-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DGmKZOgEec2X7KLktX+J9Zb42U6d0NsfkkmmsFzDhd0RokRFxog+/aTw2cBP0/q8 grSigA3mDE3zbXuI9fwFww== 0001116502-02-001124.txt : 20020814 0001116502-02-001124.hdr.sgml : 20020814 20020814154003 ACCESSION NUMBER: 0001116502-02-001124 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARLUX FRAGRANCES INC CENTRAL INDEX KEY: 0000802356 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 222562955 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15491 FILM NUMBER: 02736034 BUSINESS ADDRESS: STREET 1: 3725 S W 30TH AVE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 BUSINESS PHONE: 9543169008 MAIL ADDRESS: STREET 1: 3725 S W 30TH AVENUE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 10-Q 1 parlux-10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------------------- FORM 10-Q ( Mark One ) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2002 ------------- Or______ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _____________________ Commission file number: 0-15491 ------- PARLUX FRAGRANCES, INC. - -------------------------------------------------------------------------------- ( Exact name of registrant as specified in its charter ) DELAWARE 22-2562955 - -------------------------------------------------------------------------------- ( State or other jurisdiction of ( IRS employer identification no. ) incorporation or organization ) 3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312 - -------------------------------------------------------------------------------- ( Address of principal executive offices ) ( Zip code ) Registrant's telephone number, including area code 954-316-9008 ------------------------------ - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate with an "X" whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate with an "X" whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 14, 2002, 9,976,896 shares of the issuer's common stock were outstanding. PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS -------------------- See pages 6 to 15. 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. 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 financial statements and notes. This discussion and analysis should be read in conjunction with such financial statements and notes. Critical Accounting Policies and Estimates - ------------------------------------------ In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company has included in its Annual Report on Form 10-K for the year ended March 31, 2002 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. Except for the Company's adoption of Emerging Issues Task Force ("EITF") 01-09, Accounting for Consideration Given by a Vendor to a Customer, described below, the Company has not made any changes of these critical accounting policies during the first quarter of 2002, nor has it made any material changes in any of the critical accounting estimates underlying these accounting policies during the first quarter 2002. Effective April 1, 2002, the Company adopted EITF 01-09, which codified and reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14 provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these discounts, coupons, rebates and free products. Upon adoption of this pronouncement, the Company has classifed gift-with-purchase ("GWP") activities, which were previously reported as advertising and promotional expenses, as cost of goods sold. The adoption of EITF 01-09 did not have any impact on operating 2 income; however, for the three-month period ended June 30, 2002, gross margin has been decreased by $1,214,429 offset by an equal decrease in advertising and promotional expenses. Additionally, $941,821 of such costs incurred during the three months ended June 30, 2001 have been reclassified to cost of goods sold for comparative purposes. All discussions below include the effect of the adoption and reclassification. Results of Operations - --------------------- Comparison of the three-month period ended June 30, 2002 with the three-month period ended June 30, 2001. During the quarter ended June 30, 2002, net sales increased 10% to $19,825,736 as compared to $18,013,373 for the same period for the prior year. The increase is mainly attributable to the launch of Perry Ellis "Reserve for Women" fragrance, which resulted in an increase in total Perry Ellis brand gross sales from $12,920,488 to $14,209,259, and the launches of "Ocean Pacific" for women in the Fall of 2001, and "Jockey" for men and women in the Spring of 2002, which added gross sales of $1,325,702 and $1,083,287, respectively, during the current