SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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.
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(Exact name of registrant as specified in its charter)
Delaware 22-2562955
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3725 SW 30th Avenue, Ft. Lauderdale, FL 33312
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(Address of principal executive offices (zip code)
(Registrant's telephone number, including area code) (954) 316-9008
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ( par value $ .01 per share)
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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 30, 1998
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Common Stock, $ .01 par value 14,755,319
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The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant was approximately $24,557,730 based on a
closing price of $1.875 for the Common Stock as of June 30, 1998 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).
<PAGE>
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 and national department stores. The fragrance market is
generally divided into a prestige segment (distributed primarily through
department and specialty stores) and a mass market segment. The Company's
products are positioned primarily in the prestige segment. Additionally, the
Company manufactures and distributes certain brands through Perfumania Inc., a
related party national chain which is a leading specialty retailer of
fragrances. Currently, the Company engages in the manufacture (through
sub-contractors), distribution and sale of PERRY ELLIS, FRED HAYMAN BEVERLY
HILLS, BARYSHNIKOV and PHANTOM fragrances and grooming items on an exclusive
worldwide basis as a licensee. See "Licensing Agreements" on pages 5 and 6 for
further discussion. Additionally, the Company manufactures, distributes and
sells four of its own brands, including ANIMALE fragrance, on a worldwide basis.
Restatement of Net Income and Net Income Per Share to Reflect SEC Announcement
and for Debt Extinguishment
- ------------------------------------------------------------------------------
In a 1997 announcement discussed in Topic No. D-60 by the Emerging
Issues Task Force, the staff of the Securities and Exchange Commission
("S.E.C.") indicated that when debt is convertible at a discount from the then
current common stock market price, the discounted amount reflects at that time
an incremental yield, e.g. a "beneficial conversion feature" which should be
recognized as a return to the debt holders from the date the debt is issued to
the date it first becomes convertible. Based on the market price of the
Company's common stock on the date of issuance of the convertible debt, the
convertible debentures issued by the Company during the period November 1995
through July 1996 had a beneficial conversion feature of $7,156,001. Although
management believes that the Company followed generally accepted accounting
principles in existence at the time of the issuances, it has complied with the
SEC announcement, restating its net income and per share information for the
year ended March 31, 1997 ("fiscal 1997") and fiscal 1996, to reflect such
accounting treatment for this non-cash charge, which has been recorded as
additional interest expense in the accompanying restated consolidated financial
statements. In addition, the October 1996 redemption of certain debentures no
longer results in a loss of $901,648 as previously reported as an extraordinary
item during the year ended March 31, 1997, since the price paid in excess of the
carrying value of the debentures was charged to additional paid-in capital to
offset the beneficial conversion feature originally recorded at the date of
issuance. The effect of the restatement was to decrease net income for fiscal
1997 by $3,454,143, resulting in a net loss of ($3,277,920), and to decrease net
income for fiscal 1996 by $2,800,210, resulting in net income of $4,972,481.
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Recent Developments
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In January 1998, the Company completed the third phase of its common
stock buy-back program involving 1,000,000 shares, and the Board of Directors
authorized the repurchase of an additional 1,250,000 shares. As of March
31,1998, the Company has repurchased under all phases a total of 2,450,755
shares at a cost of $5,760,777 (2,653,159 shares at a cost of $6,198,288 through
June 30, 1998). The accompanying consolidated balance sheets also include
treasury stock transactions prior to fiscal 1996.
On March 3, 1998, the Company entered into a long-term agreement to
license the worldwide cosmetic/fragrance rights for the Alexandra de Markoff
(AdM) brand to Cosmetic Essence, Inc. See Note 6 to the accompanying
consolidated financial statements for further discussion.
In March 1998, with the licensing of AdM, the further intent to license
BAL A VERSAILLES and the discontinuation of TODD OLDHAM and certain other
marginal brands and products, the Company announced that the costs related to
these brand and product discontinuations of approximately $9,224,000 would be
recorded in the quarter ended March 31, 1998. The charge relates mainly to
write-offs of inventory and advertising material. See Note 2 to the accompanying
consolidated financial statements for further discussion.
On June 10, 1998, the Company entered into a long-term agreement to
license the worldwide fragrance rights to the BAL A VERSAILLES/JEAN DESPREZ
brands to Genesis International Marketing Corporation. See Note 6 to the
accompanying consolidated financial statements for further discussion.
THE PRODUCTS
The Company's principal products are fragrances. Each fragrance is
distributed in a variety of sizes and packaging. In addition, each fragrance
line may be complemented by beauty-related products such as soaps, deodorants,
body lotions, cremes and dusting powders. The Company's basic products generally
retail at prices ranging from $20 to $215 per item.
The Company designs and creates fragrances using its own staff and
independent contractors. It also supervises the design of its packaging by
independent contractors. During fiscal 1998, the Company completed the design
process for FRED HAYMAN'S "HOLLYWOOD" for women, which was launched in the fall
of 1997. The Company is currently developing FRED HAYMAN'S "HOLLYWOOD For Men"
for a launch prior to Christmas 1998, as well as PERRY ELLIS "PORTFOLIO" for a
1999 launch.
During the last three fiscal years, the following brands have accounted
for 10% or more of the Company's gross sales:
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<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
<S> <C> <C> <C>
PERRY ELLIS 56% 48% 39%
FRED HAYMAN 17% 13% 20%
ALEXANDRA DE MARKOFF 12% 14% 3%
ANIMALE 11% 15% 15%
</TABLE>
MARKETING AND SALES
In the United States, the Company has established its own sales and
marketing staff, and also utilizes independent sales representatives for certain
channels of distribution. The Company sells directly to retailers, primarily
national and regional department stores and specialty stores, which it believes
will maintain the image of its products as prestige fragrances. The Company's
products are sold in over 1,800 retail outlets in the United States.
Additionally, the Company sells products to Perfumania, Inc., a related party,
which is a leading specialty retailer of fragrances with over 250 retail outlets
principally located in manufacturers' outlet malls and regional malls.
Marketing and sales activities outside the United States are conducted
through arrangements with independent distributors. The Company has established
relationships for the marketing of its fragrances with distributors in Canada,
Europe, the Middle East, the Far East, Latin America, the Caribbean and Russia.
The Company advertises 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. The
Company is required to spend certain minimum amounts for advertising under
certain licensing agreements. See "Licensing Agreements" and Note 9 (B) to the
Consolidated Financial Statements.
RAW MATERIALS
Raw materials and components for the Company's products are available
from sources in the United States and Europe. The Company uses third party
contract manufacturers to produce finished products. During the fiscal year
ended March 31, 1998, the Company completed the transition of its contract
manufacturing in France to the United States.
To date, the Company has had little difficulty obtaining raw materials
at competitive prices. The Company has no reason to believe that this situation
will change in the near future, but there can be no assurances that this will
continue.
SEASONALITY
Typical of the fragrance industry, the Company has its highest sales
during the calendar year end holiday season. Lower than projected sales during
this period could have a material adverse affect on the Company's operating
results.
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INDUSTRY PRACTICES
It is an industry practice in the United States for businesses that
market cosmetics and fragrances to department stores to provide the department
stores with rights to return merchandise. The Company's products are subject to
such return rights. It is the Company's practice to establish reserves and
provide allowances for product returns at the time of sale. The Company believes
that such reserves and allowances are adequate based on past experience;
however, no assurances can be made that reserves and allowances will continue to
be adequate. Consequently, if product returns are in excess of the reserves and
allowances made by the Company, sales will be reduced when such fact becomes
known.
CUSTOMERS
The Company concentrates its sales efforts in the United States in
specialty stores, such as Nordstrom's and Neiman Marcus and a number of regional
department store retailers including, among others, Lord & Taylor, Mercantile,
Macy's, Foley's, J.L. Hudson, and Bloomingdales. Retail distribution has been
targeted by brand to maximize potential and minimize overlap between each of
these distribution channels.
Sales to Perfumania, a company in which the Company's Chairman of the
Board and Chief Executive Officer has an ownership interest, amounted to
$21,939,235 for the fiscal year ended March 31, 1998. Net amounts owed by
Perfumania to the Company amounted to $17,973,197 at March 31, 1998. The loss of
Perfumania as a customer could have a material adverse effect on the operations
of the Company.
FOREIGN AND EXPORT SALES
A significant portion of the Company's international sales and exports
had previously been made through its wholly-owned French subsidiary, Parlux S.A.
("S.A.") Net sales to unaffiliated customers by S.A. were $2,128,698,
$12,776,773 and $9,101,611 for fiscal years ended March 31, 1998, 1997, and
1996, respectively. As of March 31, 1998, all of S.A.'s operations have been
transitioned to the Company's South Florida location.
LICENSING AGREEMENTS
PERRY ELLIS: The Company acquired the Perry Ellis license from Sanofi Beaute in
December 1994. The Perry Ellis license is entering its thirteenth year, and is
renewable every two years if the average annual sales in the completed period
exceed 75% of the average sales of the previous four years. All minimum sales
levels have been met, and based on the Company's current sales projections,
management believes that this will continue. The license requires the payment of
royalties, which decline as a percentage of
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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, the Company entered into an Asset Purchase Agreement
with Fred Hayman Beverly Hills, Inc. (FHBH), pursuant to which the Company
purchased 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.
BARYSHNIKOV: The Company assumed the Baryshnikov license as part of the Richard
Barrie Fragrances acquisition, pursuant to which the Company has the exclusive
right to manufacture and distribute fragrances and personal care products using
the Baryshnikov trademark. The license has recently been renewed through March
31, 2001 and is further renewable for a subsequent three-year period upon
achieving specified sales or minimum royalty levels. The license requires the
payment of royalties, and the spending of certain minimum amounts for
advertising based upon the annual net sales of the products.
PHANTOM: In 1998, the Company entered into an exclusive worldwide agreement with
Creative Fragrances, Inc. for the worldwide manufacturing and distribution
rights to PHANTOM covering men's and women's fragrances and beauty related
products. The agreement expires in April 2003. Royalties are payable at 5% of
net sales. There are no minimum sales or advertising requirements.
VICKY TIEL: In September 1992, the Company entered into an exclusive worldwide
license agreement with VICKY TIEL S.A. in which the Company secured the rights
to manufacture and distribute fragrances and beauty care products using the
VICKY TIEL trademark for an initial five-year period, renewable for a subsequent
five-year period upon achieving specified sales or minimum royalty levels.
On August 8, 1997, the Company consummated the sale of certain assets relating
to the VICKY TIEL brands to Five Star Fragrances Company, Inc. ("FSF") for
approximately $680,000, which approximated the net book value of assets sold.
The Company sold to FSF all inventories, fixed assets and licenses related to
the brands, and FSF assumed certain liabilities for purchase orders issued prior
to August 8, 1997.
TODD OLDHAM: In December 1992, the Company entered into an exclusive worldwide
licensing agreement with L-7 Designs, Inc. in which the Company secured the
rights to manufacture and distribute fragrances and beauty care products using
the TODD OLDHAM trademark for an initial contract period ending March 31, 1997,
renewable for subsequent three-year and four-year periods upon achieving
specified sales or minimum royalty levels. The license required the payment of
royalties and the spending of certain minimum amounts for advertising based upon
net sales levels.
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<PAGE>
The initial three-year period expired March 31, 1997, and the Company informed
the Licensor that it would not renew the agreement. In accordance with the
licensing agreement, the Company produced and sold the TODD OLDHAM trademarked
products until March 31, 1998, with no sales or advertising minimums. In
addition, the Company was required to destroy all remaining unsold inventory and
advertising material relating to the trademarked products. Sales of TODD OLDHAM
products represented less than 1% and 2% of total Company net sales for the
fiscal years ended March 31, 1998 and 1997, respectively. The Company incurred a
loss of approximately $3,200,000 as a result of terminating the agreement.
SUMMARY: The Company believes it is presently in compliance with all material
obligations under the above agreements. There can be no assurance the Company
will be able to continue to comply with the terms of these agreements in the
future.
TRADEMARKS
The Company owns the worldwide trademarks and distribution rights to
ANIMALE, BAL A VERSAILLES, DANIEL DE FASSON, DECADENCE and LIMOUSINE fragrances,
and ALEXANDRA de MARKOFF for products other than fragrances and cosmetics.
Accordingly, there are no licensing agreements requiring the payment of
royalties by the Company on these trademarks. Additionally, royalties are
payable to the Company 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. The Company has the rights to license certain
of these trademarks for all classes of merchandise.
PRODUCT LIABILITY
The Company has insurance coverage for product liability in the amount
of $5 million per incident. The Company maintains an additional $5 million of
coverage under an "umbrella" policy. In addition, the Company believes that the
manufacturers of the products sold by the Company also carry product liability
coverage and that the Company effectively is protected thereunder.
There are no pending and, to the best of the Company's knowledge, no
threatened product liability claims. Over the past ten years, the Company has
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. The
Company believes that the quality of its fragrance products, as well as its
ability to develop, distribute and
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market new products, will enable it 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 the Company. There are also companies
which are substantially larger and more diversified, and which have
substantially greater financial and marketing resources than the Company, as
well as greater name recognition, and the ability to develop and market products
similar to, and competitive with, those distributed by the Company.
EMPLOYEES
As of March 31, 1998, the Company had 136 full-time and part-time
employees, which reflects the reduction in staffing requirements resulting from
the licensing of the AdM cosmetic line. Of these, 21 were engaged in worldwide
sales activities, 66 in operations, administrative and finance functions and 49
in warehousing and distribution activities. None of the Company's employees are
covered by a collective bargaining agreement and the Company believes that its
relationship with its employees is satisfactory. The Company also uses the
services of independent contractors in various capacities, including sales
representatives.
During June 1993, the Company 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.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system hardware consists of an IBM
AS 400, coupled with networked personal computer work stations. The Company is
currently upgrading its JD Edwards software to the latest release, which will be
"year 2000" compliant. In addition, the Company is upgrading its hardware to
support the new release and other business applications. Management anticipates
that the upgrades will be completed no later than September 30, 1998, and costs
to complete the project are estimated at $300,000. The Company plans to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner. Nevertheless, if the Company, its customers or vendors are unable to
resolve such processing issues in a timely manner, it could result in a material
financial risk.
Item 2. PROPERTIES
In November 1995, the Company moved its corporate headquarters and
domestic operations from a 38,500 square foot leased facility in Pompano Beach,
Florida to a new 100,000 square foot leased facility in Fort Lauderdale,
Florida. The annual lease cost of the facility is approximately $600,000, with
the lease covering a ten-year period.
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On February 10, 1997, the Company consummated an agreement with
Cosmetic Essence, Inc., one of the Company's third-party fillers, to sublease
the manufacturing and distribution areas (78,000 square feet), and purchase
certain fixed assets, at its 90,000 square foot facility in Orange, Connecticut,
which lease was assumed as part of the Richard Barrie Fragrances, Inc. ("RBF")
acquisition. The Company's aggregate liability, net of the sublease, was
approximately $262,500 during the remaining period of the lease, which was
recorded as part of the Company's restructuring charge during the quarter ended
March 31, 1997. The Company is actively seeking to sublease the remaining 12,000
square feet of office space under this lease, which expires on December 31,
1998.
All of the remaining distribution and warehousing activities previously
performed at the Connecticut facility were consolidated in Fort Lauderdale. In
connection therewith, the Company leased an additional 26,600 square feet of
warehouse space adjacent to its corporate headquarters at an annual cost of
approximately $170,000. The lease was to expire in March 2002. With additional
capacity being provided from the discontinuation of certain brands and licensing
of the AdM brand, the Company vacated the premises in November 1997 and paid
$155,000 to cancel the lease and has no further liability under this lease.
Effective October 1, 1996, the Company entered into an agreement with
Hirel Holdings, Inc. ("Hirel"), a publicly traded company, to sublease the
Company's previous corporate headquarters and distribution center in Pompano
Beach, Florida, for the approximate lease commitment, including escalations.
Hirel encountered financial difficulties and vacated the premises in June 1998.
On June 30, 1998, the Company entered into a new agreement with Panache Party
Rentals to sublease the premises for the remaining lease commitment at the same
rental rates included in the Company's original lease.
The Company's French subsidiary leased approximately 1,500 square feet
under an operating lease which provided for annual rentals equivalent to
approximately $42,000, which was to terminate in 1999. In connection with the
closing of the French operations, the Company vacated the premises and paid
$20,000 to cancel the lease and has no further liability under this lease.
Item 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no proceedings
pending against the Company or any of its properties which, if determined
adversely to the Company, would have a material effect on the Company's
financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any actions for shareholders' approval
during the quarter ended March 31, 1998 and through June 30, 1998.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock, par value $0.01 per share, has been listed
on the National Association of Securities Dealers Automatic Quotation System
("NASDAQ") National Small Cap List market since February 26, 1987 and commenced
trading on the NASDAQ National Market on October 24, 1995. All share references
have been retroactively adjusted to reflect the two-for-one stock split effected
on November 3, 1995.
The Company believes that the number of beneficial owners of its common
stock is approximately 5,000.
The following chart, as reported by the National Association of
Securities Dealers, Inc., shows the high and low bid prices for the Company's
securities available for each quarter of the last two years and the interim
period from April through June 1998. The prices represent quotations by the
dealers without adjustments for retail mark-ups, mark-downs or commissions and
may not represent actual transactions.
Fiscal Quarter Common Stock
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High Low
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First (April/June) 1996 $15.250 $9.000
Second (July/Sept.) 1996 11.250 4.125
Third (Oct./Dec.) 1996 4.563 3.063
Fourth (Jan./Mar.) 1997 4.750 2.313
First (April/June) 1997 3.313 2.938
Second (July/Sept.) 1997 2.938 1.875
Third (Oct./Dec.) 1997 2.313 1.313
Fourth (Jan./Mar.) 1998 2.000 1.500
First (April/June) 1998 2.969 1.750
The Company has not paid a cash dividend on its common stock nor does it
contemplate paying any dividends in the near future.
Item 6. SELECTED FINANCIAL DATA
The following data has been derived from financial statements audited
by PricewaterhouseCoopers LLP, independent certified public accountants.
Consolidated balance sheets at March 31, 1997 and 1998 and the related
consolidated statements of operations and of cash flows for the three years
ended March 31, 1998 and notes thereto appear elsewhere in this Annual Report on
Form 10-K.
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<TABLE>
<CAPTION>
For the Year Ended March 31, (in thousands of dollars, except per share data)
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 62,369 $ 87,640 $ 67,727 $ 38,209 $ 25,366
Costs/operating exp 73,911 84,321 53,539 31,208 23,071
Operating income (loss) (11,542) 3,319 14,188 7,001 2,295
Net income (loss) (1) (8,687) (3,278) 4,972 4,231 1,362
Income (loss) per share (1):
Basic (2) ($ 0.53) ($ 0.22) $ 0.57 $ 0.63 $ 0.24
Diluted (2)(3) $ 0.48 $ 0.54 $ 0.22
</TABLE>
(1) As disclosed in Note 8 to the consolidated financial statements, the net
income and net income per share information for 1997 and 1996 has been
restated to account for the value attributable to the beneficial conversion
feature on certain convertible debentures issued during fiscal 1996 and
1997.
(2) Years 1994-1997 have been restated to reflect the provisions of Statement of
Financial Accounting Standards No. 128.
(3) The calculation of diluted loss per share was not required for fiscal 1998
and 1997 since it would be antidilutive.
<TABLE>
<CAPTION>
At March 31, 1998 1997 1996 1995 1994
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $66,509 $81,205 $67,666 $31,955 $18,514
Current liabilities 30,185 31,885 36,866 27,113 14,679
Working capital 36,324 49,320 30,800 4,842 3,835
Trademarks, licenses and
goodwill, net 25,378 26,784 24,623 11,380 1,342
Long-term debt 4,108 4,949 4,694 5,281 0
Total assets 95,881 111,385 95,239 45,477 20,746
Total liabilities 34,713 37,266 51,641 32,394 14,678
Stockholders' equity 61,168 74,119 43,598 13,083 6,068
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
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 the Company's business and prospects, including
economic, competitive, governmental, technological and other factors discussed
in this annual report and in the Company's filings with the Securities and
Exchange Commission.
Comparison of the twelve-month period ended March 31, 1998 with the
twelve-month period ended March 31, 1997
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During the fiscal year ended March 31, 1998, net sales decreased 29% to
$62,368,523 as compared to $87,640,006 in the same period in the prior year. The
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decrease was primarily due to: 1) a decrease of $12,689,213 (75%) in Perry Ellis
"America" brand fragrance and Perry Ellis brand cosmetics gross sales, which
were initially launched in the prior year. Net sales were further impacted by
$1,933,264 in returns accepted in the current period for these brands; 2) gross
sales of Alexandra de Markoff (AdM) brand cosmetics decreased 40% to $7,813,381,
as compared to $12,951,646 in the prior year, due mainly to out-of-stock
situations relating to the transfer of manufacturing from Revlon (from whom the
Company purchased the AdM brand) to third party manufacturers (effective March
3, 1998, the Company has licensed the AdM brand to an unrelated third party); 3)
gross sales of discontinued brands (Francesco Smalto, Todd Oldham and Vicky
Tiel) decreased $5,030,551 during the period; and 4) a 3% decrease in gross
sales of all brands other than those noted above from $57,525,949 in the prior
year to $55,960,523 in the current year.
Net sales to unrelated customers (which were directly affected by the
out-of-stock situation discussed above) decreased 32% to $40,429,288 in the
current period compared to $59,799,669 in the same period in the prior year,
while sales to related parties decreased 21% to $21,939,235 compared to
$27,840,337 in accordance with the Company's strategic plan to reduce its
dependence on sales to related parties.
