UNITED STATES
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, 2003
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
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 27, 2003
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Common Stock, $ .01 par value 8,554,259
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $14,265,000 based on a
closing price of $3.04 for the Common Stock as of JUNE 27, 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 5%
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
---- ----
PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Stock and Related Security
Holder Matters 11
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
7. A Quantitative and Qualitative Disclosures About Market Risks 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 22
PART III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 23
12. Security Ownership of Certain Beneficial Owners and Management 23
13. Certain Relationships and Related Transactions 23
14. Controls and Procedures 23
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
2
FORWARD-LOOKING STATEMENTS
Certain statements within this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward-looking statements are based on current expectations
regarding important risk factors. Investors are cautioned that forward-looking
statements involve such 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. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved.
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 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. During
the fiscal year ended March 31, 2003, we engaged in the manufacture (through
sub-contractors), distribution and sale of PERRY ELLIS, FRED HAYMAN BEVERLY
HILLS ("FHBH"), OCEAN PACIFIC, and JOCKEY fragrances and grooming items on an
exclusive basis as a licensee. See "LICENSING AGREEMENTS" on page 7 for further
discussion. Additionally, we manufactured, distributed and sold our own brand,
ANIMALE fragrance, on a worldwide basis. See page 7 and 8, respectively, for
further discussions of recent transactions relating to the FHBH and Animale
brands.
Recent Developments
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On May 20, 2003, we received a Tender Offer Proposal (the "Proposal"),
dated May 19, 2003, from Quality King Distributors, Inc. ("Quality King") and
Ilia Lekach, our Chairman and Chief Executive Officer, to form a new entity to
acquire all of our outstanding shares of common stock at a price of $4.00 per
share in cash, which was a premium of approximately 60% over the closing price
of the common stock of $2.50 on that day. The Proposal was conditional upon the
approval of Quality King's lenders and the approval of our Board of Directors
under Section 203 of the Delaware General Corporation Law.
3
On May 22, 2003, at a special Board of Directors meeting, our Board
appointed a Special Committee of Independent Directors to evaluate and negotiate
the Proposal, and to ultimately vote to approve or disapprove the proposed
Tender Offer. The Independent Committee consists of Messrs. Glenn Gopman and
David Stone, and Ms. Esther Egozi Choukroun. The Independent Committee had
engaged legal counsel and was interviewing investment bankers to assist in this
matter.
On June 13, 2003, the Board of Directors received a letter from Quality
King withdrawing its Proposal due to the inability to obtain approval of the
proposed transaction from its lenders.
In addition, see Legal Proceedings on page 10 for further discussion.
THE PRODUCTS
Our principal products are fragrances, which are distributed in a
variety of sizes and packaging. In addition, beauty-related products such as
soaps, shower gels, deodorants, body lotions, creams and dusting powders
complement the fragrance line. Our basic fragrance products generally retail at
prices ranging from $20 to $65 per item.
We design and create fragrances using our own staff and independent
contractors. We also supervise the design of our packaging by independent
contractors. During fiscal 2003, we completed the design process for PERRY, a
new brand under the PERRY ELLIS line, for both men and women, which launched in
Fall 2002, and OP Blend for men and women, which launched in Spring 2003.
During the last three fiscal years, the following brands have accounted
for 10% or more of our gross sales in a given year:
Fiscal 2003 Fiscal 2002 Fiscal 2001
----------- ----------- -----------
PERRY ELLIS 75% 67% 69%
OCEAN PACIFIC 10% 12% 3%
ANIMALE 7% 13% 16%
FRED HAYMAN 6% 8% 11%
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, which is a leading specialty retailer of fragrances with
approximately 240 retail outlets principally located in manufacturers' outlet
malls and regional malls (see "CUSTOMERS" section for further discussion).
4
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 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.
5
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, Carson's, Elder Beerman, Famous Barr, Foley's, Hecht's, J.C.
Penney, J.L. Hudson, Lord & Taylor, Macy's, Parisian, Proffitts, Rich's/Lazarus,
and Robinson May. 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, 2003 and 2002, we had net sales
of $12,823,696 and $18,063,310, respectively, to Perfumania. Net trade accounts
receivable owed by Perfumania to us amounted to $11,426,977 and $12,491,993 at
March 31, 2003 and 2002, respectively. Trade accounts receivable 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 transfer price was based on a per share price of $2.98 ($11.92
post reverse stock split described below), which approximated 90% of the closing
price of Perfumania's common stock for the previous 20 business days. The
agreement was consummated on August 31, 1999, and the shares were registered in
June 2000. Effective February 1, 2000, ECMV was formed as a holding company and
the Company's shares of Perfumania common stock were converted into shares of
common stock in ECMV. As described in Note 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, 2003, the fair market value of
the investment in ECMV had declined to $1,361,164 ($3.60 per share after the
reverse split). Based on the increase in ECMV's stock price subsequent to March
31, 2003, the decline in market price was temporary.
As of June 18, 2003, the fair market value of the investment in ECMV is
$2,506,810 ($6.63 per share after the reverse split).
6
FOREIGN AND EXPORT SALES
During the three years ended March 31, 2003, gross sales to
international customers were approximately $38,364,000, $31,329,000, and
$30,726,000, 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.
On March 28, 2003, we entered into an exclusive agreement to sublicense the FHBH
rights to Victory International (USA), LLC, for a fee of 2% of net sales, with a
guaranteed minimum annual fee of $50,000. The initial term of the agreement is
for five years, renewable every five years at the sublicensee's option. As part
of the agreement, we sold the inventory, promotional materials and molds
relating to FHBH for its approximate book value. At closing, the purchaser paid
$2,000,000 in cash and provided a promissory note due in twelve monthly
installments of approximately $169,356, plus interest at prime plus 1%,
commencing January 2004.
The Sublicense Agreement excluded the rights to "273 Indigo" for men and women,
the latest fragrance introduction for the FHBH brand. Such rights, as well as
the rights to any other new FHBH fragrance additions, will transfer to the
sublicensee after twelve (12) months from the date of launch. The sublicensee is
also required to purchase the inventory and promotional materials relating to
the new additions for a price equal to our book value, up to $500,000.
OCEAN PACIFIC: In August 1999, we entered into an exclusive worldwide licensing
agreement with Ocean Pacific Apparel Corp. ("OP"), to manufacture and distribute
men's and women's fragrances and other related products under the OP label. The
initial term of the agreement extends through December 31, 2003, with seven (7)
three-year renewal options, of which the last four require the achievement of
7
certain minimum net sales. The license requires the payment of royalties, which
decline as a percentage of net sales as net sales volume increases, and the
spending of certain minimum amounts for advertising based upon annual net sales
of the products.
JOCKEY INTERNATIONAL: On March 23, 2001, we entered into an exclusive worldwide
licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture
and distribute men's and women's fragrances and other related products under the
Jockey(R) label. The initial term of the agreement extends through December 31,
2004, with three (3) three-year renewal options. The license requires the
payment of royalties, which decline as a percentage of net sales as net sales
volume increases, and the spending of certain minimum amounts for advertising
based upon annual net sales of the products. We launched Jockey fragrances for
women and men during the first calendar quarter of 2002. At the present date, we
do not anticipate exercising the renewal option.
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 owned 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.
On January 16, 2003, we entered into an agreement with the Animale
Group, S.A., to sell the inventory, promotional materials, molds, and
intangibles, relating to the Animale brand for $4,000,000, which closely
approximates the brand's net book value at the date of sale. At Closing, the
purchaser paid $2,000,000 in cash and provided a $2,000,000 note payable in
twelve equal monthly installments of $166,667, plus interest at prime plus 1%,
through January 31, 2004. In accordance with the note's security agreement, we
maintain control of certain component and raw material inventory held at third
party processor locations until the balance of the note is less than $500,000.
As of March 31, 2003, notes receivable in the accompanying 2003 consolidated
balance sheet includes $1,666,667 relating to this transaction.
As part of the agreement we did not include the inventory of Chaleur
d'Animale, the Animale brand's newest product introduction, and maintain the
rights to manufacture and distribute this product line, on a royalty-free basis,
until January 2005.
Prior to Fiscal 2003, 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 of these
two brands.
8
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, with the ability to develop and market products
similar to, and competitive with, those distributed by us.
EMPLOYEES
As of March 31, 2003, we had 111 full-time and part-time employees. Of
these, 40 were engaged in worldwide sales activities, 49 in operations,
administrative and finance functions and 22 in warehousing and distribution
activities. None of our employees are covered by a collective bargaining
agreement and we believe that our relationship with our employees is
satisfactory. We also use the services of independent contractors in various
capacities, including sales representatives.
