-----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, DSMBGR0mU5ytVtxwvQY42kO/uPURoaZdNukvKlyP8rMZj5I7C1519B93fWTDGAhk cSXscZATJqURgFEDKZx6aw== 0001116502-01-501392.txt : 20020410 0001116502-01-501392.hdr.sgml : 20020410 ACCESSION NUMBER: 0001116502-01-501392 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1790569 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: September 30, 2001 ------------------ 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 (IRS employer identification no.) of 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 November 13, 2001, 9,976,146 shares of the issuer's common stock were outstanding. PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements - ------- -------------------- See pages 7 to 18. 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. Recent Developments - ------------------- The September 11th national tragedy immediately impacted our business, both domestically and internationally. Our orders during the final twenty days of September, and continuing to date, have been significantly lower than expected. In view of the current economic conditions and the uncertainty surrounding the upcoming holiday season, we anticipate reductions in both sales and profits for the second half of our fiscal year ending March 31, 2002. Results of Operations - --------------------- Comparison of the three-month period ended September 30, 2001 with the - ---------------------------------------------------------------------- three-month period ended September 30, 2000. - -------------------------------------------- During the quarter ended September 30, 2001, net sales increased 5% to $19,041,386 as compared to $18,199,377 for the same period for the prior year. The increase is mainly attributable to the launch of "Ocean Pacific" for men and women in the Spring and Fall of 2001, which added gross sales of $2,836,908 for the three-month period ended September 30, 2001. Net sales to unrelated customers increased 2% to $13,746,089 in the current period, compared to $13,483,702 for the same period in the prior year, reflecting the launches discussed above. Sales to related parties increased 12% to $5,295,297 in the current period compared to $4,715,675 for the same period in the prior year. Cost of goods sold increased as a percentage of net sales from 38% for the quarter ended September 30, 2000 to 48% for the current period. The increase was mainly attributable to the sale of certain closeout merchandise to international customers at lower margins during the current period and a change in sales mix. 2 Domestic department store customers and related parties purchased a higher percentage of value sets for the holiday season earlier than in prior years as compared to basic stock merchandise. These value sets have a higher cost of goods. Cost of goods sold on sales to unrelated customers and related parties approximated 45% and 55%, respectively, for the current period, as compared to 40% and 34%, respectively, for the same period in the prior year. Operating expenses decreased by 7% compared to the same period in the prior year from $8,070,144 to $7,505,556, decreasing as a percentage of net sales from 44% to 39%. Advertising and promotional expenses increased 5% to $3,752,329 compared to $3,589,318 in the prior year period, reflecting the necessary investment to fund the launch costs for "Ocean Pacific". Selling and distribution costs increased 1% to $1,627,515 in the current period as compared to $1,610,193 for the same period of the prior year, remaining relatively constant at 9% of net sales. General and administrative expenses decreased by 44% compared to the prior year period from $1,862,885 to $1,049,554, decreasing as a percentage of net sales from 10% to 6%. The prior year period included approximately $800,000 in bad debt expense for international customers. Depreciation and amortization decreased by $42,810 during the current period from $579,849 to $537,039, as approximately $119,000 of amortization on intangibles with indefinite lives was not required during the current period as a result of new accounting guidelines (See Note C for further discussion). The decrease was partially offset by depreciation of new molds required for Ocean Pacific products. Royalties increased by 26% in the current period, increasing as a percentage of net sales from 2% to 3% due to increased sales of Ocean Pacific products. As a result of the above, operating income decreased by 21% to $2,476,901 or 13% of net sales for the current period, compared to $3,132,302 or 17% of net sales for the same period in the prior year. Net interest expense decreased to $209,177 in the current period as compared to $227,583 for the same period in the prior year. The decrease reflects the reduction in interest rates on borrowings offset by the reduction in interest income generated by notes receivable from related parties, which had higher average balances outstanding during the prior year period. Income before taxes for