Cost of goods sold for the fiscal year ended March 31, increased to 56%
of net sales as compared to 45% of net sales in the same period in the prior
year. The current fiscal year includes approximately $8,195,000 in costs related
to discontinuing certain brands and products, and to the closeout of Todd Oldham
merchandise at below cost. The year ended March 31, 1997 included approximately
$5,243,000 in costs involved with discontinuing certain brands and closing
distribution centers. See Note 2 to the accompanying consolidated financial
statements for further discussion of the restructuring charges. Without the
effect of these restructuring charges in both years, cost of goods sold would
have been 43% and 39%, respectively. The increase in fiscal 1998 was mainly
attributable to the sale of Todd Oldham merchandise at below cost during the
final year of the license agreement. Cost of goods sold for sales to unrelated
customers and related parties approximated 38% and 52%, respectively, during the
fiscal year ended March 31, 1998, as compared to 33% and 51%, respectively in
the prior year, excluding the effect of special charges.
Operating expenses decreased by 14% compared to the prior fiscal year
from $45,138,306 to $38,682,537 but increased as a percentage of sales from 51%
to 62%. Advertising and promotional expenses decreased 26% to $17,887,892
compared to $24,245,502 in the prior year period, reflecting a reduction in
print advertising and promotional expenses for the U.S. department and specialty
store business resulting mainly from Perry Ellis and AdM brand activities. The
prior year period included increased promotional activity related to the launch
of the Perry Ellis "America" brand fragrances. Selling and distribution costs
decreased by 15% to $7,927,418 in the current fiscal period as compared to
$9,381,306 in the same period of the prior fiscal year, but increased as a
percentage of net sales from 11% to 13%. This percentage of sales increase was
mainly attributable to the reduction in sales previously discussed, which
resulted in a lower sales base to absorb these relatively fixed costs, and
approximately $147,000 in
12
<PAGE>
severance costs relating to significant staff reductions in connection with
discontinuing certain brands and products coupled with the licensing of AdM.
General and administrative expenses increased by 13% compared to the prior year
period from $6,468,586 to $7,295,236, increasing as a percentage of net sales
from 7% to 12%. The increase was attributable to approximately $900,000
in bad debts relating to the bankruptcy of two customers, approximately $125,000
of costs in connection with the closing of the Company's French operations, and
approximately $154,000 in severance costs relating to the previously mentioned
staff reductions. Depreciation and amortization increased by $257,751 which was
mainly attributable to a full period amortization of the goodwill from the
Richard Barrie Fragrances, Inc. acquisition which occurred on June 28, 1996.
Royalties increased to $2,684,441 for the current period compared to $2,413,113
in the prior year, and increased as a percent of sales from 3% in the prior year
to 4% in the current year. The increase was due to a higher mix of PERRY ELLIS
brand sales in the current period.
As a result of the above, the Company incurred an operating loss of
$11,542,014 for the fiscal year ended March 31, 1998, compared to operating
income of $3,318,535 for the comparable period in the prior year.
Interest expense decreased by 66% to $2,241,170 in the current fiscal
year as compared to $6,531,419 in the same period in the prior year due to the
non-cash interest charge in the prior year of $4,355,791 to account for the
beneficial conversion feature of convertible debt (See Note 8 to the
consolidated financial statements). Exchange gains were $108,289 in the current
year as compared to a gain of $595,045 in the same period in the prior year.
As a result of the above, the loss before income taxes increased to
$13,674,895 for the current period compared to a loss of $2,617,839 in the same
period in the prior year. The Company recorded a tax benefit of $4,987,972 in
the current fiscal year as compared to a tax expense of $660,081 in the prior
year, which reflects the non-deductible nature of the non-cash interest charge
in fiscal 1997. As a result, the Company reported a net loss of $8,686,923 for
the fiscal year ended March 31, 1998, as compared to a loss of $3,277,920 for
fiscal year ended March 31, 1997.
Comparison of the twelve-month period ended March 31, 1997 with the twelve-month
period ended March 31, 1996
- -------------------------------------------------------------------------------
For the fiscal year ended March 31, 1997 net sales increased 29% to
$87,640,006 as compared to $67,726,926 in the prior fiscal year. This increase
was primarily due to continued growth of Perry Ellis brand products, the full
year effect of Alexandra de Markoff (AdM) brand cosmetics, and Bal a Versailles
(BAV) brand products in fiscal 1997, compared to a partial year of operations in
the prior year, and licensed sales of Baryshnikov brand products acquired in
connection with the RBF acquisition in June 1996. Gross sales of Perry Ellis
increased 64% to $43,807,624 as compared to $26,663,302 in the prior year. Gross
sales of Parlux house brands (brands which the
13
<PAGE>
Company owns) increased 34% to $41,209,043, as compared to $30,759,544 in the
prior year, due to significant increases in AdM and BAV which are included in
this category. AdM and BAV increased to $12,951,646 and $2,137,682,
respectively, as compared to $2,095,035 and $1,542,138, respectively, in the
prior year. Baryshnikov brand product gross sales totaled $2,147,781 in its
initial period of operations by the Company. These increases were partially
offset by a decrease in gross sales of $3,933,695 of Francesco Smalto brand
fragrances, which license was terminated on September 30, 1996.
Net sales to unrelated customers increased by 44% to $59,799,669, while
net sales to related parties increased by 6% to $27,840,337. The percentage of
net sales to related parties in relation to total net sales decreased from 39%
in the prior year to 32% in fiscal 1997. Approximately 85% of total net sales in
the fiscal year ended March 31, 1997 came from operations in, or supplied by,
the United States, and 15% from the Company's French subsidiary.
Cost of goods sold increased as a percentage of net sales from 42% for
the fiscal year ended March 31, 1996 to 45% for the fiscal year ended March 31,
1997, which was mainly attributable to the costs involved in discontinuing
certain brands and closing distribution centers in the last quarter of the
fiscal year. These costs totaled approximately $5,243,000. Without the effects
of the restructuring costs, cost of goods sold in the fiscal year ended March
31, 1997 would have been 39%. Cost of goods sold on sales to unrelated customers
and related parties approximated 33% and 51%, respectively, excluding the effect
of the restructuring costs. All of the Company's products are manufactured by
third parties. For fiscal 1997, approximately 2% of the Company's products were
manufactured in France, and the Company has consolidated its manufacturing,
warehousing and shipping in the United States, to achieve cost reductions
through consolidation.
Operating expenses increased 80% to $45,138,306 for the year ended
March 31, 1997 compared to $25,099,294 in the prior year, and as a percentage of
sales were 51% in fiscal 1997 compared to 37% in the prior year. Management does
not expect this adverse trend to continue as significant expenses were incurred
in fiscal 1997 to promote goodwill with certain of the Company's U.S. department
and specialty store customers. The major portion of the increase was due to
advertising and promotional expenses which increased by 87% to $24,245,502
compared to $12,942,647 in fiscal 1996, reflecting the investments required to
launch new brands, particularly Perry Ellis "America", the full year support
costs for AdM and increased promotional expenses in connection with the U.S.
department and specialty store business. Selling and distribution costs
increased by 84%, and as a percentage of sales increased from 8% in the prior
fiscal year to 11% currently. This was partially due to costs of approximately
$522,000 in connection with terminating warehousing and distribution operations
in Connecticut and France and certain duplicate costs from maintaining two
domestic facilities until March 1997. General and administrative costs increased
by 53% in fiscal 1997 compared to the prior year, and increased as a percentage
of net sales from 6% to 7%. The increases were mainly attributable to the full
year's effect of staff additions during the last quarter of fiscal 1996 and
increased support required for the AdM cosmetic line. Depreciation and
14
<PAGE>
amortization almost doubled in fiscal 1997 compared to the prior year reflecting
a full period amortization of goodwill from the AdM and BAV acquisitions which
occurred in December 1995 an March 1996, respectively. Royalty expense increased
by 61% in fiscal 1997 compared to the prior year, principally due to the
royalties required on the sale of Perry Ellis brand products, and increased to
3% of net sales as compared to 2% in the prior year.
As a result of the above, operating income decreased by 77% to
$3,318,535 or 4% of net sales for the year ended March 31, 1997, compared to
$14,187,843 or 21% of net sales in the prior year.
Interest expense increased by 39% to $6,531,419 for fiscal 1997
compared to $4,685,622 for fiscal 1996 due to increased borrowing levels and an
increase in the non-cash charge to account for the beneficial conversion feature
of convertible debt to $4,355,791 for fiscal 1997 compared to $2,800,210 in the
prior year (See Note 8 to the consolidated financial statements). Excluding the
effect of the non-cash interest charges, interest decreased from 3% of net sales
in the prior year to 2% in the current year. Exchange gains were $595,045 for
fiscal 1997 compared to exchange gains of $234,074 in the prior year, due to the
weakening of the French franc against the U.S. dollar and the Company's net
French franc liability position.
As a result of the above, loss before taxes increased to $2,617,839 in
fiscal 1997 compared to income of $9,736,295 in fiscal 1996. As a result of the
non-cash interest charges discussed above, which are not deductible for income
tax purposes, the Company reported a net loss of $3,277,920 in the fiscal year
ended March 31, 1997, compared to net income of $4,972,481 for the fiscal year
ended March 31, 1996.
Liquidity and Capital Resources
- -------------------------------
Working capital decreased to $36,323,891 at March 31, 1998 from
$49,320,272 at March 31, 1997. The decrease was mainly attributable to the net
loss incurred during the period as a result of the fourth quarter restructuring
charge of approximately $9,224,000, coupled with the purchase of approximately
$4,000,000 in treasury stock as discussed below. In addition, the Company sold
the AdM inventory to the new licensee. Approximately $1,853,000 of the
receivable is classified as long-term as of March 31, 1998.
In January 1998, the Company completed the third phase of its common
stock buy-back program involving 1,000,000 shares, and the Board of Directors
authorized the repurchase of an additional 1,250,000 shares. As of March
31,1998, the Company has repurchased under all phases a total of 2,450,755
shares at a cost of $5,760,777 (2,653,159 shares at a cost of $6,198,288 through
June 30, 1998). The accompanying consolidated balance sheets also include
additional treasury stock transactions prior to fiscal 1996.
15
<PAGE>
In May 1997, the Company entered into a three-year loan and Security
Agreement ( the Credit Agreement ) with General Electric Capital Corporation
(GECC). Under the Credit Agreement, the Company is able to borrow, depending on
the availability of a borrowing base, on a revolving basis, up to $25,000,000 at
an interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street
Journal prime rate, at the Company's option. Proceeds from the Credit Agreement
were used, in part, to repay the Company's previous $10,000,000 credit facility
with Finova Capital Corporation and Merrill Lynch Financial Services, Inc.
GECC has taken a security interest in substantially all of the domestic
assets of the Company. The Credit 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 GECC. The
Credit Agreement also contains certain financial covenants relating to net
worth, interest coverage and other financial ratios. During the fiscal year
ended March 31, 1998, the Company was not in compliance with certain financial
covenants relating to "Earnings Before Interest, Taxes, Depreciation and
Amortization" (EBITDA), minimum tangible net worth and minimum fixed charge
coverage ratio, as well as a restricted payment covenant concerning the amount
of treasury stock which can be purchased by the Company. GECC has agreed to
waive this noncompliance through June 30, 1998, and has amended the Credit
Agreement to reflect changes in certain covenants going forward.
The Company had overdraft and trade financing facilities aggregating
18,150,000 French francs (approximately $3,220,000 as of March 31, 1997), which
were fully utilized at March 31, 1997. These credit facilities were repaid
during fiscal 1998.
The Company incurred a loss of approximately $8,686,923 during the
fiscal year ended March 31, 1998. As indicated above, the Company, as part of
its Credit Agreement, is subject to certain financial covenants among others,
regarding EBITDA and tangible net worth, as defined. If the Company is not able
to return to profitability and be able to meet the newly revised covenants, the
Credit Agreement may become payable on demand, and if unable to secure
alternative financing, the Company's operations and possibly the realization of
certain of its assets may be impaired. Management believes that, based on
current circumstances and the recent restructuring activities which will reduce
future overhead, the Company will be able to meet the revised covenants and
funds from operations, the income tax refund and the Credit Agreement will be
sufficient to fund the Company's operating needs.
New Accounting Pronouncements
- -----------------------------
During June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") and Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131") effective for fiscal years beginning after
December 1997.
16
<PAGE>
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Management does not expect SFAS No.
130 and 131 to have a significant impact on the Company's reporting and
disclosure requirements in fiscal 1999.
Impact of Currency Exchange and Inflation
- -----------------------------------------
The Company's business operations were positively affected in the
amount of $108,289, $595,045 and $234,074 in the fiscal years ended March 31,
1998, 1997 and 1996, respectively, due to the movement of the French franc vs.
the U.S. dollar.
Prior to March 31, 1998, the Company's sales and purchases were
virtually all in U.S. dollars or French francs. A weakening of the French franc
vis-a-vis the U.S. dollar resulted in exchange rate gains for the Company.
Conversely, a strengthening of the French franc vis-a-vis the U.S. dollar
resulted in exchange rate losses for the Company.
The Company monitors exchange rates on a daily basis and regularly
seeks to evaluate long-term expectations for the French franc in order to
minimize its exchange rate risk.
The Company has completed the centralization of manufacturing in the
United States and closed its French operations which will minimize the currency
exchange impact in the future.
Item 8. FINANCIAL STATEMENTS
The financial statements are included herein commencing on page F-1.
The financial statement schedules are 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 the Company's 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.
17
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the Company's 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 the Company's 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the Company's 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:
4.24 Amendment No. 1 dated July 9, 1998 to Credit Agreement, dated May 23,
1997, between the Company and General Electric Capital Corporation.
10.46 Licensing Agreement dated as of March 3, 1998 between the Company and
Cosmetic Essence, Inc.
10.47 Licensing Agreement dated as of June 9, 1998 between the Company and
Genesis International Marketing Corporation.
18
<PAGE>
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule ( for SEC use only )
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended
March 31, 1998.
19
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
FORM 10-K SCHEDULES:
Schedule VIII - Valuation and Qualifying Accounts F-26
Schedule IX - Short-term Bank Borrowings F-27
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
<PAGE>
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 index
referred to under Item 14(a)(1) and (2) on page 18 and appearing on page F-1
present fairly, in all material respects, the financial position of Parlux
Fragrances, Inc. and its subsidiaries at March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Miami, Florida
July 20, 1998
F-2
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
ASSETS 1998 1997
- --------------------------------------------------------- ----------------- ---------------------
(As Restated, Note 8)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $205,760 $191,486
Receivables, net of allowance for
doubtful accounts, sales returns and
allowances of approximately $2,170,000 and $2,494,000
in 1998, and 1997, respectively 9,403,548 14,289,841
Trade receivables from related parties 17,973,197 22,862,335
Inventories, net 24,629,669 35,595,323
Prepaid expenses and other current assets 9,949,959 8,266,126
Income tax receivable 4,347,134 -
------------ -------------
TOTAL CURRENT ASSETS 66,509,267 81,205,111
Equipment and leasehold improvements, net 2,020,741 3,253,800
Trademarks, licenses and goodwill, net 25,378,263 26,783,807
Other 1,972,794 142,526
------------ -------------
TOTAL ASSETS $95,881,065 $111,385,244
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
CURRENT LIABILITIES:
Borrowings, current portion $17,853,772 $12,665,065
Accounts payable 9,674,407 11,904,808
Accrued expenses 2,033,090 1,622,966
Income taxes payable 624,107 5,692,000
------------ -------------
TOTAL CURRENT LIABILITIES 30,185,376 31,884,839
Borrowings, less current portion 4,107,618 4,949,230
Deferred tax liability 419,632 432,440
------------ -------------
TOTAL LIABILITIES 34,712,626 37,266,509
------------ -------------
COMMITMENTS AND CONTINGENCIES - -
------------ -------------
STOCKHOLDERS' EQUITY :
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 0 issued and outstanding
Common stock, $0.01 par value, 30,000,000
shares authorized, 17,447,478 shares issued 174,475 174,475
Additional paid-in capital 73,007,949 73,007,949
Retained earnings (accumulated deficit) (5,764,404) 2,922,519
Cumulative translation adjustment (355,331) (103,562)
------------ -------------
67,062,689 76,001,381
Less - 2,489,755 and 420,055 shares of common stock in treasury,
at cost, in 1998 and 1997, respectively (5,894,250) (1,882,646)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 61,168,439 74,118,735
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,881,065 $111,385,244
============ =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(As Restated, Note 8)
Net sales:
<S> <C> <C> <C>
Unrelated customers $40,429,288 $59,799,669 $41,539,466
Related parties 21,939,235 27,840,337 26,187,460
-------------------------------------------
62,368,523 87,640,006 67,726,926
Cost of goods sold 35,228,000 39,183,165 28,439,789
-------------------------------------------
Gross margin 27,140,523 48,456,841 39,287,137
-------------------------------------------
Operating expenses:
Advertising and promotional 17,887,892 24,245,502 12,942,647
Selling and distribution 7,927,418 9,381,306 5,101,897
General and administrative 7,295,236 6,468,586 4,228,257
Depreciation and amortization 2,887,550 2,629,799 1,324,361
Royalties 2,684,441 2,413,113 1,502,132
-------------------------------------------
Total operating expenses 38,682,537 45,138,306 25,099,294
-------------------------------------------
Operating income (loss) (11,542,014) 3,318,535 14,187,843
Interest expense and bank charges 2,241,170 6,531,419 4,685,622
Exchange gains (108,289) (595,045) (234,074)
-------------------------------------------
Income (loss) before income taxes (13,674,895) (2,617,839) 9,736,295
Income tax provision (benefit) (4,987,972) 660,081 4,763,814
-------------------------------------------
Net income (loss) ($8,686,923) ($3,277,920) $4,972,481
-------------------------------------------
Earnings (loss) per common share:
Basic ($0.53) ($0.22) $0.57
-------------------------------------------
Diluted ($0.53) ($0.22) $0.48
-------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(As Restated, Note 8)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------- ADDITIONAL EARNINGS
NUUMBER PAR PAID-IN (ACCUMULATED
ISSUED VALUE CAPITAL DEFICIT)
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE at April 1, 1995 3,490,214 $34,902 $11,563,537 $1,271,947
Net income - - - 4,972,481
Issuance of common stock upon exercise of:
Employee stock options 11,175 112 33,910 -
Warrants 1,056,916 10,569 3,006,022 -
Sale of stock in private placements 1,001,514 10,015 7,605,570 -
Stock issued in connection with the acquisition of assets 424,000 4,240 3,739,760 -
Conversion of debentures, net of unamortized debt -
issuance costs 1,073,688 10,737 6,932,408
Beneficial conversion feature of debentures 4,303,320
Adjustment for stock split 4,398,919 43,989 - (43,989)
Foreign currency translation adjustment - - - -
------------- -------------- ------------- -------------
BALANCE at March 31, 1996 (As Restated, Note 8) 11,456,426 114,564 37,184,527 6,200,439
Net loss - - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options 14,500 145 18,448 -
Options 176,000 1,760 1,406,240 -
Warrants 60,000 600 415,650 -
Stock issued in connection with the acquisition of assets 370,000 3,700 3,002,550 -
Conversion of debentures, net of unamortized debt
issuance costs 5,370,552 53,706 29,029,501 -
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
Foreign currency translation adjustment - - - -
Purchase of 381,055 shares of treasury stock, at cost - - - -
------------- -------------- ------------- -------------
BALANCE at March 31, 1997 (As Restated, Note 8) 17,447,478 174,475 73,007,949 2,922,519
Net loss - - - (8,686,923)
Foreign currency translation adjustment
Purchase of 2,069,700 shares of treasury stock, at cost
============= ============== ============= =============
Balance at March 31, 1998 17,447,478 $174,475 $73,007,949 ($5,764,404)
============= ============== ============= =============
(re-stubbed table)
CUMULATIVE
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
------------- -------------- -------------
<S> <C> <C> <C>
BALANCE at April 1, 1995 $345,753 ($133,472) $13,082,667
Net income - - 4,972,481
Issuance of common stock upon exercise of:
Employee stock options - - 34,022
Warrants - - 3,016,591
Sale of stock in private placements - - 7,615,585
Stock issued in connection with the acquisition of assets - - 3,744,000
Conversion of debentures, net of unamortized debt - -
issuance costs 6,943,145
Beneficial conversion feature of debentures 4,303,320
Adjustment for stock split - - -
Foreign currency translation adjustment (163,506) - (163,506)
------------- ------------- --------------
BALANCE at March 31, 1996 (As Restated, Note 8) 182,247 (133,472) 43,548,305
Net loss - - (3,277,920)
Issuance of common stock upon exercise of:
Employee stock options - - 18,593
Options - - 1,408,000
Warrants - - 416,250
Stock issued in connection with the acquisition of assets - - 3,006,250
Conversion of debentures, net of unamortized debt
issuance costs - - 29,083,207
Beneficial conversion feature of debentures 2,852,681
Reversal of beneficial conversion feature attributable
to redeemed debentures (901,648)
Foreign currency translation adjustment (285,809) - (285,809)
Purchase of 381,055 shares of treasury stock, at cost - (1,749,174) (1,749,174)
------------- ------------- --------------
BALANCE at March 31, 1997 (As Restated, Note 8) (103,562) (1,882,646) 74,118,735
Net loss - - (8,686,923)
Foreign currency translation adjustment (251,769) (251,769)
Purchase of 2,069,700 shares of treasury stock, at cost (4,011,604) (4,011,604)
============= ============= ==============
Balance at March 31, 1998 ($355,331) ($5,894,250) $61,168,439
============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(As Restated, Note 8)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ($8,686,923) ($3,277,920) $4,972,481
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,898,227 2,784,790 1,563,673
Loss on disposal of equipment 8,707 137,971 -
Net deferred tax benefit (12,808) (1,103,817) (4,184)
Beneficial conversion feature of debentures - 3,454,143 2,800,210
Changes in assets and liabilities net of effect of acquisitions:
Decrease (increase) in trade receivables - customers 4,886,293 (4,107,535) (7,900,097)
Decrease (increase) in trade receivables - related parties 4,889,138 (9,379,912) (8,588,713)
Decrease (increase) in inventories 6,700,220 1,451,721 (15,371,203)
Decrease (increase) in prepaid expenses and other current assets 105,087 954,549 (1,032,135)
Increase in income taxes receivable (4,347,134) - -
Decrease (increase) in other non-current assets 22,931 296,061 (376,504)
(Decrease) increase in accounts payable (2,230,401) (7,989,864) 11,401,204
(Decrease) increase in accrued expenses and income taxes payable (4,657,769) 1,296,895 2,726,637
(Decrease) increase in advances from customers - - (2,451,059)
------------ ------------ ------------
Total adjustments 8,262,491 (12,204,998) (17,232,171)
------------ ------------ ------------
Net cash used in operating activities (424,432) (15,482,918) (12,259,690)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (473,655) (1,579,912) (1,168,386)
Purchases of trademarks (76,489) (19,309) (82,122)
Cash received from brand licensing/sales:
Alexandra de Markoff 202,000
Vicky Tiel 680,553
Cash paid in acquisitions:
Alexandra de Markoff - - (8,608,000)
Richard Barrie Fragrances, Inc. - (694,707) -
Bal a Versailles - - (1,697,500)
------------ ------------ ------------
Net cash provided by (used in) investing activities 332,409 (2,293,928) (11,556,008)
------------ ------------ ------------
Cash flows from financing activities:
(Payments) proceeds - S.A. overdraft facilities (1,128,946) (646,368) 145,450
(Payments) proceeds - S.A. financing facilities (1,981,820) 1,188,890 579,731
(Payments) proceeds - notes payable Distr. de Perfumes Senderos 0 (674,722) 674,722
(Payments) proceeds - notes payable related parties (400,000) 300,000
Proceeds - note payable to GE Capital Corp. 16,818,951
(Payments) proceeds - revolving credit facility with Finova Capital Corp. (7,878,091) 3,989,713 (127,352)
Payments to National Bank of Kuwait - - (560,000)
(Payments) proceeds from Eagle Bank - (482,392) 401,378
Payments to Sanofi Beaute, Inc. - - (5,501,535)
Payments to Fred Hayman Beverly Hills (514,873) (478,510) (202,480)
(Payments) proceeds - International Finance Bank (567,653) 753,125 -
Payments - Parfums Jean Desprez (2,553,360) -
(Payments) proceeds - Lyon Credit Corporation (320,869) 984,858 -
Payments - note payable to stockholder (148,545) -
(Payments) proceeds - other notes payable (79,604) 122,450 -
Proceeds - 7% debentures, net - - 3,666,000
Proceeds - 5% debentures, net 16,451,774 14,614,500
Purchases of treasury stock (4,011,604) (1,749,174) -
Proceeds from issuance of common stock, net 1,489,520 9,771,094
------------ ------------ ------------
Net cash provided by financing activities 335,491 17,847,259 23,761,508
------------ ------------ ------------
Effect of exchange rate changes on cash (229,194) (218,350) 91,500
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 14,274 (147,937) 37,310
Cash and cash equivalents, beginning of year 191,486 339,423 302,113
------------ ------------ ------------
Cash and cash equivalents, end of year $205,760 $191,486 $339,423
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PARLUX FRAGRANCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
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, cosmetics and beauty
related products, on a worldwide basis.
