Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company”: in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý
As of September 28, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $48,251,634 based on a closing sale price of $3.89 as reported on the National Association of Securities Dealers Automated Quotation System. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on Schedule 13D and 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for other purposes.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at June 6, 2008 |
Common Stock, $ .01 par value per share |
| 20,679,912 shares |
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12,13 & 14) is incorporated by reference from the registrant’s definitive proxy statement related to its 2008 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Item 1.
BUSINESS.
Introduction
Parlux Fragrances, Inc. is engaged in the business of creating, designing, manufacturing, distributing and selling 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 (distributed primarily through chain drug stores, mass merchandisers, smaller perfumeries and pharmacies). Our fragrance products are positioned primarily in the prestige segment.
During the fiscal year ended March 31, 2008, we engaged in the manufacture (through sub-contractors), distribution and sale of Paris Hilton, GUESS?, Jessica Simpson, Nicole Miller, XOXO, Ocean Pacific (OP), Maria Sharapova, Andy Roddick, and babyGUND fragrances and grooming items on an exclusive basis as a licensee.
During 2005, we expanded our product offerings under the Paris Hilton brand into the accessory market, specifically, watches, handbags, purses, and small leather goods. Such products, which have similar distribution channels as our fragrance products, are intended to strengthen our position with our current customers and distributors while providing incremental sales volume.
We were incorporated as a Delaware corporation in 1984. Our common stock, par value $0.01, is listed on the National Association of Securities Dealers Automatic Quotation System (“Nasdaq”) Global Select Market under the symbol "PARL." For information concerning our financial condition, results of operations and related financial data, you should refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data” sections of this document. You should also review and consider the risks relating to our business, operations, financial performance and cash flows that we describe below under “Risk Factors.”
On May 17, 2006, we announced a two-for-one stock split of common stock in the form of a dividend, for stockholders of record on May 31, 2006 (the “Stock Split”). The Stock Split was effected on June 16, 2006 and did not include shares held in treasury. All discussions concerning common stock, earnings per share, and outstanding shares throughout this Annual Report on Form 10-K as well as comparable share information, have been adjusted to reflect the Stock Split. In connection with the Stock Split, we modified outstanding warrants. See Note 1 (V) to the accompanying consolidated financial statements for further discussion of the effect of the modification of warrants in connection with the Stock Split and the related non-cash share-based compensation expense recorded during the quarter ended June 30, 2006.
Availability of Reports and Other Information
Our corporate website is www.parlux.com. We make available on this website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically submit such material to the Securities and Exchange Commission (the “SEC”). We also make available on our website copies of materials regarding our corporate governance policies and practices. You also may obtain a printed copy of the foregoing materials by sending a written request to: Corporate Secretary, Parlux Fragrances, Inc. 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, Florida 33309. In addition, the Commission’s website is http://www.sec.gov. The SEC makes available on this website, free of charge, reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. Information on our website or the SEC’s website is not part of this document.
1
Recent Developments
Office Lease
On November 30, 2007, we entered into a lease agreement, commencing during February 2008, for 19,072 square feet of office space in Fort Lauderdale, Florida, which serves as our new corporate headquarters. The lease is for eight (8) years, expiring in 2016. We moved during the second week in February 2008 from our former 99,000 square foot office/warehouse facility, also in Fort Lauderdale, which is currently being marketed for sublease. Warehouse operations have been consolidated into our 198,050 square foot leased distribution center in New Jersey.
Jessica Simpson Fragrance License
On June 21, 2007, we entered into an exclusive license agreement with VCJS, LLC, to develop, manufacture and distribute prestige fragrances and related products under the Jessica Simpson name. The initial term of the agreement expires five years from the date of the first product sales and is renewable for an additional five years if certain sales levels are met.
We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate that the first fragrance under this agreement will be launched in late summer 2008.
Nicole Miller Fragrance License
On August 1, 2007, we entered into an exclusive license agreement with Kobra International, Ltd., to develop, manufacture and distribute prestige fragrances and related products under the Nicole Miller name. The initial term of the agreement expires on September 30, 2013 and is renewable for two additional terms of three years each, if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2008, and have recently resumed the manufacturing of certain previously developed Nicole Miller fragrances.
Josie Natori Fragrance License
Effective May 1, 2008, we entered into an exclusive license agreement with J.N. Concepts, Inc., to develop, manufacture and distribute prestige fragrances and related products under the Josie Natori name. The initial term of the agreement expires on September 30, 2012 or December 31, 2012, depending on the first product launch date, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010.
Queen Latifah Fragrance License
Effective May 22, 2008, we entered into an exclusive license agreement with Queen Latifah Inc., to develop, manufacture and distribute prestige fragrances and related products under the Queen Latifah name. The initial term of the agreement expires on March 31, 2014 , and is renewable for an additional five-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010.
The Products
At present, our principal products are fragrances, which are distributed in a variety of sizes and packaging. In addition, beauty-related products such as body lotions, creams, shower gels, deodorants, soaps, 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 supervise the design of our packaging by independent contractors to create products appealing to the intended customer base. The creation and marketing of each product line is closely linked with the applicable brand name, its positioning and market trends for the prestige fragrance industry. This development process usually takes twelve to eighteen months
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to complete. During fiscal 2008, we completed the design process and production of PARIS HILTON “Can Can” for women and GUESS? by Marciano for women.
During the last three fiscal years, the following brands have accounted for 10% or more of our gross sales from continuing operations:
|
| Fiscal 2008 |
| Fiscal 2007 |
| Fiscal 2006 |
PARIS HILTON (including accessories) |
| 68% |
| 56% |
| 69% |
GUESS? |
| 23% |
| 37% |
| 20% |
|
|
|
|
|
|
|
Under a separate license agreement, we developed a line of “limited edition” watches under the Paris Hilton brand which were introduced during the 2005 holiday season. The initial “limited edition” products retailed at prices ranging from $100,000 to $150,000. A “fashion watch” is now available for sale, which retails at prices ranging from $85 to $200 per item. We sell the “fashion watch” directly to a limited number of U.S. department store customers through our own sales force and through distribution agreements for international markets. We are working closely with several watch manufacturers to establish products at different price levels.