period. Net sales to unrelated customers increased 22% to $14,275,667 in the current period, compared to $11,665,256 for the same period in the prior year, reflecting the launches discussed above. Sales to related parties decreased 13% to $5,550,069 in the current period compared to $6,348,117 for the same period in the prior year. Cost of goods sold increased as a percentage of net sales from 47% for the quarter ended June 30, 2001 to 51% for the current period. The increase was mainly attributable to the change in sales mix whereby all customer groups purchased a higher percentage of value sets than in the prior year comparable period. These value sets have a higher cost of goods. Cost of goods sold on sales to unrelated customers and related parties approximated 48% and 61%, respectively, for the current period, as compared to 49% and 43%, respectively, for the same period in the prior year. Operating expenses decreased by 1% compared to the same period in the prior year from $7,716,793 to $7,640,049, decreasing as a percentage of net sales from 43% to 39%. Advertising and promotional expenses decreased 15% to $3,273,356 compared to $3,846,888 in the prior year period, as the previous period reflected the necessary investment to fund the launch costs for "Ocean Pacific" for men. Without the reclassification of GWP activity in both periods, the decrease would have been 6%. Selling and distribution costs decreased 1% to $1,711,454 in the current period as compared to $1,722,191 for the same period of the prior year, decreasing as a percentage of net sales from 10% to 9%. General and administrative expenses increased by 40% compared to the prior year period from $1,060,167 to $1,481,302, increasing as a percentage of net sales from 6% to 7%. The increase is mainly attributable to an increase in legal fees in connection with our lawsuit against a supplier, and the reduction in licensing fees of $162,500 which offset expenses in the prior year. Depreciation and amortization decreased by $172,436 during the current period from $521,427 to $348,991, as approximately $141,000 of amortization on intangibles from the Alexandra de Markoff ("ADM") and Bal a Versailles ("BAV") brands was no longer required during the current period (See Note C for further discussion). Royalties increased by 46% in the current period, increasing as a percentage of net sales from 3% to 4% due to minimum royalty requirements for the Jockey license. As a result of the above, operating income increased by 8% to $1,993,415 remaining at 10% of net sales for the current period, compared to $1,838,066 for the same period in the prior year. Net interest expense decreased to $193,348 in the current period as compared to $331,858 for the same period in the prior year. The decrease was mainly attributable to the substantial 3 reduction in interest rates compared to the prior year, reflecting the terms of our new line of credit coupled with a reduced prime rate. The Company recorded a $2,858,447 non-cash charge during the prior period, representing a writedown for an other-than-temporary decline in the value of our investment in affiliate. Income before taxes for the current period was $1,800,067 compared to a loss before taxes of $1,352,239 in the same period for the prior year. Giving effect to the tax provision and the deferred tax benefit of $207,360 related to the non-cash charge in the prior year, we recorded net income of $1,116,042 for the current period, compared to a net loss of $1,717,238 in the prior year. Liquidity and Capital Resources - ------------------------------- Working capital increased to $39,506,879 as of June 30, 2002, compared to $37,662,059 at March 31, 2002, reflecting the current period's net income and the increase in the market value of our investment in affiliate. Consistent with prior years, our operations for the three months ended June 30, 2002, resulted in a use of cash which is mainly attributable to the increases in inventories and receivables from related parties, typical of the seasonality of our business. The use of cash was funded by increased borrowings under our line of credit. In September 1999, we completed the fourth phase of our common stock buy-back program involving 2,000,000 shares. In connection therewith, the Board of Directors authorized the repurchase of an additional 2,500,000 shares. As of June 30, 2001, the Company had repurchased under all phases a total of 7,978,131 shares at a cost of $21,983,523, with 121,869 shares still available for repurchase under the last program. On July 25, 2001, the Board of Directors authorized a new 2,500,000 share repurchase, subject