B. Principles of consolidation
The consolidated financial statements include the accounts of Parlux Fragrances,
Inc., Parlux S.A., a wholly-owned French subsidiary ( 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 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 Company's reserve for doubtful
accounts, sales returns and allowances, inventory obsolescence and periods of
amortization for trademarks, licenses and goodwill. 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.
E. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The cost of inventories includes product costs and handling charges,
including the allocation of the Company's applicable overhead in an amount of
$3,409,000 and $4,300,000 at March 31, 1998 and 1997, respectively.
F. 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 defers the gross margin on
barter sales until the advertising is used.
The estimated value of the advertising is recorded as a prepaid expense on the
Company's balance sheet at the time such inventory is sold, net of unearned
income equal to the amount of advertising credits minus the related cost of
goods sold. As advertising credits are used by the Company, advertising and
promotional expense is charged for the advertising credits used, unearned income
is debited and cost of
F-7
<PAGE>
goods sold is credited. As a result, as the advertising credits are used,
aggregate cost of goods sold as a percentage of net sales decreases and gross
margin as a percentage of net sales increases.
G. 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.
H. Trademarks, licenses and goodwill
Trademarks, licenses and goodwill are recorded at cost and amortized over the
estimated periods of benefit, principally 25 years. Accumulated amortization at
March 31, 1998 of trademarks, licenses and goodwill was $3,827,407 ($2,360,373
at March 31, 1997).
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of" (SFAS 121), which requires a review of the
carrying value of intangibles whenever events or changes in circumstances
indicate that the carrying value amount of the asset may not be recoverable. Any
such determination would require a charge to income for the estimated reduction
in carrying value.
I. Advertising costs
Advertising and promotional expenditures are charged to operations as incurred.
These expenditures include print and media advertising, as well as in-store
cooperative advertising and promotions.
J. 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.
K. Foreign currency translation
The assets and liabilities of S.A. are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at weighted average
rates of exchange prevailing during the year. Translation adjustments are
accumulated as a separate component of stockholders' equity.
Both realized and unrealized gains and losses arising from foreign currency
transactions are recorded in the statement of income.
During 1998, the Company closed its operations in France which will minimize the
currency exchange impact in the future.
L. Fair value of financial instruments
The Company's financial instruments consist primarily of instruments whose fair
value approximates their carrying value.
F-8
<PAGE>
M. Basic and diluted earnings per share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS128). SFAS 128 replaces primary and fully diluted EPS with basic and
diluted EPS. Basic EPS no longer reflects dilution from common stock equivalents
and diluted EPS utilizes the average market price of the Company's common stock
during the period as compared to the higher of the average price or period end
price. The Company adopted the provisions of SFAS 128 for the year ended March
31, 1998, and has restated all prior periods presented as required under the
statement.
On October 26, 1995, the Company announced a two-for-one stock split effected in
the form of a dividend to shareholders of record as of November 3, 1995 (the
stock split). All references to share and per share data within the financial
statements and notes thereto have been retroactively adjusted to reflect the
stock split.
N. Stock based compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, Accounting For Stock Based
Compensation (SFAS123). SFAS 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 adopted the provisions of SFAS 123 for the
year ended March 31, 1997. Upon adoption, the Company retained the intrinsic
value method of accounting for stock based compensation, which it previously
used. Had the fair value based provisions of SFAS 123 been adopted, the effect
would be insignificant for fiscal 1998, 1997 and 1996 as the number of options
or warrants granted were not significant. Accordingly, no proforma disclosures
have been presented.
In calculating the potential effect for proforma presentation, the fair market
value on the date of grant was calculated using the Black-Scholes option-pricing
model with the following weighted average assumptions.
1998 1997 1996
---- ---- ----
Expected life (years) 3 4 4
Interest rate 6% 6% 6%
Volatility 71% 74% 74%
Dividend Yield 0 0 0
O. 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 follow:
1998 1997 1996
---- ---- ----
Cash paid for:
Interest $2,263,000 $2,210,000 $1,940,000
========== ========== ==========
Income taxes $4,641,000 $ 840,000 $1,390,000
========== ========== ==========
F-9
<PAGE>
In addition to the barter transactions discussed in Note 9 (D), the following
non-cash transactions were entered into:
Year ended March 31, 1998:
The consideration received for the sale of inventory relating to the
licensing of the ALEXANDRA DE MARKOFF brand included a non-interest bearing
receivable from the licensee in the amount of $4,000,000, which has
been recorded at its present value of $3,659,753.
Year ended March 31, 1997:
Notes payable and accrued interest in the amount of $300,000 and $53,323,
respectively, were repaid from the proceeds of the issuance of common stock
in connection with the exercise of certain warrants.
Acquisition of Richard Barrie Fragrances, Inc. was partially funded
through the issuance of common stock, as discussed in Note 6.
Year ended March 31, 1996:
Acquisition of the Alexandra de Markoff cosmetic line and the Bal A
Versailles fragrance lines were partially funded through the issuance of
common stock and notes payable, respectively, as discussed in Note 6.
Notes payable and accrued interest in the amount of $792,603 and $178,750,
respectively, were repaid through the issuance of common stock in
connection with the exercise of certain warrants and options.
P. Reclassifications
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform to the 1998 presentation.
2. CORPORATE RESTRUCTURINGS
In March of 1998, with the agreement to license the fragrance and cosmetics
rights for the AdM brand, and the further intent to license the fragrance rights
for BAL A VERSAILLES, which agreement was executed in June 1998, the Company
announced that it would discontinue certain marginal brands and products to
complete its reconfiguration process to concentrate on its core fragrance
business. As of March 31, 1998, the Company has completed personnel layoffs
relating to the restructuring as well as certain brand and product
discontinuations and estimates that the remaining brand and product
discontinuations will be completed within one year. The costs relating to this
restructuring of approximately $9,224,000 have been recorded in the current
quarter ended March 31, 1998, increasing cost of goods sold, advertising and
promotional expenses, selling and distribution expenses and general and
administrative expenses by approximately $8,195,000, $844,000, $75,000 and
$110,000, respectively. At March 31, 1998, approximately $3,671,000 and $185,000
of restructuring charges remained in the reserve for potential inventory
obsolescence and accrued expenses, respectively.
In November of 1996, the Company engaged investment bankers to explore a
potential sale or merger of the Company, or other alternatives which would lead
to the maximization of shareholder value. In March of 1997, the Company
announced that such exploration had not resulted in alternatives which should be
pursued. Accordingly, the Company announced that it would independently
restructure the Company by terminating warehousing and distribution operations
in Connecticut and France, discontinuing certain brands, and
F-10
<PAGE>
consolidating operations in South Florida. Costs related to this restructuring
of approximately $5,765,000 were recorded in the quarter ended March 31, 1997,
increasing costs of goods sold and selling and distribution expenses by
approximately $5,243,000 and $522,000, respectively. As of March 31, 1997, the
Company had completed the restructuring of warehousing and distribution
operations and approximately $1,633,000 and $262,000 of restructuring charges
remained in the reserve for inventory obsolescence and accrued expenses,
respectively. As of March 31, 1998, the restructuring has been completed and no
further liabilities or reserves, relating to the restructuring, are included in
the accompanying balance sheet at March 31, 1998.
3. INVENTORIES
The components of inventories are as follows:
March 31,
---------
1998 1997
---- ----
Finished products $13,509,636 $16,075,376
Components and packaging material 8,386,879 14,944,196
Raw material 2,733,154 4,575,751
----------- -----------
$24,629,669 $35,595,323
=========== ===========
The above amounts are net of reserves for potential inventory obsolescence of
$4,671,000 and $2,833,000 at March 31, 1998 and 1997, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows:
March 31,
---------
1998 1997
----- ----
Promotional supplies $4,314,398 $4,313,083
Deferred tax assets 2,370,218 2,168,945
Account receivable-current portion Adm 1,806,554 ---
Prepaid advertising 684,667 534,686
Advertising barter credits, net 233,296 723,263
Other 540,826 526,149
---------- ----------
$9,949,959 $8,266,126
========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
<TABLE>
<CAPTION>
March 31, Estimated useful
--------- ----------------
1998 1997 lives (in years)
---- ---- ----------------
<S> <C> <C> <C>
Molds and equipment $4,975,903 $6,113,025 3-7
Furniture and fixtures 1,024,408 966,149 3-5
Leasehold improvements 569,960 460,411 5-7
Vehicles - 5,617 3
----------- ----------- -----
6,570,271 7,545,202
Less: accumulated depreciation and amortization (4,549,530) (4,291,402)
----------- -----------
$2,020,741 $3,253,800
=========== ===========
</TABLE>
F-11
<PAGE>
Depreciation and amortization expense on equipment and leasehold improvements
for the years ended March 31, 1998, 1997 and 1996 was $1,421,599, $1,407,916,
and $1,007,522, respectively.
6. TRADEMARKS, LICENSES AND GOODWILL
Trademarks, licenses and goodwill are attributable to the following brands:
<TABLE>
<CAPTION>
March 31,
---------
1998 1997
---- ----
Owned Brands:
<S> <C> <C>
Alexandra de Markoff $11,179,839 $11,187,059
Fred Hayman Beverly Hills 2,747,434 2,729,382
Bal A Versailles 3,227,406 3,219,492
Animale 1,431,332 1,420,225
Other 209,078 201,685
Licensed Brands:
Perry Ellis 7,940,340 7,916,096
Barishnikov 2,470,241 2,470,241
--------- ---------
29,205,670 29,144,180
Less: accumulated amortization (3,827,407) (2,360,373)
------------ ------------
$25,378,263 $26,783,807
============ ============
</TABLE>
On June 28, 1996, the Company consummated the acquisition of substantially all
of the assets and assumption of certain liabilities of Richard Barrie
Fragrances, Inc. (RBF), pursuant to an asset purchase agreement entered into on
January 31, 1996.
Parlux acquired from RBF certain inventories, fixed assets and licenses relating
to the brands Baryshnikov and Melrose Place, as well as fixed assets located in
RBF's office and distribution center in Orange, Connecticut.
Parlux provided as consideration $750,000 in cash which was paid on July 1,
1996, and 370,000 shares of common stock. The common stock was valued at
$3,006,250, the average price of the shares on January 30, 1996, the date of the
original asset purchase agreement, which in management's opinion, better
reflected the acquisition price, since the average price of the common stock at
the date of closing was affected by matters unrelated to the acquisition or the
regular operations of the Company.
The estimated fair value of the net assets acquired is summarized as follows:
Molds and other fixed assets $ 893,856
Inventories, net 1,784,474
Other assets 141,518
Goodwill and licenses 2,417,957
Accounts payable and other liabilities (1,481,555)
-----------
Fair value of net assets acquired $3,756,250
===========
On March 19, 1996, the Company consummated the acquisition of the trademarks and
certain inventory for the Bal A Versailles (BAV) fragrance and beauty products
brand name from Parfums Jean Desprez, S.A., pursuant to a letter of intent
entered into on January 11, 1996.
F-12
<PAGE>
At closing, the Company provided as consideration $1,697,500 in cash and
$2,553,360 in the form of non-interest bearing promissory notes due in varying
installments through August 1996.
The estimated fair value of the assets acquired is summarized as follows:
Goodwill, licenses and trademarks $2,872,500
Inventories 878,360
Covenant-not-to-compete 300,000
Molds and other fixed assets 200,000
----------
Fair value of assets acquired $4,250,860
==========
On June 9, 1998, the Company entered into an exclusive agreement to license the
BAV rights to Genesis International Marketing Corporation 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, automatically renewable every five years. As part of the agreement, the
Company sold the inventory, promotional materials and molds relating to BAV for
its approximate book value.
On December 27, 1995, the Company consummated the acquisition of substantially
all of the assets of Alexandra de Markoff (AdM), a prestige cosmetic line,
pursuant to an asset purchase agreement entered into on September 21, 1995
between the Company and Revlon Holdings, Inc. (Revlon).
Parlux acquired from Revlon certain inventories and fixed assets and the rights
in certain trademarks relating to AdM. Parlux provided as consideration
$8,608,000 in cash, 424,000 shares of common stock valued at $3,392,000 and
agreed to accept returns and allowances in excess of $100,000 related to sales
of AdM products by Revlon prior to December 27, 1995. In addition, the Company
granted Revlon an option to purchase 176,000 shares of the Company's common
stock, until June 30, 1996, at an exercise price of $8.00 per share;
management's estimate of the value of these options was $352,000 using the
Black-Scholes method.
The estimated fair value of the net assets acquired is summarized as follows:
Goodwill, licenses and trademarks $11,117,000
Advance for future inventory purchases 4,000,000
Molds and other fixed assets 85,000
Reserve for sales returns and allowances (2,850,000)
-----------
Fair value of net assets acquired $12,352,000
===========
On March 2, 1998, the Company entered into an exclusive agreement to license the
AdM rights to Cosmetic Essence, Inc. 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.
As part of the Agreement, the Company sold the inventory, promotional material
and molds relating to AdM which resulted in a loss of approximately $923,000
which is reflected in the accompanying consolidated statement of operations for
the year ended March 31, 1998. At closing, the purchaser provided as
consideration, $202,000 in cash and a $4,000,000 non-interest bearing receivable
due in periodic installments based on the purchaser's use of the inventory, with
any remaining balance due on January 1, 2000. In accordance with generally
accepted accounting principles and based on the Company's current borrowing cost
of 9.25%, the note was reduced to a present value of $3,659,753, of which
$1,806,554 and $1,853,199 are included in other current assets and other assets,
respectively, in the accompanying March 31, 1998 consolidated balance sheet.
F-13
<PAGE>
7. BORROWINGS
<TABLE>
<CAPTION>
The composition of debt is as follows: March 31, March 31, 1997
---------- --------------
1998 1997
<S> <C> <C>
Revolving credit facility payable to General Electric Capital Corporation,
interest at LIBOR plus 2.50% or prime (8.50% at March 31, 1998) plus .75%, at
the Company's option, net of restricted cash of $1,209,955. $16,818,951 ---
Note payable to FHBH, secured by the acquired licensed trademarks, interest at
7.25%, payable in equal monthly installments of $69,863, including interest,
through June 2004 4,179,826 $4,694,699
Revolving credit facility payable to Finova Capital Corporation, interest at
Citibank N.A. prime rate (8.25% at March 31, 1997) plus 1 3/4%, repaid in May
1997, net of restricted cash of $884,464 ---- 7,878,090
Note payable to Lyon Credit Corporation, secured by certain equipment, interest
at 11%, payable in equal monthly installments through September 2001. 663,989 984,858
Unsecured $1,000,000 line of credit payable to International Finance Bank,
interest at the bank's prime rate plus 2%, due May 1, 1998. 185,472 753,125
Overdraft facilities, interest from 10.25% to 10.75%, repaid in March 1998(1) --- 1,128,946
Receivable financing facilities, interest at 9.25% to 10.25%, repaid in
March 1998 (1) --- 1,981,820
Other notes payable 113,152 192,757
----------- ------------
21,961,389 17,614,295
Less: long-term borrowings (4,107,618) (4,949,230)
------------ -----------
Short-term borrowings $17,853,771 $12,665,065
=========== ===========
</TABLE>
(1) Denominated in French francs.
In May 1997, the Company entered into a Loan and Security Agreement ( the Credit
Agreement ) with General Electric Capital Corporation (GECC), pursuant to which
the Company is able to borrow, depending on the availability of a borrowing
base, on a revolving basis for a three-year period, up to $25,000,000 at an
interest rate of LIBOR plus 2.50% or .75% in excess of the Wall Street Journal
prime rate, at the Company's option. Proceeds from the Credit Agreement were
used, in part, to repay the Company's previous $10,000,000 credit facility with
Finova Capital Corporation and Merrill Lynch Financial Services, Inc. At March
31, 1998, based on the borrowing base at that date, the credit line amounted to
approximately $19,500,000.
F-14
<PAGE>
GECC has taken a security interest in substantially all of the domestic assets
of the Company. The Credit 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 GECC. The Credit
Agreement also contains certain financial covenants relating to net worth,
interest coverage and other financial ratios. During the fiscal year ended March
31, 1998, the Company was not in compliance with certain financial covenants
relating to EBITDA, minimum tangible net worth and minimum fixed charge coverage
ratio, as well as a restricted payment covenant concerning the amount of
treasury stock which can be purchased by the Company. GECC has agreed to waive
this noncompliance through June 30, 1998, and has amended the Credit Agreement
to reflect changes in certain covenants going forward.
The Company incurred a loss of approximately $8,687,000 during the fiscal year
ended March 31, 1998. As indicated above, the Company, as part of its Credit
Agreement, is subject to certain financial covenants among others, regarding
EBITDA and tangible net worth, as defined. If the Company is not able to return
to profitability and be able to meet the newly revised covenants, the Credit
Agreement may become payable on demand, and if unable to secure alternative
financing, the Company's operations and possibly the realization of certain of
its assets may be impaired. Management believes that, based on current
circumstances and the recent restructuring activities which will reduce future
overhead, the Company will be able to meet the revised covenants and funds from
operations, the income tax refund and the Credit Agreement will be sufficient to
fund the Company's operating needs.
The Company had overdraft and trade financing facilities aggregating 18,150,000
French francs (approximately $3,220,000 as of March 31, 1997), which were fully
utilized at March 31, 1997. These credit facilities were repaid during fiscal
1998.
Future maturities of borrowings are as follows (in 000's):
For the year ending March 31,
-----------------------------
1999 $17,854
2000 823
2001 855
2002 785
2003 743
Thereafter 901
-------
Total $21,961
=======
8. CONVERTIBLE DEBENTURES
During the period November 2, 1995 through March 31, 1996, the Company issued
$3,700,000 of 7% convertible debentures and $15,000,000 of 5% convertible
debentures (the Debentures), pursuant to Regulation S. The Debentures were
convertible into shares of the Company's common stock at 85% of the closing
price of the stock as listed on NASDAQ over specific time frames. As of March
31, 1996, $7,000,000 of the Debentures, plus accrued interest of $48,146, had
been converted into 1,073,688 shares of common stock. Subsequent to March 31,
1996, the remaining $11,700,000 have been converted into 1,348,058 shares of
common stock.
During April and May 1996, the Company issued an additional $13,000,000 of 5%
convertible debentures, $3,000,000 pursuant to Regulation S and $10,000,000
pursuant to Regulation D with the same conversion features and terms as those
issued above, of which $9,355,324, plus accrued interest of $130,916, have been
converted into 1,868,272 shares of common stock.