We have a 401-K Plan covering substantially all of our employees. We
match 25% of the first 6% of employee contributions, within annual limitations
established by the Internal Revenue Code.
ITEM 2. 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 $709,000, with
the lease covering a ten-year period through 2005.
9
In July 2002, we leased an additional 13,000 square feet of warehouse
space at a monthly cost of approximately $7,800. This lease expires on June 30,
2003.
ITEM 3. LEGAL PROCEEDINGS
On June 4, 2003, we were served with a shareholder's class action
complaint (the "Complaint"), filed in the Delaware Court of Chancery by Judy
Altman, purporting to act on behalf of herself and other public stockholders of
the Company. The Complaint names Parlux Fragrances, Inc. as a defendant along
with all of our Board of Directors, except Mr. David Stone. The Complaint seeks
to enjoin the defendants from consummating the Tender Offer Proposal discussed
on Page 3, and seeks to have the acquisition rescinded if it is consummated. In
addition, the Complaint seeks unspecified damages, plus the fees, costs and
disbursements of Ms. Altman's attorneys. The defendants are currently scheduled
to file a written response to the Complaint on July 23, 2003.
The Company and the named defendants have engaged Delaware counsel and
we intend to vigorously defend the action. We believe that the Complaint is
without merit. In addition, the Tender Offer Proposal, which precipitated the
Complaint, has been withdrawn. However, there can be no assurance of the
ultimate outcome.
To the best of our knowledge, there are no other proceedings pending
against us or any of our properties which, if determined adversely to us, would
have a material effect on our financial position or results of operation.
On May 8, 2001, and as amended on June 8, 2001, we filed a legal
complaint against a component supplier to recover out-of-pocket costs and
damages resulting from the supplier having delivered faulty components for two
of our fragrances. Out-of-pocket costs to refurbish the products were included
in cost of goods sold for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement
whereby we would receive cash consideration of $3,958,000 from the supplier's
insurance carrier plus an additional $42,564 from the supplier. These funds were
received on October 7, 2002 and the suit has been dismissed.
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, 2003 or through June 27, 2003.
10
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 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, 2003 through June 27, 2003. 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
---- ---
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 2.850 1.660
Second (July/Sept.) 2002 2.700 1.430
Third (Oct./Dec.) 2002 2.900 1.640
Fourth (Jan./Mar.) 2003 3.100 1.900
First (April/June) 2003 3.890 2.200
We have not paid a cash dividend on our common stock nor do we
contemplate paying any dividends in the near future. Our loan agreement
restricts payment of dividends without prior approval.
The following chart outlines the Company's equity compensation plan
information as of March 31, 2003.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average exercise equity compensation plans
be issued upon exercise exercise price of (excluding securities
of outstanding options, outstanding options, reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------- --------------------- ------------------- -------------------------
Equity compensation
plans approved by
security holders(1) 110,725 $2.40 252,563
Equity compensation
plans not approved by
security holders(2) 3,046,000 $2.15 n/a
--------- -------
Total 3,156,725 $2.16 252,563
========= =======
11
(1) See note 10 to the Company's consolidated financial statements included
with this filing for a discussion of the Company's stock option plans.
(2) See note 8(D) to the Company's consolidated financial statements included
with this filing for a discussion of the Company's options and warrants
granted in connection with employment and consulting arrangements.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from audited consolidated financial
statements. Consolidated balance sheets at March 31, 2003 and 2002, and the
related consolidated statements of operations and of cash flows for the three
years ended March 31, 2003 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)
- ----------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales $72,254 $70,001 $68,875 $66,385 $56,151
Costs/operating expenses 66,409 73,868 61,495 59,786 51,920
Operating income (loss) 5,845 (3,867) 7,380 6,599 4,231
Net income (loss) 5,474 (5,655) 3,926 3,873 1,418
Income (loss) per share:
Basic $ 0.56 $ (0.57) $ 0.39 $ 0.32 $ 0.10
Diluted (1) $ 0.54 $ (0.57) $ 0.38 $ 0.31 $ 0.10
(1) The calculation of diluted loss per share was the same as the basic loss
per share for fiscal 2002 since inclusion of potential common stock in the
computation would be antidilutive.
At March 31, (in thousands of dollars)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Current assets $52,655 $60,282 $50,810 $57,992 $56,349
Current liabilities 13,741 22,620 20,274 23,238 18,159
Working capital 38,914 37,662 30,536 34,754 38,190
Trademarks, licenses and
goodwill, net 8,231 9,535 20,464 21,469 23,926
Long-term borrowings 102 962 1,686 2,571 3,561
Total assets 64,452 72,248 74,012 81,862 82,081
Total liabilities 13,902 24,324 23,138 28,217 22,227
Stockholders' equity 49,550 47,924 50,874 53,645 59,854
12
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
SEC Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies
provide additional disclosure and commentary on those accounting policies
considered most critical. FRR 60 considers an accounting policy to be critical
if it is important to the Company's financial condition and results, and
requires significant judgment and estimates on the part of management in its
application. We believe the accounting policies described below represent our
critical accounting policies as contemplated by FRR 60. See Note 1 to
Consolidated Financial Statements for a detailed discussion on the application
of these and other accounting policies.
Accounting for Intangible Assets. 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.
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.
13
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.
Since April 2002, we have not made any changes of these critical
accounting policies, nor have we made any material changes in any of the
critical accounting estimates underlying these accounting policies, except for
the adoption of Emerging Issues Task Force ("EITF") 01-09 described on Page 19.
All discussions below include the effect of adopting EITF 01-09 and the
resulting reclassifications.
Comparison of the year ended March 31, 2003 with the year ended March 31, 2002.
- -------------------------------------------------------------------------------
During the fiscal year ended March 31, 2003, net sales increased 3% to
$72,253,699 as compared to $70,001,063 for the same period for the prior year.
The increase is mainly attributable to the launch of "Perry" by Perry Ellis for
men and women, which resulted in an increase in total Perry Ellis brand gross
sales from $49,434,433 to $57,354,411, and launches of "Jockey" for men and
women in the Spring of 2002, which added gross sales of $1,325,960 in the
current period. These increases were offset by reductions in gross sales of
Animale (which brand was sold during January 2003) and Ocean Pacific brand
products of $4,689,844 and $1,154,883, respectively, as certain products were
launched during the prior year period.
Net sales to unrelated customers increased 10% to $50,505,473 in the
current period, compared to $45,971,696 for the same period in the prior year,
as a result of the launches discussed above. Sales to related parties decreased
9% to $21,748,226 in the current period compared to $24,029,367 for the same
period in the prior year.
Cost of goods sold decreased as a percentage of net sales from 51% for
the fiscal year ended March 31, 2002 to 50% for the current period. Cost of
goods sold on sales to unrelated customers and related parties approximated 47%
and 57%, respectively, for the current period, as compared to 51% for each, for
the same period in the prior year. The prior year period included the sale of
certain close-out merchandise to international customers at lower margins. The
increase in cost of goods sold to related parties for the current period was due
to the purchase of a higher percentage of value sets for holiday seasons than in
the prior year. These value sets have a higher cost of goods when compared to
basic stock items.
14
Operating expenses, excluding the impairment loss on intangibles in the
prior year, decreased by 1% compared to the same period in the prior year from
$30,665,046 to $30,536,582, decreasing as a percentage of net sales from 44% to
42%. Advertising and promotional expenses decreased 2% to $14,244,338 compared
to $14,598,130 in the prior year period, decreasing as a percentage of net sales
from 21% to 20%. The prior year period includes approximately $728,000 in
charges relating to the bankruptcy filing by an advertising firm that owed us
barter advertising credits. Excluding the barter charge, advertising and
promotional expenses would have increased by 3%. Selling and distribution costs
decreased 1% to $6,545,221 in the current period as compared to $6,644,561 for
the same period of the prior year, remaining relatively constant at 9% of net
sales. General and administrative expenses increased slightly compared to the
prior year period from $5,181,473 to $5,188,592, remaining relatively constant
at 7% of net sales. Depreciation and amortization decreased by 32% during the
current period from $1,995,096 to $1,356,597, as approximately $564,000 of
amortization on intangibles relating to the Alexandra de Markoff ("ADM") and Bal
a Versailles ("BAV") brands was no longer required during the current period
(See Note 6 to the Company's consolidated financial statements for further
discussion). Royalties increased by 43% in the current period, increasing as a
percentage of net sales from 3% to 4% due to minimum royalty requirements for
the Jockey license. During the prior period, we recorded an impairment charge on
the intangibles relating to the ADM and BAV brands totaling $7,441,554.
