SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For Fiscal Year Ended March 31, 2002
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________to _______________
Commission File Number 0-15491
Parlux Fragrances, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2562955
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at June 28, 2002
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Common Stock, $ .01 par value 9,976,896
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $11,878,000 based on a
closing price of $2.35 for the Common Stock as of June 28, 2002 as reported on
the National Association of Securities Dealers Automated Quotation System on
such date. For purposes of the foregoing calculation, only the Directors and
beneficial owners of the registrant are deemed to be affiliates.
Documents incorporated by Reference: The information required by Part III (Items
10, 11, 12 & 13) is incorporated by reference from the registrant's definitive
proxy statement (to be filed pursuant to Regulation 14A).
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Registrant's Common Stock and Related Security Holder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
7. A Quantitative and Qualitative Disclosures About Market Risks 17
8. Financial Statements and Supplementary Data 18
9. Changes in and Disagreements with Accountants on Accounting 18
and Financial Disclosures
PART III
10. Directors and Executive Officers of the Registrant 18
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
2
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. Our products are positioned primarily in the prestige
segment. Additionally, we manufacture and 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 has
an ownership interest and holds identical management positions. Perfumania is a
leading specialty retailer of fragrances in the United States and Puerto Rico.
Currently, we engage in the manufacture (through sub-contractors), distribution
and sale of PERRY ELLIS, FRED HAYMAN BEVERLY HILLS, OCEAN PACIFIC, and JOCKEY
fragrances and grooming items on an exclusive basis as a licensee. See
"LICENSING AGREEMENTS" on page 6 for further discussion. Additionally, we
manufacture, distribute and sell our own brand, ANIMALE fragrance, on a
worldwide basis.
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 $215 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 2002, we completed the design process for OCEAN
PACIFIC for women, which was launched in Fall 2001 and JOCKEY "Physical" for men
and women, which was launched in Spring 2002. We are currently developing PERRY,
a new brand under the PERRY ELLIS line, for both men and women for launch in the
current fiscal year.
During the last three fiscal years, the following brands have accounted
for 10% or more of our gross sales in a given year:
Fiscal 2002 Fiscal 2001 Fiscal 2000
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PERRY ELLIS 67% 69% 73%
ANIMALE 13% 16% 11%
OCEAN PACIFIC 12% 3% ---
FRED HAYMAN 8% 11% 16%
3
MARKETING AND SALES
In the United States, we have our own sales and marketing staff, and
also utilize independent sales representatives for certain channels of
distribution. We sell directly to retailers, primarily national and regional
department stores and specialty 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/ECMV, which is a leading specialty retailer of fragrances with
approximately 250 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 arrangements with independent distributors, which are administered by
our international sales staff. We have established relationships for the
marketing of our fragrances with distributors in Canada, Europe, the Middle
East, the Far East, Latin America, the Caribbean and Russia.
We advertise both directly, and through a cooperative advertising
program in association with major retailers, in the 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 for our products are available from
sources in the United States and Europe. We use third party contract
manufacturers to produce finished products.
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 that this will
continue.
SEASONALITY
Typical of the fragrance industry, we have our highest sales during the
calendar year end holiday season. Lower than projected sales during this period
could have a material adverse affect 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
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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 specialty
stores and a number of regional department store retailers including, among
others, Burdines, Dillard's, Famous Barr, Foley's, J.L. Hudson, Lord & Taylor,
Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. Retail
distribution has been targeted by brand to maximize potential and minimize
overlap between each of these distribution channels.
During the fiscal years ended March 31, 2002 and 2001, we had net sales
of $18,063,310 and $22,362,294, respectively, to Perfumania. Net trade accounts
receivable owed by Perfumania to us amounted to $12,491,993 and $13,006,178 at
March 31, 2002 and 2001, respectively. Amounts due from related parties are
non-interest bearing and are due in less than one year.
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 exchange price was based on a per share price for the stock 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 accordingly, the Company now holds common stock in ECMV. As
described in Note 1F of the notes to consolidated financial statements, a
continuing decline in fair value below cost could be deemed to be "other than
temporary" and require a charge to earnings rather than being presented as a
component of accumulated other comprehensive loss and charged directly to
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, 2002, the fair market value of the
investment in ECMV was $907,442 ($2.40 per share after the reverse split). We
believe, based on our evaluation of ECMV's operations, that this current decline
in market price is temporary.
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As of June 21, 2002, the fair market value of the investment in ECMV is
$1,553,995 ($4.11 per share after the reverse split).
FOREIGN AND EXPORT SALES
During the three years ended March 31, 2002, gross sales to
international customers were approximately $31,329,000, $30,726,000, and
$20,007,000, respectively.
LICENSING AGREEMENTS
PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license
is renewable every two years if the 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, and 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.
OCEAN PACIFIC: On August 20, 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 extends through December 31, 2003, with
seven (7) 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 the annual net sales of the products. OP for men was launched last Spring
2001 and OP for women was launched in Fall 2001.
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 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 the annual net sales of the products. We launched Jockey fragrances
for women and men during the first calendar quarter of 2002.
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We believe we are presently 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 own the worldwide trademarks and distribution rights to ANIMALE and
LIMOUSINE fragrances and have the rights to license certain of these trademarks
for all classes of merchandise. There are no licensing agreements requiring the
payment of royalties by us for these trademarks. Additionally, royalties were
payable to us by the licensees of the ALEXANDRA de MARKOFF and BAL A VERSAILLES
brands. See Note 6 to the accompanying Consolidated Financial Statements for
further discussion as these two brands.
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. 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, and which
have substantially greater financial and marketing resources than us, as well as
greater name recognition, and the ability to develop and market products similar
to, and competitive with, those distributed us.
EMPLOYEES
As of March 31, 2002, we had 117 full-time and part-time employees. Of
these, 38 were engaged in worldwide sales activities, 47 in operations,
administrative and
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finance functions and 32 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 established a 401-K Plan covering substantially all of our U.S.
employees. Commencing on April 1, 1996, we matched 25% of the first 6% of
employee contributions, within annual limitations established by the Internal
Revenue Code.
ITEM 2. PROPERTIES
In November 1995, we moved our corporate headquarters and domestic
operations to a new 100,000 square foot leased facility in Fort Lauderdale,
Florida. The annual lease cost of the facility is approximately $640,000, with
the lease covering a ten-year period through 2005.
ITEM 3. LEGAL PROCEEDINGS
To the best of our knowledge, there are no 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.
On May 8, 2001, and amended on June 8, 2001, we filed a legal complaint
against a component supplier to recover out-of-pocket costs and damages
resulting from the supplier having delivered faulty components for two of our
fragrances. Estimated out-of-pocket costs to refurbish the products of
approximately $1.5 million were included in cost of goods sold for the year
ended March 31, 2001. An additional $200,000 was provided during the fiscal year
ended March 31, 2002, to cover the refurbishing of additional product returns.
The parties are currently engaged in the discovery process. Although management
believes that the litigation has significant merit, there can be no assurance of
the outcome.
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, 2002 and through June 28, 2002.
PART II
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
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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.
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, 2002 through June 28, 2002. 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
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High Low
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First (April/June) 2000 $4.125 $2.500
Second (July/Sept.) 2000 3.500 2.125
Third (Oct./Dec.) 2000 2.625 1.281
Fourth (Jan./Mar.) 2001 2.453 1.438
First (April/June) 2001 2.730 1.469
Second (July/Sept.) 2001 3.530 1.890
Third (Oct./Dec.) 2001 2.590 1.560
Fourth (Jan./Mar.) 2002 2.190 1.620
First (April/June) 2002 2.750 1.660
We have not paid a cash dividend on our common stock nor do we
contemplate paying any dividends in the near future. Our new loan agreement
restricts payment of dividends without prior approval.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from audited financial
statements. Consolidated balance sheets at March 31, 2002 and 2001, and the
related consolidated statements of operations and of cash flows for the three
years ended March 31, 2002 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)
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2002 2001 2000 1999 1998
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Net sales $70,001 $68,875 $66,385 $56,151 $ 62,369
Costs/operating expenses 73,868 61,495 59,786 51,920 73,911
Operating (loss) income (3,867) 7,380 6,599 4,231 (11,542)
Net (loss) income (5,655) 3,926 3,873 1,418 (8,687)
Loss per share:
Basic ($0.57) $ 0.39 $ 0.32 $ 0.10 ($ 0.53)
Diluted(1) $ 0.38 $ 0.31 $ 0.10
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23 The calculation of the diluted loss per share was the same as the basic
loss per share for fiscal 2002 and 1998 since inclusion of potential
common stock in the computation would be antidilutive.