F-15
<PAGE>
On July 2, 1996, the Company issued an additional $10,000,000 of 5% Debentures,
in private placements pursuant to Regulation D, with the same conversion
features and terms as those issued above, except that the conversion rate was
86%. During October 1996, $8,412,236 of the debentures, plus accrued interest of
$72,466, were converted into 2,154,222 shares of common stock.
During October 1996, the Company entered into agreements to redeem $5,232,440 of
the May and July Debentures which had not been converted, plus $105,638 of
accrued interest thereon, by issuing $6,239,726 of 10% bonds which were repaid
in accordance with their terms in December 1996.
In a 1997 announcement discussed in Topic No. D-60 by the Emerging Issues Task
Force, the staff of the Securities and Exchange Commission ("S.E.C.") indicated
that when debt is convertible at a discount from the then current common stock
market price, the discounted amount reflects at that time an incremental yield,
e.g. a "beneficial conversion feature" which should be recognized as a return to
the debt holders from the date the debt is issued to the date it first becomes
convertible. Based on the market price of the Company's common stock on the date
of issuance of the convertible debt, the convertible debentures issued by the
Company during the period November 1995 through July 1996 had a beneficial
conversion feature of $7,156,001. Although management believes that the Company
followed generally accepted accounting principles in existence at the time of
the issuances, it has complied with the SEC announcement, restating its net
income and per share information for the year ended March 31, 1997 ("fiscal
1997") and fiscal 1996, to reflect such accounting treatment for this non-cash
charge, which has been recorded as additional interest expense in the
accompanying restated consolidated financial statements. In addition, the
October 1996 redemption of certain debentures no longer results in a loss of
$901,648 previously reported as an extraordinary item during the year ended
March 31, 1997, since the price paid in excess of the carrying value of the
debentures was charged to additional paid-in capital to offset the beneficial
conversion feature originally recorded at the date of issuance. The effect of
the restatement was to decrease net income for fiscal 1997 by $3,454,143,
resulting in a net loss of ($3,277,920), and to decrease net income for fiscal
1996 by $2,800,210, resulting in net income of $4,972,481.
9. COMMITMENTS AND CONTINGENCIES
A. Leases:
The Company leases its office space and certain equipment under operating leases
expiring on various dates through October 31, 2005. Total rent expense charged
to operations for the years ended March 31, 1998, 1997 and 1996 was
approximately $853,687, $1,451,000 and $916,000, respectively.
At March 31, 1998, the minimum annual rental commitments are as follows (in
000's ):
For the year ending March 31,
-----------------------------
1999 $758
2000 731
2001 634
2002 585
2003 495
Thereafter 1, 556
------
Total $4,759
======
F-16
<PAGE>
B. License and Distribution Agreements:
During the year ended March 31, 1998, the Company held the following exclusive
worldwide licenses to manufacture and sell fragrance and other related products:
Perry Ellis
Baryshnikov
Phantom
Vicky Tiel
Todd Oldham
Under each of these arrangements, the Company must pay royalties at various
rates based on net sales, and spend minimum amounts for advertising based on
sales volume. The agreements expire on various dates and are subject to renewal.
In 1997, the Company informed the Todd Oldham licensor of its intent not to
renew the license. In accordance with the licensing agreement, the Company
produced and sold the Todd Oldham trademarked products until March 31, 1998. In
addition, the Company was required to destroy all remaining unsold inventory and
advertising material relating to the trademarked products. Sales of Todd Oldham
products represented less than 1% and 2% of total Company net sales for the
years ended March 31, 1998 and 1997, respectively. The Company incurred a loss
of $3,200,000 as a result of terminating the agreement.
On August 8, 1997, the Company consummated the sale of certain assets relating
to the VICKY TIEL brands to Five Star Fragrances Company, Inc. ("FSF") for
approximately $680,000, which approximated the net book value of assets sold.
The Company sold to FSF all inventories, fixed assets and licenses related to
the brands, and FSF assumed certain liabilities for purchase orders issued prior
to August 8, 1997.
In May 1995, the Company terminated its license agreement with Francesco Smalto
for breach of contract. On October 5, 1995, the Company entered into a
transition and termination agreement with SMALTO which provided for the
continued use of the Francesco Smalto trademark through September 30, 1996. The
agreement contained certain production restrictions and required a fixed amount
of royalties during the period, which approximated 5% of net sales of Smalto
fragrances. Sales of Francesco Smalto products represented approximately 1% of
total Company net sales for the year ended March 31, 1997.
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, 1999 2000 2001
---------------------------- ---- ---- ----
Advertising $8,118 $8,118 $200
Royalties $500 $515 $150
C. Trademarks:
Through various acquisitions since 1991, the Company acquired worldwide
trademarks and distribution rights to ANIMALE, DANIEL DE FASSON, DECADENCE,
LIMOUSINE and BAL A VERSAILLES fragrances and ALEXANDRA de MARKOFF cosmetics and
fragrances. In addition, FHBH granted the
F-17
<PAGE>
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. Additionally, royalties are payable to the Company from the
licensees of ALEXANDRA DE MARKOFF and BAL A VERSAILLES brands, and the Company
has the rights to license all these trademarks, other than FHBH, for all classes
of merchandise.
D. Barter Arrangements:
In June 1991, the Company entered into a barter arrangement (the Barter
Agreement ) for which the Company would receive advertising credits in exchange
for its inventory of JOAN COLLINS products. The final sale of these products was
completed in June 1993.
The following table sets forth the balances and transactions included in the
accompanying financial statements related to the Barter Agreement (in 000's):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Prepaid advertising at March 31, net of deferred
income of $137, $345 and $434 in 1998, 1997 and
1996, respectively $233 $588 $660
==== ==== ====
Advertising credits expensed during the year
ended March 31 $463 $161 $684
==== ==== ====
Deferred income recognized for the year ended
March 31 $208 $89 $355
==== === ====
</TABLE>
E. Employment and Consulting Agreements:
The Company has employment contracts with certain officers and employees which
expire through March 2000. Minimum commitments under these contracts are as
follows (in 000's):
For the year ending March 31,
-----------------------------
1999 $1,416
2000 970
------
$2,386
======
In connection with previous employment contracts, warrants to purchase 1,190,000
shares of common stock, at prices ranging from $1.50 to $7.50 were issued
between 1993 and 1995. These warrants are exercisable for a ten-year period from
the date of grant and vest over the term of the applicable contracts through
January 1998. During the year ended March 31, 1996, 28,000 warrants were
exercised. As of March 31, 1998, 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 issued to key employees would double
in the event of a change in control.
On April 1, 1994, the Company entered into a three-year consulting agreement
with Cosmix, Inc., a company owned by Mr. Frederick Purches, the Vice Chairman
of the Board, which provides for monthly payments of $8,333. The agreement calls
for Mr. Purches to assist the Company in the areas of banking, SEC and
stockholder relations, financial planning, assessment and coordination of
acquisitions and divestiture, and any other similar activities which may be
assigned by the Board of Directors. Mr.
F-18
<PAGE>
Purches receives certain insurance benefits as a part of his agreement, and has
received 90,000 warrants to acquire shares of common stock at $2.06 over the
three-year period of the contract, of which 60,000 warrants have been exercised
during the year ended March 31, 1996. The consulting agreement was extended for
an additional three-year period until March 31, 2000, with no additional
warrants being provided.
On April 1, 1994, the Company entered into a three-year consulting agreement
commencing June 1, 1994, with Cambridge Development Corporation, a company owned
by Mr. Albert F. Vercillo, who is a director of the Company. The Agreement calls
for Mr. Vercillo to assist the Company in the areas of U.S. and international
financial analysis and planning. Cambridge Development Corporation receives
$4,500 a month and Mr. Vercillo receives certain insurance benefits, and has
received 30,000 warrants to acquire shares of common stock at $2.06 over the
three-year period of the contract. The consulting agreement was extended for an
additional three-year period until May 31, 2000, at a rate of $5,416 per month.
No additional warrants were provided.
On April 1, 1994, the Company entered into a consulting agreement with its
former President, which provided for monthly payments of $16,667 through
September 30, 1997. In addition, the former President had previously received
warrants to purchase 500,000 shares of common stock, at an exercise price of
$1.875 per share.
All of the previously described warrants were issued at the market value of the
underlying shares at the date of grant and reflect the two-for-one stock split
effected as of November 3, 1995.
F. Contingencies:
The Company is required to pay royalties under the Perry Ellis ( "Licensor" )
license agreement discussed in Note 9 (B) above. The Licensor has asserted,
through its legal counsel, that the Company is in default of the license
agreement in that the sales of Perry Ellis brand products by an affiliate of the
Company were not properly included in sales for the purpose of calculating
royalties. For purposes of calculating such royalties, the Company has reported
and paid royalties to the Licensor on sales of approximately $40 million from
January 1, 1995 through March 31, 1998 based only on amounts invoiced to the
affiliate. This matter is presently under investigation. Management believes the
effect of this matter will not have a material adverse effect on the Company's
financial position or results of operations.
The Company is also 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.
10. FOREIGN SUBSIDIARY
The following amounts relate to the Company's wholly-owned subsidiary, Parlux
S.A.:
<TABLE>
<CAPTION>
As of and for the year ended March 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total assets $2,985,155 $10,443,117 $9,458,774
Working capital 2,506,732 2,731,167 2,115,755
Equity 2,506,732 2,761,554 2,229,714
F-19
<PAGE>
Net Sales:
Trade 2,128,698 12,776,773 9,101,611
Affiliates 175,600 409,557 2,742,211
Intercompany 455,011 2,760,856 4,258,054
--------- --------- ---------
Total $2,759,309 $15,947,186 $16,101,876
========== =========== ===========
Net income (loss) $ (3,053) $ 817,649 $ 887,163
=============== ============= =============
</TABLE>
Prior to fiscal 1996, foreign sales were principally made by Parlux S.A. During
the years ended March 31, 1998, 1997 and 1996, sales to foreign customers from
the Company's domestic subsidiary amounted to approximately $24,101,000,
$18,059,000 and 19,000,000, respectively. At March 31, 1998 and 1997, trade
receivables from foreign customers (all payable in U.S. dollars) amounted to
approximately $7,186,000 and $11,228,000, respectively.
At March 31, 1998, the Company has ceased operations in France.
11. INCOME TAXES
Income tax expense ( benefit ) is as follows:
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
Current taxes (benefit):
U.S. Federal ($4,634,263) $ 1,116,040 $ 3,764,477
U.S. state and local (440,239) 132,058 472,360
Foreign income taxes 232,998 515,800 531,161
----------- ----------- -----------
(4,841,505) 1,763,898 4,767,998
U.S. Federal deferred tax benefit (146,468) (1,103,817) (4,184)
----------- ----------- -----------
Income tax expense ( benefit ) ($4,987,972) $ 660,081 $ 4,763,814
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the Company's effective
tax rate follows:
1998 1997 1996
---- ---- ----
Tax at statutory rate (35.0)% (35.0)% 35.0%
Beneficial conversion feature of debenture - 58.2% 10.9%
Incremental foreign taxes 1.7% .5% .3%
State and local taxes (3.2)% 1.7% 2.4%
Other -% (.2)% .3%
---- ---- ----
(36.5)% 25.2% 48.9%
==== ==== ====
Deferred tax assets, which are included in other current assets, and deferred
tax liabilities, are comprised of the following:
<TABLE>
<CAPTION>
March 31, 1998 1997
--------- ---- ----
<S> <C> <C>
Allowance for doubtful accounts, sales returns and
allowances $ 795,356 $ 961,118
State net operating loss carry forwards 512,019 ---
Reserve for inventory obsolescence 376,300 1,076,540
Federal net operating loss carry forwards 185,377 ---
F-20
<PAGE>
Other, net 501,166 131,287
---------- ---------
Total deferred tax assets $2,370,218 $2,168,945
========== ==========
Deferred tax liabilities related to
depreciation and amortization $ 419,632 $ 432,440
=========== ==========
</TABLE>
In fiscal 1997, the Internal Revenue Service audited the Company's federal
income tax return for the year ended March 31, 1994. The audit resulted in no
changes to taxes due.
12. COMMON STOCK
At various dates since April 1989, the Company has issued, in addition to the
warrants described in Note 9 (E), a total of 688,000 warrants to key employees
and/or consultants to purchase the Company's common stock at an average exercise
price of $1.87 per share. In March 1993, Mr. Gerard Semhon, in exchange for an
amount due him of $180,000, exercised warrants to acquire 96,000 registered
shares and Mr. Fred Purches exercised warrants for the acquisition of 28,000
unregistered shares in exchange for cash and amounts due him of $47,000. In
September 1993, Mr. Semhon exercised his remaining warrants to acquire 24,000
registered shares in exchange for amounts due him of $45,000. Accordingly, as of
March 31, 1995, 540,000 of these warrants remained outstanding. The underlying
shares related to the unexercised warrants had not been registered.
In September 1990, in connection with a long-term loan, the Company issued
100,000 warrants to Mr. Boris Lekach which were exercisable at $2.00 per share.
Mr. Boris Lekach is related to Mr. Ilia Lekach, the Company's Chairman and Chief
Executive Officer.
In March 1991, the Company issued warrants to Deco Distribution Group, Inc.
(Deco) to acquire 1,100,000 shares of common stock in accordance with an Asset
Acquisition Agreement of the same date. The warrants were exercisable through
March 1, 2001 at an exercise price of $2.00 per share.
In May 1995, the Company extended a discount of $0.75 per share to those holders
of warrants issued in connection with the FHBH and Deco acquisitions, as well as
the loan to Mr. Boris Lekach, if the holders would exercise by May 31, 1995. The
exercise period was subsequently extended to July 31, 1995. These warrant
holders exercised all of their warrants into 1,400,000 shares of common stock,
increasing stockholders' equity by approximately $2,300,000.
In June 1993, in recognition of continuing financial support, personal
guarantees and pledged deposits in connection with the NBK loan, the Company
issued 52,916 warrants to Mr. Zouheir Beidoun, a Director of the Company, at an
exercise price of $1.75. These warrants, along with an additional 200,000
warrants issued during 1991, were exercised during February 1996, whereby a
portion of the note payable to Mr. Beidoun, including accrued interest payable,
was partially converted to equity.
The following table summarizes the activity and related information for the
warrants outstanding under the commitments disclosed in Note 9 (E) and the
warrants described above after the retroactive effect of the stock split:
F-21
<PAGE>
Weighted Average
----------------
Amount Exercise Price
------ --------------
Balance at March 31, 1995 3,572,916 $ 1.99
Issued 307,978 $ 7.78
Exercised (1,830,916) $ 1.97
---------
Balance at March 31, 1996 2,049,978 $ 2.88
Issued 10,000 $ 6.75
Exercised (236,000) $ 7.73
---------
Balance at March 31, 1997 1,823,978 $ 2.24
Issued --
Exercised --
Canceled (53,978) $ 8.11
---------
Balance at March 31, 1998 1,770,000 $ 2.06
=========
The following table summarizes information about warrants outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Range of Warrants Outstanding Warrants Exercisable
Exercise -------------------- --------------------
---------- Weighted Average Weighted Average Weighted Average
Prices Amount Exercise Price Remaining Life Amount Exercise Price
------ ------ --------------- -------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
$1.50-$2.07 1,562,000 $1.89 5 1,562,000 $1.89
$3.13-$4.00 198,000 $3.20 8 182,667 $3.14
$6.75 10,000 $6.75 9 6,666 $6.75
--------- ----- - --------- -----
1,770,000 $2.07 5 1,751,333 $2.03
========= ===== = ========= =====
</TABLE>
13. 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.
On June 20, 1995, the Company granted to various employees additional options to
acquire 24,500 shares of common stock at $5.75, the closing bid price of the
stock on June 19, 1995. These options are exercisable at the rate of 25% per
annum beginning June 20, 1996. Concurrently, 5,500 options were canceled through
employee resignations.
As of March 31, 1998, and since the inception of the Plan, options have been
issued, net of cancellations, to purchase 241,092 shares at exercise prices
ranging from $1.06 to $5.75 per share. No
F-22
<PAGE>
further options are issuable under the Plan. Through March 31, 1998, 174,092
options had been exercised under the Plan.
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. As of this date, these shares have not been registered. Only employees who
are not officers or directors of the Company shall be eligible to receive
options under the 1996 Plan.
On January 2, 1998, the Company granted to various employees, options to acquire
79,000 shares of common stock at $1.375 per share, the closing bid price of the
stock on December 31, 1997. None of these options are exercisable as of March
31, 1998.
The following table summarizes the activity for options covered under all plans:
<TABLE>
<CAPTION>
Plan 1996 Plan
----------------------------- -------------------------------
.
Weighed Average Weighed Average
Amount Exercise Price Amount Exercise Price
------ -------------- ------ --------------
<S> <C> <C>
Balance at March 31, 1996 81,500 $2.82
Issued --- ---
Exercised (14,500) $1.28
Canceled --- ---
-------
Balance at March 31, 1997 67,000 $3.15 -
Issued --- --- 79,000 $1.38
Exercised --- ---
Canceled (12,000) $5.75 (7,750) $1.38
------ ------
Balance at March 31, 1998 55,000 $2.59 71,250 $1.38
====== ======
</TABLE>
As of March 31, 1998, options to purchase 55,000 shares are outstanding under
the Plan, of which 48,750 are currently exercisable at a weighted average
exercise price of $2.18 and 6,250 become exercisable during the year ending
March 31, 1999.
During June 1993, the Company established a 401-K plan covering substantially
all of its U.S. employees. No Company contribution was made during the year.
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 $57,000 and $54,000
for the years ended March 31, 1998 and 1997, respectively.
14. BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
The following is the reconciliation of the numerators and denominators of the
basic and diluted net income per common share calculations, retroactively
adjusted for the stock split, and the adoption of the provisions of SFAS 128:
<TABLE>
<CAPTION>
1998 1997 (1) 1996 (1)
------------------------------------------------
<S> <C> <C> <C>
Net income ( loss) ($8,686,923) ($3,277,920) $4,972,481
============ ============ ==========
Weighted average number of shares outstanding used in basic
earnings per share calculation 16,300,060 15,013,931 8,791,479
============ ============ ==========
Basic net income ( loss ) per common share ($0.53) ($0.22) $0.57
======= ======= =====
F-23
<PAGE>
Weighted average number of shares outstanding used in basic
earnings per share calculation 8,791,749
Affect of dilutive securities (2):
Stock options and warrants, net of treasury shares acquired
1,500,631
Convertible debentures (3): ----------
Weighted average number of shares outstanding used in diluted
earnings per share calculation 10,292,380
==========
Diluted net income per common share $0.48
=====
Antidilutive securities not included in diluted earnings (loss)
per share computation:
Options and warrants to purchase common stock 1,896,250 1,890,978 630,847
Exercise price $1.38 - $6.75 $1.44 - $8.11 $5.75 - $8.11
</TABLE>
(1) As disclosed in Note 8, the net income ( loss ) and the net income per share
for fiscal 1997 and 1996 was restated to account for the value attributable
to the beneficial conversion feature on convertible debentures issued during
fiscal 1997 and 1996.
(2) The calculation of diluted loss per share was not required for fiscal
1998 and 1997 since it would be antidilutive.
(3) The 1,300,195 share effect of conversion of debentures in fiscal 1996 was
not assumed since it would be antidilutive.
15. RELATED PARTY TRANSACTIONS, SIGNIFICANT CUSTOMERS AND CONCENTRATION OF
CREDIT RISK
On September 3, 1997, the Company loaned $150,000 to its Chairman/CEO, which is
included in other current assets. The loan is unsecured, bears interest at 10%
per annum and is due on December 31, 1998.
The Company had sales of approximately $21,940,000, $26,568,000, and $26,187,000
during the fiscal years ended March 31, 1998, 1997 and 1996, respectively, to
Perfumania, Inc. (Perfumania), and sales of $1,272,000 during the fiscal year
ended March 31, 1997, to L. Luria & Son, Inc. (Luria), companies in which the
Company's Chairman and Chief Executive Officer has an ownership interest. Net
amounts due from Perfumania amounted to $17,973,000, and $22,136,000 at March
31, 1998 and 1997, respectively. Amounts due from Luria totaled $726,000 at
March 31, 1997. Amounts due from related parties are non-interest bearing and
are realizable in less than one year.
On August 13, 1997, Luria filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code, which has subsequently resulted in a Chapter
7 liquidation. At the time of the filing Luria owed the Company $690,886. The
Company has filed its claim and has been characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by Luria's in the
United States Bankruptcy Court, Southern District of Florida. The committee of
unsecured creditors in Luria's bankruptcy proceedings is investigating potential
actions to recover substantial funds from alleged insiders of Luria's and their
affiliates, which might include actions against the Company to recover amounts
paid for merchandise sold to Luria's. Management cannot presently predict the
outcome of these matters, although management believes, upon the advice of legal
counsel, these matters should not have a materially adverse effect on the
Company's financial position or result of operations. As of March 31, 1998,
this receivable was fully reserved.
F-24
<PAGE>
No unrelated customer accounted for more than 10% of the Company's sales during
the years ended March 31, 1998, 1997 and 1996.
16. 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, 1998 and 1997 (in thousands, except
per share amounts). Certain of the quarterly information has been restated as
described below.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998 (1)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $13,297 $14,938 $20,375 $13,758
Gross margin 8,341 8,479 11,034 (714)
Net income (loss) 16 17 43 (8,763)
Earnings (loss) per common share
Basic $0.00 $0.00 $0.00 ($0.58)
Diluted (4)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 (3) 1996 (3) 1996 (3) 1997 (2)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $18,740 $25,503 $27,020 $16,377
Gross margin 12,454 13,987 16,378 5,638
Net income (loss) (746) 473 990 (3,995)
Earnings (loss) per common share
Basic $0.12 $0.12 $0.01 ($0.23)
Diluted (4)
</TABLE>
(1) Includes charge of approximately $9,224,000 relating to the discontinuation
of certain brands and products. See Note 2 for further discussion.
