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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:  September 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 November 12, 2004, 8,908,590 shares of the issuer’s common stock were outstanding.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

See pages 10 to 22

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 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 is renewable for an additional three-year period.

Under the license agreement, we must pay a fixed royalty percentage and spend minimum amounts for advertising based on sales volume. We anticipate that the first fragrance under this agreement will be launched prior to March 31, 2006.

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 and six month periods ended September 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 most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently un certain. The Company has not made any changes in these

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critical accounting policies, nor has it made any material change 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 September 30, 2004 with the three-month period ended September 30, 2003.

During the quarter ended September 30, 2004, net sales increased 24% to $22,723,357 as compared to $18,251,732 for the same period for the prior year. The increase was mainly attributable to the sale of “Perry m” and “Perry f” products under the Perry Ellis line of fragrances, which were launched in the quarter ended December 31, 2003, and the launch of “360 BLUE” for men and women in September 2004, resulting in an increase of $5,667,604 in total Perry Ellis brand gross sales from $15,092,972 to $20,760,576. The increase was partially offset by a reduction in gross sales of Chaleur d’Animale and Fred Hayman 273 Indigo brand products of $519,527 and $304,150, respectively. We sold the Animale brand in January 2003 and retained the rights to manufacture and distribute Chaleur d’Animale until January 16, 2005. We sublicens ed the Fred Hayman brand in March 2003, but retained the rights to the “273 Indigo” brand.

Net sales to unrelated customers increased 7% to $7,931,474, compared to $7,391,521 for the same period in the prior year, mainly as a result of the Perry Ellis brand increase, as discussed above. Sales to related parties increased 36% to $14,791,883 compared to $10,860,211 for the same period in the prior year. The increase in Perry Ellis brand sales was partially offset by the reduction in Chaleur d’Animale product sales. We expect that this pattern in distribution channels will continue until the launch of our initial Paris Hilton fragrance product (commenced shipping in November 2004), and our initial GUESS? fragrance product (which is anticipated during the Summer 2005 season), and will initially only be sold to unrelated customers.

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

Cost of goods sold decreased as a percentage of net sales to 50% for the quarter ended September 30, 2004 compared to 52% for the prior year comparable period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 49% and 50%, respectively, for the current period, as compared to 54% and 50%, respectively, for the same period in the prior year. For the prior two fiscal years, the cost of goods sold to unrelated customers has increased, and consequently gross margins 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. The prior year comparable period included a higher percentage of value set sales to unrelated customers. For the near future, we anticipate the percentage of value sets sold

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to unrelated customers will remain constant and that the overall cost of goods sold to unrelated customers will also remain relatively constant.

Operating expenses increased by 17% compared to the same period in the prior year from $6,481,407 to $7,600,417, decreasing as a percentage of net sales from 36% to 33%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 38% to $3,373,558 compared to $2,438,576 in the prior year period, increasing as a percentage of net sales from 13% to 15%. Selling and distribution costs increased 9% to $1,682,724 in the current period compared to $1,549,550 for the same period of the prior year, decreasing as a percentage of net sales from 8% to 7%. General and administrative expenses increased by 6% compared to the prior year period from $1,390,626 to $1,480,223, decreasing as a percentage of net sales from 8% to 7%. The increase was mainly attributable to increases in salaries, health insurance costs and legal and professional fees. Depreciation and amortization decreased by 22% during the current period from $316,500 to $245,997, as molds used in production for certain Ocean Pacific brand products became fully depreciated. Royalties increased by 4% in the current period, remaining relatively constant at 4% of net sales. The prior year period included minimum royalties payable under the Jockey license agreement, which are no longer required. The Jockey license expires on December 31, 2004.

As a result of the above factors, operating income increased to $3,803,497 or 17% of net sales for the current period, compared to $2,310,827 or 13% of net sales for the same period in the prior year. Net interest income was $28,715 as compared to net interest expense of $49,780 for the same period in the prior year. We did not borrow during the current period and invested our excess cash in money market deposit accounts.

Income before taxes for the current period was $3,832,212 compared to $2,261,047 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $2,375,971 or 10% of net sales for the current period compared to $1,401,849 or 8% of net sales in the comparable period of the prior year.

Comparison of the six-month period ended September 30, 2004 with the six-month period ended September 30, 2003.

During the six months ended September 30, 2004, net sales increased 30% to $45,684,560 as compared to $35,193,521 for the same period for the prior year. The increase was 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 in the quarter ended December 31, 2003, the launch of “360 BLUE” for men and women in September 2004, and an increase in sales of Reserve for men and women resulting in an increase of $11,188,979 in total Perry Ellis brand gross sales from $28,860,223 to $40,049,202, 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 $1,772,667. The increase was partially offset by a reduction in gross sales of Chaleur d’Animale and Fred Hayman 273 Indigo brand products of $706,303 and $1,463,175, respectively.

Net sales to unrelated customers decreased 7% to $17,037,126, compared to $18,233,124 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 $1,549,685 and $803,591, respectively, from the prior period. Sales to related parties increased 69% to $28,647,434 compared to $16,960,397 for the same period in the prior year. Brands 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, which accounted for $2,072,440 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 (“360 BLUE” and Ocean Pacific for men and women) were developed for immediate distribution in all of

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the Company’s channels. We expect that this pattern in distribution channels will continue until the launch of our initial Paris Hilton brand fragrance product (commenced shipping during November 2004), and our initial GUESS? fragrance product (which is anticipated during the Summer 2005 season), and will only initially be sold to unrelated customers.