At March 31, (in thousands of dollars)
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2002 2001 2000 1999 1998
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Current assets $60,282 $50,810 $57,992 $56,349 $66,359
Current liabilities 22,620 20,274 23,238 18,159 30,185
Working capital 37,662 30,536 34,754 38,190 36,174
Trademarks, licenses and
goodwill, net 9,535 20,464 21,469 23,926 25,378
Long-term borrowings 962 1,686 2,571 3,561 4,108
Total assets 72,248 74,012 81,862 82,081 95,731
Total liabilities 24,324 23,138 28,217 22,227 34,713
Stockholders' equity 47,924 50,874 53,645 59,854 61,018
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.
Investors are cautioned that forward looking statements involve risks and
uncertainties which may affect our business and prospects, including economic,
competitive, governmental, technological and other factors discussed in this
annual report and in our filings with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting 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. In fiscal 2002, we adopted Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(FAS 142), new rules for measuring the impairment of brand licenses, trademarks
and intangibles and discontinued amortization for intangible assets with
indefinite useful lives.
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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.
Allowance for Sales Returns. As is customary in the prestige fragrance
industry, we grant certain of our U.S. department store customers the right to
return product, which does not "sell-through" to consumers. Upon 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. 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 uncollectible 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.
Provisions for Inventory Obsolescence. We record a provision 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,
additional provisions for inventory obsolescence 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.
Comparison of the year ended March 31, 2002 with the year ended March 31, 2001.
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During the fiscal year ended March 31, 2002, net sales increased 2% to
$70,001,063 as compared to $68,875,110 for the same period for the prior year.
The increase is mainly attributable to the launch of "Ocean Pacific" for men and
women in the Spring and Fall of 2001, which added gross sales of $6,924,891
during the current year period. The increase was offset by the $3,869,392 sales
decrease experienced over all brands during the quarter ended December 31, 2001,
which was mainly attributable to the
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economic effects of the September 11th tragedy and the resulting sluggish
holiday season, both internationally and in the U.S. department store sector.
Net sales to unrelated customers decreased 1% to $45,971,696 in the
current period, compared to $46,512,816 for the same period in the prior year.
Sales to related parties increased 7% to $24,029,367 in the current period,
compared to $22,362,294 for the same period in the prior year.
Cost of goods sold increased as a percentage of net sales from 40% for
the fiscal year ended March 31, 2001 to 46% for the current period. The increase
was mainly attributable to the sale of certain closeout merchandise to
international customers at lower margins during the current period and the
change in sales mix during the six months ended December 31, 2001. Domestic
department store customers and related parties purchased a higher percentage of
value sets for the holiday season than in prior years as compared to basic stock
merchandise. These value sets have a higher cost of goods. Cost of goods sold on
sales to unrelated customers and related parties approximated 44% and 50%,
respectively, during the fiscal year ended March 31, 2002, as compared to 38%
and 45%, respectively, for the same period in the prior year.
Operating expenses for the current fiscal year period, excluding the
impairment loss on intangibles, increased by 1% compared to the same period in
the prior year from $33,768,345 to $34,276,106, remaining relatively constant at
49% of net sales. Advertising and promotional expenses increased 4% to
$18,209,190 compared to $17,484,616 in the prior year period. The current year
period includes approximately $728,000 in charges relating to the December 2001
bankruptcy filing by an advertising firm that owed us barter advertising
credits. Selling and distribution costs increased 2% to $6,644,561 in the
current period as compared to $6,534,583 for the same period of the prior year,
remaining relatively constant at 9% of net sales. General and administrative
expenses decreased by 5% compared to the prior year period from $5,415,061 to
$5,181,473, decreasing as a percentage of net sales from 8% to 7%. The decrease
was mainly attributable to a $977,000 reduction in bad debt expense for certain
international receivables, partially offset by an increase of $310,000 in legal
fees relating to our litigation against a component supplier. Depreciation and
amortization decreased by $313,697 during the current period from $2,308,793 to
$1,995,096, as approximately $476,000 of amortization on intangibles with
indefinite lives was not required during the current fiscal year period as a
result of new accounting guidelines (See Note 6 of the accompanying consolidated
financial statements for further discussion). The decrease was partially offset
by depreciation of new molds required for Ocean Pacific products. Royalties
remained relatively constant at 3% of net sales. During the current fiscal year
period, we recorded an impairment charge on the intangibles relating to the
Alexandra de Markoff and Bal a Versailles brands totaling $7,441,554.
As a result of the above, we incurred an operating loss of $3,866,540
for the fiscal year ended March 31, 2002, compared to operating income of
$7,380,319 for the comparable prior year period. Net interest expense decreased
to $1,032,975 in the current
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period as compared to $1,100,777 for the same period in the prior year. The
decrease reflects lower interest rates on borrowings offset by the reduction in
interest income generated by a lower average balance on notes receivable from
related parties outstanding during the entire prior year period. During the
first quarter of the current fiscal year period, we recorded a $2,858,447
non-cash charge representing a writedown for an other-than-temporary decline in
the value of our investment in affiliate.
Loss before taxes for the current fiscal year was $7,745,449 compared
to income before taxes of $6,284,816 in the same period for the prior year.
Giving effect to the tax provision and the deferred tax benefit of $207,360
related to the non-cash charge, the net loss amounted to $5,665,401 for the
current fiscal year period, as compared to net income of $3,925,659 for the same
period in the prior year. Excluding the effect of the impairment loss on
intangibles and the non-cash writedown of our investment, net income of
$1,583,822 would have been reported for the current fiscal year period.
Comparison of the year ended March 31, 2001 with the year ended March 31, 2000
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During the fiscal year ended March 31, 2001, net sales increased 4% to
$68,875,110 as compared to $66,385,151 for the fiscal year ended March 31, 2000.
The increase is mainly attributable to the launch of "Chaleur d'Animale" men's
and women's fragrances during the current year, which resulted in an increase in
total Animale brand gross sales of 62%, from $7,368,886 to $11,901,783, and the
launch of "OCEAN PACIFIC" for men in the Spring of 2001, which added gross sales
of $2,071,292. These increases were offset by a $2,815,667 reduction in gross
sales of Fred Hayman brand products, mainly "Hollywood" for men and women, from
$11,021,573 to $8,205,906. Total gross sales of all Perry Ellis brand products
also decreased slightly compared to the same period in the prior year from
$50,683,562 to $50,034,796. The decrease results from a faulty component on both
"Portfolio" men and women, which caused us to cease shipments and accept
returns. The quality problem, which posed no product safety issues, has been
rectified, and we have initiated legal action to recover damages from the
component supplier. Out-of-pocket costs to refurbish the products of
approximately $1.5 million have been included in cost of goods sold for the year
ended March 31, 2001.
Net sales to unrelated customers increased 29% to $46,512,816 in the
current period, compared to $35,958,199 in the same period in the prior year.
Sales to related parties decreased 27% to $22,362,294 in the current period
compared to $30,426,952 in the same period in the prior fiscal year. For further
information with respect to transactions with the related party, see "Business -
Customers" elsewhere herein.
Cost of goods sold decreased as a percentage of net sales from 43% for
the fiscal year ended March 31, 2000 to 40% for the current period. Without the
Portfolio refurbishing costs discussed above, the costs of goods sold percentage
for the current period would have been 38%. The decrease was mainly attributable
to the significant increase in sales to unrelated parties that have a lower cost
of goods. Cost of goods sold on sales to unrelated customers and related parties
approximated 38% and 45%,
13
respectively, during the fiscal year ended March 31, 2001, compared to 43% and
42%, respectively, in the prior year period.