In addition, we entered into various distribution agreements with Paris Hilton Entertainment, Inc. for handbags, purses, wallets, and other small leather goods (“handbags”), which have been shipped in the U.S. and certain international markets, and cosmetics and sunglasses. We are currently analyzing different options for these additional licenses to determine the most efficient and profitable method to produce and distribute such products, including possible assignment or sublicensing of our rights thereunder. During the year ended March 31, 2008, we sublicensed the international rights for handbags generating $460,000 in sublicense revenue. We anticipate minimum revenues of $360,000 under this sublicense for fiscal 2009.
Marketing and Sales
In the United States, we have our own fragrance sales and marketing staff, and utilize independent commissioned sales representatives for sales to domestic U.S. military bases and mail order distribution. We sell directly to retailers, primarily national and regional department stores, whom we believe will maintain the image of our products as prestige fragrances. Our products are sold in over 2,500 retail outlets in the United States. Additionally, we sell a number of our products to Perfumania Inc. (“Perfumania”), which is a specialty retailer of fragrances with approximately 315 retail outlets principally located in manufacturers’ outlet malls and regional malls in the U.S. and in Puerto Rico. Perfumania is a wholly-owned subsidiary of E Com Ventures, Inc. (“ECMV”). Our former Chairman and CEO had a significant equity interest in ECMV and held identical management positions in ECMV until February 2004, when he sold most of his shares in ECMV to Glenn and Stephen Nussdorf (the “Nussdorfs”). Shortly thereafter, Mr. Lekach resigned from the ECMV board and was terminated as CEO, without cause, as a result of the change in management. Parlux previously maintained an approximate 13% ownership interest in ECMV until we sold all of our shares in ECMV during August and September 2006. The Nussdorfs acquired an approximate 12.2% (at that time) ownership interest in Parlux during August and September 2006 and accordingly, all transactions with ECMV or Perfumania have been reported as Related Party transactions. The Nussdorfs currently own approximately 10.7% of our outstanding shares.
In addition, we have distribution agreements with unrelated third parties to market and distribute handbags in North America and certain international markets, and we utilize a combination of our own sales force and independent commissioned sales representatives to reach the market for watches.
Outside the United States, marketing and sales activities for all of our products are conducted through distribution agreements with independent distributors, whose activities are monitored by our international sales staff. We presently market our fragrances through distributors in Canada, Europe, the Middle East, Asia, Australia, Latin America, the Caribbean and Russia, covering over 80 countries. Gross sales to unrelated international customers amounted to approximately 40%, 37%, and 38% of our total net sales from continuing operations during the fiscal years ended March 31, 2008, 2007 and 2006, respectively.
We advertise directly, and through cooperative advertising programs in association with major retailers, in fashion media on a national basis and through retailers’ statement enclosures and catalogues. We are required to spend certain minimum amounts for advertising under certain licensing agreements. See “Licensing Agreements” and Note 8(B) to the accompanying consolidated financial statements.
3
Raw Materials
Raw materials and components (“raw materials”) for our fragrance products are available from sources in the United States, Europe, and the Far East. We source the raw materials, which are delivered directly to third party contract manufacturers who produce and package the finished products, based on our estimates of anticipated needs for finished goods, from independent suppliers. As is customary in our industry, we do not have long-term agreements with our contract manufacturers. We anticipate purchasing almost all of our watch and handbag finished products from the Far East. We believe we have good relationships with our manufacturers and that there are alternative sources available should one or more of these manufacturers be unable to produce at competitive prices.
To date, we have had little difficulty obtaining raw materials at competitive prices. There is no reason to believe that this situation will change in the near future, but there can be no assurance this will continue.
Seasonality
Typical of the fragrance industry, we have our highest sales as our customers purchase our products in advance of the Mother’s and Father’s Day periods and the calendar year end holiday season, which fall during our first fiscal quarter, and our third fiscal quarter. Lower than projected sales during these periods could have a material adverse effect on our operating results.
Industry Practices
It is an industry practice in the United States for businesses that market fragrances to department stores to provide the department stores with rights to return merchandise. Our fragrance 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 based on historical return patterns. We believe that such reserves and allowances are adequate based on past experience; however, we cannot provide assurance that reserves and allowances will continue to be adequate or that returns will not increase. Consequently, if product returns are in excess of the reserves and allowances provided, net sales will be reduced when such fact becomes known.
Customers
We concentrate our fragrance sales efforts in the United States in a number of regional department store retailers which include, among others, Belk, Bon Ton, Boscovs, Carson’s, J.C. Penney, Macy’s, and Stage Door. We also sell directly to perfumery and cosmetic retailers, including Perfumania, Sephora and Ulta, as well as the GUESS? retail stores. Retail distribution has been targeted by brand to maximize potential revenue and minimize overlap between each of these distribution channels.
Our international sales efforts are carried out through distributors in over 80 countries, the main focus of which has been in Latin America, Canada, Europe, Asia, Australia, the Middle East, the Caribbean and Russia. These distributors sell our products to the local department stores as well as to numerous perfumeries in the local markets. Some of these distributors may also sell our watches and handbags, and we continue to seek agreements with new distributors who specialize in such products.
| Year Ended March 31, |
|
|
| ||||||||
| 2008 |
| 2007 |
| 2006 |
|
|
| ||||
Sales to |
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|
|
|
|
|
|
|
|
|
|
|
Continuing operations | $ | 51,148,000 |
| $ | 11,720,000 |
| $ | 7,517,000 |
|
|
|
|
Discontinued operations |
| — |
|
| 5,513,000 |
|
| 15,925,000 |
|
|
|
|
| $ | 51,148,000 |
| $ | 17,233,000 |
| $ | 23,442,000 |
|
|
|
|
During the fiscal years ended March 31, 2008, 2007 and 2006, we had sales from continuing operations of approximately $51,148,000, $11,720,000 and $7,517,000, respectively, to Perfumania, which represented 33%, 9% and 7%, respectively, of our sales from continuing operations for the periods. In addition, we had sales to Perfumania of approximately $0, $5,513,000 and $15,925,000, respectively, of Perry Ellis products over the same periods which are reflected as discontinued operations. Perfumania is one of our largest customers and transactions with them are closely monitored by management, and any unusual trends or issues are brought to the attention of our
4
Audit Committee and Board of Directors. Perfumania offers us the opportunity to sell our products in approximately 315 retail outlets and our terms with Perfumania take into consideration the relationship existing between the companies for over 16 years. Pricing and terms with Perfumania reflect (a) the volume of Perfumania’s purchases, (b) a policy of no returns from Perfumania, (c) minimal spending for advertising and promotion, (d) exposure of our products provided in Perfumania’s store windows, and (e) minimal distribution costs to fulfill Perfumania orders shipped directly to their distribution center.
