-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItATM3b79FWCUecxJ3Yw6xsASJp8RCTSMDbHEwWiY26avEsL/g6xl1Cwai7TfDBr qJ6NPKDv7Xi5drYvn7C48Q== 0001116502-02-000885.txt : 20020701 0001116502-02-000885.hdr.sgml : 20020701 20020701162127 ACCESSION NUMBER: 0001116502-02-000885 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARLUX FRAGRANCES INC CENTRAL INDEX KEY: 0000802356 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 222562955 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15491 FILM NUMBER: 02693797 BUSINESS ADDRESS: STREET 1: 3725 S W 30TH AVE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 BUSINESS PHONE: 9543169008 MAIL ADDRESS: STREET 1: 3725 S W 30TH AVENUE CITY: FT LAUDERDALE STATE: FL ZIP: 33312 10-K 1 parlux-10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------------------ Form 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For Fiscal Year Ended March 31, 2002 - ------------------------------------ OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________to _______________ Commission File Number 0-15491 Parlux Fragrances, Inc. - ----------------------- (Exact name of registrant as specified in its charter) Delaware 22-2562955 - --------------------------------------------------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3725 SW 30th Avenue, Ft. Lauderdale, FL 33312 - --------------------------------------------------- ----- (Address of principal executive offices (zip code) (Registrant's telephone number, including area code) (954) 316-9008 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on which registered - ------------------------- ------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock ( par value $ .01 per share) ------------------------------------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ -------- Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date. Class Outstanding at June 28, 2002 - ------------------------ ---------------------------- Common Stock, $ .01 par value 9,976,896 The aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $11,878,000 based on a closing price of $2.35 for the Common Stock as of June 28, 2002 as reported on the National Association of Securities Dealers Automated Quotation System on such date. For purposes of the foregoing calculation, only the Directors and beneficial owners of the registrant are deemed to be affiliates. Documents incorporated by Reference: The information required by Part III (Items 10, 11, 12 & 13) is incorporated by reference from the registrant's definitive proxy statement (to be filed pursuant to Regulation 14A). TABLE OF CONTENTS
ITEM PAGE ---- ---- PART I 1. Business 3 2. Properties 8 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 8 PART II 5. Market for Registrant's Common Stock and Related Security Holder Matters 8 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 7. A Quantitative and Qualitative Disclosures About Market Risks 17 8. Financial Statements and Supplementary Data 18 9. Changes in and Disagreements with Accountants on Accounting 18 and Financial Disclosures PART III 10. Directors and Executive Officers of the Registrant 18 11. Executive Compensation 18 12. Security Ownership of Certain Beneficial Owners and Management 18 13. Certain Relationships and Related Transactions 18 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
2 ITEM 1. BUSINESS Parlux Fragrances, Inc. (the "Company"), was incorporated in Delaware in 1984 and is engaged in the creation, design, manufacture, distribution and sale of prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. The fragrance market is generally divided into a prestige segment (distributed primarily through department and specialty stores) and a mass market segment. Our products are positioned primarily in the prestige segment. Additionally, we manufacture and distribute certain brands through Perfumania Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which our Chairman and Chief Executive Officer has an ownership interest and holds identical management positions. Perfumania is a leading specialty retailer of fragrances in the United States and Puerto Rico. Currently, we engage in the manufacture (through sub-contractors), distribution and sale of PERRY ELLIS, FRED HAYMAN BEVERLY HILLS, OCEAN PACIFIC, and JOCKEY fragrances and grooming items on an exclusive basis as a licensee. See "LICENSING AGREEMENTS" on page 6 for further discussion. Additionally, we manufacture, distribute and sell our own brand, ANIMALE fragrance, on a worldwide basis. THE PRODUCTS Our principal products are fragrances, which are distributed in a variety of sizes and packaging. In addition, beauty-related products such as soaps, shower gels, deodorants, body lotions, creams and dusting powders complement the fragrance line. Our basic fragrance products generally retail at prices ranging from $20 to $215 per item. We design and create fragrances using our own staff and independent contractors. We also supervise the design of our packaging by independent contractors. During fiscal 2002, we completed the design process for OCEAN PACIFIC for women, which was launched in Fall 2001 and JOCKEY "Physical" for men and women, which was launched in Spring 2002. We are currently developing PERRY, a new brand under the PERRY ELLIS line, for both men and women for launch in the current fiscal year. During the last three fiscal years, the following brands have accounted for 10% or more of our gross sales in a given year: Fiscal 2002 Fiscal 2001 Fiscal 2000 ----------- ----------- ----------- PERRY ELLIS 67% 69% 73% ANIMALE 13% 16% 11% OCEAN PACIFIC 12% 3% --- FRED HAYMAN 8% 11% 16% 3 MARKETING AND SALES In the United States, we have our own sales and marketing staff, and also utilize independent sales representatives for certain channels of distribution. We sell directly to retailers, primarily national and regional department stores and specialty stores, which we believe will maintain the image of our products as prestige fragrances. Our products are sold in over 2,000 retail outlets in the United States. Additionally, we sell some of our products to Perfumania/ECMV, which is a leading specialty retailer of fragrances with approximately 250 retail outlets principally located in manufacturers' outlet malls and regional malls (see "CUSTOMERS" section for further discussion). Marketing and sales activities outside the United States are conducted through arrangements with independent distributors, which are administered by our international sales staff. We have established relationships for the marketing of our fragrances with distributors in Canada, Europe, the Middle East, the Far East, Latin America, the Caribbean and Russia. We advertise both directly, and through a cooperative advertising program in association with major retailers, in the fashion media on a national basis and through retailers' statement enclosures and catalogues. We are required to spend certain minimum amounts for advertising under certain licensing agreements. See "Licensing Agreements" and Note 8 (B) to the Consolidated Financial Statements. RAW MATERIALS Raw materials and components for our products are available from sources in the United States and Europe. We use third party contract manufacturers to produce finished products. To date, we have had little difficulty obtaining raw materials at competitive prices. There is no reason to believe that this situation will change in the near future, but there can be no assurance that this will continue. SEASONALITY Typical of the fragrance industry, we have our highest sales during the calendar year end holiday season. Lower than projected sales during this period could have a material adverse affect on our operating results. INDUSTRY PRACTICES It is an industry practice in the United States for businesses that market fragrances to department stores to provide the department stores with rights to return merchandise. Our products are subject to such return rights. It is our practice to establish reserves and 4 provide allowances for product returns at the time of sale. We believe that such reserves and allowances are adequate based on past experience; however, no assurance can be made that reserves and allowances will continue to be adequate. Consequently, if product returns are in excess of the reserves and allowances provided, net sales will be reduced when such fact becomes known. CUSTOMERS We concentrate our sales efforts in the United States in specialty stores and a number of regional department store retailers including, among others, Burdines, Dillard's, Famous Barr, Foley's, J.L. Hudson, Lord & Taylor, Macy's, Parisian, Proffitts, Rich's/Lazarus, and Robinson May. Retail distribution has been targeted by brand to maximize potential and minimize overlap between each of these distribution channels. During the fiscal years ended March 31, 2002 and 2001, we had net sales of $18,063,310 and $22,362,294, respectively, to Perfumania. Net trade accounts receivable owed by Perfumania to us amounted to $12,491,993 and $13,006,178 at March 31, 2002 and 2001, respectively. Amounts due from related parties are non-interest bearing and are due in less than one year. On July 1, 1999, our Board of Directors approved accepting 1,512,406 shares of Perfumania treasury stock in consideration for a partial reduction of the outstanding trade receivable balance from Perfumania in the amount of $4,506,970. The exchange price was based on a per share price for the stock of $2.98 ($11.92 post reverse stock split described below), which approximated 90% of the closing price of Perfumania's common stock for the previous 20 business days. The agreement was consummated on August 31, 1999, and the shares were registered in June 2000. Effective February 1, 2000, ECMV was formed as a holding company and accordingly, the Company now holds common stock in ECMV. As described in Note 1F of the notes to consolidated financial statements, a continuing decline in fair value below cost could be deemed to be "other than temporary" and require a charge to earnings rather than being presented as a component of accumulated other comprehensive loss and charged directly to stockholders' equity. During the first quarter of the fiscal year ended March 31, 2002, we recorded a non-cash charge to earnings of $2,858,447, which reflected an other-than-temporary decline in value of the investment based on a sustained reduction in the quoted market price of $1.09 per share ($4.36 post reverse stock split described below) as of June 30, 2001, compared to the original cost per share of $2.98 ($11.92 post reverse stock split described below). As a result of this non-cash reduction of the cost basis of the Company's investment, we reversed $3,496,220 of previously recorded unrealized losses on the investment, net of taxes, which had been recorded as a component of Stockholders' Equity as of March 31, 2001. On March 21, 2002, ECMV effected a one-for-four reverse stock split, and we now own 378,101 shares. As of March 31, 2002, the fair market value of the investment in ECMV was $907,442 ($2.40 per share after the reverse split). We believe, based on our evaluation of ECMV's operations, that this current decline in market price is temporary. 5 As of June 21, 2002, the fair market value of the investment in ECMV is $1,553,995 ($4.11 per share after the reverse split). FOREIGN AND EXPORT SALES During the three years ended March 31, 2002, gross sales to international customers were approximately $31,329,000, $30,726,000, and $20,007,000, respectively. LICENSING AGREEMENTS PERRY ELLIS: We acquired the Perry Ellis license in December 1994. The license is renewable every two years if the average annual sales in the two-year license period exceed 75% of the average sales of the previous four years. All minimum sales levels have been met, and based on our current sales projections, management believes that this will continue. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon net sales levels achieved in the prior year. FRED HAYMAN: In June 1994, we entered into an Asset Purchase Agreement with Fred Hayman Beverly Hills, Inc. (FHBH), purchasing substantially all of the assets and liabilities of the FHBH fragrance division. In addition, FHBH granted to Parlux an exclusive royalty free 55-year license to use FHBH's United States Class 3 trademarks Fred Hayman(R), 273(R), Touch(R), With Love(R) and Fred Hayman Personal Selections(R) and the corresponding international registrations. There are no minimum sales or advertising requirements. OCEAN PACIFIC: On August 20, 1999, we entered into an exclusive worldwide licensing agreement with Ocean Pacific Apparel Corp. ("OP"), to manufacture and distribute men's and women's fragrances and other related products under the OP label. The initial term of the agreement extends through December 31, 2003, with seven (7) three-year renewal options, of which the last four require the achievement of certain minimum net sales. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon the annual net sales of the products. OP for men was launched last Spring 2001 and OP for women was launched in Fall 2001. JOCKEY INTERNATIONAL: On March 23, 2001, we entered into an exclusive worldwide licensing agreement with Jockey International, Inc. ("Jockey"), to manufacture and distribute men's and women's fragrances and other related products under the Jockey(R) label. The initial term of the agreement extends through December 31, 2004, with three (3) three-year renewal options. The license requires the payment of royalties, which decline as a percentage of net sales as net sales volume increases, and the spending of certain minimum amounts for advertising based upon the annual net sales of the products. We launched Jockey fragrances for women and men during the first calendar quarter of 2002. 6 We believe we are presently in compliance with all material obligations under the above agreements. There can be no assurance that we will be able to continue to comply with the terms of these agreements in the future. TRADEMARKS We own the worldwide trademarks and distribution rights to ANIMALE and LIMOUSINE fragrances and have the rights to license certain of these trademarks for all classes of merchandise. There are no licensing agreements requiring the payment of royalties by us for these trademarks. Additionally, royalties were payable to us by the licensees of the ALEXANDRA de MARKOFF and BAL A VERSAILLES brands. See Note 6 to the accompanying Consolidated Financial Statements for further discussion as these two brands. PRODUCT LIABILITY We have insurance coverage for product liability in the amount of $5 million per incident. We maintain an additional $5 million of coverage under an "umbrella" policy. We believe that the manufacturers of the products sold by us also carry product liability coverage and that we effectively are protected thereunder. There are no pending and, to the best of our knowledge, no threatened product liability claims of a material nature. Over the past ten years, we have not been presented with any significant product liability claims. Based on this historical experience, management believes that its insurance coverage is adequate. COMPETITION The market for fragrances and beauty related products is highly competitive and sensitive to changing consumer preferences and demands. We believe that the quality of our fragrance products, as well as our ability to develop, distribute and market new products, will enable us to continue to compete effectively in the future and to continue to achieve positive product reception, position and inventory levels in retail outlets. However, there are products, which are better known than the products distributed by us. There are also companies, which are substantially larger and more diversified, and which have substantially greater financial and marketing resources than us, as well as greater name recognition, and the ability to develop and market products similar to, and competitive with, those distributed us. EMPLOYEES As of March 31, 2002, we had 117 full-time and part-time employees. Of these, 38 were engaged in worldwide sales activities, 47 in operations, administrative and 7 finance functions and 32 in warehousing and distribution activities. None of our employees are covered by a collective bargaining agreement and we believe that our relationship with our employees is satisfactory. We also use the services of independent contractors in various capacities, including sales representatives. We have established a 401-K Plan covering substantially all of our U.S. employees. Commencing on April 1, 1996, we matched 25% of the first 6% of employee contributions, within annual limitations established by the Internal Revenue Code. ITEM 2. PROPERTIES In November 1995, we moved our corporate headquarters and domestic operations to a new 100,000 square foot leased facility in Fort Lauderdale, Florida. The annual lease cost of the facility is approximately $640,000, with the lease covering a ten-year period through 2005. ITEM 3. LEGAL PROCEEDINGS To the best of our knowledge, there are no proceedings pending against us or any of our properties which, if determined adversely to us, would have a material effect on our financial position or results of operation. On May 8, 2001, and amended on June 8, 2001, we filed a legal complaint against a component supplier to recover out-of-pocket costs and damages resulting from the supplier having delivered faulty components for two of our fragrances. Estimated out-of-pocket costs to refurbish the products of approximately $1.5 million were included in cost of goods sold for the year ended March 31, 2001. An additional $200,000 was provided during the fiscal year ended March 31, 2002, to cover the refurbishing of additional product returns. The parties are currently engaged in the discovery process. Although management believes that the litigation has significant merit, there can be no assurance of the outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any actions for shareholders' approval during the quarter ended March 31, 2002 and through June 28, 2002. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Our Common Stock, par value $0.01 per share, has been listed on the National Association of Securities Dealers Automatic Quotation System ("NASDAQ") National 8 Small Cap List market since February 26, 1987 and commenced trading on the NASDAQ National Market on October 24, 1995. We believe that the number of beneficial owners of our common stock is approximately 4,000. The following chart, as reported by the National Association of Securities Dealers, Inc., shows the high and low bid prices for our securities available for each quarter of the last two years and the interim period from April 1, 2002 through June 28, 2002. The prices represent quotations by the dealers without adjustments for retail mark-ups, markdowns or commissions and may not represent actual transactions. Fiscal Quarter Common Stock -------------- ------------ High Low ---- --- First (April/June) 2000 $4.125 $2.500 Second (July/Sept.) 2000 3.500 2.125 Third (Oct./Dec.) 2000 2.625 1.281 Fourth (Jan./Mar.) 2001 2.453 1.438 First (April/June) 2001 2.730 1.469 Second (July/Sept.) 2001 3.530 1.890 Third (Oct./Dec.) 2001 2.590 1.560 Fourth (Jan./Mar.) 2002 2.190 1.620 First (April/June) 2002 2.750 1.660 We have not paid a cash dividend on our common stock nor do we contemplate paying any dividends in the near future. Our new loan agreement restricts payment of dividends without prior approval. ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from audited financial statements. Consolidated balance sheets at March 31, 2002 and 2001, and the related consolidated statements of operations and of cash flows for the three years ended March 31, 2002 and notes thereto appear elsewhere in this Annual Report on Form 10-K. For the Year Ended March 31, (in thousands of dollars, except per share data) - ---------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net sales $70,001 $68,875 $66,385 $56,151 $ 62,369 Costs/operating expenses 73,868 61,495 59,786 51,920 73,911 Operating (loss) income (3,867) 7,380 6,599 4,231 (11,542) Net (loss) income (5,655) 3,926 3,873 1,418 (8,687) Loss per share: Basic ($0.57) $ 0.39 $ 0.32 $ 0.10 ($ 0.53) Diluted(1) $ 0.38 $ 0.31 $ 0.10 9 23 The calculation of the diluted loss per share was the same as the basic loss per share for fiscal 2002 and 1998 since inclusion of potential common stock in the computation would be antidilutive. At March 31, (in thousands of dollars) - ------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Current assets $60,282 $50,810 $57,992 $56,349 $66,359 Current liabilities 22,620 20,274 23,238 18,159 30,185 Working capital 37,662 30,536 34,754 38,190 36,174 Trademarks, licenses and goodwill, net 9,535 20,464 21,469 23,926 25,378 Long-term borrowings 962 1,686 2,571 3,561 4,108 Total assets 72,248 74,012 81,862 82,081 95,731 Total liabilities 24,324 23,138 28,217 22,227 34,713 Stockholders' equity 47,924 50,874 53,645 59,854 61,018 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this annual report. Except for the historical matters contained herein, statements made in this annual report are forward looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Investors are cautioned that forward looking statements involve risks and uncertainties which may affect our business and prospects, including economic, competitive, governmental, technological and other factors discussed in this annual report and in our filings with the Securities and Exchange Commission. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The SEC has recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results, and requires significant judgment and estimates on the part of management in its application. We believe the accounting policies described below represent our critical accounting policies as contemplated by FRR 60. See Note 1 to Consolidated Financial Statements for a detailed discussion on the application of these and other accounting policies. Accounting for Intangible Assets. In fiscal 2002, we adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142), new rules for measuring the impairment of brand licenses, trademarks and intangibles and discontinued amortization for intangible assets with indefinite useful lives. 10 The value of our intangible assets, including brand licenses, and trademarks, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We review intangible assets for impairment using the guidance of applicable accounting literature. Allowance for Sales Returns. As is customary in the prestige fragrance industry, we grant certain of our U.S. department store customers the right to return product, which does not "sell-through" to consumers. Upon sale, we record a provision for estimated product returns based on our historical "sell-through" experience, economic trends and changes in customer demand. Based upon this information, we provide an allowance for sales returns. There is considerable judgment used in evaluating the factors influencing the allowance for returns and additional allowances in any particular period may be needed, reducing net income or increasing net loss. Allowances for Doubtful Accounts Receivable. We maintain allowances for doubtful accounts to cover uncollectible accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including a customer-by-customer review for large accounts. If the financial condition of our customers, or any one customer, deteriorates resulting in an impairment of their ability to pay, additional allowances may be required. Provisions for Inventory Obsolescence. We record a provision for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, the estimated market value, the shelf life of the inventory and our historical experience. If there are changes to these estimates, additional provisions for inventory obsolescence may be necessary. Income Taxes and Valuation Reserves. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider projected future taxable income and ongoing tax planning strategies in assessing the valuation allowance. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period of such determination. Comparison of the year ended March 31, 2002 with the year ended March 31, 2001. - ------------------------------------------------------------------------------- During the fiscal year ended March 31, 2002, net sales increased 2% to $70,001,063 as compared to $68,875,110 for the same period for the prior year. The increase is mainly attributable to the launch of "Ocean Pacific" for men and women in the Spring and Fall of 2001, which added gross sales of $6,924,891 during the current year period. The increase was offset by the $3,869,392 sales decrease experienced over all brands during the quarter ended December 31, 2001, which was mainly attributable to the 11 economic effects of the September 11th tragedy and the resulting sluggish holiday season, both internationally and in the U.S. department store sector. Net sales to unrelated customers decreased 1% to $45,971,696 in the current period, compared to $46,512,816 for the same period in the prior year. Sales to related parties increased 7% to $24,029,367 in the current period, compared to $22,362,294 for the same period in the prior year. Cost of goods sold increased as a percentage of net sales from 40% for the fiscal year ended March 31, 2001 to 46% for the current period. The increase was mainly attributable to the sale of certain closeout merchandise to international customers at lower margins during the current period and the change in sales mix during the six months ended December 31, 2001. Domestic department store customers and related parties purchased a higher percentage of value sets for the holiday season than in prior years as compared to basic stock merchandise. These value sets have a higher cost of goods. Cost of goods sold on sales to unrelated customers and related parties approximated 44% and 50%, respectively, during the fiscal year ended March 31, 2002, as compared to 38% and 45%, respectively, for the same period in the prior year. Operating expenses for the current fiscal year period, excluding the impairment loss on intangibles, increased by 1% compared to the same period in the prior year from $33,768,345 to $34,276,106, remaining relatively constant at 49% of net sales. Advertising and promotional expenses increased 4% to $18,209,190 compared to $17,484,616 in the prior year period. The current year period includes approximately $728,000 in charges relating to the December 2001 bankruptcy filing by an advertising firm that owed us barter advertising credits. Selling and distribution costs increased 2% to $6,644,561 in the current period as compared to $6,534,583 for the same period of the prior year, remaining relatively constant at 9% of net sales. General and administrative expenses decreased by 5% compared to the prior year period from $5,415,061 to $5,181,473, decreasing as a percentage of net sales from 8% to 7%. The decrease was mainly attributable to a $977,000 reduction in bad debt expense for certain international receivables, partially offset by an increase of $310,000 in legal fees relating to our litigation against a component supplier. Depreciation and amortization decreased by $313,697 during the current period from $2,308,793 to $1,995,096, as approximately $476,000 of amortization on intangibles with indefinite lives was not required during the current fiscal year period as a result of new accounting guidelines (See Note 6 of the accompanying consolidated financial statements for further discussion). The decrease was partially offset by depreciation of new molds required for Ocean Pacific products. Royalties remained relatively constant at 3% of net sales. During the current fiscal year period, we recorded an impairment charge on the intangibles relating to the Alexandra de Markoff and Bal a Versailles brands totaling $7,441,554. As a result of the above, we incurred an operating loss of $3,866,540 for the fiscal year ended March 31, 2002, compared to operating income of $7,380,319 for the comparable prior year period. Net interest expense decreased to $1,032,975 in the current 12 period as compared to $1,100,777 for the same period in the prior year. The decrease reflects lower interest rates on borrowings offset by the reduction in interest income generated by a lower average balance on notes receivable from related parties outstanding during the entire prior year period. During the first quarter of the current fiscal year period, we recorded a $2,858,447 non-cash charge representing a writedown for an other-than-temporary decline in the value of our investment in affiliate. Loss before taxes for the current fiscal year was $7,745,449 compared to income before taxes of $6,284,816 in the same period for the prior year. Giving effect to the tax provision and the deferred tax benefit of $207,360 related to the non-cash charge, the net loss amounted to $5,665,401 for the current fiscal year period, as compared to net income of $3,925,659 for the same period in the prior year. Excluding the effect of the impairment loss on intangibles and the non-cash writedown of our investment, net income of $1,583,822 would have been reported for the current fiscal year period. Comparison of the year ended March 31, 2001 with the year ended March 31, 2000 - ------------------------------------------------------------------------------ During the fiscal year ended March 31, 2001, net sales increased 4% to $68,875,110 as compared to $66,385,151 for the fiscal year ended March 31, 2000. The increase is mainly attributable to the launch of "Chaleur d'Animale" men's and women's fragrances during the current year, which resulted in an increase in total Animale brand gross sales of 62%, from $7,368,886 to $11,901,783, and the launch of "OCEAN PACIFIC" for men in the Spring of 2001, which added gross sales of $2,071,292. These increases were offset by a $2,815,667 reduction in gross sales of Fred Hayman brand products, mainly "Hollywood" for men and women, from $11,021,573 to $8,205,906. Total gross sales of all Perry Ellis brand products also decreased slightly compared to the same period in the prior year from $50,683,562 to $50,034,796. The decrease results from a faulty component on both "Portfolio" men and women, which caused us to cease shipments and accept returns. The quality problem, which posed no product safety issues, has been rectified, and we have initiated legal action to recover damages from the component supplier. Out-of-pocket costs to refurbish the products of approximately $1.5 million have been included in cost of goods sold for the year ended March 31, 2001. Net sales to unrelated customers increased 29% to $46,512,816 in the current period, compared to $35,958,199 in the same period in the prior year. Sales to related parties decreased 27% to $22,362,294 in the current period compared to $30,426,952 in the same period in the prior fiscal year. For further information with respect to transactions with the related party, see "Business - Customers" elsewhere herein. Cost of goods sold decreased as a percentage of net sales from 43% for the fiscal year ended March 31, 2000 to 40% for the current period. Without the Portfolio refurbishing costs discussed above, the costs of goods sold percentage for the current period would have been 38%. The decrease was mainly attributable to the significant increase in sales to unrelated parties that have a lower cost of goods. Cost of goods sold on sales to unrelated customers and related parties approximated 38% and 45%, 13 respectively, during the fiscal year ended March 31, 2001, compared to 43% and 42%, respectively, in the prior year period. Operating expenses for the current fiscal year period increased 8% compared to the prior year period from $31,133,646 to $33,768,345, increasing as a percentage of net sales from 47% to 49%. Advertising and promotional expenses increased 14% to $17,484,616 compared to $15,307,913 in the prior year period, reflecting a renewed emphasis on in-store spending as well as print advertising in support of program launches. Selling and distribution costs increased 8% to $6,534,583 in the current fiscal period as compared to $6,050,583 in the same period of the prior fiscal year, remaining relatively constant at 9% of net sales. General and administrative expenses increased by 22% compared to the prior year period from $4,442,578 to $5,415,061, increasing as a percentage of net sales from 7% to 8%. The increase was mainly attributable to an increase of approximately $423,000 in bad debt expense for certain international receivables and increased salaries and bonuses. Depreciation and amortization decreased $1,233,432 as a result of the increased amortization of goodwill due to the cancellation of the Baryshnikov license agreement in the prior year. Royalties increased to $2,025,292 for the current period compared to $1,790,347 in the prior year, remaining relatively constant at 3% of net sales. As a result of the above, we had operating income of $7,380,319 or 11% of net sales for the fiscal year period ended March 31, 2001, compared to $6,599,304 or 10% of net sales for the comparable prior year period. The fiscal year ended March 31, 2000, includes a $541,013 gain on the sale of perfumania.com common stock, which was originally purchased during October 1999. Net interest expense increased by 32% to $1,100,777 in the current fiscal year as compared to $871,919 in the same period in the prior year, reflecting penalties and increased interest rates paid on our previous line of credit. See Liquidity and Capital Resources on pages 14, 15 and 16 for further discussion. There were exchange gains of $5,274 in the current year as compared to losses of $30,143 in the same period in the prior year. Income before taxes increased to $6,284,816 or 9% of net sales for the current fiscal year compared to $6,238,555 or 9% of net sales in the same period in the prior year. Giving effect to the tax provision, net income amounted to $3,925,659 or 6% of net sales for the fiscal year ended March 31, 2001, as compared to $3,872,611 or 6% of net sales for the same period in the prior fiscal year. Liquidity and Capital Resources - ------------------------------- Working capital increased to $37,662,059 at March 31, 2002 compared to $30,535,978 at March 31, 2001, reflecting the effect of the non-cash charge, partially offset by the current period's net loss. In September 1999, we completed the fourth phase of our common stock buy-back program involving 2,000,000 shares. In connection therewith, the Board of Directors 14 authorized the repurchase of an additional 2,500,000 shares. As of June 30, 2001, the Company had repurchased a total of 7,978,131 shares under all phases at a cost of $21,983,523, with 121,869 shares still available for repurchase under the last program. On July 25, 2001, the Board of Directors authorized a new 2,500,000 share repurchase, subject to the restrictions and covenants in our new loan agreement discussed below. No shares have been purchased under the latest authorization. The accompanying consolidated balance sheets also include an additional 39,000 shares of treasury stock purchased at a cost of $133,472 prior to fiscal 1996. In May 1997, we entered into a six-year $25 million loan and Security Agreement (the Credit Agreement) with General Electric Capital Corporation (GECC). Due principally to the significant treasury stock purchases under our stock buy back program, as of March 31, 2000, we were not in compliance with certain financial covenants. GECC had extended, through various short-term agreements, the maturity of the Credit Agreement through July 31, 2001, while reducing the borrowing limit to $14 million, in line with the Company's current needs at the time. On July 20, 2001, we entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Proceeds from the Loan Agreement were used, in part, to repay amounts outstanding under the Company's $14 million credit facility with GECC. 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"). At March 31, 2002, based on the borrowing base at that date, the credit line amounted to approximately $16,248,000, and accordingly, we had approximately $4,440,000 available under the credit line, excluding the effect of restricted cash of approximately $1,248,000. Substantially all of our domestic assets collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. As of March 31, 2002, we were not in compliance with financial covenants relating to EBITDA and minimum fixed charge coverage. We obtained a waiver of this noncompliance from GMACCC and a modification of the covenants for future periods. 15 Management believes that funds from operations and our financing will be sufficient to meet our operating needs for the foreseeable future. New Accounting Pronouncements - ----------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment to SFAS No. 133. SFAS No. 137 deferred the effective date of adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on April 1, 2001 did not have a material impact on our financial statements. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method and further requires separate recognition of intangible assets that meet one of two criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill, and other intangible assets with an indefinite useful life, should not be amortized, but shall be periodically tested for impairment. The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly, amortization was discontinued for intangible assets with indefinite useful lives and, as a result, amortization of approximately $478,000 for the year ended March 31, 2002, was no longer required. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with early adoption encouraged. The Company does not expect the adoption of SFAS No. 143 to have a material effect on its financial statements or disclosures. 16 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company does not expect the adoption of SFAS No. 144 to have a material effect on its financial statements or disclosures. Effective April 1, 2002, the Company will adopt Emerging Issues Task Force ("EITF") 01-09, Accounting for Consideration Given by a Vendor to a Customer, which codified and reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14 provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these discounts, coupons, rebates and free products. Upon adoption of this pronouncement, the Company will classify gift-with-purchase activities, which were previously reported as advertising and promotional expenses, as cost of goods sold. The adoption of EITF 01-09 will have no impact on operating loss; however, for each of the three years in the period ended March 31, 2002, gross margin would have decreased by approximately $3.6 million, $3.7 million, and $3.1 million, respectively, offset by an equal decrease in advertising and promotional expenses. EITF 01-09 also codified and reconciled EITF No. 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products. EITF No. 00-25 provides guidance on the income statement classification of consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's products or to promote sales of the vendor's products. The adoption of this pronouncement did not have a material impact on the Company's operations or financial statement presentation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We sell our products worldwide with all such sales being denominated in United States dollars. As a result, we are not at risk to any foreign exchange translation exposure, but could be subject to changes in political and economic conditions in many of these countries. We closely monitor such conditions and are able, for the most part, to adjust our sales strategies accordingly. Our exposure to market risk for changes in interest rates relates primarily to our bank line of credit. The bank line of credit bears interest at a variable rate, as discussed above under "Liquidity and Capital Resources". We mitigate interest rate risk by continuously monitoring the interest rates and electing the lower of the fixed rate LIBOR or prime rate option available under the line of credit. As a result of borrowings associated with our operating and investing activities, we are exposed to interest rate risk. 17 As of March 31, 2002 and 2001, primary source of funds for working capital and other needs were lines of credit totaling $20.0 million and $14.0 million, respectively. Of the of $12.5 million and $9.6 million of short-term and long-term borrowings on the Company's balance sheet as of March 31, 2002 and 2001, respectively, approximately 15% and 30%, respectively, represented fixed rate instruments. The line of credit bears interest at a floating rate of prime plus 1% (prime plus 4% at March 31, 2001). A hypothetical 10% adverse move in interest rates would increase fiscal year 2002 and 2001 interest expense by approximately $0.1 million in each year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The financial statements and supplementary data are included herein commencing on page F-1. The financial statement schedule is listed in the Index to Financial Statements on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this item is incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements See Index to Financial Statements beginning on page F-1 of this annual report. 2. Financial Statement Schedules See Index to Financial Statements beginning on Page F-1 of this annual report. 3. Exhibit Index The following exhibits are attached: 10.57 Agreement, dated February 27, 2002, between the Company and J.F.C. Marks, L.L.C. 10.58 Employment Agreement, with Ilia Lekach, dated as of May 1, 2002. 10.59 Employment Agreement, with Frank A. Buttacavoli, dated as of May 1, 2002. 10.60 Consulting Agreement, with Cosmix, Inc., dated as of May 1, 2002. 10.61 Consulting Agreement, with Cambridge Development Corp., dated as of May 1, 2002. 23.1 Consent of Deloitte & Touche LLP, Independent Auditors 23.2 Consent of PricewaterhouseCoopers LLP, Independent Certified Public Accountants (b) Reports on Form 8-K There were no reports on Form 8-K during the quarter ended March 31, 2002. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PARLUX FRAGRANCES, INC. /s/ Ilia Lekach - ----------------------------------------- Ilia Lekach, Chief Executive Officer, President and Chairman Dated: July 1, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ Frank A. Buttacavoli - ------------------------------------------- Frank A. Buttacavoli, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director /s/ Frederick E. Purches - ------------------------------------------- Frederick E. Purches, Vice Chairman and Director /s/ Albert F. Vercillo - -------------------------------------------- Albert F. Vercillo, Director /s/ Zalman Lekach - -------------------------------------------- Zalman Lekach, Director /s/ Glenn Gopman - --------------------------------------------- Glenn Gopman, Director /s/ Esther Egozi Choukroun - --------------------------------------------- Esther Egozi Choukroun, Director 20 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ FINANCIAL STATEMENTS: Page ---- Report of Independent Auditors F-2 Report of Independent Certified Public Accountants F-3 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 FORM 10-K SCHEDULES: Schedule II - Valuation and Qualifying Accounts F-25 All other Schedules are omitted as the required information is not applicable or the information is presented in the financial statements or the related notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Parlux Fragrances, Inc. Ft. Lauderdale, Florida We have audited the accompanying consolidated balance sheets of Parlux Fragrances, Inc. and subsidiaries (the "Company") as of March 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule for the years then ended listed in Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As described in Note 2 to the consolidated financial statements, the Company conducts significant transactions with related parties. Deloitte & Touche LLP Miami, Florida June 21, 2002 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Parlux Fragrances, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the results of operations and cash flows of Parlux Fragrances, Inc. and its subsidiaries (collectively the "Company") for the year ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K, for the year ended March 31, 2000, the Loan and Security Agreement (the "Credit Agreement") expires on August 29, 2000. Management is currently negotiating with other banks to obtain financing to replace the Credit Agreement. As of June 30, 2000, the Company has not obtained financing from an alternative source. Management believes that the Company will be able to obtain financing from alternative sources to replace the Credit Agreement. However, there is no assurance that alternative financing will be available in the future, which creates substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As described in Note 2 to the consolidated financial statements, the Company conducts significant transactions with a related party. PricewaterhouseCoopers LLP Miami, Florida June 30, 2000 F-3 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
March 31, March 31, ASSETS 2002 2001 - ---------------------------------------------- ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 164,793 $ 30,214 Receivables, net of allowance for doubtful accounts, sales returns and advertising allowances of approximately $1,430,000 and $1,922,000, respectively 5,527,522 6,640,616 Trade receivables from related parties 12,788,320 13,006,178 Income tax receivable 1,745,401 -- Inventories, net 31,102,875 22,174,181 Prepaid expenses and other current assets, net 8,045,933 8,155,477 Investment in affiliate 907,442 803,390 ------------ ------------ TOTAL CURRENT ASSETS 60,282,286 50,810,056 Equipment and leasehold improvements, net 2,361,659 2,649,347 Trademarks, licenses and goodwill, net 9,534,937 20,464,254 Other 69,609 88,366 ------------ ------------ TOTAL ASSETS $ 72,248,491 $ 74,012,023 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Borrowings, current portion $ 11,493,461 $ 7,862,607 Accounts payable 10,118,080 11,363,779 Accrued expenses 1,008,686 880,673 Income taxes payable -- 167,019 ------------ ------------ TOTAL CURRENT LIABILITIES 22,620,227 20,274,078 Borrowings, less current portion 962,275 1,686,142 Deferred tax liability 742,214 1,177,329 ------------ ------------ TOTAL LIABILITIES 24,324,716 23,137,549 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY : Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2002 and March 31, 2001 -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 17,993,277 and 17,986,565 shares issued at March 31, 2002 and March 31, 2001, respectively 179,933 179,866 Additional paid-in capital 74,011,221 74,002,059 (Accumulated deficit) retained earnings (2,203,080) 3,452,321 Accumulated other comprehensive loss (1,110,139) (3,851,830) Notes receivable from officer (837,165) (790,947) ------------ ------------ 70,040,770 72,991,469 Less - 8,017,131 shares of common stock in treasury, at cost, at March 31, 2002 and March 31, 2001 (22,116,995) (22,116,995) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 47,923,775 50,874,474 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,248,491 $ 74,012,023 ============ ============
See notes to consolidated financial statements. F-4 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
Year Ended March 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Net sales: Unrelated customers $ 45,971,696 $ 46,512,816 $ 35,958,199 Related parties 24,029,367 22,362,294 30,426,952 ------------ ------------ ------------ 70,001,063 68,875,110 66,385,151 Cost of goods sold 32,149,943 27,726,446 28,652,201 ------------ ------------ ------------ Gross margin 37,851,120 41,148,664 37,732,950 ------------ ------------ ------------ Operating expenses: Advertising and promotional 18,209,190 17,484,616 15,307,913 Selling and distribution 6,644,561 6,534,583 6,050,583 General and administrative, net of licensing fees of $487,500 in 2002, $650,000 in 2001 and of $637,500 in 2000 5,181,473 5,415,061 4,442,578 Depreciation and amortization 1,995,096 2,308,793 3,542,225 Royalties 2,245,786 2,025,292 1,790,347 Impairment loss on intangibles 7,441,554 -- -- ------------ ------------ ------------ Total operating expenses 41,717,660 33,768,345 31,133,646 ------------ ------------ ------------ Operating income (loss) (3,866,540) 7,380,319 6,599,304 Gain on sale of securities -- -- 541,013 Interest income 166,116 376,605 504,944 Interest expense and bank charges (1,199,091) (1,477,382) (1,376,863) Exchange gain (loss) 12,513 5,274 (30,143) Other-than-temporary decline in value of investment in affiliate (2,858,447) -- -- ------------ ------------ ------------ (Loss) income before income taxes (7,745,449) 6,284,816 6,238,255 Income taxes benefit (provision) 2,090,048 (2,359,157) (2,365,644) ------------ ------------ ------------ Net (loss) income ($ 5,655,401) $ 3,925,659 $ 3,872,611 ============ ============ ============ (Loss) income per common share: Basic ($ 0.57) $ 0.39 $ 0.32 ============ ============ ============ Diluted ($ 0.57) $ 0.38 $ 0.31 ============ ============ ============
See notes to consolidated financial statements. F-5 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- YEARS ENDED MARCH 31, 2002, 2001 AND 2000 -----------------------------------------
