REVISED PRELIMINARY COPY - SUBJECT TO COMPLETION,
DATED JANUARY 17, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A INFORMATION
Consent Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant |_|
Filed by a Party other than the Registrant |X|
Check the appropriate box:
|X| Revised Preliminary Consent Statement
|_| Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive Consent Statement
|_| Definitive Additional Materials
|_| Soliciting Materials Pursuant to Section 240.14a-12
PARLUX FRAGRANCES, INC.
(Name of Registrant as Specified in its Charter)
GLENN NUSSDORF
(Name of Person(s) Filing Consent Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
1.) Title of each class of securities to which the transaction
applies:
2.) Aggregate number of securities to which transaction applies:
3.) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
4.) Proposed maximum aggregate value of transaction:
5.) Total fee paid:
|_| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1.) Amount Previously Paid:
2.) Form, Schedule or Registration Statement No.:
3.) Filing Party:
4.) Date Filed:
REVISED PRELIMINARY COPY - SUBJECT TO COMPLETION,
DATED JANUARY 17, 2007
CONSENT STATEMENT
OF
GLENN NUSSDORF
This consent statement and the enclosed WHITE consent card are being
furnished by Glenn Nussdorf ("Mr. Nussdorf ") in connection with the
solicitation by Mr. Nussdorf of written consents from the holders of shares of
common stock, par value $0.01 per share (the "Shares" or the "Common Stock"), of
Parlux Fragrances, Inc., a Delaware corporation (the "Company"), to take the
following actions (each, a "Proposal" and collectively, the "Proposals") without
a meeting of stockholders, as authorized by the General Corporation Law of the
State of Delaware (the "DGCL"):
Proposal 1. Remove, without cause, all existing members of the
Company's Board of Directors (the "Board") (and any
person or persons, other than those elected pursuant
to this consent solicitation, elected or designated
by any of such directors to fill any vacancy or newly
created directorship); and
Proposal 2. Elect Glenn Nussdorf, Michael Katz, Joshua Angel,
Anthony D'Agostino, Neil Katz and Robert Mitzman
(each, a "Nominee" and collectively, the "Nominees")
as the directors of the Company (or if any such
Nominee is unable or unwilling to serve on the Board,
any other person designated as a Nominee by Mr.
Nussdorf).
Mr. Nussdorf believes that the Proposals, if adopted, will provide the
stockholders of the Company with a Board which will be comprised of individuals
with integrity and extensive business experience, the skills and conviction to
evaluate management performance and the capability of assisting with the
selection of highly qualified senior executives who intend to take such actions
as may be necessary to stem the downward trend of the Company's stock price.
This consent statement is first being mailed to stockholders, along
with the enclosed WHITE consent card, on or about January [ ], 2007.
Neither of the Proposals is subject to, or is conditioned upon, the
adoption of the other Proposal; however, if none of the existing members of the
Board are removed in Proposal 1, there will be no vacancies to fill and none of
the Nominees can be elected in Proposal 2. Accordingly, Mr. Nussdorf will not be
seeking to elect the Nominees unless the stockholders also approve the removal,
without cause, of one or more of the existing members of the Board. Neither of
the Proposals will be effective unless the delivery of the written consents
complies with Section 228(c) of the DGCL. See "Consent Procedures" for
additional information regarding the removal and election of directors.
Mr. Nussdorf beneficially owns an aggregate of 2,212,629 Shares
(approximately 12.0%) of the Company's Common Stock and intends to deliver a
consent in favor of each of the Proposals. Other than Mr. Nussdorf, no other
participant in Mr. Nussdorf's solicitation of written consents from the
stockholders of the Company beneficially owns any Shares of the Company's Common
Stock.
Mr. Nussdorf and Alfred Paliani, together with the Nominees, are
participants in this solicitation of written consents by Mr. Nussdorf from the
stockholders of the Company (collectively, the "Participants," and each, a
"Participant"). Alfred Paliani is the General Counsel of Quality King
Distributors, Inc., a privately-held corporation controlled by Mr. Nussdorf,
Stephen Nussdorf and Arlene Nussdorf-Mark ("QKD"). Michael Katz, one of the
Nominees, is the President and Chief Executive Officer of E Com Ventures, Inc.
("ECMV"), a public company controlled by Mr. Nussdorf and Stephen Nussdorf, and
also serves as a director and executive officer of certain other private
companies controlled by the Nussdorf family. Mr. Nussdorf, Stephen Nussdorf and
Arlene Nussdorf-Mark are siblings and Lillian Ruth Nussdorf is their mother.
Additional information concerning the Nominees is set forth
1
in "The Proposals - Proposal 2: Election of Nominees" and additional
information concerning the Participants is set forth in Annex A.
THIS CONSENT SOLICITATION IS BEING MADE BY MR. NUSSDORF AND NOT BY OR
ON BEHALF OF THE COMPANY. MR. NUSSDORF IS ASKING THE STOCKHOLDERS OF THE COMPANY
TO ACT BY WRITTEN CONSENT WITH RESPECT TO THESE PROPOSALS ON THE ACCOMPANYING
WHITE CONSENT CARD.
A consent solicitation is a process that allows a company's
stockholders to act by submitting written consents to any proposed stockholder
actions in lieu of voting in person or by proxy at an annual or special meeting
of stockholders. Whereas at special or annual meetings of stockholders at which
a quorum is present, proposed actions may only require that a majority of the
shares present and entitled to vote on a proposal vote in favor of the proposal,
a written consent solicitation requires the majority vote of all outstanding
stock of a company.
YOUR PROMPT ACTION IS IMPORTANT. MR. NUSSDORF URGES YOU TO SIGN, DATE
AND RETURN THE ENCLOSED WHITE CONSENT CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE. YOUR CONSENT IS IMPORTANT, NO MATTER HOW MANY OR HOW FEW SHARES YOU
OWN. PLEASE SEND IN YOUR WHITE CONSENT CARD TODAY. PLEASE NOTE YOU MUST SIGN AND
DATE THE WHITE CONSENT CARD IN ORDER FOR IT TO BE VALID.
Mr. Nussdorf has engaged Innisfree M&A Incorporated ("Innisfree") to
assist him in the solicitation of consents from the Company's stockholders. If
your Shares are registered in your name on the Company's stock records, please
sign, date and mail the enclosed WHITE consent card to Innisfree at 501 Madison
Avenue, 20th Floor, New York, New York 10022, in the postage-paid envelope
provided. If your Shares are held in the name of a brokerage firm, bank or other
nominee, only it can execute a consent representing your Shares and only on
receipt of your specific instructions. Accordingly, you should contact the
person responsible for your account and give instructions for a WHITE consent
card to be signed on your behalf. You can also sign, date and return the
enclosed WHITE consent card to your brokerage firm, bank or other nominee in the
postage paid envelope provided.
