ITEM 1. BUSINESS
Parlux Fragrances, Inc. (the "Company"), was incorporated in Delaware in 1984 and is engaged in the creation, design, manufacture, distribution and sale of prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. The fragrance market is generally divided into a prestige segment (distributed primarily through department and specialty stores) and a mass market segment (primarily smaller perfumeries and pharmacies). Our products are positioned primarily in the prestige segment. Additionally, we distribute certain brands through Perfumania Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which our Chairman and Chief Executive Officer had an ownership interest and held identical management positions until February 2004. We currently maintain an approximate 13% ownership interest in ECMV. Perfumania is a specialty retailer of fragrances in the United States and Puerto Rico.
During the fiscal year ended March 31, 2004, we engaged in the manufacture (through sub-contractors), distribution and sale of PERRY ELLIS, OCEAN PACIFIC, FRED HAYMAN BEVERLY HILLS ("FHBH") "273 Indigo", and JOCKEY fragrances and grooming items on an exclusive basis as a licensee. Additionally, we have rights to distribute ROYAL COPENHAGEN fragrances in the U.S. department store market. See "LICENSING AGREEMENTS" on pages 8-10 for further discussion. Additionally, we manufactured, distributed and sold our own brand, CHALEUR D'ANIMALE ("Animale") fragrance, on a worldwide basis. See page 9 and 11 respectively, for further discussions of transactions relating to the FHBH and Animale brands.
Recent Developments
On May 4, 2004, we entered into a letter of intent with Ms. Paris Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under her name. Effective June 1, 2004,
we entered into a definitive license agreement with Paris Hilton Entertainment, Inc. ("PHEI"), the initial term of which expires on June 30, 2009. The agreement is renewable for an additional five-year period.
Under the PHEI Agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first PH fragrance will be launched prior to March 31, 2005.
On February 4, 2004, we filed with the Securities and Exchange Commission ("SEC") a registration statement on Form S-3 (file number 333-112472) in order to register 1,306,000 shares of our common stock on behalf of certain selling shareholders. All of the shares are shares issuable, or that were already issued, upon the exercise of warrants held by the selling shareholders. Although we will not receive any of the proceeds from any subsequent resale of the shares, we would receive approximately $2,800,000 if all of the warrants are exercised. As of June 25, 2004, 1,096,000 of these warrants had been exercised and we received proceeds of $2,126,499 (1,048,000 and $1,992,624 as of March 31, 2004). The registration statement was declared effective by the SEC on April 26, 2004.
Effective November 1, 2003, we entered into an exclusive license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products on a worldwide basis. The agreement continues through December 2009, and is renewable for an additional five years if certain sales levels are met.
Under the GUESS? Agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first GUESS? fragrance will be launched during July 2005.
No other material changes in our contractual obligations, outside the ordinary course of business, has occurred during the period covered by this report.
THE PRODUCTS
Our principal products are fragrances, which are distributed in a variety of sizes and packaging. In addition, beauty-related products such as soaps, shower gels, deodorants, body lotions, creams and dusting powders complement the fragrance line. Our basic fragrance products generally retail at prices ranging from $20 to $65 per item.
We design and create fragrances using our own staff and independent contractors. We also supervise the design of our packaging by independent contractors. During fiscal 2004, we completed the design process for PERRY m for men and PERRY f for women, as well as 360 RED, for both men and women, which launched in Fall 2003, (new brands under the PERRY ELLIS line), and OCEAN PACIFIC for men and women, which launched in Spring 2004.
During the last three fiscal years, the following brands have accounted for 10% or more of our gross sales in a given year:
Fiscal 2004 Fiscal 2003 Fiscal 2002 ----------- ----------- ----------- PERRY ELLIS 81% 75% 67% OCEAN PACIFIC 13% 10% 12% ANIMALE 2% 7% 13%
MARKETING AND SALES
In the United States, we have our own sales and marketing staff, and also utilize independent commission sales representatives for mail order distribution and sales to the U.S. military. We sell directly to retailers, primarily national and regional department stores, which we believe will maintain the image of our products as prestige fragrances. Our products are sold in over 2,000 retail outlets in the United States. Additionally, we sell some of our products to Perfumania, which is a specialty retailer of fragrances with over 230 retail outlets principally located in manufacturers' outlet malls and regional malls (see "CUSTOMERS" section for further discussion).
Marketing and sales activities outside the United States are conducted through distribution agreements with independent distributors, whose activities are administered by our international sales staff. We presently market our fragrances through distributors in Canada, Europe, the Middle East, the Far East, Latin America, the Caribbean and Russia, covering over 70 countries. Sales to unrelated international customers amounted to 75%, 76% and 67% of our total net sales to unrelated customers during the fiscal years ended March 31, 2004, 2003 and 2002, respectively.
We advertise directly, and through a cooperative advertising program in association with major retailers, in fashion media on a national basis and through retailers' statement enclosures and catalogues. We are required to spend certain minimum amounts for advertising under certain licensing agreements. See "Licensing Agreements" and Note 8 (B) to the Consolidated Financial Statements.
RAW MATERIALS
Raw materials and components ("raw materials") for our products are available from sources in the United States and Europe. We source the raw materials directly from independent suppliers, which are delivered directly to third party contract manufacturers who produce and package the finished products. As is customary in our industry, we do not have long-term agreements with our contract manufacturers. We believe we have good relationships with these manufacturers and that there are alternative sources available should one or more of these manufacturers be unable to produce at competitive prices.
To date, we have had little difficulty obtaining raw materials at competitive prices. There is no reason to believe that this situation will change in the near future, but there can be no assurance this will continue.
SEASONALITY
Typical of the fragrance industry, we have our highest sales during the Mother's and Father's Day periods and the calendar yearend holiday season. Lower than projected sales during these periods could have a material adverse effect on our operating results.
INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that market fragrances to department stores to provide the department stores with rights to return merchandise. Our products are subject to such return rights. It is our practice to establish reserves and provide allowances for product returns at the time of sale. We believe that such reserves and allowances are adequate based on past experience; however, no assurance can be made that reserves and allowances will continue to be adequate. Consequently, if product returns are in excess of the reserves and allowances provided, net sales will be reduced when such fact becomes known.
CUSTOMERS
We concentrate our sales efforts in the United States in a number of regional department store retailers including, among others, Burdines, Carson's, Elder Beerman, Famous Barr, Foley's, Hecht's, J.C. Penney, J.L. Hudson, Lord & Taylor, Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. We also sell directly to perfumery and cosmetic retailers, including Perfumania and Ulta. Retail distribution has been targeted by brand to maximize potential and minimize overlap between each of these distribution channels.
Our international sales efforts are carried out through distributors in over 70 countries, the main focus of which is in Latin America, Canada, the Middle East and the Caribbean. These distributors sell our products to the department stores as well as to numerous perfumeries in the local markets.
During the fiscal years ended March 31, 2004 and 2003, we had net sales of $31,964,407 and $12,823,696, respectively, to Perfumania, which represented 40% and 18%, respectively, of our net sales for the periods. Perfumania, a related party, is our largest customer and transactions with them are closely monitored by our Audit Committee and Board of Directors to ensure that we deal with Perfumania at arms length. Perfumania offers us the opportunity to sell our products in over 230 retail outlets and our terms with Perfumania take into consideration our over 15 year relationship. Pricing and terms with Perfumania reflect (a) the volume of Perfumania's purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) free
exposure of our products provided in Perfumania's store windows and (e) minimal distribution costs to fulfill Perfumania orders.
While our invoice terms to Perfumania appear as net ninety (90) days, for over ten years, the Board of Directors has granted longer payment terms taking into consideration the factors discussed above. Our Board evaluates the credit risk involved and imposes a specific dollar limit, which is determined based on Perfumania's reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with the Board limit.
Net trade accounts receivable owed by Perfumania to us amounted to $10,890,338 and $11,426,977 at March 31, 2004 and 2003, respectively. Trade accounts receivable from Perfumania are non-interest bearing, and are paid in accordance with the terms established by the Board.
As reported in ECMV's latest public filing, on May 12, 2004, Perfumania entered into a new three-year amended and restated senior secured revolving credit facility with its then current lender and a new participant, increasing its borrowing capabilities from $40 million to $60 million. We continue to evaluate our credit risk and assess the collectibility of the Perfumania receivables. Perfumania's reported financial information, as well as our payment history with Perfumania, indicates that the first quarter historically is Perfumania's most difficult quarter as is the case with most U.S. based retailers. We have, in the past, received significant payments from Perfumania during the last three months of the calendar year, and have no reason to believe that this will not continue. Based on our evaluation, no allowances have been recorded as of March 31, 2004. We will continue to evaluate Perfumania's financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.
On July 1, 1999, our Board of Directors approved accepting 1,512,406 shares of Perfumania treasury stock in consideration for a partial reduction of the outstanding trade receivable balance from Perfumania in the amount of $4,506,970. The transfer price was based on a per share price of $2.98 ($11.92 post reverse stock split described below), which approximated 90% of the closing price of Perfumania's common stock for the previous 20 business days. The agreement was consummated on August 31, 1999, and the shares were registered in June 2000. Effective February 1, 2000, ECMV was formed as a holding company and the Company's shares of Perfumania common stock were converted into shares of common stock in ECMV. As described in Note 2 of the notes to consolidated financial statements, if the quoted market price of ECMV's common stock remained below the recorded cost per share of $2.98 ($11.92 post reverse stock split, described below) for an extended period of time, we would be required to record a charge to earnings as opposed to treating such amount as an unrealized loss and presenting it as a reduction directly within stockholders' equity. During the first quarter of the fiscal year ended March 31, 2002, we recorded a non-cash charge to earnings of $2,858,447, which reflected an other-than-temporary decline in value of the investment based on a sustained reduction in the quoted market price of $1.09 per share ($4.36 post reverse stock split described below) as of June 30, 2001, compared to the original cost
per share of $2.98 ($11.92 post reverse stock split described below). As a result of this non-cash reduction of the cost basis of the Company's investment, we reversed $3,496,220 of previously recorded unrealized losses on the investment, net of taxes, which had been recorded as a component of stockholders' equity as of March 31, 2001.
On March 21, 2002, ECMV effected a one-for-four reverse stock split, and we now own 378,101 shares. As of March 31, 2004, the fair market value of the investment in ECMV had increased to $4,839,693 ($12.80 per share after the reverse split).
As of June 25, 2004, the fair market value of the investment in ECMV is $2,816,852 ($7.45 per share after the reverse split).
FOREIGN AND EXPORT SALES
During the three years ended March 31, 2004, gross sales to unrelated international customers were approximately $28,356,000, $38,364,000, and $31,329,000, respectively. During the fiscal year ended March 31, 2004, we increased our focus on the Mexican marketplace and engaged a distributor for Mexico in lieu of a commissioned representative. The Mexican distributor is owned and operated by individuals related to our Chairman and Chief Executive Officer. Sales to this distributor, which are included in related party sales, amounted to approximately $3,966,000 and are in addition to the sales to unrelated international customers noted above.
LICENSING AGREEMENTS
See "THE PRODUCTS" on page 4 for further discussion of the relative importance of our license agreements.
PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license renews automatically every two years if average annual sales in the two-year license period exceed 75% of the average sales of the previous four years. All minimum sales levels have been met; based on our current sales projections, management believes that this will continue. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon net sales levels achieved in the prior year.
FRED HAYMAN: In June 1994, we entered into an Asset Purchase Agreement with Fred Hayman Beverly Hills, Inc. (FHBH), purchasing substantially all of the assets and liabilities of the FHBH fragrance division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year license to use FHBH's United States Class 3 trademarks Fred Hayman(R), 273(R), Touch(R), With Love(R) and Fred Hayman Personal Selections(R) and the corresponding international registrations. There are no minimum sales or advertising requirements.