Operating expenses for the current fiscal year period increased 8%
compared to the prior year period from $31,133,646 to $33,768,345, increasing as
a percentage of net sales from 47% to 49%. Advertising and promotional expenses
increased 14% to $17,484,616 compared to $15,307,913 in the prior year period,
reflecting a renewed emphasis on in-store spending as well as print advertising
in support of program launches. Selling and distribution costs increased 8% to
$6,534,583 in the current fiscal period as compared to $6,050,583 in the same
period of the prior fiscal year, remaining relatively constant at 9% of net
sales. General and administrative expenses increased by 22% compared to the
prior year period from $4,442,578 to $5,415,061, increasing as a percentage of
net sales from 7% to 8%. The increase was mainly attributable to an increase of
approximately $423,000 in bad debt expense for certain international receivables
and increased salaries and bonuses. Depreciation and amortization decreased
$1,233,432 as a result of the increased amortization of goodwill due to the
cancellation of the Baryshnikov license agreement in the prior year. Royalties
increased to $2,025,292 for the current period compared to $1,790,347 in the
prior year, remaining relatively constant at 3% of net sales.
As a result of the above, we had operating income of $7,380,319 or 11%
of net sales for the fiscal year period ended March 31, 2001, compared to
$6,599,304 or 10% of net sales for the comparable prior year period. The fiscal
year ended March 31, 2000, includes a $541,013 gain on the sale of
perfumania.com common stock, which was originally purchased during October 1999.
Net interest expense increased by 32% to $1,100,777 in the current fiscal year
as compared to $871,919 in the same period in the prior year, reflecting
penalties and increased interest rates paid on our previous line of credit. See
Liquidity and Capital Resources on pages 14, 15 and 16 for further discussion.
There were exchange gains of $5,274 in the current year as compared to losses of
$30,143 in the same period in the prior year.
Income before taxes increased to $6,284,816 or 9% of net sales for the
current fiscal year compared to $6,238,555 or 9% of net sales in the same period
in the prior year. Giving effect to the tax provision, net income amounted to
$3,925,659 or 6% of net sales for the fiscal year ended March 31, 2001, as
compared to $3,872,611 or 6% of net sales for the same period in the prior
fiscal year.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $37,662,059 at March 31, 2002 compared to
$30,535,978 at March 31, 2001, reflecting the effect of the non-cash charge,
partially offset by the current period's net loss.
In September 1999, we completed the fourth phase of our common stock buy-back
program involving 2,000,000 shares. In connection therewith, the Board of
Directors
14
authorized the repurchase of an additional 2,500,000 shares. As of June 30,
2001, the Company had repurchased a total of 7,978,131 shares under all phases
at a cost of $21,983,523, with 121,869 shares still available for repurchase
under the last program. On July 25, 2001, the Board of Directors authorized a
new 2,500,000 share repurchase, subject to the restrictions and covenants in our
new loan agreement discussed below. No shares have been purchased under the
latest authorization. The accompanying consolidated balance sheets also include
an additional 39,000 shares of treasury stock purchased at a cost of $133,472
prior to fiscal 1996.
In May 1997, we entered into a six-year $25 million loan and Security
Agreement (the Credit Agreement) with General Electric Capital Corporation
(GECC). Due principally to the significant treasury stock purchases under our
stock buy back program, as of March 31, 2000, we were not in compliance with
certain financial covenants. GECC had extended, through various short-term
agreements, the maturity of the Credit Agreement through July 31, 2001, while
reducing the borrowing limit to $14 million, in line with the Company's current
needs at the time.
On July 20, 2001, we entered into a three-year Loan and Security
Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC).
Proceeds from the Loan Agreement were used, in part, to repay amounts
outstanding under the Company's $14 million credit facility with GECC. Under the
Loan Agreement, we are able to borrow, depending upon the availability of a
borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of
LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at our
option. The Loan Agreement contains provisions to reduce both rates by a maximum
of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt
to "Earnings Before Interest, Taxes and Depreciation ("EBITDA").
At March 31, 2002, based on the borrowing base at that date, the credit
line amounted to approximately $16,248,000, and accordingly, we had
approximately $4,440,000 available under the credit line, excluding the effect
of restricted cash of approximately $1,248,000.
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, 2002, we were not in compliance with financial
covenants relating to EBITDA and minimum fixed charge coverage. We obtained a
waiver of this noncompliance from GMACCC and a modification of the covenants for
future periods.
15
Management believes that funds from operations and our financing will
be sufficient to meet our operating needs for the foreseeable future.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment to SFAS No. 133. SFAS No. 137 deferred the effective date of adoption
of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of
SFAS No. 133 on April 1, 2001 did not have a material impact on our financial
statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and further requires separate recognition of
intangible assets that meet one of two criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. This statement also
provides that goodwill, and other intangible assets with an indefinite useful
life, should not be amortized, but shall be periodically tested for impairment.
The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly,
amortization was discontinued for intangible assets with indefinite useful lives
and, as a result, amortization of approximately $478,000 for the year ended
March 31, 2002, was no longer required.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with early adoption encouraged. The Company does
not expect the adoption of SFAS No. 143 to have a material effect on its
financial statements or disclosures.
16
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption encouraged. The
provisions of SFAS No. 144 generally are to be applied prospectively. The
Company does not expect the adoption of SFAS No. 144 to have a material effect
on its financial statements or disclosures.
Effective April 1, 2002, the Company will adopt Emerging Issues Task Force
("EITF") 01-09, Accounting for Consideration Given by a Vendor to a Customer,
which codified and reconciled EITF Issue No. 00-14, Accounting for Certain Sales
Incentives. EITF No. 00-14 provides guidance on accounting for discounts,
coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. Upon
adoption of this pronouncement, the Company will classify gift-with-purchase
activities, which were previously reported as advertising and promotional
expenses, as cost of goods sold. The adoption of EITF 01-09 will have no impact
on operating loss; however, for each of the three years in the period ended
March 31, 2002, gross margin would have decreased by approximately $3.6 million,
$3.7 million, and $3.1 million, respectively, offset by an equal decrease in
advertising and promotional expenses.
EITF 01-09 also codified and reconciled EITF No. 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products. EITF No. 00-25 provides guidance on the
income statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. The adoption of this pronouncement did not have
a material impact on the Company's operations or financial statement
presentation.
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, 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.
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.
17
As of March 31, 2002 and 2001, primary source of funds for working capital and
other needs were lines of credit totaling $20.0 million and $14.0 million,
respectively.
Of the of $12.5 million and $9.6 million of short-term and long-term
borrowings on the Company's balance sheet as of March 31, 2002 and 2001,
respectively, approximately 15% and 30%, respectively, represented fixed rate
instruments. The line of credit bears interest at a floating rate of prime plus
1% (prime plus 4% at March 31, 2001). A hypothetical 10% adverse move in
interest rates would increase fiscal year 2002 and 2001 interest expense by
approximately $0.1 million in each year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are included herein
commencing on page F-1. The financial statement schedule is listed in the Index
to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
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. 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. 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.
18
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements beginning on page F-1 of this
annual report.
2. Financial Statement Schedules
See Index to Financial Statements beginning on Page F-1 of this
annual report.
3. Exhibit Index
The following exhibits are attached:
10.57 Agreement, dated February 27, 2002, between the Company and J.F.C.
Marks, L.L.C.
10.58 Employment Agreement, with Ilia Lekach, dated as of May 1, 2002.
10.59 Employment Agreement, with Frank A. Buttacavoli, dated as of May 1,
2002.
10.60 Consulting Agreement, with Cosmix, Inc., dated as of May 1, 2002.
10.61 Consulting Agreement, with Cambridge Development Corp., dated as of
May 1, 2002.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP, Independent Certified Public
Accountants
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended March 31, 2002.
19
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
Dated: July 1, 2002
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
/s/ Frederick E. Purches
- -------------------------------------------
Frederick E. Purches, Vice Chairman and Director
/s/ Albert F. Vercillo
- --------------------------------------------
Albert F. Vercillo, Director
/s/ Zalman Lekach
- --------------------------------------------
Zalman Lekach, Director
/s/ Glenn Gopman
- ---------------------------------------------
Glenn Gopman, Director
/s/ Esther Egozi Choukroun
- ---------------------------------------------
Esther Egozi Choukroun, Director
20
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FINANCIAL STATEMENTS: Page
----
Report of Independent Auditors F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
FORM 10-K SCHEDULES:
Schedule II - Valuation and Qualifying Accounts F-25
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.