As a result of the above, operating income increased to $5,845,289 or
8% of net sales for the current period, compared to an operating loss of
$3,866,540 for the same period in the prior year. The current year period
includes other income of $3,542,083 relating to the settlement of our lawsuit
with a supplier. Net interest expense decreased to $694,317 in the current
period as compared to $1,032,975 for the same period in the prior year. The
decrease was mainly attributable to the substantial reduction in interest rates
compared to the prior year, reflecting the terms of our new line of credit,
coupled with a reduced prime rate and lower average balance outstanding. The
Company recorded a $2,858,447 non-cash charge during the prior period,
representing a writedown for an other-than-temporary decline in the value of our
investment in affiliate.
Income before taxes for the current period was $8,692,922 or 12% of net
sales, compared to a loss of $7,745,449 in the same period for the prior year.
Giving effect to the tax provision and the deferred tax benefit of $207,360 in
2002 related to the non-cash charge in the prior year, we recorded net income of
$5,474,459 for the current period, compared to a net loss of $5,665,401 in the
prior year.
15
Comparison of the year ended March 31, 2002 with the year ended March 31, 2001.
- -------------------------------------------------------------------------------
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 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 46% for
the fiscal year ended March 31, 2001 to 51% 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 each approximated 51% during
the fiscal year ended March 31, 2002, as compared to 46% 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 2% compared to the same period in
the prior year from $30,019,323 to $30,665,046, remaining relatively constant at
44% of net sales. Advertising and promotional expenses increased 6% to
$14,598,130 compared to $13,735,594 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. Excluding the barter charge, advertising and promotional expenses would
have increased by 1%. 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 14% 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
16
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 ADM and BAV 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 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.
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $38,913,687 at March 31, 2003 compared to
$37,662,059 at March 31, 2002, the result of current period's net income offset
by the purchase of treasury stock discussed below.
During the fiscal year ended March 31, 2003, net cash provided by
operating activities was $7,855,720 compared with a use of cash of $4,500,246 in
the prior year. The prior year period included an increase in inventory of over
$10 million as a result of the economic slowdown after September 11, and the
buildup of inventory relating to certain brands affected by faulty components.
See page 10, Legal Proceedings, paragraphs 4 and 5, for further discussion.
Net cash provided by investing activities increased to $3,913,317 in
the current year period, compared to $1,778,275 in the prior year, the result of
cash generated from additional brand sales/licensing.
The cash provided by operating and investing activities during the
current year was used to reduce debt, both long-term and under our line of
credit, as well as repurchase almost $4.5 million of our common stock (see
below). The prior year period required an increase in borrowings of almost $2.9
million to offset net cash used for operating activities.
17
As of June 30, 2001, we had repurchased, under all phases of our common
stock buy-back program, a total of 7,978,131 shares at a cost of $21,983,523,
with 121,869 shares still available for repurchase under the last program. On
July 25, 2001, the Board of Directors, at that date, authorized an additional
2,500,000 share repurchase, subject to the restrictions and covenants in our new
loan agreement discussed below. Through January 31, 2003, no shares were
purchased under the latest authorization. On February 6, 2003, we received
approval from our lender to proceed with the latest phase of our repurchase
program, which was ratified on February 14, 2003, by our current Board of
Directors. As of March 31, 2003, we repurchased an additional 1,476,700 shares
at a cost of $4,469,593. The accompanying consolidated balance sheets also
include an additional 39,000 shares of treasury stock purchased at a cost of
$133,472 prior to fiscal 1996.
Prior to the effectiveness of the Sarbanes-Oxley Act
("Sarbanes-Oxley"), we had made several personal loans to Mr. Ilia Lekach, our
chairman and chief executive officer. These loans, which were consolidated into
one note agreement on April 1, 2002, became due on March 31, 2003 in accordance
with the note's terms. On March 31, 2003, Mr. Lekach repaid $46,854 in principal
and $71,364 of accrued interest, through that date. The repayment was affected
via an offset of amounts due Mr. Lekach under his regular compensation
arrangement. Sarbanes-Oxley prohibits the Company from renewing or amending the
loan, as well as issuing new loans to Company officers and directors.
Mr. Lekach has informed the Company that he anticipates repaying the
entire unpaid loan balance of $742,884, plus interest at the default rate
stipulated in the note, during the quarter ending September 30, 2003. The
Company intends to diligently pursue collection.
On July 20, 2001, we entered into a three-year Loan and Security
Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). On
February 6, 2003, the Loan Agreement was extended for an additional year through
July 20, 2005. Proceeds from the Loan Agreement were used, in part, to repay
amounts outstanding under the Company's $14 million credit facility with General
Electric Capital Corporation. Under the Loan Agreement, we are able to borrow,
depending upon the availability of a borrowing base, on a revolving basis, up to
$20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the
Bank of New York's prime rate, at our option. The Loan Agreement contains
provisions to reduce both rates by a maximum of 1% or increase both rates by a
maximum of .5% based on a ratio of funded debt to "Earnings Before Interest,
Taxes and Depreciation ("EBITDA"), as defined in the Loan Agreement.
18
At March 31, 2003, based on the borrowing base at that date, the credit
line amounted to approximately $14,226,000, and accordingly, we had
approximately $8,649,000 available under the credit line, excluding the effect
of restricted cash of approximately $1,478,000.
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.
Management believes that funds from operations and our existing
financing will be sufficient to meet our operating needs for the foreseeable
future.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
Effective April 1, 2002, the Company adopted 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 has classified gift-with-purchase
("GWP") activities, which were previously reported as advertising and
promotional expenses, as cost of goods sold. The adoption of EITF 01-09 did not
have any impact on operating income; however, for the year ended March 31, 2003,
gross margin has been decreased by $3,203,485, offset by an equal decrease in
advertising and promotional expenses. Accordingly, $3,611,060 and $3,749,022 of
such GWP costs during the years ended March 31, 2002 and 2001, respectively,
have been reclassified from advertising and promotional to cost of goods sold
for comparative purposes.
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.
19
In April 2002, FASB issued SFAS No. 145, Rescission of the FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishment of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with earlier adoption encouraged. The Company does not expect the
adoption of SFAS No. 145 to have a material effect on its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
SFAS No. 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. As the
provisions of SFAS No. 146 are required to be applied prospectively after the
adoption date, the Company cannot determine the potential effects that adoption
of SFAS No. 146 will have on its consolidated financial statements.
In November 2002, the FASB Emerging Issues Task Force issued EITF No.
02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor.
EITF No. 02-16 addresses how a reseller of a vendor's products should account
for cash consideration (as that term is defined in EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products) received from a vendor. EITF 02-16 is to be applied to new
arrangements, including a modification to existing arrangements, entered into
after December 31, 2002, and did not have a material effect on the Company's
financial position and results of operation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002. The Company adopted the disclosure
requirements and does not expect that the adoption of FIN 45 will have a
significant impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
20
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant over the amount an employee must pay to acquire the stock. The Company has
adopted the annual disclosure provisions of SFAS No. 148 in its financial
reports for the year ended March 31, 2003 and will adopt the interim disclosure
provisions for financial reports for the quarter ending June 30, 2003. As the
adoption of this standard involves disclosures only, the Company does not expect
a significant impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition, but does not expect a significant impact.
In April 2003 the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. This
Statement is effective for contracts entered into or modified after June 30,
2003. The Company does not expect the adoption of SFAS 149 to have a significant
impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement requires that an issuer classify financial instruments that are within
its scope as a liability. Many of those instruments were classified as equity
under previous guidance. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 is not expected to have a significant
impact on the Company's consolidated financial statements.
21
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. As of March 31, 2003
and 2002, primary source of funds for working capital and other needs was our
$20 million line of credit.
Of the approximate $5.0 million and $12.5 million of short-term and
long-term borrowings on the Company's balance sheet as of March 31, 2003 and
2002, respectively, approximately 20% and 15%, respectively, represented fixed
rate instruments. The line of credit bears interest at a floating rate of prime
plus 1%. A hypothetical 10% adverse move in interest rates would increase fiscal
year 2003 and 2002 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 and are incorporated herein by reference.
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.
22
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to our Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chairman and Chief Executive Officer and the Company's
Executive Vice President and Chief Operating/Financial Officer, who are the
principal executive officer and principal financial officer, respectively, have
evaluated the effectiveness and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-14 of the Securities Exchange Act of
1934, as amended, within 90 days of the filing of the report (the "Evaluation
Date"). Based upon such evaluation, they have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were
functioning effectively to provide reasonable assurance that information
required to be disclosed by the Company in its reports filed or submitted by it
under the Securities and Exchange Act of 1934, as amended, has been recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
The Company's Chairman and Chief Executive Officer, and Executive Vice
President and Chief Operating/Financial Officer, have determined that there were
no significant changes in internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, subsequent to the
Evaluation Date.