If you have any questions about executing your consent or require
assistance, please contact:
Innisfree M&A Incorporated
501 Madison Avenue
20th Floor
New York, NY 10022
Stockholders Call Toll Free: (877) 456-8847
Banks and Brokers Call Collect: (212) 750-5833
2
THE PROPOSALS
Mr. Nussdorf is soliciting consents from the Company's stockholders in
support of the following Proposals:
PROPOSAL 1: REMOVAL OF DIRECTORS.
Proposal 1 is to remove, without cause, all existing directors of the
Company (and any person or persons, other than those elected by this consent
solicitation, elected or designated by any of such directors to fill any vacancy
or newly created directorship at the time the action proposed to be taken by
this consent procedure becomes effective). According to the Company's filings
with the Securities and Exchange Commission (the "Commission"), the following
six persons currently are members of the Company's Board of Directors: Ilia
Lekach, Frank Buttacavoli, Glenn Gopman, Esther Egozi Choukroun, David Stone and
Jaya Kader Zebede. According to the Company's filings with the Commission, Isaac
Lekach, the 25-year old son of Ilia Lekach, resigned as a director on November
16, 2006 after serving on the Board for nearly two years, citing time and travel
constraints as the reason for his resignation.
Pursuant to Section 141(k) of the DGCL, any director or the entire
Board may be removed, with or without cause, by holders of a majority of the
Shares then entitled to vote at an election of directors. See "Consent
Procedures" for further details on the requirements to remove an individual
director.
PROPOSAL 2: ELECTION OF NOMINEES.
Proposal 2 is to elect Mr. Nussdorf's six Nominees to serve as
directors of the Company. Accordingly, if Proposal 1 is approved, Mr. Nussdorf
is nominating six Nominees to fill the available seats on the Board, and if the
Nominees are elected they will constitute the entire membership of the Board.
See "Consent Procedures" for further details relating to the election of the
Nominees if fewer than all the existing directors are removed pursuant to
Proposal 1.
Mr. Nussdorf's Nominees are named in the table below. Mr. Nussdorf and
Michael Katz, if elected, would not be independent directors within the meaning
of NASDAQ listing standards. If elected, the Nominees intend to appoint Mr.
Nussdorf as Chairman of the Board and Chief Executive Officer of the Company and
Michael Katz as Vice Chairman of the Board. These positions, in addition to the
fact that Michael Katz has operational duties at other companies controlled by
Mr. Nussdorf, would make Mr. Nussdorf and Michael Katz inside directors of the
Company and thus not independent, if elected. Mr. Nussdorf believes that the
remaining Nominees are independent within the meaning of NASDAQ listing
standards and, except as described herein, are not currently affiliated with Mr.
Nussdorf, or with the Company or any subsidiary of the Company. Consequently,
Mr. Nussdorf believes that if the Nominees are elected, a majority of the
directors will be independent within the meaning of the NASDAQ listing
standards, and there will be a sufficient number of independent directors to
serve on the Board's Audit, Compensation and Nominating Committees. Mr. Nussdorf
reserves the right to nominate or substitute additional persons if the Company
makes or announces any changes to its bylaws or takes or announces any other
action that has, or if consummated would have, the effect of disqualifying any
or all of the Nominees.
The composition of the Board's committees will be determined by the
Nominees, if elected. The Audit Committee, Compensation Committee and Nominating
Committee will each consist solely of independent directors as determined in
accordance with NASDAQ listing standards. Except as described herein with
respect to the Strategic Alternatives Committee, no other specific
determinations regarding the composition of the Board's committees have been
made as of the date of this consent statement.
The Nominees have furnished the following information regarding their
principal occupations and certain other matters.
3
- --------------------------------- ------- ------------------------------------------------------------------------------
Principal Occupation or Employment During
Name and Business Address Age The Last Five Years and Other Directorships
------------------------- --- -------------------------------------------
- --------------------------------- ------- ------------------------------------------------------------------------------
Glenn Nussdorf 52 Since 1996, Mr. Nussdorf has served as Chief Executive Officer of QKD and
2060 Ninth Avenue, its subsidiary and affiliates, a group of companies engaged in the business
Ronkonkoma, New York 11779 of wholesale distribution of health and beauty care products,
pharmaceuticals, hair care products and fragrances. From 1996 until
November 2006 when he resigned his offices and directorships, Mr.
Nussdorf was a director and senior officer of Model Reorg, Inc.
("Model"), a sister company to QKD, and all of Model's subsidiaries, all
of which are wholesalers and retailers of fragrances.
- --------------------------------- ------- ------------------------------------------------------------------------------
Michael Katz 58 Mr. Katz joined ECMV, a specialty retailer and wholesaler of fragrances and
2060 Ninth Avenue, related products, in February 2004 as its President, Chief Executive Officer
Ronkonkoma, New York 11779 and as a director. Mr. Nussdorf and his brother, Stephen Nussdorf,
beneficially own an aggregate of approximately 45% of ECMV's outstanding
common stock. Mr. Katz has served in various capacities at QKD and its
affiliated companies and has been primarily responsible for overseeing
administration, finance and mergers and acquisitions. Mr. Katz has
participated in the design and implementation of the business strategy that
has fostered the growth of QKD and its affiliated companies. From 1994
until 1996 he was Senior Vice President of QKD. From 1996, he has served as
Executive Vice President of QKD. From 1996 until November 2006, he served
in the Office of the Chief Executive and as a director of Model. Mr. Katz
resigned from this position in November 2006. Mr. Katz became Executive
Vice President, Chief Financial Officer and Treasurer of QK Healthcare,
Inc., a wholly owned subsidiary of QKD in 2000. Mr. Katz is a Certified
Public Accountant.
- --------------------------------- ------- ------------------------------------------------------------------------------
Joshua Angel 70 From 1981 to January 2006, Mr. Angel served as President of Angel & Frankel,
460 Park Avenue P.C., a specialty law firm. This firm merged its practice into Cole,
New York, New York 10022 Schotz, Meisel, Forman & Leonard, P.A. ("Cole Schotz") on January 1, 2006.
Mr. Angel was Of Counsel to Cole Schotz until January 12, 2007. He is
currently Of Counsel to Herrick, Feinstein LLP, a law firm. Also, Mr.
