,553 9,538,994
Accumulated other comprehensive income 2,546,664 2,696,623
------------ ------------
97,990,958 90,466,733
Less - 10,346,525 and 10,179,695 shares of common stock
in treasury, at cost, at December 31, 2004 and March 31, 2004 (30,651,065) (29,226,300)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 67,339,893 61,240,433
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,647,624 $ 72,466,696
============ ============
See notes to condensed consolidated financial statements.
10
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales:
Unrelated customers, including
licensing fees of $56,250 and
$18,750 in 2004 $ 14,963,501 $ 12,009,892 $ 32,000,627 $ 30,243,016
Related parties 13,784,998 13,753,769 42,432,432 30,714,166
------------ ------------ ------------ ------------
28,748,499 25,763,661 74,433,059 60,957,182
------------ ------------ ------------ ------------
Cost of goods sold:
Unrelated customers 5,808,330 5,712,270 14,550,531 15,246,441
Related parties 6,887,508 7,242,105 21,155,216 16,063,461
------------ ------------ ------------ ------------
12,695,838 12,954,375 35,705,747 31,309,902
------------ ------------ ------------ ------------
Gross margin 16,052,661 12,809,286 38,727,312 29,647,280
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotional 6,482,954 5,030,498 13,261,807 10,199,093
Selling and distribution 2,097,689 1,840,649 5,473,038 4,928,623
General and administrative 1,501,899 1,507,916 4,548,343 4,417,316
Depreciation and amortization 267,728 307,167 762,774 968,378
Royalties 1,113,266 1,322,426 2,792,973 2,799,784
------------ ------------ ------------ ------------
Total operating expenses 11,463,536 10,008,656 26,838,935 23,313,194
------------ ------------ ------------ ------------
Operating income 4,589,125 2,800,630 11,888,377 6,334,086
Interest income 38,476 55,628 106,080 168,752
Interest expense and bank charges (117) (134,894) (2,758) (363,420)
Exchange loss (2,087) -- (2,087) --
------------ ------------ ------------ ------------
Income before income taxes 4,625,397 2,721,364 11,989,612 6,139,418
Income tax provision (1,757,651) (1,034,118) (4,556,053) (2,332,979)
------------ ------------ ------------ ------------
Net income $ 2,867,746 $ 1,687,246 $ 7,433,559 $ 3,806,439
============ ============ ============ ============
Income per common share:
Basic $ 0.32 $ 0.21 $ 0.83 $ 0.45
============ ============ ============ ============
Diluted $ 0.27 $ 0.18 $ 0.70 $ 0.40
============ ============ ============ ============
See notes to condensed consolidated financial statements.
11
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 2004
(Unaudited)
COMMON STOCK ACCUMULATED TREASURY STOCK
---------------------- ADDITIONAL OTHER -------------------------
NUMBER PAR PAID-IN RETAINED COMPREHENSIVE NUMBER
ISSUED VALUE CAPITAL EARNINGS INCOME (LOSS) OF SHARES COST TOTAL
---------- -------- ----------- ----------- ------------- ---------- ------------ -----------
BALANCE at
March 31, 2004 19,191,115 $191,911 $78,039,205 $ 9,538,994 $2,696,623 10,179,695 $(29,226,300) $61,240,433
Comprehensive income:
Net income -- -- -- 7,433,559 -- -- 7,433,559
Change in unrealized
holding gain on
investment in
affiliate (152,375) (152,375)
Foreign currency
translation
adjustment -- -- -- -- 2,416 -- 2,416
-----------
Total comprehensive
income 7,283,600
-----------
Issuance of
common stock
upon exercise
of warrants 74,000 740 239,885 -- -- 240,625
Purchase of treasury
stock, at cost 166,830 (1,424,765) (1,424,765)
---------- -------- ----------- ----------- ---------- ---------- ------------ -----------
BALANCE at
December 31, 2004 19,265,115 $192,651 $78,279,090 $16,972,553 $2,546,664 10,346,525 $(30,651,065) $67,339,893
========== ======== =========== =========== ========== ========== ============ ===========
See notes to condensed consolidated financial statements.