the current period was $2,280,201 or 12% of net sales compared to $2,907,825 or 16% of net sales in the same period for the prior year. Giving effect to the tax provision, net income amounted to $1,413,725 or 7% of net sales for the current period, as compared to net income of $1,802,851 or 10% of net sales for the same period in the prior year. Comparison of the six-month period ended September 30, 2001 with the six-month - ------------------------------------------------------------------------------ period ended September 30, 2000. - -------------------------------- During the six-month period ended September 30, 2001, net sales increased 9% to $37,054,759 as compared to $33,910,562 for the same period for the prior year. The increase is mainly attributable to the launch of "Ocean Pacific" for men and women in the Spring and Fall of 2001, which added gross sales of $4,525,767 for the six-month period ended September 30, 2001. Net sales to unrelated customers increased 16% to $25,411,345 in the current period, compared to $21,879,221 for the same period in the prior year, reflecting the launches discussed above. Sales to related parties decreased 3% to $11,643,414 in the current period compared to $12,031,341 for the same period in the prior year. Cost of goods sold increased as a percentage of net sales from 39% for the six-month period ended September 30, 2000 to 45% for the current period. The increase was mainly attributable to the sale of certain closeout merchandise to international customers at lower margins during the current six-month period and the change in sales mix during the quarter ended September 30, 2001, as discussed above. Cost of goods sold on sales to unrelated customers and related 3 parties approximated 43% and 49%, respectively, for the current six-month period, as compared to 38% and 39%, respectively, for the same period in the prior year. Operating expenses for the current six-month period decreased marginally compared to the same period in the prior year from $16,185,155 to $16,164,170, decreasing as a percentage of net sales from 48% to 44%. Advertising and promotional expenses increased 7% to $8,541,038 compared to $7,989,530 in the prior year period, reflecting the necessary investment to fund the launch costs for "Ocean Pacific". Selling and distribution costs increased 6% to $3,349,706 in the current period as compared to $3,166,288 for the same period of the prior year, remaining relatively constant at 9% of net sales. General and administrative expenses decreased by 28% compared to the prior year period from $2,913,109 to $2,109,721, decreasing as a percentage of net sales from 9% to 6%. The prior six-month period included approximately $1,000,000 in bad debt expense for international customers. Depreciation and amortization decreased by $59,635 during the current period from $1,118,101 to $1,058,466, as approximately $238,000 of amortization on intangibles with indefinite lives was not required during the current six-month period as a result of new accounting guidelines (See Note C for further discussion). The decrease was partially offset by depreciation of new molds required for Ocean Pacific products. Royalties remained relatively constant as a percentage of net sales at 3%. As a result of the above, operating income decreased by 7% to $4,314,967 or 12% of net sales for the current six-month period, compared to $4,653,704 or 14% of net sales for the same period in the prior year. Net interest expense increased to $541,035 in the current period as compared to $457,234 for the same period in the prior year. The increase reflects the reduction in interest income generated by notes receivable from related parties that were outstanding during the entire prior year period, offset by lower interest rates on borrowings. The Company recorded a $2,858,447 non-cash charge during the current period, representing a writedown for an other-than-temporary decline in the value of our investment in affiliate. Income before taxes for the current six-month period was $927,962 compared to $4,199,576 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, the net loss amounted to $303,513 for the current period, as compared to income of $2,603,737 for the same period in the prior year. Excluding the effect of the non-cash charge (net of income taxes), net income of $2,347,574 would have been reported for the current six-month period. Liquidity and Capital Resources - ------------------------------- Working capital increased to $33,009,249 as of September 30, 2001, compared to $30,535,978 at March 31, 2001, reflecting the current period's net loss, offset by the effect of the non-cash charge. 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. No shares have been purchased under the latest authorization. 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. 