to the restrictions and covenants in our new loan agreement discussed below. The accompanying consolidated balance sheets also include an additional 39,000 shares of treasury stock purchased at a cost of $133,472 prior to fiscal 1996. On July 20, 2001, we entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Proceeds from the Loan Agreement were used, in part, to repay amounts outstanding under the Company's $14 million credit facility with General Electric Capital Corporation (GECC). Under the Loan Agreement, we are able to borrow, depending upon the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at our option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to EBITDA. Substantially all of our domestic assets collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. Management believes that, based on current circumstances, funds from operations and our new financing will be sufficient to meet our operating needs for the foreseeable future. 4 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- ----------------------------------------------------------- During the quarter ended June 30, 2002, there have been no material changes in the information about the Company's market risks as of March 31, 2002, as set forth in Item 7A of the Form 10-K for the year ended March 31, 2002. PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS ----------------- To the best of our knowledge, there are no legal proceedings pending against us which, if determined adversely to us, would have a material effect on our financial position or results of operations. On May 8, 2001, and amended on June 8, 2001, we filed a legal complaint against a component supplier to recover out-of-pocket costs and damages resulting from the supplier having delivered faulty components for two of our fragrances. Out-of-pocket costs to refurbish the products were included in cost of goods for the years ended March 31, 2002 and 2001. We are still in the discovery phase of the legal action. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits - None (b) There were no filings on Form 8-K during the period. 5 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, March 31, ASSETS 2002 2002 - ------------------------------------------------------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 101,490 $ 164,793 Receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $2,117,000 and $1,430,000, respectively 6,396,132 5,527,522 Trade receivables from related parties 16,403,644 12,788,320 Income tax receivable 1,080,367 1,745,401 Inventories, net 34,017,509 31,102,875 Prepaid expenses and other current assets, net 7,076,070 8,045,933 Investment in affiliate 1,569,119 907,442 ------------ ------------ TOTAL CURRENT ASSETS 66,644,331 60,282,286 Equipment and leasehold improvements, net 2,065,810 2,361,659 Trademarks, licenses and goodwill, net 9,527,345 9,534,937 Other 78,741 69,609 ------------ ------------ TOTAL ASSETS $ 78,316,227 $ 72,248,491 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------ CURRENT LIABILITIES: Borrowings, current portion $ 14,722,288 $ 11,493,461 Accounts payable 11,175,432 10,118,080 Accrued expenses 1,239,732 1,008,686 ------------ ------------ TOTAL CURRENT LIABILITIES 27,137,452 22,620,227 Borrowings, less current portion 734,892 962,275 Deferred tax liability 742,214 742,214 ------------ ------------ TOTAL LIABILITIES 28,614,558 24,324,716 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY : Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2002 and March 31, 2002 -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 17,994,027 and 17,993,277 shares issued at June 30, 2002 and March 31, 2002, respectively 179,940 179,933 Additional paid-in capital 74,012,245 74,011,221 Accumulated deficit (1,087,038) (2,203,080) Accumulated other comprehensive loss (447,808) (1,110,139) Notes receivable from officer (838,675) (837,165) ------------ ------------ 71,818,664 70,040,770 Less - 8,017,131 shares of common stock in treasury, at cost, at June 30, 2002 and March 31, 2002 (22,116,995) (22,116,995) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 49,701,669 47,923,775 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,316,227 $ 72,248,491 ============ ============