COMMON STOCK RETAINED --------------------- ADDITIONAL EARNINGS NUMBER PAR PAID-IN (ACCUMULATED ISSUED VALUE CAPITAL DEFICIT) ---------- --------- --------- ----------- BALANCE at March 31, 1999 17,462,478 $174,625 $73,030,586 ($4,345,949) Comprehensive income: Net income -- -- -- 3,872,611 Unrealized holding gains on investment in affiliate, net of taxes of $1,340,521 -- -- -- -- Foreign currency translation adjustment -- -- -- -- Total comprehensive income Issuance of common stock upon exercise of: Employee stock options 10,625 106 14,504 Warrants 500,000 5,000 932,500 Purchase of 4,049,767 shares of treasury stock, at cost -- -- -- -- Net increase in notes receivable from officer -- -- -- -- ---------- --------- ----------- ----------- BALANCE at March 31, 2000 17,973,103 179,731 73,977,590 (473,338) Comprehensive income (loss): Net income -- -- -- 3,925,659 Unrealized holding loss on investment in affiliate, net of a tax benefit of $1,547,881 -- -- -- -- Foreign currency translation adjustment -- -- -- -- Total comprehensive loss Issuance of common stock upon exercise of employee stock options 13,462 135 24,469 -- Purchase of 312,333 shares of treasury stock, at cost -- -- -- -- Net decrease in notes receivable from officer -- -- -- -- ---------- --------- ----------- ----------- BALANCE at March 31, 2001 17,986,565 179,866 74,002,059 3,452,321 Comprehensive income (loss): Net loss -- -- -- (5,655,401) Reversal of unrealized holding loss on investment in affiliate, net of taxes -- -- -- -- Unrealized holding loss on investment in affiliate -- -- -- -- Foreign currency translation adjustment -- -- -- -- Total comprehensive loss -- -- -- -- Issuance of common stock upon exercise of employee stock options 6,712 67 9,162 -- Net increase in notes receivable from officer -- -- -- -- ---------- --------- ----------- ----------- BALANCE at March 31, 2002 17,993,277 $ 179,933 $74,011,221 $(2,203,080) ========== ========= =========== =========== [RESTUB] ACCUMULATED NOTES OTHER RECEIVABLE COMPREHENSIVE FROM TREASURY (LOSS) INCOME OFFICER STOCK TOTAL -------------- ---------- --------- ----------- BALANCE at March 31, 1999 ($351,505) ($426,446) ($8,227,067) $59,854,244 Comprehensive income: Net income -- -- -- 3,872,611 Unrealized holding gains on investment in affiliate, net of taxes of $1,340,521 2,187,166 -- -- 2,187,166 Foreign currency translation adjustment (1,054) -- -- (1,054) --------- Total comprehensive income 6,058,723 --------- Issuance of common stock upon exercise of: Employee stock options 14,610 Warrants 937,500 Purchase of 4,049,767 shares of treasury stock, at cost -- -- (12,747,634) (12,747,634) Net increase in notes receivable from officer -- (472,659) -- (472,659) ------------ ---------- ----------- ----------- BALANCE at March 31, 2000 1,834,607 (899,105) (20,974,701) 53,644,784 Comprehensive income (loss): Net income -- -- -- 3,925,659 Unrealized holding loss on investment in affiliate, net of a tax benefit of $1,547,881 (5,683,386) -- -- (5,683,386) Foreign currency translation adjustment (3,051) -- -- (3,051) ----------- Total comprehensive loss (1,760,778) ----------- Issuance of common stock upon exercise of employee stock options -- -- -- 24,604 Purchase of 312,333 shares of treasury stock, at cost -- -- (1,142,294) (1,142,294) Net decrease in notes receivable from officer -- 108,158 -- 108,158 ------------ ---------- ----------- ----------- BALANCE at March 31, 2001 (3,851,830) (790,947) (22,116,995) 50,874,474 Comprehensive income (loss): Net loss -- -- -- (5,655,401) Reversal of unrealized holding loss on investment in affiliate, net of taxes 3,496,220 -- -- 3,496,220 Unrealized holding loss on investment in affiliate (741,081) -- -- (741,081) Foreign currency translation adjustment (13,448) -- -- (13,448) ---------- Total comprehensive loss -- -- (2,913,710) ---------- Issuance of common stock upon exercise of employee stock options -- -- -- 9,229 Net increase in notes receivable from officer -- (46,218) -- (46,218) ------------ ---------- ----------- ----------- BALANCE at March 31, 2002 $(1,110,139) $(837,165) $(22,116,995) $47,923,775 =========== ========= ============ ===========
See notes to consolidated financial statements. F-6 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
Year ended March 31, ------------------------------------------------ 2002 2001 2000 ------------ ----------- ----------- Cash flows from operating activities: Net (loss) income ($5,655,401) $3,925,659 $3,872,611 ------------ ----------- ---------- Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,995,096 2,308,793 3,542,225 Other-than-temporary decline in market value of investment in affiliate 2,858,447 -- -- Impairment loss on intangibles 7,441,554 -- -- Provision for doubtful accounts 590,000 1,567,000 1,143,790 Reserve for prepaid promotional supplies and inventory obsolescence 1,970,000 1,600,000 1,400,000 Gain on sale of securities -- -- (541,013) Deferred income tax (benefit) provision (801,520) 869,568 75,426 Changes in assets and liabilities net of effect of acquisitions: Decrease (increase) in trade receivables - customers 525,174 (2,141,467) 13,012 Decrease (increase) in note and trade receivables - related parties 217,858 (944,628) 1,689,693 Increase in income tax receivable (1,745,401) -- -- (Increase) decrease in inventories (10,328,694) 473,251 (3,272,357) (Increase) decrease in prepaid expenses and other current assets (301,411) (1,143,041) 1,230,135 Decrease in other non-current assets 18,757 24,056 527 (Decrease) increase in accounts payable (1,245,699) 809,711 5,239,298 (Decrease) increase in accrued expenses and income taxes payable (39,006) (1,642,602) 730,672 ------------ ----------- ----------- Total adjustments 1,155,155 1,780,641 11,251,408 ------------ ----------- ----------- Net cash (used in) provided by operating activities (4,500,246) 5,706,300 15,124,019 ------------ ----------- ----------- Cash flows from investing activities: Proceeds from sale of securities -- -- 2,276,018 Purchase of securities -- -- (1,735,005) Purchases of equipment and leasehold improvements, net (1,222,751) (1,596,742) (1,543,340) Purchases of trademarks (6,974) (67,756) (137,976) Cash received from sale of Adm brand 3,008,000 -- -- ------------ ----------- ----------- Net cash provided by (used in) investing activities 1,778,275 (1,664,498) (1,140,303) ------------ ----------- ----------- Cash flows from financing activities: Proceeds - note payable to GMAC Commercial Credit, net 10,559,914 -- -- Payments - note payable to GE Capital Corporation, net (6,782,973) (2,142,640) (936,471) Payments - note payable to Fred Hayman Beverly Hills (687,489) (639,550) (594,953) Payments - note payable to United Capital Corporation (111,231) (204,890) (183,508) Payments - notes payable to Bankers Capital Leasing (52,365) (29,389) (122,117) Payments - other notes payable (18,869) -- (44,114) Net (increase) decrease in notes receivable from officer (46,218) 108,158 (472,659) Purchases of treasury stock -- (1,142,294) (12,747,634) Proceeds from issuance of common stock, net 9,229 24,604 952,110 ------------ ----------- ----------- Net cash provided by (used in) financing activities 2,869,998 (4,026,001) (14,149,346) ------------ ----------- ----------- Effect of exchange rate changes on cash (13,448) (3,051) (1,054) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 134,579 12,750 (166,684) Cash and cash equivalents, beginning of year 30,214 17,464 184,148 ------------ ----------- ----------- Cash and cash equivalents, end of year $164,793 $30,214 $17,464 ============ =========== ===========
See notes to consolidated financial statements. F-7 PARLUX FRAGRANCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2002, 2001, AND 2000 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------------- A. NATURE OF BUSINESS ------------------ Parlux Fragrances, Inc. was incorporated in Delaware on July 23, 1984, and is a manufacturer and distributor of prestige fragrances and beauty related products, on a worldwide basis. B. PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of Parlux Fragrances, Inc., and its wholly-owned subsidiaries Parlux S.A., a French company ("S.A."), and Parlux, Ltd. (jointly referred to as the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. C. ACCOUNTING ESTIMATES -------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("generally accepted accounting principles") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates relate to the carrying value of accounts receivable from related parties, reserve for doubtful accounts, sales returns and advertising allowances, inventory obsolescence and periods of depreciation and amortization for trademarks, licenses, goodwill, and equipment. Actual results could differ from those estimates. D. REVENUE RECOGNITION ------------------- Revenue is recognized when the product is shipped to a customer. Estimated amounts for sales returns and allowances are recorded at the time of sale. Licensing income, which is included as an offset to general and administrative expenses, is recognized ratably over the terms of the contractual license agreements. E. INVENTORIES AND COST OF GOODS SOLD ---------------------------------- Inventories are stated at the lower of cost (using the first-in, first-out method) or market. The cost of inventories includes product costs and handling charges, including an allocation of the Company's applicable overhead in an amount of $2,409,000 and $2,275,000 at March 31, 2002 and 2001, respectively. F. INVESTMENT IN AFFILIATE ----------------------- Investment in Affiliate consists of an investment in common stock of E Com Ventures, Inc., the parent company of Perfumania, Inc. (see Note 2). Such securities are considered available-for-sale and are recorded at fair value. Changes in unrealized gains and losses of the Company's investment are charged or credited as a component of accumulated other comprehensive income (loss), net of tax, and are included in the accompanying statements of changes in stockholders' equity. A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary is charged to earnings. F-8 G. BARTER SALES AND CREDITS ------------------------ The Company has sold certain of its products to a barter broker in exchange for advertising that the Company will use. The Company does not record the transfer of such products as sales, nor does it record a profit on such transactions. The advertising credits received, which are recorded as a prepaid expense on the Company's balance sheet at the time such inventory is shipped, are valued at the cost of goods bartered. H. EQUIPMENT AND LEASEHOLD IMPROVEMENTS ------------------------------------ Equipment and leasehold improvements are carried at cost. Equipment is depreciated using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lesser of the estimated useful life or the lease period. Repairs and maintenance charges are expensed as incurred, while betterments and major renewals are capitalized. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. I. TRADEMARKS, LICENSES AND GOODWILL --------------------------------- Trademarks, licenses and goodwill are recorded at cost and those with a definite life are amortized over the estimated periods of benefit, principally 25 years. Accumulated amortization of trademarks, licenses and goodwill was $3,347,897 and $6,251,772 at March 31, 2002 and 2001, respectively. Amortization expense was $484,657, $1,072,239 and $2,595,311 for the years ended March 31, 2002, 2001, and 2000, respectively. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected undiscounted future cash flows of the related assets are less than their carrying values. The impairment loss is determined based on the difference between the carrying value of the assets and anticipated future cash flows discounted at a value commensurate with the risk involved, which is management's estimate of fair value. Management does not believe that there are any unrecorded impairment losses as of March 31, 2002. J. ADVERTISING COSTS ----------------- Advertising and promotional expenditures are expensed to operations as incurred. These expenditures include print and media advertising, as well as in-store cooperative advertising and promotions. K. INCOME TAXES ------------ The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded, using currently enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. L. FOREIGN CURRENCY TRANSLATION ---------------------------- The Company's functional currency for its foreign subsidiary is the local currency. Other income and expense includes foreign currency gains and losses, which are recognized as incurred. M. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying value of the Company's financial instruments, consisting principally of cash and cash equivalents, receivables, note receivable from related party, notes receivable from officer, accounts payable and borrowings, approximate fair value due to either the short-term maturity of the instruments or borrowings with similar interest rates and maturities. F-9 N. BASIC AND DILUTED EARNINGS PER SHARE ------------------------------------ Basic earnings per common share calculations are determined by dividing earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing earnings attributable to common stockholders by the weighted average number of shares of common stock and dilutive potential common stock equivalents outstanding during the year. O. STOCK BASED COMPENSATION ------------------------ Statement of Financial Accounting Standards No. 123, Accounting For Stock Based Compensation ("SFAS No. 123") establishes a fair value based method of accounting for stock based compensation plans, the effect of which can either be disclosed or recorded. The Company retained the intrinsic value method of accounting for stock based compensation, which it previously used prior to the issuance of SFAS No. 123. In calculating the potential effect for proforma disclosure, the fair market value on the date of grant was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions: 2002 2001 2000 ---- ---- ---- Expected life (years) 5 5 5 Interest rate 5% 5% 5% Volatility 70% 75% 75% Dividend Yield -- -- -- If compensation cost had been determined based on the fair value at the grant date under SFAS No. 123, the Company's net (loss) income and (loss) income per share would have been as follows:
For the years ended March 31, 2001 2000 2002 ---- ---- ---- Net (loss) income: As reported $ (5,655,401) $ 3,925,659 $ 3,872,611 Proforma $ (6,262,080) $ 3,895,617 $ 3,853,610 Basic net (loss) income per share: As reported $ (0.57) $ 0.39 $ 0.32 Proforma $ (0.63) $ 0.39 $ 0.32 Diluted net (loss) income per share: As reported $ (0.57) $ 0.38 $ 0.31 Proforma $ (0.63) $ 0.37 $ 0.31
P. CASH FLOW INFORMATION --------------------- The Company considers temporary investments with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash flow information are as follows: 2002 2001 2000 ---- ---- ---- Cash paid for: Interest $1,288,250 $1,546,029 $1,334,769 ========== ========== ========== Income taxes $ 623,580 $2,633,381 $1,216,348 ========== ========== ========== Supplemental disclosures of non-cash investing and financing activities are as follows: F-10 Year ended March 31, 2002: o The conversion of trade accounts receivable from Perfumania in the amount of $3,000,000, as discussed in Note 2. 0 The Company incurred an unrealized holding loss of $741,081 on the investment in affiliate. o The Company acquired equipment in the amount of $249,989 through capital lease arrangements. o The Company incurred an other-than-temporary decline in value on the investment in affiliate of $2,858,447, with a corresponding deferred tax benefit of $207,360. o The Company reversed an unrealized holding loss of $3,496,220 on the investment in affiliate, net of tax benefits. Year ended March 31, 2001: o The Company incurred an unrealized holding loss of $5,683,386 on the investment in affiliate, net of tax benefits. o The Company entered into a barter agreement for which it exchanged inventory of Baryshnikov brand products with a cost of approximately $728,000 in exchange for advertising credits. Year ended March 31, 2000: o The Company incurred an unrealized holding gain of $2,187,166 on the investment in affiliate, net of taxes. o The conversion of trade accounts receivable in the amounts of $4,506,970 and $8,000,000 discussed in Note 2. Q. SEGMENT INFORMATION ------------------- As of March 31, 2002, the Company operates solely in one segment, the marketing and manufacture of prestige fragrances and beauty related products. R. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment to SFAS No. 133. SFAS No. 137 deferred the effective date of adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on April 1, 2001 did not have a material impact on the Company's financial statements. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method and further requires separate recognition of intangible assets that meet one of two criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. F-11 SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill, and other intangible assets with an indefinite useful life, should not be amortized, but shall be periodically tested for impairment. The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly, amortization was discontinued for intangible assets with indefinite useful lives and, as a result, amortization of approximately $478,000 for the year ended March 31, 2002, was no longer required. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with early adoption encouraged. The Company does not expect the adoption of SFAS No. 143 to have a material effect on its financial statements or disclosures. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company does not expect the adoption of SFAS No. 144 to have a material effect on its financial statements or disclosures. Effective April 1, 2002, the Company will adopt Emerging Issues Task Force ("EITF") 01-09, Accounting for Consideration Given by a Vendor to a Customer, which codified and reconciled EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14 provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these discounts, coupons, rebates and free products. Upon adoption of this pronouncement, the Company will classify gift-with-purchase activities, which were previously reported as advertising and promotional expenses, as cost of goods sold. The adoption of EITF 01-09 will have no impact on operating loss; however, for each of the three years in the period ended March 31, 2002, gross margin would have decreased by approximately $3.6 million, $3.7 million, and $3.1 million, respectively, offset by an equal decrease in advertising and promotional expenses. EITF 01-09 also codified and reconciled EITF No. 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products. EITF No. 00-25 provides guidance on the income statement classification of consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's products or to promote sales of the vendor's products. The adoption of this pronouncement did not have a material impact on the Company's operations or financial statement presentation. 2. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS ---------------------------------------------------- As of March 31, 2002, the Company had loaned a total of $837,165 ($790,947 at March 31, 2001) to its Chairman/CEO, which is recorded as a component of stockholders' equity in the accompanying consolidated balance sheets. The notes are unsecured, bear interest at 8% per annum, and were due in one balloon payment on March 31, 2002, which has been extended until March 31, 2003. Interest payments were made through December 31, 2001; accrued interest of $47,428 is included in the total loan balance as of that date. The Company had net sales of $18,063,310, $22,362,294, and $30,426,952 during the fiscal years ended March 31, 2002, 2001 and 2000, respectively, to Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV"), a company in which the Company's Chairman and Chief Executive Officer has an ownership interest and holds identical management positions. Net trade accounts receivable owed by Perfumania to the Company totaled $12,491,993 and $13,006,178 at March 31, 2002 and 2001, respectively. Amounts due from related parties are non-interest bearing and are due in less than one year. On July 1, 1999, Perfumania and the Company's Board of Directors approved the transfer of 1,512,406 shares of Perfumania treasury stock to the Company in consideration for a partial reduction of the outstanding trade F-12 receivable balance in the amount of $4,506,970. The transfer price was based on a per share price of $2.98 ($11.92 post reverse split discussed below), which approximated 90% of the closing price of Perfumania's common stock for the previous 20 business days. The agreement was consummated on August 31, 1999, and the shares registered in June 2000. Effective February 1, 2000, ECMV was formed as a holding company and accordingly, former Perfumania shareholders now hold common stock in ECMV. During the first quarter of the fiscal year ended March 31, 2002, the Company recorded a non-cash charge to earnings of $2,858,447 which reflected an other-than-temporary decline in value of the investment in affiliate based upon a sustained reduction in the quoted market price of $1.09 per share ($4.36 post reverse split discussed below), as of June 30, 2001, compared to the original cost per share of $2.98 ($11.92 post reverse split discussed below). As a result of this non-cash reduction of the cost basis of the Company's investment, the Company reversed $3,496,220 of previously recorded unrealized losses on the investment, net of taxes, which had been recorded as a component of stockholders' equity as of March 31, 2001. On March 21, 2002, ECMV effected a one-for-four reverse stock split; accordingly, the Company now owns 378,101 shares. As of March 31, 2002, the fair market value of the investment in ECMV was $907,442 ($2.40 per share after the reverse split). The Company believes that, based on the evaluation of ECMV's operations, that this current decline in market price is temporary. As of June 21, 2002, the fair market value of the investment in ECMV is $1,553,995 ($4.11 per share after the reverse split). As of June 30, 2001, the Company and Perfumania had entered into a $3 million subordinated note agreement which converted $3 million of the outstanding trade receivable due from Perfumania to the Company as of that date. The note was repayable in installments of $50,000 on October 31, 2001, $300,000 on November 30, 2001, $2,500,000 on December 31, 2001, and $50,000 on each of January 31, 2002, February 28, 2002, and March 31, 2002. Accrued interest is paid with each principal installment. As of March 31, 2002, the loan had been repaid in accordance with its terms. The Company had net sales of $5,966,057 during the year ended March 31, 2002, to fragrance distributors owned/operated by individuals related to the Company's Chairman/CEO, including $4,355,239 to a director of the Company. These sales are included as related party sales in the accompanying statement of operations. As of March 31, 2002, trade receivables from related parties include $296,327 from these customers. In October 1999, the Company purchased, in the open market, 250,000 shares of perfumania.com common stock for $1,735,005. These shares were sold during November 1999, resulting in a gain of $541,013, which is included in the accompanying consolidated statement of operations for the fiscal year ended March 31, 2000. 3. INVENTORIES ----------- The components of inventories are as follows: March 31, --------- 2002 2001 ---- ---- Finished products $17,532,428 $11,485,963 Components and packaging material 9,616,274 6,959,423 Raw material 3,954,173 3,728,795 ----------- ----------- $31,102,875 $22,174,181 =========== =========== The above amounts are net of reserves for estimated inventory obsolescence of approximately $2,140,000 and $2,805,000 at March 31, 2002 and 2001, respectively. 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are as follows:
March 31, --------- 2002 2001 ---- ---- Promotional supplies, net $4,857,274 $4,036,834 Deferred tax assets 1,685,490 1,526,445 Prepaid advertising (including unused barter credits of $728,000 in 2001) 514,138 1,491,060 Other 989,031 1,101,138 ---------- ---------- $8,045,933 $8,155,477 ========== ==========
F-13 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS ------------------------------------ Equipment and leasehold improvements are comprised of the following:
March 31 Estimated useful -------- ---------------- 2002 2001 lives (in years) ----------- ---------- ---------------- Molds and equipment $ 7,971,908 $ 6,910,493 3-7 Furniture and fixtures 1,352,100 1,314,997 3-5 Leasehold improvements 452,935 328,702 5-7 ----------- ---------- 9,776,943 8,554,192 Less: accumulated depreciation and amortization (7,415,284) (5,904,845) ----------- ---------- $ 2,361,659 $2,649,347 =========== ==========