23
PART IV
ITEM 15. 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:
10.64 Agreement, dated March 28, 2003, between the Company and
Victory International (USA) LLC
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
99.1 Section 906 Certification
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended March 31,
2003. However, the following reports on Form 8-K have been issued
during the period April 1, 2003 through June 27, 2003:
o Report dated May 28, 2003, relating to the Proposal Letter from
Ilia Lekach and Quality King Distributors, Inc.
o Report dated June 17, 2003, relating to the Letter of Withdrawal
from Quality King Distributors, Inc.
24
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: June 30, 2003
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/ Glenn Gopman
- -----------------------------------------------------------
Glenn Gopman, Director
/s/ Esther Egozi Choukroun
- -----------------------------------------------------------
Esther Egozi Choukroun, Director
/s/ Jaya Kader Zebede
- -----------------------------------------------------------
Jaya Kader Zebede, Director
/s/ David Stone
- -----------------------------------------------------------
David Stone, Director
25
I, Ilia Lekach, certify that:
1. I have reviewed this annual report on Form 10-K of Parlux Fragrances, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: June 30, 2003
/s/ ILIA LEKACH
----------------------
Ilia Lekach,
Chairman and Chief Executive Officer
26
I, Frank A. Buttacavoli, certify that:
1. I have reviewed this annual report on Form 10-K of Parlux Fragrances, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: June 30, 2003
/s/ FRANK A. BUTTACAVOLI
-----------------------------
Frank A. Buttacavoli,
Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
27
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FINANCIAL STATEMENTS: Page
-----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
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, 2003 and 2002,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended March 31,
2003. Our audits also included the financial statement schedule for each of the
three years in the period then ended listed in Item 15. 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, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 2003, 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 18, 2003
F-2
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, March 31,
ASSETS 2003 2002
- ------------------------------------------------------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 137,023 $ 164,793
Receivables, net of allowance for doubtful accounts,
sales returns and advertising allowances of approximately
$1,734,000 and $1,430,000, respectively 3,751,570 5,527,522
Trade receivable from related parties 11,933,952 12,788,320
Notes receivable, current portion 2,182,135 --
Income tax receivable -- 1,745,401
Inventories, net 26,281,297 31,102,875
Prepaid expenses and other current assets, net 7,007,410 8,045,933
Investment in affiliate 1,361,164 907,442
------------ ------------
TOTAL CURRENT ASSETS 52,654,551 60,282,286
Equipment and leasehold improvements, net 1,668,284 2,361,659
Trademarks, licenses and goodwill, net 8,231,145 9,534,937
Notes receivable, less current portion 1,524,204 --
Other 373,666 69,609
------------ ------------
TOTAL ASSETS $ 64,451,850 $ 72,248,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $ 4,858,378 $ 11,493,461
Accounts payable 7,420,405 10,118,080
Income taxes payable 279,610 --
Accrued expenses 1,182,471 1,008,686
------------ ------------
TOTAL CURRENT LIABILITIES 13,740,864 22,620,227
Borrowings, less current portion 102,096 962,275
Deferred tax liability 1,058,479 742,214
------------ ------------
TOTAL LIABILITIES 14,901,439 24,324,716
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding at March 31, 2003 and
March 31, 2002 -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
18,046,840 and 17,993,277 shares issued at March 31, 2003
and March 31, 2002, respectively 180,468 179,933
Additional paid-in capital 74,084,335 74,011,221
Retained earnings (accumulated deficit) 3,271,379 (2,203,080)
Accumulated other comprehensive loss (656,299) (1,110,139)
Notes receivable from officer (742,884) (837,165)
------------ ------------
76,136,999 70,040,770
Less - 9,493,831 and 8,017,131 shares of common stock in treasury,
at cost, at March 31, 2003 and March 31, 2002, respectively (26,586,588) (22,116,995)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 49,550,411 47,923,775
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,451,850 $ 72,248,491
============ ============
See notes to consolidated financial statements.
F-3
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended March 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net sales:
Unrelated customers $ 50,505,473 $ 45,971,696 $ 46,512,816
Related parties 21,748,226 24,029,367 22,362,294
------------ ------------ ------------
72,253,699 70,001,063 68,875,110
Cost of goods sold, including $3,203,485,
$3,611,060 and $3,749,022 of promotional
items in 2003, 2002 and 2001, respectively 35,871,828 35,761,003 31,475,468
------------ ------------ ------------
Gross margin 36,381,871 34,240,060 37,399,642
------------ ------------ ------------
Operating expenses:
Advertising and promotional 14,244,338 14,598,130 13,735,594
Selling and distribution 6,545,221 6,644,561 6,534,583
General and administrative, net of licensing fees
of $487,500 in 2002 and $650,000 in 2001 5,188,592 5,181,473 5,415,061
Depreciation and amortization 1,356,597 1,995,096 2,308,793
Royalties 3,201,834 2,245,786 2,025,292
Impairment loss on intangibles -- 7,441,554 --
------------ ------------ ------------
Total operating expenses 30,536,582 38,106,600 30,019,323
------------ ------------ ------------
Operating income (loss) 5,845,289 (3,866,540) 7,380,319
Interest income 125,039 166,116 376,605
Interest expense and bank charges (819,356) (1,199,091) (1,477,382)
Exchange gain (loss) (133) 12,513 5,274
Litigation settlement, net of expenses 3,542,083 -- --
Other-than-temporary decline in value
of investment in affiliate -- (2,858,447) --
------------ ------------ ------------
Income (loss) before income taxes 8,692,922 (7,745,449) 6,284,816
Income taxes (provision) benefit (3,218,463) 2,090,048 (2,359,157)
------------ ------------ ------------
Net income (loss) $ 5,474,459 ($ 5,655,401) $ 3,925,659
============ ============ ============
Income (loss) per common share:
Basic $ 0.56 ($ 0.57) $ 0.39
============ ============ ============
Diluted $ 0.54 ($ 0.57) $ 0.38
============ ============ ============
See notes to consolidated financial statements.
F-4
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
------------------------------------------
COMMON STOCK RETAINED
----------------------------- ADDITIONAL EARNINGS
NUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------ ------------ ------------ ------------
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 of $207,360 -- -- -- --
Unrealized holding loss on investment
in affiliate (741,081) (741,081)
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)
Comprehensive income:
Net income -- -- -- 5,474,459
Unrealized holding gain on investment in affiliate -- -- -- --
Foreign currency translation adjustment
Total comprehensive income
Issuance of common stock upon exercise of
employee stock options 53,563 535 73,114
Purchase of 1,476,700 shares of treasury stock, at cost -- -- -- --
Net decrease in notes receivable from officer -- -- -- --
------------ ------------ ------------ ------------
BALANCE at March 31, 2003 18,046,840 $ 180,468 $ 74,084,335 $ 3,271,379
============ ============ ============ ============
[RESTUBBED]
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FROM TREASURY
(LOSS) INCOME OFFICER STOCK TOTAL
------------ ------------ ----------- ------------
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 of $207,360 3,496,220 -- -- 3,496,220
Unrealized holding loss on investment
in affiliate
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
Comprehensive income:
Net income -- -- -- 5,474,459
Unrealized holding gain on investment in affiliate 453,722 -- -- 453,722
Foreign currency translation adjustment 118 118
------------
Total comprehensive income 5,928,299
------------
Issuance of common stock upon exercise of
employee stock options 73,649
Purchase of 1,476,700 shares of treasury stock, at cost -- -- (4,469,593) (4,469,593)
Net decrease in notes receivable from officer -- 94,281 -- 94,281
------------ ------------ ------------ ------------
BALANCE at March 31, 2003 $ (656,299) $ (742,884) $(26,586,588) $ 49,550,411
============ ============ ============ ============
See notes to consolidated financial statements.