F-1
INDEPENDENT AUDITORS' REPORT
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, 2002 and 2001,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedule for the years then ended listed in Item 14. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and
2001, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with related parties.
Deloitte & Touche LLP
Miami, Florida
June 21, 2002
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Parlux Fragrances, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations and
cash flows of Parlux Fragrances, Inc. and its subsidiaries (collectively the
"Company") for the year ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 8
to the consolidated financial statements included in the Company's Annual Report
on Form 10-K, for the year ended March 31, 2000, the Loan and Security Agreement
(the "Credit Agreement") expires on August 29, 2000. Management is currently
negotiating with other banks to obtain financing to replace the Credit
Agreement. As of June 30, 2000, the Company has not obtained financing from an
alternative source. Management believes that the Company will be able to obtain
financing from alternative sources to replace the Credit Agreement. However,
there is no assurance that alternative financing will be available in the
future, which creates substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 2 to the consolidated financial statements, the Company
conducts significant transactions with a related party.
PricewaterhouseCoopers LLP
Miami, Florida
June 30, 2000
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, March 31,
ASSETS 2002 2001
- ---------------------------------------------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 164,793 $ 30,214
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,430,000 and $1,922,000, respectively 5,527,522 6,640,616
Trade receivables from related parties 12,788,320 13,006,178
Income tax receivable 1,745,401 --
Inventories, net 31,102,875 22,174,181
Prepaid expenses and other current assets, net 8,045,933 8,155,477
Investment in affiliate 907,442 803,390
------------ ------------
TOTAL CURRENT ASSETS 60,282,286 50,810,056
Equipment and leasehold improvements, net 2,361,659 2,649,347
Trademarks, licenses and goodwill, net 9,534,937 20,464,254
Other 69,609 88,366
------------ ------------
TOTAL ASSETS $ 72,248,491 $ 74,012,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 11,493,461 $ 7,862,607
Accounts payable 10,118,080 11,363,779
Accrued expenses 1,008,686 880,673
Income taxes payable -- 167,019
------------ ------------
TOTAL CURRENT LIABILITIES 22,620,227 20,274,078
Borrowings, less current portion 962,275 1,686,142
Deferred tax liability 742,214 1,177,329
------------ ------------
TOTAL LIABILITIES 24,324,716 23,137,549
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 2002 and
March 31, 2001 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
17,993,277 and 17,986,565 shares issued at
March 31, 2002 and March 31, 2001, respectively 179,933 179,866
Additional paid-in capital 74,011,221 74,002,059
(Accumulated deficit) retained earnings (2,203,080) 3,452,321
Accumulated other comprehensive loss (1,110,139) (3,851,830)
Notes receivable from officer (837,165) (790,947)
------------ ------------
70,040,770 72,991,469
Less - 8,017,131 shares of common stock in treasury,
at cost, at March 31, 2002 and March 31, 2001 (22,116,995) (22,116,995)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 47,923,775 50,874,474
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,248,491 $ 74,012,023
============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended March 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales:
Unrelated customers $ 45,971,696 $ 46,512,816 $ 35,958,199
Related parties 24,029,367 22,362,294 30,426,952
------------ ------------ ------------
70,001,063 68,875,110 66,385,151
Cost of goods sold 32,149,943 27,726,446 28,652,201
------------ ------------ ------------
Gross margin 37,851,120 41,148,664 37,732,950
------------ ------------ ------------
Operating expenses:
Advertising and promotional 18,209,190 17,484,616 15,307,913
Selling and distribution 6,644,561 6,534,583 6,050,583
General and administrative, net of licensing fees
of $487,500 in 2002, $650,000 in 2001 and
of $637,500 in 2000 5,181,473 5,415,061 4,442,578
Depreciation and amortization 1,995,096 2,308,793 3,542,225
Royalties 2,245,786 2,025,292 1,790,347
Impairment loss on intangibles 7,441,554 -- --
------------ ------------ ------------
Total operating expenses 41,717,660 33,768,345 31,133,646
------------ ------------ ------------
Operating income (loss) (3,866,540) 7,380,319 6,599,304
Gain on sale of securities -- -- 541,013
Interest income 166,116 376,605 504,944
Interest expense and bank charges (1,199,091) (1,477,382) (1,376,863)
Exchange gain (loss) 12,513 5,274 (30,143)
Other-than-temporary decline in value
of investment in affiliate (2,858,447) -- --
------------ ------------ ------------
(Loss) income before income taxes (7,745,449) 6,284,816 6,238,255
Income taxes benefit (provision) 2,090,048 (2,359,157) (2,365,644)
------------ ------------ ------------
Net (loss) income ($ 5,655,401) $ 3,925,659 $ 3,872,611
============ ============ ============
(Loss) income per common share:
Basic ($ 0.57) $ 0.39 $ 0.32
============ ============ ============
Diluted ($ 0.57) $ 0.38 $ 0.31
============ ============ ============
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
-----------------------------------------
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
---------- --------- --------- -----------
BALANCE at March 31, 1999 17,462,478 $174,625 $73,030,586 ($4,345,949)
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on
investment in affiliate, net
of taxes of $1,340,521 -- -- -- --
Foreign currency translation
adjustment -- -- -- --
Total comprehensive income
Issuance of common stock
upon exercise of:
Employee stock options 10,625 106 14,504
Warrants 500,000 5,000 932,500
Purchase of 4,049,767 shares
of treasury stock, at cost -- -- -- --
Net increase in notes
receivable from officer -- -- -- --
---------- --------- ----------- -----------
BALANCE at March 31, 2000 17,973,103 179,731 73,977,590 (473,338)
Comprehensive income (loss):
Net income -- -- -- 3,925,659
Unrealized holding loss on
investment in affiliate, net
of a tax benefit of $1,547,881 -- -- -- --
Foreign currency
translation adjustment -- -- -- --
Total comprehensive loss
Issuance of common stock
upon exercise of employee
stock options 13,462 135 24,469 --
Purchase of 312,333 shares of
treasury stock, at cost -- -- -- --
Net decrease in notes
receivable from officer -- -- -- --
---------- --------- ----------- -----------
BALANCE at March 31, 2001 17,986,565 179,866 74,002,059 3,452,321
Comprehensive income (loss):
Net loss -- -- -- (5,655,401)
Reversal of unrealized holding
loss on investment in
affiliate, net of taxes -- -- -- --
Unrealized holding loss on
investment in affiliate -- -- -- --
Foreign currency translation
adjustment -- -- -- --
Total comprehensive loss -- -- -- --
Issuance of common stock upon
exercise of employee
stock options 6,712 67 9,162 --
Net increase in notes
receivable from officer -- -- -- --
---------- --------- ----------- -----------
BALANCE at March 31, 2002 17,993,277 $ 179,933 $74,011,221 $(2,203,080)
========== ========= =========== ===========
[RESTUB]
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FROM TREASURY
(LOSS) INCOME OFFICER STOCK TOTAL
-------------- ---------- --------- -----------
BALANCE at March 31, 1999 ($351,505) ($426,446) ($8,227,067) $59,854,244
Comprehensive income:
Net income -- -- -- 3,872,611
Unrealized holding gains on
investment in affiliate, net
of taxes of $1,340,521 2,187,166 -- -- 2,187,166
Foreign currency translation
adjustment (1,054) -- -- (1,054)
---------
Total comprehensive income 6,058,723
---------
Issuance of common stock
upon exercise of:
Employee stock options 14,610
Warrants 937,500
Purchase of 4,049,767 shares
of treasury stock, at cost -- -- (12,747,634) (12,747,634)
Net increase in notes
receivable from officer -- (472,659) -- (472,659)
------------ ---------- ----------- -----------
BALANCE at March 31, 2000 1,834,607 (899,105) (20,974,701) 53,644,784
Comprehensive income (loss):
Net income -- -- -- 3,925,659
Unrealized holding loss on
investment in affiliate, net
of a tax benefit of $1,547,881 (5,683,386) -- -- (5,683,386)
Foreign currency
translation adjustment (3,051) -- -- (3,051)
-----------
Total comprehensive loss (1,760,778)
-----------
Issuance of common stock
upon exercise of employee
stock options -- -- -- 24,604
Purchase of 312,333 shares of
treasury stock, at cost -- -- (1,142,294) (1,142,294)
Net decrease in notes
receivable from officer -- 108,158 -- 108,158
------------ ---------- ----------- -----------
BALANCE at March 31, 2001 (3,851,830) (790,947) (22,116,995) 50,874,474
Comprehensive income (loss):
Net loss -- -- -- (5,655,401)
Reversal of unrealized holding