Depreciation and amortization expense on equipment and leasehold improvements for the years ended March 31, 2002, 2001 and 2001 was $1,510,439, $1,236,555, and $946,913, respectively. Amounts subject to capital leases at March 31, 2002 and 2001, included in molds and equipment above, totaled $778,578 and $528,589, respectively, net of accumulated amortization of $467,762 and $284,500. 6. TRADEMARKS, LICENSES AND GOODWILL --------------------------------- Trademarks, licenses and goodwill are attributable to the following brands: March 31, --------- 2002 2001 ------------ ------------ Owned Brands: Fred Hayman Beverly Hills ("FHBH") $ 2,820,361 $ 2,820,361 Animale 1,582,367 1,574,693 Alexandra de Markoff -- 11,191,174 Bal A Versailles 300,000 2,948,942 Other 216,646 216,546 Licensed Brands: Perry Ellis 7,963,560 7,964,310 ------------ ------------ 12,882,834 26,716,026 Less: accumulated amortization (3,347,897) (6,251,772) ------------ ------------ $ 9,534,937 $ 20,464,254 ============ ============ On March 2, 1998, the Company entered into an exclusive agreement to license the Alexandra de Markoff (AdM) rights to Cosmetic Essence, Inc. ("CEI") for an annual fee of $500,000. The initial term of the agreement is ten years, automatically renewable for additional ten and five year terms. The annual fee reduces to $100,000 after the third renewal. The license was assigned by CEI to one of its affiliates, Irving W. Rice & Co. CEI guarantees payment of the annual licensing fee for the entire term of the agreement, including renewals. On February 27, 2002, the Company entered into an agreement to sell the AdM trademark to the former owner of CEI for $3,008,000 in cash, which closed on March 1, 2002. The net book value of the intangibles associated with AdM was $8,507,092. In anticipation of the agreement, an impairment charge against the intangibles in the amount of $5,499,092 has been recorded in the accompanying statements of operations for the year ended March 31, 2002. On June 9, 1998, the Company entered into an exclusive agreement to license the Bal A Versailles (BAV) rights to Genesis International Marketing Corporation ("Genesis") for an annual licensing fee of $100,000 during the initial year of the agreement, increasing to $150,000 for subsequent years for the remainder of the initial term, and to $200,000 each year thereafter. The initial term of the agreement is for ten years, renewable every five years. F-14 The Company is currently negotiating a sale, similar to that of AdM, whereby Genesis would purchase the BAV trademark outright. In anticipation of such an agreement, an impairment charge against the intangibles related to BAV in the amount of $1,942,462 has been recorded in the accompanying statement of operations for the year ended March 31, 2002. SFAS No. 142, "Goodwill and Other Intangible Assets", requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill, and other intangible assets with an indefinite useful life, should not be amortized, but shall be periodically tested for impairment. The Company has adopted SFAS No. 142 as of April 1, 2001. Accordingly, amortization was discontinued for intangible assets with indefinite useful lives and, as a result, amortization of approximately $478,000 for the year ended March 31, 2002, was no longer required. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net income and income per share would have been as follows (in 000's): Year Ended March 31, 2001 March 31, 2000 -------------- -------------- Reported net income $ 3,926 $ 3,873 Add back goodwill amortization, net of tax 296 296 --------- --------- Pro forma adjusted net income $ 4,222 $ 4,169 ========= ========= Diluted net income per share: Reported net income $ 0.38 $ 0.31 Goodwill amortization, net of tax 0.03 0.02 --------- --------- Pro forma adjusted diluted net income per share $ 0.41 $ 0.33 ========= ========= The Company has completed the transitional impairment test of its intangible assets with indefinite lives in accordance with SFAS No. 142 and has determined that such assets are not impaired. 7. BORROWINGS The composition of borrowings is as follows:
March 31, 2002 March 31, 2001 -------------- -------------- Revolving credit facility payable to GMAC Commercial Credit, interest at LIBOR plus 3.75%, or prime (4.75% at March 31, 2002) plus 1% at the Company's option, net of restricted cash of $1,248,477 at March 31, 2002 $10,559,914 $ ---- Revolving credit facility payable to General Electric Capital Corporation, interest at prime plus 4%, net of restricted cash of $1,983,334 at March 31, 2001 ---- 6,782,973 Note payable to Fred Hayman Beverly Hills (FHBH), collateralized by the acquired licensed trademarks, interest at 7.25%, payable in equal monthly installments of $69,863, including interest, through June 2004 1,704,368 2,391,857 F-15 Capital lease payable to Bankers Leasing, collateralized by certain warehouse equipment, payable in quarterly installments of $33,992, including interest, through July 2003. 155,889 ---- Capital lease payable to Bankers Leasing, collateralized by certain shipping equipment, payable in quarterly installments of $18,249, including interest, through October 2002. 35,565 102,127 Capital lease payable to Bankers Leasing, collateralized by certain computer hardware and software, payable in quarterly installments of $36,378, including interest, through January 2002. ---- 141,692 Note payable to United Capital Corporation, collateralized by certain equipment, interest at 11%, payable in equal monthly installments of $19,142, including interest, through September 2001 ---- 111,231 Other notes payable ---- 18,869 ----------- ------------ 12,455,736 9,548,749 Less: long-term borrowings ( 962,275) (1,686,142) ----------- ------------ Short-term borrowings $11,493,461 $ 7,862,607 =========== ============
In May 1997, the Company entered into a $25 million Loan and Security Agreement ( the Credit Agreement ) with General Electric Capital Corporation (GECC). Due principally to the significant treasury stock purchases under the Company's stock buy back program, as of March 31, 2000, the Company was not in compliance with certain financial covenants. GECC had extended, through various short-term agreements, the maturity of the Credit Agreement through July 31, 2001, while reducing the borrowing limit to $14 million, more in line with the Company's current needs at the time. On July 20, 2001, the Company entered into a three-year Loan and Security Agreement (the Loan Agreement) with GMAC Commercial Credit LLC (GMACCC). Proceeds from the Loan Agreement were used, in part, to repay amounts outstanding under the Company's $14 million credit facility with GECC. Under the Loan Agreement, the Company is able to borrow, depending on the availability of a borrowing base, on a revolving basis, up to $20,000,000 at an interest rate of LIBOR plus 3.75% or 1.0% in excess of the Bank of New York's prime rate, at the Company's option. The Loan Agreement contains provisions to reduce both rates by a maximum of 1% or increase both rates by a maximum of .5% based on a ratio of funded debt to EBITDA. At March 31, 2002, based on the borrowing base at that date, the credit line amounted to approximately $16,248,000 and, accordingly, the Company had approximately $4,440,000 available under the credit line, excluding the effect of restricted cash of $1,248,000. Substantially all of the domestic assets of the Company collateralize this borrowing. The Loan Agreement contains customary events of default and covenants which prohibit, among other things, incurring additional indebtedness in excess of a specified amount, paying dividends, creating liens, and engaging in mergers and acquisitions without the prior consent of GMACCC. The Loan Agreement also contains certain financial covenants relating to net worth, interest coverage and other financial ratios. As of March 31, 2002, the Company was not in compliance with financial covenants relating to EBITDA and minimum fixed charge coverage. On June 1, 2002, the Company obtained a waiver of this noncompliance from GMACCC and a modification of the covenants for future periods. Management believes that based on current circumstances, funds from operations and its financing will be sufficient to meet the Company's operating needs for the foreseeable future. Future maturities of borrowings are as follows (in 000's): F-16 For the year ending March 31, ----------------------------- 2003 $11,493 2004 799 2005 164 2006 ------- Total $12,456 ======= 8. COMMITMENTS AND CONTINGENCIES ----------------------------- A. LEASES: ------- The Company leases its office space and certain equipment under certain operating leases expiring on various dates through October 31, 2005. Total rent expense charged to operations for the years ended March 31, 2002, 2001 and 2000 was approximately $891,000, $963,000, and $924,000, respectively. At March 31, 2001, the future minimum annual rental commitments under noncancellable operating leases are as follows (in 000's): For the year ending March 31, Amount ----------------------------- ------ 2003 $702 2004 691 2005 657 2006 443 2007 16 ------ Total $2,509 ====== B. LICENSE AND DISTRIBUTION AGREEMENTS: ----------------------------------- During the year ended March 31, 2002, the Company held exclusive worldwide licenses to manufacture and sell fragrance and other related products for Perry Ellis, Ocean Pacific ("OP"), and Jockey. Effective January 1, 2000, the Company entered into an exclusive licensing agreement with PEZ Candy, Inc. ("PEZ"), to manufacture and distribute men's and women's fragrances and other related products under the PEZ trademark throughout the Western Hemisphere. Effective April 1, 2001, the Company and PEZ agreed to terminate the agreement with no further liability to either party. The Company believes it is presently in compliance with all material obligations under the above agreements. The Company expects to incur continuing obligations for advertising and royalty expense under these license agreements. The minimum amounts of these obligations derived from the aggregate minimum sales goals, set forth in the agreements, over the remaining contract periods are as follows (in 000's):
Fiscal year ending March 31, 2003 2004 2005 2006 2007 ---------------------------- ---- ---- ---- ---- ---- Advertising $9,606 $9,806 $9,306 $9,506 $8,106 Royalties $1,260 $1,296 $1,245 $1,325 $375
C. TRADEMARKS: ----------- Through various acquisitions since 1991, the Company acquired worldwide trademarks and distribution rights to ANIMALE, LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de MARKOFF cosmetics and fragrances. In addition, FHBH granted the Company an exclusive 55-year royalty free license. Accordingly, there are no licensing agreements requiring the payment of royalties by the Company on these trademarks and the Company had the rights to license all of these trademarks, other than FHBH, for all classes of merchandise. Royalties were payable to the Company from the licensees of ALEXANDRA DE MARKOFF and BAL A VERSAILLES brands. Additionally, see Note 6 for further discussion of these two brands. F-17 D. EMPLOYMENT AND CONSULTING AGREEMENTS: ------------------------------------ The Company has contracts with certain officers, employees and consultants which expire at different periods through March 2006. Minimum commitments under these contracts total approximately $3,926,000 ($1,208,000 for the year ending March 31, 2003, and $906,000 for each of three years ending March 31, 2006). In addition, warrants to purchase shares of common stock at prices ranging from $1.86 to $2.44 were granted in connection with these contracts. These warrants are exercisable for a ten-year period from the date of grant, vest over the three-year term of the applicable contract and double in the event of a change in control. On June 8, 2001, the Compensation Committee of the Board of Directors authorized grants to the Company's Chief Executive Officer and Chief Operating/Financial Officer of 500,000 and 100,000 warrants, respectively, to acquire shares of common stock at $2.44 per share. The warrants vested on the date of grant and are exercisable for a ten year period. In connection with previous employment contracts, warrants to purchase shares of common stock, at prices ranging from $1.50 to $7.50 were granted between 1989 and 2000. These warrants are exercisable for a ten-year period from the date of grant and vested over the term of the applicable contracts. As of March 31, 2002, all of the above mentioned warrants were vested. In addition, during January 1996, the Board of Directors approved a resolution whereby the number of warrants granted to key employees would double in the event of a change in control. On January 18, 1999, the Compensation Committee of the Board of Directors authorized the grant to the Company's Chairman and Chief Executive Officer of 1,000,000 warrants to acquire shares of common stock at $8.00 per share for a five year period. The warrants were cancelled during April 2001. On April 1, 1994, the Company entered into a consulting agreement with a former executive, which provided for monthly payments of $16,667 through September 30, 1997. In addition, the former executive had previously received warrants, in connection with a previous employment contract, to purchase 500,000 shares of common stock, at an exercise price of $1.875 per share. These warrants were exercised during March 2000, and the Company repurchased these shares at $4.00 per share, the closing price of the shares on March 23, 2000. All of the previously described warrants were granted at or in excess of the market value of the underlying shares at the date of grant. E. CONTINGENCIES: -------------- The Company is a party to legal and administrative proceedings arising in the ordinary course of business. The outcome of these actions are not expected to have a material effect on the Company's financial position or results of operations. F-18 9. INCOME TAXES The components of the provision for income taxes for each of the years ended March 31 are as follows: Years Ended March 31, --------------------- 2002 2001 2000 ----------- ----------- ----------- Current taxes (benefit): U.S. federal ($1,380,986) $ 1,311,059 $ 2,271,211 U.S. state and local 85,941 121,440 -- Foreign 6,517 57,090 36,500 ----------- ----------- ----------- (1,288,528) 1,489,589 2,307,711 Deferred tax (benefit) (801,520) 869,568 57,933 ----------- ----------- ----------- Income tax expense (benefit) ($2,090,048) $ 2,359,157 $ 2,365,644 =========== =========== =========== The following table reconciles the statutory federal income tax rate to the Company's effective tax rate for the years ended March 31 as follows: 2002 2001 2000 ----- ---- ---- Statutory federal income tax rate (35.0%) 35.0% 35.0% Increase (decrease) resulting from: Change in valuation allowance 10.4% -- -- Other (2.4%) 2.5% 2.9% ----- ---- ---- (27.0%) 37.5% 37.9% ====== ==== ==== Deferred income taxes as of March 31 are provided for temporary differences between the financial reporting carrying value and the tax basis of the Company's assets and liabilities under SFAS 109. The tax effects of temporary differences are as follows: Deferred Tax Assets
2002 2001 ----------- ----------- Allowance for doubtful accounts, sales returns and allowances $ 379,285 $ 557,529 State net operating loss carry forwards 163,747 -- Reserve for inventory obsolescence 911,200 575,399 Other than temporary decline on investment in affiliate 1,083,137 -- Other, net 23,898 186,157 ----------- ----------- Subtotal 2,561,267 1,319,085 ----------- ----------- Deferred Tax Liabilities Depreciation and amortization (742,214) (1,114,453) Other -- (62,876) ----------- ----------- Subtotal (742,214) (1,177,329) ----------- ----------- Net deferred tax asset before valuation allowance 1,819,053 141,756 Less: Valuation allowance (875,777) -- ----------- ----------- Net deferred tax asset after valuation allowance 943,276 141,756 ----------- ----------- Unrealized loss on investment in affiliate 281,611 1,407,360 Less: valuation allowance (281,611) (1,200,000) ----------- ----------- Subtotal -- 207,360 ----------- ----------- ----------- Net deferred tax asset after valuation allowance $ 943,276 $ 349,116 =========== ===========
A valuation allowance is provided since management can provide no assurance that the Company will more likely than not generate sufficient capital gains to completely offset the unrealized loss on investments. F-19 10. STOCK OPTION AND OTHER PLANS ---------------------------- The Company has adopted a Stock Option Plan and a 1989 Stock Option Plan (collectively, the "Plan") and has reserved and registered 250,000 shares of its common stock for issue thereunder. Options granted under the Plan are not exercisable after the expiration of five years from the date of grant and vest 25% after each of the first two years, and 50% after the third year. Options for most of the shares in the Plan may qualify as "incentive stock options" under the Internal Revenue Code. The shares are also available for distribution pursuant to options which do not so qualify. Under the Plan, options can be granted to eligible officers and key employees at not less than the fair market value of the shares at the date of grant of the option (110% of the fair market value for 10% or greater stockholders). Options which do not qualify as "incentive stock options" may also be granted to consultants. Options generally may be exercised only if the option holder remains continuously associated with the Company or a subsidiary from the date of grant to the date of exercise. As of March 31, 2002, and since the inception of the Plan, options have been granted, net of cancellations, to purchase 199,092 shares at exercise prices ranging from $1.06 to $5.75 per share. No further options are issuable under the Plan. Through March 31, 2002, 196,592 options had been exercised under the Plan and no further shares are exercisable. In October 1996, the Company's shareholders ratified the establishment of a new stock option plan (the "1996 Plan") which reserved 250,000 shares of its Common Stock for issue thereunder with the same expiration and vesting terms as the Plan. Only employees who are not officers or directors of the Company shall be eligible to receive options under the 1996 Plan. During January 2000, the shares were registered with the Securities and Exchange Commission via a Form S-8 registration statement. On May 16, 2000, the Company granted to various employees, options under the 1996 Plan to acquire 88,975 shares of common stock at $2.8125 per share, the closing bid price of the stock on May 15, 2000. As of March 31, 2001, and since the inception of the 1996 Plan, options have been granted net of cancellations, to purchase 247,437 shares at exercise prices ranging from $1.375 to $2.813 per share. Through March 31, 2002, 23,298 options had been exercised and 84,138 options were vested. The following table summarizes the activity for options covered under all of the above plans:
Plan 1996 Plan ------------------------------- ------------------------------ Weighted Average Weighted Average Amount Exercise Price Amount Exercise Price ------ -------------- ------ -------------- Balance at March 31, 1999 10,000 $3.08 62,250 $1.38 Granted - 96,600 $1.38 Exercised - (10,625) $1.38 Canceled/Expired - (20,200) $1.38 -------- -------- Balance at March 31, 2000 10,000 $3.08 128,025 $1.38 Granted - 88,975 $2.82 Exercised (7,500) $2.19 (5,962) $1.38 Canceled/Expired (2,500) $5.75 (5,688) $1.38 -------- -------- Balance at March 31, 2001 -- 205,350 $1.98 Granted Exercised (6,712) $1.38 Canceled/Expired (25,800) $1.38 -------- Balance at March 31, 2002 172,838 $2.26 ========
In October 2000, the Company's shareholders ratified the establishment of a third stock option plan (the "2000 Plan") which reserved an additional 250,000 shares of its Common Stock for issue thereunder with the same expiration and vesting terms as the 1996 Plan. To date, no grants have been made under the 2000 Plan. The following table summarizes the activity and related information for all other options and warrants outstanding, including the warrants discussed under commitments in Note 8 (E): Weighted Average Amount Exercise Price ------ ---------------- Balance at March 31, 1999 2,770,000 $4.21 Granted 366,000 $2.43 (500,000) $1.88 Cancelled/Expired -- -- --------- Balance at March 31, 2000 2,636,000 $4.41 Granted 10,000 $2.25 Exercised -- -- Cancelled/Expired -- -- -------- -- Balance at March 31, 2001 2,646,000 $4.41 Granted 620,000 $2.43 Exercised -- -- Canceled/Expired (1,000,000) $8.00 --------- Balance at March 31, 2002 2,266,000 $2.28 ========= The following table summarizes information about these options and warrants outstanding at March 31, 2001:
Options And Options and Warrants Outstanding Warrants Exercisable -------------------------------- -------------------- Range of Exercise Weighted Average Weighted Average Weighted Average Exercise Prices Amount Exercise Price Remaining Life Amount Exercise Price --------------- ------ -------------- -------------- ------ -------------- $1.38-$2.81 2,222,838 $2.14 5 2,024,138 $2.12 $3.13-$4.56 202,000 $3.23 4 202,000 $3.23 $6.75 10,000 $6.75 5 10,000 $6.75 $8.00 4,000 $8.00 3 4,000 $8.00 --------- ----- - --------- ----- 2,438,838 $2.26 5 2,240,138 $2.25 ========= ===== = ========= =====
The Company has established a 401-K plan covering substantially all of its U.S. employees. Commencing on April 1, 1996, the Company matched 25% of the first 6% of employee contributions, within annual limitations established by the Internal Revenue Code. The cost of the matching program totaled approximately $54,000, $53,000, and $56,000 for the years ended March 31, 2002, 2001, and 2000, respectively. 11. BASIC AND DILUTED EARNINGS PER COMMON SHARE ------------------------------------------- The following is the reconciliation of the numerators and denominators of the basic and diluted net income per common share calculations:
2002 2001 2000 ---- ---- ---- Net (loss) income ($5,655,401) $3,925,659 $3,872,611 ============ ========== ========== Weighted average number of shares outstanding used in basic earnings per share calculation 9,973,046 10,068,422 11,965,713 ============ ========== ========== Basic net income (loss) per common share ($0.57) $0.39 $0.32 ======= ===== ===== Weighted average number of shares outstanding used in basic earnings per share calculation 10,068,422 11,965,713 Effect of dilutive securities: (1) Stock options and warrants, net of treasury shares acquired 320,630 547,260 ---------- ---------- Weighted average number of shares outstanding used in diluted earnings per share calculation 10,389,052 12,512,973 ========== ========== Diluted net income per common share $0.38 $0.31 ===== ===== Antidilutive securities not included in diluted earnings per share computation: Options and warrants to purchase common stock 1,255,566 1,301,850 1,218,500 ============ ========== ========== Exercise Price $2.25-$8.00 $2.81-$8.00 $3.13-$8.00 ============ ========== ==========