F-5
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended March 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 5,474,459 ($ 5,655,401) $ 3,925,659
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,356,597 1,995,096 2,308,793
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 200,000 590,000 1,567,000
Reserve for prepaid promotional supplies and inventory obsolescence 920,000 1,970,000 1,600,000
Deferred income tax provision (benefit) 328,963 (801,520) 869,568
Changes in assets and liabilities net of effect of brand licensing/sales:
Decrease (increase) in trade receivables - customers 1,675,952 525,174 (2,141,467)
Decrease (increase) in note and trade receivables - related parties 854,368 217,858 (944,628)
Decrease (increase) in income tax receivable 1,745,401 (1,745,401) --
(Increase) decrease in inventories (2,239,646) (10,328,694) 473,251
Decrease (increase) in prepaid expenses and other current assets 87,962 (301,411) (1,143,041)
(Increase) decrease in other non-current assets (304,056) 18,757 24,056
(Decrease) increase in accounts payable (2,697,675) (1,245,699) 809,711
Increase (decrease) in accrued expenses and income taxes payable 453,395 (39,006) (1,642,602)
------------ ------------ ------------
Total adjustments 2,381,261 1,155,155 1,780,641
------------ ------------ ------------
Net cash provided by (used in) operating activities 7,855,720 (4,500,246) 5,706,300
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (620,016) (1,222,751) (1,596,742)
Purchases of trademarks -- (6,974) (67,756)
Cash received from brand licensing/sales:
Animale 2,333,333 -- --
Fred Hayman 2,000,000 -- --
Bal a Versailles 200,000 -- --
AdM -- 3,008,000 --
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,913,317 1,778,275 (1,664,498)
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - note payable to GMAC Commercial Credit, net (6,592,783) 10,559,914 --
Payments - note payable to GE Capital Corporation, net -- (6,782,973) (2,142,640)
Payments - note payable to Fred Hayman Beverly Hills (739,023) (687,489) (639,550)
Payments - notes payable to Bankers Capital Leasing (163,456) (52,365) (29,389)
Payments - note payable to United Capital Corporation -- (111,231) (204,890)
Payments - other notes payable -- (18,869) --
Net decrease (increase) in notes receivable from officer 94,281 (46,218) 108,158
Purchases of treasury stock (4,469,593) -- (1,142,294)
Proceeds from issuance of common stock, net 73,649 9,229 24,604
------------ ------------ ------------
Net cash (used in) provided by financing activities (11,796,925) 2,869,998 (4,026,001)
------------ ------------ ------------
Effect of exchange rate changes on cash 118 (13,448) (3,051)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (27,770) 134,579 12,750
Cash and cash equivalents, beginning of year 164,793 30,214 17,464
------------ ------------ ------------
Cash and cash equivalents, end of year $ 137,023 $ 164,793 $ 30,214
============ ============ ============
See notes to consolidated financial statements.
F-6
PARLUX FRAGRANCES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
A. NATURE OF BUSINESS
------------------
Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984,
and is a manufacturer and distributor of prestige fragrances and
beauty related products, on a worldwide basis.
B. PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of Parlux
Fragrances, Inc., and its wholly-owned subsidiaries, Parlux S.A., a
French company ("S.A."), and Parlux, Ltd. (jointly referred to as the
"Company"). All material intercompany accounts and transactions have
been eliminated in consolidation.
C. ACCOUNTING ESTIMATES
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The more
significant estimates relate to the carrying value of accounts
receivable from related parties, reserve for doubtful accounts, sales
returns and advertising allowances, inventory obsolescence and periods
of depreciation and amortization for trademarks, licenses, 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 $2,255,000 and $2,409,000 at March
31, 2003 and 2002, 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-7
G. BARTER SALES AND CREDITS
------------------------
On occasion, the Company has sold certain of its products to barter
brokers 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. A barter sale occurred during the year ended
March 31, 2001, and no barter sales have been entered into during the
years ended March 31, 2003 and 2002.
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 $2,892,287 and $3,347,897 at March 31, 2003 and 2002,
respectively. Amortization expense was $43,207, $484,657, and
$1,072,239 for the years ended March 31, 2003, 2002, and 2001,
respectively.
Statement of Financial Accounting Standards ("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 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 each of the years ended March 31, 2003 and 2002, was no longer
required.
Had the Company been accounting for its goodwill under SFAS No. 142
for the year ended March 31, 2001, the Company's net income and income
per share would have been as follows (in 000's):
Year Ended
March 31, 2001
--------------
Reported net income $ 3,926
Add back goodwill amortization, net of tax 296
-------
Pro forma adjusted net income $ 4,222
=======
Diluted net income per share:
Reported net income $ 0.38
Goodwill amortization, net of tax 0.03
-------
Pro forma adjusted diluted net income per share $ 0.41
=======
J. LONG-LIVED ASSETS
-----------------
Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. Impairment losses are recognized if
expected undiscounted future cash flows of the related assets are less
F-8
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, 2003.
K. 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.
L. 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.
M. 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.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying value of the Company's financial instruments, consisting
principally of cash and cash equivalents, receivables, notes
receivable, 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.
O. 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.
P. 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:
2003 2002 2001
---- ---- ----
Expected life (years) 5 5 5
Interest rate 3% 5% 5%
Volatility 70% 75% 75%
Dividend Yield - - -
F-9
If compensation cost had been determined based on the fair value at
the grant date under SFAS No. 123, the Company's net income (loss) and
income (loss) per share would have been as follows:
For the years ended March 31,
2003 2002 2001
---- ---- ----
Net income (loss):
As reported $5,474,459 $(5,655,401) $3,925,659
Proforma $5,441,848 $(6,262,080) $3,895,617
Basic net income (loss) per share:
As reported $0.56 $(0.57) $0.39
Proforma $0.55 $(0.63) $0.39
Diluted net income (loss) per share:
As reported $0.54 $(0.57) $0.38
Proforma $0.53 $(0.63) $0.37
Q. 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:
2003 2002 2001
---- ---- ----
Cash paid for:
Interest $ 820,923 $1,288,250 $1,546,029
========= ========== ==========
Income taxes $ 853,728 $ 623,580 $2,633,381
========= ========= ==========
Supplemental disclosures of non-cash investing and financing
activities are as follows:
Year ended March 31, 2003:
o The conversion of trade accounts receivable from Perfumania
in the amounts of $3,000,000 discussed in Note 2.
o The Company incurred an unrealized holding gain of $453,722
on the investment in affiliate.
o The consideration received for the sale of assets relating
to the sublicense of the Fred Hayman Beverly Hills brands
included an interest-bearing note from the sublicensee, as
discussed in Note 8 (C).
o The consideration received from the sale of the Animale
brand and assets related thereto, included an
interest-bearing note from the purchaser in the amount of
$2,000,000 as discussed in Note 8 (C).
Year ended March 31, 2002:
o The conversion of trade accounts receivable from Perfumania
in the amount of $3,000,000, as discussed in Note 2.
o The Company incurred an unrealized holding loss of $741,081
on the investment in affiliate.
o The Company acquired equipment in the amount of $249,989
through capital lease arrangements.
o The Company incurred an other-than-temporary decline in
value on the investment in affiliate of $2,858,447, with a
corresponding deferred tax benefit of $207,360.
o The Company reversed an unrealized holding loss of
$3,496,220 on the investment in affiliate, net of tax
benefits.
F-10
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.
R. SEGMENT INFORMATION
-------------------
As of March 31, 2003, the Company operates solely in one segment, the
marketing and manufacture of prestige fragrances and beauty related
products.
S. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
Effective April 1, 2002, the Company adopted 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 has classified gift-with-purchase ("GWP")
activities, which were previously reported as advertising and
promotional expenses, as cost of goods sold. The adoption of EITF
01-09 did not have any impact on operating income; however, for the
year ended March 31, 2003, gross margin has been decreased by
$3,203,485 offset by an equal decrease in advertising and promotional
expenses. Accordingly, $3,611,060 and $3,749,022 of such GWP costs
incurred during the years ended March 31, 2002 and 2001, respectively,
have been reclassified from advertising and promotional to cost of
goods sold for comparative purposes.
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.
In April 2002, FASB issued SFAS No. 145, Rescission of the FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 eliminates the requirement to
classify gains and losses from the extinguishment of indebtedness as
extraordinary, requires certain lease modifications to be treated the
same as a sale-leaseback transaction, and makes other non-substantive
technical corrections to existing pronouncements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with earlier
adoption encouraged. The Company does not expect the adoption of SFAS
No. 145 to have a material effect on its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activities. SFAS
No. 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged.
F-11
As the provisions of SFAS No. 146 are required to be applied
prospectively after the adoption date, the Company cannot determine
the potential effects that adoption of SFAS No. 146 will have on its
consolidated financial statements.
In November 2002, the FASB Emerging Issues Task Force issued EITF No.