(2) Includes restructuring charge of approximately $5,765,000. See Note 2 for
further discussion.
(3) As discussed in Note 8 to the consolidated financial statements, the net
income and net income per share for fiscal 1997 has been restated to
account for the value attributable to the beneficial conversion feature on
convertible debentures issued during fiscal 1997 and 1996.
(4) The calculation of diluted earnings per share was not required for 1998
since it would be antidilutive.
F-25
<PAGE>
<TABLE>
<CAPTION>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
Balance at beginning Additions charged to Balance at
Description of period costs and expenses Deductions end of period
- ------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
<S> <C> <C> <C> <C>
Reserves for:
Doubtful accounts $ 542,729 $ 1,413,699 $ 1,251,568 $ 704,860
Sales returns 383,401 4,998,031 5,081,432 300,000
Demonstration and co-op
advertising allowances 1,567,750 5,624,955 6,027,113 1,165,592
--------- --------- --------- ---------
$2,493,880 $12,036,685 $12,360,113 $2,170,452
========= ========== ========== =========
Reserve for inventory
shrinkage and obsolescence $2,833,000 $ 7,519,105 $ 5,680,712 $4,671,393
========= =========== ========= =========
Year ended March 31, 1997
Reserves for:
Doubtful accounts $ 472,561 $ 557,502 $ 487,334 $ 542,729
Sales returns 637,221 3,915,488 4,169,308 383,401
Demonstration and co-op
advertising allowances 1,011,463 7,368,791 6,812,504 1,567,750
--------- --------- --------- ---------
$2,121,245 $11,841,781 (1) $11,469,146 $2,493,880
========= ========== ========== =========
Reserve for inventory
shrinkage and obsolescence $1,200,000 $ 3,857,483 (2) $ 2,224,483 $2,833,000
========= ========= ========= =========
Year ended March 31, 1996
Reserves for:
Doubtful accounts $1,231,522 $ 123,936 $ 882,897 $ 472,561
Sales returns 318,972 780,342 462,093 637,221
Demonstration and co-op
advertising allowances 504,919 4,144,166 3,637,622 1,011,463
------- --------- --------- ---------
$2,055,413 $ 5,048,444 (3) $ 4,982,612 $2,121,245
========= ========= ========= =========
Reserve for inventory
shrinkage and obsolescence $ 685,629 $ 688,626 (4) $ 174,255 $1,200,000
======= ======= ======= =========
</TABLE>
(1) Net of reserves of $630,562 recorded in connection with the RBFI
acquisition.
(2) Net of reserves recorded in connection with:
RBFI acquisition: $833,433 BAV acquisition: $100,000
AdM acquisition: $1,000,000
(3) Net of reserves of $1,500,000 recorded in connection with the AdM
acquisition.
(4) Includes $600,000 recorded in connection with the AdM acquisition.
F-26
<PAGE>
<TABLE>
<CAPTION>
PARLUX FRAGRANCES, INC. AND SUBSIDIARIES
----------------------------------------
SCHEDULE IX - SHORT-TERM BANK BORROWINGS
----------------------------------------
Col. A Col. B. Col.C Col.D Col.E Col.F
Category of Balance at end Weighted Maximum amount Average amount Weighted
aggregate of period average outstanding outstanding average
short-term interest during the period during the period interest
borrowings rate (4) during the
period (5)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1998 Notes
Payable
Banks (1) $17,004,432 8.4% $20,375,531 $17,279,332 10.2%
March 31, 1997 Notes
Payable
Banks (2) $12,459,266 10.2% $12,459,266 $9,861,542 11.0%
March 31, 1996
Notes Payable
Banks (3) $6,939,014 10.2% $7,823,478 $7,361,251 12.1%
</TABLE>
(1) Loans of $16,818,951 from GECC, $ 185,472 from International Finance Bank,
and French facilities which were repaid during fiscal 1998.
(2) Loans of $8,595,375 from Finova, $753,125 for International Finance Bank
and $3,110,766 in overdraft and receivable facilities granted by French
banks.
(3) Loans of $3,888,378 from Finova, $482,392 from Eagle National Bank, as well
as overdraft and receivable facilities of $2,568,244 granted by French
banks.
(4) The weighted average interest rate was computed by dividing the estimated
annual interest costs (based on the applicable March 31 rates) by the actual
borrowings outstanding at March 31.
(5) The weighted average interest rate during the period was computed by
dividing the actual interest ased on the applicable March 31 rates) by the
actual borrowings outstanding at March 31.
F-27
<PAGE>
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 and Chairman
Dated: July 21, 1998
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/Zalman Lekach
- ------------------------------------------
Zalman Lekach, President, Chief Operating Officer and Director
/s/Frank A. Buttacavoli
- -------------------------------------------
Frank A. Buttacavoli, Executive Vice President, 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/Mayi de la Vega
- ---------------------------------------------
Mayi de la Vega, Director
/s/Glenn Gopman
- ---------------------------------------------
Glenn Gopman, Director
FIRST MODIFICATION OF CREDIT AGREEMENT AND WAIVER
THIS MODIFICATION is made as of this 9th day of July, 1998, by
and among PARLUX, LTD., a New York corporation ("Borrower"), PARLUX FRAGRANCES,
INC., a Delaware corporation ("Parent") and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation as agent (the "Agent") and the lender
signatory to this Modification (the "Lender").
Statement of Facts
------------------
Agent, Lender, Borrower and Parent are parties to that certain
Credit Agreement, dated as of May 23, 1997 (the "Credit Agreement"), pursuant to
which Lender has agreed to make one or more loans from time to time to the
Borrower in accordance with the terms and conditions thereof. Lender and
Borrower desire to modify the Credit Agreement in certain respects in accordance
with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Borrower, the Agent and Lender do hereby agree that all capitalized terms used
herein shall have the meanings ascribed thereto in the Credit Agreement (except
as otherwise expressly defined or limited herein) and do hereby further agree as
follows:
Statement of Terms
------------------
1. Waiver. Each of the Agent and the Lender hereby waives any
Default or Event of Default under the Credit Agreement which may have resulted
from any failure on the Borrower's part to comply with the following covenants
for the dates and time periods described below (a) the restricted payment
covenant set forth in Section 6.15 of the Credit Agreement for each of the
fiscal months ending June 30, 1997 through June 30, 1998, (b) the minimum EBITDA
covenant set forth in clause (a) to Schedule 6.11 to the Credit Agreement for
the Fiscal Quarters ending June 30, 1997, September 30, 1997, December 30, 1997,
March 31, 1998 and June 30,1998, (c) the minimum Tangible Net Worth covenant set
forth in clause (b) of Schedule 6.11 to the Credit Agreement as of the end of
the Fiscal Quarters ending December 31, 1997, March 31, 1998 and June 30, 1998,
and (d) the minimum Fixed Charge Coverage Ratio set forth in clause (c) of
Schedule 6.11 to the Credit Agreement for the Fiscal Quarters ending June 30,
1997, September 31, 1997, December 31, 1998, March 31, 1998, and June 30, 1998.
The aforesaid waivers relate solely to the specific covenants, dates and time
periods described above and nothing in this Section 1 is intended (or shall be
construed) to constitute a waiver by the Agent or the Lender of any other
Default or Event of Default which may now or hereafter exist under the Credit
Agreement (including, without limitation, any future failure on Borrower's part
to comply with Section 6.15 or clauses (a), (b) and (c) of Schedule 6.11 to the
Credit Agreement, as amended by this Modification).
<PAGE>
2. Amendment of Credit Agreement. Subject to the fulfillment
of the conditions precedent to the effectiveness of this Modification which are
set forth below, the Credit Agreement shall be amended as follows:
A. Clauses (a), (b) and (c) of Schedule 6.11 to the Credit
Agreement shall be deleted in its entireties and the following new clauses (a),
(b) and (c) shall be substituted in lieu thereof:
(a) Minimum EBITDA. Parent shall have, at the end of each
period set forth below (measured in each case, based on the consecutive
12-month period ending at the end of such period unless otherwise
expressly noted below), EBITDA for the respective period set forth
below of not less than the following:
Period Minimum EBITDA
------ --------------
Fiscal Month ending July 31, 1998
(based on the consecutive 4-month
period ending on such date) 1,640,000
Fiscal Month ending August 30, 1998
(based on the consecutive 5-month
period ending on such date) 2,740,000
Fiscal Month ending September 30, 1998
(based on the consecutive 6-month
period ending on such date) 4,390,000
Fiscal Month ending October 31, 1998
(based on the consecutive 7-month
period ending on such date) 6,210,000
Fiscal Month ending November 30, 1998
(based on the consecutive 8-month
period ending on such date) 7,520,000
Fiscal Month ending December 31, 1998
(based on the consecutive 9-month
period ending on such date) 7,250,000
Fiscal Month ending January 31, 1999
(based on the consecutive 10-month
period ending on such date) 7,300,000
-2-
<PAGE>
Period Minimum EBITDA
------ --------------
Fiscal Month ending February 28, 1999
(based on the consecutive 11-month
period ending on such date) $7,870,000
Fiscal Month ending March 31, 1999 8,470,000
Fiscal Month ending April 30, 1999 8,680,000
Fiscal Month ending May 31, 1999 8,800,000
Fiscal Month ending June 30, 1999 8,800,000
Fiscal Month ending July 31, 1999 8,840,000
Fiscal Month ending August 30, 1999 8,900,000
Fiscal Month ending September 30, 1999 9,170,000
Fiscal Month ending October 31, 1999 9,400,000
Fiscal Month ending November 30, 1999 9,580,000
Fiscal Month ending December 31, 1999 9,610,000
Fiscal Month ending January 31, 2000 9,670,000
Fiscal Month ending February 29, 2000 9,790,000
Fiscal Month ending March 31, 2000 9,900,000
(b) Minimum Tangible Net Worth. Parent's Tangible Net Worth as
of the end of each Fiscal Quarter ending on or after September 30, 1998
shall not be less than the amount shown below for such period:
Fiscal Quarter Ending Minimum Tangible Net Worth
--------------------- --------------------------
September 30, 1998 35,500,000
December 31, 1998 35,500,000
March 31, 1999 35,500,000
June 30, 1999 35,500,000
September 30, 1999 37,000,000
-3-
<PAGE>
Fiscal Quarter Ending Minimum Tangible Net Worth
--------------------- --------------------------
December 31, 1999 36,000,000
March 31, 2000 36,000,000
(c) Minimum Fixed Charge Coverage Ratio. Parent shall have, at
the end of each period set forth below (measured in each case, based on
the consecutive 12-month period ending at the end of such period unless
otherwise expressly noted below), a Fixed Charge Coverage Ratio for the
respective periods set forth below of not less than the following:
Minimum Fixed Charge
Period Coverage Ratio
------ --------------------
Fiscal Month ending July 31, 1998
(based on the consecutive 4-month
period ending on such date) 0.7: 1.0
Fiscal Month ending August 30, 1998
(based on the consecutive 5-month
period ending on such date) 1.1: 1.0
Fiscal Month ending September 30, 1998
(based on the consecutive 6-month
period ending on such date) 1.1: 1.0
Fiscal Month ending October 31, 1998
(based on the consecutive 7-month
period ending on such date) 1.1: 1.0
Fiscal Month ending November 30, 1998
(based on the consecutive 8-month
period ending on such date) 1.1: 1.0
Fiscal Month ending December 31, 1998
(based on the consecutive 9-month
period ending on such date) 0.9: 1.0
Fiscal Month ending January 31, 1999
(based on the consecutive 10-month
period ending on such date) 0.8: 1.0
Fiscal Month ending February 28, 1999
-4-
<PAGE>
Minimum Fixed Charge
Period Coverage Ratio
------ --------------------
(based on the consecutive 11-month
period ending on such date) 0.9: 1.0
Fiscal Month ending March 31, 1999 0.9: 1.0
Fiscal Month ending April 30, 1999 0.9: 1.0
Fiscal Month ending May 31, 1999 0.9: 1.0
Fiscal Month ending June 30, 1999 1.0: 1.0
Fiscal Month ending July 31, 1999 1.0: 1.0
Fiscal Month ending August 30, 1999 1.0: 1.0
Fiscal Month ending September 30, 1999 1.0: 1.0
Fiscal Month ending October 31, 1999 1.0: 1.0
Fiscal Month ending November 30, 1999 1.1: 1.0
Fiscal Month ending December 31, 1999 1.1: 1.0
Fiscal Month ending January 31, 2000 1.1: 1.0
Fiscal Month ending February 29, 2000 1.1: 1.0
Fiscal Month ending March 31, 2000 1.1: 1.0
B. Section 6.15 of the Credit Agreement shall be deleted in
its entirety and the following new Section 6.l5 is substituted in the lieu
thereof:
6.15. Restricted Payments. Parent shall not make any Restricted
Payments; provided, however, the Parent may make a Restricted Payment
to the extent that (i) the aggregate amount of all Restricted Payments
made by Parent in any one Fiscal Month does not exceed the Permitted
Restricted Payment Amount for such month, (ii) Borrower's Unused
Borrowing Availability after Parent makes such Restricted Payment is
not less than $1,250,000, and (iii) no Default or Event of Default
exists at the time of or would be caused by such Restricted Payment.
For purposes of this Section 6.15 the term "Permitted Restricted
Payment Amount"
-5-
<PAGE>
means a Restricted Payment or Restricted Payments for each period set
forth below in an amount not to exceed the amount set forth below for
such period:
<TABLE>
<CAPTION>
Maximum Permitted Restricted Payment
Period Amount
------ ------------------------------------
<S> <C>
Each Fiscal Month ending during the period from July 1, 1998 -
October 31, 1998 $200,000 per Fiscal Month
Each Fiscal Month ending during the period from November 1, 1998 -
December 31, 1998 $1,000,000 per Fiscal Month
Each Fiscal Month ending during the period from January 1, 1999 -
March 31, 1999 $200,000 per Fiscal Month
Each Fiscal Month ending during the period from April 1, 1999 - March
31, 2000 $100,000 per Fiscal Month
</TABLE>
Borrower shall not be permitted to carry forward any unused Permitted
Restricted Payment Amounts to future months.
C. Schedule 6.11 to the Credit Agreement is hereby further
amended by adding the following new clause (g) to such schedule:
(g) Non-Perfumania/Non-Affiliate Sales. Borrower's sales of
Inventory to Persons other than Perfumania and Affiliates of Borrower
for each period set forth below shall be in an amount not less than the
amount shown below for such period:
<TABLE>
<CAPTION>
Minimum Sales to Persons Other than
Period Perfumania and Affiliates
------ -----------------------------------
<S> <C>
Fiscal Month ending July 31, 1998
(based on the consecutive 4-month
period ending on such date) 9,115,000
Fiscal Month ending August 30, 1998
(based on the consecutive 5-month
period ending on such date) 11,740,000
-6-
<PAGE>
Minimum Sales to Persons Other than
Period Perfumania and Affiliates
------ -----------------------------------
Fiscal Month ending October 31, 1998
(based on the consecutive 7-month
period ending on such date) 22,685,000
Fiscal Month ending November 30, 1998
(based on the consecutive 8-month
period ending on such date) 26,880,000
Fiscal Month ending December 31, 1998
(based on the consecutive 9-month
period ending on such date) 27,980,000
Fiscal Month ending January 31, 1999
(based on the consecutive 10-month
period ending on such date) 29,460,000
Fiscal Month ending February 28, 1999
(based on the consecutive 11-month
period ending on such date) 32,160,000
Fiscal Month ending March 31, 1999 34,950,000
(based on the consecutive 12-month
period ending on such date)
Fiscal Month ending April 30, 1999 35,330,000
(based on the consecutive 13-month
period ending on such date)
Fiscal Month ending May 31, 1999 35,600,000
(based on the consecutive 14-month
period ending on such date)
Fiscal Month ending June 30, 1999 35,695,000
(based on the consecutive 15-month
period ending on such date)
-7-
<PAGE>
Minimum Sales to Persons Other than
Period Perfumania and Affiliates
------ -----------------------------------
Fiscal Month ending July 31, 1999 35,810,000
(based on the consecutive 16-month
period ending on such date)
Fiscal Month ending August 30, 1999 36,060,000
(based on the consecutive 17-month
period ending on such date)
Fiscal Month ending September 30, 1999 36,580,000
(based on the consecutive 18-month
period ending on such date)
Fiscal Month ending October 31, 1999 37,090,000
(based on the consecutive 19-month
period ending on such date)
Fiscal Month ending November 30, 1999 37,480,000
(based on the consecutive 20-month
period ending on such date)
Fiscal Month ending December 31, 1999 37,590,000
(based on the consecutive 21-month
period ending on such date)
Fiscal Month ending January 31, 2000 37,730,000
(based on the consecutive 22-month
period ending on such date)
Fiscal Month ending February 29, 2000 37,980,000
(based on the consecutive 23-month
period ending on such date)
Fiscal Month ending March 31, 2000 38,250,000
(based on the consecutive 24-month
period ending on such date)
</TABLE>
3. No Other Amendment or Waiver. Except for the amendment and
waiver expressly set forth and referred to in Section 1 and Section 2 above, the
Credit Agreement shall remain unchanged and in full force and effect. Nothing in
this Modification is intended, or shall be construed, to constitute a novation
or an accord and satisfaction of any of the Borrower's or
-8-
<PAGE>
Guarantor's indebtedness or other indebtedness to the Agent or any Lender under
or in connection with the Credit Agreement (collectively, the "Obligations") or
to modify, affect or impair the perfection or continuity of Agent's security
interests in, security titles to or other liens on any collateral for the
Obligations.
4. Representations and Warranties. To induce the Agent and the
Lender to enter into this Modification, each Credit Party does hereby warrant,
represent and covenant to the Agent and the Lender that: (a) each representation
or warranty of such Credit Party set forth in the Credit Agreement is hereby
restated and reaffirmed as true and correct on and as of the date hereof as if
such representation or warranty were made on and as of the date hereof (except
to the extent that any such representation or warranty expressly relates to a
prior specific date or period), and no Default or Event of Default has occurred
and is continuing as of this date under the Credit Agreement as amended by this
Modification; and (b) each Credit Party has the power and is duly authorized to
enter into, deliver and perform this Modification and this Modification is the
legal, valid and binding obligation of such Credit Party enforceable against it
in accordance with its terms.
5. Conditions Precedent to Effectiveness of this Modification.
The effectiveness of this Modification and the amendment and waiver provided in
Section 1 and Section 2 above are subject to (i) the truth and accuracy in all
material respects of the representations and warranties of each Credit Party
contained in Section 4 above, (ii) the Agent's and Lender's receipt of one or
more counterparts of this Modification duly executed and delivered by the Credit
Parties, and (iii) Borrower's payment of the fees and expenses set forth in the
letter agreement dated as of June 26, 1998 between Borrower and Lender.
6. Counterparts. This Modification may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which
when taken together shall constitute one and the same instrument.
7. Lender Expenses. Without limiting its obligations under the
Credit Agreement, the Borrower agrees to pay on demand all of the Agent's and
the Lender's reasonable attorneys' fees and expenses and all other reasonable
out-of-pocket costs incurred by the Agent and the Lender in connection with its
evaluation, negotiation, documentation or consummation of this Modification and
the transactions contemplated hereby or thereby.
-9-
<PAGE>
8. GOVERNING LAW. THIS MODIFICATION SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE
PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Modification to be duly executed and delivered as of the day and year specified
at the beginning hereof.
BORROWER:
PARLUX, LTD.
(CORPORATE SEAL)
________________________ By: /s/ Frank A. Buttacavoli
-----------------------------
________________________ Title: Executive VP and CFO
Title:
GUARANTOR:
PARLUX FRAGRANCES, INC.
(CORPORATE SEAL)
________________________ By: /s/ Frank A. Buttacavoli
-----------------------------
________________________ Title: Executive VP and CFO
Title:
LENDER:
GENERAL ELECTRIC CAPITAL
CORPORATION, in its capacity as Agent and a Lender
By: /s/ Timothy C. Huban
-----------------------------
Title: Senior Vice President
11
LICENSE AGREEMENT
THIS AGREEMENT MADE IN THE STATE OF NEW JERSEY, THIS 3rd DAY OF MARCH,
1998, BY AND BETWEEN PARLUX FRAGRANCES, INC., a Delaware Corporation, duly
incorporated and having a principal place of business at 3725 SW 30th Avenue,
Ft. Lauderdale, Florida 33312, (referred to as the "Grantor") AND COSMETIC
ESSENCE, INC. a New Jersey Corporation, duly incorporated and having a principal
place of business at 200 Clearview Avenue, Edison, New Jersey (hereinafter
referred to as the "Licensee") and;
WHEREAS, Grantor is the owner of certain trade marks, trade names,
registrations, and/or applications therefore as well as all rights therein and
all technical knowledge with respect to products produced or marketed in
connection therewith, as further set forth in this Agreement;
WHEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which is acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS
In this Agreement,
(a) "Effective Date" means the date on which this
Agreement is executed.
(b) "Know-How" includes, among other things, all technical
information, procedures, processes, trade secrets,
formulae for the perfume oil and the bulk of all the
products, methods, practices, techniques, information,
bills of parts, diagrams, drawings, specifications,
blueprints, lists of materials, labor and general costs,
production manuals and data relating to design,
manufacture, production, inspection and testing of the
Products known by, available to, used or owned by Grantor;
(c) "Products" shall be deemed to be all products sold
under the Trademarks and the trademarked names limited to
"Class 3" products, including but not limited to
cosmetics; powders; toiletries; perfumes and fragrance
products; shampoo, soaps, shower and bath gels and other
bath products; creams and lotions related promotional
products, and similar products developed and sold now or
in the future under the Trademarked names or the
Trademarks.