(1) The calculation of diluted loss per share was the same as the basic loss per share for the year ended March 31, 2002, since the inclusion of potential common stock in the computation would be antidilutive. F-22 12. CONCENTRATION OF REVENUE SOURCES AND CREDIT RISKS: ------------------------------------------------- During the last three fiscal years, the following brands have accounted for 10% or more of the Company's gross sales: 2002 2001 2000 ---- ---- ---- PERRY ELLIS 67% 69% 73% ANIMALE 13% 16% 11% OCEAN PACIFIC 12% 3% --- FRED HAYMAN 8% 11% 16% Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables from department and specialty stores in the United States, distributors throughout the world, and Perfumania. To reduce credit risk for trade receivables from unaffiliated parties, the Company performs ongoing evaluations of its customers' financial condition but does not generally require collateral. Management has established an allowance for doubtful accounts for estimated losses. The allowances for doubtful accounts are considered adequate to cover estimated credit losses. During the year ended March 31, 2002, one unrelated customer accounted for approximately 14% of the Company's net sales. No unrelated customer accounted for more than 10% of the Company's net sales during the years ended March 31, 2001 and 2000. Revenues from Perfumania represented 26%, 32%, and 46% of the Company's net sales during the years ended March 31, 2002, 2001, and 2000, respectively. To reduce credit risk, on occasion, the Company, based on its reviews of Perfumania's financial condition, convert certain trade receivables into subordinated notes receivable. (See Note 2 for a detailed discussion of a previous conversion of trade receivables into notes receivable from Perfumania). During the year ended March 31, 2002, revenues from other related parties represented approximately 9% of the Company's net sales. Gross sales to international customers totaled approximately $31,329,000, $30,726,000, and $20,007,000, for the years ended March 31, 2002, 2001, and 2000, respectively. At March 31, 2002 and 2001, trade receivables from foreign customers (all payable in U.S. dollars) amounted to approximately $4,388,000 and $4,580,000, respectively. F-22 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): ---------------------------------------------- The following is a summary of the Company's unaudited quarterly results of operations for the years ended March, 31, 2002 and 2001 (in thousands, except per share amounts). Quarter Ended --------------------------------------------- June 30, September 30, December 31, March 31, 2001 2001 2001 2002 -------- ------------- ------------ -------- 2001 2001 2001 2002 Net sales $ 18,013 $ 19,041 $ 16,280 $11,750 Gross margin 10,497 9,982 7,731 9,641 Net (loss) income (1,717) 1,414 (6,155) 803 Income (loss) common share: Basic ($0.17) $ 0.14 ($ 0.62) $ 0.08 Diluted ($0.17) $ 0.13 ($ 0.62) $ 0.08 Quarter Ended --------------------------------------------- June 30, September 30, December 31, March 31, 2000 2000 2000 2001 -------- ------------- ------------ -------- Net sales $15,711 $18,199 $20,150 $14,815 Gross margin 9,636 11,202 11,891 8,420 Net income 801 1,803 702 620 Income per common share: Basic $0.08 $0.18 $0.07 $0.06 Diluted $0.07 $0.17 $0.07 $0.06 F-23 PARLUX FRAGRANCES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at beginning Additions charged to Net Balance at Description of period costs and expenses Deductions end of period ----------- ----------- ----------- ----------- Year ended March 31, 2002 Reserves for: Doubtful accounts $ 571,848 $ 590,000 $ 1,058,378 $ 103,470 Sales returns 537,195 4,229,790 4,118,749 648,236 Demonstration and co-op advertising allowances 812,961 3,666,788 3,801,100 678,649 ----------- ----------- ----------- ----------- $ 1,922,004 $ 8,486,578 $ 8,978,227 $ 1,430,355 =========== =========== =========== =========== Reserve for inventory shrinkage and obsolescence $ 2,804,773 $ 1,400,000 $ 2,064,313 $ 2,140,460 =========== =========== =========== =========== Reserve for prepaid promotional supplies $ 396,580 $ 570,000 $ -- $ 966,580 =========== =========== =========== =========== Year ended March 31, 2001 Reserves for: Doubtful accounts $ 1,921,229 $ 1,567,000 $ 2,916,381 $ 571,848 Sales returns 421,162 3,127,030 3,010,997 537,195 Demonstration and co-op advertising allowances 977,415 5,228,315 5,392,769 812,961 ----------- ----------- ----------- ----------- $ 3,319,806 $ 9,922,345 $11,320,147 $ 1,922,004 =========== =========== =========== =========== Reserve for inventory shrinkage and obsolescence $ 1,519,694 $ 1,500,000 $ 214,921 $ 2,804,773 =========== =========== =========== =========== Reserve for prepaid promotional supplies $ 600,000 $ 100,000 $ 303,420 $ 396,580 =========== =========== =========== =========== Year ended March 31, 2000 Reserves for: Doubtful accounts $ 750,273 $ 1,543,790 $ 372,834 $ 1,921,229 Sales returns 411,320 3,512,170 3,502,328 421,162 Demonstration and co-op advertising allowances 951,343 4,484,795 4,458,723 977,415 ----------- ----------- ----------- ----------- $ 2,112,936 $ 9,540,755 $ 8,333,885 $ 3,319,806 =========== =========== =========== =========== Reserve for inventory shrinkage and obsolescence $ 976,259 $ 800,000 $ 256,565 $ 1,519,694 =========== =========== =========== =========== Reserve for prepaid promotional supplies $ -- $ 600,000 $ -- $ 600,000 =========== =========== =========== ===========
F-24 EX-10.57 3 assetpur-jfc.txt ASSET PURCHASE AND SALE - JFC Exhibit 10.57 ASSET PURCHASE AND SALE AGREEMENT --------------------------------- THIS AGREEMENT, made and entered into as of the 27th day of February 2002, by and between Parlux Fragrances Inc., a Delaware corporation, having a principal place of business at 3725 SW 30th Avenue, Ft. Lauderdale, Florida 33312 (hereinafter "Seller") and J.F.C. Marks, L.L.C., having a place of business at 2182 Route 35 Holmdel, New Jersey 07733 (hereinafter " Buyer"). WITNESSETH WHEREAS, Seller presently owns certain trademarks, trade names, registrations and/ or applications for the Trademark (as that term is defined below) Alexandra de Markoff, as well as certain Know-How (as that term is defined below) and product information relating to cosmetic products which have been sold under or associated with the Trademark; WHEREAS, Cosmetic Essence, Inc. and Seller entered into a License Agreement (hereinafter "License Agreement") on March 3, 1998 which agreement was assigned by Cosmetic Essence, Inc. to Adem Cosmetics, Inc. which is currently in force; and WHEREAS, Buyer wishes to purchase from Seller and Seller wishes to sell to Buyer the Trademarks and Know-How and to assume the Seller's rights and obligations under the License Agreement now in existence between them. NOW THEREFORE, in consideration of the premises and mutual covenants and agreements hereinafter set forth, the parties hereby covenant and agree as follows: 1. DEFINITIONS 1.1 "Closing Date" shall mean the date on which the transactions contemplated by this Agreement are consummated. 1.2 "Conveyed Assets" shall mean the Know-How and Trademarks as those terms are defined below. The conveyed assets shall also include the License Agreement. 1.3 "Know-How" shall mean all technical information procedures, processes , trade secrets, formulae for the perfume oil and applicable production methods, practices, techniques, parts, diagrams, drawings, specifications, blue prints, lists of materials, production manuals and data relating to the design, manufacture, production, inspection and testing of the Products known by, available to or used or owned by Seller. "Products" shall mean all products on which Seller or its licensees have used the Trademarks. 1.4 "Trade Marks" shall refer to those U.S. and foreign trade marks, services marks, imprints, logos , trade dress and trade names whether or not registered and all issued registrations, pending applications as set forth on Schedule A relating to the name "Alexandra de Markoff" and all other names designs logos trademarks trade names and the like used on or in connection with Products bearing the names as set forth on that Schedule. 1.5 "Territory" shall mean worldwide without exclusion. 2. PURCHASE AND SALE 2.1 Upon the terms and subject to the conditions of this Agreement, and in reliance on the representations, warranties and covenants set forth in this Agreement, Buyer agrees to purchase for the purchase price set forth below on the Closing Date the Conveyed Assets and Seller will sell, convey, transfer, deliver and assign to Buyer, all rights, title and interest in and to the Conveyed Assets. The sale, assignment, conveyance, transfer, and delivery by Seller of the Conveyed Assets shall be made at the Closing by a duly executed Assignment and Assumption of License (including any royalties or payments due thereunder accruing on or after January 1, 2002), Assignment for the Trademarks and Know-How, and a Bill of Sale for all tangible forms or embodiments of the Trademarks and Know-How, such Assignment of Trademarks, Bill of Sale and Assignment and Assumption of License Agreement shall be in the form annexed as Exhibits A and B, respectively (the "Bill of Sale" and "Assignment") as well as any other assignments, conveyances and bills of sale sufficient to convey to Buyer good and marketable title to all the Conveyed Assets free and clear of all mortgages, pledges, liens, licenses, rights of possession, security interest, restrictions, encumbrances, charges, title retention conditionals sale or other security arrangements and all claims or agreements of any nature whatsoever, (as well as such other instruments of conveyance as Buyer may reasonably deem necessary or desirable both at and after the Closing Date to effect or evidence the transfers contemplated hereby). 2 2.2 The execution and delivery of this Agreement shall not be deemed to confer any rights upon any person or entity other than the parties hereto, or make any person or entity other than the parties hereto, or make any person or entity a third party beneficiary of this Agreement, or to obligate the parties to any person or entity other than the parties to this Agreement. This Agreement is intended by the parties to be an agreement for the sale and purchase of Conveyed Assets; and none of the provisions hereof shall be deemed to create any obligation or liability on the part of Buyer to any person or entity that is not a party to this Agreement, whether under a third party beneficiary theory, successor liability theory, or otherwise. 3. CLOSING The Closing Date shall be as of the close of business on February 28th, 2002 or such other date as the parties may agree (the "Closing Date"). Conveyed Assets, all of which shall be transferred to Buyer, as provided for herein. In no event shall Buyer be required to proceed in accordance with the Agreement unless and until each and every condition precedent as set forth in the Agreement shall have been satisfied, waived or made a condition subsequent. If on March 8th, 2002 the parties have not satisfied all conditions precedent, then Buyer, may terminate this Agreement in the manner provided in Paragraph 15. 4. DELIVERIES AT THE CLOSING 4.1. At the Closing, Buyer shall deliver the following: (a) Three million eight thousand dollars ($3,008,000.00) in immediately available funds by wire transfer; (b) certified copies of resolutions duly adopted by Buyer constituting all necessary corporate authorization for the consummation by Buyer of the transactions contemplated by this Agreement; and (c) executed copies of the Assignment and Assumption of the License Agreement as set forth in Exhibit A 4.2 At the Closing, Seller shall deliver the following: (a) certified copies of resolutions duly adopted by Seller constituting all necessary corporate authorization for the consummation by Seller of the transactions contemplated by this Agreement; 3 (b) the Assignment and Bill of Sale, duly executed by Seller in the form set forth in Exhibit B transferring title to the Conveyed Assets, duly executed by Seller, and whatever additional documents of title, such as invoices, endorsements, or other documents as Buyer may reasonably request; (c) an assignment of any warranties for the Conveyed Assets being transferred hereunder; (d) executed copies of the Assignment and Assumption of the License Agreement as set forth in Exhibit A; (e) executed copies of the Assignment of Trademarks as set forth in Exhibit C; (f) executed release of liens on the Trademarks; (g) any other records, lists, or reports required hereunder or reasonably requested by Buyer which pertain to the Conveyed Assets being purchased hereunder; and (h) documents, in a form reasonably satisfactory to Buyer confirming release of any and all liens, security interest, restrictions, claims and encumbrances of the Conveyed Assets as of the Closing Date. 5. PURCHASE PRICE The purchase price (hereinafter " Purchase Price") to be paid for the conveyed Assets shall be U.S. $3,008,000.00. This sum shall be paid by Buyer in immediately available funds at the Closing. 6. TAXES AND TRANSFER COSTS 6.1 Any sales, transfer, documentary, or excise taxes applicable to the transfer of any Assets from Seller to Buyer shall be paid by Seller whenever due or assessed. Seller shall also prepare and file whatever returns as may be required in connection with any of the foregoing taxes. Seller shall also make payment of all personal property, real property, ad valorem, franchise, and similar taxes which are due and owing on the Conveyed Assets up until the Closing Date. 6.2 Buyer shall pay all fees incurred in transferring any Trademark or other forms of intellectual property registrations and or applications on the Conveyed Assets. 4 7. BROKERS AND FINDERS Each of the parties hereby represents and warrants to the other that it has not employed or dealt with any broker or finder in connection with this Agreement or the transactions contemplated hereby, and agrees to indemnify the other and hold it harmless from any and all liabilities (including, without limitation, reasonable attorneys' fees and disbursements paid or incurred in connection with any such liabilities) for any brokerage commissions or finders' fees in connection with this Agreement or the transactions contemplated hereby, insofar as such liabilities shall be based on the arrangements or agreements made by or on its behalf. 8. SELLER'S OBLIGATIONS 8.1 In advance of the Closing, Seller shall obtain whatever releases are required to transfer the Conveyed Assets free and clear of any and all liens, security interests, restrictions, claims and encumbrances which all may subsist on the Conveyed Assets so that the Conveyed Assets may be transferred to Buyer on the Closing Date free and clear of all of the foregoing. 8.2 Prior to the Closing Date, Seller shall afford Buyer, at reasonable times and on reasonable notice, the opportunity to make such inspections of Seller's records pertaining to the Conveyed Assets being transferred, as Buyer shall deem reasonably necessary. 8.3 Following the Closing Date, Seller will discontinue any use of the Trademarks or the Know-How and shall not authorize any other person to so use the Trademarks or Know-How. 8.4 From and after the Closing Date, Seller shall take such actions and promptly execute and deliver to Buyer any and all such further assignments, licenses, endorcements or other documents as Buyer my request from time to time for purposes of carrying out the transfer of the Conveyed Assets or permitting Buyer to better enjoy or exploit or perfect its interest or rights in the Conveyed Assets or assist Buyer in maintaining its exclusive rights in and to the Conveyed Assets or to permit Buyer to more fully exploit its rights in the Trademarks or Know How. 9. BULK TRANSFERS Seller represents that the transfer of Conveyed Assets is not covered by the provisions of the Bulk Transfer Law of the UCC, or any similar statute and agrees to indemnify Buyer for any and all claims, losses, damages, judgments, together with penalties, expenses and reasonable attorney's fees suffered as a result of said non-compliance. 5 10. SELLER'S INDEMNIFICATION Seller hereby agrees to indemnify and hold Buyer, its officers, directors, employees and agents harmless from and against all claims, demands, losses, costs, damages, liabilities, judgments (including penalties and interest), suits, causes of action and expenses, including reasonable attorney's fees and cost of investigation arising from the violation, breach, or failure of any of its covenants or obligations hereunder or any representation or warranty made by Seller in this Agreement or which arise out of or are in any way related to the Conveyed Assets or the transfer thereof by Seller to Buyer. Buyer shall give prompt notice to Seller of any of the foregoing; and at Seller's election, Seller may defend any such action through counsel reasonably satisfactory to Buyer. 11. BUYER'S INDEMNIFICATION Buyer hereby agrees to indemnify and hold Seller, its officers, directors, employees and agents harmless from and against all claims, demands, losses, costs, expenses, judgments, penalties, interest, damages, liabilities, suits, causes of action and expenses, including reasonable attorney's fees and cost of investigation and experts arising from the violation of any representation or warranty made by Buyer in this Agreement or failure of Buyer to perform its obligations hereunder or Buyer's use of the Conveyed Assets following the Closing Date, provided that the facts and circumstances which gave rise to the action did not occur prior to the Closing Date or result from Seller's acts or prior ownership of the Conveyed Assets. Seller shall give prompt notice to Buyer of any of the foregoing, and at Buyer's election will defend such action through counsel reasonably acceptable to Seller. 12. SELLER'S REPRESENTATIONS Seller hereby makes the following representations and warranties: (a). Seller is a duly organized, validly existing corporation and in good standing under the law of its state of incorporation with full power and authority to own the Conveyed Assets being transferred hereunder, to execute and deliver this Agreement, and to carry out the transactions contemplated hereby. (b). All necessary action, corporate or otherwise, has been taken by Seller to authorize the execution, delivery and performance of this Agreement and the Agreements set forth in the Exhibits hereto, and the same are valid and binding obligations of Seller in accordance with its terms. 6 (c ) Seller has good and valid title to all of the Conveyed Assets to be transferred hereunder; that all said Conveyed Assets at the date of the applicable Closing, are free and clear of any and all mortgages, security interests, liens and encumbrances, that there are and to the best of Seller's knowledge will be no legal, administrative or other proceedings, investigations, inquiries, claims, judgments, injunctions or restrictions either threatened, pending or outstanding against or related to Seller with respect to said Conveyed Assets, or which would have the tendency to interfere with Seller's performance hereunder, and that Seller does not know or have reasonable grounds to know of any basis for any such proceedings, investigations, inquiries, claims, judgments, injunctions or restrictions. (d) All issued registrations for the Trademarks and Know How as presented on their respective schedules are current and valid and that Seller has made timely application for such and has timely filed all renewals and or extensions and to the best of Seller's knowledge there is no basis for challenging the validity of any of such registrations. (e) Other than the License Agreement, Seller has not entered into any contract, agreement, understanding or commitment that in any way relates to or cover the Conveyed Assets. (f) All representations and warranties made by Seller in this Agreement and in the Exhibits and schedules there to and the statements, lists and other information required to be submitted in connection with this transaction shall be true and complete as of the date when made and as of the Closing Date as though such representations and warranties were made as of the Closing Date. (g) No representation or warranty made by Seller contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, false or misleading. (h) Seller is not engaged in or a party to or to the best of Seller's knowledge threatened with any legal action, suit, investigation or other proceeding related to or arising in connection with the Conveyed Assets and Seller knows of no sustainable basis for any such action, investigation or proceeding; and there are no outstanding orders, rulings, decrees, judgments or stipulations related to or arising in connection with the Conveyed Assets to which Seller is a part or by which Seller or the Conveyed Assets are bound by or with any court, arbitrator or administrative agency. Seller is not in default in the payment of any taxes, including without limitation property, sales, franchise, use and other similar taxes that are due and payable and any assessments received in respect thereof, in each case which could result in the imposition of any material lien or 7 charge upon any of the Conveyed Assets, provided however that for the purposes of the Seller's indemnification obligations under Paragraph 10 hereof with respect to a breach of the representations contained in this Section such representations shall be deemed to be made without the references to "materially" contained herein. (i) Seller has the right and authority and has obtained all approvals required to convey the Conveyed Assets in accordance with the terms of this Agreement. (j) Seller shall never (in any trademark class) use or file to use the name "Alexandra de Markoff" or any variation thereof, including any existing or abandoned mark associated at any time with the Alexandra de Markoff brand. 13. BUYER'S REPRESENTATIONS Buyer hereby makes the following representations and warranties: (a) Buyer is a New Jersey corporation authorized to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. (b )All necessary action has been taken by Buyer to authorize the execution, delivery and performance of this Agreement, and this Agreement is a valid and binding obligation of Buyer in accordance with its terms. (c) All representations and warranties made by Buyer shall be true and complete as of the date when made and as of the Closing Date as though such representations and warranties were made as of the Closing Date. 14. CONDITIONS PRECEDENT The obligations of Buyer and Seller to consummate this Agreement and the transactions contemplated hereby are subject to the fulfillment prior to or at the Closing Date of the following conditions precedent: A. All of the duties and covenants to be performed by Seller and Buyer, respectively, at or prior to the Closing Date shall have been duly and timely performed. B. There shall not have been received by either party hereto any notice of the commencement of any legal or administrative proceeding questioning the validity of this Agreement or seeking to enjoin, prohibit or delay or otherwise necessarily having the effect of preventing, the consummation of the transactions contemplated by this Agreement or the realization of the benefits intended thereby or there shall otherwise be lodged against Seller any investigation, inquiry, claim, injunction, action, cause, or restriction of any nature or sort, which may impede this transaction. 8 C. That each and every representation, acknowledgment and warranty made in this Agreement by Seller or Buyer shall be true and correct on the Closing Date. D. That if third party approval is requested for Seller's performance, this shall be a condition precedent. 15. TERMINATION A. At any time prior to the Closing Date, this Agreement may be terminated (i) by mutual consent of Buyer and Seller with the approval of their respective Boards of Directors, or (ii) by either Buyer or Seller if there has been a material misrepresentation, breach of any obligation or representation or warranty or breach of covenant by the other party in its representations, warranties, obligations, and covenants set forth herein. If this Agreement shall be terminated as provided in the preceding sentence, all obligations of either Buyer or Seller, as the case may be, to proceed as provided in this Agreement shall terminate without liability of the non-breaching party to the other solely by reason of such termination, and the License Agreement shall remain in full force and effect. B. The right of either Buyer or Seller to terminate this Agreement as provided above is not an exclusive remedy, but is in addition to and may be exercised in addition to and in combination with all other rights and remedies available to Buyer and Seller under law or equity in the event of breach or default of this Agreement. 16. EXPENSES A. Except as indicated otherwise herein, Buyer and Seller shall bear their own fees and expenses regarding the completion of the transaction as contemplated herein. B. In the event either Buyer or Seller institutes suit or is required to defend an action instituted by the other party, based upon or arising out of a breach of this Agreement or a representation or warranty made by the other party or misrepresentation, the prevailing party in such lawsuit shall be entitled to reasonable attorney's fees and costs as may be fixed by a court of proper jurisdiction. 9 17. CONSTRUCTION This Agreement shall be governed and construed in accordance with the laws of the State of New Jersey applicable to agreements made in such state between residents thereof and to be wholly performed therein. The parties hereto hereby irrevocably submit to the exclusive jurisdiction of any Federal or State Court sitting in the State of New Jersey in any action or proceeding arising out of or relating to this Agreement. The parties hereby waive any defenses which they may have in respect to the selection of the forum. 18. WAIVER Seller and Buyer shall have the right to waive in writing any requirement or undertaking of the other party contained herein. Any waiver or a breach of any term or condition of this Agreement shall not operate as a waiver of any other breach of such term or condition or of any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provisions or of any other provision hereof. 19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNITIES The representations and warranties made by Buyer and Seller shall survive the Closing Date. 20. COUNTERPARTS This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and the agreements appended hereto or executed in connection with this Agreement may be signed and transmitted by facsimile, and any copy with a facsimile signature will be deemed a valid signature hereto or thereto and shall be deemed binding on the parties as if it were an original signature. 