12
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income $ 7,433,559 $ 3,806,439
------------ -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 762,774 968,378
Provision for doubtful accounts 90,000 90,000
Write-downs of prepaid promotional supplies and inventories 1,949,000 1,160,000
Changes in assets and liabilities:
Increase in trade receivables - customers (2,768,048) (412,424)
Decrease (increase) in note and trade receivables - related parties 1,866,365 (3,152,227)
Increase in inventories (1,001,326) (4,463,097)
(Increase) decrease in prepaid expenses and other current assets (1,103,802) 1,066,065
(Increase) decrease in other non-current assets (15,537) 304,021
(Decrease) increase in accounts payable (964,083) 2,462,800
Increase in accrued expenses and income taxes payable 541,235 742,413
------------ -----------
Total adjustments (643,422) (1,234,071)
------------ -----------
Net cash provided by operating activities 6,790,137 2,572,368
------------ -----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (357,120) (365,711)
Prepayment on acquisition of XOXO license (750,000)
Collections on notes receivable from unrelated parties 1,538,256 1,331,880
------------ -----------
Net cash provided by investing activities 431,136 966,169
------------ -----------
Cash flows from financing activities:
Net decrease (increase) in restricted cash 4,162,669 (5,956,802)
Proceeds - note payable to GMAC Commercial Credit, net -- 4,749,992
Payments - note payable to Fred Hayman Beverly Hills (170,927) (590,399)
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) (1,982,183)
Proceeds from issuance of common stock 240,625 72,218
------------ -----------
Net cash provided by financing activities 2,807,602 (2,992,289)
------------ -----------
Effect of exchange rate changes on cash 2,416 457
------------ -----------
Net increase in cash and cash equivalents 10,031,291 546,705
Cash and cash equivalents, beginning of period 654,633 137,023
------------ -----------
Cash and cash equivalents, end of period $ 10,685,924 $ 683,728
============ ===========
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 condensed consolidated financial statements. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 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 Compensation--Transition and Disclosure--an amendment of SFAS 123".
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant (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 FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $2,867,746 $1,687,246 $7,433,559 $3,806,439
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 43,586 97,650 130,757 221,407
---------- ---------- ---------- ----------
Pro forma net income $2,824,160 $1,589,596 $7,302,802 $3,585,032
========== ========== ========== ==========
Basic net income per share:
As reported $ 0.32 $ 0.21 $ 0.83 $ 0.45
Proforma $ 0.32 $ 0.19 $ 0.81 $ 0.43
Diluted net income per share:
As reported $ 0.27 $ 0.18 $ 0.70 $ 0.40
Proforma $ 0.27 $ 0.17 $ 0.69 $ 0.38
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment, (SFAS 123(R)). This Statement
requires companies to expense the estimated fair value of stock options and
similar equity instruments issued to employees. Currently, companies are
required to calculate the estimated fair value of these share-based payments and
can elect to either include the estimated cost in earnings or disclose the pro
forma effect in the footnotes to their financial statements. The Company has
chosen to disclose the pro forma effect. The fair value concepts were not
changed significantly in SFAS 123(R); however, in adopting this Standard,
companies must choose among alternative valuation models and amortization
assumptions. The valuation model and amortization assumption used by the Company
continues to be available, but it has not yet completed its assessment of the
alternatives. The new Standard will be effective for the Company beginning with
the quarter ending September 30, 2005. Transition options allow companies to
choose whether to adopt prospectively, restate results to the beginning of the
year, or to restate prior periods with the amounts that have been included in
the footnotes. The Company has not yet concluded on which transition option it
will select. See above for the pro forma effect for the three and nine months
ended December 31, 2004 and 2003, using our existing valuation and amortization
assumptions.
C. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventories are as follows:
December 31, 2004 March 31, 2004
----------------- --------------
Finished products $21,055,406 $18,000,231
Components and packaging material 6,671,141 9,094,932
Raw material 3,277,332 4,466,390
----------- -----------
$31,003,879 $31,561,553
=========== ===========
The cost of inventories includes product costs and handling charges, including
an allocation of the Company's applicable overhead in the approximate amount of
$2,285,000 and $2,307,000 at December 31, 2004 and March 31, 2004, respectively.
15
D. TRADEMARKS AND LICENSES
Trademarks and licenses are attributable to the following brands:
ESTIMATED LIFE
DECEMBER 31, 2004 MARCH 31, 2004 (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 (1,434,799) (1,215,758)
----------
Subtotal of amortizable intangibles 1,837,633 2,056,674
Perry Ellis 5,888,250 5,888,250 indefinite
----------- ----------
$ 7,725,883 $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 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 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
December 31, 2004, note receivable in the accompanying condensed consolidated
balance sheet includes $170,525 ($1,708,511 at March 31, 2004), relating to this
transaction. All remaining amounts due under the note were collected during
January 2005.
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.