02-16, Accounting by a Reseller for Cash Consideration Received from a
Vendor. EITF No. 02-16 addresses how a reseller of a vendor's products
should account for cash consideration (as that term is defined in EITF
No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products) received from a vendor. EITF
02-16 is to be applied to new arrangements, including modifications to
existing arrangements, entered into after December 31, 2002, and did
not have a material effect on the Company's financial position and
results of operation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45
requires a company, at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related
to guarantees and warranties. The initial recognition requirements of
FIN 45 are effective for guarantees issued or modified after December
31, 2002. The Company adopted the disclosure requirements and does not
expect that the adoption of FIN 45 will have a significant impact on
its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
SFAS 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen
to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the
market value of our stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports
for the year ended March 31, 2003 and will adopt the interim
disclosure provisions for financial reports for the quarter ending
June 30, 2003. As the adoption of this standard involves disclosures
only, the Company does not expect a significant impact on its
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB
No. 51. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
The Company is currently evaluating the effect that the adoption of
FIN 46 will have on its results of operations and financial condition,
but does not expect a significant impact.
In April 2003 the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. This Statement is effective for contracts
entered into or modified after June 30, 2003. The Company does not
expect the adoption of SFAS 149 to have a significant impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement requires that an issuer classify financial
instruments that are within its scope as a liability. Many of those
instruments were classified as equity under previous guidance. Most of
the guidance in SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 is not expected to have a
significant impact on the Company's consolidated financial statements.
F-12
2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
----------------------------------------------------
Prior to the effectiveness of the Sarbanes-Oxley Act ("Sarbanes-Oxley"),
the Company had made several personal loans to its chairman and chief
executive officer, Mr. Ilia Lekach. These loans, which were consolidated
into one note agreement on April 1, 2002, became due on March 31, 2003 in
accordance with the note's terms. On March 31, 2003, Mr. Lekach repaid
$46,854 in principal and $71,364 of accrued interest, through that date.
The repayment was affected via an offset of amounts due Mr. Lekach under
his regular compensation arrangement. Sarbanes-Oxley prohibits the Company
from renewing or amending the loan, as well as issuing new loans to Company
officers and directors.
Mr. Lekach has informed the Company that he anticipates repaying the entire
unpaid loan balance of $742,884, plus interest at the default rate
stipulated in the note, during the quarter ending September 30, 2003. The
Company intends to diligently pursue collection.
The Company had net sales of $12,823,696, $18,063,310, and $22,362,294
during the fiscal years ended March 31, 2003, 2002 and 2001, 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 $11,426,977 and $12,491,993 at March 31, 2003 and 2002,
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
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, 2003, the
fair market value of the investment in ECMV had declined to $1,361,164
($3.60 per share after the reverse split). The Company believes, based on
the increase in ECMV's stock price subsequent to March 31, 2003, that the
decline in market price was temporary.
As of June 18, 2003, the fair market value of the investment in ECMV is
$2,506,810 ($6.63 per share after the reverse split).
During September 2002, the Company and Perfumania 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, 2002, $300,000
on November 30, 2002, $2,500,000 on December 31, 2002, and $50,000 on each
of January 31, 2003, February 28, 2003, and March 31, 2003. Accrued
interest was payable with each principal installment. The loan was repaid
in accordance with its terms.
The Company had net sales of $8,924,530 and $5,966,057 during the years
ended March 31, 2003 and 2002, respectively, to fragrance distributors
owned/operated by individuals related to the Company's Chairman/CEO,
including $6,354,400 and $4,355,239 to a former director of the Company.
These sales are included as related party sales in the accompanying
statements of operations. As of March 31, 2003 and 2002, trade receivables
from related parties include $506,975 and $296,327, respectively, from
these customers.
F-13
3. INVENTORIES
-----------
The components of inventories are as follows:
March 31,
---------
2003 2002
---- ----
Finished products $15,873,033 $17,532,428
Components and packaging material 7,642,649 9,616,274
Raw material 2,765,615 3,954,173
----------- -----------
$26,281,297 $31,102,875
=========== ===========
The above amounts are net of an allowance for estimated inventory
obsolescence of approximately $2,348,000 and $2,140,000 at March 31, 2003
and 2002, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid expenses and other current assets are as follows:
March 31,
---------
2003 2002
---- ----
Promotional supplies, net $3,665,465 $4,857,274
Deferred tax assets 1,672,792 1,685,490
Prepaid advertising 728,029 514,138
Prepaid royalties 400,000 285,417
Other 541,124 703,614
---------- ----------
$7,007,410 $8,045,933
========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
------------------------------------
Equipment and leasehold improvements are comprised of the following:
March 31, Estimated useful
--------- ----------------
2003 2002 lives (in years)
---- ---- ----------------
Molds and equipment $ 6,274,563 $ 7,971,908 3-7
Furniture and fixtures 1,007,576 1,352,100 3-5
Leasehold improvements 588,986 452,935 5-7
----------- -----------
7,871,125 9,776,943
Less: accumulated depreciation and amortization (6,202,841) (7,415,284)
----------- -----------
$ 1,668,284 $ 2,361,659
=========== ===========
Depreciation and amortization expense on equipment and leasehold
improvements for the years ended March 31, 2003, 2002 and 2001 was
$1,313,390, $1,510,439, and $1,236,555, respectively. Amounts subject to
capital leases at March 31, 2003 and 2002, included in molds and equipment
above, totaled $145,932 and $778,578, respectively, net of accumulated
amortization of $51,076 and $467,762.
6. TRADEMARKS, LICENSES AND GOODWILL
---------------------------------
Trademarks, licenses and goodwill are attributable to the following brands:
March 31,
---------
2003 2002
---- ----
Owned Brands:
Fred Hayman Beverly Hills ("FHBH") $ 2,820,361 $ 2,820,361
Animale 122,965 1,582,367
Bal A Versailles -- 300,000
Other 216,546 216,546
Licensed Brands:
Perry Ellis 7,963,560 7,963,560
------------ ------------
11,123,432 12,882,834
Less: accumulated amortization (2,892,287) (3,347,897)
------------ ------------
$ 8,231,145 $ 9,534,937
============ ============
See Note 8 (C) for further discussion of the FHBH and Animale brands.
F-14
On March 2, 1998, the Company entered into an exclusive agreement to
license the Alexandra de Markoff (ADM) rights to Cosmetic Essence, Inc.
("CEI") for an annual fee of $500,000. The initial term of the agreement is
ten years, automatically renewable for additional ten and five year terms.
The annual fee reduces to $100,000 after the third renewal. The license was
assigned by CEI to one of its affiliates, Irving W. Rice & Co. CEI
guarantees payment of the annual licensing fee for the entire term of the
agreement, including renewals.
On February 27, 2002, the Company entered into an agreement to sell the ADM
trademark and assign the license agreement with CEI to the former owner of
CEI for $3,008,000 in cash, which closed on March 1, 2002. The net book
value of the intangibles associated with ADM was $8,507,092. In
anticipation of the agreement, an impairment charge against the intangibles
in the amount of $5,499,092 was recorded in the accompanying statement of
operations for the year ended March 31, 2002.
On June 9, 1998, the Company entered into an exclusive agreement to license
the Bal A Versailles (BAV) rights to Genesis International Marketing
Corporation ("Genesis") for an annual licensing fee of $100,000 during the
initial year of the agreement, increasing to $150,000 for subsequent years
for the remainder of the initial term, and to $200,000 each year
thereafter. The initial term of the agreement was for ten years, renewable
every five years.
On November 4, 2002, the Company entered into an agreement to sell the BAV
trademarks to Genesis for $300,000, of which $200,000 has been paid as of
March 31, 2003. As part of the agreement, licensing fees due under the
original licensing agreement stopped accruing on December 31, 2001. As a
result of the ongoing negotiations, an impairment charge against the
intangibles related to BAV in the amount of $1,942,462 was recorded in the
accompanying statements of operations for the year ended March 31, 2002.
7. BORROWINGS
----------
The composition of borrowings is as follows:
March 31, 2003 March 31, 2002
-------------- --------------
Revolving credit facility payable to GMAC
Commercial Credit, interest at LIBOR plus
3.75%, or prime (4.25% at March 31, 2003) plus
1% at the Company's option, net of restricted
cash of $1,477,841 and $1,248,477 at March 31,
2003 and 2002, respectively. $3,967,130 $10,559,914
Note payable to Fred Hayman Beverly Hills
(FHBH), collateralized by the acquired licensed
trademarks, interest at 7.25%, payable in equal
monthly installments of $69,863, including
interest, through June 2004 965,345 1,704,368
Capital lease payable to Bankers Leasing,
collateralized by certain warehouse equipment,
payable in quarterly installments of $33,992,
including interest, through July 2003. 27,999 155,889
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
---------- -----------
4,960,474 12,455,736
Less: long-term borrowings (102,096) (962,275)
---------- -----------
Short-term borrowings $4,858,378 $11,493,461
========== ===========
F-15
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 General
Electric Capital Company. 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, 2003, based on the borrowing base at that date, the credit
line amounted to approximately $14,226,000 and, accordingly, the Company
had approximately $8,649,000 available under the credit line, excluding the
effect of restricted cash of approximately $1,478,000.