21. ENTIRE AGREEMENT This Agreement, including the lists, schedules, and other Agreements and assignments required to be entered hereunder, and all other agreements entered into by the parties simultaneously herewith sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party hereto. There are no restrictions, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein. In the event of a conflict of the terms of this Agreement and any other agreement between the parties or in the License Agreement, the term of this Agreement shall prevail. 10 22. AMENDMENT This Agreement may not be altered, amended or modified in any respect, except by written instrument executed by and between the parties hereto and there shall be no waiver of any term, condition, obligation, or undertaking provided herein, except in writing signed by the party granting the waiver. 23. NOTICES Any and all notices, requests, consents and other communications required hereunder shall be in writing sent by registered or certified mail, return receipt requested or by overnight courier, addressed as follows or at such other address as either party may designate to the other from time to time in writing: TO THE SELLER: Mr. Ilia Lekach Chairman & Chief Executive Officer 3725 S.W. 30th Avenue Fort Lauderdale, FL 33312 Facsimile: 954-316-8155 TO THE BUYER: John F. Croddick PO Box 419, Route 79 Morganville, New Jersey 07751 With a copy to: W. Lane Miller, Esq. 1203 Route 9 South Woodbridge, New Jersey 07095 Facsimile: 732-855-9898 24. FURTHER ASSURANCES From time to time, at the Buyer's request, whether at or after the Closing and without further consideration, the Seller at its expense will execute and deliver such further instruments of conveyance and transfer and take such other action as the Buyer reasonably may require 11 more effectively to convey and transfer to the Buyer title to any of the Conveyed Assets, and will assist the Buyer in the collection or reduction to possession of such property. 25. CONSTRUCTION The Article and Section headings of this Agreement are for the convenience of the parties and shall not govern the construction or interpretation of this Agreement or any of its counterparts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SELLER Parlux Fragrances, Inc. By: /s/ Ilia Lekach -------------------------------------- Mr. Ilia Lekach Chairman and Chief Executive Officer BUYER J.F.C. Marks, L.L.C. By: /s/ John F. Croddick -------------------------------------- John F. Croddick, Manager 12 AGREEMENT BETWEEN PARLUX FRAGRANCES, INC. AND J.F.C. MARKS, L.L.C. dated as of February 27, 2002 List of Exhibits ---------------- Exhibit A - Assignment and Assumption of License Exhibit B - Bill of Sale Exhibit C - Assignment of Trademarks and Know-How Schedule A - List of Marks 13 EX-10.58 4 emppilia2002.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Exhibit 10.58 -------------------- ------------- Agreement (the "Agreement") dated as of May 1, 2002 between Parlux Fragrances, Inc., a corporation of the State of Delaware with offices located at 3725 S.W. 30th Avenue, Fort Lauderdale, Florida 33312 (hereinafter called the "Company"), and Ilia Lekach, residing, at 137 Golden Beach Drive, Golden Beach, Florida 33160 (hereinafter called the "Executive"). WITNESSETH WHEREAS, the Company desires to continue the employment of the Executive and the Executive is willing to be employed by the Company and accepts such employment; WHEREAS, the Company and the Executive (hereinafter sometimes referred to as "the parties") are parties to an existing Employment Agreement extending through March 31, 2003, which is hereby terminated without liability to either party. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained intending to be legally bound, the parties do hereby agree as follows: 1. Employment. The Company agrees to employ the Executive and the Executive hereby accepts the terms and conditions hereinafter set forth, for a period commencing on May 1, 2002 and ending on March 31, 2006 ( the "Initial Term" ) ( unless terminated as specifically provided for in this Agreement ). Upon expiration of the Initial Term, the Executive's term of employment shall be extended for an additional three (3) year period, unless either party gives written notice of its intention not to renew this Agreement at least six (6) months prior to the expiration of the Initial Term, in which case the Executive's term of employment shall end upon such expiration. 2. Position and Duties. The Executive shall serve as Chairman & Chief Executive Officer and President of the Company and shall have the powers and duties as may from time to time be prescribed by the Company's Board of Directors ( the "Board" ), provided that the Executive's duties are consistent with the Executive's position as a senior executive officer involved with the general management of the Company. The Executive shall report to the Board. 3. Place of Performance. In connection with his employment by the Company, the Executive shall be based, and the duties to be performed, shall be performed at the Company's principal executive offices located in Broward County or Dade County, South Florida. Such office shall not be further relocated without the Executive's consent. 4. Compensation and Related Matters. (a) Base Salary: The Executive shall receive a base salary, exclusive of benefits (the "Base Salary"), in substantially equal monthly or bi-weekly installments as follows: (i) For the period commencing May 1, 2002 through March 31, 2003, at the annual rate of $350,000; for the period commencing on April 1, 2003 and ending on March 31, 2004, at the annual rate of $400,000; for the periods commencing on April 1, 2004 and 2005 and ending on March 31, 2005 and 2006, respectively, at the immediate prior year's annual rate, plus an increase based on performance, to be determined by the Board. (b) Expenses: During the term of his employment under this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him in accordance with the policies and procedures of the Company for reimbursement of business expenses by its senior executive officers, provided that the Executive accounts for the expenses in accordance with the Company's policies. (c) Other Benefits: The Executive shall be entitled to participate in or receive benefits under all executive benefit plans and arrangements made available by the Company at any time to its employees and key management executives. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary or any other obligation payable to the Executive pursuant to this Agreement. (d) Vacations: The Executive shall be entitled to the number of paid vacation days in each fiscal year determined by the Company from time to time for its senior executive officers, but not less than four weeks in any fiscal year. (e) Perquisites: The Executive shall be entitled to receive all perquisites and fringe benefits provided or available to senior executive officers of the Company in accordance with present practice and as may be changed from time to time with respect to all senior executive officers of the Company. (f) Stock Options: The Executive will be granted non qualified stock options (warrants) to purchase 500,000 shares of the Company's common stock at an exercise price of $1.86 per share, being the closing price of the shares at April 30, 2002. The options (warrants) will be exercisable at the rate of 166,666 shares each on March 31, 2004, 2005 and 2006, respectively. The rights of the Executive with respect to any stock options (warrants) granted to the Executive shall be determined exclusively by the plans and agreements relating to the options (warrants) and this Agreement shall not affect in any way the rights and obligations of the plans and agreements. Each option shall be exercisable for a period of ten years after the date of grant unless earlier terminated in accordance with its terms or those of the Agreement. 5. Noncompetition; unauthorized disclosure: (a) No material competition: Except with respect to services performed under this Agreement on behalf of the Company, and subject to the obligations of the Executive as an officer of the Company and the employment obligations of the Executive under this Agreement, the Executive agrees that at no time during the term of this Agreement or, for a period of one year immediately following any termination of this Agreement for any reason other than a change in control as defined in Section 6 (d) of this Agreement, will he engage in any business if, within thirty (30) days of the Executive advising the Company in writing of his proposed business activity, the Board determines in good faith that such proposed business activity is directly competitive with a material part of the business of the Company and its subsidiaries (both present and future) and such competitive business activity is reasonably likely to materially affect in an adverse manner the consolidated sales, profits or financial condition of the Company. (b) Unauthorized disclosures: During the period of his employment under this Agreement, the Executive shall not, without the written consent of the Board or a person authorized by the Board, disclose to any person, other than an Executive of the Company or person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the company, any material confidential information obtained by him while in the employ of the company with respect to any of the Company's customers, suppliers, creditors, lenders, investment bankers or methods of marketing, the disclosure of which he knows will materially damage the Company; provided, however, that confidential information shall not include any information known generally to the 2 public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. For the period ending one year following the termination of employment under this Agreement for any reason, the Executive shall not disclose any confidential information of the type described above except as determined by him to be reasonably necessary in connection with any business or activity in which he is then engaged. (c) Certain Provisions: The limitations of Section 5 (a) shall terminate if upon termination of this Agreement for any reason the Company does not fulfill its obligations as required by Section 7 of this Agreement; however, such termination shall not affect the rights of the Executive to receive all payments he is entitled to receive under Section 7. The provisions of Section 5 shall apply during the time the Executive is receiving any payments from the Company as a result of a termination of this Agreement pursuant to Section 6 (b). 6. Termination. The Company may terminate the Executive's employment under this Agreement prior to the expiration of the term set forth in Section 1 only under the following circumstances: (a) Death. Upon the Executive's death. (b) Disability. If , as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties under this Agreement on a full time basis for 120 calendar days during any calendar year, then 30 days after written notice of termination is given to the Executive (which may only be given after the end of the 120 day period), provided that he has not returned to his duties under this Agreement on a full time basis. (c) Cause. For Cause. The Company shall have "Cause" to terminate the Executive's employment under this Agreement upon (A) the willful and continued failure by the Executive to substantially perform his duties under this Agreement ( other than any failure resulting from the Executive's incapacity due to physical or mental illness ) for thirty (30) days after written demand for substantial performance is delivered by the Company specifically identifying the manner in which the Company believes the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in misconduct (including embezzlement and criminal fraud) which is materially injurious to the Company, or (C) the willful violation by the Executive of Section 5 of this Agreement, provided that the violation results in material injury to the Company, or (D) the conviction of the Executive of a felony. For purposes of this paragraph, no act, or failure to act, by the Executive shall be considered "willful" unless done or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the interest of the Company. The Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after a reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clause (A), (B), (C) or (D) and specifying the particulars of the conduct in detail. (d) Termination by the Executive. The Executive may terminate his employment under this Agreement (i) for Good Reason (as defined below) or (ii) if his health should become impaired to any extent that makes the continued performance of his duties under this Agreement hazardous to his physical or mental health or his life, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to that effect and 3 provided further that at the Company's request and expense the Executive shall submit to an examination by a doctor selected by the Company, and the doctor shall have concurred in the conclusion of the Executive's doctor. "Good Reason" means the Company has (through its Board or otherwise) (A) limited the powers of the Executive in any manner not contemplated by Section 2, (B) failed to comply with Section 3 or 4, (C) failed to cause any successor as contemplated in Section 8 of this Agreement to assume this Agreement, or (D) a change in control. The Executive shall give the Company 30 days prior written notice of his intent to terminate this Agreement as a result of clause (A), (B), (C) or (D) and the Company shall have the right to cure within the 30 day period. For purposes of this Agreement, a change in control means the occurrence of one or more of the following events (whether or not approved by the Board): (i) an event or series of events by which any person or other entity or group of persons or other entities acting in concert as determined in accordance with Section 13 (d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not applicable, together with its or their affiliates or associates shall, as a result of a tender offer or exchange offer, open market purchases, privately negotiated purchases, merger or otherwise ( including pursuant to receipt of revocable proxies) (A) be or become directly or indirectly the beneficial owner (within the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire whether such right is exercisable immediately or only after the passage of time) of more than 30% of the combined voting power of the then outstanding common stock of the Company or (B) otherwise have the ability to elect, directly or indirectly, a majority of the members of the Board. (e) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to subsection (a) above) shall be communicated by written Notice of Termination to the other party of this Agreement. "Notice of Termination" means a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) Date of Termination. Date of termination means (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to subsection (b) above, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during the 30 day period), (iii) if the Executive's employment is terminated pursuant to subsection (c) above, the date specified in the Notice of Termination after the expiration of any cure periods, and (iv) if the Executive's employment is terminated for any other reason, the date on which Notice of Termination is given. 7. Compensation Upon Termination or During Disability: (a) Upon the Executive's death, the Company shall pay to the person designated by the Executive in a notice filed with the Company or, if no person is designated, to his estate as a lump sum death benefit, his full Base Salary for a period of six months after the date of his death in addition to any payments the Executive's spouse, beneficiaries or estate may be entitled to receive pursuant to any pension, stock option or Executive benefit plan or life insurance policy or similar plan or policy then maintained by the Company. Upon full payment of all amounts required to be paid under this subsection, the Company shall have no further obligation under this Agreement. 4 (b) During any period that the Executive fails to perform his duties under this Agreement as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his full base salary until the Executive's employment is terminated pursuant to Section 6 (b) of this Agreement, or until the Executive terminates his employment pursuant to Section 6 (d) (ii) of this Agreement, whichever comes first. After termination, the Executive shall receive in equal monthly installments 100% of his base salary at the rate in effect at the time Notice of Termination is delivered for one year, plus any disability payments otherwise payable by or pursuant to plans provided by the Company ("Disability Payments"). (c) If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full base salary through the date of termination at the rate in effect at the time Notice of Termination is delivered and the Company shall have no further obligation to the Executive under this Agreement. (d) If (A) in breach of this Agreement, the Company shall terminate the Executive's employment other than pursuant to Sections 6 (b) or 6 (c) ( it being understood that a purported termination pursuant to Sections 6 (b) or 6 (c) which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement ), or (B) the Executive shall terminate his employment for Good Reason, then (i) The Company shall pay the Executive his full base salary through the date of termination at the rate then in effect at the time Notice of Termination is given; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in consideration of the rights of the Company under Section 5 of this Agreement, the Company shall pay severance pay to the Executive on the fifth day following the date of termination, in a lump sum amount equal to the entire salary due until the end of the term of this Agreement based on an annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the date of Termination. (iii) In the event of a change in control of the Company as defined in Section 6 (d), the Company shall pay in a lump sum payment (or in monthly installments at the option of the Executive) the greater of twice the amount of severance pay required in Section 7 (d) (ii) above, or three times the annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the date of the termination. (iv) In the event of a change in control of the Company as defined in Section 6 (d) above, the total number of outstanding unexercised options (warrants) granted to the Executive under this Agreement or any previous employment or other agreements, shall be doubled in quantity while retaining the original exercise price. (v) The Company shall pay all reasonable legal fees and expenses incurred by the Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit in this Agreement. (e) Unless the Executive is terminated for Cause, the Company shall maintain in full force and effect, for the continued benefit of the Executive for the greater of the remaining term of this Agreement or eighteen (18) months after termination of this Agreement, all Executive health and hospitalization plans and programs in which the Executive was entitled to participate in immediately prior to the Date of Termination, provided that the Executive's continued 5 participation is possible under the general terms and provisions of the plans and programs. If the Executive's participation in any plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under the plan and program from which his continued participation is barred. (f) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, however, the amount of any payment provided for in this Section 7 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination. (g) In the event of a termination of this Agreement by the Executive for Good Reason as a result of a change in control, the amount to be utilized in Section 7 (d) (ii) shall be changed to the average compensation of the Executive during this Agreement for the taxable years prior to such termination (all as determined to compute the base amount for purposes of Section 280G of the Internal Revenue Code of 1984, as amended). 8. Successors; Binding Agreement: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to or simultaneously with the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to under this Agreement if he terminated his employment for Good Reason, except for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, "Company" shall mean the Company as previously defined and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 8 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive under this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him under this Agreement, including all payments payable under Section 7, if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there is no such designee, the Executive's estate. 9. Notice: For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Ilia Lekach 137 Golden Beach Drive Golden Beach, Florida 33160 6 If to the Company: Parlux Fragrances, Inc. 3725 S.W. 30th Avenue Fort Lauderdale, Florida 33312 Attention: Board of Directors or to such other address as any party may have furnished to the others in writing in accordance herewith, except with notices of change of address which shall be effective only upon receipt. 10. Entire Agreement: No provisions of this Agreement may be modified, waived or discharged unless such is signed by the Executive and the officer of the Company which is specifically designated by the Board. No Agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement and this Agreement supersedes any other employment agreement between the Company and the Executive. 11. Waiver of Breach: No waiver by either party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other provision or condition at any prior or subsequent time. 12. Headings: The section headings contained in this Agreement have been inserted only as a matter of convenience or reference and in no way define, limit or describe the scope or intent of any provisions of this Agreement nor in any way affect any of these provisions. 13. Governing Law: The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Florida, without giving effect to conflict of law principles. 14. Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not effect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. ATTEST: PARLUX FRAGRANCES, INC. /s/ Frederick E. Purches /s/ Frank A. Buttacavoli - --------------------------- By: ---------------------------------------------- WITNESS Frank A. Buttacavoli, Executive V.P./C.O.O./C.F.O. /s/ Tania N. Espinosa /s/ Ilia Lekach - --------------------------- --------------------------------------- WITNESS Ilia Lekach, Executive 7 EX-10.59 5 empfrank2002.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Exhibit 10.59 -------------------- ------------- Agreement ( the "Agreement" ) dated as of May 1, 2002 between Parlux Fragrances, Inc., a corporation of the State of Delaware with offices located at 3725 S.W. 30th Avenue, Fort Lauderdale, Florida 33312 ( hereinafter called the "Company" ), and Frank A. Buttacavoli, residing at 5451 Alton Road, Miami Beach, Florida 33140 ( hereinafter called the "Executive" ). WITNESSETH WHEREAS, the Company desires to continue the employment of the Executive and the Executive is willing to be employed by the Company and accepts such employment; WHEREAS, the Company and the Executive (hereinafter sometimes referred to as "the parties" ) are parties to an existing Employment Agreement extending through March 31, 2003, which is hereby terminated without liability to either party. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained intending to be legally bound, the parties do hereby agree as follows: 1. Employment. The Company agrees to employ the Executive and the Executive hereby accepts the terms and conditions hereinafter set forth, for a period commencing on May 1, 2002 and ending on March 31, 2006 ( the "Initial Term" ) ( unless terminated as specifically provided for in this Agreement ). Upon expiration of the Initial Term, the Executive's term of employment shall be extended for an additional three (3) year period, unless either party gives written notice of its intention not to renew this Agreement at least six (6) months prior to the expiration of the Initial Term, in which case the Executive's term of employment shall end upon such expiration. 2. Position and Duties. The Executive shall serve as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company and shall have the powers and duties as may from time to time be prescribed by the Company's Chief Executive Officer and Board of Directors ( the "Board" ), provided that the Executive's duties are consistent with the Executive's position as a senior executive officer involved with the general management of the Company. The Executive shall report to the Chief Executive Officer. 3. Place of Performance. In connection with his employment by the Company, the Executive shall be based, and the duties to be performed, shall be performed at the Company's principal executive offices located in Broward County or Dade County, South Florida. Such office shall not be further relocated without the Executive's consent. 