(d) "Territory" shall mean worldwide and without
exclusion.
(e) "Trade Marks" shall refer to those U.S. and foreign
trade marks, service marks, imprints, logos, trade dress
and trade names whether or not registered, and all issued
registrations, pending applications, or future
applications as set forth on Schedule A hereto and
relating to the name "Alexandra de Markoff" and other
names as set forth on that Schedule, limited to the
Products.
2. GRANT OF LICENSE
(1) Exclusive Grant: Grantor grants to Licensee the exclusive
right and license worldwide to utilize and exploit the Trade Marks and know how
in connection with the manufacture, distribution, marketing and sale of
products, including but not limited to:
(a) manufacture the existing Products covered by the
Trademarks;
(b) design, create and manufacture new products to be
marketed, distributed and sold under the Trademarks;
(c) distribute, use, market and sell the Products covered
by the Trademarks so manufactured; and
<PAGE>
(d) use the Trade Marks in conjunction with and as they
relate to the Products and all advertising and letter
heads and collateral promotional material; and
(e) Except as otherwise provided in the Shared Technology
Agreement, Licensee shall , consistent with the reputation
and prestige of the Trademarks, be entitled to apply the
Trade Marks to and to sell the Products within such form
of containers and packaging which in Licensee's discretion
it deems fit and proper for the particular market within
the Territory towards which such Products are to be
directed.
(f) "Shared Technology Agreement" shall mean that certain
agreement dated September 21, 1995 between Grantor and
Revlon Holdings, Inc. as amended by letter dated December
6, 1996.
(g) "Shared Technology" and "Shared Technology Products"
shall have the meaning(s) ascribed to them in the Shared
Technology Agreement, as amended.
(2) Grantor grants to Licensee the exclusive rights to use and
exploit the Know-How in the manufacture distribution, marketing and sale of the
Products.
(3) Grantor grants to Licensee, and any sublicense thereof,
during the term of this Agreement and any renewals thereof, the exclusive right
with regard to the Products to use and exhibit the name "Alexandra de Markoff",
whether as a trademark, trade name, or otherwise.
(4) Licensee acknowledges that some or all of the Know-How has
been disclosed and delivered to Licensee in confidence prior to and in
contemplation of the execution and Effective Date of this Agreement. The
remainder of the Know-How shall be furnished to Licensee as soon as practicable
after the date of execution of this Agreement but no later than 30 days after
the Effective Date.
(5) The obligation to furnish the Know-How shall extend to
Know-How existing at the date of this Agreement and to any relevant Know-How
which is acquired by Grantor during the first six months after the Effective
Date.
(6) Grantor warrants that there are no other existing licenses
for the Trade Marks with regard to the Products covered by this Agreement, and
Grantor covenants that no further disclosure to third parties will be made by it
of the Know-How relating to the Trade Marks for the Products covered by this
Agreement and Grantor shall:
(a) to the extent it owns any rights to the tooling and
molds previously used by contracted suppliers of
components for the Products, and has a right to do so,
issue instructions to such suppliers so identified not to
further use the tooling or molds otherwise then under
purchase order from Licensee and will provide to the
Licensee a full list of such suppliers not later than
three (3) weeks after the date hereof; and
(b) to the extent it holds all copyright and similar
rights in respect of items to be provided under paragraph
"6(1)" hereinbelow, grant Licensee such rights for the
Products for the term of this Agreement and any extension
thereof.
(7) Grantor warrants that the Know-How will be sufficient and
suitable to the manufacture of the Products to a quality comparable to the
quality of the sample Products furnished to the Licensee by Grantor, provided
that Licensee at all times conforms strictly to and with the Know-How.
3. OBLIGATIONS TO MAINTAIN PRESTIGE OF TRADEMARKS
Each party agrees to take such actions reasonably necessary to
maintain the prestige of the Trademarks and the reputation of quality for
products marketed thereunder. Grantor agrees that it shall not enter into any
license agreement for, or itself produce any product(s) utilizing the Trademarks
or the Trademarked name, unless such products are to be of a nature and quality
consistent with the prestige and reputation of the Products. Grantor shall
include in any license agreement relating to the Trademarks a requirement that
the licensee thereunder produce products of the highest quality consistent with
the prestige of the Trademarks and Trademarked names, and that Licensee shall do
no act inconsistent with such prestige and reputation for quality.
<PAGE>
4. SUBLICENSES/ASSIGNMENTS
(1) Licensee may in its discretion assign this Agreement or
appoint sublicensees for the Products within the Territory. In the event of such
Sublicense or assignment, Licensee unless expressly released in writing by
Grantor, shall remain liable as a direct obligor for performance of all terms
under this Agreement, including but not limited to maintaining the quality and
prestige of the Trademarks and payment of all Licensing Fees.
5. TERM OF AGREEMENT
(1) Initial Term. The initial term of this Agreement shall
be ten years.
(2) First Extended Term. In the event there is no material
uncured default under the terms of this Agreement, this Agreement shall renew
for an additional ten year term. (The First Extended Term). In the event there
is a material uncured default, the non-defaulting party may elect to not renew
this Agreement upon written notice to the other at least 30 and not more than 60
days prior to the end of the Initial Term.
(3) Second Extended Term. In the event there is no material
uncured default under the terms of this Agreement, this agreement shall renew
for an additional five year term. (The Second Extended Term). In the event there
is a material uncured default, the non-defaulting party may elect to not renew
this agreement upon written notice to the other at least 30 and not more than 60
days prior to the end of the First Extended Term.
(4) Subsequent Terms. After the Second Extended Term, this
agreement shall renew for successive five year terms unless the Licensee
provides written notice to Grantor at least 180 days prior to the end of the
Second Extended Term or any subsequent renewal Term of its intent to not so
renew.
6. OBLIGATIONS OF GRANTOR
(1) Marketing Information: To the extent they exist and are
available, Grantor shall for a period of six months after the Effective Date
provide at its cost to the Licensee sample marketing information such as
installation instructions, technical data and manuals as may be necessary to
promote the sale of the Products, including trade advertisements and promotional
literature, if requested by Licensee. Grantor, if requested by Licensee, shall
also furnish Licensee at Grantor's cost with available art work, transparencies,
and the like, used by Grantor in any advertising and merchandising campaigns
related to the Products. In addition, to the extent such items were issued by
Grantor or Grantor's previous distributors in advertising and merchandising
campaigns related the Products and for their packaging. Grantor shall upon
request provide same to Licensee. If such items are not in the possession of
Grantor, it shall use its best efforts to obtain and deliver same and shall
charge Licensee no more than its own cost therefor. Licensee shall be
responsible for any model fees or other third party charges for use of same in
connection with the sale of the product to the extent such fees or charges are
incurred after the effective date of this Agreement.
(2) Transitional Assistance: Grantor agrees for a period of
six months to assist Licensee and its customers within the limits of its
reasonable ability in providing information related to solving problems they may
have in connection with the Products.
(3) Technical Assistance: For a period of six months after the
effective date of this Agreement, upon the written request of Licensee, Grantor
shall render all Know-How, training and technical assistance necessary to be
provided by Grantor under this Agreement at times and places mutually agreed
upon and subject to the availability of Grantor's personnel and facilities.
Licensee shall be responsible for the travel, meals and lodging expenses of
Grantor's personnel.
7. GRANTOR AND LICENSEE'S PROHIBITIONS
Neither Grantor nor any of its affiliates or licensees (or the
heirs, successors, or assigns of any of the foregoing) shall sell, directly or
indirectly, any Products under the Trademark, establish any branch or maintain
any office or depot in relation to the Products, or in any way seek to exploit
the Trademark or otherwise use the name "Alexandra de Markoff" in connection
with the sale of items competing with the Products.
8. CONSIDERATION
(1) As consideration for the license of the Trade Marks and
Know How and Grantor's other obligations hereunder, Licensee agrees to pay the
<PAGE>
Grantor a license fee of $500,000 each year of the Initial Term, the First
Extended Term, and the Second Extended Term that this Agreement is in effect and
$100,000 per year for each year of any subsequent terms after the Second
Extended Term. Said license fee shall be paid quarterly in arrears on the
following dates: May 1, August 1, November 1, February 1.
9. WARRANTY RE: TRADE MARKS AND KNOW-HOW
(1) Power to Grant Rights: Grantor warrants that it has the
right to grant the rights granted in this Agreement and that it has granted no
other rights or licenses which would derogate from the rights granted in this
Agreement.
(2) Notice of Infringement: Each party hereto shall advise the
other promptly of any instances of infringements, limitations, illegal use or
misuse of any Trade Mark. Licensee shall have the right to commence legal action
for the enforcement of any such Trade Marks in the Territory. Grantor and
Licensee shall cooperate fully in the prosecution of any such action free of
charge, and each agrees that it shall be joined as a party plaintiff to the
action and authorizes such joinder. Each shall have the right at its own expense
to retain independent counsel or shall designate an individual of its choosing
who shall be kept fully informed of all issues in the action, who shall be
advised in advance of each new step in the action, and who shall be entitled
promptly to receive copies of all pleadings, documents and correspondence
regarding the action.
(3) Additional Representations and Warranties of Grantor:
(a) Each Trademark is, and all registrations and
applications relating thereto are, to the best of
Grantor's knowledge and belief, valid and subsisting and
in full force and effect as of the date hereof.
(b) To the best of Grantor's knowledge and belief, no
Trademark and, except as disclosed in the Shared
Technology Agreement, none of the Know-How infringes upon
the rights of any other person, firm or entity within the
Territory nor has any person claimed that any Trademark or
any Know-How has infringed the rights of any person, firm
or entity in the Territory within the past five (5) years.
(c) Annexed hereto as Schedule "B" hereof is a true,
accurate and complete schedule and copies of all
registrations and applications for each U.S. Trademark and
to the best of Grantor's knowledge and belief for each
foreign Trademark within the Territory, including a
schedule of the dates of the applications or registrations
or renewals thereof as the case may be, and the expiration
dates of each Trademark. Grantor agrees to provide a
computer diskette containing all registration information
for use by Licensee.
(d) All of the U.S. Trademarks and, to the best of
Grantor's knowledge and belief, all foreign Trademarks,
are owned by the Grantor free and clear of all claims,
liens and encumbrances, except for certain liens in favor
of G.E. Capital Corp., Grantor represents and warrants
that it shall cause such lien to be satisfied and removed
no later than 30 days after receipt of the final payment
for inventory purchased by Licensee from Grantor under a
separate agreement between the parties regarding the Sale
of Certain Assets.
(e) The Products manufactured and/or sold by Grantor prior
to the Effective Date are, to the best of Grantor's
knowledge and belief, fit for the use intended, have been
manufactured, sold and distributed in compliance with all
applicable law, rules and regulations within the Territory
including, but not limited to, all Administration and the
U.S. Bureau of Alcohol Tobacco and Firearms and conform in
all respects to all applicable laws within the Territory.
(f) Grantor has not granted in the Territory any license,
franchise or permit to any third party to use any of the
Trademarks or Know-How as they relate to the Products
except in the ordinary course of its business.
(g) None of the Trademarks in the U.S. and to the best of
Grantor's knowledge and belief outside the U.S. in the
Territory, is subject to any outstanding order, decree,
judgment, stipulation, restriction, or agreement limiting
the scope or the use of any of the Trademarks.
<PAGE>
(h) Except as disclosed on Schedule C hereto, Grantor has
not entered into any agreement relating to the Trademarks
or Products.
(i) To the best of Grantor's knowledge there are no
pending or threatened claims relating to the Trademarks or
the manufacture, distribution or sale of the products,
except as are specifically disclosed in writing on the
annexed Schedule D.
10. INDEMNITY FOR TRADE MARK ACTIONS
(1) Indemnity re Trade Marks: For one year after the Effective
Date, Grantor will defend Licensee, its subsidiaries, affiliates, sublicensors,
customers, distributors, directors, officers, representatives, agents,
successors and assigns against any claim that the sale of any of the Products
infringes Trade Marks in the Territory in the Territory in which Grantor has
registered its Trade Marks, and Grantor will pay resulting costs, damages and
legal fees finally awarded up to a maximum of the Royalties to which Grantor is
entitled under this Agreement provided, however, that Licensee shall promptly
notify Grantor in writing of the claim.
11. REGISTRATIONS, MAINTENANCE AND FILINGS
(1) Registrations and Approvals of Trade Marks: Grantor shall
be responsible for maintaining the Trade Marks in full force and effect
throughout the term of this Agreement, and, for any registration of the Trade
Marks beyond registrations which already exist in the Territory. Licensee shall
reimburse Grantor its actual out of pocket costs for same within 45 days of
receiving an invoice for same. .
(2) Maintenance of Trade Marks: Grantor shall follow-up and
advance all renewal registration fees and otherwise maintain the rights in the
Trade Marks in the Territory where presently maintained. Grantor further agrees
(a) to instruct this local trade mark and patent agent(s) to keep Licensee fully
and completely informed of all action taken or scheduled to be taken in respect
of the trade marks and to cooperate with Licensee to take such actions as need
be taken to maintain such trade marks, and (b) to notify Licensee at the time it
makes an application for a patent or trade mark or acquires any right in a
patent or trade mark which is or becomes subject to the terms of this Agreement.
(3) Assistance re: Prosecution: Grantor shall render all
possible and reasonable assistance, if so requested by Licensee in the
prosecution of any future patent or Trademark applications in the Territory and
shall do all things in its power towards maintaining the validity and
enforceability of any Trademarks which may have issued or which may issue in
respect of such applications. Grantor shall render all practicable assistance,
if so requested by Licensee, in connection with and in support of any
application by Licensee for the extension of the terms of any Trademarks without
cost to Grantor. If Grantor will incur costs, it will so advise Licensee, and
Licensee may elect to pay same.
(4) Preemption right re: Trade Marks: Grantor shall have no
right to transfer mortgage, hypothecate, pledge, or otherwise create a lien in
or with regard to the Trademarks or Grantor's reversionary interest therein.
During the term of this Agreement and for one year thereafter,
except in the event of Licensees uncured default as set forth in paragraph 19
hereof. Grantor shall have a right of both first refusal and of last refusal in
the event Grantor wishes to sell its interests in the Trademark and Know How.
12.1 TRADE MARKS AND OTHER PROPRIETARY MARKS
(1) Description as Authorized Licensee: Licensee is
authorized, but not obligated, to describe, refer to and advertise itself as a
licensee of Grantor for the manufacture of the Products in the Territory.
(2) Display of Trade Mark: Licensee may display on all of the
packaging and containers for Products manufactured and offered for sale, the
Trade Marks (see Schedule "A" hereof). Where reasonable or appropriate, uses of
the Trademarks by Licensee shall indicate either "TM" or "R", as is appropriate.
Below this identification or trade mark Licensee may affix an additional mark
showing that the manufacture has been made in the workshops of Licensee. Text
and size, however, shall not exceed one-half of the size of the Trade Marks.
(3) Modification to the Trade Marks: Licensee shall not make
any material modifications to the Trade Marks without the express written
consent of the Grantor. Grantor shall not withhold its consent except based on
reasonable basis with objective criteria establishing a likelihood of damage to
<PAGE>
the value and prestige of the Trademarks. Failure by Grantor to object within 30
days of receipt of written notice of any proposed modification shall be the
equivalent of consent.
13. LICENSEE'S INDEMNITY OF GRANTOR
(1) No Warranty: Except as otherwise set forth in this
Agreement, Grantor makes no warranty with respect to the Know-How or Products.
Licensee shall indemnify and save Grantor harmless from all loss, costs or
damages which Grantor may suffer or pay as a result of claim or suits arising
out of any injuries to persons and/or damage to property due to or arising out
of or relating to any acts, duties or obligations or omissions of Licensee or of
any personnel employed or otherwise engaged by Licensee to perform Licensee's
obligations under this Agreement, and Licensee shall, at the request of Grantor,
assume the defense of any demand, claim, action, suit or proceeding brought
against Grantor by any reason thereof and pay any and all damages assessed
against or that are payable by Grantor as the result of the disposition of any
such demand, claim, action, suit or proceeding. Without limiting the generality
of the foregoing, Licensee agrees to indemnify and save Grantor, its directors,
officers, employees and agents and their respective heirs, executors,
administrators, successors and assigns and each of them harmless of and from any
and all manner of action, causes of action, claims, liabilities, debts,
covenants, contracts, accounts, duties, demands, damages or expenses whatsoever,
directly or indirectly suffered by it or them in connection with or otherwise
related to product liability, personal injury and property loss of, to or
experienced by third parties in relation to the Products manufactured after the
Effective Date. Grantor agrees to indemnify, defend and save Licensee, its
directors, officers, employees and agents and their respective heirs, executors,
administrators, successors and assigns and each of them harmless of and from any
and all manner of action, causes of action, claims, liabilities, debts,
covenants, contracts, accounts, duties, demands, damages or expenses whatsoever,
directly or indirectly suffered by it or them in connection with or otherwise
related to product liability, personal injury and property loss of, to or
experienced by third parties in relation to the Products manufactured prior to
the Effective Date or any wrongful acts or omission of Grantor, its officers,
directors, agents or employees. Grantor agrees for at least one year after the
Effective Date to continue to carry products liability insurance coverage
insuring against any such claim(s) with minimum limits of at least $1,000,000
per occurrence.
14. CONFIDENTIALITY
(1) Confidential Information: All information, including the
Know-How, (other than information generally known in the industry or
information) ("Confidential Information") supplied by or on behalf of Grantor
pursuant to this Agreement shall be treated as confidential by Grantor and shall
be used solely to enable Licensee to manufacture, use, sell and develop a market
for the Products in accordance with this Agreement.
(2) Duty Not to Disclose:Grantor covenants and agrees that no
Confidential Information by or on behalf of Grantor in the manner described or
otherwise shall be disclosed to anyone outside the organization of Licensee (or
to its attorneys and accountants so long as same are bound to keep such
information confidential) without the prior written consent of Licensee unless
otherwise required by law but only after reasonable prior written notice of same
to Licensee.
(3) Reasonable Efforts: Grantor agrees to use all reasonable
efforts to take such actions as may be appropriate to prevent the unauthorized
use and disclosure of, and to keep confidential all such Confidential
Information, including:
(a) ensuring that such Confidential Information is
disclosed only to responsible employees of Licensee who
have first been properly instructed to maintain such
Confidential Information in confidence;
(b) save as above not disclosing to any third party the
terms and conditions of this Agreement;
(c) save as above not disclosing methods of manufacture or
sale of the Products including production and marketing
plans; and (d) safeguarding as far as practicable the
confidential information against theft, damage or access
by unauthorized persons.
15. LICENSEE'S STATUS
(1) Independent Parties: The relationship between Licensee and
Grantor is intended to be and shall be that of independent parties, and Licensee
and its employees, agents and representatives shall under no circumstances by
<PAGE>
considered agents, partners, joint venturers, or representatives of Grantor.
Neither party shall act or attempt to act, or represent itself, directly or by
implication, as agent, joint venturer, partner or representative of the other or
in any manner assume or attempt to assume or create any obligations or liability
of any kind, nature or sort, express or implied, on behalf of or in the name of
the other.
(2) No Franchise: The relationship created by this Agreement
does not constitute the granting of a franchise to Licensee by Grantor and no
federal or provincial franchise statute, law, regulation or rule is intended to
or has been applied by the parties, nor shall any such franchise, statute, law,
regulation or rule be deemed or construed to apply to the formation, operation,
administration or termination of this Agreement.
16. APPLICABILITY OF SECTION 365; WAIVER OF DISCHARGE
The parties acknowledge that this contract is not an executory
contract.
The parties also acknowledge that they intend the grant of
rights and Know How to be a grant of intellectual property rights such that same
will fall within the provision of Section 365 (n) of the United States
Bankruptcy Code.
The parties in any event acknowledge and agree that during the
term hereof Licensee shall in reliance on the terms and conditions of this
agreement, invest substantial time, effort, and funds in maintaining, developing
and expanding the Trademark(s) and related Know How. In consideration of same
and of Licensee's obligations hereunder, and as material inducement to Licensee
to enter this Agreement, Grantor agrees and warrants that in the event Grantor
files for protection under the provisions of the United States Bankruptcy Code
(or of any other Country), it shall not seek to reject this contract or to avoid
or discharge its obligations under this agreement pursuant to Section 365
thereof or otherwise.
In the event CEI files for bankruptcy and thereafter this
contract is avoided or rejected, all rights in the Trademarks shall revert to
Grantor.
17. TRANSITIONAL PROVISIONS
(1) General: Each party agrees to provide the other its
cooperation and assistance for at least six months following the Effective Date
of this Agreement.
(2) Filling Purchase Orders: Grantor agrees to provide
Licensee all purchase orders relating to the Products received by Grantor after
the Effective Date of the Agreement. Said purchase orders shall be filled by and
for the account of Licensee.
(3) Allocation of Receipts: Grantor shall retain the right to
collect and retain payment for any goods shipped prior to the Effective Date.
Licensee shall have the right to collect and retain payment for any Products
filled or shipped after the Effective Date. Grantor agrees that for up to 30
days after the Effective Date, it will, at Licensee's request, perform invoicing
services on behalf of Licensee. Each party agrees that it shall promptly turn
over to the other remittances received by such party which properly belong to
the other.
(4) Returns: Licensee shall have full title and ownership
right in and to any product returned after the Effective Date. Licensee shall
assume responsibility for any credit or chargebacks occurring after the
Effective Date. Notwithstanding the foregoing in the event the returns received
after the Effective Date attributable to Product shipped by Grantor exceed the
aggregate of $100,000.00 (the "Excess"), Grantor shall be responsible for same.