loss on investment in
affiliate, net of taxes 3,496,220 -- -- 3,496,220
Unrealized holding loss on
investment in affiliate (741,081) -- -- (741,081)
Foreign currency translation
adjustment (13,448) -- -- (13,448)
----------
Total comprehensive loss -- -- (2,913,710)
----------
Issuance of common stock upon
exercise of employee
stock options -- -- -- 9,229
Net increase in notes
receivable from officer -- (46,218) -- (46,218)
------------ ---------- ----------- -----------
BALANCE at March 31, 2002 $(1,110,139) $(837,165) $(22,116,995) $47,923,775
=========== ========= ============ ===========
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended March 31,
------------------------------------------------
2002 2001 2000
------------ ----------- -----------
Cash flows from operating activities:
Net (loss) income ($5,655,401) $3,925,659 $3,872,611
------------ ----------- ----------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,995,096 2,308,793 3,542,225
Other-than-temporary decline in market value of investment
in affiliate 2,858,447 -- --
Impairment loss on intangibles 7,441,554 -- --
Provision for doubtful accounts 590,000 1,567,000 1,143,790
Reserve for prepaid promotional supplies
and inventory obsolescence 1,970,000 1,600,000 1,400,000
Gain on sale of securities -- -- (541,013)
Deferred income tax (benefit) provision (801,520) 869,568 75,426
Changes in assets and liabilities net of
effect of acquisitions:
Decrease (increase) in trade receivables - customers 525,174 (2,141,467) 13,012
Decrease (increase) in note and trade receivables -
related parties 217,858 (944,628) 1,689,693
Increase in income tax receivable (1,745,401) -- --
(Increase) decrease in inventories (10,328,694) 473,251 (3,272,357)
(Increase) decrease in prepaid expenses and
other current assets (301,411) (1,143,041) 1,230,135
Decrease in other non-current assets 18,757 24,056 527
(Decrease) increase in accounts payable (1,245,699) 809,711 5,239,298
(Decrease) increase in accrued expenses and
income taxes payable (39,006) (1,642,602) 730,672
------------ ----------- -----------
Total adjustments 1,155,155 1,780,641 11,251,408
------------ ----------- -----------
Net cash (used in) provided by
operating activities (4,500,246) 5,706,300 15,124,019
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities -- -- 2,276,018
Purchase of securities -- -- (1,735,005)
Purchases of equipment and leasehold improvements, net (1,222,751) (1,596,742) (1,543,340)
Purchases of trademarks (6,974) (67,756) (137,976)
Cash received from sale of Adm brand 3,008,000 -- --
------------ ----------- -----------
Net cash provided by (used in)
investing activities 1,778,275 (1,664,498) (1,140,303)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds - note payable to GMAC Commercial Credit, net 10,559,914 -- --
Payments - note payable to GE Capital Corporation, net (6,782,973) (2,142,640) (936,471)
Payments - note payable to Fred Hayman Beverly Hills (687,489) (639,550) (594,953)
Payments - note payable to United Capital Corporation (111,231) (204,890) (183,508)
Payments - notes payable to Bankers Capital Leasing (52,365) (29,389) (122,117)
Payments - other notes payable (18,869) -- (44,114)
Net (increase) decrease in notes receivable from officer (46,218) 108,158 (472,659)
Purchases of treasury stock -- (1,142,294) (12,747,634)
Proceeds from issuance of common stock, net 9,229 24,604 952,110
------------ ----------- -----------
Net cash provided by (used in)
financing activities 2,869,998 (4,026,001) (14,149,346)
------------ ----------- -----------
Effect of exchange rate changes on cash (13,448) (3,051) (1,054)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 134,579 12,750 (166,684)
Cash and cash equivalents, beginning of year 30,214 17,464 184,148
------------ ----------- -----------
Cash and cash equivalents, end of year $164,793 $30,214 $17,464
============ =========== ===========
See notes to consolidated financial statements.
F-7
PARLUX FRAGRANCES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
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 ("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, goodwill, and
equipment. Actual results could differ from those estimates.
D. REVENUE RECOGNITION
-------------------
Revenue is recognized when the product is shipped to a customer.
Estimated amounts for sales returns and allowances are recorded at the
time of sale.
Licensing income, which is included as an offset to general and
administrative expenses, is recognized ratably over the terms of the
contractual license agreements.
E. 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 and handling charges, including an allocation of the Company's
applicable overhead in an amount of $2,409,000 and $2,275,000 at March
31, 2002 and 2001, respectively.
F. INVESTMENT IN AFFILIATE
-----------------------
Investment in Affiliate consists of an investment in common stock of E
Com Ventures, Inc., 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.
F-8
G. BARTER SALES AND CREDITS
------------------------
The Company has sold certain of its products to a barter broker in
exchange for advertising that the Company will use. The Company does
not record the transfer of such products as sales, nor does it record
a profit on such transactions. The advertising credits received, which
are recorded as a prepaid expense on the Company's balance sheet at
the time such inventory is shipped, are valued at the cost of goods
bartered.
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, LICENSES AND GOODWILL
---------------------------------
Trademarks, licenses and goodwill are recorded at cost and those with
a definite life are amortized over the estimated periods of benefit,
principally 25 years. Accumulated amortization of trademarks, licenses
and goodwill was $3,347,897 and $6,251,772 at March 31, 2002 and 2001,
respectively. Amortization expense was $484,657, $1,072,239 and
$2,595,311 for the years ended March 31, 2002, 2001, and 2000,
respectively.
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, 2002.
J. ADVERTISING 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.
K. 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.
L. 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.
M. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, note receivable
from related party, notes receivable from officer, 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.
F-9
N. 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.
O. 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:
2002 2001 2000
---- ---- ----
Expected life (years) 5 5 5
Interest rate 5% 5% 5%
Volatility 70% 75% 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 (loss) income and
(loss) income per share would have been as follows:
For the years ended March 31,
2001 2000 2002
---- ---- ----
Net (loss) income:
As reported $ (5,655,401) $ 3,925,659 $ 3,872,611
Proforma $ (6,262,080) $ 3,895,617 $ 3,853,610
Basic net (loss) income per share:
As reported $ (0.57) $ 0.39 $ 0.32
Proforma $ (0.63) $ 0.39 $ 0.32
Diluted net (loss) income per share:
As reported $ (0.57) $ 0.38 $ 0.31
Proforma $ (0.63) $ 0.37 $ 0.31
P. 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:
2002 2001 2000
---- ---- ----
Cash paid for:
Interest $1,288,250 $1,546,029 $1,334,769
========== ========== ==========
Income taxes $ 623,580 $2,633,381 $1,216,348
========== ========== ==========
Supplemental disclosures of non-cash investing and financing
activities are as follows:
F-10
Year ended March 31, 2002:
o The conversion of trade accounts receivable from Perfumania in
the amount of $3,000,000, as discussed in Note 2.
0 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.
Year ended March 31, 2001:
o The Company incurred an unrealized holding loss of $5,683,386 on
the investment in affiliate, net of tax benefits.
o The Company entered into a barter agreement for which it
exchanged inventory of Baryshnikov brand products with a cost of
approximately $728,000 in exchange for advertising credits.
Year ended March 31, 2000:
o The Company incurred an unrealized holding gain of $2,187,166 on
the investment in affiliate, net of taxes.
o The conversion of trade accounts receivable in the amounts of
$4,506,970 and $8,000,000 discussed in Note 2.
Q. SEGMENT INFORMATION
-------------------
As of March 31, 2002, the Company operates solely in one segment, the
marketing and manufacture of prestige fragrances and beauty related
products.
R. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive
hedge accounting treatment. In June 1999, the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an amendment
to SFAS No. 133. SFAS No. 137 deferred the effective date of adoption
of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 on April 1, 2001 did not have a material
impact on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method and further
requires separate recognition of intangible assets that meet one of
two criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001.