Angel serves as a director of Cellular Technical Services Company, Inc. He
has from time to time provided legal services to certain companies
affiliated with Mr. Nussdorf. Mr. Angel was paid $32,686, $19,391 and
$37,358 for the twelve month periods ended October 31, 2004, 2005, and
2006, respectively, for legal services he rendered to companies affiliated
with Mr. Nussdorf.
- --------------------------------- ------- ------------------------------------------------------------------------------
Anthony D'Agostino 49 Since 2004, Mr. D'Agostino has been a consultant, assisting the chief
24 Newport Drive financial officers and boards of directors of private and public companies,
Plainview, New York 11803 including QKD, with Sarbanes-Oxley compliance issues and various
transactions. From 2003 to 2004, Mr. D'Agostino served as the Vice
President of Finance and Chief Financial Officer of CPI
Aerostructures, Inc., a defense contractor. From 2002 to 2003, Mr.
D'Agostino served as the Vice President of Finance and Chief
Financial Officer of American Patriot Apparel Corporation, a start-up
not-for-profit organization. From 2000 to 2002, he served as Senior Vice
President of Finance and Chief Financial Officer of Softheon, Inc., a
software start-up company.
- --------------------------------- ------- ------------------------------------------------------------------------------
Neil Katz 62 Mr. Katz is a private investor. From March 2004 through December 2006, Mr.
9 Michael Drive Katz served as the President and Chief Executive Officer of Gemini
Scarsdale, New York 10583 Cosmetics, Inc., a prestige fragrance company. From 2003 through 2004, he
served as the President of Strategem Creative Marketing Corporation, a
marketing and consulting company which provided services to third parties,
which included Mr. Nussdorf and certain members of his family, and
certain of their affiliated companies. From 1991 through 2002, Mr. Katz
served as President of Liz Claiborne Cosmetics, the prestige fragrance
division of the
- --------------------------------- ------- ------------------------------------------------------------------------------
4
[TABLE CONTINUED]
- --------------------------------- ------- ------------------------------------------------------------------------------
Principal Occupation or Employment During
Name and Business Address Age The Last Five Years and Other Directorships
------------------------- --- -------------------------------------------
- --------------------------------- ------- ------------------------------------------------------------------------------
Liz Claiborne Corporation. From 1986 to 1990, Mr.
Katz served as President of Revlon's Beauty Care Division.
- --------------------------------- ------- ------------------------------------------------------------------------------
Robert Mitzman 51 Since 1981, Mr. Mitzman has served as Chief Executive Officer of Quick
212 Fifth Avenue International Courier, a privately held courier company, with over 600
New York, New York 10010 employees and over 4,000 agents and worldwide offices. Mr. Mitzman was
previously a member of Young Presidents Organization and currently
serves on the Board of Directors of US Doctors for Africa.
- --------------------------------- ------- ------------------------------------------------------------------------------
There is no family relationship between Michael Katz and Neil Katz.
Each of the Nominees has consented to being named as a nominee in this
consent statement. Mr. Nussdorf does not expect that any of the Nominees will be
unable to stand for election to the Board or to serve as a director if elected.
In the event that a vacancy in the slate of Mr. Nussdorf's Nominees should occur
unexpectedly, Mr. Nussdorf may appoint a substitute candidate selected by him.
If Mr. Nussdorf determines to add nominees because the Company expands the size
of the Board of Directors subsequent to the date of this consent statement, Mr.
Nussdorf intends to supplement this consent statement.
If elected, the Nominees will be responsible for managing the business
and affairs of the Company. Each director of the Company has an obligation under
the DGCL to discharge his duties as a director on an informed basis, in good
faith, with the care an ordinarily careful and prudent person in a like position
would exercise under similar circumstances and in a manner the director honestly
believes to be in the best interests of the Company and the stockholders. In
this regard, circumstances may arise in which the interests of Mr. Nussdorf and
his affiliates, on the one hand, and the interests of other stockholders of the
Company, on the other hand, may differ. In any such case, Mr. Nussdorf expects
the Nominees to discharge fully their obligations to the Company and its
stockholders under Delaware law.
Each of Mr. Nussdorf's Nominees (other than Mr. Nussdorf and Michael
Katz), if elected, will be entitled to receive compensation customarily paid by
the Company to its directors, which is described in the Company's revised
definitive proxy statement filed with the Commission on August 25, 2006 (the
"2006 Proxy Statement").
Mr. Nussdorf has agreed to indemnify each Nominee, to the fullest
extent permitted by the DGCL and other applicable law, against, and to hold each
Nominee harmless from, any and all liabilities, losses, claims, damages, and
expenses (including reasonable attorneys' fees and expenses) (collectively,
"Losses") based upon or arising out of the matters set forth in this consent
solicitation; provided, however, that Mr. Nussdorf will not be liable in any
such case to the extent that any such Losses arise out of any inaccurate written
information supplied by the Nominees for inclusion in any filings made with any
federal or state governmental agency, including any consent solicitation
materials (including this consent statement), or is found in a final judgment by
a court, not subject to further appeal, to have resulted from bad faith, gross
negligence or willful misconduct on the Nominees' part.
BACKGROUND AND REASONS FOR THE CONSENT SOLICITATION
On May 19, 2003, QKD, a privately-held corporation owned by Mr.
Nussdorf, Stephen Nussdorf (Mr. Nussdorf's brother) and Arlene Nussdorf-Mark
(Mr. Nussdorf's sister), acting together with Ilia Lekach, the Chairman and
Chief Executive Officer of the Company, submitted a proposal to the Company to
acquire all the outstanding shares of the Company's Common Stock, pursuant to a
tender offer, at a price of $4.00 per share in cash. This proposal was
contingent on the approval of the Board and the approval of QKD's lenders. QKD
withdrew its proposal on June 12, 2003 because QKD was unable to obtain the
approval of its lenders.
Mr. Nussdorf has been generally familiar with the Company, its business
and operations for many years. In 2003, acting through QKD, Mr. Nussdorf was
prepared to acquire the Company with Ilia Lekach, but subsequent to that time,
Mr. Nussdorf has observed what he believes to be the poor financial performance
of the Company and the recent dramatic decline of the Company's stock price
resulting from what Mr. Nussdorf believes to be an inadequate senior management
team and a lack of Board oversight of senior management.
5
From time to time, Mr. Nussdorf has purchased and sold shares of the
Company's Common Stock. Commencing in August 2006, at which time Mr. Nussdorf
did not beneficially own any shares of the Company's Common Stock, Mr. Nussdorf
began acquiring shares of the Company's Common Stock, which he believed to be
undervalued. Mr. Nussdorf also believed the value of the investment in the
Company by all stockholders could be enhanced with a well-qualified and
highly-respected Board and senior management team addressing certain business
issues, as described below, in order to improve the Company's financial
performance. Mr. Nussdorf currently is the beneficial owner of 2,212,629 shares,
constituting approximately 12.0%, of the Company's Common Stock.
