STATES UNITED DISTRICT COURT SOUTHERN DISTRICT OF FLORID A
, Individually and On Behalf of All Others Similarly Situated,
CIVIL ACTION NO .
Plaintiff, CLASS ACTION COMPLAIN T vs . PARLUX FRAGRANCES, INC ., ILIA LEKACH, and FRANK A . BUTTACAVOLI,
JURY TRIAL DEMANDE D
Defendant s
Plaintiff, ("Plaintiff'), alleges the following based upon the investigation b y Plaintiffs counsel, which included, among other things, a review of the defendants' public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission ("SEC") filings, wire and press releases published by and regarding Parlux Fragrances, Inc . ("Parlux" or the "Company") securities analysts' reports and advisories about the Company, and information readily available on the Internet, and Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery .
NATURE OF THE ACTION AND OVERVIE W
1 . This is a federal class action on behalf of purchasers of the common stock o f Parlux between February 8, 2006 and August 10, 2006, inclusive (the "Class Period"), seeking t o pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act" ) 2 . Parlux is a manufacturer and international distributor of prestige products . The Company holds licenses for Paris Hilton fragrances , watches, cosmetics , sunglasses, handbags
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and other small leather accessories in addition to licenses to manufacture and distribute the designer fragrance brands of Perry Ellis, GUESS?, XOXO, Ocean Pacific (OP), Maria Sharapova, Andy Roddick, babyGund and Fred Hayman Beverly Hills . 3 . The complaint alleges that, throughout the Class Period, defendants failed t o disclose material adverse facts about the Company's financial well-being . Specifically, defendants failed to disclose : (1) that increased advertising costs and decreased sales were negatively impacting the Company's financial results ; (2) that the Company lacked adequate internal controls ; and (3) that, as a result of the above, defendants' statements concerning Parlux's financial performance were lacking in any reasonable basis when made . 4 . On June 29, 2006, Parlux announced that it would delay filing its Form 10-K for a second time because management had not yet completed its assessment of the internal controls and reporting requirements of the Sarbanes-Oxley Act of 2002 . 5 . On this news, shares of Parlux shed $0 .31, or 3 .1 percent, to close, on June 30, 2006, at $9 .69 per share . 6 . On August 10, 2006, after the market closed and despite previous assurances that the Company had resolved its internal controls and Sarbanes-Oxley reporting issues, Parlux stunned investors when the Company announced that it would delay filing its quarterly report with the SEC . Additionally, Parlux reported that its earnings for the quarter would be lower than previous guidance suggested due to decreased sales to U .S . department stores and significantly increased advertising and promotional costs . 7 . On this news, shares of Parlux plummeted $3 .38, or 41 .4 percent, to close, on August 11, 2006, at $4 .78 per share, on unusually heavy trading volume .
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JURISDICTION AND VENU E
8 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) o f
the Exchange Act, (15 U .S .C . 78j (b) and 78t(a)), and Rule lOb-5 promulgated thereunder (1 7 C .F .R . 240 .10b-5) .
9 . This Court has jurisdiction over the subject matter of this action pursuant t o
Section 27 of the Exchange Act (15 U .S .C . 78aa) and 28 U .S .C . 1331 .
10 . Venue is proper in this Judicial District pursuant to Section 27 of the Exchang e Act, 15 U .S .C . 78aa and 28 U .S .C . 1391(b) . Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this Judicial District . Additionally, the Company maintains a principal executive office within this Judicial District . 11 . In connection with the acts, conduct and other wrongs alleged in this complaint , defendants, directly or indirectly, used the means and instrumentalities of interstate commerce , including but not limited to, the United States mails, interstate telephone communications an d the facilities of the national securities exchange .
PARTIES
12 . Plaintiff, as set forth in the accompanying certification, incorporate d by reference herein, purchased Parlux common stock at artificially inflated prices during th e Class Period and has been damaged thereby . 13 . Defendant Parlux is a Delaware corporation with its principal place of busines s
located at 3725 South West 30th Avenue, Fort Lauderdale, Florida 33312 .
14 . Defendant Ilia Lekach ("Lekach") was, at all relevant times, the Company' s Chairman and Chief Executive Officer .