On January 7, 2005, the Company entered into a purchase and sale agreement,
effective January 6, 2005, ( the "Purchase Agreement") with Victory
International (USA), LLC ("Victory"), whereby the Company acquired the exclusive
worldwide licensing rights, along with inventories, molds, designs and other
assets, relating to the XOXO fragrance brand. As consideration, Victory was paid
approximately $7.46 million, of which approximately $5.8 million was allocated
to the license and will be amortized over its term. The consideration given
included $2.55 million in the form of a 60-day promissory note payable in two
equal installments on February 6 (which was paid in accordance with its terms)
and March 6, 2005. During December 2004, the Company advanced $750,000 of the
consideration to Victory, which is included in prepaid and other current assets
in the accompanying December 31, 2004 condensed consolidated balance sheet.
On December 1, 2003, Victory had entered into a license agreement with Global
Brand Holdings, LLC (the "Fragrance License") to manufacture and distribute XOXO
branded fragrances. The first XOXO fragrances were introduced in December 2004.
Under the Purchase Agreement, Victory assigned its rights, and the Company
assumed the obligations, under the Fragrance License. Similar to the Company's
other license agreements, the Fragrance License requires the payment of a fixed
royalty percentage and minimum spending amounts for advertising based on sales
volume.
16
E. BORROWINGS - BANKS AND OTHERS
The composition of borrowings is as follows:
DECEMBER 31, 2004 MARCH 31, 2004
----------------- --------------
Revolving credit facility payable to GMAC Commercial
Credit LLC, interest at LIBOR plus 3.75% or prime
(5.25% at December 31, 2004) at the Company's option. -- $ --
Note payable to Fred Hayman Beverly Hills,
collateralized by the acquired licensed trademarks,
interest at 7.25%, payable in equal monthly
installments of $69,863, including interest,
through June 2004. -- 170,927
---- --------
-- 170,927
Less: long-term borrowings -- --
---- --------
Borrowings, current portion -- $170,927
==== ========
On July 20, 2001, the Company entered into a Loan and Security Agreement (the
Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). On January 4, 2005,
the Loan Agreement was extended through July 20, 2006. 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 of
the Bank of New York's prime rate, at the Company's option.
At December 31, 2004, based on the borrowing base at that date, the credit line
amounted to $19,016,000, 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 Company's 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 Company's 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 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 $30,403,037 and $24,466,509 during the nine-month
periods ended December 31, 2004 and 2003 ($9,486,314 and $10,758,138 during the
three months ended December 31, 2004 and 2003), 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 has 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
17
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
$9,482,519 and $10,890,338 at December 31, 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 ECMV's public filings, 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 historically the first quarter 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 December 31 or 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.
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 December 31, 2004, the fair market value of the investment was
$4,593,927 or $12.15 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 Company's cost basis
for the shares is $1,648,523 or $4.36 per share.
During the nine months ended December 31, 2004 and 2003, the Company had net
sales of $12,029,395 and $6,247,657 ($4,298,684 and $2,995,631 during the three
months ended December 31, 2004 and 2003), respectively, to fragrance
distributors owned/operated by individuals related to the Company's
Chairman/CEO, including a distributorship for the Mexican market. These sales
are included as related party sales in the accompanying condensed consolidated
statements of income. As of December 31, 2004 and March 31, 2004, trade
receivables from related parties include $155,588 and $614,134, respectively,
from these customers, which were current in accordance with their sixty (60) or
ninety (90) day terms.
During the nine months ended December 31, 2004, the Company purchased $200,000
($90,000 during the three months ended December 31, 2004) in television
advertising on the "Adrenalina" show, which is broadcast in various U.S. markets
and Latin American countries. The Company's Chairman/CEO's 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 DECEMBER 31,
-------------------------------
2004 2003
------------ ------------
Net income $ 2,867,746 $ 1,687,246
============ ============
Weighted average number of shares issued 19,256,745 18,057,356
Weighted average number of treasury shares (10,346,525) (9,864,330)
------------ ------------
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,910,220 8,193,026
============ ============
Basic net income per common share $ 0.32 $ 0.21
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,910,220 8,193,026
Effect of dilutive securities:
Stock options and warrants 1,704,435 1,274,583
------------ ------------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,614,655 9,467,609
============ ============
Diluted net income per common share $ 0.27 $ 0.18
============ ============
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock -- 36,000
============ ============
Exercise Price -- $4.00-$8.00
============ ============
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
2004 2003
------------ ------------
Net income $ 7,433,559 $ 3,806,439
============ ============
Weighted average number of shares issued 19,240,017 18,051,011
Weighted average number of treasury shares (10,259,499) (9,645,322)
------------ ------------
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,980,518 8,405,689
============ ============
Basic net income per common share $ 0.83 $ 0.45
============ ============
Weighted average number of shares outstanding used in basic earnings
per share calculation 8,980,518 8,405,689
Effect of dilutive securities:
Stock options and warrants 1,610,573 1,091,550
------------ ------------
Weighted average number of shares outstanding used in diluted earnings
per share calculation 10,591,091 9,497,239
============ ============
Diluted net income per common share $ 0.70 $ 0.40
============ ============
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock -- 76,000
============ ============
Exercise Price -- $3.60-$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:
Nine-months ended December 31,
------------------------------
Cash paid for: 2004 2003
---------- ----------
Interest $ 3,791 $ 284,827
Income taxes $4,297,032 $1,452,676
Supplemental disclosures of non-cash investing and financing activities are as
follows:
Nine months ended December 31, 2004:
- Change in unrealized holding gain of $152,375 on the investment in
affiliate, net of deferred taxes.