On August 16, 2006, the Company issued a press release announcing that
it had entered into a letter of intent to sell its Perry Ellis fragrance rights
to Victory International (USA) LLC ("Victory") for a total of up to $140
million. The terms of the sale were to include up to $20 million for inventory,
and $120 million for the fragrance rights paid in 60 equal monthly installments
of $2 million each, commencing ninety days after closing.
In a letter to the Board dated August 31, 2006, Mr. Nussdorf requested
that the Board approve purchases of the Company's Common Stock by Mr. Nussdorf
and Stephen Nussdorf of fifteen percent (15%) or more in the aggregate of the
Company's outstanding shares of Common Stock for purposes of Section 203 of the
DGCL. Mr. Nussdorf and Stephen Nussdorf sought the Board's approval because
Section 203 of the DGCL prohibits a Delaware corporation from engaging in a
"business combination" with a person owning 15% or more of the corporation's
voting stock for three years following the time that person becomes a 15%
stockholder, with certain exceptions, if such person became a 15% stockholder
without the Board's approval. Although Mr. Nussdorf has not determined whether
or not he will acquire 15% or more of the Company's outstanding shares of Common
Stock or make an acquisition proposal, the effect of the Board approval is that
Mr. Nussdorf has been given the flexibility to purchase 15% or more of the
Company's outstanding shares of Common Stock without becoming subject to the
three year moratorium on engaging in a "business combination" with the Company
pursuant to DGCL Section 203. By letter dated September 5, 2006, the Board
granted such approval for such purchases, subject to the condition that Mr.
Nussdorf and Stephen Nussdorf not become "interested stockholders" for purposes
of Section 203 of the DGCL by acquiring Shares directly from any of the
Company's directors.
On September 6, 2006, the Company issued a press release announcing
that it had engaged GLMAC (which had been the intermediary for the proposed sale
of the Perry Ellis fragrance business) to assist the Company in the sale of
certain non-core product lines.
On September 7, 2006, Mr. Nussdorf and Lillian Ruth Nussdorf (Mr.
Nussdorf's mother) filed a Schedule 13D with the Commission reporting that Mr.
Nussdorf may seek to influence or serve on the Board or designate nominees for
election to the Board. Subsequently, Mr. Nussdorf increased his beneficial
ownership to approximately 12.2% of the Company's then outstanding shares of
Common Stock.
Commencing in September 2006, Mr. Nussdorf and his representatives had
conversations with a limited number of other stockholders of the Company. Such
discussions related generally to the displeasure of Mr. Nussdorf and such other
stockholders with the Company's financial performance, the decline of the
Company's stock price, the Company's management, the Company's failure to file
required reports with the Commission on a timely basis, the Company's proposed
sale of the Perry Ellis fragrance rights and the potential sale by the Company
of other assets.
On September 26, 2006, Mr. Nussdorf sent the following letter to the
Board:
September 26, 2006
Members of the Board of Directors
Parlux Fragrances, Inc.
3725 S.W. 30th Avenue
Ft. Lauderdale, FL 33312
Dear Board Members:
6
As you know, Lillian Ruth Nussdorf and I are major
shareholders of Parlux Fragrances, Inc. ("Parlux" or the "Company")
holding, at present, approximately 10.5%(1) of the outstanding shares
of the Company. As indicated in our Schedule 13D filing, we may seek to
influence or serve on the Board of Directors of the Company or
designate nominees for election to the Board. In view of the fact that
we are actively considering these actions in the foreseeable future, we
strongly urge the Board to act in a fully informed and deliberate
manner and not take any action that is inconsistent with the interests
of the Company's shareholders.
In its Form 8-K filing and August 16th press release, the
Company announced that it has "entered into a letter of intent to sell
its Perry Ellis fragrance rights to Victory International (USA) LLC
("Victory") for a total of up to $140 million: $120 million for the
fragrance rights and up to $20 million for inventory". In my view, this
proposed transaction is contrary to the best interests of the Company
and its shareholders for several reasons:
1. I have investigated the available information regarding
Victory's financial wherewithal to consummate a transaction of this
nature and to perform its obligations thereunder. As described in the
Company's press release, this transaction would require Victory to pay
$20 million at the outset and then make subsequent payments totaling
$24 million per year (in $2 million monthly installments) for the next
five years. Based on the financial information that Victory has made
available to the industry through credit reporting agencies, its sales,
profits and net worth do not appear to support such a payment
obligation, even with the additional income generated from the sale of
Perry Ellis fragrances. Moreover, there is no indication in the
Company's disclosures as to whether Victory has obtained the financing
necessary to fund its obligations to the Company.
It is likely that this transaction would transfer a
significant and valuable asset of the Company without adequate
assurances that its value would be realized, potentially resulting in a
tie-up of the Perry Ellis brand while the Company attempts to retrieve
the brand from Victory in the event of a failure by Victory to perform
its financial obligations to the Company. In this connection, since
Victory does not appear to have the means to fund this obligation, it
is likely that it will have to manufacture inordinately large
quantities of the Perry Ellis line and sell these quantities into mass
and discount markets, and possibly to other wholesalers domestically
and internationally, in order to fund this obligation. Such
overproduction and non-department and specialty store sales will erode
the value of the brand and strain relationships with the licensor,
thereby resulting in a much less valuable asset coming back to Parlux
in the event that Victory fails to meet its payment obligations to
Parlux.
2. It is highly unlikely that the licensor of the Perry
Ellis trademark would give their consent to a transaction such as
this, especially since the proposed sale is to a non-affiliate and it
constitutes, in effect, the sale of the entire Perry Ellis fragrance
brand. Moreover, even if consent were to be contemplated, it is
likely the licensor would demand a significant price for it, which
would reduce the economic value of this transaction to the Company.
3. The proposed transaction constitutes a sale of the
Company's principal asset, since sales of the Perry Ellis line over
the past several fiscal years have ranged from 81% to 41% of the
Company's total sales. In view of the significant contribution to
sales and profitability of the Perry Ellis asset, I believe that its
sale might well require approval of the Company's shareholders under
Delaware General Corporation Law Section 271, which requires that
shareholders vote on and approve a sale of all or substantially all
of a company's property and assets. In any event, in view of our
stated intentions, as well as the views of other large shareholders
with whom we have spoken, it is contrary to the best interests of the
Company, and
- ----------------------
(1) On September 26, 2006, the date of the letter, Mr. Nussdorf owned
approximately 12.2% of the Company's then outstanding Shares. The
discrepancy was due to a record keeping error and subsequently was
corrected.