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15 . Defendant Frank A . Buttacavoli ("Buttacavoli") was, at all relevant times, the Company's Executive Vice President, Chief Operating Officer, and Chief Financial Officer . 16 . Defendants Lekach and Buttacavoli are collectively referred to hereinafter as the "Individual Defendants ." The Individual Defendants, because of their positions with th e Company, possessed the power and authority to control the contents of Parlux's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i .e ., the market . Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected . Because of their positions and access to material non-public information available to them, each of these defendants knew that the adverse facts specified herein had not bee n disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading . The Individual Defendants are liable for the false statements pleaded herein, as those statements were each "grouppublished" information, the result of the collective actions of the Individual Defendants . SUBSTANTIVE ALLEGATIONS Backgroun d 17 . Parlux is a manufacturer and international distributor of prestige products . The Company holds licenses for Paris Hilton fragrances, watches, cosmetics, sunglasses, handbags and other small leather accessories in addition to licenses to manufacture and distribute the designer fragrance brands of Perry Ellis, GUESS?, XOXO, Ocean Pacific (OP), Maria Sharapova, Andy Roddick, babyGund and Fred Hayman Beverly Hills .
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Materially False and Misleading Statements Issued During the Class Perio d 18 . The Class Period begins on February 8, 2006 . At that time, Parlux announce d financial results for the quarter ended December 31, 2005 . The Company reported that net sales were $56,412,315 compared to $28,748,499 in the same period of the prior year, an increase of 96 percent . The Company's net income more than doubled to $5,996,089 compared to $2,867,746 in the same period of the prior year . Earnings per share on a diluted basis were $0 .57 compared to prior-year earnings of $0 .27 per share, an increase of 111 percent. 19 . Commenting on these results, defendant Lekach stated : Paris Hilton fragrances continued to achieve strong consumer demand . Our GUESS? women's fragrance established a strong sales base in its first holiday season, which will be expanded with the launch of the GUESS? men's fragrance this spring . Perry Ellis fragrance products retain their strength . Perry Ellis remains our largest brand, representing almost half of our total business and we will be introducing a new "Perry Ellis 18" fragrance in summer 2006 . It is important to note that our GUESS?, Paris Hilton and Maria Sharapova fragrances continue to be launched in a number of international markets . We anticipate shipping Paris Hilton watches and handbags during our fourth quarter, and development for Paris Hilton cosmetics and a babyGund fragrance are on schedule for holiday 2006 . I am especially pleased that our earnings growth has accelerated . 20 . Additionally, defendant Lekach reaffirmed the Company's financial guidance for fiscal 2007 . Specifically, defendant Lekach stated : Assuming the acceptance of our new product introductions remain on course and economic conditions stay stable, our previous earnings guidance of $2 .00 to $2 .20 per share on revenues of approximately $190 million for the fiscal year ending March 31, 2006 should be achieved . Based on the continued strength of our brands and the planned new product introductions, our preliminary guidance for fiscal 2007 is for sales to exceed $300 million, with earnings in the range of $3 .00 to $3 .25 per share . 21 . On February 9, 2006, Parlux filed its quarterly report with the SEC on For m
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1O-Q . The Company's Form 1O-Q was signed by the Individual Defendants and reaffirmed the Company's previously announced financial results . The Company's Form 1O-Q also contained the following Sarbanes-Oxley required certifications signed by the Individual Defendants : 1 . I have reviewed this report on Form 1O-Q of Parlux Fragrances, Inc . ; 2 . Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3 . Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; 4 . The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant, and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; an d c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting ; and
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5 . The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; an d b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .
SECTION 906 CERTIFICATIO N 1 . The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company . 22 . On May 9, 2006, Parlux announced that the Company anticipated record revenue s and record diluted earnings per share for the fiscal year ended March 31, 2006 . Specifically, the Company stated : Parlux Fragrances, Inc . announced today that based upon preliminary unaudited information, the Company anticipates reporting record total revenues and record fully diluted earnings per share for the fiscal year ended March 31, 2006 . Revenues for the fiscal year are expected to approximate $183 million, an increase of 82 percent over the prior fiscal year ended March 31, 2005 . Fully diluted earnings per share for the fiscal year ended March 31, 2006 are expected to more than double and be in the range of $2 .05 to $2 .10 per share compared to $1 .02 per share for the prior fiscal year . 23 . Commenting on the anticipated financial results, defendant Lekach stated : Our excellent results were attributable to the continuing soli d
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performance of our Perry Ellis fragrances combined with the stellar growth of Paris Hilton fragrances and the successful launch of our GUESS fragrances . We recently initiated the sale of Paris Hilton watches and handbags and expect to introduce Paris Hilton cosmetics and sunglasses during fiscal 2007 . I remain optimistic for fiscal 2007 and anticipate revenues in the range of $270-$280 million and earnings in the range of $2 .80-$2 .90 per share assuming the successful implementation of our anticipated new launches and stable economic conditions . 24 . On June 13, 2006, after the market closed, Parlux announced financial results fo r the 2006 fiscal year . The Company reported that its unaudited fiscal 2006 results reflected sales of $182,236,594 compared to its prior year of $100,360,981, an increase of 82 percent . Unaudited net income was $22,483,263, or $2 .13 per diluted share compared to the prior year's net income of $10,824,256, or $1 .02 per share, an increase of 109 percent, exceeding previous estimates . Additionally, the Company announced that it would delay filing its annual report with the SEC on Form 10-K . 25 . The statements contained in 11[18-24 were materially false and misleading whe n made because defendants failed to disclose or indicate the following : (1) that increased advertising costs and decreased sales were negatively impacting the Company's financial results ; (2) that the Company lacked adequate internal controls ; and (3) that, as a result of the above, the Company's statements concerning Parlux's financial performance were lacking in any reasonable basis when made . The Truth Begins to Emerg e 26 . Also on June 13, 2006, defendant Lekach revealed that he would attempt to take Parlux private . Specifically, on June 13, 2006, after the market closed, PF Acquisition of Florida LLC ("PF Acquisition"), a Delaware limited liability company owned by defendant Lekach, announced that it had made a proposal to the Board of Directors of Parlux to acquire all of the outstanding shares of the Company other than those owned by defendant Lekach, IZJD Corp .
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and Pacific Investment Group, Inc ., for $29 .00 per share in cash . PF Acquisition further stated that defendant Lekach's proposal was made to "eliminate the substantial public company compliance costs currently incurred by [Parlux] and to end the disruptions in [Parlux's] operations caused primarily by short sellers . " 27 . On this news, shares of the Company's stock rose $1 .74, or 9 .3 percent, to close, on June 14, 2006, at $20 .48 per share. 28 . On June 14, 2006, after the market closed, Parlux announced that, due t o defendant Lekach's unsolicited offer to acquire all of the Company's common shares, the Company would suspend its Annual Investors' Day scheduled for Friday, June 23rd in Hollywood, Florida . The Company further announced that the offer had been referred to the Special Committee of Independent Directors of the Board of Parlux for consideration . 29 . On June 21, 2006, after the market closed, Parlux announced that it had sent a response to PF Acquisition and defendant Lekach's acquisition proposal . Specifically, the Company stated : Parlux Fragrances, Inc . ("Parlux") announced today that on June 20, 2006, the Independent Committee (the "Committee") of the Board of Directors of Parlux sent a response to the proposal received from PF Acquisition of Florida LLC ("Acquisition Co ."), which is owned by Ilia Lekach, Chairman and CEO of Parlux, to acquire all of the outstanding common shares of Parlux, pursuant to an offer at a price of $29 .00 per share in cash (the "Proposal") (previously disclosed in Parlux's June 14, 2006 Form 8-K) . Mr . Lekach is currently the beneficial owner of 26 .2% of the common stock of Parlux . Through their legal counsel, the Committee responded (the "Response") to the offer by stating that the Committee does not believe it is prudent for Parlux to move forward to consider the transaction with the significant financial and other contingencies contained in the Proposal . Further, the Committee questions the propriety of a proposed break up fee . The Committee believes that if Parlux proceeds with the Proposal and the transaction does not close, it may have a very negative effect on Parlux . In order to