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.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
2004 $4,858
2005 102
------
Total $4,960
======
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. LEASES:
The Company leases its office space and certain equipment under
certain operating leases expiring on various dates through 2007. Total
rent expense charged to operations for the years ended March 31, 2003,
2002 and 2001 was approximately $1,000,000, $891,000, and $963,000,
respectively.
At March 31, 2003, the future minimum annual rental commitments under
noncancellable operating leases are as follows (in 000's):
For the year ending March 31, Amount
----------------------------- ------
2004 $760
2005 726
2006 489
2007 17
------
Total $1,992
======
B. LICENSE AND DISTRIBUTION AGREEMENTS:
------------------------------------
During the year ended March 31, 2003, the Company held exclusive
worldwide licenses to manufacture and sell fragrance and other related
products for Perry Ellis, Ocean Pacific ("OP"), and Jockey.
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
F-16
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, 2004 2005 2006 2007 2008
---------------------------- ---- ---- ---- ---- ----
Advertising $11,576 $11,576 $11,576 $11,576 $10,527
Royalties $1,139 $1,027 $634 $569 $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.
On January 16, 2003, the Company entered into an agreement with the
Animale Group, S.A., to sell the inventory, promotional materials,
molds, and intangibles, relating to the Animale brand for $4,000,000,
which closely approximates the brand's net book value at the date of
sale. At Closing, the purchaser paid $2,000,000 in cash and provided a
$2,000,000 note payable in twelve equal monthly installments of
$166,667, plus interest at prime plus 1%, through January 31, 2004. In
accordance with the note's security agreement, the Company will
continue to store and control certain component and raw material
inventory until the balance of the note is less than $500,000. As of
March 31, 2003, notes receivable in the accompanying consolidated
balance sheet includes $1,666,667 relating to this transaction.
As part of the agreement the Company did not include the inventory of
Chaleur d'Animale, the Animale brand's newest product introduction,
and maintains the rights to manufacture and distribute this product
line, on a royalty-free basis, until January 2005.
On March 28, 2003, the Company entered into an exclusive agreement to
sublicense the FHBH rights to Victory International (USA), LLC, for a
royalty of 2% of net sales, with a guaranteed minimum annual royalty
of $50,000. The initial term of the agreement is for five years,
renewable every five years at the sublicensee's option. As part of the
agreement, the Company sold the inventory, promotional materials and
molds relating to FHBH for its approximate book value. At closing, the
purchaser paid $2,000,000 in cash and provided a promissory note due
in twelve monthly installments of approximately $169,356, plus
interest at prime plus 1%, commencing January 2004. As of March 31,
2003, notes receivable in the accompanying consolidated balance sheet
includes $515,468 and $1,524,204, of current and long-term receivables
respectively, relating to this transaction.
The Sublicense Agreement excluded the rights to "273 Indigo" for men
and women, the latest fragrance introduction for the FHBH brand. Such
rights, as well as the rights to any other new FHBH fragrance
additions, will transfer to the sublicensee after twelve (12) months
from the date of launch. The sublicensee is also required to purchase
the inventory and promotional materials relating to the new additions
for a price equal to our book value, up to $500,000.
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
$3,606,000 ($1,314,000 for the year ending March 31, 2004 and
$1,146,000 for each of two years ending March 31, 2006). In addition,
warrants to purchase 760,000 shares of common stock at a price of
$1.86 were granted to officers and directors in connection with these
contracts. These warrants are exercisable for a ten-year period from
the date of grant, vest over the three-year term of the applicable
contract starting on March 31, 2004, and double in the event of a
change in control.
F-17
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, 2003, 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.
All of the previously described warrants were granted at or in excess
of the market value of the underlying shares at the date of grant.
E. PURCHASE COMMITMENTS AND CONTINGENCIES:
---------------------------------------
As of March 31, 2003, the Company is contingently liable in the amount
of approximately $18 million for purchase orders issued in the normal
course of business for components, raw materials and promotional
supplies. The purchase orders, for the most part, stipulate delivery
dates ranging from thirty days to periods exceeding one year, based on
forecasted production needs.
The Company is a party to legal and administrative proceedings arising
in the ordinary course of business. The outcome of these actions is
not expected to have a material effect on the Company's financial
position or results of operations. See Note 15 to the consolidated
financial statements for further discussion.
9. INCOME TAXES
------------
The components of the provision for income taxes for each of the years
ended March 31 are as follows:
Years Ended March 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Current taxes (benefit):
U.S. federal $ 2,724,601 ($1,380,986) $ 1,311,059
U.S. state and local 164,899 85,941 121,440
Foreign -- 6,517 57,090
----------- ----------- -----------
2,889,500 (1,288,528) 1,489,589
Deferred tax (benefit) 328,963 (801,520) 869,568
----------- ----------- -----------
Income tax expense (benefit) $ 3,218,463 ($2,090,048) $ 2,359,157
=========== =========== ===========
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:
2003 2002 2001
---- ---- ----
Statutory federal income tax rate 35.0% (35.0%) 35.0%
Increase (decrease) resulting from:
Change in valuation allowance 2.2% 10.4% --
Other (0.2%) (2.4%) 2.5%
---- ---- ---
37.0% (27.0%) 37.5%
==== ===== ====
Deferred income taxes as of March 31 are provided for temporary differences
between financial reporting carrying value and the tax basis of the
Company's assets and liabilities under SFAS 109. The tax effects of
temporary differences are as follows:
F-18
Deferred Tax Assets 2003 2002
----------- -----------
Allowance for doubtful accounts, sales returns and allowances $ 441,925 $ 379,285
State net operating loss carry forwards 9,656 163,747
Reserve for inventory obsolescence 1,177,961 911,200
Other than temporary decline on investment in affiliate 1,074,404 1,083,137
Other, net 43,250 23,898
----------- -----------
Subtotal 2,747,196 2,561,267
----------- -----------
Deferred Tax Liabilities
Depreciation and amortization (1,022,194) (742,214)
Other (36,285) --
----------- -----------
Subtotal (1,058,479) (742,214)
----------- -----------
Net deferred tax asset before valuation allowance 1,688,717 1,819,053
Less: Valuation allowance (1,074,404) (875,777)
----------- -----------
Net deferred tax asset after valuation allowance 614,313 943,276
----------- -----------
Unrealized loss on investment in affiliate 109,196 281,611
Less: valuation allowance (109,196) (281,611)
----------- -----------
Subtotal -- --
----------- -----------
Net deferred tax asset after valuation allowance $ 614,313 $ 943,276
=========== ===========
A valuation allowance is provided since management can provide no assurance
that the Company will more likely than not generate sufficient capital
gains to completely offset the unrealized loss on investments.
10. STOCK OPTION AND OTHER PLANS
----------------------------
The Company 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, 2003, 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, 2003, 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.
F-19
As of March 31, 2003, 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,
2003, 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, 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
=====
Granted --
Exercised (6,712) $1.38
Canceled/Expired (25,800) $1.38
-------
Balance at March 31, 2002 172,838 $2.26
Granted --
Exercised (53,563) $1.38
Canceled/Expired ( 8,550) $1.38
Balance at March 31, 2003 110,725 $2.40
=======
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 (D):
Amount
------
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
Granted 780,000 $1.86
Exercised -- --
Canceled/Expired -- --
Balance at March 31, 2003 3,046,000 $2.15
=========
F-20
The following table summarizes information about these options and warrants
outstanding at March 31, 2003:
Options And
Options and Warrants Outstanding Warrants Exercisable
-------------------------------- --------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Amount Exercise Price Remaining Life Amount Exercise Price
--------------- ------ -------------- -------------- ------ --------------
$1.38-$2.81 2,940,725 $2.06 6 1,997,944 $2.12
$3.13-$4.56 202,000 $3.23 4 202,000 $3.23
$6.75 10,000 $6.75 4 10,000 $6.75
$8.00 4,000 $8.00 2 4,000 $8.00
--------- ----- --------- -----
3,156,725 $2.16 5 2,213,944 $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, $54,000, and $53,000 for the years ended March 31,
2003, 2002, and 2001, 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:
2003 2002 2001
---------- ----------- ----------
Net income (loss) $5,474,459 ($5,655,401) $3,925,659
========== =========== ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,849,156 9,973,046 10,068,422
========== =========== ===========
Basic net income (loss) per common share $0.56 ($0.57) $0.39
========== =========== ===========
Weighted average number of shares outstanding used in basic
earnings per share calculation 9,849,156 9,973,046 10,068,422
Effect of dilutive securities: (1)
Stock options and warrants, net of treasury shares acquired 330,708 -- 320,630
---------- ----------- ----------
Weighted average number of shares outstanding used in
diluted earnings per share calculation 10,179,864 9,973,046 10,389,052
========== =========== ==========
Diluted net income per common share $0.54 ($0.57) $0.38
========== =========== ===========
Antidilutive securities not included in diluted earnings per
share computation:
Options and warrants to purchase common stock 1,171,072 1,255,566 1,301,850
========== =========== ===========
Exercise Price $2.44-$8.00 $2.25-$8.00 $2.81-$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.