While our invoice terms to Perfumania are stated as net ninety (90) days, for over ten years, management has granted longer payment terms taking into consideration the factors discussed above. We evaluate the credit risk involved, which is determined based on Perfumania’s reported results and comparable store sales performance. Management monitors the account activity to ensure compliance with their limits.
Net trade accounts receivable owed by Perfumania to us amounted to $15,392,112 and $6,101,456 at March 31, 2008 and 2007, respectively. Trade accounts receivable from Perfumania are non-interest bearing, and are paid in accordance with the terms established by management. See “Liquidity and Capital Resources” for further discussion of this receivable.
We continue to evaluate our credit risk and assess the collectibility of the Perfumania receivables. Perfumania’s reported financial information, as well as our payment history with Perfumania, indicates that, historically, their first quarter ending approximately April 30, is Perfumania’s most difficult operating quarter as is the case with most U.S. based retailers. We have, in the past, received significant payments from Perfumania during the last three months of the calendar year, and have no reason to believe that this will not continue. Based on our evaluation, no allowances have been recorded as of March 31, 2008, and 2007. We will continue to evaluate Perfumania’s financial condition on an ongoing basis and consider the possible alternatives and effects, if any, on the Company.
Foreign and Export Sales
We record sales, cost of sales, and other direct expenses in three categories: Domestic, International and Related Parties. Domestic includes sales generated by our Domestic Sales Division and generally includes sales to department and specialty stores in the United States that are not deemed to be related parties. International covers all sales other than domestic and related party sales that are processed by way of our International Sales Division to international distributors that are not deemed to be related parties for the sale of products in markets outside of the United States. Related parties are those parties that are known to us as having a related party relationship as defined in SFAS 57, “Related Party Disclosure.” See Note 2 to the accompanying consolidated financial statements for additional information regarding related parties. Because of the substantial margins generated by fragrance sales, some products intended for sale in certain international territories are re-exported to the United States, a common practice in the fragrance industry. In addition, prior season gift sets, refurbished returns and other slow moving products, are sold at substantially discounted prices, and as such, can find their way into mass market channels. Additionally, where the licensor does not restrict distribution, sales are made in all markets deemed appropriate for the brand.
Prior to July 1, 2007, sales to parties related to the Company’s former Chairman and CEO were treated as related party sales. As of June 30, 2007, the former Chairman and CEO’s beneficial ownership interest in the Company had declined to approximately 7.6%, further declining during the quarter ended September 30, 2007, to less than 5% (less than 1% at March 31, 2008). Accordingly, effective July 1, 2007, transactions with parties related to the former Chairman and CEO are no longer included as related party transactions. Sales to Perfumania have increased as sales to distributors formerly reported as related parties have decreased.
| Year Ended March 31, |
| |||||||
| 2008 |
| 2007 |
| 2006 |
| |||
Sales to unrelated international customers: |
|
|
|
|
|
|
|
|
|
Continuing operations | $ | 61,527,000 |
| $ | 51,917,000 |
| $ | 42,375,000 |
|
Discontinued operations |
| — |
|
| 13,434,000 |
|
| 31,203,000 |
|
| $ | 61,527,000 |
| $ | 65,351,000 |
| $ | 73,578,000 |
|
5
| Year Ended March 31, |
| ||||||||
| 2008 |
| 2007 |
| 2006 |
| ||||
Sales to other related parties: |
|
|
|
|
|
|
|
|
|
|
Continuing operations | $ | 8,005,000 |
| $ | 40,118,000 |
| $ | 26,667,000 |
|
|
Discontinued operations |
| — |
|
| 15,027,000 |
|
| 24,470,000 |
|
|
| $ | 8,005,000 |
| $ | 55,145,000 |
| $ | 51,137,000 |
|
|
During the years ended March 31, 2008, 2007, and 2006, sales from continuing operations to unrelated international customers were approximately $61,527,000, $51,917,000 and $42,375,000, respectively, (total unrelated international sales of approximately $61,527,000, $65,351,000 and $73,578,000, respectively). Gross sales from continuing operations to international distributors owned and operated by individuals related to our former Chairman and CEO during the fiscal years ended March 31, 2008, 2007 and 2006, which are included in related party sales until June 30, 2007, amounted to approximately $8,005,000, $40,118,000 and $26,667,000, respectively (total sales of approximately $8,005,000, $55,145,000 and $51,137,000, respectively), and are in addition to the sales to unrelated international customers noted above. Effective July 1, 2007, transactions with parties related to the former Chairman and CEO are no longer included as related party transactions . (See Note 2 to the consolidated financial statements for further discussion of related parties)
Licensing Agreements
See “The Products” on page 2 for further discussion of the relative importance of our licensing agreements.
PARIS HILTON: Effective June 1, 2004, we entered into a definitive license agreement with Paris Hilton Entertainment, Inc. (“PHEI”), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under her name, which expires on June 30, 2009. The agreement is renewable for an additional five-year period, at the option of the Licensee as long as minimum royalties for the initial term have been fully paid. The first Paris Hilton women’s fragrance was launched during November 2004, and was followed by a launch of a men’s fragrance in April 2005.
On January 26, 2005, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute watches and other time pieces under the Paris Hilton name. The initial term of the agreement expires on June 30, 2010 and is renewable for an additional five-year period, at the mutual agreement of both parties. The first “limited edition” watches under this agreement were launched during December 2005 and a line of “fashion watches” was launched during spring 2006.
On May 11, 2005, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute cosmetics under the Paris Hilton name. The initial term of the agreement expires on January 15, 2011 and is renewable for an additional five-year period, at the mutual agreement of both parties. To date, no products have been launched under this license.
On May 13, 2005, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute handbags, purses, wallets and other small leather goods, under the Paris Hilton name. The initial term of the agreement expires on January 15, 2011 and is renewable for an additional five-year period, at the mutual agreement of both parties. The first products under this agreement were launched during summer 2006. During fiscal 2008, we sublicensed the international rights under this agreement.
On April 5, 2006, we entered into an exclusive worldwide license agreement with PHEI, to develop, manufacture and distribute sunglasses under the Paris Hilton name. The initial term of the agreement expires on January 15, 2012 and is renewable for an additional five-year period, at the mutual agreement of both parties. To date, no products have been launched under this license.