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protect Parlux and its shareholders, the Committee believes that the closing contingencies should be removed from the Proposal and Acquisition Co . should provide a deposit to the Company as evidence of Acquisition Co .'s ability to proceed and in recognition of the significant cost Parlux will incur in considering the Proposal . The Committee continues to state that, in the event that the transaction cannot be completed due to an inability by Acquisition Co . to obtain financing, the deposit would be used to reimburse Parlux for its costs and expenses in connection with the consideration of the Proposal . After receiving the Response, Acquisition Co . sent a follow-up letter (the "Follow-up Letter") . The Follow-up Letter stated that Acquisition Co . does not expect the Committee to incur any expense until Acquisition Co . has obtained its financing commitments and when Acquisition Co . completes that task, it would expect to proceed in a customary fashion without any deposit or waiver of the financial and other contingencies and with a break up fee . At this time Parlux intends to continue operations in the ordinary course and meet its SEC reporting requirements . 30 . However, despite Parlux's negative response, on June 22, 2006, while the marke t was open, defendant Lekach reiterated his commitment to taking Parlux private . Specifically , defendant Lekach stated : Ilia Lekach, the principal of PF Acquisition of Florida LLC, a Delaware limited liability company, announced today that [PF Acquisition] has retained financial advisors and investment bankers to pursue its "going private" proposal of Parlux Fragrances, Inc . (Nasdaq : PARL - News) . PF Acquisition of Florida is currently in discussions with a variety of financing partners to execute this "going private" proposal . Commenting on the proposal, Mr. Lekach stated, "I am fully committed to this `going private' proposal and once the financing is in place, it will be up to Parlux's independent shareholders to vote on this `going private' initiative . " 31 . On this news, shares of the Company's stock rose as high as $11 .25 per share, an d closed, on June 22, 2006, at $11 .09 per share . 32 . On June 29, 2006, after the market closed, Parlux announced that the filing of it s
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Form 10-K would again be delayed as management had not yet completed its assessment of the internal controls and reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002 . The Company further reported that the delay in the Company's Sarbanes-Oxley procedures was not expected to affect the Company's previous announcement that net sales for the fiscal year ended March 31, 2006 would approximate $182 million and net earnings per share would reach $2 .13 ($1 .07 post common stock split) per share . Specifically, the Company stated : Parlux Fragrances, Inc . announced today that the filing of its Form 10-K would be delayed as a result of management not yet completing its assessment of the internal controls and reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) . The Company became obligated to comply with the quicker implementation schedule under Section 404 when it became an accelerated filer on September 30, 2005, the end of its second quarter . Management completed its testing and has concluded that its internal control procedures contain material weakness in areas such as access to certain computer master files, segregation of duties, processing of certain adjustments to accounts payable and accounts receivable, and management overrides, despite the fact that the Company's testing did not disclose any improprieties . The Company is completing the assessment and reporting process involved in complying with its SOX obligations . The Company will issue its Form 10-K after the assessment and reporting processes, including those of the Company's independent auditors, are completed . This delay in the Company's SOX procedures is not expected to affect the Company's previous announcement that net sales for the fiscal year ended March 31, 2006 will approximate $182 million and net earnings per share will reach $2 .13 ($1 .07 post common stock split) per share . 33 . On July 5, 2006, while the market was open, Parlux announced that the Company had received a delisting notice from NASDAQ due to the delayed filing of its Form 10-K . Specifically, the Company stated :
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Parlux Fragrances, Inc . announced today that due to the delay in filing its Form 10-K for the period ended March 31, 2006, the Company has received a letter from The Nasdaq Stock Market indicating that the Company's common stock is subject to delisting pursuant to Nasdaq Marketplace Rule 4310(c)(14) . Nasdaq Marketplace Rule 4310(c)(14) requires the Company to file all reports with the Securities and Exchange Commission on a timely basis, as required by the Securities Exchange Act of 1934, as amended . Parlux will request a hearing before the Nasdaq Listing Qualifications Panel, thereby automatically deferring the delisting of its common stock pending the Panel's review and determination . Until the Panel issues a determination and the expiration of any exception granted by the Panel, Parlux's common stock will continue to be traded on The Nasdaq National Market . However, as a result of the delayed filing of its Form 10-K, the trading symbol for the Company's common stock will be changed from PARL to PARLE . As announced on June 29, 2006, Parlux has delayed filing its Annual Report on Form 10-K until completion of management's assessment of the internal controls and reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX") . Parlux intends to file its Form 10-K for the fiscal year ended March 31, 2006 as soon as practicable following completion of the SOX assessment and reporting processes, including those of the Company's independent auditors . 34 . On July 13, 2006, while the market was open, Parlux announced that, despite hi s previous expressions of commitment, the Company received written notification that defendan t Lekach had withdrawn his privatization offer . 35 . On this news, shares of Parlux's common stock fell $0 .65, or 7 .6 percent, to close , on July 13, 2006, at $7 .91 per share, on heavy trading volume .