4 In May 1997, we entered into a three-year $25 million loan and Security Agreement (the Credit Agreement) with General Electric Capital Corporation (GECC). Due principally to the significant treasury stock purchases under our stock buy back program, as of March 31, 2000, we were not in compliance with financial covenants relating to tangible net worth, current ratio and minimum fixed charge coverage ratio as well as the restricted payment covenants exceeding the amount of fixed assets and treasury stock which can be purchased as well as advances to related parties and employees. GECC had extended, through various short-term agreements, the maturity of the Credit Agreement through July 31, 2001, while reducing the borrowing limit to $14 million, more in line with the Company's current needs. 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 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. Item 3. Quantitative and Qualitative Disclosures About Market Risks - ------- ----------------------------------------------------------- During the quarter ended September 30, 2001, there have been no material changes in the information about the Company's market risks as of March 31, 2001, as set forth in Item 7A of the Form 10-K for the year ended March 31, 2001. 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 year ended March 31, 2001. We are still awaiting the supplier's response to the complaint, which has been extended by the court due to their counsel's offices being formerly located in the World Trade Center. 5 Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits - None (b) On July 26, 2001, we filed a Form 8-K in connection with the execution of a Revolving Credit and Security Agreement with GMACCC. 6 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, March 31, ASSETS 2001 2001 - ------------------------------------------------ ------------------ ------------------- CURRENT ASSETS: Cash and cash equivalents $ 105,609 $ 30,214 Receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $2,137,000 and $1,922,000, respectively 6,483,717 6,640,616 Trade receivables from related parties 14,866,747 13,006,178 Note receivable from a related party 3,057,889 -- Inventories, net 34,860,704 22,174,181 Prepaid expenses and other current assets 9,826,176 8,155,477 Investment in affiliate 907,444 803,390 ------------ ------------ TOTAL CURRENT ASSETS 70,108,286 50,810,056 Equipment and leasehold improvements, net 2,506,636 2,649,347 Trademarks, licenses and goodwill, net 20,173,065 20,464,254 Other 82,548 88,366 ------------ ------------ TOTAL ASSETS $ 92,870,535 $ 74,012,023 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Borrowings, current portion $ 15,386,073 $ 7,862,607 Accounts payable 19,997,748 11,363,779 Accrued expenses 718,665 880,673 Income taxes payable 996,551 167,019 ------------ ------------ TOTAL CURRENT LIABILITIES 37,099,037 20,274,078 Borrowings, less current portion 1,285,813 1,686,142 Deferred tax liability 1,177,329 1,177,329 ------------ ------------ TOTAL LIABILITIES 39,562,179 23,137,549 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY : Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2001 and March 31, 2001 -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 17,993,277 shares issued at September 30, 2001 and 17,986,565 at March 31, 2001 179,933 179,866 Additional paid-in capital 74,011,221 74,002,059 Retained earnings 3,148,808 3,452,321 Accumulated other comprehensive loss (1,108,949) (3,851,830) Notes receivable from officer (805,662) (790,947) ------------ ------------ 75,425,351 72,991,469 Less - 8,017,131 shares of common stock in treasury, at cost, at September 30, 2001 and March 31, 2001 (22,116,995) (22,116,995) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 53,308,356 50,874,474 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,870,535 $ 74,012,023 ============ ============
See notes to consolidated financial statements. 7 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, Six Months Ended September 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------- Net sales: Unrelated customers $ 13,746,089 $ 13,483,702 $ 25,411,345 $ 21,879,221 Related parties 5,295,297 4,715,675 11,643,414 12,031,341 ------------ ------------ ------------ ------------ 19,041,386 18,199,377 37,054,759 33,910,562 Cost of goods sold 9,058,929 6,996,931 16,575,622 13,071,703 ------------ ------------ ------------ ------------ Gross margin 9,982,457 11,202,446 20,479,137 20,838,859 ------------ ------------ ------------ ------------ Operating expenses: Advertising and promotional 3,752,329 3,589,318 8,541,038 7,989,530 Selling and distribution 1,627,515 1,610,193 3,349,706 3,166,288 General and administrative, net of licensing fees of $162,500 and $325,000 in 2001 and 2000 1,049,554 1,862,885 2,109,721 2,913,109 Depreciation and amortization 537,039 579,849 1,058,466 1,118,101 Royalties 539,119 427,899 1,105,239 998,127 ------------ ------------ ------------ ------------ Total operating expenses 7,505,556 8,070,144 16,164,170 16,185,155 ------------ ------------ ------------ ------------ Operating income 2,476,901 3,132,302 4,314,967 4,653,704 Interest