4. Compensation and Related Matters. (a) Base Salary: The Executive shall receive a base salary, exclusive of benefits ( the "Base Salary" ), in substantially equal monthly or bi-weekly installments as follows: (i) For the period commencing May 1, 2002 through March 31, 2003, at the annual rate of $250,000; for the period commencing on April 1, 2003 and ending on March 31, 2004, at the annual rate of $285,000; for the periods commencing on April 1, 2004 and 2005 and ending on March 31, 2005 and 2006, respectively, at the immediate prior year's annual rate, plus an increase based on performance, to be determined by the Chief Executive Officer. (b) Expenses: During the term of his employment under this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him in accordance with the policies and procedures of the Company for reimbursement of business expenses by its senior executive officers, provided that the Executive accounts for the expenses in accordance with the Company's policies. (c) Other Benefits: The Executive shall be entitled to participate in or receive benefits under all executive benefit plans and arrangements made available by the Company at any time to its employees and key management executives. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary or any other obligation payable to the Executive pursuant to this Agreement. (d) Vacations: The Executive shall be entitled to the number of paid vacation days in each fiscal year determined by the Company from time to time for its senior executive officers, but not less than four weeks in any fiscal year. (e) Perquisites: The Executive shall be entitled to receive all perquisites and fringe benefits provided or available to senior executive officers of the Company in accordance with present practice and as may be changed from time to time with respect to all senior executive officers of the Company. (f) Stock Options: The Executive will be granted non qualified stock options (warrants) to purchase 200,000 shares of the Company's common stock at an exercise price of $1.86 per share, being the closing price of the shares on April 30, 2002. The options (warrants) will be exercisable at the rate of 66,666 shares each on March 31, 2004, 2005 and 2006, respectively. The rights of the Executive with respect to any stock options (warrants) granted to the Executive shall be determined exclusively by the plans and agreements relating to the options (warrants) and this Agreement shall not affect in any way the rights and obligations of the plans and agreements. Each option shall be exercisable for a period of ten years after the date of grant unless earlier terminated in accordance with its terms or those of the Agreement. 5. Noncompetition; unauthorized disclosure: (a) No material competition: Except with respect to services performed under this Agreement on behalf of the Company, and subject to the obligations of the Executive as an officer of the Company and the employment obligations of the Executive under this Agreement, the Executive agrees that at no time during the term of this Agreement or, for a period of one year immediately following any termination of this Agreement for any reason other than a change in control as defined in Section 6 (d) of this Agreement, will he engage in any business if, within thirty (30) days of the Executive advising the Company in writing of his proposed business activity, the Board determines in good faith that such proposed business activity is directly competitive with a material part of the business of the Company and its subsidiaries ( both present and future ) and such competitive business activity is reasonably 2 likely to materially affect in an adverse manner the consolidated sales, profits or financial condition of the Company. (b) Unauthorized disclosures: During the period of his employment under this Agreement, the Executive shall not, without the written consent of the Board or a person authorized by the Board, disclose to any person, other than an Executive of the Company or person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the company, any material confidential information obtained by him while in the employ of the company with respect to any of the Company's customers, suppliers, creditors, lenders, investment bankers or methods of marketing, the disclosure of which he knows will materially damage the Company; provided, however, that confidential information shall not include any information known generally to the public ( other than as a result of unauthorized disclosure by the Executive ) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. For the period ending one year following the termination of employment under this Agreement for any reason, the Executive shall not disclose any confidential information of the type described above except as determined by him to be reasonably necessary in connection with any business or activity in which he is then engaged. (c) Certain Provisions: The limitations of Section 5 (a) shall terminate if upon termination of this Agreement for any reason the Company does not fulfill its obligations as required by Section 7 of this Agreement; however, such termination shall not affect the rights of the Executive to receive all payments he is entitled to receive under Section 7. The provisions of Section 5 shall apply during the time the Executive is receiving any payments from the Company as a result of a termination of this Agreement pursuant to Section 6 (b). 6. Termination. The Company may terminate the Executive's employment under this Agreement prior to the expiration of the term set forth in Section 1 only under the following circumstances: (a) Death. Upon the Executive's death. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties under this Agreement on a full time basis for 120 calendar days during any calendar year, then 30 days after written notice of termination is given to the Executive ( which may only be given after the end of the 120 day period ), provided that he has not returned to his duties under this Agreement on a full time basis. (c) Cause. For Cause. The Company shall have "Cause" to terminate the Executive's employment under this Agreement upon (A) the willful and continued failure by the Executive to substantially perform his duties under this Agreement ( other than any failure resulting from the Executive's incapacity due to physical or mental illness ) for thirty (30) days after written demand for substantial performance is delivered by the Company specifically identifying the manner in which the Company believes the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in misconduct ( including embezzlement and criminal fraud ) which is materially injurious to the Company, or (C) the willful violation by the Executive of Section 5 of this Agreement, provided that the violation results in material injury to the Company, or (D) the conviction of the Executive of a 3 felony. For purposes of this paragraph, no act, or failure to act, by the Executive shall be considered "willful" unless done or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the interest of the Company. The Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose ( after a reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board ), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clause (A), (B), (C) or (D) and specifying the particulars of the conduct in detail. (d) Termination by the Executive. The Executive may terminate his employment under this Agreement (i) for Good Reason ( as defined below ) or (ii) if his health should become impaired to any extent that makes the continued performance of his duties under this Agreement hazardous to his physical or mental health or his life, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to that effect and provided further that at the Company's request and expense the Executive shall submit to an examination by a doctor selected by the Company, and the doctor shall have concurred in the conclusion of the Executive's doctor. "Good Reason" means the Company has ( through its Board or otherwise) (A) limited the powers of the Executive in any manner not contemplated by Section 2, (B) failed to comply with Section 3 or 4, (C) failed to cause any successor as contemplated in Section 8 of this Agreement to assume this Agreement, or (D) a change in control. The Executive shall give the Company 30 days prior written notice of his intent to terminate this Agreement as a result of clause (A), (B), (C) or (D) and the Company shall have the right to cure within the 30 day period. For purposes of this Agreement, a change in control means the occurrence of one or more of the following events ( whether or not approved by the Board ): (i) an event or series of events by which any person or other entity or group of persons or other entities acting in concert as determined in accordance with Section 13 (d) of the Securities Exchange Act of 1934, as amended ( the "Exchange Act" ), whether or not applicable, together with its or their affiliates or associates shall, as a result of a tender offer or exchange offer, open market purchases, privately negotiated purchases, merger or otherwise ( including pursuant to receipt of revocable proxies) (A) be or become directly or indirectly the beneficial owner ( within the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire whether such right is exercisable immediately or only after the passage of time) of more than 30% of the combined voting power of the then outstanding common stock of the Company or (B) otherwise have the ability to elect, directly or indirectly, a majority of the members of the Board. (e) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive ( other than termination pursuant to subsection (a) above ) shall be communicated by written Notice of Termination to the other party of this Agreement. "Notice of Termination" means a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) Date of Termination. Date of termination means (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's 4 employment is terminated pursuant to subsection (b) above, 30 days after Notice of Termination is given ( provided that the Executive shall not have returned to the performance of his duties on a full-time basis during the 30 day period ), (iii) if the Executive's employment is terminated pursuant to subsection (c) above, the date specified in the Notice of Termination after the expiration of any cure periods, and ( iv) if the Executive's employment is terminated for any other reason, the date on which Notice of Termination is given. 7. Compensation Upon Termination or During Disability: (a) Upon the Executive's death, the Company shall pay to the person designated by the Executive in a notice filed with the Company or, if no person is designated, to his estate as a lump sum death benefit, his full Base Salary for a period of six months after the date of his death in addition to any payments the Executive's spouse, beneficiaries or estate may be entitled to receive pursuant to any pension, stock option or Executive benefit plan or life insurance policy or similar plan or policy then maintained by the Company. Upon full payment of all amounts required to be paid under this subsection, the Company shall have no further obligation under this Agreement. (b) During any period that the Executive fails to perform his duties under this Agreement as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his full base salary until the Executive's employment is terminated pursuant to Section 6 (b) of this Agreement, or until the Executive terminates his employment pursuant to Section 6 (d) (ii) of this Agreement, whichever comes first. After termination, the Executive shall receive in equal monthly installments 100% of his base salary at the rate in effect at the time Notice of Termination is delivered for one year, plus any disability payments otherwise payable by or pursuant to plans provided by the Company ( "Disability Payments" ) (c) If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full base salary through the date of termination at the rate in effect at the time Notice of Termination is delivered and the Company shall have no further obligation to the Executive under this Agreement. (d) If (A) in breach of this Agreement, the Company shall terminate the Executive's employment other than pursuant to Sections 6 (b) or 6 (c) ( it being understood that a purported termination pursuant to Sections 6 (b) or 6 (c) which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement ), or (B) the Executive shall terminate his employment for Good Reason, then (i) The Company shall pay the Executive his full base salary through the date of termination at the rate then in effect at the time Notice of Termination is given; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in consideration of the rights of the Company under Section 5 of this Agreement, the Company shall pay severance pay to the Executive on the fifth day following the date of termination, in a lump sum amount equal to the entire salary due until the end of the term of this Agreement based on an annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the date of Termination. 5 (iii) In the event of a change in control of the Company as defined in Section 6 (d), the Company shall pay in a lump sum payment ( or in monthly installments at the option of the Executive ) the greater of twice the amount of severance pay required in Section 7 (d) (ii) above, or three times the annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the date of the termination. (iv) In the event of a change in control of the Company as defined in Section 6 (d) above, the total number of outstanding unexercised options (warrants) granted to the Executive under this Agreement or any previous employment or other agreements, shall be doubled in quantity while retaining the original exercise price. (v) The Company shall pay all reasonable legal fees and expenses incurred by the Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit in this Agreement. (e) Unless the Executive is terminated for Cause, the Company shall maintain in full force and effect, for the continued benefit of the Executive for the greater of the remaining term of this Agreement or eighteen ( 18 ) months after termination of this Agreement, all Executive health and hospitalization plans and programs in which the Executive was entitled to participate in immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of the plans and programs. If the Executive's participation in any plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under the plan and program from which his continued participation is barred. (f) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, however, the amount of any payment provided for in this Section 7 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination. (g) In the event of a termination of this Agreement by the Executive for Good Reason as a result of a change in control, the amount to be utilized in Section 7 (d) (ii) shall be changed to the average compensation of the Executive during this Agreement for the taxable years prior to such termination ( all as determined to compute the base amount for purposes of Section 280G of the Internal Revenue Code of 1984, as amended ). 8. Successors; Binding Agreement: (a) The Company will require any successor ( whether direct or indirect, by purchase, merger, consolidation or otherwise ) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to or simultaneously with the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to under this Agreement if he terminated his employment for Good Reason, except for purposes of implementing the foregoing, the date on which any such 6 succession becomes effective shall be deemed the date of termination. As used in this Agreement, "Company" shall mean the Company as previously defined and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 8 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive under this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him under this Agreement, including all payments payable under Section 7, if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there is no such designee, the Executive's estate. 9. Notice: For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Frank A. Buttacavoli 5451 Alton Road Miami Beach, Florida 33140 If to the Company: Parlux Fragrances, Inc. 3725 S.W. 30th Avenue Fort Lauderdale, Florida 33312 Attention: Board of Directors or to such other address as any party may have furnished to the others in writing in accordance herewith, except with notices of change of address which shall be effective only upon receipt. 10. Entire Agreement: No provisions of this Agreement may be modified, waived or discharged unless such is signed by the Executive and the officer of the Company which is specifically designated by the Board. No Agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement and this Agreement supersedes any other employment agreement between the Company and the Executive. 11. Waiver of Breach: No waiver by either party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other provision or condition at any prior or subsequent time. 12. Headings: The section headings contained in this Agreement have been inserted only as a matter of convenience or reference and in no way define, limit or describe the scope or intent of any provisions of this Agreement nor in any way affect any of these provisions. 13. Governing Law: The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Florida, without giving effect to conflict of law principles. 7 14. Severability: The invalidity or unenforceability of any provision or provisions of this Agreement shall not effect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. ATTEST: PARLUX FRAGRANCES, INC. /s/ Frederick E. Purches By: /s/ Ilia Lekach - ----------------------------- ----------------------------------------------- Witness Ilia Lekach, Chairman & Chief Executive Officer /s/ Tania N. Espinosa /s/ Frank A. Buttacavoli - ----------------------------- ---------------------------------------- Witness Frank A. Buttacavoli, Executive 8 EX-10.60 6 consultcosmix2002.txt CONSULTING AGREEMENT CONSULTING AGREEMENT Exhibit 10.60 ------------- This Consulting Agreement (hereinafter "Agreement") dated as of May 1, 2002, between PARLUX FRAGRANCES, INC., a corporation organized and existing under the laws of the State of Delaware (hereinafter "Corporation") and COSMIX, INC. 333 East 69th Street, New York 10021 (hereinafter "Consultant"), and Frederick E. Purches (hereinafter "Purches"), the President of Consultant residing at 333 East 69th Street New York, New York 10021. Collectively hereinafter referred to as "Parties". WHEREAS, Corporation, Consultant and Purches are parties to a Consulting Agreement extending through March 31, 2003 which is hereby terminated without liability to either party. WHEREAS, the parties wish to enter into a new Consulting Agreement under revised terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual understanding set forth herein, the Parties agree as follows: 1. Consultant's Duties: The Corporation hereby engages the Consultant as its business and financial consultant. Subject at all times to the control and direction of the Corporations's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer (hereinafter Management), the Consultant shall have the duties as the general advisor and consultant to Management on all matters pertaining to the business and to render all other services relevant thereto. The Consultant, by Purches, shall perform all other duties that may be reasonably assigned to it by Management provided said duties be consistent with the prestige and responsibility of Purches's position. The Consultant shall, through its agents, servants and employees, devote its best efforts at all times necessary to perform its duties and to advance the Corporation's best interests, subject to reasonable vacations. The Consultant and the Corporation acknowledge that the Consultant and its agents, servants and employees have other business interests and shall not be required to devote its exclusive time and attention to the performance of its duties hereunder. 2. Term: Unless sooner terminated as provided in Section 7 below, this Agreement shall be for a term of three (3) years and eleven (11) months commencing as of May 1, 2002 and ending on March 31, 2006; provided however, that the term of this Agreement shall be automatically extended on the same terms and conditions for a one year period and from year to year thereafter unless either the Corporation or the Consultant shall give written notice of the termination of this Agreement to the other at least six (6) months prior to the expiration of said term or extended term. 3. Compensation: For all services rendered by the Consultant under this Agreement, the Corporation shall pay to Consultant as compensation the sum of $125,000 per annum, payable in equal bi-weekly installments of $4,807.69. 4. Health and Life Insurance: The Corporation shall, at no cost to the Consultant or Purches, provide Purches with full health insurance, basic, major medical and dental as well as group life insurance. Said coverage shall be identical to that afforded the Corporation's Management. 5. Expenses: Consultant will be reimbursed by the Corporation for all reasonable business expenses incurred by the Consultant in the performance of its duties. Said reimbursement shall be made no less frequently than monthly upon submission by the Consultant of a written request for same. CONSULTING AGREEMENT Page 2 6. Stock Options (Warrants): Purches shall be granted non qualified stock options (warrants) to purchase 30,000 shares of Corporation's common stock at an exercise price of $1.86 per share being the closing price of the shares of common stock on April 30, 2002. The options (warrants) shall be exercisable at the rate of 10,000 on March 31, 2004, 10,000 on March 31, 2005 and 10,000 on March 31, 2006. Each option (warrant) shall be exercised within a period of ten (10) years after the date of the grant unless earlier terminated in accordance with its terms or those of this Agreement. The rights of Purches with respect to any stock option (warrant) granted to Purches shall be determined exclusively by the plans and agreements relating to the options (warrants) and this Agreement shall not affect, in any way, the rights and obligations of the plans and agreements. 