See notes to consoldiated financial statements. 6 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, ---------------------------- 2002 2001 ------------ ------------ Net sales: Unrelated customers $ 14,275,667 $ 11,665,256 Related parties 5,550,069 6,348,117 ------------ ------------ 19,825,736 18,013,373 Cost of goods sold, including $1,214,429 and $941,821 of promotional items in 2002 and 2001, respectively 10,192,272 8,458,514 ------------ ------------ Gross margin 9,633,464 9,554,859 ------------ ------------ Operating expenses: Advertising and promotional 3,273,356 3,846,888 Selling and distribution 1,711,454 1,722,191 General and administrative, net of licensing fees of $162,500 in 2001 1,481,302 1,060,167 Depreciation and amortization 348,991 521,427 Royalties 824,946 566,120 ------------ ------------ Total operating expenses 7,640,049 7,716,793 ------------ ------------ Operating income 1,993,415 1,838,066 Interest income 15,784 15,777 Interest expense and bank charges (209,132) (347,635) Other-than-temporary decline in value of investment in affiliate (2,858,447) ------------ ------------ Income (loss) before income taxes 1,800,067 (1,352,239) Income taxes provision (684,025) (364,999) ------------ ------------ Net income (loss) $ 1,116,042 ($ 1,717,238) ============ ============ Income (loss) per common share: Basic $ 0.11 ($ 0.17) ============ ============ Diluted $ 0.11 ($ 0.17) ============ ============
See notes to consolidated financial statements. 7 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED JUNE 30, 2002 (Unaudited)
COMMON STOCK ACCUMULATED --------------------- ADDITIONAL OTHER NUMBER PAR PAID-IN ACCUMULATED COMPREHENSIVE ISSUED VALUE CAPITAL DEFICIT (LOSS) INCOME (1) ---------- --------- ------------ ------------ ------------ BALANCE at March 31, 2002 17,993,277 $ 179,933 $ 74,011,221 $ (2,203,080) $ (1,110,139) Comprehensive income: Net income -- -- -- 1,116,042 -- Unrealized holding gain on investment in affiliate -- -- -- -- 661,677 Foreign currency translation adjustment -- -- -- -- 654 Total comprehensive income Issuance of common stock upon exercise of employee stock options 750 7 1,024 Net increase in notes receivable from officer -- -- -- -- -- ---------- --------- ------------ ------------ ------------ BALANCE at June 30, 2002 17,994,027 $ 179,940 $ 74,012,245 $ (1,087,038) $ (447,808) ========== ========= ============ ============ ============ [RESTUB] NOTES RECEIVABLE FROM TREASURY OFFICER STOCK TOTAL ------------ ------------ ------------ BALANCE at March 31, 2002 $ (837,165) $(22,116,995) $ 47,923,775 Comprehensive income: Net income -- -- 1,116,042 Unrealized holding gain on investment in affiliate -- -- 661,677 Foreign currency translation adjustment -- -- 654 ------------ Total comprehensive income 1,778,373 Issuance of common stock upon exercise of employee stock options 1,031 Net increase in notes receivable from officer (1,510) -- (1,510) ------------ ------------ ------------ BALANCE at June 30, 2002 $ (838,675) $(22,116,995) $ 49,701,669 ============ ============ ============
(1) Accumulated other comprehensive (loss) income includes foreign currency translation adjustments and unrealized holding gains and losses on investment in affiliate. See notes to consolidated financial statements. 8 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended June 30, -------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 1,116,042 ($1,717,238) ----------- ----------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 348,991 521,427 Other-than-temporary decline in market value of investment in affiliate -- 2,858,447 Deferred income tax benefit -- (207,360) Provision for doubtful accounts 60,000 60,000 Reserve for prepaid promotional supplies and inventory obsolescence 481,550 170,000 Changes in assets and liabilities: (Increase) decrease in trade receivables - customers (928,610) 1,588,694 Increase in note and trade receivables - related parties (3,615,324) (3,587,942) Decrease in income tax receivable 665,034 -- Increase in inventories (3,196,183) (5,130,577) Decrease (increase) in prepaid expenses and other current assets 769,862 (1,111,329) (Increase) decrease in other non-current assets (9,132) 5,611 Increase in accounts payable 1,057,352 4,211,509 Increase in accrued expenses and income taxes payable 231,046 3,037 ----------- ----------- Total adjustments (4,135,414) (618,483) ----------- ----------- Net cash used in operating activities (3,019,372) (2,335,721) ----------- ----------- Cash flows from investing activities: Purchases of equipment and leasehold improvements (45,550) (291,624) Purchase of trademarks -- (6,974) ----------- ----------- Net cash used in investing activities (45,550) (298,598) ----------- ----------- Cash flows from financing activities: Proceeds - note payable to GMAC Commercial Credit, net 3,229,804 Proceeds - note payable to GE Capital -- 3,284,538 Payments - note payable to Fred Hayman Beverly Hills (179,778) (167,242) Payments - note payable to Lyon Credit Corp. -- (54,850) Payments - notes payable to Bankers Capital Leasing (48,582) (50,529) Payments - other notes payable -- (18,869) Net increase in notes receivable from officer (1,510) (15,776) Proceeds from issuance of common stock, net 1,031 -- ----------- ----------- Net cash provided by financing activities 3,000,965 2,977,272 ----------- ----------- Effect of exchange rate changes on cash 654 (1,774) ----------- ----------- Net (decrease) increase in cash and cash equivalents (63,303) 341,179 Cash and cash equivalents, beginning of period 164,793 30,214 ----------- ----------- Cash and cash equivalents, end of period $ 101,490 $ 371,393 =========== ===========