Under all of the PHEI agreements, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume. We are currently analyzing different options for the non-fragrance licenses to determine the most efficient and profitable method to produce and distribute such products, including possible assignment or additional sublicensing of our rights thereunder.
GUESS: Effective November 1, 2003, we entered into an exclusive license agreement with GUESS? and GUESS? IP HOLDER L.P., to develop, manufacture and distribute prestige fragrances and related products on a
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worldwide basis. The term of the agreement continues through December 2009, and is renewable for an additional five years if certain sales levels are met.
In December 2006, we received a complaint from GUESS?, Inc. (“GUESS?”) alleging that GUESS? fragrance products were being sold in unauthorized retail channels. Although we did not sell such products directly to these channels, the occurrence of any such sales by third parties still represents a violation of our license agreement with GUESS?. On May 7, 2007, we entered into a settlement agreement with GUESS? which, among other items, requires GUESS?’s reapproval of all international distributors selling GUESS? fragrance products, liquidating damages in the amount of $500,000, payable in nine equal monthly installments of $55,556, as well as requiring us to strictly monitor distribution channels. Any further violations surrounding unapproved distribution could result in termination of the license agreement. During the quarter ended March 31, 2007, we stopped shipments to international distributors. GUESS? has approved certain international distributors and we have commenced shipments to these approved distributors. We continue to submit approval requests for additional international distributors in accordance with procedures outlined in our license agreement with GUESS?.
Under the GUESS? agreement, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume. The first GUESS? women’s fragrance was launched during July 2005, which was followed by a launch of a men’s fragrance in March 2006.
OCEAN PACIFIC: In August 1999, we entered into an exclusive worldwide licensing agreement with Ocean Pacific Apparel Corp. (“OP”), to manufacture and distribute men’s and women’s fragrances and other related products under the OP label. The initial term of the agreement extended through December 31, 2003, and was automatically renewed for two additional three-year periods, with the latest term ending December 31, 2009. We initially had six additional three-year renewal options, of which the first two contained automatic renewals at our option, and the last four require the achievement of certain minimum net sales. The license requires the payment of minimum royalties, whether or not any product sales are made, 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.
XOXO: Effective January 6, 2005, we entered into a purchase and sale agreement (the “Purchase Agreement”) with Victory International (USA), LLC (“Victory”), whereby we acquired the exclusive worldwide licensing rights (“the Fragrance License”), along with inventories, molds, designs and other assets, relating to the XOXO fragrance brand. The initial term of the Fragrance License continued through June 30, 2007, and was renewable for an additional three-year period, at the mutual agreement of both parties. The Fragrance License requires the payment of a minimum royalty, whether or not any product sales are made, and the spending of certain minimum amounts for advertising.
During June 2006, we extended the Fragrance License through June 30, 2010 and negotiated renewal terms which, among other items, reduced minimum royalty requirements.
MARIA SHARAPOVA: On September 15, 2004, we entered into an exclusive worldwide license agreement with Ms. Maria Sharapova, to develop, manufacture and distribute prestige fragrances and related products under her name. The initial term of the agreement expires on June 30, 2008 and was renewable for an additional three-year period, at the mutual agreement of both parties. We have determined it is not in our best interest to renew the agreement and accordingly, have the right to sell inventory relating to the brand through December 31, 2008. The first fragrance under this agreement was launched in September 2005. Under the agreement, we paid a minimum royalty, whether or not any product sales were made, and spent minimum amounts for advertising based on sales volume.
ANDY RODDICK: On December 8, 2004, we entered into an exclusive worldwide license agreement with Mr. Andy Roddick, to develop, manufacture and distribute prestige fragrances and related products under his name. The initial term of the agreement, as amended, expires on March 31, 2010 and is renewable for an additional three-year period, at the mutual agreement of both parties. The first fragrance under this agreement was produced during March 2008. Under the agreement, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume.
babyGUND: Effective April 6, 2005, we entered into an exclusive license agreement with GUND, Inc., to develop, manufacture and distribute children’s fragrances and related products on a worldwide basis under the babyGund trademark. The agreement continues through June 2010, and is renewable for an additional two years if
7
certain sales levels are met. The first products under this agreement were produced during fall 2007. Under the agreement, we must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based on sales volume.
JESSICA SIMPSON: On June 21, 2007, we entered into an exclusive license agreement with VCJS, LLC, to develop, manufacture and distribute prestige fragrances and related products under the Jessica Simpson name. The initial term of the agreement expires five years from the date of the first product sales and is renewable for an additional five years if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate that the first fragrance under this agreement will be launched during late summer 2008.
NICOLE MILLER: On August 1, 2007, we entered into an exclusive license agreement with Kobra International, Ltd., to develop, manufacture and distribute prestige fragrances and related products under the Nicole Miller name. The initial term of the agreement expires on September 30, 2013 and is renewable for two additional terms of three years each, if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2008, and have recently resumed the manufacturing of certain previously developed Nicole Miller fragrances.
JOSIE NATORI: Effective May 1, 2008, we entered into an exclusive license agreement with J.N. Concepts, Inc., to develop, manufacture and distribute prestige fragrances and related products under the Josie Natori name. The initial term of the agreement expires on September 30, 2012 or December 31, 2012, depending on the first product launch date, and is renewable for an additional three-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010.
QUEEN LATIFAH: Effective May 22, 2008, we entered into an exclusive license agreement with Queen Latifah Inc., to develop, manufacture and distribute prestige fragrances and related products under the Queen Latifah name. The initial term of the agreement expires on March 31, 2014, and is renewable for an additional five-year term if certain sales levels are met. We must pay a minimum royalty, whether or not any product sales are made, and spend minimum amounts for advertising based upon sales volume. We anticipate launching a new fragrance under this license in the fall of 2009 or early 2010.
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 us an exclusive royalty free 55-year license to use FHBH’s United States Class 3 trademarks Fred Haymanâ, 273â, Touchâ, With Loveâ and Fred Hayman Personal Selectionsâ 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 for a royalty of 2% of net sales, with a guaranteed minimum annual royalty of $50,000 (the “Sublicense”). The initial term of the Sublicense is for five years, renewable every five years at the sublicensee’s option.
The Sublicense excluded the right to “273 Indigo” for men and women, the latest fragrance introduction for the FHBH brand, as well as all new FHBH product development rights.