36 . On July 24, 2006, Parlux announced that the Company had filed its Form 10- K
for the fiscal year ended March 31, 2006 . The Company also reported that its filed result s confirmed net sales of $182,236,594, an increase of 82 percent over the prior year, and net earnings of $1 .08 per share, an increase of 108 percent over the prior year's $0 .52 per shar e
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($2 .15 compared to $1 .02 on a pre-stock split basis) . Specifically, the Company stated : Parlux Fragrances, Inc . ("Parlux") announced today that it had filed its Form 10-K for the fiscal year ended March 31, 2006 . Filed results confirmed net sales of $182,236,594, an increase of 82% over prior year, and net earnings of $1 .08 per share, an increase of 108% over prior year's $0 .52 per share ($2 .15 compared to $1 .02 on a pre-stock split basis) . All share calculations, including prior years, and those on the attached table, have been adjusted to reflect the stock split effected on June 16, 2006 . Due to an increase in the Company's market capitalization as measured on September 30, 2005, the Company became an accelerated filer under the Sarbanes-Oxley Act of 2002 ("SOX") . While reducing the year end filing requirements from 90 to 75 days, SOX also required the Company to assess its internal controls and report on their effectiveness for the full fiscal year, although the first half of the year had already passed. Management's report, included in the Annual Report on Form 10K for the fiscal year ended March 31, 2006, indicates that the Company did not maintain effective control over financial reporting as a result of material weaknesses outlined in such report . As announced on June 29, 2006, Parlux had delayed filing its Annual Report on Form 10-K until completion of management's assessment of the internal controls and reporting requirements . The Company received a letter from The Nasdaq Stock Market indicating that the Company's common stock was subject to delisting pursuant to Nasdaq Marketplace Rule 4310(c)(14), which requires the Company to file all reports with the Securities and Exchange Commission on a timely basis, as required by the Securities Exchange Act of 1934, as amended . Parlux requested a hearing before the Nasdaq Listing Qualifications Panel, thereby automatically deferring the delisting of its common stock pending the Panel's review and determination and believes that today's filing will fulfill all of its reporting requirements . Therefore, Parlux believes that such a hearing will no longer be necessary, and its common stock shall continue to be listed on The Nasdaq Stock Market . 37 . Also on July 24, 2006, Parlux filed its annual report with the SEC on Form 10-K . The Company's Form 10-K was signed by the Individual Defendants and reaffirmed th e Company's previously announced financial results . Additionally, the Company's Form 10- K contained the following Sarbanes-Oxley required certifications signed by the Individua l
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Defendants : 1 . I have reviewed this annual report on Form 10-K of Parlux Fragrances, Inc . ; 2 . Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3 . Based on my knowledge, the financial statements, and other financial information included in this fairly report, present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; 4 . The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; an d d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant' s
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fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting ; and 5 . The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .
SECTION 906 CERTIFICATIO N
1 . The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and 2 . The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company . 38 . The statements contained in 11 30, 32, 36, and 37 were materially false an d misleading when made because defendants failed to disclose or indicate the following : (1) that increased advertising costs and decreased sales were negatively impacting the Company' s financial results ; (2) that the Company lacked adequate internal controls ; and (3) that, as a resul t of the above, defendants' statements concerning Parlux's financial performance were lacking i n any reasonable basis when made . The Truth Continues to Emerg e 39 . On August 10, 2006, Parlux stunned investors when the Company announced tha t it would delay filing its quarterly report with the SEC . Additionally, Parlux reported that it s
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earnings for the quarter would be lower than previous guidance suggested due to decreased sales to U .S . department stores and significantly increased advertising and promotional costs . Specifically, the Company stated : The Company anticipates that diluted earnings per share for the quarter ended June 30, 2006 will be in the range of $0 .04 to $0 .05 per share, compared to $0 .18 per share in the prior year comparable quarter . The reduction is mainly attributable to the decrease in sales to U .S . department stores due to the acquisitions and consolidations in this sector, and a reduction in sales to related parties . Department store advertising and promotional programs, committed to in advance, also had a disproportionate impact on earnings . Net sales are anticipated to increase by approximately 22% for the comparable three-month period, while the increase in advertising and promotional costs is expected to exceed 40% . In addition, the sales increase during the period was mainly attributable to increased sales to international distributors, which sales result in lower gross margins . 