F-11
SFAS No. 142 requires that an intangible asset that is acquired shall
be initially recognized and measured based on its fair value. This
statement also provides that goodwill, and other intangible assets
with an indefinite useful life, should not be amortized, but shall be
periodically tested for impairment.
The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly,
amortization was discontinued for intangible assets with indefinite
useful lives and, as a result, amortization of approximately $478,000
for the year ended March 31, 2002, was no longer required.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and
reporting for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
SFAS No. 143 is effective for fiscal years beginning after June 15,
2002, with early adoption encouraged. The Company does not expect the
adoption of SFAS No. 143 to have a material effect on its financial
statements or disclosures.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those
fiscal years, with early adoption encouraged. The provisions of SFAS
No. 144 generally are to be applied prospectively. The Company does
not expect the adoption of SFAS No. 144 to have a material effect on
its financial statements or disclosures.
Effective April 1, 2002, the Company will adopt Emerging Issues Task
Force ("EITF") 01-09, Accounting for Consideration Given by a Vendor
to a Customer, which codified and reconciled EITF Issue No. 00-14,
Accounting for Certain Sales Incentives. EITF No. 00-14 provides
guidance on accounting for discounts, coupons, rebates and free
products, as well as the income statement classification of these
discounts, coupons, rebates and free products. Upon adoption of this
pronouncement, the Company will classify gift-with-purchase
activities, which were previously reported as advertising and
promotional expenses, as cost of goods sold. The adoption of EITF
01-09 will have no impact on operating loss; however, for each of the
three years in the period ended March 31, 2002, gross margin would
have decreased by approximately $3.6 million, $3.7 million, and $3.1
million, respectively, offset by an equal decrease in advertising and
promotional expenses.
EITF 01-09 also codified and reconciled EITF No. 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products. EITF No. 00-25
provides guidance on the income statement classification of
consideration from a vendor to a retailer in connection with the
retailer's purchase of the vendor's products or to promote sales of
the vendor's products. The adoption of this pronouncement did not have
a material impact on the Company's operations or financial statement
presentation.
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
----------------------------------------------------
As of March 31, 2002, the Company had loaned a total of $837,165 ($790,947
at March 31, 2001) to its Chairman/CEO, which is recorded as a component of
stockholders' equity in the accompanying consolidated balance sheets. The
notes are unsecured, bear interest at 8% per annum, and were due in one
balloon payment on March 31, 2002, which has been extended until March 31,
2003. Interest payments were made through December 31, 2001; accrued
interest of $47,428 is included in the total loan balance as of that date.
The Company had net sales of $18,063,310, $22,362,294, and $30,426,952
during the fiscal years ended March 31, 2002, 2001 and 2000, respectively,
to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com
Ventures, Inc. ("ECMV"), a company in which the Company's Chairman and
Chief Executive Officer has an ownership interest and holds identical
management positions. Net trade accounts receivable owed by Perfumania to
the Company totaled $12,491,993 and $13,006,178 at March 31, 2002 and 2001,
respectively. Amounts due from related parties are non-interest bearing and
are due in less than one year.
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
F-12
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, 2002, the
fair market value of the investment in ECMV was $907,442 ($2.40 per share
after the reverse split). The Company believes that, based on the
evaluation of ECMV's operations, that this current decline in market price
is temporary. As of June 21, 2002, the fair market value of the investment
in ECMV is $1,553,995 ($4.11 per share after the reverse split).
As of June 30, 2001, the Company and Perfumania had entered into a $3
million subordinated note agreement which converted $3 million of the
outstanding trade receivable due from Perfumania to the Company as of that
date. The note was repayable in installments of $50,000 on October 31,
2001, $300,000 on November 30, 2001, $2,500,000 on December 31, 2001, and
$50,000 on each of January 31, 2002, February 28, 2002, and March 31, 2002.
Accrued interest is paid with each principal installment. As of March 31,
2002, the loan had been repaid in accordance with its terms.
The Company had net sales of $5,966,057 during the year ended March 31,
2002, to fragrance distributors owned/operated by individuals related to
the Company's Chairman/CEO, including $4,355,239 to a director of the
Company. These sales are included as related party sales in the
accompanying statement of operations. As of March 31, 2002, trade
receivables from related parties include $296,327 from these customers.
In October 1999, the Company purchased, in the open market, 250,000 shares
of perfumania.com common stock for $1,735,005. These shares were sold
during November 1999, resulting in a gain of $541,013, which is included in
the accompanying consolidated statement of operations for the fiscal year
ended March 31, 2000.
3. INVENTORIES
-----------
The components of inventories are as follows:
March 31,
---------
2002 2001
---- ----
Finished products $17,532,428 $11,485,963
Components and packaging material 9,616,274 6,959,423
Raw material 3,954,173 3,728,795
----------- -----------
$31,102,875 $22,174,181
=========== ===========
The above amounts are net of reserves for estimated inventory obsolescence
of approximately $2,140,000 and $2,805,000 at March 31, 2002 and 2001,
respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
---------
2002 2001
---- ----
Promotional supplies, net $4,857,274 $4,036,834
Deferred tax assets 1,685,490 1,526,445
Prepaid advertising (including unused barter credits
of $728,000 in 2001) 514,138 1,491,060
Other 989,031 1,101,138
---------- ----------
$8,045,933 $8,155,477
========== ==========
F-13
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
------------------------------------
Equipment and leasehold improvements are comprised of the following:
March 31 Estimated useful
-------- ----------------
2002 2001 lives (in years)
----------- ---------- ----------------
Molds and equipment $ 7,971,908 $ 6,910,493 3-7
Furniture and fixtures 1,352,100 1,314,997 3-5
Leasehold improvements 452,935 328,702 5-7
----------- ----------
9,776,943 8,554,192
Less: accumulated depreciation and amortization (7,415,284) (5,904,845)
----------- ----------
$ 2,361,659 $2,649,347
=========== ==========
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended March 31, 2002, 2001 and 2001 was
$1,510,439, $1,236,555, and $946,913, respectively. Amounts subject to
capital leases at March 31, 2002 and 2001, included in molds and equipment
above, totaled $778,578 and $528,589, respectively, net of accumulated
amortization of $467,762 and $284,500.
6. TRADEMARKS, LICENSES AND GOODWILL
---------------------------------
Trademarks, licenses and goodwill are attributable to the following brands:
March 31,
---------
2002 2001
------------ ------------
Owned Brands:
Fred Hayman Beverly Hills ("FHBH") $ 2,820,361 $ 2,820,361
Animale 1,582,367 1,574,693
Alexandra de Markoff -- 11,191,174
Bal A Versailles 300,000 2,948,942
Other 216,646 216,546
Licensed Brands:
Perry Ellis 7,963,560 7,964,310
------------ ------------
12,882,834 26,716,026
Less: accumulated amortization (3,347,897) (6,251,772)
------------ ------------
$ 9,534,937 $ 20,464,254
============ ============
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 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 has been recorded in
the accompanying statements 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 is for ten years, renewable
every five years.
F-14
The Company is currently negotiating a sale, similar to that of AdM,
whereby Genesis would purchase the BAV trademark outright. In anticipation
of such an agreement, an impairment charge against the intangibles related
to BAV in the amount of $1,942,462 has been recorded in the accompanying
statement of operations for the year ended March 31, 2002.
SFAS No. 142, "Goodwill and Other Intangible Assets", requires that an
intangible asset that is acquired shall be initially recognized and
measured based on its fair value. This statement also provides that
goodwill, and other intangible assets with an indefinite useful life,
should not be amortized, but shall be periodically tested for impairment.
The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly,
amortization was discontinued for intangible assets with indefinite useful
lives and, as a result, amortization of approximately $478,000 for the year
ended March 31, 2002, was no longer required.
Had the Company been accounting for its goodwill under SFAS No. 142 for all
periods presented, the Company's net income and income per share would have
been as follows (in 000's):
Year Ended
March 31, 2001 March 31, 2000
-------------- --------------
Reported net income $ 3,926 $ 3,873
Add back goodwill amortization, net of tax 296 296
--------- ---------
Pro forma adjusted net income $ 4,222 $ 4,169
========= =========
Diluted net income per share:
Reported net income $ 0.38 $ 0.31
Goodwill amortization, net of tax 0.03 0.02
--------- ---------
Pro forma adjusted diluted net income per share $ 0.41 $ 0.33
========= =========
The Company has completed the transitional impairment test of its
intangible assets with indefinite lives in accordance with SFAS No. 142 and
has determined that such assets are not impaired.