7
also contravenes principles of responsible management and good
corporate governance, to proceed hastily with a transaction which
could adversely impact shareholder value and expose the Company to a
myriad of issues and problems.
We have retained as special counsel the firm of Skadden, Arps,
Slate, Meagher & Flom LLP to advise us in connection with our
investment in the Company and our available options relating thereto. I
again urge the Board to proceed prudently, deliberately and in
accordance with law in considering the proposed transaction. If the
Board or management take any action that is detrimental to the Company
or inconsistent with the best of interests of shareholders, we intend
to take all actions necessary to hold each director or executive
officer accountable and personally liable.
In view of the urgency of this matter, we are available to
meet with members of the Board immediately and would like to do so as
soon as possible, wherever and whenever is most convenient for the
members of the Board.
I look forward to hearing from you promptly.
Very truly yours,
/s/ Glenn H. Nussdorf
On October 9, 2006, the Company issued a press release disclosing that
it had been informed by Perry Ellis International of its decision not to consent
to the sale of the Perry Ellis fragrance rights to Victory.
On October 17, 2006, Mr. Nussdorf and Lillian Ruth Nussdorf filed an
amendment to their Schedule 13D indicating that as a result of Mr. Nussdorf's
ongoing review and evaluation of the Company's business, he and his
representatives had begun to communicate with the Company's management, Board
and other stockholders with respect to operational, strategic, financial or
governance matters, including the composition of the Board. The amended Schedule
13D also disclosed that Mr. Nussdorf was exploring the possibility of making an
acquisition proposal to acquire the Company in a business combination
transaction, and that he and his representatives had preliminary discussions
with potential financing sources to obtain the funds necessary for such a
transaction. Mr. Nussdorf did not obtain, and has not obtained, any financing
commitments. Mr. Nussdorf has made no determination at this time as to whether
to submit an acquisition proposal and no assurances can be given as to whether
or not Mr. Nussdorf will submit such a proposal to the Company.
On November 13, 2006, the Company filed a Form 12b-25 notice of late
filing with respect to its Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2006.
On November 21, 2006, Mr. Nussdorf sent the following letter to the
Board announcing his intention to commence a consent solicitation to replace the
members of the Board:
November 21, 2006
BY FACSIMILE AND
----------------
FEDERAL EXPRESS
---------------
Board of Directors of Parlux Fragrances, Inc.
c/o Mr. Ilia Lekach
Chairman of the Board, Chief Executive Officer and President
8
3725 S.W. 30th Avenue
Ft. Lauderdale, FL 33312
Dear Board Members:
I am writing to advise you that I intend to commence a consent
solicitation to remove all or a majority of the members of the Board of
Directors of Parlux Fragrances, Inc. ("Parlux" or the "Company") and to
fill vacancies created by such removal with individuals to be nominated
by me.
As the beneficial owner of a substantial percentage of the
outstanding shares of Parlux, I believe that much can be done to
increase shareholder value and that it is time for immediate change at
both the Board and management levels. The decline in the Company's
share price from a high closing price of $18.96 earlier this year
(after adjusting for a 2-for-1 split in June 2006) to the current $6.26
level (a decrease in shareholder value of 67%), the Company's recent
disclosure of decreased sales and earnings for the quarter ended
September 30, 2006, and the allegations in the recently amended class
action lawsuit that the Company improperly recognized revenues on sales
to related parties, have led me to conclude that the Board of Directors
is failing to act in the best interests of the Company's shareholders
and is not exercising appropriate oversight of management. I am
convinced that a continuation of the status quo risks a further
destruction of shareholder value and, accordingly, I intend to protect
the value of my significant investment in the Company through a consent
solicitation to replace members of the Board of Directors.
As I have publicly disclosed in my Schedule 13D filing, I am
exploring the possibility of making an acquisition proposal to acquire
the Company in a business combination transaction. While I have not
made a decision at this time whether to pursue such a proposal, I
strongly urge the Board not to take any action (such as the previously
announced and subsequently abandoned sale of the Perry Ellis brand)
which would materially modify or impact the Company's business,
products or assets and could adversely effect the Company's value. In
addition, the consent solicitation will present Parlux shareholders
with a unique opportunity to express their views on the future
direction of the Company.
In view of the foregoing, I am putting each director and
executive officer on notice not to attempt to usurp the rights of
shareholders to determine the Company's future direction, including any
attempt to sell or otherwise dispose of or surrender any of its product
lines, including, without limitation, the Perry Ellis brand.
I intend to take all actions necessary to hold each director
and executive officer accountable if they approve or engage in any
transaction with respect to the foregoing or which is otherwise
inconsistent with the best interests of the Company and its
shareholders.
In addition, Mr. Lekach is aware of my serious concern about
the level of payments and benefits under existing severance agreements
with him and three other senior executives of Parlux. I am putting
Parlux's Board of Directors on notice that no payments should be made
or benefits granted under these agreements until they are subjected to
a thorough review by my nominees, if elected to the Board.
Sincerely,
/s/ Glenn H. Nussdorf
On November 22, 2006, the Company issued a press release disclosing
that it had been notified by the Nasdaq Stock Market that the Company's Common
Stock was subject to delisting pursuant to Nasdaq Marketplace
9
Rule 4310(c)(14) due to the Company's failure to make a timely filing of its
Form 10-Q for the period ended September 30, 2006. The Company stated in its
press release that it would request a hearing before the Nasdaq Listing
Qualifications Panel (the "Panel"), which request would automatically defer
the delisting of its Common Stock pending the Panel's review and
determination. On January 9, 2007, the Company issued a press release
disclosing that Nasdaq had set a hearing date of February 1, 2007 in response
to the Company's request for a hearing before the Panel. The Company's Common
Stock will continue to be traded on the Nasdaq National Market pending the
Panel's decision.
Also, on November 22, 2006, the Company filed a Form 8-K with the
Commission disclosing the resignation of Isaac Lekach from the Company's Board
of Directors on November 16, 2006. Isaac Lekach is Ilia Lekach's 25-year old
son.
Subsequent to sending his November 21, 2006 letter to the Board, Mr.