7. Early Termination: The Corporation may terminate the Consultant's relationship under this Agreement prior to the expiration of the term set forth in Section 2 above only under the following circumstances: i. Death. Upon the death of Purches. ii. Disability. If, as a result of Purches's incapacity due to physical or mental illness, Purches having been unable to perform his duties under this Agreement for a period of six consecutive calendar months, then thirty (30) days after written notice of termination is given to Consultant (which may only be given after the end of the six consecutive calendar month period) provided that Purches has not returned to his duties under this Agreement. iii. Cause. For Cause. The Corporation shall have "Cause" to terminate this Agreement upon (a) the willful and continued failure by Consultant to substantially perform its duties under this Agreement (other than any failure resulting from Purches's incapacity due to physical or mental illness) for thirty (30) days after written demand for substantial performance is delivered by the Corporation specifically identifying the manner in which the Corporation believes Consultant has not substantially performed its duties, or (b) the willful engaging by Consultant or Purches in misconduct (including embezzlement and criminal fraud) which is materially injurious to the Corporation, or (c) the conviction of Purches of a felony. For purposes of this paragraph, no act, or failure to act, by the Consultant shall be considered "willful" unless done or omitted to be done, by Consultant not in good faith and without reasonable belief that its action or omission was in the interest of the Corporation. Consultant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Consultant a copy of a resolution, duly adopted by the affirmative vote of a majority of the entire membership of the Board of Directors (Board) at a meeting of the Board called and held for such purpose (after a reasonable notice to the Consultant and an opportunity for Consultant, together with its counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Consultant was guilty of conduct set forth above and specifying the particulars of the conduct in detail. CONSULT1NG AGREEMENT Page 3 iv. Termination by Consultant or Purches. Consultant or Purches may terminate this Agreement (a) for Good Reason (as defined below) or (b) Purches's health should become impaired to any extent that makes the performance of his duties under this Agreement hazardous to his physical or mental health or his life, provided that Purches shall have furnished the Corporation with a written statement from a qualified doctor to that effect and provided further that at the Corporation's request and expense Purches shall submit to an examination by a doctor selected by the Corporation, and the doctor shall have concurred in the conclusion of Purches's doctor. Consultant shall give the Corporation thirty (30) days prior written notice of its intent to terminate this agreement. "Good Reason" means the Corporation has had a Change in Control. For purposes of this Agreement, a Change in Control means the occurrence of an event or series of events (whether or not approved by the Board) by which any person or other entity or group of persons or other entities acting in concert as determined in accordance with Section 12(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not applicable, together with its or their affiliates or associates shall, as a result of a tender offer or exchange offer, open market purchases, privately negotiated purchases, merger or otherwise (including pursuant to receipt of revocable proxies) (a) be or become directly or indirectly the beneficial owner (within the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire whether such right is exercisable immediately or only after the passage of time) of more than thirty (30) percent of the combined voting power of the then outstanding common stock of the Corporation or (b) otherwise have the ability to elect, directly or indirectly, a majority of the Board. v. Notice of Termination. Any termination of this Agreement shall be communicated by written Notice of Termination to the other party of this Agreement. "Notice of Termination" means a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for the termination of the Consultant's retention under the provision so indicated. vi. Date of Termination. Date of termination means (a) if the Agreement is terminated by Purches's death, the date of his death, (b) if the Consultant's retention is terminated pursuant to subsection 7(iii)(a) above, thirty (30) days after Notice of Termination is given provided that Purches shall not have returned to the performance of his duties during the thirty (30) day period, (c) if the Consultant's retention is terminated pursuant to subsection 7(iii)(c) above, the date specified in the Notice of Termination after the expiration of any cure periods, and (d) if the Consultant's retention is terminated for any other reason, the date on which Notice of Termination is given. CONSULTING AGREEMENT Page 4 8. Compensation Upon Termination or During Disability: i. Upon Purches's death, the Corporation shall pay to the person designated by Consultant in a notice filed with the Corporation or, if no person is designated, to Purches's estate as a lump sum death benefit, Consultant's full compensation for a period of six (6) months after the date of Purches's death. Upon full payment of amounts required to be paid under this subsection, the Corporation shall have no further obligation under this Agreement. ii. During any period that Purches fails to perform his duties under this Agreement as a result of incapacity due to physical or mental illness, Consultant shall continue to receive its full compensation until the Consultant's relationship is terminated pursuant to Section 7(ii) of this Agreement, or until Consultant shall receive a lump sum of six months' compensation. iii. If the Consultant's retention is terminated for Cause as defined in subsection 7(iii), the Corporation shall pay the Consultant its compensation through the date of termination at the rate in effect at the time Notice of Termination is delivered and the Corporation shall have no further obligation to Consultant under this Agreement. iv. If (a) in breach of this Agreement, the Corporation shall terminate the Consulting relationship other than pursuant to Sections 7(iii)(b) or 7(iii)(c) (it being understood that a purported termination pursuant to Sections 7(iii)(b) or 7(iii)(c) which is disputed and finally determined not to have been proper shall be a termination by the Corporation in breach of this Agreement), or (b) the Consultant shall terminate the relationship for Good Reason, then (1) The Corporation shall pay the Consultant its full compensation through the date of termination at the rate then in effect at the time Notice of Termination is given through the end of the Term; (2) In the event of a Change in Control as defined in Section 7(iv), the Corporation shall pay Consultant, in a lump sum, an amount equal to the greater of (a) twice the amount then due through the end of the Term; or (b) two times the annual compensation paid to Consultant. (3) In the event of a Change in Control of the Corporation as defined in Section 7(iv) above, the total number of outstanding unexercised options (warrants) granted to Consultant under this Agreement as well as any previous employment, consultant or other agreements, shall be doubled in quantity while retaining the original exercise price. (4) The Corporation shall pay all reasonable legal fees and expenses incurred by Consultant in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit in this Agreement. CONSULTING AGREEMENT Page 5 v. Unless the Consultant is terminated for Cause, the Corporation shall maintain in full force and effect, for the continued benefit of Consultant for the greater of the remaining term of this Agreement or eighteen (18) months after termination of this Agreement, all health and hospitalization plans and programs in which Consultant was entitled to participate in immediately prior to the Date of Termination as defined in Section 4 of this Agreement, provided that Consultant's continued participation is possible under the general terms and provisions of the plans and programs. If Consultant's participation in any plan or program is barred, the Corporation shall arrange to provide the Consultant with benefits substantially similar to those which Consultant would otherwise have been entitled to receive under the plan and program from which his continued participation is barred. 9. Savings Clause: The determination that any provision of this Agreement is unenforceable shall not terminate this Agreement or otherwise affect the other provisions of this Agreement, it being the intention of the parties hereto that this Agreement shall be construed to permit the equitable reformation of such provision to permit the enforcement thereof, if possible, and otherwise to permit the enforcement of the remaining provisions of this Agreement as if such unenforceable provision were not included herein. 10. Equitable Relief: The parties hereto agree and declare that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement. 11. Notice: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given and received on the date when personally delivered or deposited in the United States Mail, registered postage prepaid, addressed: a. if to the Corporation to: Mr. Ilia Lekach Parlux Fragrances, Inc. 3725 S.W. 30th Avenue Fort Lauderdale, FL 33312 b. if to the Consultant or Purches to: Mr. Frederick Purches 333 East 69th Street New York, New York 10021 or to such other address as the Corporation or the Consultant may designate in writing. 12. Amendments: This Agreement may be amended or modified only by a writing. 13. Governing Law: This Agreement shall be governed and construed under the laws of the State of Florida. 14. Entire Agreement: This Agreement constitutes the entire Agreement between the Consultant, Purches and the Corporation, with respect to its subject matter, and all prior and other agreements between them, oral or written concerning the same subject matter are merged into this Agreement and thus extinguished. CONSULTING AGREEMENT Page 6 15. Survival of Covenants: Any of the provisions in this Agreement which would by their terms continue after the termination of this Agreement shall be deemed to survive such termination. 16. Assignability and Binding Effect: This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns. This Agreement may not be assigned by either party without the written consent of the other party hereto. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date first written above. PARLUX FRAGRANCES, INC. By: /s/ Ilia Lekach ------------------------------------------------- Ilia Lekach, Chief Executive Officer Consultant: COSMIX INC By: /s/ Frederick E. Purches ------------------------------------------------- Frederick E. Purches, President and Frederick E. Purches Individually EX-10.61 7 consultcamb2002.txt CONSULTING AGREEMENT CONSULTING AGREEMENT Exhibit 10.61 -------------------- ------------- This Consulting Agreement (hereinafter "Agreement") dated as of May 1, 2002, between PARLUX FRAGRANCES, INC., a corporation organized and existing under the laws of the State of Delaware (hereinafter "Corporation") and CAMBRIDGE DEVELOPMENT CORPORATION, 14 Vanderventer Avenue, Port Washington, New York 11050 (hereinafter "Consultant"), and Albert F. Vercillo (hereinafter "Vercillo"), the President of Consultant residing at 74 Summit Road, Port Washington, New York 11050. Collectively hereinafter referred to as "Parties". WHEREAS, Corporation, Consultant and Vercillo are parties to a Consulting Agreement dated November 1, 1999 extending through May 31, 2003, which is hereby terminated without liability to either party. WHEREAS, the parties wish to enter into a new Consulting Agreement under revised terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual understanding set forth herein, the Parties agree as follows: 1. Consultant's Duties: The Corporation hereby engages the Consultant as its business and financial consultant. Subject at all times to the control and direction of the Corporations's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer (hereinafter Management), the Consultant shall have the duties as the general advisor and consultant to Management on all matters pertaining to the business and to render all other services relevant thereto. The Consultant, by Vercillo, shall perform all other duties that may be reasonably assigned to it by Management provided said duties be consistent with the prestige and responsibility of Vercillo's position. The Consultant shall, through its agents, servants and employees, devote its best efforts at all times necessary to perform its duties and to advance the Corporation's best interests, subject to reasonable vacations. The Consultant and the Corporation acknowledge that the Consultant and its agents, servants and employees have other business interests and shall not be required to devote its exclusive time and attention to the performance of its duties hereunder. 2. Term: Unless sooner terminated as provided in Section 7 below, this Agreement shall be for a term of three (3) years and eleven (11) months commencing as of May 1, 2002 and ending on March 31, 2006; provided however, that the term of this Agreement shall be automatically extended on the same terms and conditions for a one year period and from year to year thereafter unless either the Corporation or the Consultant shall give written notice of the termination of this Agreement to the other at least six (6) months prior to the expiration of said term or extended term. 3. Compensation: For all services rendered by the Consultant under this Agreement, the Corporation shall pay to Consultant as compensation the sum of $96,200 per annum payable in equal bi-weekly installments of $3,700.00. 4. Health and Life Insurance: The Corporation shall, at no cost to the Consultant or Vercillo, provide Vercillo with full health insurance, basic, major medical and dental as well as group life insurance. Said coverage shall be identical to that afforded the Corporation's Management. CONSULTING AGREEMENT Page 2 5. Expenses: Consultant will be reimbursed by the Corporation for all reasonable business expenses incurred by the Consultant in the performance of its duties. Said reimbursement shall be made no less frequently than monthly upon submission by the Consultant of a written request for same. 6. Stock Options (Warrants): Vercillo shall be granted non qualified stock options (warrants) to purchase 30,000 shares of Corporation's common stock at an exercise price of $1.86 per share being the closing price of the shares of common stock on April 30, 2002. The options (warrants) shall be exercisable at the rate of 10,000 on March 31, 2004, 10,000 on March 31, 2005 and 10,000 on March 31, 2006. Each option (warrant) shall be exercised within a period of ten (10) years after the date of the grant unless earlier terminated in accordance with its terms or those of this Agreement. The rights of Vercillo with respect to any stock option (warrant) granted to Vercillo shall be determined exclusively by the plans and agreements relating to the options (warrants) and this Agreement shall not affect, in any way, the rights and obligations of the plans and agreements. 7. Early Termination: The Corporation may terminate the Consultant's relationship under this Agreement prior to the expiration of the term set forth in Section 2 above only under the following circumstances: i. Death. Upon the death of Vercillo. ii. Disability. If, as a result of Vercillo's incapacity due to physical or mental illness, Vercillo having been unable to perform his duties under this Agreement for period of six consecutive calendar months, then thirty (30) days after written notice of termination is given to Consultant (which may only be given after the end of the six consecutive calendar month period) provided that Vercillo has not returned to his duties under this Agreement. iii. For Cause. The Corporation shall have "Cause" to terminate this Agreement upon (a) the willful and continued failure by Consultant to substantially perform its duties under this Agreement (other than any failure resulting from Vercillo's incapacity due to physical or mental illness) for thirty (30) days after written demand for substantial performance is delivered by the Corporation specifically identifying the manner in which the Corporation believes Consultant has not substantially performed its duties, or (b) the willful engaging by Consultant or Vercillo in misconduct (including embezzlement and criminal fraud) which is materially injurious to the Corporation, or (c) the conviction of Vercillo of a felony. For purposes of this paragraph, no act, or failure to act, by the Consultant shall be considered "willful" unless done or omitted to be done, by Consultant not in good faith and without reasonable belief that its action or omission was in the interest of the Corporation. Consultant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Consultant a copy of a resolution, duly adopted by the affirmative vote of a majority of the entire membership of the Board of Directors (Board) at a meeting of the Board called and held for such purpose (after a reasonable notice to the Consultant and an opportunity for Consultant, together with its counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Consultant was guilty of conduct set forth above and specifying the particulars of the conduct in detail. CONSULTING AGREEMENT Page 3 iv. Termination by Consultant or Vercillo. Consultant or Vercillo may terminate this Agreement (a) for Good Reason (as defined below) or (b) Vercillo's health should become impaired to any extent that makes the performance of his duties under this Agreement hazardous to his physical or mental health or his life, provided that Vercillo shall have furnished the Corporation with a written statement from a qualified doctor to that effect and provided further that at the Corporation's request and expense Vercillo shall submit to an examination by a doctor selected by the Corporation, and the doctor shall have concurred in the conclusion of Vercillo's doctor. Consultant shall give the Corporation thirty (30) days prior written notice of its intent to terminate this agreement. "Good Reason" means the Corporation has had a Change in Control. For purposes of this Agreement, a Change in Control means the occurrence of an event or series of events (whether or not approved by the Board) by which any person or other entity or group of persons or other entities acting in concert as determined in accordance with Section 12(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not applicable, together with its or their affiliates or associates shall, as a result of a tender offer or exchange offer, open market purchases, privately negotiated purchases, merger or otherwise (including pursuant to receipt of revocable proxies) (a) be or become directly or indirectly the beneficial owner (within the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire whether such right is exercisable immediately or only after the passage of time) of more than thirty (30) percent of the combined voting power of the then outstanding common stock of the Corporation or (b) otherwise have the ability to elect, directly or indirectly, a majority of the Board. v. Notice of Termination. Any termination of this Agreement shall be communicated by written Notice of Termination to the other party of this Agreement. "Notice of Termination" means a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for the termination of the Consultant's retention under the provision so indicated. vi. Date of Termination. Date of termination means (a) if the Agreement is terminated by Vercillo's death, the date of his death, (b) if the Consultant's retention is terminated pursuant to subsection 7(iii)(a) above, thirty (30) days after Notice of Termination is given provided that Vercillo shall not have returned to the performance of his duties during the thirty (30) day period, (c) if the Consultant's retention is terminated pursuant to subsection 7(iii)(c) above, the date specified in the Notice of Termination after the expiration of any cure periods, and (d) if the Consultant's retention is terminated for any other reason, the date on which Notice of Termination is given. CONSULTING AGREEMENT Page 4 8. Compensation Upon Termination or During Disability: i. Upon Vercillo's death, the Corporation shall pay to the person designated by Consultant in a notice filed with the Corporation or, if no person is designated, to Vercillo's estate as a lump sum death benefit, Consultant's full compensation for a period of six (6) months after the date of Vercillo's death. Upon full payment of amounts required to be paid under this subsection, the Corporation shall have no further obligation under this Agreement. ii. During any period that Vercillo fails to perform his duties under this Agreement as a result of incapacity due to physical or mental illness, Consultant shall continue to receive its full compensation until the Consultant's relationship is terminated pursuant to Section 7(ii) of this Agreement, or until Consultant shall receive a lump sum of six months' compensation. iii. If the Consultant's retention is terminated for Cause as defined in subsection 7(iii), the Corporation shall pay the Consultant its compensation through the date of termination at the rate in effect at the time Notice of Termination is delivered and the Corporation shall have no further obligation to Consultant under this Agreement. iv. If (a) in breach of this Agreement, the Corporation shall terminate the Consulting relationship other than pursuant to Sections 7(iii)(b) or 7(iii)(c) (it being understood that a purported termination pursuant to Sections 7(iii)(b) or 7(iii)(c) which is disputed and finally determined not to have been proper shall be a termination by the Corporation in breach of this Agreement), or (b) the Consultant shall terminate the relationship for Good Reason, then (1) The Corporation shall pay the Consultant its full compensation through the date of termination at the rate then in effect at the time Notice of Termination is given through the end of the Term; (2) In the event of a Change in Control as defined in Section 7(iv), the Corporation shall pay Consultant, in a lump sum, an amount equal to the greater of (a) twice the amount then due through the end of the Term; or (b) two times the annual compensation paid to Consultant. (3) In the event of a Change in Control of the Corporation as defined in Section 7(iv) above, the total number of outstanding unexercised options (warrants) granted to Consultant under this Agreement as well as any previous employment, consultant or other agreements, shall be doubled in quantity while retaining the original exercise price. (4) The Corporation shall pay all reasonable legal fees and expenses incurred by Consultant in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit in this Agreement. CONSULTING AGREEMENT Page 5 v. Unless the Consultant is terminated for Cause, the Corporation shall maintain in full force and effect, for the continued benefit of Consultant for the greater of the remaining term of this Agreement or eighteen (18) months after termination of this Agreement, all health and hospitalization plans and programs in which Consultant was entitled to participate in immediately prior to the Date of Termination as defined in Section 4 of this Agreement, provided that Consultant's continued participation is possible under the general terms and provisions of the plans and programs. If Consultant's participation in any plan or program is barred, the Corporation shall arrange to provide the Consultant with benefits substantially similar to those which Consultant would otherwise have been entitled to receive under the plan and program from which his continued participation is barred. 9. Savings Clause: The determination that any provision of this Agreement is unenforceable shall not terminate this Agreement or otherwise affect the other provisions of this Agreement, it being the intention of the parties hereto that this Agreement shall be construed to permit the equitable reformation of such provision to permit the enforcement thereof, if possible, and otherwise to permit the enforcement of the remaining provisions of this Agreement as if such unenforceable provision were not included herein. 10. Equitable Relief: The parties hereto agree and declare that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement. 11. Notices: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given and received on the date when personally delivered or deposited in the United States Mail, registered postage prepaid, addressed: a. if to the Corporation to: Mr. Ilia Lekach Parlux Fragrances, Inc. 3725 S.W. 30th Avenue Fort Lauderdale, FL 33312 b. if to the Consultant or Vercillo to: Mr. Albert Vercillo 74 Summit Road Port Washington, NY 11050 or to such other address as the Corporation or the Consultant may designate in writing. 12. Amendments: This Agreement may be amended or modified only by a writing. 13. Governing Law: This Agreement shall be governed and construed under the laws of the State of Florida. 14. Entire Agreement: This Agreement constitutes the entire Agreement between the Consultant, Vercillo and the Corporation, with respect to its subject matter, and all prior and other agreements between them, oral or written concerning the same subject matter are merged into this Agreement and thus extinguished. CONSULTING AGREEMENT Page 6 15. Survival of Covenants: Any of the provisions in this Agreement which would by their terms continue after the termination of this Agreement shall be deemed to survive such termination. 16. Assignability and Binding Effect: This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns. This Agreement may not be assigned by either party without the written consent of the other party hereto. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date first written above. PARLUX FRAGRANCES, INC. By: /s/ Ilia Lekach ---------------------------------------------- Ilia Lekach, Chief Executive Officer Consultant: CAMBRIDGE DEVELOPMENT CORPORATION By: /s/ Albert F. Vercillo ---------------------------------------------- Albert F. Vercillo, President and Albert F. Vercillo Individually EX-23.1 8 deloitteconsent.txt CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-95657 of Parlux Fragrances, Inc. on Form S-8 of our report dated June 21, 2002 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to transactions with related parties as described in Note 2), appearing in this Annual Report on Form 10-K of Parlux Fragrances, Inc. for the year ended March 31, 2002. Deloitte & Touche LLP Miami, Florida July 1, 2002 EX-23.2L 9 pricewaterhouse-consent.txt PRICEWATERHOUSE CONSENT Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-95657) of Parlux Fragrances, Inc. of our report dated June 30, 2000 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Miami, Florida July 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----