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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 30, 2004

Or______

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( d ) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ______________

Commission file number:  0-15491

PARLUX FRAGRANCES, INC.

(Exact name of registrant as specified in its charter)

3725 S.W. 30th Avenue, Ft. Lauderdale, FL 33312

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code  954-316-9008

Former name, former address and former fiscal year, if changed since last report

Indicate with an “X” whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  ¨

Indicate with an “X” whether the registrant is an accelerated filer (As defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  ý

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate with an “X” whether the registrant has filed all documents and reports  required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes  ¨  No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 10, 2004, 9,059,420 shares of the issuer’s common stock were outstanding.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

See pages 8 to 20

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

We may periodically release forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, including those in this Form 10-Q, involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or our achievements, or our industry, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, among others, collectability of trade receivables from related parties, future trends in sales and our ability to introduce new products in a cost-effective manner. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release t he result of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

On May 4, 2004, we entered into a letter of intent with Ms. Paris Hilton (“PH”), to develop, manufacture and distribute prestige fragrances and related products, on an exclusive basis, under her name. Effective June 1, 2004, we entered into a definitive license agreement with Paris Hilton Entertainment, Inc. (“PHEI”), the initial term of which expires on June 30, 2009. The agreement is renewable for an additional five-year period.

Under the PHEI Agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first PH fragrance will be launched prior to March 31, 2005.

No other material change in our contractual obligations, outside the ordinary course of business, has occurred during the periods covered by this report.

The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements and notes. This discussion and analysis should be read in conjunction with such condensed consolidated financial statements and notes.

The accompanying management’s discussion and analysis of financial condition and results of operations gives effect to the restatement of the condensed consolidated financial statements for the three months ended June 30, 2003 as described in Note L to the condensed consolidated financial statements.

Critical Accounting Policies and Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company has included in its Annual Report on Form 10-K for the year ended March 31, 2004 a discussion of the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s

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most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has not made any changes on these critical accounting policies, nor has it made any material changes in any of the critical accounting estimates underlying these accounting policies, since the Form 10-K filing, discussed above.

Significant Trends.

Over the last few years, a significant number of new prestige fragrance products have been introduced on a worldwide basis. The beauty industry in general is highly competitive and rapidly changing with consumer preferences. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of our industry. Department stores continue to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies are required to introduce new products more quickly, which requires additional spending for development and advertising and promotional expenses. We believe this pattern will continue. If one or more of our new product introductions would be unsuccessful, it could result in a reduction in profitability and operating cash flows.

Results of Operations

Comparison of the three-month period ended June 30, 2004 with the three-month period ended June 30, 2003.

During the quarter ended June 30, 2004, net sales increased 36% to $22,961,203 as compared to $16,941,789 for the same period for the prior year. The increase is mainly attributable to (1) the sale of “Perry m”, “Perry f”, and “360 Red” for men and women products under the Perry Ellis line of fragrances, which were launched during the quarter ended December 31, 2003, resulting in an increase of $5,521,375 in total Perry Ellis brand gross sales from $13,767,251 to $19,288,626, and, (2) the sale of “Ocean Pacific” for men and women, which were also launched during the quarter ended December 31, 2003, resulting in an increase in total Ocean Pacific brand gross sales of $2,061,987.

Net sales to unrelated customers decreased 16% to $9,105,652, compared to $10,841,603 for the same period in the prior year. The prior year period included the continued roll out of “Perry Man” and “Perry Woman”, and OP Blend for Men and Women, for which current period gross sales decreased $1,449,776 and $695,216, respectively, from the prior period. Sales to related parties increased 127% to $13,855,551 compared to $6,100,186 for the same period in the prior year, as brands, which were originally launched in the U.S. department store market over the last few years (including Perry Man and Woman and OP Blend for Men and Women, as discussed above, which accounted for $3,123,023 of the increase in sales to related parties) are now being sold through all of our distribution channels. In addition, the products launched during the current period were dev eloped for immediate distribution in all of the Company’s channels. We anticipate that this pattern in distribution channels will continue until the launch of a new Perry Ellis brand fragrance product, and the launch of the initial GUESS? fragrance product, both of which are anticipated during the Fall and Winter 2005 season.

Our gross margins may not be comparable to other entities that include all of the costs related to their distribution network in costs of goods sold as compared to our allocating only a portion of these distribution costs to costs of goods sold and including the remaining unallocated amounts as selling and distribution expenses.

Cost of goods sold decreased as a percentage of net sales to 51% for the quarter ended June 30, 2004 compared to 53% for the prior year comparable period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 53% and 50%, respectively, for the current period,

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as compared to 51% and 55%, respectively, for the same period in the prior year. For the prior two fiscal years, the cost of goods sold to unrelated customers increased, and consequently gross margins have decreased, due to a higher percentage of value sets being sold. Value sets have a higher cost of goods when compared to basic stock items. For the near future, we anticipate the percentage of value sets sold to unrelated customers will remain constant and that the overall cost of goods sold to unrelated customers will also remain relatively constant. The current year quarterly period also includes the sale of a higher percentage of basic stock items to related parties, than in the prior year comparable quarter, which result in higher margins.