On March 28, 2003, we entered into an exclusive agreement to sublicense the FHBH rights to Victory International (USA), LLC, for a royalty of 2% of net sales, with a guaranteed minimum annual royalty of $50,000. The initial term of the agreement is for five years, renewable every five years at the sublicensee's option. As part of the agreement, we sold the inventory, promotional materials and molds relating to FHBH for its approximate book value. At closing, the purchaser paid $2,000,000 in cash and provided a promissory note in the amount of $2,032,272 due in twelve monthly installments of approximately $169,356, plus interest at prime plus 1%, commencing January 2004.
The Sublicense Agreement excluded the rights to "273 Indigo" for men and women, the latest fragrance introduction for the FHBH brand. Such rights, as well as the rights to any other new FHBH fragrance addition, were to transfer to the sublicensee after twelve (12) months from the date of launch. The sublicensee would have been required to purchase the inventory and promotional materials relating to new additions for a price equal to our book value, up to $500,000.
On October 17, 2003, the parties amended the Sublicense Agreement, granting new FHBH product development rights to the sublicensee. The guaranteed minimum annual royalty increased to $75,000 and the royalty percentage on sales of new FHBH products was increased to 3% of net sales. The sublicensee is no longer required to purchase inventory and promotional materials relating to "273 Indigo", and we may continue to manufacture and distribute "273 Indigo" products.
OCEAN PACIFIC: In August 1999, we entered into an exclusive worldwide licensing agreement with Ocean Pacific Apparel Corp. ("OP"), to manufacture and distribute men's and women's fragrances and other related products under the OP label. The initial term of the agreement extended through December 31, 2003, but has automatically renewed for an additional three-year period. We have six (6) additional three-year renewal options, of which the last four require the achievement of certain minimum net sales. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon annual net sales of the products.
JOCKEY INTERNATIONAL: On March 23, 2001, we entered into an exclusive worldwide licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture and distribute men's and women's fragrances and other related products under the Jockey(R) label. The initial term of the agreement extends through December 31, 2004, with three (3) three-year renewal options. The license required the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon annual net sales of the products. We launched Jockey fragrances for women and men during the first calendar quarter of 2002. We did not exercise the renewal option as market penetration of the brand did not meet our expectations.
ROYAL COPENHAGEN: On September 1, 2003, the Company entered into an agreement with Five Star Fragrances Company, Inc., to market and distribute Royal Copenhagen fragrance products to the U.S. department store market. The term of the agreement is for three years, with an option to renew for one additional year. There are no royalties, sales minimums or advertising commitments under this agreement.
GUESS: Effective November 1, 2003, we entered into an exclusive license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products on a worldwide basis. The term of the agreement continues through December 2009, and is renewable for an additional five years if certain sales levels are met.
Under the GUESS? Agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first GUESS? fragrance will be launched during July 2005.
PARIS HILTON: On May 4, 2004, we entered into a letter of intent with Ms. Paris Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under her name. Effective June 1, 2004, we entered into a definitive license agreement with Paris Hilton Entertainment, Inc. ("PHEI"), which expires on June 30, 2009. The agreement is renewable for an additional five-year period.
Under the PHEI Agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first PH fragrance will be launched prior to March 31, 2005.
We believe we are in compliance with all material obligations under the above agreements. There can be no assurance that we will be able to continue to comply with the terms of these agreements in the future.
TRADEMARKS
We have exclusive licenses, as discussed above, to use trademark and tradename rights in connection with the packaging, marketing and distribution of our products, both in the United States and internationally where such products are sold. See "THE PRODUCTS" on page 4 for further discussion of the relative importance of these licenses.
In addition, we own the worldwide trademark and distribution rights to LIMOUSINE fragrances. There are no licensing agreements requiring the payment of royalties to us for this trademark. We have not distributed fragrance products under the LIMOUSINE brand since fiscal 1998, nor do we anticipate distribution in the near future.
On January 16, 2003, we entered into an agreement with the Animale Group, S.A., to sell the inventory, promotional materials, molds, and trademarks
relating to the Animale brand (we owned the worldwide trademarks and distribution rights prior to the sale) for $4,000,000, which closely approximated the brand's net book value at the date of sale. At closing, the purchaser paid $2,000,000 in cash and provided a $2,000,000 note payable in twelve equal monthly installments of $166,667, plus interest at prime plus 1%, through January 31, 2004. The note has been paid in full in accordance with its terms.
As part of the agreement we did not include the inventory of Chaleur d'Animale, the Animale brand's newest product introduction, and maintain the rights to manufacture and distribute this product line, on a royalty-free basis, until January 2005.
Prior to Fiscal 2003, we owned the worldwide trademarks and distribution rights to the ALEXANDRA de MARKOFF and BAL A VERSAILLES brands. Royalties were payable to us by the licensees of these brands. See Note 6 to the accompanying Consolidated Financial Statements for discussion of the sale of these two brands to the previous licensees.
PRODUCT LIABILITY
We have insurance coverage for product liability in the amount of $5 million per incident. We maintain an additional $5 million of coverage under an "umbrella" policy. We believe that the manufacturers of the products sold by us also carry product liability coverage and that we effectively are protected thereunder.
There are no pending and, to the best of our knowledge, no threatened product liability claims of a material nature. Over the past ten years, we have not been presented with any significant product liability claims. Based on this historical experience, management believes that its insurance coverage is adequate.
COMPETITION
The market for fragrances and beauty related products is highly competitive and sensitive to changing consumer preferences and demands. We believe that the quality of our fragrance products, as well as our ability to develop, distribute and market new products, will enable us to continue to compete effectively in the future and to continue to achieve positive product reception, position and inventory levels in retail outlets. We believe we compete primarily on the basis of product recognition and emphasis on providing in-store customer service. However, there are products, which are better known than the products distributed by us. There are also companies, which are substantially larger and more diversified (the October 2003 issue of "WWD Beauty Biz" lists the 75 largest companies in the world ranked by total beauty sales. The top 26 companies in the listing have sales levels exceeding $1 billion, with the 75th largest at $90 million) and which have substantially greater financial and marketing resources than us, as well as greater name recognition, with the ability to develop and market products similar to, and competitive with, those distributed by us.
EMPLOYEES
As of March 31, 2004, we had a total of 120 full-time and part-time employees. Of these, 44 were engaged in worldwide sales activities, 51 in operations, marketing, administrative and finance functions and 25 in warehousing and distribution activities. None of our employees are covered by a collective bargaining agreement and we believe that our relationship with our employees is satisfactory. We also use the services of independent contractors in various capacities, including sales representatives.
We have a 401-K Plan covering substantially all of our employees. We match 25% of the first 6% of employee contributions, within annual limitations established by the Internal Revenue Code.
ITEM 2.
ITEM 2. PROPERTIES
In November 1995, we moved our corporate headquarters and distribution center to a new 100,000 square foot leased facility in Fort Lauderdale, Florida. The current annual lease cost of the facility is approximately $714,000, with the lease covering the ten-year period ending November 2005. We have an option to extend the lease for an additional five-year period with minimal rent escalation.
In July 2002, we leased an additional 13,000 square feet of warehouse space at a monthly cost of approximately $7,800. This lease expired on January 31, 2004.
In May 2004, we leased an additional 38,000 square feet of warehouse space in Fort Lauderdale at a monthly cost of approximately $23,300. This lease expires December 31, 2005.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 2003, we were served with a complaint (the" Complaint") filed in the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade County, which was amended on January 26, 2004. The Complaint is a derivative action, in which the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham, Partners I, LP, purport to be suing for the benefit of the Company itself and all of its public shareholders. The Complaint names Parlux Fragrances, Inc. as the nominal defendant and all of the current members of the Board of Directors as the defendants. It seeks unspecified damages allegedly arising out of breaches of fiduciary duties in connection with transactions involving the Company and Mr. Ilia Lekach, its Chief Executive Officer or companies in which he has an ownership interest.
The Complaint seeks to enjoin the Company from continuing to enter into such transactions, seeks payment of costs and fees to Plaintiffs' counsel and other unstated relief.
Based on its preliminary investigation of allegations asserted by the Plaintiffs, the Company believes that the claims in the Complaint are without merit. The Company and the Board members have engaged experienced Florida securities counsel and intend to defend the action vigorously. We filed a Motion to Dismiss the action on February 27, 2004. A hearing on the Motion was held on April 14, 2004, and the Complaint was dismissed, without prejudice. The Court encouraged the Plaintiffs to serve a demand upon the Company to examine the issues alleged in the Complaint rather than file an Amended Complaint, but gave the Plaintiffs thirty (30) days to file an Amended Complaint if they chose to do so. Following the order granting dismissal, the Company voluntarily furnished detailed information to Plaintiff's counsel demonstrating the Company's view that there was no legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Additional exchanges of correspondence have followed and additional extensions of time have been granted. As of the date of this filing, no amended complaint has been served.
On June 4, 2003, we were served with a shareholder's class action complaint (the "June Complaint"), filed in the Delaware Court of Chancery by Judy Altman, purporting to act on behalf of herself and other public stockholders of the Company. The June Complaint named Parlux Fragrances, Inc. as a defendant along with all of the Company's Board of Directors, except Mr. David Stone. The June Complaint sought to enjoin the defendants from consummating a tender offer proposal from Quality King Distributors, Inc. and Ilia Lekach, the Company's Chairman and Chief Executive Officer, to acquire the Company's common stock, and sought to have the acquisition rescinded if it was consummated. In addition, the June Complaint sought unspecified damages, plus the fees, costs and disbursements of Ms. Altman's attorneys.
The Company and the named defendants engaged Delaware counsel to defend the action, and the action was voluntarily dismissed on September 11, 2003. In addition, the tender offer proposal, which precipitated the Complaint, was withdrawn.
To the best of our knowledge, there are no other proceedings pending against us or any of our properties which, if determined adversely to us, would have a material effect on our financial position or results of operation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any actions for shareholders' approval during the quarter ended March 31, 2004 or through June 27, 2004.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our Common Stock, par value $0.01 per share, has been listed on the National Association of Securities Dealers Automatic Quotation System ("NASDAQ") National Small Cap List market since February 26, 1987 and commenced trading on the NASDAQ National Market on October 24, 1995.
We believe that the number of beneficial owners of our common stock is approximately 4,000, including owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
The following chart, as reported by the National Association of Securities Dealers, Inc., shows the high and low bid prices for our securities available for each quarter of the last two years and the interim period from April 1, 2004 through June 25, 2004. The prices represent quotations by the dealers without adjustments for retail mark-ups, markdowns or commissions and may not represent actual transactions.
Fiscal Quarter Common Stock -------------- --------------- High Low ---- --- First (April/June) 2002 2.850 1.660 Second (July/Sept.) 2002 2.700 1.430 Third (Oct./Dec.) 2002 2.900 1.640 Fourth (Jan./Mar.) 2003 3.100 1.900 First (April/June) 2003 3.890 2.200 Second (July/Sept.) 2003 3.750 2.910 Third (Oct./Dec.) 2003 5.360 3.120 Fourth (Jan./Mar.) 2004 13.730 4.560 First (April/June) 2004 12.090 7.150
We have not paid a cash dividend on our common stock nor do we contemplate paying any dividends in the near future. Our loan agreement restricts payment of dividends without prior approval.
The following chart outlines the Company's equity compensation plan information as of March 31, 2004.
- ---------- (1) See note 10 to the Company's consolidated financial statements included with this filing for a discussion of the Company's stock option plans.
(2) See note 8(D) to the Company's consolidated financial statements included with this filing for a discussion of the Company's options and warrants granted in connection with employment and consulting arrangements.