12. LITIGATION SETTLEMENT
---------------------
On May 8, 2001, and as amended on June 8, 2001, the Company filed a legal
complaint against a component supplier to recover out-of-pocket costs and
damages resulting from the supplier having delivered faulty components for
two of its fragrances. Out-of-pocket costs to refurbish the products were
included in cost of goods for the years ended March 31, 2002 and 2001.
On September 25, 2002, the parties entered into a settlement agreement
whereby the Company would receive cash consideration of $3,958,000 from the
supplier's insurance carrier, plus an additional $42,564 from the supplier.
These funds were received on October 7, 2002, and the suit has been
dismissed.
F-21
The Company has recorded the settlement in the accompanying consolidated
statement of operations for the year ended March 31, 2003, net of certain
expenses as follows:
Proceeds from settlement $4,000,564
Less expenses directly related to the claim
and incurred during the period April 1, 2002
through March 31, 2003:
Legal fees 326,327
Refurbishing costs 132,154
----------
Net litigation settlement recorded $3,542,083
==========
Refurbishing expenses and legal fees incurred prior to April 1, 2002, have
been expensed directly to cost of goods sold and general and administrative
expenses, respectively.
The above expenses do not include other general and administrative costs
such as employee travel in connection with the lawsuit discovery process.
13. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS:
--------------------------------------------------
During the last three fiscal years, the following brands have accounted for
10% or more of the Company's gross sales:
2003 2002 2001
---- ---- ----
PERRY ELLIS 75% 67% 69%
OCEAN PACIFIC 10% 12% 3%
ANIMALE 7% 13% 16%
FRED HAYMAN 6% 8% 11%
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 years ended March 31, 2003 and 2002, one unrelated customer
accounted for approximately 19% and 14%, respectively, of the Company's net
sales. No unrelated customer accounted for more than 10% of the Company's
net sales during the year ended March 31, 2001.
Revenues from Perfumania represented 18%, 26%, and 32% of the Company's net
sales during the years ended March 31, 2003, 2002, and 2001, respectively.
To reduce credit risk, on occasion, the Company, based on its reviews of
Perfumania's financial condition, converts certain trade receivables into
subordinated notes receivable. (See Note 2 for a detailed discussion of a
previous conversion of trade receivables into notes receivable from
Perfumania). During the years ended March 31, 2003 and 2002, revenues from
other related parties represented approximately 12% and 9%, respectively,
of the Company's net sales.
During the first quarter of 2003, Perfumania's reported operations and
liquidity position have suffered some deterioration which is explained by
Perfumania's management in its public reports as resulting from, among
other factors, general economic and industry conditions. Management
continues to evaluate its credit risk and assess the collectibility of the
Perfumania receivables. Perfumania's reported financial information, as
well as the Company's payment history with Perfumania, indicates that the
first quarter historically is Perfumania's most difficult quarter as is the
case with most U.S. based retailers. The Company has, in the past, received
significant payments from Perfumania during the last three months of the
calendar year, and has no reason to believe that this will not continue.
Based on management's evaluation, no allowances have been recorded as of
March 31, 2003. Management will continue to evaluate Perfumania's financial
condition on an ongoing basis and consider the possible alternatives and
effects, if any, on the Company.
F-22
Gross sales to international customers totaled approximately $38,364,000,
$31,329,000, and $30,726,000, for the years ended March 31, 2003, 2002, and
2001, respectively. At March 31, 2003 and 2002, trade receivables from
foreign customers (all payable in U.S. dollars) amounted to approximately
$4,897,000 and $4,388,000, respectively.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
----------------------------------------------
The following is a summary of the Company's unaudited quarterly results of
operations for the years ended March, 31, 2003 and 2002 (in thousands,
except per share amounts).
Quarter Ended
-----------------------------------------------------------------
June 30, September 30, December 31, March 31,
2002 2002 2002 2003
------------ ------------ ------------ -----------
Net Sales $19,826 $18.007 $19,781 $14,640
Gross margin 9,633 8,686 10,104 7,959
Net income 1,116 3,110 107 1,141
Income per common share:
Basic $ 0.11 $0.31 $0.01 $0.12
Diluted $ 0.11 $0.31 $0.01 $0.12
Quarter Ended
-----------------------------------------------------------------
June 30, September 30, December 31, March 31,
2001 2001 2001 2002
------------ ------------ ------------ -----------
Net Sales $18,013 $19,041 $16,280 $16,667
Gross margin 9,555 9,185 6,783 8,717
Net (loss) income (1,717) 1,414 (6,155) 803
Income (loss) per common share:
Basic $ (0.17) $ 0.14 $ (0.62) $ 0.08
Diluted $ (0.17) $ 0.13 $ (0.62) $ 0.08
15. SUBSEQUENT EVENTS:
------------------
On May 20, 2003, Parlux Fragrances, Inc. (the "Company") received a Tender
Offer Proposal (the "Proposal"), dated May 19, 2003, from Quality King
Distributors, Inc. ("Quality King") and Ilia Lekach, the Chairman and Chief
Executive Officer of the Company, to form a new entity to acquire all the
outstanding shares of common stock of the Company at a price of $4.00 per
share in cash, which was a premium of 60% over the closing price of the
common stock of $2.50 on that day. If the proposed Tender Offer is
successful, the Company will become a private company. The Proposal is
conditional upon the approval of the lenders to Quality King and the
approval of the Board of Directors of the Company of actions specified by
Section 203 of the Delaware General Corporation Law.
On May 22, 2003, at a special Board of Directors meeting, the Board
appointed an Independent Directors Committee to evaluate and negotiate the
Proposal, and to ultimately vote to approve or disapprove the proposed
Tender Offer. The Independent Committee consists of Messrs. Glenn Gopman
and David Stone, and Ms. Esther Egozi Choukroun. The Independent Committee
had engaged legal counsel to assist in this matter.
On June 13, 2003, the Board of Directors received a letter from Quality
King withdrawing its Proposal due to the inability to obtain approval of
the proposed transaction from its lenders.
Additionally, on June 4, 2003, the Company was served with a shareholder's
class action complaint (the "Complaint"), filed in the Delaware Court of
Chancery by Judy Altman, purporting to act on behalf of herself and other
public stockholders of the Company. The Complaint names Parlux Fragrances,
Inc. as a defendant along with all of the Company's Board of Directors,
F-23
except Mr. David Stone. The Complaint seeks to enjoin the defendants from
consummating the Proposal, and seeks to have the acquisition rescinded if
it is consummated. In addition, the Complaint seeks unspecified damages,
plus the fees, costs and disbursements of Ms. Altman's attorneys. The
defendants are currently scheduled to file a written response to the
Complaint on July 23, 2003.
The Company and the named defendants have engaged Delaware counsel and
intend to vigorously defend the action. Management believes that the
Complaint is without merit. In addition, the Proposal, which precipitated
the Complaint, has been withdrawn. However, there can be no assurance of
the ultimate outcome.
F-24
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at beginning of Additions charged to Net Balance at
Description period costs and expenses Deductions end of period
- -------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2003
--------------
Reserves for:
Doubtful accounts $ 103,470 $ 200,000 $ (8,955) $ 312,425
Sales returns 648,236 4,534,429 4,581,979 600,686
Demonstration and co-op
advertising allowances 678,649 4,313,357 4,171,558 820,448
------------ ------------ ------------ ------------
$ 1,430,355 $ 9,047,786 $ 8,744,582 $ 1,733,559
============ ============ ============ ============
Reserve for inventory shrinkage
and obsolescence $ 2,140,460 $ 600,000 $ 392,552 $ 2,347,908
============ ============ ============ ============
Reserve for prepaid
promotional supplies $ 966,580 $ 320,000 $ 500,530 $ 786,050
============ ============ ============ ============
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
============ ============ ============ ============
F-25