See notes to consolidated financial statements. 9 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) ----------- A. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries, Parlux, S.A., a French company ("S.A.") and Parlux Ltd. (jointly referred to as the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited 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 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 which, in the opinion of management, are necessary for a fair presentation of the interim unaudited consolidated financial statements. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's March 31, 2002 Form 10-K as filed with the Securities and Exchange Commission on July 1, 2002. Effective April 1, 2002, the Company adopted EITF 01-09, which codified and reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14 provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these discounts, coupons, rebates and free products. Upon adoption of this pronouncement, the Company has classifed gift-with-purchase ("GWP") activities, which were previously reported as advertising and promotional expenses, as cost of goods sold. The adoption of EITF 01-09 did not have any impact on operating income; however, for the three-month period ended June 30, 2002, gross margin has been decreased by $1,214,429 offset by an equal decrease in advertising and promotional expenses. Additionally, $941,821 of such costs incurred during the three months ended June 30, 2001 have been reclassified to cost of goods sold for comparative purposes. B. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. The components of inventories are as follows: June 30, 2002 March 31, 2002 ------------- -------------- Finished products $17,108,455 $17,532,428 Components and packaging material 11,910,974 9,616,274 Raw material 4,998,080 3,954,173 ----------- ----------- $34,017,509 $31,102,875 =========== =========== 10 The cost of inventories includes product costs and handling charges, including allocation of the Company's applicable overhead in the approximate amount of $2,353,000 and $2,409,000 at June 30, 2002 and March 31, 2002, respectively. The above amounts are net of reserves for estimated inventory obsolescence of approximately $2,070,000 and $2,140,000 at June 30, 2002 and March 31, 2002, respectively. C. TRADEMARKS, LICENSES AND GOODWILL Trademarks, licenses and goodwill are attributable to the following brands: June 30, March 31, 2002 2002 ---------- --------- Owned Brands: Fred Hayman Beverly Hills $2,820,361 $2,820,361 Animale 1,582,367 1,582,367 Bal A Versailles 300,000 300,000 Other 216,546 216,546 Licensed Brands: Perry Ellis 7,963,560 7,963,560 ---------- ---------- 12,882,834 12,882,834 Less: accumulated amortization (3,355,489) (3,347,897) ----------- ----------- $9,527,345 $9,534,937 ========== ========== On June 9, 1998, the Company entered into an exclusive agreement to license the Bal A Versailles (BAV) rights to Genesis International Marketing Corporation ("Genesis") for an annual licensing fee of $100,000 during the initial year of the agreement, increasing to $150,000 for subsequent years for the remainder of the initial term, and to $200,000 each year thereafter. The initial term of the agreement is for ten years, renewable every five years. The Company is currently negotiating a sale whereby Genesis would purchase the BAV trademark outright. In anticipation of such an agreement, an impairment charge against the intangibles related to BAV in the amount of $1,942,462 was recorded in the Company's statement of operations for the year ended March 31, 2002. D. BORROWINGS - BANKS AND OTHERS The composition of borrowings is as follows:
June 30, 2002 March 31, 2002 ------------- -------------- Revolving credit facility payable to GMAC Commercial Credit, interest at LIBOR plus 3.75% or prime (4.75% at June 30, 2002) plus 1% at the Company's option, net of restricted cash of $490,823 and $1,248,477 at June 30 and March 31, 2002, respectively $13,789,718 $10,559,914 Note payable to Fred Hayman Beverly Hills (FHBH), collateralized by the acquired licensed trademarks, interest at 7.25%, payable in equal monthly installments of $69,863, including interest, through June 2004 1,524,590 1,704,368 11 Capital lease payable to Bankers Leasing, collateralized by certain warehouse equipment, payable in quarterly installments of $33,992, including interest, through July 2003. 124,892 155,889 Capital lease payable to Bankers Leasing, collateralized by certain shipping equipment, payable in quarterly installments of $18,249, including interest, through October 2002. 17,980 35,565 ---------- ---------- 15,457,180 12,455,736 Less: long-term borrowings (734,892) (962,275) ----------- ----------- Short-term borrowings $14,722,288 $11,493,461 =========== ===========
On July 20, 2001, the Company entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Under the Loan Agreement, the Company is able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at the Company's option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to EBITDA. At June 30, 2002, based on the borrowing base at that date, the credit line amounted to $19,197,000 and, accordingly, the Company had approximately $4,916,000 available under the credit line excluding the effect of restricted cash of $491,000. Substantially all of the domestic assets of the Company collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. Management believes that, based on current circumstances, funds from operations and its new financing will be sufficient to meet the Company's operating needs for the foreseeable future. E. RELATED PARTIES TRANSACTIONS As of June 30, 2002, the Company had loaned a total of $838,675 ($837,165 at March 31, 2002) to its Chairman/CEO, which is recorded as a component of stockholders' equity in the accompanying consolidated balance sheets. The note is unsecured, bears interest at 8% per annum, and is due in one balloon payment on March 31, 2003. Interest payments are current through March 31, 2002. The Company had net sales of $3,921,425 and $5,362,527 during the three-month periods ended June 30, 2002 and June 30, 2001, respectively, to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which the Company's Chairman/CEO has an ownership interest and holds identical management positions. Net trade accounts receivable owed by Perfumania to the Company amounted to $15,594,781 and $12,491,993 at June 30, 2002 and March 31, 2002, respectively. Amounts due from related parties are non-interest bearing and are due in less than one year. 12 On July 1, 1999, Perfumania and the Company's Board of Directors approved the transfer of 1,512,406 shares of Perfumania treasury stock to the Company in consideration for a partial reduction of the outstanding trade receivable balance in the amount of $4,506,970. The transfer price was based on a per share price of $2.98 ($11.92 post reverse split discussed below), which approximated 90% of the closing price of Perfumania's common stock for the previous 20 business days. The agreement was consummated on August 31, 1999, and the shares registered in June 2000. Effective February 1, 2000, ECMV was formed as a holding company and accordingly, former Perfumania shareholders now hold common stock in ECMV. During the quarter ended June 30, 2001, the Company recorded a non-cash charge to earnings of $2,858,447 which reflected an other-than-temporary decline in value of the investment in affiliate based upon a sustained reduction in the quoted market price of $1.09 per share ($4.36 post reverse split discussed below), as of June 30, 2001, compared to the original cost per share of $2.98 ($11.92 post reverse split discussed below). As a result of this non-cash reduction of the cost basis of the Company's investment, the Company reversed $3,496,220 of previously recorded unrealized losses on the investment, net of taxes, which had been recorded as a component of stockholders' equity as of March 31, 2001. On March 21, 2002, ECMV effected a one-for-four reverse stock split; accordingly, the Company now owns 378,101 shares. As of June 30, 2002, the fair market value of the investment in ECMV was $1,569,119 ($4.15 per share after the reverse split). The Company believes that, based on the evaluation of ECMV's operations, that this current decline in market price is temporary. As of August 12, 2002, the fair market value of the investment in ECMV is $1,697,673 ($4.49 per share after the reverse split). As of June 30, 2001, the Company and Perfumania had entered into a $3 million subordinated note agreement which converted $3 million of the outstanding trade