On October 17, 2003, the parties amended the Sublicense, granting all new FHBH product development rights to the sublicensee. In addition, the guaranteed minimum annual royalty increased to $75,000 and the royalty percentage on sales of new FHBH products was increased to 3% of net sales. We received licensing fees under this sublicense totaling $75,000, $96,075 and $75,540 during the fiscal years ended March 31, 2008, 2007 and 2006, respectively.
PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license renewed automatically every two years if average annual net sales in the preceding two-year license period exceeded 75% of the average net sales of the previous four years. All minimum sales levels had been met. The license required the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon net sales levels achieved in the prior year. During December 2006, we sold the Perry Ellis fragrance rights and related assets to the licensor, Perry Ellis International (“PEI”).
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ROYAL COPENHAGEN: On September 1, 2003, we entered into an agreement with Five Star Fragrances Company, Inc. (“Five Star”), to market and distribute Royal Copenhagen fragrance products to the U.S. department store market. The original term of the agreement was for three years, with an option to renew for one additional year. Five Star elected to terminate the agreement effective as of July 31, 2006. There were no royalties, sales minimums or advertising commitments under this agreement. In accordance with the terms of the agreement, Five Star repurchased all of our unsold Royal Copenhagen inventory at our cost.
We believe we are currently in compliance with all material obligations under the above agreements. There can be no assurance that we will be able to continue to comply with the terms of these agreements in the future.
Trademarks
We have exclusive licenses, as discussed above, to use trademark and tradename rights in connection with the packaging, marketing and distribution of our products, both in the United States and internationally where such products are sold. See “The Products” for further discussion of the relative importance of these licenses.
In addition, we own the worldwide trademark and distribution rights to LIMOUSINE fragrances. There are no licensing agreements requiring the payment of royalties to us for this trademark. We have not distributed fragrance products under the LIMOUSINE brand since fiscal 1998, nor do we anticipate distribution in the near future.
Product Liability
We have insurance coverage for product liability in the amount of $2 million per incident. We maintain an additional $10 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.
In connection with our Paris Hilton fashion watch business, we provide a one-year warranty on the watch mechanism and anticipate that repair service would be handled by an outside third party, as necessary. We may opt to replace the watch if we consider this action to be more cost beneficial.
Government Regulations
A fragrance is defined as a “cosmetic” under the Federal Food, Drug and Cosmetics Act (the “FDC Act”). A fragrance must comply with the labeling requirements of the FDC Act as well as the Fair Packaging and Labeling Act and its regulations. Under U.S. law, a product may be classified as both a cosmetic and a drug. If we produce such products, there would be additional regulatory requirements for products which are “drugs” including additional labeling requirements, registration of the manufacturer and the semi-annual update of a drug list.
Effective March 11, 2005, we were required to comply with the labeling, durability and non-animal testing guidelines from the European Cosmetic Toiletry and Perfumery Association (“COLIPA”) Amendment No. 7, to distribute our products in the European Union (“EU”). We created “safety assessor approved” dossiers for all our products to be distributed in the EU, and have filed such documentation both domestically and with our agent in France. In addition to the EU specific requirements, we comply with all other significant international requirements.
We are not aware of any violations or issues with the regulations above, or any other significant regulations to which the Company may be subject.
Competition
The markets for fragrance and beauty related products, as well as watches, handbags and other accessories, are highly competitive and sensitive to changing consumer preferences and demands. We believe that the quality of our products, as well as our ability to develop, distribute and market new products, will enable us to continue to compete effectively in the future and to continue to achieve positive product reception, position and inventory levels in retail outlets. We believe we compete primarily on the basis of product recognition and emphasis on providing in-store customer service. However, there are products, which are better known than the products distributed by us, and we do not presently have the extent of experience in the accessories market to compete effectively. There are also
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companies, which are substantially larger and more diversified. The top 27 companies, as listed in the September 2007 issue of “WWD Beauty Biz”, have sales levels exceeding $1 billion and have substantially greater financial and marketing resources than we have, 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, 2008, we had a total of 154 employees, consisting solely of full-time employees, all of which were located in the United States. Of these, 58 were engaged in worldwide sales activities, 63 in operations, marketing, administrative and finance functions and 33 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 both domestically and internationally, as well as temporary agency personnel to assist with seasonal distribution requirements.
Item 1A.
RISK FACTORS.
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should note that forward-looking statements in this document speak only as of the date of this Annual Report on Form 10-K and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
The Paris Hilton and GUESS? lines are our primary sources of revenue following our sale of the Perry Ellis brand.
During the year ended March 31, 2008, licensed Paris Hilton and GUESS? brand products generated approximately $108 million and $37 million, respectively, in gross sales. The Paris Hilton and GUESS? brands of fragrances and accessories accounted for approximately 68% and 23%, respectively, of our gross sales from continuing operations during the fiscal year ended March 31, 2008, and are expected to account for the majority of our gross sales in the year ending March 31, 2009. If Paris Hilton's appeal as a celebrity were to diminish, or GUESS? would not approve shipments to our international distributors (See “Licensing Agreements” for further discussion) it could result in a material reduction in our sales of products licensed by them, adversely affecting our results of operations and operating cash flows. That risk has become more significant as these product lines have become our primary source of revenue.
If we are unable to acquire or license additional brands, secure additional distribution arrangements, or obtain the required financing for these agreements and arrangements, the growth of our business could be impaired.
Our business strategy contemplates the continued increase of our portfolio of licensed brands. Our future expansion through acquisitions or new product distribution arrangements, if any, will depend upon the capital resources and working capital available to us. We may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business.
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Our arrangements with our manufacturers, suppliers and customers are generally informal and any change, interruption, or termination of any of our relationships could limit our supply of inventory and reduce sales, profitability and operating cash flow.
Although we have signed distribution agreements with many of our international distributors, we do not have long-term or exclusive contracts with any of our domestic customers and generally do not maintain long-term or exclusive contracts with our suppliers. Virtually all of our finished products are assembled from multiple components and manufactured by third parties. The loss of key suppliers or customers, such as Perfumania, or a change in our relationship with them, could result in supply and inventory interruptions and reduced sales, profitability, and operating cash flows.
The fragrance and cosmetic industry is highly competitive, and if we are unable to compete effectively it could have a material adverse effect on our sales, profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.