Operating expenses increased by 14% compared to the same period in the prior year from $6,823,131 to $7,774,982, decreasing as a percentage of net sales from 40% to 34%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 25% to $3,405,295 compared to $2,730,019 in the prior year period, decreasing as a percentage of net sales from 16% to 15%. Selling and distribution costs increased 10% to $1,692,625 in the current period compared to $1,538,424 for the same period of the prior year, decreasing as a percentage of net sales from 9% to 7%. General and administrative expenses increased by 3% compared to the prior year period from $1,518,774 to $1,566,221, decreasing as a percentage of net sales from 9% to 7%. The increase was mainly attributable to increases in sa laries, health insurance costs and legal and professional fees, offset by a decrease in non-recurring charitable contributions. Depreciation and amortization decreased by 28% during the current period from $344,711 to $249,049, as molds used in production for certain Ocean Pacific brand products became fully depreciated. Royalties increased by 25% in the current period, remaining relatively constant at 4% of net sales.

As a result of the above factors, operating income increased to $3,495,755 or 15% of net sales for the current period, compared to $1,222,629 or 7% of net sales for the same period in the prior year. Net interest income was $36,248 in the current period as compared to net interest expense of $65,622 for the same period in the prior year. The increase reflects a lower average balance outstanding under our line of credit as compared to the prior year, as we did not borrow during the current period.

Income before taxes for the current period was $3,532,003 compared to $1,157,007 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $2,189,842 or 10% of net sales for the current period compared to $717,344 or 4% of net sales in the comparable period of the prior year.

Liquidity and Capital Resources

Working capital increased to $54,881,598 as of June 30, 2004, compared to $53,879,645 at March 31, 2004, primarily as a result of the current period’s net income offset by the decrease in the market value of our investment in affiliate.

During the three months ended June 30, 2004, net cash provided by operating activities was $2,387,446 compared to a use of cash of $3,186,113 during the prior year comparable period. The improvement between the comparable periods was mainly attributable to the increase in net income of over $1.4 million and a $2.2 million increase in accrued expenses and income taxes payable as a result of the increased profit during the three-month period. Such amounts were paid during July 2004.

Net cash provided by investing activities decreased slightly as we purchased a slightly higher amount of equipment during the current year period.

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Net cash provided by financing activities improved by approximately $1.2 million. Collections on trade accounts receivable were transferred into our operating accounts by our bank during April 2004 since there were no borrowings outstanding under the revolving credit facility. There was no restricted cash as of June 30, 2004.

As of June 30, 2004 and 2003, our ratios of the number of days sales in accounts receivable and inventory, on an annualized basis, were as follows:

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(1)

Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $2,011,000 and $1,771,000 in 2004 and 2003, respectively.

The improvement from 2003 to 2004 for unrelated customers is attributable to certain international distributors for whom a portion of their trade receivable balance was in excess of 90 days as of June 30, 2003. These receivables were subsequently collected in full.

Consistent with prior year periods, the number of days sales in trade receivables from related parties exceed those of unrelated customers, due mainly to the seasonal cash flow of Perfumania (See Note F to the accompanying condensed consolidated financial statements for further discussion of our relationship with Perfumania). We anticipate an improvement in the days outstanding based on published information concerning Perfumania’s increased borrowing capability.

Due to the lead time for certain of our raw materials and components inventory (up to 120 days), we are required to maintain a three to six month supply of some items in order to ensure production schedules. In addition, when we launch a new brand or Stock Keeping Unit (“SKU”), we often produce a six-month supply to ensure adequate inventories if the new products exceed our forecasted expectations. We believe that the gross margins on our products outweigh the additional carrying costs. The improvement in turnover from 2004 to 2003 is attributable to the 37% increase in sales for the comparable quarter, which resulted in a 31% increase in cost of goods sold, while inventories increased only 6% during the current three-month period.

On February 4, 2004, we filed with the Securities and Exchange Commission (“SEC”) a registration statement on Form S-3 (file number 333-112472), to register 1,306,000 shares of our common stock on behalf of certain selling shareholders. All of the shares are issuable, or were already issued, upon the exercise of warrants held by the selling shareholders. Although we do not receive any of the proceeds from any subsequent resale of the shares, we expect to receive approximately $2,800,000 if all of the warrants are exercised. The registration statement was declared effective by the SEC on April 26, 2004. As of June 30, 2004, 1,096,000 of these warrants had been exercised and we received proceeds of $2,126,499 (1,048,000 and $1,992,624 as of March 31, 2004).