7. BORROWINGS
The composition of borrowings is as follows:
March 31, 2002 March 31, 2001
-------------- --------------
Revolving credit facility payable to GMAC Commercial Credit, interest at
LIBOR plus 3.75%, or prime (4.75% at March 31, 2002) plus 1% at the
Company's option, net of restricted cash of $1,248,477 at March 31, 2002 $10,559,914 $ ----
Revolving credit facility payable to General Electric Capital Corporation,
interest at prime plus 4%, net of restricted cash of $1,983,334 at March
31, 2001 ---- 6,782,973
Note payable to Fred Hayman Beverly Hills (FHBH), collateralized by the
acquired licensed trademarks, interest at 7.25%, payable in equal monthly
installments of $69,863, including interest, through June 2004 1,704,368 2,391,857
F-15
Capital lease payable to Bankers Leasing, collateralized by certain
warehouse equipment, payable in quarterly installments of $33,992,
including interest, through July 2003. 155,889 ----
Capital lease payable to Bankers Leasing, collateralized by certain
shipping equipment, payable in quarterly installments of $18,249, including
interest, through October 2002. 35,565 102,127
Capital lease payable to Bankers Leasing, collateralized by certain
computer hardware and software, payable in quarterly installments of
$36,378, including interest, through January 2002. ---- 141,692
Note payable to United Capital Corporation, collateralized by certain
equipment, interest at 11%, payable in equal monthly installments of
$19,142, including interest, through September 2001 ---- 111,231
Other notes payable ---- 18,869
----------- ------------
12,455,736 9,548,749
Less: long-term borrowings ( 962,275) (1,686,142)
----------- ------------
Short-term borrowings $11,493,461 $ 7,862,607
=========== ============
In May 1997, the Company entered into a $25 million Loan and Security
Agreement ( the Credit Agreement ) with General Electric Capital
Corporation (GECC). Due principally to the significant treasury stock
purchases under the Company's stock buy back program, as of March 31, 2000,
the Company was not in compliance with certain financial covenants. GECC
had extended, through various short-term agreements, the maturity of the
Credit Agreement through July 31, 2001, while reducing the borrowing limit
to $14 million, more in line with the Company's current needs at the time.
On July 20, 2001, the Company entered into a three-year Loan and Security
Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC).
Proceeds from the Loan Agreement were used, in part, to repay amounts
outstanding under the Company's $14 million credit facility with GECC.
Under the Loan Agreement, the Company is able to borrow, depending on the
availability of a borrowing base, on a revolving basis, up to $20,000,000
at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of
New York's prime rate, at the Company's option. The Loan Agreement contains
provisions to reduce both rates by a maximum of 1% or increase both rates
by a maximum of .5% based on a ratio of funded debt to EBITDA.
At March 31, 2002, based on the borrowing base at that date, the credit
line amounted to approximately $16,248,000 and, accordingly, the Company
had approximately $4,440,000 available under the credit line, excluding the
effect of restricted cash of $1,248,000.
Substantially all of the domestic assets of the Company collateralize this
borrowing. The Loan Agreement contains customary events of default and
covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating
liens, and engaging in mergers and acquisitions without the prior consent
of GMACCC. The Loan Agreement also contains certain financial covenants
relating to net worth, interest coverage and other financial ratios.
As of March 31, 2002, the Company was not in compliance with financial
covenants relating to EBITDA and minimum fixed charge coverage. On June 1,
2002, the Company obtained a waiver of this noncompliance from GMACCC and a
modification of the covenants for future periods.
Management believes that based on current circumstances, funds from
operations and its financing will be sufficient to meet the Company's
operating needs for the foreseeable future.
Future maturities of borrowings are as follows (in 000's):
F-16
For the year ending March 31,
-----------------------------
2003 $11,493
2004 799
2005 164
2006 -------
Total $12,456
=======
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. LEASES:
-------
The Company leases its office space and certain equipment under certain
operating leases expiring on various dates through October 31, 2005. Total
rent expense charged to operations for the years ended March 31, 2002, 2001
and 2000 was approximately $891,000, $963,000, and $924,000, respectively.
At March 31, 2001, the future minimum annual rental commitments under
noncancellable operating leases are as follows (in 000's):
For the year ending March 31, Amount
----------------------------- ------
2003 $702
2004 691
2005 657
2006 443
2007 16
------
Total $2,509
======
B. LICENSE AND DISTRIBUTION AGREEMENTS:
-----------------------------------
During the year ended March 31, 2002, the Company held exclusive worldwide
licenses to manufacture and sell fragrance and other related products for
Perry Ellis, Ocean Pacific ("OP"), and Jockey.
Effective January 1, 2000, the Company entered into an exclusive licensing
agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and distribute men's
and women's fragrances and other related products under the PEZ trademark
throughout the Western Hemisphere. Effective April 1, 2001, the Company and
PEZ agreed to terminate the agreement with no further liability to either
party.
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. 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):
Fiscal year ending March 31, 2003 2004 2005 2006 2007
---------------------------- ---- ---- ---- ---- ----
Advertising $9,606 $9,806 $9,306 $9,506 $8,106
Royalties $1,260 $1,296 $1,245 $1,325 $375
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 these two brands.
F-17
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 $3,926,000 ($1,208,000 for the
year ending March 31, 2003, and $906,000 for each of three years ending
March 31, 2006). In addition, warrants to purchase shares of common stock
at prices ranging from $1.86 to $2.44 were granted 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 and
double in the event of a change in control.
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, 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, 2002, 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 April 1, 1994, the Company entered into a consulting agreement with a
former executive, which provided for monthly payments of $16,667 through
September 30, 1997. In addition, the former executive had previously
received warrants, in connection with a previous employment contract, to
purchase 500,000 shares of common stock, at an exercise price of $1.875 per
share. These warrants were exercised during March 2000, and the Company
repurchased these shares at $4.00 per share, the closing price of the
shares on March 23, 2000.
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. CONTINGENCIES:
--------------
The Company is a party to legal and administrative proceedings arising in
the ordinary course of business. The outcome of these actions are not
expected to have a material effect on the Company's financial position or
results of operations.
F-18
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,
---------------------
2002 2001 2000
----------- ----------- -----------
Current taxes (benefit):
U.S. federal ($1,380,986) $ 1,311,059 $ 2,271,211
U.S. state and local 85,941 121,440 --
Foreign 6,517 57,090 36,500
----------- ----------- -----------
(1,288,528) 1,489,589 2,307,711
Deferred tax (benefit) (801,520) 869,568 57,933
----------- ----------- -----------
Income tax expense (benefit) ($2,090,048) $ 2,359,157 $ 2,365,644
=========== =========== ===========
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:
2002 2001 2000
----- ---- ----
Statutory federal income tax rate (35.0%) 35.0% 35.0%
Increase (decrease) resulting from:
Change in valuation allowance 10.4% -- --
Other (2.4%) 2.5% 2.9%
----- ---- ----
(27.0%) 37.5% 37.9%
====== ==== ====
Deferred income taxes as of March 31 are provided for temporary differences
between the 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:
Deferred Tax Assets
2002 2001
----------- -----------
Allowance for doubtful accounts, sales returns and allowances $ 379,285 $ 557,529
State net operating loss carry forwards 163,747 --
Reserve for inventory obsolescence 911,200 575,399
Other than temporary decline on investment in affiliate 1,083,137 --
Other, net 23,898 186,157
----------- -----------
Subtotal 2,561,267 1,319,085
----------- -----------
Deferred Tax Liabilities
Depreciation and amortization (742,214) (1,114,453)
Other -- (62,876)
----------- -----------
Subtotal (742,214) (1,177,329)
----------- -----------
Net deferred tax asset before valuation allowance 1,819,053 141,756
Less: Valuation allowance (875,777) --
----------- -----------
Net deferred tax asset after valuation allowance 943,276 141,756
----------- -----------
Unrealized loss on investment in affiliate 281,611 1,407,360
Less: valuation allowance (281,611) (1,200,000)
----------- -----------
Subtotal -- 207,360
----------- -----------
-----------
Net deferred tax asset after valuation allowance $ 943,276 $ 349,116
=========== ===========
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.