The following chart outlines the Company's repurchases of its common stock, all of which were purchased on the open market.
- ---------- (1) Purchased in accordance with the Company's common stock buy-back program announced on February 14, 2003. See page 23 of "Liquidity and Capital Resources" for further discussion.
(2) Represents the remaining amount approved by the Company's lender for repurchase of common stock. On February 6 ,2003, the Company received approval to repurchase up to $7.5 million inshare value.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from audited consolidated financial statements. Consolidated balance sheets at March 31, 2004 and 2003, and the related consolidated statements of operations and of cash flows for each of the three years in the period ended March 31, 2004 and notes thereto appear elsewhere in this Annual Report on Form 10-K.
For the Year Ended March 31, (in thousands of dollars, except per share data) - ----------------------------
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Net sales $80,581 $72,254 $ 70,489 $69,525 $67,022 Costs/operating expenses 70,268 66,409 74,356 62,145 60,423 Operating income (loss) 10,313 5,845 (3,867) 7,380 6,599 Net income (loss) 6,268 5,474 (5,655) 3,926 3,873 Income (loss) per share: Basic $ 0.75 $ 0.56 ($ 0.57) $ 0.39 $ 0.32 Diluted (1) $ 0.63 $ 0.54 ($ 0.57) $ 0.38 $ 0.31 - ---------- (1) The calculation of diluted loss per share was the same as the basic loss per share for fiscal 2002 since inclusion of potential common stock in the computation would be antidilutive.
At March 31, (in thousands of dollars) ------------ 2004 2003(2) 2002(2) 2001(2) 2000(2) ------- ------- ------- ------- ------- Current assets $63,385 $54,875 $61,531 $52,793 $60,460 Current liabilities 9,505 15,219 23,869 22,257 25,706 Working capital 53,880 39,656 37,662 30,536 34,754
Trademarks, licenses and goodwill, net 7,945 8,231 9,535 20,464 21,469 Long-term borrowings, net -- 102 962 1,686 2,571 Total assets 72,467 66,672 73,497 75,995 84,330
Total liabilities 11,226 16,379 25,573 25,121 30,685
Stockholders' equity 61,240 50,293 47,924 50,874 53,645 - ---------- (2) Amounts as of March 31, 2003, 2002, 2001 and 2000 have been restated. See Note 15 to the Company's consolidated financial statements for further discussion.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this annual report. Except for the historical matters contained herein, statements made in this annual report are forward looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The accompanying management's discussion and analysis of financial condition and results of operations gives effect to the restatement of the consolidated financial statements for the years ended March 31, 2003 and 2002 as described in Note 15 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
SEC Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results, and requires significant judgment and estimates on the part of management in its application. We believe the accounting policies described below represent our critical accounting policies as contemplated by FRR 60. See Note 1 to Consolidated Financial Statements for a detailed discussion on the application of these and other accounting policies.
Accounting for Intangible Assets. The value of our intangible assets, including brand licenses and trademarks, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We review intangible assets for impairment using the guidance of applicable accounting literature. Indefinite-lived intangible assets are reviewed annually during the Company's fourth quarter of each fiscal year for impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The identification and measurement of impairment of indefinite-lived intangible assets involves the estimation of the fair value of the related asset. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about discounted expected future cash flows. Future cash flows can be affected by changes in industry or market conditions.
Allowance for Sales Returns. As is customary in the prestige fragrance industry, we grant certain of our unrelated U.S. department store customers the right to return product which does not "sell-through" to consumers. At the time of sale, we record a provision for estimated product returns based on our historical "sell-through" experience, economic trends and changes in customer demand. Based upon this information, we provide an allowance for sales returns. It is only after the specific gift-giving season (Mother's Day, Christmas, etc.) that the customer requests approval of the return for unsold items. We decide to accept returns on a case-by-case basis. There is considerable judgment used in evaluating the factors influencing the allowance for returns and additional allowances in any particular period may be needed, reducing net income or increasing net loss.
Allowances for Doubtful Accounts Receivable. We maintain allowances for doubtful accounts to cover uncollectable accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including a customer-by-customer review for large accounts. If the financial condition of our customers, or any one customer, deteriorates resulting in an impairment of their ability to pay, additional allowances may be required.
Inventory Write-downs. We record inventory write-downs for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, the estimated market value, the shelf life of the inventory and our historical experience. If there are changes to these estimates, or changes in consumer preferences, additional inventory write-downs may be necessary.
Income Taxes and Valuation Reserves. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be
realized. We consider projected future taxable income and ongoing tax planning strategies in assessing the valuation allowance. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period of such determination.
Since April 2003 we have not made any changes of these critical accounting policies, nor have we made any material changes in any of the critical accounting estimates underlying these accounting policies.
Significant Trends.
Over the last few years, a significant number of new prestige fragrance products have been introduced on a worldwide basis. The beauty industry in general is highly competitive and rapidly changing with consumer preferences. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of our industry. Department stores continue to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development and advertising and promotional expenses. We believe this trend will continue. If one or more of our new product introductions would be unsuccessful, it could result in a reduction in profitability and operating cash flows.
Comparison of the year ended March 31, 2004 with the year ended March 31, 2003.
During the fiscal year ended March 31, 2004, net sales increased 12% to $80,580,709 compared to $72,253,699 for the same period for the prior year. The increase is mainly attributable to (1) the launch of "Perry m", Perry f", and "360 Red" for men and women under the Perry Ellis line of fragrances, which resulted in an increase of $10,615,473 in total Perry Ellis brand gross sales from $57,354,411 to $67,969,884, and, (2) the launch of Ocean Pacific for men and women, which resulted in an increase in total Ocean Pacific brand gross sales of $3,374,117. These increases were offset by the reduction in gross sales of Animale and FHBH brand products of $3,762,730 and $2,662,933, respectively (which brands were sold and sublicensed during January and March 2003, respectively) and a $1,406,830 reduction in gross sales of Jockey brand products. The Jockey license agreement expires on December 31, 2004, and we do not anticipate significant sales of such products during the remaining term.
Net sales to unrelated customers decreased 24% to $38,138,631, compared to $50,505,473 for the same period in the prior year, as a result of the reductions discussed above. Additionally, the prior year period included the launch of "Perry Man" and "Perry Woman", for which current period gross sales decreased $5,350,155 compared to the prior launch year period. Net sales to related parties increased 95% to $42,442,078, compared to $21,748,266 for the same period in the prior year, as brands, which were originally launched in the U.S. department store market over the last few years reached full distribution potential. In addition, the products launched during the current period have been developed for immediate distribution in all of the Company's channels. We
anticipate that this trend in distribution channels will continue until the launch of a new Perry Ellis brand fragrance product, and the launch of the initial GUESS? fragrance product, both of which are anticipated during the Fall and Winter 2005 season.
Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold as compared to our allocating only a portion of these distribution costs to costs of goods sold and including the remaining unallocated amounts as selling and distribution expenses.
Our overall cost of goods sold remained relatively stable as a percentage of net sales, decreasing from 50% for the fiscal year ended March 31, 2003 to 49% for the current comparable period. Cost of goods sold on sales to unrelated customers and related parties both approximated 49% for the current period, as compared to 47% and 57%, respectively, for the same period in the prior year. The increase in cost of goods sold to unrelated customers for the current period was due to the purchase by unrelated parties of a higher percentage of value sets than in the prior year. These value sets have a higher cost of goods when compared to basic stock items. For the last two fiscal years, the cost of goods sold to unrelated customers has increased, and consequently gross margins have decreased, due to a greater number of value sets sold as discussed above. For the near future, we anticipate the percentage of value sets sold to unrelated customers will remain constant and that the overall cost of goods sold to unrelated customers will also remain relatively constant. The current year period also includes the sale of a higher percentage of basic stock items to related parties, which result in higher margins.
Operating expenses increased slightly compared to the same period in the prior year from $30,536,582 to $30,659,884, decreasing as a percentage of net sales from 42% to 38%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses decreased 11% to $12,714,825 compared to $14,244,338 in the prior year period, decreasing as a percentage of net sales from 20% to 16%. The prior year period included promotional costs for "Perry Man" and "Perry Woman", which launched during the fall of 2002. No such major launches occurred during the current year period. Selling and distribution costs increased slightly to $6,560,973 in the current period compared to $6,545,221 for the same period of the prior year, decreasing as a percentage of net sales from 9% to 8%. The increase was mainly attributable to increases in employee salaries and health insurance premiums offset by a reduction in commissions paid to an international sales representative who previously sold FHBH products in the Caribbean and to reduced commissions to a sales representative in Mexico. These commission reductions will not continue to effect future periods. During the current period, the Company increased its focus on the Mexican marketplace and engaged a distributor for Mexico in lieu of a commissioned representative. This distributor is owned and operated by individuals related to our Chairman and Chief Executive Officer. General and administrative expenses increased by 19% compared to the prior year period from $5,188,592 to $6,162,926, increasing as a percentage of net sales from 7% to 8%. The increase is mainly attributable to
increases in employee salaries, health insurance premiums, legal and professional fees, and non-recurring charitable contributions, offset by a reduction in bad debt expense. Depreciation and amortization decreased by 7% during the current period from $1,356,597 to $1,256,593. Royalties increased by 24% in the current period, increasing as a percentage of net sales from 4% to 5% as a result of minimum royalty requirements on Jockey brand products. This trend should not continue as the Jockey license expires in December 2004.
As a result of the above factors, operating income increased to $10,312,629 or 13% of net sales for the current period, compared to $5,845,289 or 8% of net sales for the same period in the prior year. Net interest expense decreased to $224,368 in the current period as compared to $694,317 for the same period in the prior year. The decrease reflects a lower average balance outstanding under our line of credit as compared to the prior year, coupled with increased interest income generated on notes receivable. The current year period includes foreign exchange gains of $20,796 relating to the sales and collection activities with our Canadian distributor, the only country where we assume foreign exchange risk, due to the strengthening of the Canadian currency against the U.S. dollar. The prior year period includes other income of $3,542,083 relating to the settlement of a lawsuit we filed in 2001 against a supplier (See Note 12 to the Company's consolidated financial statements for further discussion of the litigation settlement).
Income before taxes for the current period was $10,109,057 compared to $8,692,922 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $6,267,615 for the current period, compared to $5,474,459 in the prior year period.
Comparison of the year ended March 31, 2003 with the year ended March 31, 2002.
During the fiscal year ended March 31, 2003, net sales increased 3% to $72,253,699 as compared to $70,488,563 for the same period for the prior year. The increase is mainly attributable to the launch of "Perry" by Perry Ellis for men and women, which resulted in an increase in total Perry Ellis brand gross sales from $49,434,433 to $57,354,411, and launches of "Jockey" for men and women in the Spring of 2002, which added gross sales of $1,325,960 in the current period. These increases were offset by reductions in gross sales of Animale (which brand was sold during January 2003) and Ocean Pacific brand products of $4,689,844 and $1,154,883, respectively, as certain products were launched during the prior year period.
Net sales to unrelated customers increased 9% to $50,505,473 in the current period, compared to $46,459,196 for the same period in the prior year, as a result of the launches discussed above. Sales to related parties decreased 9% to $21,748,226 in the current period compared to $24,029,367 for the same period in the prior year, which was mainly attributable to a $1,782,447 reduction in gross sales of Animale brand products, which brand was sold as discussed above.
Cost of goods sold decreased as a percentage of net sales from 51% for the fiscal year ended March 31, 2002 to 50% for the current period. Cost of goods sold on sales to unrelated customers and related parties approximated 47% and 57%, respectively, for the current period, as compared to 51% for each, for the same period in the prior year. The prior year period included the sale of certain close-out merchandise to international customers at lower margins. The increase in cost of goods sold to related parties for the current period was due to the purchase of a higher percentage of value sets for holiday seasons than in the prior year. These value sets have a higher cost of goods when compared to basic stock items. For the last two fiscal years, the cost of goods sold to related parties has increased, and consequently gross margins have decreased, due to a greater number of value sets sold as discussed above.