income 73,814 130,795 89,591 233,706 Interest expense and bank charges (282,991) (358,378) (630,626) (690,940) Exchange gain 12,477 3,106 12,477 3,106 Other-than-temporary decline in value of investment in affiliate -- -- (2,858,447) -- ------------ ------------ ------------ ------------ Income before income taxes 2,280,201 2,907,825 927,962 4,199,576 Income tax provision (866,476) (1,104,974) (1,231,475) (1,595,839) ------------ ------------ ------------ ------------ Net income (loss) $ 1,413,725 $ 1,802,851 ($ 303,513) $ 2,603,737 ============ ============ ============ ============ Income (loss) per common share: Basic $ 0.14 $ 0.18 $ (0.03) $ 0.26 ============ ============ ============ ============ Diluted $ 0.13 $ 0.17 $ (0.03) $ 0.25 ============ ============ ============ ============
See notes to consolidated financial statements. 8 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED SEPTEMBER 30, 2001 (Unaudited)
COMMON STOCK ----------------------------- ADDITIONAL NUMBER PAR PAID-IN RETAINED ISSUED VALUE CAPITAL EARNINGS ------------- ------------ --------------- -------------- BALANCE at March 31, 2001 17,986,565 $ 179,866 $ 74,002,059 $ 3,452,321 Comprehensive income: Net loss -- -- -- (303,513) Reversal of unrealized holding loss on investment in affiliate, net of taxes -- -- -- -- Unrealized holding loss on investment in affiliate -- -- -- -- Foreign currency translation adjustment -- -- -- -- Total comprehensive income Issuance of common stock upon exercise of employee stock options 6,712 67 9,162 -- Net increase in notes receivable from officer -- -- -- -- ------------ ------------ ------------ ------------ BALANCE at September 30, 2001 17,993,277 $ 179,933 $ 74,011,221 $ 3,148,808 ============ ============ ============ ============ [restubbed table] ACCUMULATED NOTES OTHER RECEIVABLE COMPREHENSIVE TREASURY FROM (LOSS) INCOME (1) STOCK OFFICER TOTAL --------------- ------------------ -------------- -------------- BALANCE at March 31, 2001 $ (3,851,830) $(22,116,995) $ (790,947) $ 50,874,474 Comprehensive income: Net loss -- -- -- (303,513) Reversal of unrealized holding loss on investment in affiliate, net of taxes 3,496,220 -- -- 3,496,220 Unrealized holding loss on investment in affiliate (741,079) -- -- (741,079) Foreign currency translation adjustment (12,260) -- -- (12,260) ------------ Total comprehensive income 2,439,368 ------------ Issuance of common stock upon exercise of employee stock options -- -- -- 9,229 Net increase in notes receivable from officer -- -- (14,715) (14,715) ------------ ------------ ------------ ------------ BALANCE at September 30, 2001 $ (1,108,949) $(22,116,995) $ (805,662) $ 53,308,356 ============ ============ ============ ============
(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. 9 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended September 30, --------------------------------------- 2001 2000 ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ (303,513) $ 2,603,737 ------------ ------------ Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,058,466 1,118,101 Other-than-temporary decline in market value of investment in affiliate 2,858,447 -- Deferred income tax benefit (207,360) -- Provision for doubtful accounts 120,000 1,147,000 Reserve for prepaid promotional supplies and inventory obsolescence 350,000 450,000 Changes in assets and liabilities: Decrease (increase) in trade receivables - customers 36,899 (1,970,959) Increase in note and trade receivables - related parties (4,918,458) (4,157,346) Increase in inventories (13,036,523) (1,066,726) (Increase) decrease in prepaid expenses and other current assets (1,670,699) 62,831 Decrease in other non-current assets 5,818 51,146 Increase in accounts payable 8,633,969 651,448 Increase in accrued expenses and income taxes payable 667,524 563,345 ------------ ------------ Total adjustments (6,101,917) (3,151,160) ------------ ------------ Net cash used in operating activities (6,405,430) (547,423) ------------ ------------ Cash flows from investing activities: Purchases of equipment and leasehold improvements (617,592) (625,893) Purchase of trademarks (6,974) (62,018) ------------ ------------ Net cash used in investing activities (624,566) (687,911) ------------ ------------ Cash flows from financing activities: Proceeds - note payable to GMAC Commercial Credit 14,475,811 -- (Payments) proceeds - note payable to GE Capital (6,782,973) 2,838,175 Payments - note payable to Fred Hayman Beverly Hills (337,534) (313,997) Payments - note payable to United Credit Corp. (111,231) (99,623) Payments - notes payable to Bankers Capital Leasing (102,067) (64,536) Payments - other notes payable (18,869) -- Net (increase) decrease notes receivable from officer (14,715) 2,188 Purchases of treasury stock -- (1,142,294) Proceeds from issuance of common stock 9,229 24,260 ------------ ------------ Net cash provided by financing activities 7,117,651 1,244,173 ------------ ------------ Effect of exchange rate changes on cash (12,260) (1,600) ------------ ------------ Net increase in cash and cash equivalents 75,395 7,239 Cash and cash equivalents, beginning of period 30,214 17,464 ------------ ------------ Cash and cash equivalents, end of period $ 105,609 $ 24,703 ============ ============