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 insofar as we allocate only a portion of these distribution costs to costs of goods sold and include the remaining unallocated amounts as selling and distribution expenses.

Cost of goods sold decreased as a percentage of net sales to 50% for the six months ended September 30, 2004 compared to 52% for the prior year comparable period. Cost of goods sold as a percentage of net sales to unrelated customers and related parties approximated 51% and 50%, respectively, for the current period, as compared to 52% for both groups during the same period in the prior year. For the prior two fiscal years, the cost of goods sold to unrelated customers have increased, and consequently gross margins 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 period also includes the sale of a higher percentage of basic stock items to related parties than in the prior year comparable period, which results in higher margins.

Operating expenses increased by 16% compared to the same period in the prior year from $13,304,538 to $15,375,399, decreasing as a percentage of net sales from 38% to 34%. However, individual components of our operating expenses experienced more significant changes. Advertising and promotional expenses increased 31% to $6,778,853 compared to $5,168,595 in the prior year period, remaining relatively constant at 15% of net sales. Selling and distribution costs increased 9% to $3,375,349 in the current period compared to $3,087,974 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 5% compared to the prior year period from $2,909,400 to $3,046,444, decreasing as a percentage of net sales from 8% to 7%. The increase was mainly attributable to increases in salaries, health insurance c osts and legal and professional fees, partially offset by a decrease in non-recurring charitable contributions. Depreciation and amortization decreased by 25% during the current period from $661,211 to $495,046, as molds used in production for certain Ocean Pacific brand products became fully depreciated. Royalties increased by 14% in the current period, remaining relatively constant at 4% of net sales. The prior year period included minimum royalties payable under the Jockey license agreement, which are no longer required.

As a result of the above factors, operating income increased to $7,299,252 or 16% of net sales for the current period, compared to $3,533,456 or 10% of net sales for the same period in the prior year. Net interest income was $64,963 in the current period as compared to net interest expense of $115,402 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. We did not borrow during the current period and invested excess cash in money market deposit accounts.

Income before taxes for the current period was $7,364,215 compared to $3,418,054 in the same period for the prior year. Giving effect to the tax provision, we earned net income of $4,565,813 or 10% of net sales for the current period compared to $2,119,193 or 6% of net sales in the comparable period of the prior year.

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Liquidity and Capital Resources

Working capital increased to $57,073,819 as of September 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 purchase of treasury stock discussed below.

During the six months ended September 30, 2004, net cash provided by operating activities was $134,674 compared to a use of cash of $3,686,907 during the prior year comparable period. The improvement between the comparable periods was mainly attributable to the increase in net income of over $2.4 million and a $2.2 million increase in accrued expenses and income taxes payable.

Net cash provided by investing activities increased from $500,455 to $839,384 as a greater amount of notes receivable from unrelated parties was collected, in accordance with their terms, during the current period, and a lesser amount of equipment was purchased during the current year period.

Net cash provided by financing activities decreased by approximately $765,000, mainly as a result of an approximate $606,000 increase in treasury stock purchases as discussed below.

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

(1) Calculated on gross trade receivables excluding allowances for doubtful accounts, sales returns and advertising allowances of approximately $1,617,000 and $1,375,000 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 September 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 and same store sales.

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 30% increase in sales for the comparable six-month period, which resulted in a 25% increase in cost of goods sold, while inventories increased only 6% during the current six-month period.

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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 have already been 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. Through September 30, 2004, 1,112,000 of these warrants have been exercised and we have received proceeds of $2,164,499 (1,048,000 and $1,992,624 through 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 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.

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, which was subsequently received, for up to $8,000,000, on August 16, 2004. As of September 30, 2004, we repurchased, in the open market, 166,830 shares at a cost of $1,424,765.

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. 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 September 30, 2004, based on the borrowing base at that date, the credit line amounted to $19,117,000, 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 September 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.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risks

During the quarter ended September 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.

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.

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 no legitimate basis for the claims previously asserted. Based on that submission, Plaintiffs requested additional time to consider their amendment. Addition al exchanges of correspondence followed and additional extensions of time were 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. On August 12, 2004, the Company responded to the Amended Complaint denying the allegations and requesting dismissal as well as reimbursement of legal fees and costs. The Plaintiffs’ initial deposition occurred on October 21, 2004. The Company believes that the claims are without merit and intends to continue defending the action vigorously.

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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

4.31

Amendment No. 3 to Revolving Credit and Security Agreement, dated as of August 16, 2004, between the Company and GMAC Commercial Finance LLC.

10.68

License Agreement, dated September 15, 2004, between the Company and Maria Sharapova (“Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.)

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 September 30, 2004.

Item 4.

Submission of Matters to a Vote of Security Holders

On September 21, 2004, the Company held its Annual Meeting. The following is a summary of the proposals and corresponding votes.

Nomination and Election of Directors

The seven nominees named in the proxy statement were elected with each director receiving votes as follows:

With respect to Proposal #2, the appointment of Deloitte & Touche LLP as independent auditors, has been ratified as follows:

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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)