Operating expenses decreased by 21% compared to the same period in the prior year from $38,594,100 to $30,536,582, decreasing as a percentage of net sales from 55% to 42%. Advertising and promotional expenses decreased 2% to $14,244,338 compared to $14,598,130 in the prior year period, decreasing as a percentage of net sales from 21% to 20%. The prior year period includes approximately $728,000 in charges relating to the bankruptcy filing by an advertising firm that owed us barter advertising credits. Selling and distribution costs decreased 1% to $6,545,221 in the current period as compared to $6,644,561 for the same period of the prior year, remaining relatively constant at 9% of net sales. General and administrative expenses decreased 9% compared to the prior year period from $5,668,973 to $5,188,592, decreasing as a percentage of net sales from 8% to 7%. The decrease was mainly attributable to reductions in bad debt expense and legal fees of approximately $390,000 and $309,000, respectively, offset by an increase in health and other insurance costs. Depreciation and amortization decreased by 32% during the current period from $1,995,096 to $1,356,597, as approximately $564,000 of amortization on intangibles relating to the Alexandra de Markoff ("ADM") and Bal a Versailles ("BAV") brands was no longer required during the current period. Royalties increased by 43% in the current period, increasing as a percentage of net sales from 3% to 4% due to minimum royalty requirements for the Jockey license. During the prior period, we recorded an impairment charge on the intangibles relating to the ADM and BAV brands, which were being licensed to unrelated third parties, totaling $7,441,554. This charge was recorded as a result of our decision to sell these two brands to their respective licensees (See Note 6 to the Company's consolidated financial statements for further discussion of these brands and the impairment charge).
As a result of the above, operating income increased to $5,845,289 or 8% of net sales for the current period, compared to an operating loss of $3,866,540 for the same period in the prior year. The current year period includes other income of $3,542,083 relating to the settlement of our lawsuit with a supplier (See Note 12 to the Company's consolidated financial statements for further discussion of the litigation settlement). Net interest expense decreased to $694,317 in the current period as compared to $1,032,975 for the same period in the prior year. The decrease was mainly attributable to the substantial reduction in interest rates compared to the prior year, reflecting the terms of our new line of credit, coupled with a reduced prime rate and lower average balance outstanding. The Company recorded a $2,858,447 non-cash charge
during the prior period, representing a writedown for an other-than-temporary decline in the value of our investment in affiliate, based upon a sustained reduction in the quoted market price of the investment compared to its original cost (See Note 2 to the Company's consolidated financial statements for further discussion of this non-cash charge).
Income before taxes for the current period was $8,692,922 or 12% of net sales, compared to a loss of $7,745,449 in the same period for the prior year. Giving effect to the tax provision and the deferred tax benefit of $207,360 in 2002 related to the non-cash charge in the prior year, we recorded net income of $5,474,459 for the current period, compared to a net loss of $5,665,401 in the prior year.
Liquidity and Capital Resources
Working capital increased to $53,879,645 at March 31, 2004 compared to $39,656,571 at March 31, 2003, the result of current period's net income, the collection on notes receivable and proceeds of $2,212,904 from the exercise of warrants (See Item 1, "Business", for further discussion) and employee stock options, offset by the purchase of treasury stock discussed below.
During the fiscal year ended March 31, 2004, net cash provided by operating activities was $7,537,136 compared with $7,855,720 in the prior year.
Net cash provided by investing activities decreased to $1,615,786 in the current year period, compared to $3,913,317 in the prior year, the result of cash generated from brand sales/licensing in the prior year period. The current period includes collection on notes receivable in connection with the brand sales/licensing.
The cash provided by operating and investing activities during the current year was used to reduce debt, both long-term and under our line of credit, as well as repurchase approximately $2.6 million of our common stock (see below). The prior year period also used cash generated from operating and investing activities to reduce debt as well as repurchase approximately $4.5 million of our common stock. Additionally, during the current year period, we generated approximately $2.2 million of cash from the issuance of common stock in connection with the exercise of certain warrants and employee options. See Note 8D for further discussion.
As of March 31, 2004 and 2003, our ratios of the number of days sales in accounts receivable and inventory, on a 365-day basis, were as follows:
March 31, ---------- 2004 2003 ---- ---- Trade accounts receivable (1): Unrelated 43 40 === === Related 99 200 === === Total: 73 88 === ===
Inventories 143 133 === ===
- ---------- (1) Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $1,756,000 and $1,734,000 in 2004 and 2003, respectively.
Consistent with prior year periods, the number of days sales in trade receivables from related parties exceed those of unrelated customers, due mainly to the highly seasonal cash flow of Perfumania (See Item 1 "CUSTOMERS" for further discussion of our relationship with Perfumania). Although we expect this trend to continue, based on current information and published information concerning Perfumania's increased borrowing capability, we anticipate a continuing improvement in the days outstanding.
Due to the lead time for certain of our raw materials and components inventory (up to 120 days), we are required to maintain a three to six month supply of some items in order to ensure production schedules. In addition, when we launch a new brand or Stock Keeping Unit ("SKU"), we often produce a six-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. We believe that the significant gross margins on our products outweigh the additional carrying costs. The increase between 2004 and 2003 is attributable to recent product introductions, which did not have a full year's sales activity.
As of June 30, 2001, we had repurchased, under all phases of our common stock buy-back program, a total of 7,978,131 shares at a cost of $21,983,523, with 121,869 shares still available for repurchase under the last program. On July 25, 2001, the Board of Directors, at that date, authorized an additional 2,500,000 share repurchase, subject to the restrictions and covenants in our new loan agreement discussed below. Through January 31, 2003, no shares were purchased under the latest authorization. On February 6, 2003, we received approval from our lender to proceed with the latest phase of our repurchase program up to a maximum of $7.5 million, which was ratified on February 14, 2003, by our current Board of Directors. During the fiscal year ended March 31, 2003, we had repurchased, in the open market, an additional 1,476,700 shares at a cost of $4,469,593. During the fiscal year ended March 31, 2004, we repurchased an additional 685,864 shares in the open market at a cost of $2,639,712. The accompanying consolidated balance sheets also include an additional 39,000 shares of treasury stock purchased at a cost of $133,472 prior to fiscal 1996.
Prior to the effectiveness of the Sarbanes-Oxley Act ("Sarbanes-Oxley"), which prohibits the Company from renewing or amending loans, as well as issuing new loans to Company officers and directors, we had made several personal loans to Mr. Ilia Lekach, our chairman and chief executive officer. These loans were consolidated into one note agreement on April 1, 2002, which bore interest at 8% per annum and became due on March 31, 2003 in accordance with the note's terms. On March 31, 2003, Mr. Lekach repaid $46,854
in principal and $71,364 of accrued interest, through that date. The repayment was effected via an offset of amounts due Mr. Lekach under his regular compensation arrangement.
On July 15, 2003, Mr. Lekach repaid the entire unpaid loan balance of $742,884, plus accrued interest through that date at the default rate of prime plus 5% (9.25%) as stipulated in the note. Accordingly, the note receivable from officer balance as of March 31, 2003 has been classified as a current asset.
On July 20, 2001, we entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). On February 6, 2003, the Loan Agreement was extended for an additional year through July 20, 2005. Proceeds from the Loan Agreement were used, in part, to repay amounts outstanding under a previous $14 million credit facility with General Electric Capital Corporation. Under the Loan Agreement, we are able to borrow, depending upon the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at our option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to "Earnings Before Interest, Taxes and Depreciation ("EBITDA"), as defined in the Loan Agreement.
At March 31, 2004, based on the borrowing base at that date, the credit line amounted to approximately $16,137,000, none of which was utilized.
Substantially all of our domestic assets collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios.
As of March 31, 2004, we do not have any material commitments for capital expenditures.
Management believes that funds from operations and our existing financing will be sufficient to meet our current operating needs. However, if we would expand operations through acquisitions, new licensing arrangements or both, we may need to obtain additional financing. There is no assurance that we could obtain such additional financing or what the terms of such financing, if available, would be.
The following table sets forth information regarding our contractual obligations as of March 31, 2004 (in 000's):
- ---------- (1) Represents purchase orders issued in the normal course of business for components, raw materials and promotional supplies. (2) Consists of minimum royalty requirements under our licensing agreements.
As of March 31, 2004 we do not have any "off-balance sheet arrangements" as that term is defined in Regulation S-K Item 303(a)(4).
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after June 2003. The Company adopted the requirements of FIN 45 which did not have a significant impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 which was revised in December 2003 ("FIN 46-R"). FIN 46-R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46-R is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46-R must be applied for the first interim or annual period beginning after June 15, 2003. The Company has not invested in any entities that it believes are variable interest entities for which it is the primary beneficiary. The adoption of FIN 46-R did not have an impact, on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We sell our products worldwide with all such sales being denominated in United States dollars. As a result, we are not at risk to any foreign exchange translation exposure, other than with our Canadian distributor where we assume such risk, but could be subject to changes in political and economic conditions in many of these countries. We closely monitor such conditions and are able, for the most part, to adjust our sales strategies accordingly. During the fiscal year ended March 31, 2004, we recorded foreign exchange gains of $20,796 relating to sales/collection activity with our Canadian distribution.
Our exposure to market risk for changes in interest rates relates primarily to our bank line of credit. The bank line of credit bears interest at a variable rate, as discussed above under "Liquidity and Capital Resources". We mitigate interest rate risk by continuously monitoring the interest rates and electing the lower of the fixed rate LIBOR or prime rate option available under the line of credit. As a result of borrowings associated with our operating and investing activities, we are exposed to interest rate risk. As of March 31, 2004 and 2003, primary source of funds for working capital and other needs was our $20 million line of credit.
Of the approximate $0.2 million and $6.4 million of short-term and long-term borrowings on the Company's balance sheet as of March 31, 2004 and 2003, respectively, approximately 100% and 20%, respectively, represented fixed rate instruments. The line of credit, which was not utilized as of March 31, 2004, bears interest at a floating rate of prime plus 1%. A hypothetical 10% adverse move in interest rates would increase fiscal year 2004 and 2003 interest expense by approximately $0.1 million in each year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are included herein commencing on page. The financial statement schedule is listed in the Index to Financial Statements on page and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9.A CONTROLS AND PROCEDURES
Parlux Fragrances, Inc's Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this report, based on the evaluation required by paragraph (b) of Rule 13a-15 under the Securities Act of 1934. They have concluded that, as of such date, the Company's disclosure controls and procedures were adequate and effective.
However, the Company has restated portions of this report, including portions of Part I, Item 15 (certain line items in the consolidated financial statements as of March 31, 2003 and for the fiscal years ended Mach 31, 2003 and 2002, certain related footnote disclosures) and Part II, Item 7 (certain changes, some of which are related to the financial statement changes, to Management's Discussion and Analysis of Financial Condition and Results of Operations). These changes were made in response to comments received from the Securities and Exchange Commission in connection with its review of the Company's recent filing of a registration statement on Form S-3 (file number 333-112473).
Please see Note 15 to the consolidated financial statements included with this report. The Company has treated restricted cash as a reduction in its revolving line of credit balance since fiscal 1996, as the funds in the relevant depository accounts are under the dominion of the Company's lender under the terms of the Revolving Credit and Security Agreement. However, in this report and in the future, the Company will record such restricted cash and line of credit balances at their gross amounts.
The restatements contained in the report do not affect the Company's earnings or earnings per share for the years ended March 31, 2003 and 2002, nor do they change the conclusion of the Chief Executive Officer and Chief Financial Officer that the Company's disclosure controls and procedures were adequate and effective as of March 31, 2004.