Nine months ended December 31, 2003:
- The conversion of trade accounts receivable from Perfumania in the
amount of $5,000,000.
- Change in unrealized holding gain of $3,902,971 on the investment in
affiliate, net of deferred taxes.
I. INCOME TAXES
The provision for income taxes for the periods ended December 31, 2004 and 2003
reflects an effective tax rate of approximately 38%.
J. LICENSE AND DISTRIBUTION AGREEMENTS
As of December 31, 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"), GUESS? and Jockey. The Jockey license
agreement expired on December 31, 2004. The Company did not exercise the renewal
option, as market penetration of the brand did not meet expectations. Gross
sales of Jockey brand products were $136,530 and $101,193 during the nine month
periods ended December 31, 2004 and 2003, respectively.
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 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. The first PH
fragrance was shipped during November 2004, and we expect the launch period to
continue through March 2005.
On September 15, 2004, the Company 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. The Company anticipates that the first fragrance under this agreement
will be launched prior to March 31, 2006.
As of December 8, 2004, the Company entered into an exclusive worldwide license
agreement with Mr. Andy Roddick, to develop, manufacture and distribute prestige
fragrances and related products under his name. The initial term of the
agreement expires on June 30, 2009 and is renewable for an additional four-year
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period. The Company anticipates that the first fragrance under this agreement
will be launched prior to September 30, 2006.
On January 26, 2005, the Company entered into an exclusive worldwide license
agreement with Paris Hilton Entertainment, Inc., to develop, manufacture and
distribute watches and other time pieces under the Paris Hilton name. The
initial term of the agreement expires on June 30, 2010 and is renewable for an
additional five-year period. Under the license 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 watches under this
agreement will be launched prior to December 2005.
Similar to the Company's other license agreements, the new license agreements
require payment of a fixed royalty percentage and spending of minimum amounts
for advertising based on sales volume.
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 was a derivative
action, in which the nominal plaintiffs, the Macatee Family Limited Partnership
and Chatham, Partners I, LP, purported to be suing for the benefit of the
Company itself and all of its public shareholders. The Complaint named Parlux
Fragrances, Inc. as the nominal defendant and all of the current members of the
Board of Directors as the defendants. It sought 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 had an ownership interest. The Complaint sought to enjoin
the Company from continuing to enter into such transactions, sought payment of
costs and fees to Plaintiff's counsel and other unstated relief.
The Company and the Board members engaged experienced Florida securities counsel
to vigorously defend the action. 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 Plaintiff's counsel supporting 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 followed and additional extensions of
time were granted. On June 25, 2004, the Plaintiffs filed an Amended Complaint,
which was received by the Company's counsel on June 29, 2004. The Amended
Complaint, for the most part, contained similar allegations and requested 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.
On December 8, 2004, Plaintiff's filed a Motion for an Interim Award of $168,824
in attorneys' fees and reimbursement of expenses. Plaintiffs also noticed the
depositions of three of the Company's Board members, who agreed and provided
dates for their appearances. Plaintiff's counsel was informed of the rejection
of their claim, which the Company believes was without merit.
On December 22, 2004, Plaintiffs filed for voluntary dismissal of the action,
without prejudice. No payment was made to the Plaintiffs or Plaintiffs counsel
by the Company or the Company's insurance carrier.
There are no other proceedings pending against the Company, which, if determined
adversely, would have a material effect on the Company's financial position or
results of operations.
* * * *
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/ Ilia Lekach
- -------------------------------------------------
Ilia Lekach, Chairman and Chief Executive Officer
(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: February 14, 2005
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