See notes to consolidated financial statements. 10 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., Parlux, S.A., a wholly-owned French subsidiary ("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, 2001 Form 10-K as filed with the Securities and Exchange Commission on July 16, 2001. Certain reclassifications were made to the September 30, 2000 financial statements to conform with the presentation of the September 30, 2001 financial statements. B. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. The components of inventories are as follows: September 30, 2001 March 31, 2001 ------------------- --------------- Finished products $17,963,544 $11,485,963 Components and packaging material 10,775,300 6,959,423 Raw material 6,141,860 3,728,795 ----------- ----------- $34,860,704 $22,174,181 =========== =========== The cost of inventories includes product costs and handling charges, including allocation of the Company's applicable overhead in the amount of $2,435,220 and $2,275,186 at September 30, 2001 and March 31, 2001, respectively. The above amounts are net of reserves for estimated inventory obsolescence of approximately $1,795,000 and $2,805,000 at September 30, 2001 and March 31, 2001, respectively. 11 C. Trademarks, Licenses and Goodwill Trademarks, licenses and goodwill, which are being amortized over twenty-five years, are attributable to the following brands: September 30, March 31, 2001 2001 ---- ---- Owned Brands: Alexandra de Markoff $11,191,174 $11,191,174 Fred Hayman Beverly Hills 2,820,361 2,820,361 Bal A Versailles 2,948,942 2,948,942 Animale 1,582,367 1,574,693 Other 216,546 216,546 Licensed Brands: Perry Ellis 7,963,560 7,964,310 ----------- ----------- 26,722,950 26,716,026 Less: accumulated amortization (6,549,885) (6,251,772) ------------ ------------ $20,173,065 $20,464,254 =========== =========== On June 9, 1998, the Company entered into an exclusive agreement to license the Bal A Versailles (BAV) rights to Genesis International Marketing Corporation 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, automatically renewable every five years. On March 2, 1998, the Company entered into an exclusive agreement to license the Alexandra de Markoff (AdM) rights to Cosmetic Essence, Inc. ("CEI") for an annual fee of $500,000. The initial term of the agreement is ten years, automatically renewable for additional ten and five year terms. The annual fee reduces to $100,000 after the third renewal. The license was assigned by CEI to one of its affiliates, Irving W. Rice & Co. However, CEI guarantees payment of the annual licensing fee for the entire term of the agreement, including renewals. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method and further requires separate recognition of intangible assets that meet one of two criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill, and other intangible assets with an indefinite useful life, should not be amortized, but shall be periodically tested for impairment. The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly, amortization was discontinued for intangible assets with indefinite useful lives and, as a result, amortization of approximately $119,000 and $238,000 for the three and six months ended September 30, 2001, respectively, was no longer required. The Company has completed the initial step of a transitional impairment test of its goodwill as of April 1, 2001 in accordance with SFAS No. 142 and has determined that its goodwill may be impaired. The Company will complete the final step of the transitional impairment test by the end of the current fiscal year ended March 31, 2002 and any impairment loss resulting from the transitional impairment test would be recorded as a cumulative effect of a change in accounting principle. 12 D. Borrowings - Banks and Others
The composition of borrowings is as follows: September 30, 2001 March 31, 2001 ------------------- -------------- Revolving credit facility payable to GMAC Commercial Credit, interest at LIBOR plus 3.75%, or prime (6.0% at September 30, 2001) plus 1% at the Company's option, net of restricted cash of $513,782 at September 30, 2001 $ 14,475,811 $ -- Revolving credit facility payable to General Electric Capital Corporation, interest at prime plus 4%, net of restricted cash of $1,983,334 at March 31, 2001 -- 6,782,973 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 2,054,323 2,391,857 Capital lease payable to Bankers Leasing, collateralized by certain computer hardware and software, payable in quarterly installments of $36,378, including interest, through January 72,168 141,692 Capital lease payable to Bankers Leasing, collateralized by certain shipping equipment, payable in quarterly installments of $18,249, including interest, through October 2002 69,584 102,127 Note payable to United Capital Corporation, collateralized by certain equipment, interest at 11%, payable in equal monthly installments of $19,142, including interest, through September 2001 -- 111,231 Other notes payable -- 18,869 ------------ ------------ 16,671,886 9,548,749 Less: long-term borrowings (1,285,813) (1,686,142) ------------ ------------ Short-term borrowings $ 15,386,073 $ 7,862,607 ============ ============