There were no changes in the Company's internal controls or procedures or in other factors during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements See Index to Financial Statements beginning on page of this annual report.
2. Financial Statement Schedules See Index to Financial Statements beginning on Page of this annual report.
3. Exhibit Index
2.1 Asset Purchase Agreement, dated June 15, 1994, by and between Fred Hayman Beverly Hills Inc. and the Company (incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K, filed with the Securities and Exchange Commission (the "SEC") on June 15, 1994 and as amended on June 29, 1994 and August 26, 1994)
2.2 Asset Purchase Agreement, dated November 2, 1994, by and between Sanofi Beaute and the Company (incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K, filed with the SEC on January 11, 1995 (the "1995" Form 8-K)
3(a) Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibits 3.1 through 3.5 to the Registration Statement on Form S-3 (File No. 33-89806), declared effective on March 13, 1995 and Exhibit 4.6 of Registration Statement on Form S-3, declared effective on October 2, 1996 (File No. 333-11953)
3(b) By-Laws of the Company (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-3, declared effective on March 13, 1995 (File No. 33-89806)
10.1 Stock Option Plan (incorporated by reference to Annex A to the Company's Preliminary Proxy Statement, filed on August 16, 1996
10.2 Employee Stock Option Plan 2000 (incorporated by reference to Annex "A" to the Company's Definitive Proxy Statement, filed on August 25, 2000)
10.37 Facility lease agreement, dated June 21, 1995 between the Company and Port 95-2, Ld. (incorporated by reference to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, filed on August 11, 1995)
10.48 Stock Purchase Agreement, dated as of August 31, 1999, between the Company and Perfumania, Inc., (incorporated by reference to Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed on November 12, 1999)
10.58 Employment Agreement, with Ilia Lekach, dated as of March 31, 2002, (incorporated by reference to Exhibit 10.58 to the Company's Annual Report on Form 10-K for the year ended March 31, 2002, filed on July 1, 2002 ("the March 31, 2002 Form 10-K"))
10.59 Employment Agreement, with Frank A. Buttacavoli, dated as of March 31, 2002, (incorporated by reference to Exhibit 10.59 to the Company's March 31, 2002 Form 10-K)
10.60 Consulting Agreement, with Cosmix, Inc., dated as of March 31, 2002, (incorporated by reference to Exhibit 10.60 to the Company's March 31, 2002 Form 10-K)
10.61 Consulting Agreement, with Cambridge Development Corp., dated as of March 31, 2002, (incorporated by reference to Exhibit 10.61 to the Company's March 31, 2002 Form 10-K)
10.62 Agreement, dated November 4, 2002, between the Company and Genesis International Marketing Corporation, (incorporated by reference to Exhibit 10.62 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, filed on November 14, 2002)
10.63 Agreement, dated January 16, 2003, between the Company and Animale Group, S.A. (incorporated by reference to Exhibit 10.63 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed on February 14, 2003)
10.64 Agreement, dated March 28, 2003, between the Company and Victory International (USA) LLC (incorporated by reference to Exhibit 10.64 to the Company's Annual Report on Form 10-K for the year ended March 31, 2003, filed on June 30, 2003)
10.66 License Agreement, dated as of November 1, 2003, between the Company and GUESS?, Inc. and GUESS? IP Holder L.P. ("Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission") (incorporated by reference to Exhibit 10.66 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 14, 2003)
The following exhibits are attached:
10.67 License Agreement, dated as of June 1, 2004, between the Company and Paris Hilton Entertainment, Inc. ("Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.)
14.1 Parlux Fragrances, Inc.'s Code of Business Conduct and Ethics, adopted by the Board of Directors on April 30, 2004
23.1 Consent of Deloitte & Touche LLP, an independent registered public accounting firm
31.1 Certification of Chief Executive Officer Pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, as amended
32.2 Certification of Chief Financial Officer Pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, as amended
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARLUX FRAGRANCES, INC.
/s/ Ilia Lekach - ------------------------------------------------------------ Ilia Lekach, Chief Executive Officer, President and Chairman (Principal Executive Officer)
Dated: June 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
/s/ Frank A. Buttacavoli - ------------------------------------------------------ Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director (Principal Financial and Principal Accounting Officer)
/s/ Frederick E. Purches - ------------------------------------------------------ Frederick E. Purches, Vice Chairman and Director
/s/ Glenn Gopman - ------------------------------------------------------ Glenn Gopman, Director
/s/ Esther Egozi Choukroun - ------------------------------------------------------ Esther Egozi Choukroun, Director
/s/ Jaya Kader Zebede - ------------------------------------------------------ Jaya Kader Zebede, Director
/s/ David Stone - ------------------------------------------------------ David Stone, Director
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
FORM 10-K SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other Schedules are omitted as the required information is not applicable or the information is presented in the financial statements or the related notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Parlux Fragrances, Inc. Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Parlux Fragrances, Inc. and subsidiaries (the "Company") as of March 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2004. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the formation set forth therein.
As described in Note 2 to the consolidated financial statements, the Company conducts significant transactions with related parties. In addition, as discussed in Note 15, the accompanying 2003 and 2002 financial statements have been restated.
Deloitte & Touche LLP Certified Public Accountants
Miami, Florida June 25, 2004
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003, AND 2002
See notes to consolidated financial statements.
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
PARLUX FRAGRANCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2004, 2003, AND 2002
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -----------------------------------------------------------------
A. NATURE OF BUSINESS ------------------
Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984, and is a manufacturer and distributor of prestige fragrances and beauty related products, on a worldwide basis.
B. PRINCIPLES OF CONSOLIDATION ---------------------------
The consolidated financial statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries, Parlux S.A., a French company ("S.A."), and Parlux, Ltd. (jointly referred to as the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation.
C. ACCOUNTING ESTIMATES --------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates relate to the carrying value of accounts receivable from related parties, reserve for doubtful accounts, sales returns and advertising allowances, inventory obsolescence and periods of depreciation and amortization for trademarks, licenses, and equipment. Actual results could differ from those estimates.
D. REVENUE RECOGNITION -------------------
Revenue is recognized when the product is shipped to a customer, or in the limited circumstances, at destination, when terms provide that title passes at destination. Estimated amounts for sales returns and allowances are recorded at the time of sale.
Licensing income, which is included in sales to unrelated customers, is recognized ratably over the terms of the contractual license agreements.
E. RESTRICTED CASH ---------------
The Company had $4,162,669 and $1,477,841 of cash on deposit at March 31, 2004 and 2003, respectively, which represents collections on trade accounts receivable pending transfer to its lender, as stipulated in its revolving credit agreement discussed in Note 7. During April 2004, these funds were released from restriction and transferred into the Company's operating account since there were no amounts outstanding at March 31, 2004 under the revolving credit facility.
F. INVENTORIES AND COST OF GOODS SOLD ----------------------------------
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. The cost of inventories includes product costs, inbound freight and handling charges, including an allocation of the Company's applicable overhead in an amount of $2,307,000 and $2,255,000 at March 31, 2004 and 2003, respectively.
Cost of goods sold includes the cost of inventories discussed above, as well as gift-with-purchase activities.
G. INVESTMENT IN AFFILIATE -----------------------
Investment in Affiliate consists of an investment in common stock of E Com Ventures, Inc. ("ECMV"), the parent company of Perfumania, Inc. (see Note 2). Such securities are considered available-for-sale and are recorded at fair value. Changes in unrealized gains and losses of the Company's investment are charged or credited as a component of accumulated other comprehensive income (loss), net of tax, and are included in the accompanying statements of changes in stockholders' equity. A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary is charged to earnings.
H. EQUIPMENT AND LEASEHOLD IMPROVEMENTS ------------------------------------
Equipment and leasehold improvements are carried at cost. Equipment is depreciated using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lesser of the estimated useful life or the lease period. Repairs and maintenance charges are expensed as incurred, while betterments and major renewals are capitalized. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings.
I. TRADEMARKS AND LICENSES -----------------------
Trademarks and licenses are recorded at cost and those with a definite life are amortized over the estimated periods of benefit, principally 10 years. Amortization expense was $286,221, $43,207 and $484,657 for the years ended March 31, 2004, 2003, and 2002, respectively.
Indefinite-lived intangible assets are reviewed annually during the Company's fourth quarter of each fiscal year for impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The identification and measurement of impairment of indefinite-lived intangible assets involves the estimation of the fair value of the related asset. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about discounted expected future cash flows. Future cash flows can be affected by changes in industry or market conditions.
J. LONG-LIVED ASSETS -----------------
Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected undiscounted future cash flows of the related assets are less than their carrying values. The impairment loss is determined based on the difference between the carrying value of the assets and anticipated future cash flows discounted at a value commensurate with the risk involved, which is management's estimate of fair value. Management does not believe that there are any unrecorded impairment losses as of March 31, 2004.
K. ADVERTISING AND PROMOTION COSTS -------------------------------
Advertising and promotional expenditures are expensed to operations as incurred. These expenditures include print and media advertising, as well as in-store cooperative advertising and promotions.
Cooperative advertising, which is under the direct control of our customer and includes a percentage rebate or deduction based on net sales to the customer, is accrued and recorded as a reduction of net sales at the time of sale. Cooperative advertising with our customers, which is under the direct control of, and at the option of the Company, including catalogue and other forms of print advertising, are included in advertising and promotional expense. The costs associated with the specific advertisements are recorded as incurred, and when applicable, are offset against trade accounts receivable. Such cooperative advertising costs under our direct control amounted to approximately $2,240,000, $3,013,000 and $3,536,000, and have been included in advertising and promotional expenses for the years ended March 31, 2004, 2003, and 2002, respectively, (including $50,000 and $35,000 to Perfumania in 2004 and 2003, respectively).
L. SELLING AND DISTRIBUTION EXPENSES ---------------------------------
Selling and distribution expenses include labor costs (wages and other benefits) for employees directly involved in the selling and marketing of the Company's products, sales commissions to independent sales representatives, and the other overhead costs relating to these areas.
Additionally, this caption includes approximately $2,025,000, $2,036,000 and $2,075,000 for the years ended March 31, 2004, 2003 and 2002, respectively, relating to the cost of warehouse operations not allocated to inventories and other related distribution expenses (excluding shipping expenses which are recorded as cost of goods sold). A portion of these expenses is allocated to inventory in accordance with generally accepted accounting principles.
M. GENERAL AND ADMINISTRATIVE EXPENSES -----------------------------------
General and administrative expenses include labor costs (wages and other benefits) for employees not directly involved in the selling and distribution of the Company's products, professional service fees, corporate activities and other overhead costs relating to these areas.
N. SHIPPING AND HANDLING FEES AND COSTS ------------------------------------
Amounts billed to customers for shipping and handling, which amount is not significant, are included in net sales. The Company classifies the cost related to shipping and handling in cost of goods sold.
O. RESEARCH AND DEVELOPMENT COSTS ------------------------------
Research and product development costs, which amounted to approximately $120,000, $272,000 and $249,000 for the years ended March 31, 2004, 2003 and 2002, respectively, are expensed as incurred.
P. INCOME TAXES ------------
The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded, using currently enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Q. FOREIGN CURRENCY TRANSLATION ----------------------------
The Company's functional currency for its foreign subsidiary is the local currency. Other income and expense includes foreign currency gains and losses, which are recognized as incurred.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------------------
The carrying value of the Company's financial instruments, consisting principally of cash and cash equivalents, receivables, notes receivable, accounts payable and borrowings, approximate fair value due to either the short-term maturity of the instruments or borrowings with similar interest rates and maturities.