As of December 31, 2002, we had repurchased, under all phases of our common stock buy-back program, a total of 8,017,131 shares at a cost of $22,116,995. On February 6, 2003, we received approval from our lender to purchase an additional 2,500,000 shares not to exceed $7,500,000, which was ratified on

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February 14, 2003, by our Board of Directors. As of March 31, 2004, we had repurchased, in the open market, an additional 2,162,564 shares at a cost of $7,109,305 under this approval. During the three months ended June 30, 2004, no additional shares were repurchased.

On August 6, 2004, the Company’s Board of Directors approved the repurchase of an additional 1,000,000 shares of our common stock, subject to certain limitations, including approval from our lender.

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 previous $14 million credit facility with General Electric Capital Corporation. Under the Loan Agreement, we are able to borrow, depending upon the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York’s prime rate, at our option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to “Earnings Before Interest, Taxes, and Depreciation (EBITDA)”, as defined in the Loan Agreement.

At June 30, 2004, based on the borrowing base at that date, the credit line amounted to $16,899,000, none of which was utilized.

Substantially all of our domestic assets collateralize the Loan Agreement. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios.

As of June 30, 2004, we do not have any “off balance sheet” arrangements as that term is defined in Regulation S-K item 303(a)4, nor do we have any material commitments for capital expenditures.

Management believes that funds from operations and our existing financing will be sufficient to meet our current operating needs. However, if we would expand operations through acquisitions, new licensing arrangements or both, we may need to obtain financing. There is no assurance that we could obtain such financing or what the terms of such financing, if available, would be.

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

During the quarter ended June 30, 2004, there have been no material changes in the information about the Company’s market risks as of March 31, 2004, as set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

Item 4.

Controls and Procedures

Parlux Fragrances, Inc’s Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this report, based on the evaluation required by paragraph (b) of Rule 13a-15 under the Securities Act of 1934. They have concluded that, as of such date, the Company’s disclosure controls and procedures were adequate and effective.

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There were no changes in the Company’s internal controls or procedures or in other factors during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

On December 8, 2003, we were served with a complaint (the “Complaint”) filed in the Circuit Court for the Eleventh Judicial Circuit in Miami-Dade County, which was amended on January 26, 2004. The Complaint is a derivative action, in which the nominal plaintiffs, the Macatee Family Limited Partnership and Chatham, Partners I, LP, purport to be suing for the benefit of the Company itself and all of its public shareholders. The Complaint names Parlux Fragrances, Inc. as the nominal defendant and all of the current members of the Board of Directors as the defendants. It seeks damages allegedly arising out of breaches of fiduciary duties in connection with transactions involving the Company and Mr. Ilia Lekach, its Chief Executive Officer or companies in which he has an ownership interest.

The Complaint seeks to enjoin the Company from continuing to enter into such transactions, seeks payment of costs and fees to Plaintiffs’ counsel and other unstated relief.

Based on its preliminary investigation of allegations asserted by the Plaintiffs, the Company believes that the claims in the Complaint are without merit. The Company and the Board members have engaged experienced Florida securities counsel and intend to defend the action vigorously. A Motion to Dismiss the action was filed on February 27, 2004. A hearing on the Motion was held on April 14, 2004, and the Complaint was dismissed, without prejudice. The Court suggested that the Plaintiffs serve a demand upon the Corporation to examine the issues alleged in the Complaint rather than file an Amended Complaint, and gave the Plaintiffs thirty (30) days to file an Amended Complaint if they chose to do so. Following the order granting dismissal, the Company voluntarily furnished detailed information to Plaintiff’s counsel supporting the Company’s view that there was n o legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Additional exchanges of correspondence followed and additional extensions of time have been granted. On June 25, 2004, the Plaintiffs filed an Amended Complaint, which was received by the Company’s counsel on June 29, 2004. The Amended Complaint, for the most part, contains similar allegations and requests for relief as included in the original Complaint. The Company intends to respond to the action no later than August 12, 2004. Based on its preliminary investigation of the allegations asserted by the Plaintiffs, the Company believes that the claims are without merit and intends to continue defending the action vigorously.

On June 4, 2003, we were served with a shareholder’s class action complaint (the “June Complaint”), filed in the Delaware Court of Chancery by Judy Altman, purporting to act on behalf of herself and other public stockholders of the Company. The June Complaint named Parlux Fragrances, Inc. as a defendant along with all of the Company’s Board of Directors, except Mr. David Stone. The June Complaint sought to enjoin the defendants from consummating a Tender Offer Proposal from Quality King Distributors, Inc. and Ilia Lekach, the Company’s Chairman and Chief Executive Officer, to acquire the Company’s common stock, and sought to have the acquisition rescinded if it was consummated. In addition, the June Complaint sought unspecified damages, plus the fees, costs and disbursements of Ms. Altman’s attorneys.

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The Company and the named defendants engaged Delaware counsel to defend the action. The action was voluntarily dismissed on September 11, 2003.

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 operations.

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibit # Description

31.1

Certification of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K:

There were no reports on Form 8-K filed during the quarter ended June 30, 2004.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes to condensed consolidated financial statements.

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PARLUX FRAGRANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2004

(Unaudited)