Nussdorf decided to terminate his efforts to obtain financing for a possible
acquisition of the Company in view of the Company's failure to file its
Quarterly Report on Form 10-Q for the three-month period ended September 30,
2006. Mr. Nussdorf believed then, and continues to believe, that his efforts to
obtain financing on terms acceptable to him would be dependent on the
availability of current financial information about the Company. As stated
above, Mr. Nussdorf did not obtain, and has not obtained, any financing
commitments. At this point in time, Mr. Nussdorf has not determined whether he
will submit an acquisition proposal, and is unable to determine, if he were to
pursue an acquisition proposal, whether he would be able to obtain financing on
terms acceptable to him. Mr. Nussdorf has not sought any equity investors to
participate with him in any possible acquisition of the Company.
On December 6, 2006, the Company issued a press release disclosing the
completion of an all cash transaction in which Perry Ellis International
reacquired the license for its Perry Ellis Fragrance brand from the Company for
$63 million in cash, subject to price adjustments for inventory levels.
On January 9, 2007, the Company issued a press release disclosing,
among other things, that the Company's Board had authorized stock repurchases of
up to 10 million Shares of Common Stock, constituting almost 55% of the
Company's currently outstanding Shares.
On January 10, 2007, Mr. Nussdorf and Lillian Ruth Nussdorf filed an
amendment to their Schedule 13D disclosing that Mr. Nussdorf sent the following
letter to the Board expressing his concern that stock repurchases may be made
for the purpose of, and in a manner designed to, entrench the Company's current
management and Board:
January 10, 2007
VIA FACSIMILE AND OVERNIGHT MAIL
--------------------------------
Board of Directors of Parlux Fragrances, Inc.
c/o Mr. Ilia Lekach
Chairman of the Board and Chief Executive Officer
Parlux Fragrances, Inc.
3725 S.W. 30th Avenue
Fort Lauderdale, FL 33312
Dear Board Members:
On Monday, January 8, 2007, Parlux Fragrances, Inc. (the
"Company") issued a press release announcing a record date of January
17, 2007 in connection with my solicitation of consents from the
Company's stockholders for the purposes of removing, without cause, all
members of the Company's Board of Directors and electing myself and my
five other nominees as directors of the Company.
On Tuesday, January 9, 2007, the Company issued a press
release announcing that you, the Company's Board of Directors, have
authorized stock repurchases of up to 10 million shares of
10
the Company's common stock. This is an extraordinarily large stock
repurchase authorization, covering almost 55% of the Company's
approximately 18,430,000 outstanding shares.
In light of the fact that my consent solicitation will be
commencing very shortly, that the record date is one week from today,
and that the Board has just authorized massive stock repurchases, I am
understandably concerned that the stock repurchases may be made for the
purpose of, and in a manner designed to, entrench the Company's current
management and Board of Directors. I believe that any use of corporate
funds for such purpose would constitute an unconscionable breach of
fiduciary duty and misuse of corporate assets and, in such event, I
intend to hold you responsible.
I demand that the Company make immediate, full and clear
public disclosure of the purposes of the massive stock repurchase
authorization and how it is intended that any shares repurchased by the
Company, whether prior to, on, or after the record date, will be
treated for purposes of my consent solicitation.
Very truly yours,
/s/ Glenn H. Nussdorf
On January 11, 2007, Mr. Nussdorf received the following letter from
the Board which purported to invite him to submit an acquisition proposal:
January 11, 2007
Glenn H. Nussdorf
2060 Ninth Avenue
Ronkonkoma, NY 11779
Dear Mr. Nussdorf:
According to your SEC filings, for almost three months you have been
"exploring the possibility of making an acquisition proposal for
Parlux" and you and your representatives have "had preliminary
discussions with potential financing sources to obtain the funds
necessary for such a transaction." Yet to date, no acquisition proposal
has been forthcoming. We want to take this opportunity to invite you to
submit a bona fide acquisition proposal to the Board of Directors of
Parlux. Although Parlux is not currently for sale, we are focused on
enhancing value for all of our stockholders. Consistent with our
fiduciary duties to Parlux shareholders, your acquisition proposal
would be given full and fair consideration by the Board.
We believe that the interests of all Parlux stockholders are best
served if your proposal is considered by Parlux's duly-elected
independent Board of Directors. Notwithstanding your statements to the
contrary, we find it unreasonable to believe that your hand-picked
nominees, all but one of whom are business associates of you or your
affiliates, will exercise any real independent oversight over an
acquisition proposal submitted by you.
We find it disingenuous, after three months of "exploring the
possibility of making an acquisition proposal," to ask stockholders to
give you control of the company as you continue your evaluation
process. If you are truly interested in acquiring the company, as
stated above, you are welcome to submit a bona fide proposal. However,
should you continue your efforts to take control of Parlux without
compensating stockholders for their investment in the company, we will
vigorously oppose your efforts.
On behalf of the Board of Directors,
/s/ Ilia Lekach
11
Ilia Lekach
Chairman and Chief Executive Officer
Parlux Fragrances, Inc.
In response, on January 16, 2007, Mr. Nussdorf sent the following
letter to the Board:
January 16, 2007
VIA FACSIMILE AND OVERNIGHT MAIL
--------------------------------
Board of Directors of Parlux Fragrances, Inc.
c/o Mr. Ilia Lekach
Chairman of the Board and Chief Executive Officer
Parlux Fragrances, Inc.
3725 S.W. 30th Avenue
Fort Lauderdale, FL 33312
Dear Board Members:
Given the current state of affairs at Parlux, your January 11
letter to me appears to be nothing more than public posturing in an
effort to influence votes in my solicitation of consents to remove each
of you from office and elect a new Board of Directors.
My position on a possible acquisition of Parlux is entirely
clear, and is set out in detail in several SEC filings I have made
during the past few weeks. I also have explicitly stated in my SEC
filings that any acquisition proposal I might make would be considered
by a committee of independent directors and that, in such event, it is
anticipated that the "committee will entertain proposals from third
parties" and "will only accept the proposal that reflects the
reasonably highest value for stockholders."
This is important information for Parlux stockholders and the
investing public, and should not have been omitted from your letter,
your press release and your SEC filings.
I cannot imagine that you seriously believe that anyone would
make a bona fide acquisition proposal at the present time. Among other
things:
o Parlux has failed, for the third time in the past 12 months, to
make a timely filing of its financial information with the SEC.
Parlux's last published financial statements are for the period
ended June 30, 2006 -- a period that ended more than six months
ago;
o As a result of Parlux's failure to file timely financial
reports, the company faces possible delisting by Nasdaq, and
faces a hearing on potential delisting on February 1; and
o Due to allegations of financial improprieties in a class action
lawsuit, Parlux's Board has found it necessary, as stated in
your SEC filings, to "engage experienced Special Audit
Committee Counsel" and such counsel "engaged experienced
independent forensic accountants to investigate the
allegations." These investigations by special counsel and
forensic accountants are pending and Parlux has not announced
their results, which results could be material to any buyer of
the company.