S. BASIC AND DILUTED EARNINGS PER SHARE ------------------------------------
Basic earnings per common share calculations are determined by dividing earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing earnings attributable to common stockholders by the weighted average number of shares of common stock and dilutive potential common stock equivalents outstanding during the year.
T. STOCK BASED COMPENSATION ------------------------
Statement of Financial Accounting Standards No. 123, Accounting For Stock Based Compensation ("SFAS No. 123") establishes a fair value based method of accounting for stock based compensation plans, the effect of which can either be disclosed or recorded. The Company retained the intrinsic value method of accounting for stock based compensation, which it previously used prior to the issuance of SFAS No. 123.
In calculating the potential effect for proforma disclosure, the fair market value on the date of grant was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions: 2004 2003 2002 ---- ---- ---- Expected life (years) 5 5 5 Interest rate 3% 3% 5% Volatility 70% 70% 75% Dividend Yield - - -
If compensation cost had been determined based on the fair value at the grant date under SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been as follows:
U. CASH FLOW INFORMATION ---------------------
The Company considers temporary investments with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash flow information are as follows:
2004 2003 2002 ---------- ---------- ---------- Cash paid for: Interest $ 424,665 $ 820,923 $1,288,250 ========== ========== ========== Income taxes $1,880,325 $ 853,728 $ 623,580 ========== ========== ==========
Supplemental disclosures of non-cash investing and financing activities are as follows:
Year ended March 31, 2004:
o The conversion of trade accounts receivable into a subordinated note receivable from Perfumania in the amount of $5,000,000 discussed in Note 2.
o The Company incurred an unrealized holding gain of $3,478,529 on the investment in affiliate, net of deferred taxes of $126,435.
o The Company realized an income tax benefit of $1,753,409 in connection with the exercise of warrants and employee stock options.
Year ended March 31, 2003:
o The conversion of trade accounts receivable into a subordinated note receivable from Perfumania in the amount of $3,000,000.
o The Company incurred an unrealized holding gain of $453,722 on the investment in affiliate.
o The consideration received for the sale of assets relating to the sublicense of the Fred Hayman Beverly Hills brands included an interest-bearing note from the sublicensee, as discussed in Note 8 (C).
o The consideration received from the sale of the Animale brand and assets related thereto, included an interest-bearing note from the purchaser in the amount of $2,000,000 as discussed in Note 8 (C).
Year ended March 31, 2002:
o The conversion of trade accounts receivable into a subordinated note receivable from Perfumania in the amount of $3,000,000.
o The Company incurred an unrealized holding loss of $741,081 on the investment in affiliate.
o The Company acquired equipment in the amount of $249,989 through capital lease arrangements.
o The Company incurred an other-than-temporary decline in value on the investment in affiliate of $2,858,447, with a corresponding deferred tax benefit of $207,360.
o The Company reversed an unrealized holding loss of $3,496,220 on the investment in affiliate, net of tax benefits.
V. SEGMENT INFORMATION -------------------
As of March 31, 2004, the Company operates solely in one segment, the marketing and manufacture of prestige fragrances and beauty related products.
W. NEW ACCOUNTING PRONOUNCEMENTS -----------------------------
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after June 30, 2003. The Company adopted the requirements of FIN 45 which did not have a significant impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 which was revised in December 2003 ("FIN 46-R"). FIN 46-R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46-R is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46-R must be applied for the first interim or annual period beginning after June 15, 2003. The Company has not invested in any entities that it believes are variable interest entities for which it is the primary beneficiary. The adoption of FIN 46-R did not have an impact, on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on the Company's consolidated financial statements.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS ----------------------------------------------------
Prior to the effectiveness of the Sarbanes-Oxley Act ("Sarbanes-Oxley"), which prohibits the Company from renewing or amending loans, as well as issuing new loans to Company officers and directors, the Company had made several personal loans to its chairman and chief executive officer, Mr. Ilia Lekach. These loans were consolidated into one note agreement on April 1, 2002, which bore interest at 8% per annum and became due on March 31, 2003 in accordance with the note's terms. On March 31, 2003, Mr. Lekach repaid $46,854 in principal and $71,364 of accrued interest, through that date. The repayment was effected via an offset of amounts due Mr. Lekach under his regular compensation arrangement.
On July 15, 2003, Mr. Lekach repaid the entire loan balance of $742,884, plus accrued interest at the default rate of prime plus 5%, through that date.
The Company had net sales of $31,964,407, $12,823,696, and $18,063,310 during the fiscal years ended March 31, 2004, 2003 and 2002, respectively, to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which the Company's Chairman and Chief Executive Officer had an ownership interest and held identical management positions until February 2004. Perfumania is the Company's largest customer, and transactions with them are closely monitored by the Company's Audit Committee and Board of Directors to ensure that dealings with Perfumania are at arms length. Perfumania offers the Company the opportunity to sell its products in over 230 retail outlets and its terms with Perfumania take into consideration the companies' over 15 year relationship. Pricing and terms with Perfumania reflect (a) the volume of Perfumania's purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) free exposure of the Company's products provided in Perfumania's store windows and (e) minimal distribution costs to fulfill Perfumania orders.
While the Company's invoice terms to Perfumania appear as net ninety (90) days, for over ten years, the Board of Directors has granted longer payment terms, taking into consideration the factors discussed above. The Board evaluates the credit risk involved and imposes a specific dollar limit, which is determined based on Perfumania's reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with the Board limit. Net trade accounts receivable owed by Perfumania to the Company totaled $10,890,338 and $11,426,977 at March 31, 2004 and 2003, respectively. Amounts
due from Perfumania are non-interest bearing and were paid in accordance with the terms established by the Board (See Note 13 for further discussion of this concentration of credit risk).
On July 1, 1999, Perfumania and the Company's Board of Directors approved the transfer of 1,512,406 shares of Perfumania treasury stock to the Company in consideration for a partial reduction of the outstanding trade receivable balance in the amount of $4,506,970. The transfer price was based on a per share price of $2.98 ($11.92 post reverse split discussed below), which approximated 90% of the closing price of Perfumania's common stock for the previous 20 business days. The agreement was consummated on August 31, 1999, and the shares registered in June 2000. Effective February 1, 2000, ECMV was formed as a holding company and accordingly, former Perfumania shareholders now hold common stock in ECMV. During the first quarter of the fiscal year ended March 31, 2002, the Company recorded a non-cash charge to earnings of $2,858,447 which reflected an other-than-temporary decline in value of the investment in affiliate based upon a sustained reduction in the quoted market price of $1.09 per share ($4.36 post reverse split discussed below), as of June 30, 2001, compared to the original cost per share of $2.98 ($11.92 post reverse split discussed below). As a result of this non-cash reduction of the cost basis of the Company's investment, the Company reversed $3,496,220 of previously recorded unrealized losses on the investment, net of taxes, which had been recorded as a component of stockholders' equity as of March 31, 2001.
On March 21, 2002, ECMV effected a one-for-four reverse stock split; accordingly, the Company now owns 378,101 shares. As of March 31, 2004, the fair market value of the investment in ECMV had increased to $4,839,693 ($12.80 per share after the reverse split).
As of June 25, 2004 the fair market value of the investment in ECMV is $2,816,852 ($7.45 per share after the reverse split).
The following unaudited summarized financial data was obtained from ECMV's public filings (in 000's):
Balance Sheet Data --------------------------- January 31, 2004 February 1, 2003 ---------------- ----------------
Current assets $ 65,405 $ 75,621 ======== ======== Total assets $ 92,463 $103,423 ======== ======== Current liabilities $ 74,495 $ 73,817 ======== ======== Total liabilities $ 82,241 $ 81,569 ======== ======== Stockholders' Equity $ 10,222 $ 21,853 ======== ========
Statement of Operations Data For the Fiscal Year Ended ------------------------- January 31, February 1, February 2, 2004 2003 2002 --------- --------- --------- Net Sales $ 212,568 $ 201,514 $ 193,352 Costs and operating expenses 217,012 195,722 186,817 Depreciation and amortization 6,103 6,024 6,825 --------- --------- --------- Loss from operations (10,547) (232) (290) ========= ========= ========= Net loss $ (12,872) $ (2,826) $ (3,192) ========= ========= =========
During June 2003 the Company and Perfumania entered into a $5 million subordinated note agreement which converted $5 million of the outstanding trade receivable due from Perfumania to the Company as of that date. The note was repayable in installments of $250,000 each month from July through October 2003, $500,000 on November 30, 2003, $3,000,000 on December 31, 2003, and $250,000 on January 31, 2004 and February 29, 2004. Accrued interest was payable with each principal installment. The loan was repaid in accordance with its terms.
The Company had net sales of $10,477,671, $8,924,530 and $5,966,057 during the years ended March 31, 2004, 2003, and 2002, respectively, to fragrance distributors owned/operated by individuals related to the Company's Chairman/CEO. These sales are included as related party sales in the accompanying statements of operations. As of March 31, 2004 and 2003, trade receivables from related parties include $614,134 and $506,975, respectively, from these customers, which were current in accordance with their sixty (60) or ninety (90) day terms.
3. INVENTORIES -----------
The components of inventories are as follows: March 31, -------- 2004 2003 ----------- ----------- Finished products $18,000,231 $15,873,033 Components and packaging material 9,094,932 7,642,649 Raw material 4,466,390 2,765,615 ----------- ----------- $31,561,553 $26,281,297 =========== =========== 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS ----------------------------------------- Prepaid expenses and other current assets are as follows: March 31, --------- 2004 2003 ---------- ---------- Promotional supplies, net $3,129,411 $3,665,465 Deferred tax assets 1,923,436 1,672,792 Prepaid advertising 484,145 728,029 Prepaid royalties 107,000 400,000 Other 329,945 541,124 ---------- ---------- $5,973,937 $7,007,410 ========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS ------------------------------------
Equipment and leasehold improvements are comprised of the following:
Depreciation and amortization expense on equipment and leasehold improvements for the years ended March 31, 2004, 2003 and 2002 was $970,372, $1,313,390 and $1,510,439, respectively. There were no amounts subject to capital leases at March 31, 2004; amounts subject to capital leases at March 31, 2003, included in molds and equipment above, totaled $145,932, net of accumulated amortization of $51,076.
6. TRADEMARKS AND LICENSES -----------------------
Trademarks and licenses are attributable to the following brands:
Future amortization of licenses and trademarks is as follows (in 000's):
For the year ending March 31, Amount ----------------------------- ------
2005 $ 279 2006 $ 237 2007 $ 237 2008 $ 237 2009 $ 217 Thereafter $ 850 ------- $ 2,057 =======
See Note 8 (C) for further discussion of the FHBH and Animale brands. During the year ended March 31, 2004, and as a result of the sublicensing of the FHBH brand, the Company recorded amortization expense of $198,008 relating to the FHBH license. As of April 1, 2001, amortization had been discontinued for this intangible, as it was determined to have an indefinite life at that time.
On March 2, 1998, the Company entered into an exclusive agreement to license the Alexandra de Markoff (ADM) rights to Cosmetic Essence, Inc. ("CEI") for an annual fee of $500,000. The initial term of the agreement is ten years, automatically renewable for additional ten and five year terms. The annual fee reduces to $100,000 after the third renewal. The license was assigned by CEI to one of its affiliates, Irving W. Rice & Co. CEI guarantees payment of the annual licensing fee for the entire term of the agreement, including renewals.
On February 27, 2002, the Company entered into an agreement to sell the ADM trademark and assign the license agreement with CEI to the former owner of CEI for $3,008,000 in cash, which closed on March 1, 2002. The net book value of the intangibles associated with ADM was $8,507,092. In anticipation of the agreement, an impairment charge against the intangibles in the amount of $5,499,092 was recorded in the accompanying statement of operations for the year ended March 31, 2002.