The fragrance and cosmetic industry is highly competitive and, at times, changes rapidly due to consumer preferences and industry trends. We compete primarily with global prestige fragrance companies, some of whom have significantly greater resources than we have. Our products compete for consumer recognition and shelf space with products that have achieved significant international, national and regional brand name recognition and consumer loyalty. Our products also compete with new products that often are accompanied by substantial promotional campaigns. In addition, these factors, as well as demographic trends, economic conditions and discount pricing strategies by competitors, could result in increased competition and could have a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.
Our net sales, operating income and inventory levels fluctuate on a seasonal basis and decrease in sales or margins during our peak seasons could have a disproportionate effect on our overall financial condition and results of operations.
Our net sales and operating income fluctuate seasonally, with a significant portion of our operating income typically realized during peak holiday gift-giving seasons. Any decrease in sales or margins during this period could have a disproportionate effect on our financial condition and results of operations. Seasonal fluctuations also affect our inventory levels. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling our inventory, we may have to write down our inventory or sell it at significantly reduced prices or we may not be able to sell such inventory at all, which could have a material adverse effect on our financial condition and results of operations.
The continued consolidation of the U.S. department store segment could have a material adverse effect on our sales and profitability.
Over the last few years, the United States department store market has encountered a significant amount of consolidation, the most recent significant example of which was the merger of Federated Department Stores and May Corp (since incorporated into the Macy’s nameplate). Such mergers and consolidations have resulted in store closings, increased inventory control and management as well as changes in administrative responsibilities. This transition, if unsuccessful, could have a material adverse effect on our sales and profitability.
Perfumania is one of our largest customers, and a loss of Perfumania as a customer would have a material adverse effect on our business.
Perfumania is one of our largest customers. Perfumania is a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV") and the majority stockholders of ECMV own approximately 10.7% of our outstanding shares. During the fiscal years ended March 31, 2008, 2007 and 2006, we had net sales from continuing operations of approximately $51,148,000, $11,720,000 and $7,517,000, respectively, to Perfumania, which represented 33%, 9% and 7%, respectively, of our net sales from continuing operations for the periods. In addition, we had sales to Perfumania of approximately $0, $5,513,000 and $15,925,000, respectively, of Perry Ellis products over the same periods which are reflected as discontinued operations. Any significant reduction in business with Perfumania as a customer of the Company would have a material adverse effect on our net sales.
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Consumers may reduce discretionary purchases of our products as a result of a general economic downturn, terrorism threats, or other external factors.
We believe that consumer spending on fragrance and other accessory products is influenced to a great extent by general economic conditions and the availability of discretionary income. Accordingly, we may experience sustained periods of decline in sales during economic downturns, or in the event of terrorism or epidemics affecting customers’ purchasing patterns. In addition, a general economic downturn may result in reduced traffic in our customers’ stores which may, in turn, result in reduced net sales to our customers. Any resulting material reduction in our sales could have a material adverse effect on our business, its profitability or operating cash flows.
If we are unable to protect our intellectual property rights, specifically trademarks and trade names, our ability to compete could be negatively impacted.
The market for our products depends to a significant extent upon the value associated with our trademarks and trade names. We own, or have licenses or other rights to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our major products both in the United States and in other countries where such products are principally sold; therefore, trademark and trade name protection is important to our business. Although most of our brand names are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and trade names may be substantial.
Other parties may infringe on our intellectual property rights or other intellectual property rights which we are licensed to use and may thereby dilute our brands in the marketplace.
Any infringement of our intellectual property rights would likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. Under our license agreement with GUESS?, we are responsible for monitoring for infringement of the GUESS? intellectual property rights. We must take action, at our cost, to stop minor infringement, and may be liable to share a significant portion of the total cost, with GUESS?, to stop substantial infringement.
We are subject to significant litigation.
We have been a party to significant litigations, including those described in Item 3 - Legal Proceedings of this Form 10-K. We intend to vigorously defend these and other pending lawsuits, but the ultimate outcome of such cases can never be predicted with certainty, and the costs and distraction to management of defending such cases could impact our results of operations.
We depend on third parties for the manufacture and delivery of our products, and any disruption or interruption in this supply chain can adversely affect production levels.
We do not own or operate any significant manufacturing facilities. We use third-party manufacturers and suppliers to manufacture most of our products. We currently obtain these products from a limited number of manufacturers and other suppliers. If we were to experience delays in the delivery of the finished products or the raw materials or components used to make such products, or if these suppliers were unable to supply such products, or if there were transportation problems between the suppliers and our distribution center, our sales, profitability, and operating cash flow could be negatively impacted.
The development of new products by us involves considerable costs and any new product may not generate sufficient consumer interest and sales to become a profitable brand or to cover the costs of its development.
Generally, a significant number of new prestige fragrance products have been introduced on a worldwide basis. The beauty industry in general is highly competitive and consumer preferences change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of our industry. Department stores tend to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development, advertising and promotional expenses. In addition, a number of the new
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launches are with celebrities (either entertainers or athletes) which require substantial royalty commitments and whose careers and/or appeal could change dramatically, either positively or negatively, based on a single event. If one or more of our new product introductions were to be unsuccessful, or if the appeal of the celebrity related to a product were to diminish, it could result in a reduction in profitability and operating cash flows.
The accessories market, specifically, watches, handbags, and sunglasses, is also highly competitive and if we are unable to compete effectively it could have a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.
As with fragrances and cosmetics, the accessories market is highly competitive and also changes rapidly due to consumer preferences and industry trends. In addition, we do not have the extent of experience in this market segment as we do in fragrances. We may have difficulty in sourcing these accessory items, all of which will be manufactured by independent third parties, and may not meet the quality standards expected by the licensor and/or the consumer. Consumer awareness and positive imagery of the licensor could also be impacted by adverse publicity, which could negatively impact retailer and consumer attitudes. Additionally, we are obligated to make required minimum royalty payments. Our lack of experience in these highly competitive markets could result in a material adverse effect on our profitability, operating cash flow, and many other aspects of our business, prospects, results of operations and financial condition.
The loss of, or disruption in our distribution facility, could have a material adverse effect on our sales and our relationships with our customers.
We have one distribution facility, located in New Jersey, which is close to where our fragrance products are filled and packaged. The loss of, or any damage to our New Jersey facility, as well as the inventory stored therein, would require us to find replacement facilities. In addition, weather conditions, such as hurricanes or other natural disasters, could disrupt our distribution operations. Certain of our components require purchasing lead times in excess of ninety days. If we cannot replace our distribution capacity and inventory in a timely, cost-efficient manner, it could reduce the inventory we have available for sale, adversely affecting our profitability and operating cash flows, as well as damaging relationships with our customers who are relying on deliveries of our products.