40 . On this news, shares of Parlux plummeted $3 .38, or 41 .4 percent, to close, o n August 11, 2006, at $4 .78 per share, on unusually heavy trading volume . Post Class Period Disclosure s 41 . On August 23, 2006, after the market closed, Parlux announced that due to th e delay in filing its Form 10-Q for the period ended June 30, 2006, the Company had received a letter from NASDAQ which indicated that the Company ' s common stock was subject to delisting . Specifically, the Company stated : Parlux Fragrances, Inc . announced today that due to the delay in filing its Form 10-Q for the period ended June 30, 2006, the Company has received a letter from The Nasdaq Stock Market indicating that the Company's common stock is subject to delisting pursuant to Nasdaq Marketplace Rule 4310(c)(14) . Nasdaq Marketplace Rule 4310(c)(14) requires the Company to file all reports with the Securities and Exchange Commission on a timely basis, as required by the Securities Exchange Act of 1934, as amended. Parlux will request a hearing before the Nasdaq Listing Qualifications Panel, thereby automatically deferring the delistin g
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of its common stock pending the Panel's review and determination . Until the Panel issues a determination and the expiration of any exception granted by the Panel, Parlux's common stock will continue to be traded on The Nasdaq National Market . As announced on August 17, 2006, Parlux has delayed filing its Quarterly Report on Form 10-Q pending determination of a noncash charge to be recorded in accordance with Statement of Financial Accounting Standards No . 123R "Share Based Payment ." This non-cash charge was due to the modification of fully vested warrants, issued during the period from 1999 through 2002, to reflect the Company's stock split effected June 19, 2006 . The charge will have no effect on the stockholders' equity of the Company since the same amount appearing as a share-based compensation charge will be recorded as an increase to addition paid-in-capital, and the book value per share will remain unchanged . Parlux intends to file the Form 10-Q as soon as practicable .
PLAINTIFF'S CLASS ACTION ALLEGATION S
42 . Plaintiff brings this action as a class action pursuant to Federal Rule of Civi l Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the common stock of Parlux between February 8, 2006 and August 10, 2006, inclusive (the "Class Period") and who were damaged thereby . Excluded from the Class are defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest . 43 . The members of the Class are so numerous that joinder of all members i s impracticable . Throughout the Class Period, Parlux's common stock was actively traded o n NASDAQ . While the exact number of Class members is unknown to Plaintiff at this time an d can only be ascertained through appropriate discovery, Plaintiff believes that there are hundred s or thousands of members in the proposed Class . Record owners and other members of the Clas s may be identified from records maintained by Parlux or its transfer agent and may be notified o f
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the pendency of this action by mail, using the form of notice similar to that customarily used i n securities class actions . 44 . Plaintiff's claims are typical of the claims of the members of the Class as al l members of the Class are similarly affected by defendants' wrongful conduct in violation o f federal law that is complained of herein . 45 . Plaintiff will fairly and adequately protect the interests of the members of th e Class and has retained counsel competent and experienced in class and securities litigation . 46 . Common questions of law and fact exist as to all members of the Class an d predominate over any questions solely affecting individual members of the Class . Among the questions of law and fact common to the Class are : a . whether the federal securities laws were violated by defendants' acts a s alleged herein ; b . whether statements made by defendants to the investing public during th e Class Period misrepresented material facts about the business, operations and management of Parlux ; and c . to what extent the members of the Class have sustained damages and the proper measure of damages . 47 . A class action is superior to all other available methods for the fair and efficien t adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them . There will be no difficulty in the management of this action a s a class action .
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UNDISCLOSED ADVERSE FACT S
48 . The market for Parlux's common stock was open, well-developed and efficient at all relevant times . As a result of these materially false and misleading statements and failures to disclose, Parlux's common stock traded at artificially inflated prices during the Class Period . Plaintiff and other members of the Class purchased or otherwise acquired Parlux common stock relying upon the integrity of the market price of Parlux's common stock and market information relating to Parlux, and have been damaged thereby . 49 . During the Class Period, defendants materially misled the investing public , thereby inflating the price of Parlux's common stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading . Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein . 50 . At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class . As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Parlux's business, prospects and operations . These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Parlux and its business, prospects and operations, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times . Defendants' materially false and misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company's common stock at artificially inflated prices ,
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thus causing the damages complained of herein .