Under these circumstances, your "invitation" that I make an
acquisition proposal cannot be serious.
If you, as a Board, really want to protect and enhance
stockholder value, I would suggest that you focus immediately on the
appropriateness and legality of the existing severance
12
agreements with Messrs. Lekach, Buttacavoli, Vercillo and Purches. I
have stated that my nominees, if elected, intend to immediately
review these agreements and do not intend to permit Parlux to make
payments or provide benefits until after such review is completed.
It appears that the minimum cash payments under the four
severance agreements would be $1,425,000 to Mr. Lekach, $975,000 to Mr.
Buttacavoli, $300,000 to Mr. Vercillo and $250,000 to Mr. Purches. The
actual amounts, as you know, could be substantially greater. In
addition, Messrs. Lekach and Buttacavoli would be awarded a total of
2,320,000 additional options at exercise prices ranging from 93 cents
to $1.22. This, of course, would result in very substantial dilution to
other stockholders. These payments and benefits are very unusual and,
in view of the substantial amounts involved, could have a significant
impact on the value to be received by Parlux stockholders in any
acquisition.
Sincerely,
/s/ Glenn H. Nussdorf
Mr. Nussdorf believes that the election of the Nominees to the Board of
Directors will provide the stockholders of the Company with a Board comprised of
individuals with integrity and extensive business experience. In addition, Mr.
Nussdorf, Michael Katz and Neil Katz have significant experience in the
fragrance industry. Mr. Nussdorf also believes that the Nominees have the skills
and conviction to evaluate management performance and would be capable of
assisting with the selection of highly qualified senior executives. If elected,
the Nominees intend to terminate Mr. Lekach's employment and to appoint Mr.
Nussdorf as Chairman of the Board and Chief Executive Officer and Michael Katz
as Vice Chairman of the Board. Mr. Nussdorf believes the replacement of Mr.
Lekach, and possibly other members of the Company's senior management, is
necessary in order to take such actions as may be necessary to stem the downward
trend of the Company's stock price.
Mr. Nussdorf believes that there are numerous business issues that need
to be addressed at the Company in order to improve the Company's financial
performance, such as:
o Reviewing sales outside of the United States, including sales
to any parties affiliated with Mr. Lekach, in order to
ascertain whether such products are being diverted back into
the United States at lower prices, and if so, to minimize such
diversions. The Company's licensing agreements generally
prohibit the Company from reselling products in the domestic
wholesale market, yet such products are being found in the
domestic wholesale market indicating such diversion is taking
place. Mr. Nussdorf believes that reducing the amount of
diverted products will enhance the value of the brands by
preventing the oversupply of these products in domestic
markets, which tends to cause downward pressure on retail
prices by hurting the exclusive image of and the ability to
market these designer brands as luxury items.
o Improving communications with stockholders and analysts to
increase transparency and to establish accurate and realistic
expectations for financial performance.
o Enhancing the Company's buying expertise with the expectation
that this will, over time, decrease the Company's cost of goods
sold.
o Improving the Company's relationship with existing licensors,
with a focus on monitoring compliance with all licensing
requirements.
o Suspending any further sales of important fragrance brands,
pending full review of the Company's business, to ensure that
any sales that do occur are for full and fair value.
The terms of Mr. Nussdorf's employment as Chairman and Chief Executive Officer
would be set by a newly-constituted Compensation Committee of the Board of
Directors, which is expected to consist of solely independent
13
directors. Neither Mr. Nussdorf nor the other Nominees have determined which
independent Nominees will serve on the Compensation Committee.
Mr. Nussdorf believes that prompt and decisive action is needed to
increase investor confidence in the Company and to enhance stockholder value,
and that the quickest and surest way to do so is to bring in a new,
well-qualified and highly-respected Board and senior management team. As
evidence of what he believes to be an increasing lack of confidence in the
current senior management team, Mr. Nussdorf cites the following:
o Since February 22, 2006, the price of the Company's Common Stock has
declined from $18.96 (adjusted for a 2-for-1 stock split in June
2006) (the highest closing price during the last twelve months) to
$6.05 on January 16, 2007, which represents a dramatic decrease of
68%;
o The recent disclosure by the Company on January 9, 2007 in a press
release disclosing selected financial results for the three month
period ended September 30, 2006 that its net sales for the quarter
ended September 30, 2006 decreased by approximately 1% compared to
the same period in the prior year and its net income for the quarter
ended September 30, 2006 decreased by approximately 20% compared to
the same period in the prior year;
o The inability of the Company to timely file its required reports with
the Commission three times within the past twelve months, including
the Company's failure as of the date of this consent statement to
file its Form 10-Q for the period ended September 30, 2006, which
should have been filed with the Commission by November 9, 2006;
o The Company has now been threatened with delisting by the Nasdaq
Stock Market on three separate occasions within the past twelve
months due to the Company's failure to make timely filings of its
Form 10-Qs for the periods ended June 30, 2006 and September 30, 2006
and for its failure to make a timely filing of its Form 10-K for the
fiscal year ended March 31, 2006;
o The allegations of gross mismanagement, fraud and generation of
fictitious revenues contained in the amended complaint in Thomas
Haugh v. Parlux Fragrances, Inc., Ilia Lekach and Frank A.
Buttacavoli, and the announced review of these new allegations by the
Company's Audit Committee; and
o The sales by Ilia Lekach, Chairman and Chief Executive Officer of the
Company, Frank Buttacavoli, Chief Financial Officer, Chief Operating
Officer and Executive Vice-President of the Company, and Esther Egozi
Choukroun, Glenn Gopman, Isaac Lekach and David Stone, each directors
of the Company at the time of the sales, between February 13, 2006
and March 24, 2006, of an aggregate of 974,200 Shares of the
Company's Common Stock, at prices ranging from $15.80 to $19.01
(adjusted for a 2-for-1 split in June 2006), at a time when the
Company's share price was near its recent all time high. By contrast,
on January 16, 2007, the Company's stock price closed at $6.05.
Mr. Nussdorf expects that the Nominees, if elected, will provide a new
voice and fresh perspective to the Company, including a new perspective on
management direction, championing reform of executive compensation, perquisites,
related party transactions and management incentives and generally bringing
focus to the enhancement of stockholder value.
In addition to the removal of Mr. Lekach, the Nominees, if elected,
intend to appoint a Strategic Alternatives Committee of the Board of Directors
(the "Committee") which is expected to consist of Messrs. Angel, D'Agostino and
Neil Katz, who Mr. Nussdorf believes will be independent members of the Board.