Reductions in worldwide travel could hurt sales volumes in our duty-free related business.
We depend on consumer travel for sales to our “duty free” customers in airports and other locations throughout the world. Any reductions in travel, including as a result of general economic downturns, or acts of war or terrorism, or disease epidemics, could result in a material decline in sales and profitability for this channel of distribution, which could negatively affect our operating cash flow.
Failure to comply with restrictive covenants in our existing credit facility will result in our inability to borrow additional funds under the facility, which would require us to obtain replacement financing, of which there is no assurance.
Our revolving credit facility requires us to maintain compliance with various financial covenants. As of March 31, 2008, we were in compliance with all of these covenants. Our ability to meet those covenants can be affected by events beyond our control, and therefore we may be unable to meet those covenants. If our actual results deviate significantly from our projections, we may not remain in compliance with the covenants and would not be allowed to borrow under the credit facility. If we are not able to borrow under our credit facility, we would be required to develop an alternative source of liquidity, or to sell additional securities which would result in dilution to existing stockholders. We may be unable to obtain replacement credit facilities on favorable terms or at all. Without a source of financing, we could experience cash flow difficulties and disruptions in our supply chain.
If we lose the services of our executive officers and senior management, it could have a negative impact on our business.
Our success is dependent upon the continued service and skills of our executive officers and senior management. If we lose the services of our executive officers and senior management, it could have a negative impact on our business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
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If we lose our key personnel, or fail to attract and retain additional qualified experienced personnel, we will be unable to continue to develop our prestige fragrance products and attract and obtain new licensing partners.
We believe that our future success depends upon the continued contributions of our highly qualified sales, creative, marketing, and management personnel and on our ability to attract and retain those personnel. These individuals have developed strong reliable relationships with customers and suppliers. There can be no assurance that our current employees will continue to work for us or that we will be able to hire any additional personnel necessary for our growth. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified managerial personnel. Competition for these employees can be intense. We may not be able to attract, assimilate or retain qualified managerial personnel in the future, and our failure to do so would limit the growth potential of our business and potential licensing partners may not be as attracted to our organization.
We may unknowingly infringe on others’ intellectual property rights which could result in litigation.
We may unknowingly produce and sell products in a country where another party has already obtained intellectual property rights. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and continue to sell products in the worldwide marketplace and may require the destruction of inventory produced under the infringed name, both of which would adversely affect profitability, and, ultimately operating cash flow.
Our quarterly results of operations could fluctuate significantly due to retailing peaks related to gift giving seasons and delays in new product launches, which could adversely affect our stock price.
We may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including timing of customer orders and returns, sell-through of our products by the retailer to the ultimate consumer or gift giver, delays in new product launches, as well as additions or losses of brands or distribution rights. Any resulting material reduction in our sales could have an adverse effect on our business, its profitability and operating cash flows, and correspondingly, the price of our common stock.
Our stock price volatility could result in litigation, substantial cost, and diversion of management’s attention.
The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events, such as:
·
quarterly variations in operating results;
·
acquisitions, capital commitments or strategic alliances by us or our competitors;
·
legal and regulatory matters that are applicable to our business;
·
the operating and stock price performances of other companies that investors may deem comparable to us;
·
news reports relating to trends in our markets; and
·
the amount of shares constituting our public float.
In addition, the stock market in general has experienced significant price and volume fluctuations that often have been unrelated to the performance of specific companies. The broad market fluctuations may adversely affect the market price of our common stock regarding of our operating performance. Our stock price volatility could result in litigation, including class action lawsuits, which would require substantial monetary cost to defend, as well as the diversion of management attention from day-to-day activities which could negatively affect operating performance. Such litigation could also have a negative impact on the price of our common stock due to the uncertainty and negative publicity associated with litigation.
Item 1B.
UNRESOLVED STAFF COMMENTS.
None.
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Item 2.
PROPERTIES.
Our corporate headquarters are located at 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309 and our distribution center is located in Keasbey, New Jersey.
On November 30, 2007, we entered into a sublease agreement, commencing during February 2008, for 19,072 square feet of office space in Fort Lauderdale, Florida, to serve as our new corporate headquarters. We moved into this space in February 2008. The sublease runs for eight years, commencing on February 1, 2008, at an annual cost of approximately $160,000, increasing 3% per annum.
On April 17, 2006, we leased 198,500 square feet of warehouse space in Keasbey, New Jersey. The lease, which commenced with the landlord’s obtaining a certificate of occupancy on August 15, 2006, is for a five-year term and has an initial annual cost of approximately $1,443,000, with minimal increases after the second and fourth year of the lease. We have relocated substantially all of our fragrance warehousing and distribution activities to this facility, as well as establishing a backup information technology site in case of an unplanned disruption in our South Florida headquarters.
We currently maintain a lease for our former corporate headquarters and distribution center in Ft. Lauderdale, Florida. During May 2006, we entered into a new five-year lease on the property, commencing October 1, 2006, at an initial annual cost of approximately $865,000, increasing approximately 3% per annum. We have an option to extend the lease for an additional five-year period with minimal rent escalations of approximately 3% per annum. We are actively seeking to sublease this facility.
Item 3.
LEGAL PROCEEDINGS.
Derivative Litigation
On June 21, 2006, we were served with a stockholder derivative action (the “Derivative Action”) filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by NECA-IBEW Pension Fund, purporting to act derivatively on behalf of the Company.
The Derivative Action named Parlux Fragrances, Inc. as a defendant, along with Ilia Lekach, Frank A. Buttacavoli, Glenn Gopman, Esther Egozi Choukroun, David Stone, Jaya Kader Zebede and Isaac Lekach, each of whom at that date was one of our directors. The Derivative Action related to the proposal from PF Acquisition of Florida LLC (“PFA”), which was owned by Ilia Lekach, to acquire all of our outstanding shares of common stock for $29.00 ($14.50 after the Stock Split) per share in cash (the “Proposal”).