In May 1997, the Company entered into a $25 million Loan and Security Agreement ( the Credit Agreement ) with General Electric Capital Corporation (GECC). Due principally to the significant treasury stock purchases under the Company's stock buy back program, as of March 31, 2000, the Company was not in compliance with financial covenants relating to tangible net worth, current ratio and minimum fixed charge coverage ratio as well as the restricted payment covenants exceeding the amount of fixed assets and treasury stock which can be purchased as well as advances to related parties and employees. GECC had extended, through various short-term agreements, the maturity of the Credit Agreement through July 31, 2001, while reducing the borrowing limit to $14 million, more in line with the Company's current needs. 13 On July 20, 2001, the Company 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 GECC. 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. 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 September 30, 2001, the Company had loaned a total of $805,662 ($790,947 at March 31, 2001) to its Chairman/CEO, which is recorded as a component of stockholders' equity in the accompanying consolidated balance sheets. The notes are unsecured, bear interest at 8% per annum, and are due in one balloon payment on March 31, 2002. As of this date, interest payments are current through June 30, 2001. The Company had net sales of $9,645,600 and $12,031,341 during the six-month periods ended September 30, 2001 and September 30, 2000 ($4,283,073 and $4,715,674 during the three-months ended September 30, 2001 and September 30, 2000), respectively, to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which the Company's Chairman/CEO has an ownership interest and holds identical management positions. Net trade accounts receivable and note receivable owed by Perfumania to the Company amounted to $14,866,747 and $3,057,889, respectively, at September 30, 2001 ($13,006,178 and $0, respectively, at March 31, 2001). Amounts due from related parties are non-interest bearing and are due in less than one year, except for the subordinated note receivable discussed below which bears interest at prime plus 1%. 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, 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. As of June 30, 2001, the fair market value of the investment in ECMV was $1,648,523 ($1.09 per share). During the three months ended June 30, 2001, the Company recorded a non-cash charge 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 compared to the original cost per share of $2.98. As a result of this non-cash charge against income, 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. 14 As of June 30, 2001, the parties 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 is 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 will be paid with each principal installment. The Company had net sales of $1,997,814 during the six-month period ended September 30, 2001 ($1,012,224 during the three months ended September 30, 2001), to fragrance distributors owned/operated by individuals related to the Company's Chairman/CEO, including $912,773 to a director of the Company. These sales are included as related party sales in the accompanying statement of operations. 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 loss per common share calculations:
Three Months Ended September 30, 2001 2000 ---- ---- Net income $ 1,413,725 $ 1,802,851 ============ ============ Weighted average number of shares outstanding used in basic earnings per share calculation 9,973,520 9,969,151 ============ ============ Basic net income per common share $ 0.14 $ 0.18 ============ ============ Weighted average number of shares outstanding used in basic earnings per share calculation 9,973,520 9,969,151 Affect of dilutive securities: Stock options and warrants 542,615 428,940 ------------ ------------ Weighted average number of shares outstanding used in diluted earnings per share calculation 10,516,135 10,398,091 ============ ============ Diluted net income per common share $ 0.13 $ 0.17 ============ ============ Antidilutive securities not included in diluted earnings per share computation: Options and warrants to purchase common stock 216,000 1,304,975 ============ ============ Exercise Price $3.13-$8.00 $2.82-$8.00 ============ ============ Six Months Ended September 30, 2001 2000 ------------ ------------ Net income (loss) ($ 303,513) $ 2,603,737 ============ ============ Weighted