F-19
10. STOCK OPTION AND OTHER PLANS
----------------------------
The Company has adopted a Stock Option Plan and a 1989 Stock Option Plan
(collectively, the "Plan") and has reserved and registered 250,000 shares
of its common stock for issue thereunder. Options granted under the Plan
are not exercisable after the expiration of five years from the date of
grant and vest 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 are
also available for distribution pursuant to options which do not so
qualify. Under the Plan, options can 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 do 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, 2002, 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, 2002, 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.
On May 16, 2000, the Company granted to various employees, options under
the 1996 Plan to acquire 88,975 shares of common stock at $2.8125 per
share, the closing bid price of the stock on May 15, 2000.
As of March 31, 2001, and since the inception of the 1996 Plan, options
have been granted net of cancellations, to purchase 247,437 shares at
exercise prices ranging from $1.375 to $2.813 per share. Through March 31,
2002, 23,298 options had been exercised and 84,138 options were vested.
The following table summarizes the activity for options covered under all
of the above plans:
Plan 1996 Plan
------------------------------- ------------------------------
Weighted Average Weighted Average
Amount Exercise Price Amount Exercise Price
------ -------------- ------ --------------
Balance at March 31, 1999 10,000 $3.08 62,250 $1.38
Granted - 96,600 $1.38
Exercised - (10,625) $1.38
Canceled/Expired - (20,200) $1.38
-------- --------
Balance at March 31, 2000 10,000 $3.08 128,025 $1.38
Granted - 88,975 $2.82
Exercised (7,500) $2.19 (5,962) $1.38
Canceled/Expired (2,500) $5.75 (5,688) $1.38
-------- --------
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
========
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.
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 (E):
Weighted Average
Amount Exercise Price
------ ----------------
Balance at March 31, 1999 2,770,000 $4.21
Granted 366,000 $2.43
(500,000) $1.88
Cancelled/Expired -- --
---------
Balance at March 31, 2000 2,636,000 $4.41
Granted 10,000 $2.25
Exercised -- --
Cancelled/Expired -- --
-------- --
Balance at March 31, 2001 2,646,000 $4.41
Granted 620,000 $2.43
Exercised -- --
Canceled/Expired (1,000,000) $8.00
---------
Balance at March 31, 2002 2,266,000 $2.28
=========
The following table summarizes information about these options and warrants
outstanding at March 31, 2001:
Options And
Options and Warrants Outstanding Warrants Exercisable
-------------------------------- --------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Exercise Prices Amount Exercise Price Remaining Life Amount Exercise Price
--------------- ------ -------------- -------------- ------ --------------
$1.38-$2.81 2,222,838 $2.14 5 2,024,138 $2.12
$3.13-$4.56 202,000 $3.23 4 202,000 $3.23
$6.75 10,000 $6.75 5 10,000 $6.75
$8.00 4,000 $8.00 3 4,000 $8.00
--------- ----- - --------- -----
2,438,838 $2.26 5 2,240,138 $2.25
========= ===== = ========= =====
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 $54,000,
$53,000, and $56,000 for the years ended March 31, 2002, 2001, and 2000,
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:
2002 2001 2000
---- ---- ----
Net (loss) income ($5,655,401) $3,925,659 $3,872,611
============ ========== ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,973,046 10,068,422 11,965,713
============ ========== ==========
Basic net income (loss) per common share ($0.57) $0.39 $0.32
======= ===== =====
Weighted average number of shares outstanding used in basic
earnings per share calculation 10,068,422 11,965,713
Effect of dilutive securities: (1)
Stock options and warrants, net of treasury shares acquired 320,630 547,260
---------- ----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,389,052 12,512,973
========== ==========
Diluted net income per common share $0.38 $0.31
===== =====
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,255,566 1,301,850 1,218,500
============ ========== ==========
Exercise Price $2.25-$8.00 $2.81-$8.00 $3.13-$8.00
============ ========== ==========
(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.
F-22
12. 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:
2002 2001 2000
---- ---- ----
PERRY ELLIS 67% 69% 73%
ANIMALE 13% 16% 11%
OCEAN PACIFIC 12% 3% ---
FRED HAYMAN 8% 11% 16%
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.
During the year ended March 31, 2002, one unrelated customer accounted for
approximately 14% of the Company's net sales. No unrelated customer accounted
for more than 10% of the Company's net sales during the years ended March 31,
2001 and 2000.
Revenues from Perfumania represented 26%, 32%, and 46% of the Company's net
sales during the years ended March 31, 2002, 2001, and 2000, respectively. To
reduce credit risk, on occasion, the Company, based on its reviews of
Perfumania's financial condition, convert 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 year ended March 31, 2002, revenues from other related
parties represented approximately 9% of the Company's net sales.
Gross sales to international customers totaled approximately $31,329,000,
$30,726,000, and $20,007,000, for the years ended March 31, 2002, 2001, and
2000, respectively. At March 31, 2002 and 2001, trade receivables from foreign
customers (all payable in U.S. dollars) amounted to approximately $4,388,000 and
$4,580,000, respectively.
F-22
13. 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, 2002 and 2001 (in thousands, except
per share amounts).
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
2001 2001 2001 2002
-------- ------------- ------------ --------
2001 2001 2001 2002
Net sales $ 18,013 $ 19,041 $ 16,280 $11,750
Gross margin 10,497 9,982 7,731 9,641
Net (loss) income (1,717) 1,414 (6,155) 803
Income (loss) common share:
Basic ($0.17) $ 0.14 ($ 0.62) $ 0.08
Diluted ($0.17) $ 0.13 ($ 0.62) $ 0.08
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
2000 2000 2000 2001
-------- ------------- ------------ --------
Net sales $15,711 $18,199 $20,150 $14,815
Gross margin 9,636 11,202 11,891 8,420
Net income 801 1,803 702 620
Income per common share:
Basic $0.08 $0.18 $0.07 $0.06
Diluted $0.07 $0.17 $0.07 $0.06
F-23
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at beginning Additions charged to Net Balance at
Description of period costs and expenses Deductions end of period
----------- ----------- ----------- -----------
Year ended March 31, 2002
Reserves for:
Doubtful accounts $ 571,848 $ 590,000 $ 1,058,378 $ 103,470
Sales returns 537,195 4,229,790 4,118,749 648,236
Demonstration and co-op
advertising allowances 812,961 3,666,788 3,801,100 678,649
----------- ----------- ----------- -----------
$ 1,922,004 $ 8,486,578 $ 8,978,227 $ 1,430,355
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 2,804,773 $ 1,400,000 $ 2,064,313 $ 2,140,460
=========== =========== =========== ===========
Reserve for prepaid
promotional supplies $ 396,580 $ 570,000 $ -- $ 966,580
=========== =========== =========== ===========
Year ended March 31, 2001
Reserves for:
Doubtful accounts $ 1,921,229 $ 1,567,000 $ 2,916,381 $ 571,848
Sales returns 421,162 3,127,030 3,010,997 537,195
Demonstration and co-op
advertising allowances 977,415 5,228,315 5,392,769 812,961
----------- ----------- ----------- -----------
$ 3,319,806 $ 9,922,345 $11,320,147 $ 1,922,004
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 1,519,694 $ 1,500,000 $ 214,921 $ 2,804,773
=========== =========== =========== ===========
Reserve for prepaid
promotional supplies $ 600,000 $ 100,000 $ 303,420 $ 396,580
=========== =========== =========== ===========
Year ended March 31, 2000
Reserves for:
Doubtful accounts $ 750,273 $ 1,543,790 $ 372,834 $ 1,921,229
Sales returns 411,320 3,512,170 3,502,328 421,162
Demonstration and co-op
advertising allowances 951,343 4,484,795 4,458,723 977,415
----------- ----------- ----------- -----------
$ 2,112,936 $ 9,540,755 $ 8,333,885 $ 3,319,806
=========== =========== =========== ===========
Reserve for inventory shrinkage
and obsolescence $ 976,259 $ 800,000 $ 256,565 $ 1,519,694
=========== =========== =========== ===========
Reserve for prepaid
promotional supplies $ -- $ 600,000 $ -- $ 600,000
=========== =========== =========== ===========
F-24