The Derivative Action seeks to remedy the alleged breaches of fiduciary duties, waste of corporate assets, and other violations of law and seeks injunctive relief from the Court appointing a receiver or other truly neutral third party to conduct and/or oversee any negotiations regarding the terms of the Proposal, or any alternative transaction, on behalf of Parlux and its public shareholders, and to report to the Court and plaintiff’s counsel regarding the same. The Derivative Action alleges that the unlawful plan to attempt to buy out the public shareholders of Parlux without having proper financing in place, and for inadequate consideration, violates applicable law by directly breaching and/or aiding the other defendants’ breaches of their fiduciary duties of loyalty, candor, due care, independence, good faith and fair dealing, causing the complete waste of corporate assets, and constituting an abuse of control by the defendants. Before any response to the original complaint was due, counsel for plaintiffs indicated that an amended complaint would be filed. That First Amended Complaint (the "Amended Complaint") was served to our counsel on August 17, 2006.
The Amended Complaint continues to name the then Board of Directors as defendants along with Parlux, as a nominal defendant. The Amended Complaint is largely a collection of claims previously asserted in a 2003 derivative action, which the plaintiffs in that action, when provided with additional information, simply elected not to pursue. It adds to those claims, assertions regarding a 2003 buy-out effort and the abandoned buy-out effort of PFA. It also contains allegations regarding the prospect that the Company's stock might be delisted because of a delay in meeting Securties and Exchange Commission (“SEC”) filing requirements. It relies in large measure on a bevy of media articles rather than facts known to the plaintiffs.
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We and the other defendants engaged Florida securities counsel, including the counsel who successfully represented us in the previous failed derivative action, and on September 18, 2006, moved to dismiss the Amended Complaint. A Second Amended Complaint was filed on October 26, 2006, which added alleged violations of securities laws, which we moved to dismiss on December 1, 2006. A hearing on the dismissal was held on March 8, 2007. On March 22, 2007, the motion to dismiss was denied and the defendants were provided twenty (20) days to respond, and a response was filed on March 29, 2007. Since that time there has been extremely limited discovery conducted in the case. Some documents have been produced. Narrow interrogatories were answered. There have been no depositions and none has even been scheduled. A number of the factual allegations upon which the various complaints were based have fallen away, simply by operation of time. We were just advised, through counsel, that one of the two plaintiffs in the case has withdrawn. There was no explanation given. The remaining plaintiff has spent months attempting to get documents from the Company's former auditors. Independent counsel for the Company has asserted client-accountant privilege as to those documents. There has been no other discovery activity. Based on the allegations in the Second Amended Complaint, upon the information collected in the earlier litigation and upon the information provided in response to the limited discovery noted above, it is believed that the Second Amended Complaint is without merit.
Victory Litigation
On August 16, 2006, we entered into a letter of intent to sell our Perry Ellis fragrance rights to Victory International (USA) LLC (“Victory”) for a total of up to $140 million: $120 million for the fragrance rights, payable in sixty (60) monthly installments of $2 million, without interest, and up to $20 million for inventory due at closing. The letter of intent was subject to the execution of a definitive agreement and the approvals associated therewith, including approval by the licensor, PEI. On October 9, 2006, PEI informed us that they would not consent to the assignment of the rights. Victory had paid a deposit of $1 million to us in connection with the letter of intent, which was refunded during October 2006.
On December 6, 2006, we entered into an agreement to sell the Perry Ellis fragrance rights and related assets, including inventory, molds and other intangible assets related thereto, to PEI, at a price of approximately $63 million, subject to final inventory valuations. The closing took place shortly thereafter. We recorded a pre-tax gain of approximately $34.3 million on the sale for the year ended March 31, 2007.
On March 2, 2007, Parlux, Ilia Lekach and Frank Buttacavoli were named as defendants, along with Perry Ellis International, Inc. and its Chairman and CEO, George Feldenkreis, Rene Garcia, Quality King Distributors, Inc., E Com Ventures, Perfumania, Model Reorg, Inc., Glenn Nussdorf, DFA Holdings, Inc., Duty Free Americas, Inc., Falic Fashion Group, LLC, Simon Falic and Jerome Falic. This action by plaintiff Victory relates to PEI’s failure to consent to the assignment by us of its contractual license to the Perry Ellis brand of perfumes. The plaintiff is alleging that PEI unreasonably withheld its consent and, instead, conspired with a variety of people to prevent Victory from obtaining this license. No direct allegations are made against us. The allegations against Messrs. Lekach and Buttacavoli relate to the attempt by Glenn Nussdorf to replace all of our directors with his nominees. The First Amended Complaint alleges that Mr. Nussdorf and certain affiliates are among the alleged co-conspirators with PEI to prevent Victory from obtaining the license.
On May 18, 2007, we filed a motion to dismiss on behalf of Parlux, Messrs. Lekach and Buttacavoli on the basis that the complaint fails to state a cause of action against any of them. All other defendants moved to dismiss as well, on a host of different theories. At the same time we moved to transfer the case from the District of New Jersey to the Southern District of Florida, a motion in which 14 of the 17 defendants joined. After a hearing in December, the District Court in New Jersey granted the motion to transfer on January 2, 2008, and ordered the case transferred to the Southern District of Florida.
Once the case was re-assigned to a Florida Federal Judge, Plaintiff Victory engaged new counsel and proposed to file yet another amended complaint. At that point, Counsel for the Company met with Victory's new counsel to discuss the weaknesses of the claims against the Parlux defendants. As a result of that meeting, when the Second Amended Complaint was filed, Parlux was dropped from the case. It is no longer a defendant.
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The new complaint continues to assert claims against Mr. Lekach and Mr. Buttacavoli. It also named several additional parties from the other company defendants, but added no one from Parlux. All defendants have filed motions to dismiss all claims. Briefing on the motions will be completed before the end of May and a prompt ruling is expected from the Court. Trial is currently scheduled for November, but Victory has indicated its intention to seek an extension of that date.
There has been documentary discovery, but no depositions have yet been scheduled. It is expected that depositions will be deferred until after the Court rules on the motions to dismiss. Based on the limited discovery to date, discussions with management, with counsel for co-defendants and interviews with the two individual Parlux-related defendants, it appears that those two remaining defendants, Mr. Lekach and Mr. Buttacavoli, have meritorious defenses to all of the claims asserted.
Other
To the best of our knowledge, there are no other proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended March 31, 2008.
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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 under the symbol "PARL." On August 1, 2006, the Nasdaq National Market changed its name to the Nasdaq Global Market, with some of its members, including Parlux, being listed on Nasdaq’s Global Select Market.
The following char