average number of shares outstanding used in basic earnings per share calculation 9,971,488 10,019,591 ============ ============ Basic net (loss) income per common share ($ 0.03) $ 0.26 ============ ============ Weighted average number of shares outstanding used in basic earnings per share calculation 10,019,591 Affect of dilutive securities (1) Stock options and warrants 528,517 ------------ Weighted average number of shares outstanding used in diluted earnings per share calculation 10,548,108 ============ Diluted net (loss) income per common share $ 0.25 ============ Antidilutive securities not included in diluted earnings per share computation: Options and warrants to purchase common stock 1,238,365 ============ Exercise Price $3.13-$8.00 ============
15 (1) The calculation of diluted loss per share was the same as the basic loss per share for the six months ended September 30, 2001, since the inclusion of potential common stock in the computation would be antidilutive. Excluding the effect of the non-cash charge discussed in Note E, both basic and diluted earnings per share would have been $0.23 for the current six-month period. 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: Six-months ended September 30, 2001 2000 ---- ---- Cash paid for: Interest $714,301 $576,147 Income taxes $557,491 $470,480 Supplemental disclosures of non-cash investing and financing activities are as follows: Six months ended September 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 other-than-temporary decline in value on the investment in affiliate of $2,858,847, with a corresponding deferred tax benefit of $207,360. o The Company incurred an unrealized holding loss of $741,079 on the investment in affiliate. Six months ended September 30, 2000: o The Company entered into a barter agreement for which it exchanged inventory of Baryshnikov brand products with a cost of approximately $728,000 in exchange for advertising credits. o The conversion of $3,000,000 of trade accounts receivable from Perfumania on June 1, 2000. o The Company incurred an unrealized holding loss of $4,043,796 on the investment in affiliate. 16 H. Comprehensive Income (Loss) Comprehensive income (loss) was as follows:
Three Months Ended September 30, 2001 2000 ---- ---- Net income $ 1,413,725 $ 1,802,851 Unrealized holding loss on investment in affiliate, net of taxes (741,079) (1,465,143) Foreign currency translation adjustment (10,486) (2,095) ----------- ----------- Total comprehensive income $ 662,160 $ 335,613 =========== =========== Six Months Ended September 30, 2001 2000 ---- ---- Net income (loss) $ (303,513) $ 2,603,737 Reversal of unrealized holding loss on investment in affiliate, net of taxes 3,496,220 -- Unrealized holding loss on investment in affiliate (741,079) (4,043,796) Foreign currency translation adjustment (12,260) (1,600) ----------- ----------- Total comprehensive income $ 2,439,368 $(1,441,659) =========== ===========
I. Income Taxes The provision for income taxes for the periods ended September 30, 2001 and 2000 reflects an effective tax rate of approximately 38%, reduced by a $207,360 deferred tax benefit in the current period relating to the other-than-temporary decline in value of investment in affiliate. J. License and Distribution Agreements As of September 30, 2001 and March 31, 2001, the Company held exclusive worldwide licenses to manufacture and distribute fragrance and other related products for Perry Ellis, and Ocean Pacific ("OP"). On March 26, 2001, the Company entered into an exclusive worldwide licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture and distribute men's and women's fragrances and other related products under the Jockey trademark. The Company anticipates launching both fragrances lines for the Spring 2002 season. 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. Effective January 1, 2000, the Company entered into an exclusive license agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and distribute men's and women's fragrances and other related products under the PEZ trademark throughout the western hemisphere. Effective April 1, 2001, the Company and PEZ agreed to terminate the agreement with no further liability to either party 17 K. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with early adoption encouraged. The Company does not expect the adoption of SFAS No. 143 to have a material effect on its financial statements or disclosures. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company does not expect the adoption of SFAS No. 144 to have a material effect on its financial statements or disclosures. * * * * 18 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARLUX FRAGRANCES, INC. /s/ Ilia Lekach - ----------------------------------------- Ilia Lekach, Chairman and Chief Executive Officer /s/ Frank A. Buttacavoli - ----------------------------------------- Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director Date: November 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----