Licensee may, at its option, take any such Excess as a credit on a dollar for
dollar basis against any monies due Grantor hereunder. If such Product is
reasonably reusable, said credit shall be after deducting the standard
production cost of Products returned, net of Licensee's hard refurbishing
charges. In the event of such credit, Licensee shall give Grantor detailed
written notice documenting such return. In no event will Grantor be responsible
or charged for Products authorized by Licensee or its agents to be "destroyed in
the field" after the Effective Date. In the event of a store closing, Licensee
will take reasonable steps to cause the store to sell through the Products
rather then returning same.
18. RECORDING OF AGREEMENT; DISCLOSURE
This Agreement may be recorded or filed with any governmental
agency or official as determined to be appropriate by either party hereto or as
may be required by law or court order.
<PAGE>
19. DEFAULT BY LICENSEE
In the event Licensee fails to make payment of any license fee
as required by paragraph 8 above or payment of any cost billed pursuant to
paragraph 10(1) hereof, , Grantor shall provide Licensee written notice thereof.
Licensee shall have 30 days after Licensee's receipt of such notice to cure such
nonpayment. Interest shall accrue on any late payment at an annual rate of 18%
from the date of such notice to the date paid.
In the event at any time two payments (or portions thereof)
aggregating $250,000 in license fee payments (exclusive of interest as provided
for above) remain outstanding at the expiration of the second cure period (i.e.
30 days after notice of the second outstanding payment), Grantor may terminate
this Agreement upon written notice to Licensee. Notwithstanding the provisions
of paragraph 26, said notice shall be effective if delivered by either (a) hand
delivery with evidence of receipt by Licensee; or (b) by certified mail, return
receipt requested.
In the event of such Default, Grantor shall have the right in
its option, to terminate this Agreement and purchase from Licensee at book
value, all then existing equipment and/or inventory and/or Products, or to deem
the First and Second Extension Terms to have been exercised and to accelerate
all unpaid License Fees for the Initial Term, First Extended Term and the Second
Extended Term in which event all such fees for such terms shall then be due in
full.
20. DISPUTE RESOLUTION
All disputes, controversies or claims arising out of or in
connection with or in relation to this Agreement, including any questions
regarding its existence, validity to termination may be submitted to and be
subject to binding arbitration under the auspices of the American Arbitration
Association. One (1) arbitrator shall be chosen by Grantor and one (1)
arbitrator shall be chosen by Licensee. The third arbitrator shall be jointly
chosen by the arbitrators selected by Grantor and Licensee. The arbitration
shall be held in the State of New Jersey. The decision of the arbitrators shall
be final and binding on the parties hereto and may be enforced by any court of
competent jurisdiction, unless such arbitration procedure, either before the
commencement or prior to the issuance of the arbitrator's finding(s) and award
is preempted by the commencement of judicial proceedings in the U.S. Bankruptcy
Court, or other court of competent jurisdiction solely to the extent a request
for equitable relief is being sought therefrom.
21. EXTENDED MEANINGS
Words importing the singular number include the plural and
vice versa, and words importing gender include all genders.
22. INTERPRETATION NOT AFFECT BY HEADINGS
The division of this Agreement into paragraph and the
insertion of heading are for convenience of reference only and shall not affect
the construction or interpretation of this Agreement.
23. APPLICABLE LAWS
This Agreement shall be deemed to have been made, executed and
delivered in New Jersey and any controversy arising under or in relation to this
Agreement shall be subject to the jurisdiction of the State or Federal Courts of
New Jersey and shall be governed by and construed in accordance with applicable
federal law and the laws of the State of New Jersey.
24. ENTIRE AGREEMENT
This Agreement and a Contract For Sale of Assets related to
the Trademarks executed contemporaneous herewith constitute the entire agreement
of the parties hereto with respect to the subject-matter hereof. There are no
representations, undertakings or agreements of any kind between the parties
hereto respecting the subject-matter hereof except those contained in this
Agreement.
25. SEVERABILITY
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
or the Agreement as a whole.
<PAGE>
26. NOTICES
(1) Any notice or other documents required or permitted to be
given under this Agreement shall be in writing and shall be delivered, mailed by
prepaid registered mail, return receipt requested or sent by telex or telecopy
addressed to the party or parties to whom it is to be given at the address shown
below or at such other address or addresses as the party or parties to whom such
writing or documents is to be given shall have last notified all other parties
in accordance with the provisions of this paragraph:
(a) If to Licensee at:
Cosmetic Essence Inc.
200 Clearview Avenue
Edison, New Jersey 08818
Attn: John Croddick
with a copy to: W. Lane Miller, Esq.
Miller & Chudzik, Esqs.
3 Auer Court
East Brunswick, New Jersey 08816
(b) If to Grantor at:
Parlux Fragrances, Inc.
3725 SW 30th Avenue
Ft. Lauderdale, FL 33312
Attn: Zalman Lekach
with a copy to: Mitchell R. Schrage, Esq.
Issler & Schrager, L.L.P.
65 E 55 Street
New York, New York 10022
(2) Any such notice or other document shall:
(a) if delivered, be deemed to have given and received at
the place of receipt on the date of delivery, provided
that if such date is a day other than a business day in
the place of receipt, such notice or documents shall be
deemed to have been given and received at the place of
receipt on the first business day in the place of receipt,
thereafter;
(b) if transmitted by telex or telecopy, be deemed to have
been given and received at the place of receipt on the
next business day in the place of receipt, thereafter;
(c) if mailed, be deemed to have been given and received
at the place of receipt on the date of actual receipt.
(3) In the event of postal disruption, such notices or
documents must either be delivered personally or sent by
telex or telecopy.
27. AMENDMENT OF AGREEMENT
None of the terms, conditions or provisions of this Agreement
shall be held to have been changed, waived, varied, modified or altered by any
act or knowledge of either party hereto, their respective agents servants or
employees unless done so in writing signed by both parties hereto.
28. WAIVER OF BREACH
No waiver on behalf of any party hereto of any breach of the
provisions shall be effective or binding on such party unless the same shall be
expressed in writing and any waiver so expressed shall not be expressed in
writing and any waiver so expressed shall not limit or affect such party's
rights with respect to any future breach of any of the provisions of this
Agreement.
29. FURTHER ASSURANCES
Each of the parties hereto covenants and agrees that he, his
heirs, executors, administrators, successors and permitted assigns will execute
such further documents and do and perform or cause to be done and performed such
further and other acts as may be necessary or desirable from time to time in
order to give full effect to the provisions of this Agreement.
<PAGE>
30. SUCCESSORS AND ASSIGNS
This Agreement shall be binding on and enure to the benefit of
the successors and assigns of both parties hereto and all persons or
corporations succeeding to or acquiring the business now carried on by Grantor
or Licensee.
31. TIME
When calculating the period of time within which or following
which any act is to be done or step taken, the date which is the reference day
in calculating such period shall be excluded.
32. TIME OF THE ESSENCE
Time shall be of the essence of this Agreement.
33. CLOSING OF AGREEMENT AND CONDITIONS THERETO
(1) The Closing of this Agreement shall be deemed to have
occurred upon delivery by Licensee to Grantor of the consideration set forth in
the Contract for Sale of certain Assets dated March 3, 1998.
34. LICENSEE ABLE TO PERFORM.
Licensee has had full disclosure and had opportunity to do due
diligence to the extent it determined to be necessary and reasonable in regard
to the Grantor's Alexandra de Markoff business. Licensee is familiar with
Grantor's efforts and difficulties concerning said business and Licensee
acknowledged that Grantor had made no representation as to the operation of said
business other than is contained herein. Licensee also acknowledges that they
are aware that the Grantor is presently in a redesign and repackaging phase of
the business and Licensee will assume such efforts to the extent it determines
to be appropriate or necessary.
Licensee represents that it is capable of manufacturing the Products,
has experience in the manufacturing of such products and is aware of the
difficulties inherent in the manufacturing, sale and distribution of a cosmetic
brand and that it has sufficient and adequate marketing staff, sales staff,
sales administration and customer service staff, forecasting, packaging
development and electronic data interchange capability sufficient to conduct the
anticipated cosmetic business.
Licensee acknowledges that Grantor shall have no liability in regard to
Licensee's success or failure of the anticipated cosmetic brand contemplated by
the subject license.
35. PARTIES RIGHT TO SET OFF:
The parties acknowledge that they anticipate executing
separate contracts in which Cosmetic Essence, Inc. (Licensee here) or one of its
affiliated companies will continue to render services for and on behalf of
Parlux Fragrances, Inc. (Grantor here).
The parties agree that either party may at any time cause
monies due from Parlux to Cosmetic Essence, Inc. to be applied as a credit
against the license fee due pursuant to this Agreement; however except as agreed
between the parties in a separate writing, said set off shall not during any
contract year exceed one half the annual license fee due.
IN WITNESS WHEREOF, the parties hereto have duly executed this
agreement as of the date first above written.
Parlux Fragrances, Inc.
Grantor
/s/ Zalman Lekach
Zalman Lekach, President & COO
Cosmetic Essence, Inc.
Licensee
/s/ John Croddick
John Croddick, President
LICENSE AGREEMENT
-----------------
THIS AGREEMENT made and entered into as of the 9th day of June, 1998,
by and between PARLUX FRAGRANCES, INC., a Delaware corporation with offices at
3725 SW 30TH Avenue, Ft. Lauderdale, Fl. 33312 ("Licensor"), and GENESIS
INTERNATIONAL MARKETING CORPORATION, a Florida corporation, with offices at 2335
NW 107th Avenue, Miami, Florida 33172("Licensee").
W I T N E S S E T H :
---------------------
WHEREAS, Licensor has used and currently is using, directly and through
licenses, the Licensed Marks (as hereinafter defined) for a variety of products;
WHEREAS, the Licensor is willing to grant the Licensee and Licensee
desires to obtain from Licensor, the exclusive right and license to use the
Licensed Marks in the Territory (as hereinafter defined) for use on and in
connection with the manufacture, promotion, distribution and sale of Articles
(as hereinafter defined);
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained herein, the parties hereto covenant and agree as follows:
ARTICLE 1
---------
Definitions
-----------
The following definitions shall apply:
A. Territory. The entire world, including but not limited to, all
duty-free shops, ships, airplanes, military bases and diplomatic missions of
every country of the world.
B. Articles. Men's and women's fragrances, cosmetics, skin care
products and bath and related personal beauty care products, or any other items
included in International Class 3, as listed in the United States Patent and
Trademark Office; Acceptable Identification of Goods and Services Manual, which
are manufactured,
Page 1
<PAGE>
produced, sold, distributed, promoted and advertised by Licensee and which bear
the Licensed Marks under this License Agreement.
C. Licensed Marks. The trademarks "BAL A VERSAILLES, JEAN DESPREZ,
SHEHERAZADE, JARDANEL, REVOLUTION A VERSAILLES", and such other trademarks as
are, from time to time, agreed to by Licensor (hereto as Exhibit "A").
D. Net Sales. The sales price at which Licensee or any Subsidiary or
Affiliate (as hereinafter defined) bills its customers for Articles less all
returns of damaged, defective or other merchandise. Net sales shall not include
insurance, freight or any legitimate documented chargebacks from customers.
E. Subsidiary. Any corporation or other entity which is 100% directly
or indirectly owned by Licensee, or its subcontracted manufacturer of the
Articles.
F. Affiliate. Any party that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control with
the Licensee, or by Luis and Norma Quintero.
G. Related Parties. Affiliates of the Licensee; entities that are
managed by or under the trusteeship of Licensee's management; principal owners
of the Licensee; its management; members of the immediate family of principal
owners of the Licensee and its management; and other parties with which the
Licensee may deal if one party controls or can significantly influence the
management or operating policies of the other.
ARTICLE 2
---------
Grant Of License
----------------
Upon the terms and conditions of this Agreement, Licensor hereby grants
to Licensee, during the term of this Agreement, an exclusive, non-transferable,
non-sublicensable (except as expressly otherwise provided below in Article 16)
non-assignable right and license to use the Licensed Marks in the Territory in
connection with the manufacture, promotion, sale and distribution solely of the
Articles and on all brand identifications. Licensee will not use the Licensed
Marks on or in connection with Articles for which the use of the Licensed Marks
has not been specifically approved by Licensor. Licensee acknowledges that the
rights granted to it hereunder
Page 2
<PAGE>
do not include the right to operate a retail store outlet under the Licensed
Marks or any variation or simulation thereof. All rights in the Licensed Marks
other than those specifically granted in this Agreement are reserved by Licensor
for its own use and benefit. Licensor shall not, during any period this
Agreement is in effect, grant any rights to any third party in connection with
the Articles for the trademarks "BAL A VERSAILLES, JEAN DESPREZ, SHEHERAZADE,
JARDANEL, REVOLUTION A VERSAILLES", nor shall Licensor trade, manufacture or
distribute the articles for the above-referenced Licensed Marks themselves.
ARTICLE 3
---------
Exclusivity of License
----------------------
Licensor will not grant any other license effective during the term of
this Agreement for the use of the Licensed Marks on or in connection with the
Articles in the Territory. Licensor may use or grant others the right to use the
Licensed Marks on or in connection with goods of all other types and
descriptions in the Territory. Licensor acknowledges that Licensee presently
distributes in parts of the Territory articles similar to the Articles covered
by this Agreement which bear other trademarks. Licensor further acknowledges and
consents to the Licensee obtaining other additional licenses for the manufacture
and/or distribution of other similar lines during the term of this Agreement.
Licensee will not, during the term of this Agreement and thereafter, attack
either Licensor's title in and to the Licensed Marks or the validity of this
Agreement.
Licensor agrees not to grant any other licenses or a right to use the
Licensed Marks to others or themselves, unless the products manufactured
pursuant to said right or license is to be used on articles of high standard and
prestige and in compliance with the standards set forth in Article 7,
sub-paragraph A(i) and C below, to ensure that the Licensed Marks maintain their
quality and exclusive distribution.
Licensor further agrees that it will not manufacture any product that
is confusingly similar to the Licensed Marks, or any product that bears
confusingly similar names, smells, or fragrance oils to the Licensed Marks.
Page 3
<PAGE>
Article 4
---------
Term of Agreement
-----------------
The original term of this Agreement shall be for ten (10) years and
twenty-two (22) days, commencing as of June 10, 1998 and continuing through June
30, 2008. Thereafter, Licensee shall have the option to renew this Agreement as
provided in Article 17 below.
ARTICLE 5
---------
Confidentiality
---------------
Both parties acknowledge and agree that (i) all information relating to
the business and operations of either party which they either learn or have
learned during or prior to the term of this Agreement is confidential; (ii) the
need to preserve the confidentiality and secrecy of such information; and (iii)
during the term of this Agreement, and after the expiration or termination
hereof, neither party shall use or disclose same, and shall take all necessary
steps to preserve in all respects such confidentiality and secrecy. The
provisions of this paragraph shall not apply with respect to any information
which has entered the public domain through no fault of either party. The
provisions of this paragraph and Licensee's obligations hereunder shall survive
the expiration or termination of this Agreement.
ARTICLE 6
---------
Duties of Licensee
------------------
A. Best Efforts. During the term of this Agreement, Licensee will use
its best efforts to exploit the rights herein granted throughout the Territory
and to sell the maximum quantity of Articles therein consistent with the high
standards and prestige represented by the Licensed Marks.
B. Design and Sample Making. Licensor shall not be responsible for the
production, design or sample making of the Articles and Licensee shall bear all
costs related thereto.
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ARTICLE 7
---------
Quality Standards
-----------------
A. Manufacture of Articles; Quality Control.
(i) The contents and workmanship of Articles shall be at all
times of the highest quality consistent with the reputation, image and prestige
of the Licensed Marks and Articles shall be distributed and sold with packaging
and sales promotion materials appropriate for such highest quality Products. The
parties agree that the Articles shall be of such premium quality, prestige and
price similar to that of the Chanel, Christian Dior, and Guerlain fragrances.
(ii) All Articles shall be manufactured, labeled, sold,
distributed and advertised in accordance with all applicable national, state and
local laws and regulations.
(iii) Licensor and its duly authorized representatives shall
have the right, upon reasonable advance notice and during normal business hours,
at Licensor's expense, to examine Articles in the process of being manufactured
and to inspect all facilities utilized by Licensee in connection therewith.
B. Distribution. In order to maintain the reputation, image and
prestige of the Licensed Marks, Licensee's normal distribution patterns shall
consist of those retail establishments whose location, merchandising and overall
operations are consistent with the products described in paragraph A of Article
7 above. Licensee agrees that it will not use the Licensed Marks in any manner
whatsoever which, directly or indirectly, would derogate or detract from its
repute.
C. Sales Force. During the term of this Agreement, Licensee shall
maintain a non-exclusive sales force suitable to carry out the purpose of this
Agreement.
ARTICLE 8
---------
Guaranteed Minimum Royalty
--------------------------
In consideration of both the license granted and the services to be
performed by Licensor hereunder, Licensee shall pay to Licensor a Guaranteed
Minimum Royalty for each Annual Period as follows:
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<PAGE>
GUARANTEED
ANNUAL PERIOD MINIMUM ROYALTY
- ------------- ---------------
First 6/10/98-6/30/99 $ 100,000
Second to Tenth 7/01/99-6/30/08 $150,000 each year
The Guaranteed Minimum Royalty payable for each Annual Period shall be
paid to Licensor as follows: (i) $25,000 simultaneously with the execution
hereof, (ii) $25,000 on the first day of October 1998, January 1999, and April
1999, (iii) commencing with July 1, 1999, $37,500 on the first day of each July,
October, January and April during such period.
The Guaranteed Minimum Royalty for each Annual Period shall be credited
against the Sales Royalty for only the same Annual Period as provided in Article
9 below.
The Guaranteed Minimum Royalty for each renewal term will be $150,000
per year.
ARTICLE 9
---------
Sales Royalty; Withholding Taxes
--------------------------------
Licensee shall pay to Licensor a Sales Royalty of five percent (5%) on
Net Sales.
The Sales Royalty hereunder shall be accounted for and paid quarterly
within forty-five (45) days after the close of each quarter ending September 30,
December 31, March 31, and June 30th. The Sales Royalty payable for each period
during each Annual Period shall be computed on the basis of Net Sales during
such Annual Period, with a credit for any Guaranteed Minimum Royalty and Sales
Royalty payments made to Licensor for said Annual Period.
No payment of Sales Royalty for any Annual Period in excess of payments
of Guaranteed Minimum Royalty for the same Annual Period shall be credited
against the Guaranteed Minimum Royalty due to Licensor for any other Annual
Period.
The Sales Royalty shall be payable on each sale made by Licensee
directly or through its Affiliates or Subsidiaries, to an entity not "owned" or
"controlled" by Licensee, its Affiliates, Subsidiaries or Related Parties.
Page 6
<PAGE>
ARTICLE 10
----------
Sales Statement; Books and Records; Audits
------------------------------------------
A. Sales Statement. Licensee shall deliver to Licensor at the time each
Sales Royalty payment is due, a statement indicating by month, the number,
description and invoice price of all Articles shipped during the period covered
by such Sales Royalty payment, the amount of discounts and credits from gross
sales which may be deducted therefrom pursuant to this Agreement and a
computation of the amount of Sales Royalty payable hereunder for said period.
Such statement shall be furnished to Licensor whether or not any Articles have
been sold during the period of which such statement is due.
Licensee shall deliver to Licensor, not later than sixty (60) days
after the close of each Annual Period during the term of this Agreement (or
portion thereof in the event of prior termination for any reason), a statement
signed by a duly authorized officer relating to said entire Annual Period,
setting forth the same information required to be submitted by Licensee in
accordance with the first paragraph of this Article.
B. Books and Records; Audits. Licensee, Affiliate, and Subsidiary shall
prepare and maintain, in such manner as will allow its accountants to audit same
in accordance with generally accepted accounting principles, complete and
accurate books of account and records (specifically including without limitation
the originals or copies of documents supporting entries in the books of account)
in which accurate entries will be made covering all transactions, arising out of
or relating to this Agreement. Licensee, Affiliate, and Subsidiary shall keep
separate books and records for such matters that do not include matters or sales
related to this Agreement. Licensor and its duly authorized representatives
shall have the right, for the duration of this Agreement and for three (3) year
thereafter, during regular business hours and upon seven (7) business days
advance notice (unless a shorter period is appropriate in the circumstances), to
audit said books of account and records and examine all other documents and
material in the possession or under the control of Licensee, Affiliate, and
Subsidiary with respect to the subject matter and the terms of this Agreement,
including, without limitation, invoices, credits and shipping documents, and to
make copies of any and all of the above. All such books of account, records,
documents and materials shall be kept available by Licensee for at least three
(3) years after the end of the Annual Period to which they relate.
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<PAGE>
If, as a result of any audit of Licensee's books and records, it is
shown that Licensee's payments were less than the amount which should have been
paid by an amount equal to five (5%) percent or more of the payments actually
made with respect to sales occurring during the period in question, Licensee
shall reimburse Licensor for the cost of such audit and shall pay twice the
amount due for all payments required to be made to eliminate any discrepancy
revealed by said audit within ten (10) days after Licensor's demand therefor.
ARTICLE 11
----------
Indemnification and Insurance
-----------------------------
A. Indemnification of The Parties. Both parties hereby agree to save
and hold each other and their agents harmless of and from and to indemnify them
against any and all claims, suits, injuries, losses, liability, demands, damages
and expenses (including reasonable attorneys' fees and expenses) which either
party may incur or be obligated to pay, or for which either may become liable or
be compelled to pay in any action, claim or proceeding against it, for or by
reason of any acts, whether of omission or commission, that may be committed or
suffered by the other party or any of its servants, agents or employees in
connection with the performance of this Agreement, or failure thereof, including
but not limited to those arising out of the alleged defect in any Article
produced under this Agreement, or the manufacture, labeling, sale, distribution
or advertisement of any Article in violation of any national, state or local law
or regulation or the breach of Article 5 hereof. The provisions of this
paragraph and the obligations hereunder shall survive the expiration or
termination of this Agreement.