LOSS CAUSATIO N
51 . Defendants' wrongful conduct, as alleged herein, directly and proximately caused the economic loss suffered by Plaintiff and the Class . 52 . During the Class Period, Plaintiff and the Class purchased common stock of Parlux at artificially inflated prices and were damaged thereby . The price of Parlux common stock declined when the misrepresentations made to the market, and/or the information alleged herein to have been concealed from the market, and/or the effects thereof, were revealed, causing investors' losses .
SCIENTER ALLEGATIONS
53 . As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading ; knew that such statements or documents would be issued or disseminated to the investing public ; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Parlux, their control over, and/or receipt and/or modification of Parlux's allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning Parlux, participated in the fraudulent scheme alleged herein . 54 . Additionally, in a move meant solely to hide the Company's internal controls problems, defendants further manipulated the Company's stock price by their attempt to have the Company be taken private .
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55 . During the Class Period, and with the Company's stock trading at artificiall y inflated prices, the Individual Defendants sold 385,618 shares for gross proceeds o f
$12,865,495 .14, as evidenced by the following chart :
NAME
DATE
2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006 2/13/2006
SHARE S SOLD
2,191 1,000 100 899 500 2,000 200 400 299 99 99 99 101 300 100 1,900 400 200 1,053 400 1,800 160 400 1,495 2,800 1,509 5,148 400 4,649 4,917 Total : 35, 618
PRICE
$33 .02 $33 .03 $33 .05 $33 .08 $33 .09 $33 .12 $33 .13 $33 .15 $33 .16 $33 .17 $33 .18 $33 .19 $33 .21 $33 .25 $33 .26 $33 .27 $33 .28 $33 .35 $33 .36 $33 .38 $33 .40 $33 .41 $33 .42 $33 .43 $33 .50 $33 .51 $33 .52 $33 .53 $33 .54 $33 .55
GROS S PROCEED S
$72,346 .8 2 $33,030 .00 $3,305 .00 $29,738 .92 $16,545 .00 $66,240 .00 $6,626 .00 $13,260 .00 $9,914 .84 $3,283 .83 $3,284 .82 $3,285 .8 1 $3,354 .2 1 $9,975 .00 $3,326 .00 $63,213 .00 $13,312 .0 0 $6,670 .00 $35,128 .08 $13,352.0 0 $60,120.0 0 $5,345 .6 0 $13,368 .00 $49,977 .8 5 $93,800 .00 $50,566 .5 9 $172,560 .96 $13,412 .00 $155,927 .46 $164,965 .3 5 Total : $1,189, 235.1 4 $1,700,000 .00 $84,725 .00 $67,620 .00 $33,700 .00 $33,560 .00 $83,750 .00 $50,160 .00
Frank A . Buttacavoli
Ilia Lekach
2/15/06 2/15/06 2/15/06 2/15/06 2/15/06 2/15/06 2/15/06
50,000 2,500 2,000 1,000 1,000 2,500 1,500
$34 .00 $33 .89 $33 .81 $33 .70 $33 .56 $33 .50 $33 .44
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2/15/06 2/15/06 2/15/06 2/15/06 2/16/06 2/16/06 2/16/06 2/16/06 2/16/06 2/16/06 2/16/06
2,000 15,000 4,000 86,000 2,000 4,000 10,000 3,000 45,500 5,000 113,000 Total : 350,000 TOTAL : 385,618
$33 .35 $33 .32 $33 .31 $33 .25 $33 .48 $33 .31 $33 .30 $33 .26 $33 .25 $33 .21 $33 .20
$66,700 .00 $499,800 .00 $133,240 .00 $2,859,500 .00 $66,960 .00 $133,240 .00 $333,000 .00 $99,780 .00 $1,512,875 .00 $166,050 .00 $3,751,600 .00 Total : $11,676,260 .0 0 TOTAL : $12 , 865,495 .1 4
Applicability of Presumption of Reliance : Fraud On The Market Doctrin e 56 . At all relevant times, the market for Parlux common stock was an efficient marke t for the following reasons, among others : a . Parlux stock met the requirements for listing, and was listed and activel y traded on NASDAQ, a highly efficient and automated market ; b . As a regulated issuer, Parlux filed periodic public reports with the SE C and NASDAQ ; c . Parlux regularly communicated with public investors via establishe d market communication mechanisms, including through regula r disseminations of press releases on the national circuits of major newswir e services and through other wide-ranging public disclosures, such a s communications with the financial press and other similar reporting services ; an d d . Parlux was followed by several securities analysts employed by majo r
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