On June 9, 1998, the Company entered into an exclusive agreement to license the Bal A Versailles (BAV) rights to Genesis International Marketing Corporation ("Genesis") for an annual licensing fee of $100,000 during the initial year of the agreement, increasing to $150,000 for subsequent years for the remainder of the initial term, and to $200,000 each year thereafter. The initial term of the agreement was for ten years, renewable every five years.
On November 4, 2002, the Company entered into an agreement to sell the BAV trademarks to Genesis for $300,000, of which $262,500 has been paid as of March 31, 2004. As part of the agreement, licensing fees due under the original licensing agreement stopped accruing on December 31, 2001. As a result of the ongoing negotiations, an impairment charge against the intangibles related to BAV in the amount of $1,942,462 was recorded in the accompanying statements of operations for the year ended March 31, 2002.
7. BORROWINGS ----------
On July 20, 2001, the Company entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). On February 6, 2003, the Loan Agreement was extended for an additional year through July 20, 2005. Under the Loan Agreement, the Company is able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at the Company's option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to EBITDA.
At March 31, 2004, based on the borrowing base at that date, the credit line amounted to approximately $16,137,000, none of which was utilized.
Substantially all of the domestic assets of the Company collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios.
8. COMMITMENTS AND CONTINGENCIES -----------------------------
A. LEASES: ------
The Company leases its office space and certain equipment under certain operating leases expiring on various dates through 2007. Total rent expense charged to operations for the years ended March 31, 2004, 2003 and 2002 was approximately $900,000, $1,000,000 and $891,000, respectively.
At March 31, 2004, the future minimum annual rental commitments under noncancellable operating leases are as follows (in 000's):
For the year ending March 31, Amount ----------------------------- ------ 2005 $1,001 2006 696 2007 17 ------ Total $1,714 ======
B. LICENSE AND DISTRIBUTION AGREEMENTS: ------------------------------------
During the year ended March 31, 2004, the Company held exclusive worldwide licenses to manufacture and sell fragrance and other related products for Perry Ellis, Ocean Pacific ("OP"), and Jockey.
Effective November 1, 2003, the Company entered into an exclusive license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products on a worldwide basis. The term of the agreement continues through December 2009, and is renewable for an additional five years if certain sales levels are met.
Under the GUESS? Agreement, the Company must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. The Company anticipates that the first GUESS? fragrance will be launched during July 2005.
The Company believes it is presently in compliance with all material obligations under the above agreements. The Company expects to incur continuing obligations for advertising and royalty expense under these license agreements and the new license agreement with GUESS? As of March 31, 2004, the minimum amounts of these obligations derived from the aggregate minimum sales goals, set forth in the agreements, over the remaining contract periods are as follows (in 000's):
On May 4, 2004, the Company entered into a letter of intent with Ms. Paris Hilton ("PH"), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under her name. Effective June 1, 2004, the Company entered into a definitive license agreement with Paris Hilton Entertainment, Inc. ("PHEI"), which expires on June 30, 2009. The agreement is renewable for an additional five-year period.
Under the PHEI Agreement, the Company must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. The Company anticipates that the first PH fragrance will be launched prior to March 31, 2005.
C. TRADEMARKS: -----------
Through various acquisitions since 1991, the Company acquired worldwide trademarks and distribution rights to ANIMALE, LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de MARKOFF cosmetics and fragrances. In addition, FHBH granted the Company an exclusive 55-year royalty free license. Accordingly, there are no licensing agreements requiring the payment of royalties by the Company on these trademarks and the Company had the rights to license all of these trademarks, other than FHBH, for all classes of merchandise. Royalties were payable to the Company from the licensees of ALEXANDRA DE MARKOFF and BAL A VERSAILLES brands. Additionally, see Note 6 for further discussion of the sale of these two brands to the previous licensees.
On January 16, 2003, the Company entered into an agreement with the Animale Group, S.A., to sell the inventory, promotional materials, molds, and intangibles, relating to the Animale brand for $4,000,000, which closely approximates the brand's net book value at the date of sale. At closing, the purchaser paid $2,000,000 in cash and provided a $2,000,000 note payable in twelve equal monthly installments of $166,667, plus interest at prime plus 1%, through January 31, 2004, which was paid in accordance with its terms. As of March 31, 2003, notes receivable in the accompanying consolidated balance sheet included $1,666,667 relating to this transaction.
As part of the agreement the Company did not include the inventory of Chaleur d'Animale, the Animale brand's newest product introduction, and maintains the rights to manufacture and distribute this product line, on a royalty-free basis, until January 2005.
On March 28, 2003, the Company entered into an exclusive agreement to sublicense the FHBH rights to Victory International (USA), LLC, for a royalty of 2% of net sales, with a guaranteed minimum annual royalty of $50,000. The initial term of the agreement is for five years, renewable every five years at the sublicensee's option. As part of the agreement, the Company sold the inventory, promotional materials and molds relating to FHBH for its approximate book value. At closing, the purchaser paid $2,000,000 in cash and provided a promissory note due in twelve monthly installments of approximately $170.000, plus interest at prime plus 1%, commencing January 2004. As of March 31, 2004, notes receivable in the accompanying consolidated balance sheet of $1,708,511 relates entirely to this transaction ($515,468 and $1,524,204 of current and long-term notes receivable, respectively, at March 31, 2003).
The Sublicense Agreement excluded the rights to "273 Indigo" for men and women, the latest fragrance introduction for the FHBH brand. Such rights, as well as the rights to any other new FHBH fragrance additions, were to transfer to the sublicensee after twelve (12) months from the date of launch. The sublicensee would have been required to purchase the inventory and promotional materials relating to the new additions for a price equal to our book value, up to $500,000.
On October 17, 2003, the parties amended the Sublicense Agreement, granting new FHBH product development rights to the sublicensee. In addition, the guaranteed minimum annual royalty increased to $75,000 and royalty percentage on sales of new FHBH products increased to 3% of net sales. The sublicensee is no longer required to purchase inventory and promotional materials relating to "273 Indigao", and the Company may continue to manufacture and distribute "273 Indigo" products.
D. EMPLOYMENT AND CONSULTING AGREEMENTS: -------------------------------------
The Company has contracts with certain officers, employees and consultants which expire at different periods through March 2006. Minimum commitments under these contracts total approximately $2,472,000 ($1,326,000 for the year ending March 31, 2005 and $1,146,000 for the year ending March 31, 2006). In addition, warrants to purchase 760,000 shares of common stock at a price of $1.86 were granted to officers and directors in connection with these contracts. These warrants are exercisable for a ten-year period from the date of grant, vest over the three-year term of the applicable contract starting on March 31, 2004 (end of contract's initial year), and double in the event of a change in control. As of March 31, 2004, 253,334 of these warrants were vested.
On June 8, 2001, the Compensation Committee of the Board of Directors authorized grants to the Company's Chief Executive Officer and Chief Operating/Financial Officer of 500,000 and 100,000 warrants, respectively, to acquire shares of common stock at $2.44 per share. The warrants vested on the date of grant and are exercisable for a ten-year period.
In connection with previous employment contracts and consulting agreements, warrants to purchase shares of common stock, at prices ranging from $1.50 to $7.50 were granted between 1989 and 2000. These warrants are exercisable for a ten-year period from the date of grant and vested over the term of the applicable contracts. As of March 31, 2004, all of the above mentioned warrants were vested. In addition, during January 1996, the Board of Directors approved a resolution whereby the number of warrants granted to key employees would double in the event of a change in control.
On January 18, 1999, the Compensation Committee of the Board of Directors authorized the grant to the Company's Chairman and Chief Executive Officer of 1,000,000 warrants to acquire shares of common stock at $8.00 per share for a five year period. The warrants were cancelled during April 2001.
On February 4, 2004, the Company filed with the Securities and Exchange Commission ("SEC") a registration statement on Form S-3 (file number 333-112472) in order to register 1,306,000 shares of the Company's common stock on behalf of certain selling shareholders, including 1,270,000 shares of common stock relating to the warrants granted prior to 2000, as described below. All of the shares are shares issuable, or that were already issued, upon the exercise of warrants held by the selling shareholders. Although the Company will not receive any of the proceeds from any subsequent resale of the shares, it would receive approximately $2,800,000 if all of the warrants are exercised. As of June 25, 2004, 1,096,000 of these warrants have been exercised and the Company has received proceeds of $2,126,499 (1,048,000 and $1,992,624 as of March 31, 2004). The registration statement was declared effective by the SEC on April 26, 2004. All of the previously described warrants were granted at or in excess of the market value of the underlying shares at the date of grant.
E. PURCHASE COMMITMENTS AND CONTINGENCIES: ---------------------------------------
As of March 31, 2004, the Company is contingently liable in the amount of approximately $18 million for purchase orders issued in the normal course of business for components, raw materials and promotional supplies. The purchase orders, for the most part, stipulate delivery dates ranging from thirty days to periods exceeding one year, based on forecasted production needs.
The Company is a party to legal and administrative proceedings arising in the ordinary course of business. The outcome of these actions is not expected to have a material effect on the Company's financial position or results of operations. See Note 12 to the consolidated financial statements for further discussion.
9. INCOME TAXES ------------
The components of the provision for income taxes for each of the years ended March 31 are as follows:
Years Ended March 31, --------------------- 2004 2003 2002 ----------- ----------- ----------- Current taxes (benefit): U.S. federal $ 3,024,049 $ 2,724,601 ($1,380,986) U.S. state and local 531,722 164,899 85,941 Foreign -- -- 6,517 ----------- ----------- ----------- 3,555,771 2,889,500 (1,288,528) Deferred tax (benefit) 285,671 328,963 (801,520) ----------- ----------- ----------- Income tax expense (benefit) $ 3,841,442 $ 3,218,463 ($2,090,048) =========== =========== ===========
The following table reconciles the statutory federal income tax rate to the Company's effective tax rate for the years ended March 31 as follows:
2004 2003 2002 ------ ------ ------ Statutory federal income tax rate 35.0% 35.0% (35.0%) Increase (decrease) resulting from: Change in valuation allowance 0.1% 2.2% 10.4% Other 2.9% (0.2%) (2.4%) ------ ------ ------ 38.0% 37.0% (27.0%) ====== ====== ======
Deferred income taxes as of March 31 are provided for temporary differences between financial reporting carrying value and the tax basis of the Company's assets and liabilities under SFAS 109. The tax effects of temporary differences are as follows:
A valuation allowance is provided since management can provide no assurance that the Company will more likely than not generate sufficient capital gains to completely offset the unrealized loss on investments.
10. STOCK OPTION AND OTHER PLANS ----------------------------
The Company had adopted a Stock Option Plan and a 1989 Stock Option Plan (collectively, the "Plan") and had reserved and registered 250,000 shares of its common stock for issue thereunder. Options granted under the Plan were not exercisable after the expiration of five years from the date of grant and vested 25% after each of the first two years, and 50% after the third year. Options for most of the shares in the Plan may qualify as "incentive stock options" under the Internal Revenue Code. The shares were also available for distribution pursuant to options which do not so qualify. Under the Plan, options could be granted to eligible officers and key employees at not less than the fair market value of the shares at the date of grant of the option (110% of the fair market value for 10% or greater stockholders).
Options which did not qualify as "incentive stock options" may also be granted to consultants. Options generally may be exercised only if the option holder remains continuously associated with the Company or a subsidiary from the date of grant to the date of exercise.
As of March 31, 2004, and since the inception of the Plan, options have been granted, net of cancellations, to purchase 199,092 shares at exercise prices ranging from $1.06 to $5.75 per share. No further options are issuable under the Plan. Through March 31, 2004, 196,592 options had been exercised under the Plan and no further shares are exercisable.