B. Insurance Policy. Licensee shall procure and maintain at its own
expense in full force and effect at all times during which Articles are being
sold, with a responsible insurance carrier acceptable to Licensor, a public
liability insurance policy including products liability coverage with respect to
Articles with a limit of liability not less than $2,000,000. It shall be
acceptable if such coverage is provided by a product liability policy and an
additional umbrella policy. Such insurance policies shall be written for the
benefit of Licensee and Licensor and shall provide for at least thirty (30) days
prior written notice to said parties of the cancellation or substantial
modification thereof. Licensor shall be a named additional insured on each
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<PAGE>
such policy. Such insurance may be obtained by Licensee in conjunction with a
policy which covers products other than Articles.
C. Evidence of Insurance. Licensee shall, from time to time upon
reasonable request by Licensor, promptly furnish or cause to be furnished to
Licensor evidence in form and substance satisfactory to Licensor of the
maintenance of the insurance required by subparagraph B above, including, but
not limited to, copies of policies, certificates of insurance (with applicable
riders and endorsements) and proof of premium payments. Nothing contained in
this paragraph shall be deemed to limit in any way the indemnification
provisions of the subparagraph A above.
D. Notice. If either party receives notice of any action, claim, suit
or proceeding in respect of which indemnification may be sought, prompt notice
shall be given to the other party along with a demand that said party defend
such action, claim, suit or proceeding on behalf of both parties. In the event
appropriate action is not taken within twenty (20) days after receipt of notice,
then the notifying party shall have the right, but not the obligation, to defend
such action, claim, suit or proceeding. In any case, the Licensor and the
Licensee shall keep each other fully advised of all developments and shall
cooperate fully with each other in all respects in connection with any such
defense as is made.
ARTICLE 12
----------
The Licensed Marks
------------------
A. Licensee acknowledges the validity of the Licensed Marks, the
secondary meaning associated with the Licensed Marks, and the rights of Licensor
with respect to the Licensed Marks in the Territory in any form or embodiment
thereof and the goodwill attached or which shall become attached to the Licensed
Marks in connection with the business and goods in relation to which the same
has been, is or shall be used. Sales by Licensee shall be deemed to have been
made by Licensor for purposes of trademark registration and all uses of the
Licensed Marks by Licensee shall inure to the benefit of Licensor. Licensee
shall not, at any time, do or suffer to be done, any act or thing which may in
any way adversely affect any rights of Licensor in and to the Licensed Marks or
any registrations thereof or which, directly or indirectly, may reduce the value
of the Licensed Marks or detract from its reputation.
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<PAGE>
B. Licensor shall be responsible for keeping any Licensed Marks
registered in International Class 3, in full force and effect throughout the
term of this Agreement, and, for any registration of the Licensed Marks in
International Class 3 beyond registrations which already exist in the Territory.
Licensee shall reimburse Licensor its actual out of pocket costs plus a fee of
fifty dollars ($50) per hour to Licensor for the maintenance of same and agrees
to provide Licensee with adequate documentation for time incurred. Licensor
shall follow up and advance all renewal registration fees and otherwise maintain
the rights in the Trade Marks in the Territory where presently maintained.
Licensor further agrees (a) to instruct its local trademark and patent agent(s)
to keep Licensee fully and completely informed of all action taken or scheduled
to be taken in respect of the Licensed Marks and to cooperate with Licensee to
take such actions as need be taken to maintain such Licensed Marks, and (b) to
notify Licensee at the time it makes an application for a patent or trademarks
or acquires any right in a patent or trademarks which is or becomes subject to
the terms of this Agreement.
C. Licensee shall use the Licensed Marks in each jurisdiction in the
Territory strictly in compliance with the legal requirements obtaining therein
and shall use such markings in connection therewith as may be required by
applicable legal provisions. Licensee shall cause to appear on all Articles and
on all materials on or in connection with which the Licensed Marks is used, such
legends, markings and notices as may be reasonably necessary in order to give
appropriate notice of any trademark, trade name or other rights therein or
pertaining thereto.
D. In the event that Licensee learns of any infringement or imitation
of the Licensed Marks or of any use by any person of a trademark similar to the
Licensed Marks, it promptly shall notify Licensor thereof. In no event, however,
shall Licensor be required to take any action if it deems it inadvisable to do
so.
E. Licensor shall not be required to protect, indemnify or hold
Licensee harmless against, or be liable to Licensee for, any liabilities,
losses, expenses or damages which may be suffered or incurred by Licensee as a
result of any infringement or allegation thereof by any other person, firm or
corporation, other than by reason of Licensor's breach of the representations
made and obligations assumed herein.
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<PAGE>
ARTICLE 13
----------
Copyright
---------
Any copyright which may be created in any sketch, design,
packaging, label, tag or the like designed or approved by Licensor shall be the
property of Licensor. However, if said sketches, designs, or other artwork
created by the Licensee can be used without the Licensed Marks, then Licensee
shall have the right to do so. This right shall survive the termination or
cancellation of this Agreement. Licensee shall not, at any time, do or suffer to
be done, any act or thing which may adversely affect any rights of Licensor in
such sketches, designs, packaging, labels, containers, tags and the like,
including, without limitation, filing any application in its name to record any
claims to copyrights in Articles, and shall do all things reasonably required by
Licensor to preserve and protect said rights, including, without limitation,
placing the copyright notice specified by the Universal Copyright Convention on
all Articles and the packaging, labels and tags therefor.
ARTICLE 14
----------
Defaults; Termination
---------------------
A. The following conditions and occurrences shall constitute "Events of
Default" by Licensee:
1. the failure to pay Licensor the full amount due it under
any of the provisions of this Agreement by the prescribed date for such payment;
2. the failure to deliver full and accurate reports pursuant
to any of the provisions of this Agreement by the prescribed due date therefor;
3. the making or furnishing of a knowingly false statement in
connection with or as part of any material aspect of a report, notice or request
rendered pursuant to this Agreement;
4. the failure to maintain the insurance required by Article
11;
5. the attempted or actual assignment, transfer or sublicense
of Licensee's rights under this Agreement except as otherwise permitted
hereunder;
6. the use of the Licensed Marks in an unauthorized or
unapproved manner;
7. the commencement against Licensee of any proceeding in
bankruptcy, or similar law, seeking reorganization, liquidation, dissolution,
arrangement, readjustment, discharge of debt, or seeking the appointment of a
Page 11
<PAGE>
receiver, trustee or custodian of all or any substantial part of Licensee's
property, not contested within sixty (60) days, or Licensee's making of an
assignment for the benefit of creditors, filing of a bankruptcy petition, its
acknowledgment of its insolvency or inability to pay debts, or taking advantage
of any other provision of the bankruptcy laws;
8. a merger or consolidation of Licensee where Licensee does
not survive which is not approved by Licensor, which approval shall not be
unreasonably withheld;
9. the material breach of any other material promise or
agreement made herein.
B. In the event of (i) an Event of Default under A.3, A.5, A.6, A.7, or
A.8; (ii) Licensee fails to cure any other Event of Default within thirty (30)
days after written notice of default is transmitted to Licensee, this Agreement
shall, at Licensor's option, be terminated, on notice to Licensee, and the
remaining Guaranteed Minimum Royalties for all Annual Periods under the current
term as in Article 8 above shall become due, without prejudice to Licensor's
right to receive other payments due or owing to Licensor under this Agreement or
to any other right of Licensor, including the right to damages and/or equitable
relief.
C. Upon the termination of this Agreement, in the event this Agreement
is not renewed as provided in Article 17 below, or in the event of the
termination or expiration of a renewal term of this Agreement, Licensee, except
as specified below, will immediately discontinue use of the Licensed Marks, will
not resume the use thereof or adopt any colorable imitation of the Licensed
Marks or any of its parts. Upon request by Licensor, Licensee shall assign to
Licensor such rights as Licensee may have acquired in the Licensed Marks. In the
event that this Agreement expires or is terminated, Licensor shall have an
option, but not an obligation, to purchase the bottle molds and tooling, and all
plates, engravings, silk-screens, or the like, used to make or reproduce the
Licensed Marks, and the Designs for the Articles, free of all liens and other
encumbrances, at a price equal to Licensee's cost for same established by
submission of bill(s) from supplier and satisfactory proof of payment for same
less its allocated depreciation.
Licensor shall pay such cost as follows: 25% (twenty-five) at closing and the
balance payable in six (6) equal monthly payments. Licensor shall, at the time
it exercises its
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<PAGE>
purchase option, enter into a security agreement with Licensee with respect to
the molds, which shall entitle Licensee to foreclose on its security interest in
the molds in the event Licensor fails to make any installment payment due within
fifteen (15) days after receiving notice of default. Licensor shall exercise its
aforesaid option within thirty (30) days after Licensee's submission of
documents establishing cost. Notwithstanding the foregoing, if Licensor has
terminated this Agreement due to Licensee's default, Licensor, at its option,
shall be entitled, in exercising its purchase option, to deduct from the cost
price an amount equal to the sales and guaranteed minimum royalties Licensor is
entitled to recover, for which deduction Licensee shall receive a credit. In the
event Licensor exercises its aforesaid option, Licensee shall be precluded
forever from using the bottle molds or tools and from selling or otherwise
transferring or licensing any rights whatsoever in the molds or tools to any
third party. In the event that Licensor does not exercise its aforesaid option,
Licensee shall not use the bottle molds or tools or sell or otherwise transfer
or license any rights whatsoever in the bottle molds or tools to any third party
for a period of three (3) years after the determination of the fair market
value. In the event of any permitted use of the bottle molds and/or tools by
Licensee, Licensee shall not use in connection therewith the Licensed Marks, any
trademark confusingly similar thereto, any advertising or promotional materials
used in connection with the Articles or any other markings or materials which
would cause a reasonable consumer to believe that any new items sold using the
bottle molds and tools are authorized by Licensor or in some way associated with
the Licensed Marks. Any permitted sale or license of the bottle molds and/or
tools by Licensee shall prohibit in writing the purchaser or licensee from using
the Licensed Marks, and confusingly similar trademark, advertising, promotional
materials, markings or other materials and shall expressly make Licensor a third
party beneficiary of such provision.
ARTICLE 15
----------
Rights on Expiration or Termination
-----------------------------------
A. If this Agreement expires or is terminated, Licensee shall cease to
manufacture Articles (except for work in process or to balance component
inventory) but shall be entitled, except upon a termination by Licensor pursuant
to Article 14 above, for an additional period of twelve (12) months only, on a
non-exclusive basis, to sell and dispose of its inventory subject, however, to
the provisions of paragraph D of this Article. Such sales shall be made subject
to all of the provisions of this
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<PAGE>
Agreement and to an accounting for and the payment of Sales Royalty thereon but
not to the payment of Guaranteed Minimum Royalties. Such accounting and payment
shall be made monthly.
B. In the event of termination in accordance with Article 14 above,
Licensee shall pay to Licensor, the Sales Royalty then owed to it pursuant to
this Agreement or otherwise.
C. Notwithstanding any termination in accordance with Article 14 above,
Licensor shall have and hereby reserve all rights and remedies which it has, or
which are granted to it by operation of law, to enjoin the unlawful or
unauthorized use of the Licensed Marks, and to collect royalties payable by
Licensee pursuant to this Agreement and to be compensated for damages for breach
of this Agreement.
D. Upon the expiration or termination of this Agreement, Licensee shall
deliver to Licensor a complete and accurate schedule of Licensee's inventory of
Articles and of related work in process then on hand (including any such items
held by Subsidiaries, Affiliates, Related Parties or others on behalf of
Licensee) (hereinafter referred to as "Inventory). Such schedule shall be
prepared as of the close of business on the date of such expiration or
termination and shall reflect Licensee's cost of each such item. Notwithstanding
anything contained to the contrary in this Agreement, Licensor thereupon shall
have the option, but not an obligation, exercisable by notice in writing
delivered to Licensee within thirty (30) days after its receipt of the complete
Inventory schedule, to purchase any or all of the Inventory, free of all liens
and other encumbrances, for an amount equal to the lowest Licensee's selling
price. In the event such notice is sent by Licensor, Licensee shall deliver to
Licensor or its designee all of the Inventory referred to therein within thirty
(30) days after Licensor's said notice and, in respect of any Inventory so
purchased, assign to Licensor all outstanding orders to Licensee from its
customers. Licensor shall pay Licensee for such Inventory within forty-five (45)
days after the delivery of such Inventory to Licensor. No Sales Royalty shall be
payable to Licensor with respect to any such inventory purchased by Licensor.
E. In addition to the option afforded Licensor by paragraph D in this
Article, if, at any time after the termination of this Agreement, Licensee is
willing to sell all or substantially all of its remaining Inventory to a single
purchaser or group of related
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<PAGE>
purchasers, Licensee will advise Licensor of the identity of the prospective
purchaser(s) and the price and terms of the proposed sale and the Licensor or
its designee will have the right of first refusal to buy the remaining Inventory
at that price and on those terms and shall have the right to an assignment and
assumption of any and all then outstanding orders from Licensee to its suppliers
and from Licensee's customers to Licensee for the Articles bearing the Licensed
Marks.
ARTICLE 16
----------
Sublicensing and Distribution
-----------------------------
A. The performance of Licensee hereunder is of a personal nature.
Therefore, this Agreement may be assigned, sublicensed or transferred by
Licensee to a Subsidiary or Affiliate. However, this Agreement may not be
assigned, sublicensed or transferred by Licensee to a non-affiliated party,
except as approved by Licensor's prior written approval, which approval may be
denied by Licensor for any reason in its sole discretion. In the event that
Licensee should assign, sublicense or transfer, whether to a subsidiary or an
affiliate, as permitted by the constraints of this Article 16, Licensee hereby
acknowledges and agrees that it shall be wholly and ultimately responsible for
all of the terms and conditions for the remainder of the then current term of
this Agreement, including financial commitments as provided herein.
B. Licensee shall be entitled to use distributors in connection with
its sale of Articles under this Agreement without approval of Licensor. No such
distributor, however, shall be entitled to exercise any of Licensee's rights
hereunder except for the sale of Articles which have been approved by Licensor
hereunder.
ARTICLE 17
----------
Renewals
--------
A. Provided Licensee is not in default of any obligation owed Licensor
hereunder or cancelled at the end of the period by Licensee, and the Agreement
has not been previously terminated by Licensor due to an event of default, as
defined in Article 14 (a) above, this Agreement will automatically renew for an
additional five (5) year term. The first renewal term will commence on July 1,
2008 and expire on June 30, 2013. The terms and conditions applicable to the
first renewal term shall be the same as set forth in the Agreement for the
original term except that the Guaranteed
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<PAGE>
Minimum Royalty for each Annual Period in the first renewal term shall be
$200,000. One-quarter of the amount due for each Annual Period shall be paid on
the first day of each July, October, January and April during such period with
the Guaranteed Minimum Royalty paid for such Annual Period credited against the
Sales Royalty Paid for such Annual Period as provided in Article 9 above.
Notwithstanding anything contained to the contrary in this Agreement, in the
event the Agreement is terminated by Licensor due to a default by Licensee
during the first renewal term, Licensee shall pay Licensor all monies due for
the remainder of that term.
B. At the end of the first renewal term, provided Licensee is not in
default of any obligation owed Licensor hereunder or cancelled at the end of the
period by Licensee, and the Agreement has not been previously terminated by
Licensor, this Agreement will automatically renew every five (5) years. The
terms and conditions applicable to the subsequent renewal terms shall be the
same as set forth in the Agreement for the original term and the Guaranteed
Minimum Royalty for each Annual Period in all subsequent renewal terms shall be
$200,000. One-quarter of the amount due for each Annual Period shall be paid on
the first day of each July, October, January and April during such period with
the Guaranteed Minimum Royalty paid for such Annual Period credited against the
Sales Royalty Paid for such Annual Period as provided in Article 9 above.
Notwithstanding anything contained to the contrary in this Agreement, in the
event the Agreement is terminated by Licensor due to a default by Licensee
during any subsequent renewal term, Licensee shall pay Licensor all monies due
for the remainder of that term.
ARTICLE 18
----------
Miscellaneous
-------------
A. Representations. The parties respectively represent and warrant
that they have full right, power and authority to enter into this
Agreement and perform all of their obligations hereunder and that
they are under no legal impediment which would prevent their
signing this Agreement or consummating the same. Licensor
represents and warrants that it has the right to grant the
Licensee an exclusive license to use the Licensed Marks for
products covered under International Class 3 and that Licensor has
not granted any other existing license to use the Licensed Marks
on products covered hereunder in the Territory and that no such
license will be granted
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<PAGE>
during the term of this Agreement except in accordance with the
provisions hereof.
B. Governing Law; Entire Agreement. This Agreement shall be construed
and interpreted in accordance with the laws of the State of
Florida applicable to agreements made and to be performed in said
State, contains the entire understanding and agreement between the
parties hereto with respect to the subject matter hereof,
supersedes all prior oral or written understandings and agreements
relating thereto and may not be modified, discharged or
terminated, nor may any of the provisions hereof be waived,
orally.
C. No Agency. Nothing herein contained shall be construed to
constitute the parties hereto as partners or as joint venturers,
or either as agent of the other, and Licensee shall have no power
to obligate or bind Licensor in any manner whatsoever.
D. No Waiver. No waiver by either party, whether express or implied,
of any provision of this Agreement, or of any breach or default
thereof, shall constitute a continuing waiver of such provision or
of any other provision of this Agreement. Acceptance of payments
by Licensor shall not be deemed a waiver by Licensor of any
violation of or default under any of the provisions of this
Agreement by Licensee.
E. Void Provisions. If any provision or any portion of any provision
of this Agreement shall be held to be void or unenforceable, the
remaining provisions of this Agreement and the remaining portion
of any provision held void or unenforceable in part shall continue
in full force and effect.
F. Force Majeure. Neither party hereto shall be liable to the other
for delay in any performance or for the failure to render any
performance under the Agreement (other than payment to any accrued
obligation for the payment of money) when such delay or failure is
by reason of riots, fires, explosions, blockade, civil commotion,
epidemic, insurrection, war or warlike conditions, the elements,
embargoes, act of God or the public enemy, compliance with any
law, regulation or other governmental order, whether or not valid,
or other similar causes beyond the control of the party
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effected. The party claiming to be so affected shall give notice
to the other party promptly after it learns of the occurrence of
said event and of the adverse results thereof. Such notice shall
set forth the nature and extent of the event. The delay or failure
shall not be excused unless such notice is so given.
Notwithstanding any other provision of this Agreement, either
party may terminate this Agreement if the other party is unable to
perform any or all of its obligations hereunder for a period of
six (6) months by reason of said event as if the date of
termination were the date set forth herein as the expiration date
hereof. If either party elects to terminate this Agreement under
this paragraph, Licensee shall have no further obligations for the
Guaranteed Minimum Royalty beyond the date of termination (which
shall be prorated if less than an Annual Period is involved) and
shall be obligated to pay any Sales Royalty which is then due or
becomes due.
G. Binding Effect. This Agreement shall inure to the benefit of and
shall be binding upon the parties, their respective successors,
Licensor's transferees and assigns and Licensee's permitted
transferees and assigns.
H. Resolution of Disputes. Any dispute relating to this Agreement
shall be resolved in a court of law located in the State of
Florida, County of Dade or Broward, without a jury. Both parties
expressly waive trial by jury and consent to the jurisdiction of
such courts.
I. Survival. The provisions of Articles 10, 11A, 11D, 12,13, 14, 15,
17 (if so renewed) and 18 shall survive any expiration or
termination of this Agreement.
J. Paragraph Headings. The paragraph headings in this Agreement are
for convenience of reference only and shall be given no
substantive effect.
K. Counterparts. This Agreement may be signed in counterparts.
ARTICLE 19
----------
Notices
-------
Any notice or other communications required or permitted by this
Agreement to be given to a party will be in writing and will be considered to be
duly given when
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sent by certified mail or registered mail, return receipt requested, or by any
other expedited delivery service wherein proof of delivery is obtained, to the
party concerned to the following persons or addresses (or to such other persons
or addresses as a party may specify by notice to the other):
TO LICENSOR PARLUX FRAGRANCES, INC.
3725 S.W. 30th Avenue
Ft. Lauderdale, Florida 33312
Attention: Zalman Lekach, President & COO
Tel: 954/316-9008; Fax: 954/316-8155
WITH A COPY TO: ISSLER & SCHRAGE. L.L.P.
Park Avenue Tower
65 East 55th Street
New York, New York 10022-3219
Attention: Mitchell R. Schrage, Esq.
Tel: 212/758-1600; Fax: 212/758-1616
TO LICENSEE: GENESIS INTERNATIONAL MARKETING CORPORATION
2335 NW 107th Avenue
Miami, Florida 33172
Attention: Mr. Luis Quintero, President
Tel: 305/591-3565; Fax: 305/594-7641
WITH A COPY TO: Barry M. Boren, Esq.
Dadeland Towers
9200 S. Dadeland Blvd., Suite 412
Miami, Florida 33156
Tel: 305/670-2200; Fax: 305/670-1747
Notice of the change of any such address shall be duly given by either
party to the other in the manner herein provided.
I N WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
PARLUX FRAGRANCES, INC. GENESIS INTERNATIONAL
MARKETING CORPORATION
BY: /s/Zalman Lekach BY: /s/Luis Quintero
------------------------------- ------------------------
Zalman Lekach, President & COO Luis Quintero, President
Date: June 9, 1998 Date: June 9, 1998
------------- -------------
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-49884) of Parlux Fragrances, Inc. of our report
dated July 20, 1998 appearing on page F-2 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Miami, Florida
July 20, 1998
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