receivable due from Perfumania to the Company as of that date. The note was repayable in installments of $50,000 on October 31, 2001, $300,000 on November 30, 2001, $2,500,000 on December 31, 2001, and $50,000 on each of January 31, 2002, February 28, 2002, and March 31, 2002. Accrued interest is paid with each principal installment. As of March 31, 2002, the loan had been repaid in accordance with its terms. The Company had net sales of $1,628,644 and $985,590 during the three months ended June 30, 2002 and 2001, respectively, to fragrance distributors owned/operated by individuals related to the Company's Chairman/CEO, including $1,067,739 and $372,934, respectively, to a director of the Company. These sales are included as related party sales in the accompanying statements of operations. As of June 30, 2002 and March 31, 2002, trade receivables from related parties includes $808,863 and $296,327, respectively, from these customers, including $457,266 and 286,488, from the director. F. 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 June 30, ---------------------------- 2002 2001 ---------- ----------- Net income (loss) $1,116,042 ($1,717,238) ========== ========== Weighted average number of shares outstanding used in basic earnings per share calculation 9,976,276 9,969,434 ========== ========== Basic net (loss) income per common share $0.11 ($0.17) ========== ========== Weighted average number of shares outstanding used in basic earnings per share calculation 9,976,276 13 Effect of dilutive securities(1): Stock options and warrants 125,352 ---------- Weighted average number of shares outstanding used in diluted earnings per share calculation 10,101,628 ========== Diluted net (loss) income per common share $0.11 ========== Antidilutive securities not included in diluted earnings per share computation: Options and warrants to purchase common stock 1,274,450 1,315,850 ========= ========= Exercise Price $2.08-$8.00 $2.06-$8.00 ========== ==========
Excluding the effect of the non-cash charge discussed in Note E, both basic and diluted earnings per share would have been $0.09 for the prior year period. (1) The calculation of diluted loss per share was the same as the basic loss per share for the period ended June 30, 2001, since the inclusion of potential common stock in the computation would be antidilutive. G. 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: Three-months ended June 30, --------------------------- 2002 2001 ---- ---- Cash paid for: Interest $209,000 $344,000 Income taxes $ 19,000 $525,225 Supplemental disclosures of non-cash investing and financing activities are as follows: Three months ended June 30, 2002: o The Company incurred an unrealized holding gain of $661,677 on the investment in affiliate Three months ended June 30, 2001: o The conversion of trade accounts receivable from Perfumania in the amount of $3,000,000, as discussed in Note E. o The Company incurred an unrealized loss of $2,858,847 on the investment in affiliate, with a corresponding deferred tax benefit of $207,360. H. INCOME TAXES The provision for income taxes for the periods ended June 30, 2002 and 2001 reflects an effective tax rate of approximately 38%, reduced in 2001 by a $207,360 deferred tax benefit in the prior year period relating to the other-than-temporary decline in value of investment in affiliate. 14 I. LICENSE AND DISTRIBUTION AGREEMENTS As of June 30, 2002 and March 31, 2002, 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. J. NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The Company does not expect the adoption of SFAS No. 145 to have a material effect on its financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, we cannot determine the potential effects that adoption of SFAS No. 146 will have on our consolidated financial statements. * * * * 15 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARLUX FRAGRANCES, INC. /s/ Ilia Lekach - ------------------------------------------------- Ilia Lekach, Chairman and Chief Executive Officer /s/ Frank A. Buttacavoli - ------------------------------------------------- Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director Each of the undersigned hereby certifies in his capacity as an officer of Parlux Fragrances, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period. /s/ Ilia Lekach - ------------------------------------------------- Ilia Lekach, Chairman and Chief Executive Officer /s/ Frank A. Buttacavoli - ------------------------------------------------- Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director Date: August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----