In October 1996, the Company's shareholders ratified the establishment of a new stock option plan (the "1996 Plan") which reserved 250,000 shares of its Common Stock for issue thereunder with the same expiration and vesting terms as the Plan. Only employees who are not officers or directors of the Company shall be eligible to receive options under the 1996 Plan. During January 2000, the shares were registered with the Securities and Exchange Commission via a Form S-8 registration statement.
As of March 31, 2004, and since the inception of the 1996 Plan, options have been granted net of cancellations, to purchase 184,137 shares at exercise prices ranging from $1.375 to $2.813 per share. Through March 31, 2004, 173,137 options had been exercised and all options were vested.
The following table summarizes the activity for options covered under all of the above plans:
1996 Plan ---------------------------- Weighted Average Amount Exercise Price
Balance at March 31, 2001 205,350 $ 1.98 Granted -- -- Exercised (6,712) $ 1.38 Canceled/Expired (25,800) $ 1.38 -------- Balance at March 31, 2002 172,838 $ 2.26 Granted -- Exercised (53,563) $ 1.38 Canceled/Expired (8,550) $ 1.38 -------- Balance at March 31, 2003 110,725 $ 2.40 Granted -- Exercised (96,275) $ 2.29 Canceled/Expired (3,450) $ 2.10 -------- Balance at March 31, 2004 11,000 $ 2.81 ========
In October 2000, the Company's shareholders ratified the establishment of a third stock option plan (the "2000 Plan") which reserved an additional 250,000 shares of its Common Stock for issue thereunder with the same expiration and vesting terms as the 1996 Plan. To date, no grants have been made under the 2000 Plan and the shares underlying the options have not been registered.
The following table summarizes the activity and related information for all other options and warrants outstanding, including the warrants discussed under commitments in Note 8 (D):
Amount ------ Balance at March 31, 2001 2,646,000 $4.41 Granted 620,000 2.43 Exercised -- -- Canceled/Expired (1,000,000) $8.06 ---------- ----- Balance at March 31, 2002 2,266,000 $2.28 Granted 780,000 $1.86 Exercised -- -- Canceled/Expired -- -- ---------- ----- Balance at March 31, 2003 3,046,000 $2.15 Granted 40,000 $3.60 Exercised (1,048,000) $1.90 Canceled/Expired -- -- ---------- ----- Balance at March 31, 2004 2,038,000 $2.32 ==========
The following table summarizes information about these options and warrants outstanding at March 31, 2004:
The Company has established a 401-K plan covering substantially all of its U.S. employees. Commencing on April 1, 1996, the Company matched 25% of the first 6% of employee contributions, within annual limitations established by the Internal Revenue Code. The cost of the matching program totaled approximately $43,000, $54,000, and $54,000 for the years ended March 31, 2004, 2003 2002, respectively.
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE -------------------------------------------
The following is the reconciliation of the numerators and denominators of the basic and diluted net income per common share calculations:
(1) The calculation of diluted loss per share was the same as the basic loss per share for the year ended March 31, 2002, since the inclusion of potential common stock in the computation would be antidilutive.
12. LEGAL PROCEEDINGS
On December 8, 2003, the Company was served with a complaint (the" Complaint") filed in the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade County, which was amended on January 26, 2004. The Complaint is a derivative action, in which the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham, Partners I, LP, purport to be suing for the benefit of the Company itself and all of its public shareholders. The Complaint names Parlux Fragrances, Inc. as the nominal defendant and all of the current members of the Board of Directors as the defendants. It seeks unspecified damages allegedly arising out of breaches of fiduciary duties in connection with transactions involving the Company and Mr. Ilia Lekach, its Chief Executive Officer or companies in which he has an ownership interest.
The Complaint seeks to enjoin the Company from continuing to enter into such transactions, seeks payment of costs and fees to Plaintiffs' counsel and other unstated relief.
Based on its preliminary investigation of allegations asserted by the Plaintiffs, the Company believes that the claims in the Complaint are without merit. The Company and the Board members have engaged experienced Florida securities counsel and intend to defend the action vigorously. The Company filed a Motion to Dismiss the action on February 27, 2004. A hearing on the Motion was held on April 14, 2004 and the Complaint was dismissed, without prejudice. The Court encouraged the Plaintiffs to serve a demand upon the Corporation to examine the issues alleged in the Complaint rather than file an Amended Complaint, but gave the Plaintiffs thirty (30) days to file an Amended Complaint if they chose to do so. Following the order granting dismissal, the Company voluntarily furnished detailed information to Plaintiff's counsel demonstrating the Company's view that there was no legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Additional exchanges of correspondence have followed and additional extensions of time have been granted. As of the date of this filing, no amended complaint has been served.
On June 4, 2003, the Company was served with a shareholder's class action complaint (the "June Complaint"), filed in the Delaware Court of Chancery by Judy Altman, purporting to act on behalf of herself and other public stockholders of the Company. The June Complaint named Parlux Fragrances, Inc. as a defendant along with all of the Company's Board of Directors, except Mr. David Stone. The June Complaint sought to enjoin the defendants from consummating a Tender Offer Proposal from Quality King Distributors, Inc. and Ilia Lekach, the Company's Chairman and Chief Executive Officer, to acquire the Company's common stock, and sought to have the acquisition rescinded if it was consummated. In addition, the June Complaint sought unspecified damages, plus the fees, costs and disbursements of Ms. Altman's attorneys.
The Company and the named defendants engaged Delaware counsel to vigorously defend the action, and the action was voluntarily dismissed on September 11, 2003.
There are no other proceedings pending against the Company, which, if determined adversely, would have a material effect on the Company's financial position or results of operations.
On May 8, 2001, and as amended on June 8, 2001, the Company filed a legal complaint against a component supplier to recover out-of-pocket costs and damages resulting from the supplier having delivered faulty components for two of its fragrances. Out-of-pocket costs to refurbish the products were included in cost of goods for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement whereby the Company would receive cash consideration of $3,958,000 from the supplier's insurance carrier, plus an additional $42,564 from the supplier. These funds were received on October 7, 2002, and the suit was dismissed.
The Company has recorded the settlement in the accompanying consolidated statement of operations for the year ended March 31, 2003, net of certain expenses as follows:
Proceeds from settlement $4,000,564 Less expenses directly related to the claim and incurred during the period April 1, 2002 through March 31, 2003: Legal fees 326,327 Refurbishing costs 132,154 ---------- Net litigation settlement recorded $3,542,083 ==========
Refurbishing expenses and legal fees incurred prior to April 1, 2002, have been expensed directly to cost of goods sold and general and administrative expenses, respectively.
The above expenses do not include other general and administrative costs such as employee travel in connection with the lawsuit discovery process.
13. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS: --------------------------------------------------
During the last three fiscal years, the following brands have accounted for 10% or more of the Company's gross sales:
2004 2003 2002 ---- ---- ---- PERRY ELLIS 81% 75% 67% OCEAN PACIFIC 13% 10% 12% ANIMALE 2% 7% 13%
Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables from department and specialty stores in the United States, distributors throughout the world, and Perfumania. To reduce credit risk for trade receivables from unaffiliated parties, the Company performs ongoing evaluations of its customers' financial condition but does not generally require collateral. Management has established an allowance for doubtful accounts for estimated losses. The allowances for doubtful accounts are considered adequate to cover estimated credit losses.
No unrelated customer accounted for more than 10% of the Company's net sales during the year ended March 31, 2004. During the years ended March 31, 2003 and 2002, one unrelated customer accounted for approximately 19% and 14%, respectively, of the Company's net sales.
Revenues from Perfumania represented 40%, 18% and 26% of the Company's net sales during the years ended March 31, 2004, 2003, and 2002, respectively. To reduce credit risk, on occasion, the Company, based on its reviews of Perfumania's financial condition, converts certain trade receivables into subordinated notes receivable. (See Note 2 for a detailed discussion of a previous conversion of trade receivables into notes receivable from Perfumania). During the years ended March 31, 2004, 2003 and 2002, revenues from other related parties represented approximately 13%, 12% and 9%, respectively, of the Company's net sales.
As reported in ECMV's latest public filing, on May 12, 2004, Perfumania entered into a new three-year amended and restated senior secured revolving credit facility with its then current lender and a new participant, increasing its borrowing capabilities from $40 million to $60 million. Management continues to evaluate its credit risk and assess the collectibility of the Perfumania receivables. Perfumania's reported financial information, as well as the Company's payment history with Perfumania, indicates that the first quarter historically is Perfumania's most difficult quarter as is the case with most U.S. based retailers. The Company has, in the past, received significant payments from Perfumania during the last three months of the calendar year, and has no reason to believe that this will not continue. Based on management's evaluation, no allowances have been recorded as of March 31, 2004. Management will continue to evaluate Perfumania's financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.
Gross sales to unrelated international customers totaled approximately $28,418,000, $38,364,000 and $31,329,000, for the years ended March 31, 2004, 2003 and 2002, respectively. At March 31, 2004 and 2003, trade receivables from foreign customers (all payable in U.S. dollars) amounted to approximately $2,118,000 and, $4,897,000 respectively.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): ----------------------------------------------
The following is a summary of the Company's unaudited quarterly results of operations for the years ended March, 31, 2004 and 2003 (in thousands, except per share amounts). Quarter Ended ---------------------------------------------- June 30, September 30, December 31, March 31, 2003 2003 2003 2004 ------- ------- ------- -------
Net sales $16,942 $18,253 $25,764 $19,622 Gross margin 8,046 8,792 12,809 11,326 Net income 717 1,402 1,687 2,462 Income per common share: Basic $ 0.08 $ 0.17 $ 0.21 $ 0.30 Diluted $ 0.08 $ 0.15 $ 0.18 $ 0.24
Quarter Ended ---------------------------------------------- June 30, September 30, December 31, March 31, 2002 2002 2002 2003 ------- ------- ------- -------
Net sales $19,826 $18,007 $19,781 $14,640 Gross margin 9,633 8,686 10,104 7,959 Net income 1,116 3,110 107 1,141 Income per common share: Basic $ 0.11 $ 0.31 $ 0.01 $ 0.12 Diluted $ 0.11 $ 0.31 $ 0.01 $ 0.12
15. RESTATEMENT -----------
Subsequent to the filing of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003 and in connection with a review by the staff of the Securities and Exchange Commission ("SEC") of the Company's Registration Statement on Form S-3 filed during February 2004, management determined that the Company should present the amount of cash that the Company had on deposit pending transfer to the Company's lender, as stipulated in the Company's revolving credit agreement, as "Restricted Cash" on the accompanying consolidated balance sheet instead of netting such cash against the outstanding balance on the revolving credit facility. Such cash represents collections on the Company's trade accounts receivable. As a result, the Company also segregated the changes in restricted cash as a separate line item within "Cash flows from financing activities" on the accompanying consolidated statement of cash flows. As a result, the accompanying consolidated financial statements as of March 31, 2003 and for the fiscal year ended March 31, 2003 and 2002 have been restated from the amounts previously reported for the significant effects of the restatements on the consolidated financial statements are shown in the table below. In addition, previously reported amounts includes a reclassification of a note receivable from officer in the amount of $742,884 that was previously classified within stockholders' equity and was reclassified to a current asset as such was collected during July 2003. See Note 2 for further discussion.
Consolidated Statements of Cash Flows for the fiscal years ended As Previously Reported As Restated March 31, 2003 and 2002:
In addition, the Company segregated cost of goods sold, which was previously presented as one line item in the condensed consolidated statements of income into two separate captions, "unrelated customers" and "related parties". The Company also added a column to the condensed consolidated statement of changes in stockholders' equity titled "Treasury Stock - Number of Shares".
The adjustments discussed above did not result in any restatement of the Company's net income, earnings per share or working capital amounts from those that were previously reported.
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS -----------------------------------------------