The Committee will be directed by the Board to actively review
strategic alternatives, such as third party acquisition proposals for the
Company, including any acquisition proposal which possibly may be made by Mr.
Nussdorf or any of his affiliates, in order to effectively protect and enhance
stockholder value. If Mr. Nussdorf's Nominees are elected, Mr. Nussdorf intends
to request the Board's approval to review and assess the financial condition,
results of operations, cash flows and prospects of the Company and may explore
the possibility of making an acquisition proposal. Mr. Nussdorf's decision
whether or not to make an acquisition proposal will depend
14
primarily on the results of Mr. Nussdorf's review of the Company's books and
records and his assessment of the financial condition, results of operations,
cash flows and outstanding litigation of the Company, as well as discussions
with officers, customers and suppliers of the Company and the interest of
potential financing sources to fund any such acquisition. At this point in
time, Mr. Nussdorf has not determined whether he will submit an acquisition
proposal, and is unable to determine, if he were to pursue an acquisition
proposal, whether he would be able to obtain financing on terms acceptable to
him. No assurances can be given as to whether or not Mr. Nussdorf will submit
an acquisition proposal to the Company after completing this review, or what
the terms of any such proposal might be. In the event that Mr. Nussdorf makes
a proposal to acquire the Company, it is anticipated that the Committee will
entertain proposals from third parties and that the Committee will only accept
the acquisition proposal that reflects the reasonably highest value for
stockholders. The Committee also will suspend any further sales of the
Company's non-core product lines pending full review of the Company's business
and assurance that such sales would be for full and fair value. In addition,
the Committee will consider and evaluate whether there are other transactions
or alternatives, such as acquisitions of additional brands or a share
repurchase program, which could be implemented to further their goal of
enhancing stockholder value. The Committee and the other Nominees, including
Mr. Nussdorf, will not authorize or otherwise cause the Company to enter into
any strategic transaction, including an acquisition with respect to the
Company by Mr. Nussdorf or any of his affiliates, unless the Nominees conclude
that such transaction is in the best interest of the Company's stockholders.
In the event that the Company enters into an acquisition transaction
with any third party, including Mr. Nussdorf or any of his affiliates, it is
expected, depending upon the structure of the transaction, that the Company's
stockholders would have the opportunity to approve any such transaction, either
by voting at a special meeting of stockholders or tendering their shares into
any acquiror offer, in each case after receiving detailed disclosures and
information about the proposed business combination transaction. In the event
that the acquiror is an "affiliate" of the Company (which Mr. Nussdorf would be
if the Nominees are elected), such transaction may be subject to Rule 13e-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which is applicable to certain "going private" transactions. If applicable, Rule
13e-3 would require, among other things, that certain information concerning the
fairness of the proposed transaction and the consideration offered to
stockholders be filed with the Commission and disclosed to stockholders prior to
the consummation of the transaction.
The Nominees, if elected, also intend to immediately review the
executive compensation programs of the Company, including the appropriateness
and legality of the existing severance agreements with Messrs. Lekach,
Buttacavoli and two consultants (See "Certain Employment and Other Agreements").
The Nominees do not intend to permit the Company to make payments or provide
benefits under these agreements until after such review is completed. Messrs.
Lekach, Buttacavoli and two consultants may take legal action against the
Company to compel the Company to make severance payments and/or provide benefits
under their respective agreements. According to their employment and consulting
agreements, the Company is required to pay the legal fees of Messrs. Lekach,
Buttacavoli and two consultants regardless of the outcome of any such
litigation. While Mr. Nussdorf cannot predict the amount of any such legal fees,
such legal fees, in the aggregate, may be significant. In the event of such
litigation, the Nominees intend to challenge the provision requiring the payment
of legal fees regardless of the outcome (See "Employment Agreements of Ilia
Lekach and Frank Buttacavoli" and "Consulting Agreements of Albert Vercillo and
Frederick Purches"). If these payments or benefits are made prior to the
election of the Nominees to the Board of Directors, the Nominees may authorize
appropriate legal action to recover any such payments or benefits and to hold
the incumbent directors responsible for permitting such payments and benefits to
be made. Other than the severance agreements referred to above, the Company has
not disclosed any employment agreements with any other executive, consultant or
employee.
The Nominees, if elected, also intend to actively pursue and, if
appropriate, expand the ongoing investigation by the Audit Committee into the
allegations of a consolidated class action suit alleging improper revenue
recognition and undisclosed transactions with related parties, as announced by
the Company on November 13, 2006 in its Form 12b-25 notice of late filing of the
Company's Quarterly Report on Form 10-Q for the three month period ended
September 30, 2006.
15
CERTAIN EMPLOYMENT AND OTHER AGREEMENTS
EMPLOYMENT AGREEMENTS OF ILIA LEKACH AND FRANK BUTTACAVOLI
On June 1, 2005, the Company entered into an employment agreement with
each of Ilia Lekach, Chairman of the Board and Chief Executive Officer of the
Company (the "Lekach Agreement"), and Frank Buttacavoli, Chief Financial
Officer, Chief Operating Officer, Executive Vice President and a director of the
Company (the "Buttacavoli Agreement," together with the Lekach Agreement,
collectively, the "Agreements"). Subject to termination provisions specifically
set forth in the Agreements, the Agreements provide for an initial term which
will expire on March 31, 2009, and that upon the expiration of the initial term,
each Agreement will be extended for a period of three years, unless either party
gives a notice of non-renewal at least six months prior to the expiration of the
initial term.
The Lekach Agreement provides for annual base salaries of $400,000,
$475,000, $525,000 and $600,000 for the twelve-month periods ending on March 31,
2006, 2007, 2008 and 2009, respectively. The Buttacavoli Agreement provides for
annual base salaries of $285,000, $325,000, $350,000 and $400,000 for the
twelve-month periods ending on March 31, 2006, 2007, 2008 and 2009,
respectively.
According to the 2006 Proxy Statement, as of August 25, 2006, Mr.
Lekach owned (a) immediately exercisable warrants to purchase 300,000 shares of
Common Stock of the Company at an exercise price of $1.21875 per share under his
employment agreement, dated as of November 1, 1999, (b) immediately exercisable
warrants to purchase 1,000,000 shares of Common Stock of the Company at an
exercise price of $1.22 per share granted on June 8, 2001 and (c) immediately
exercisable warrants to purchase 1,000,000 shares of Common Stock of the Company
at an exercise price of $0.93 per share under his employment agreement, dated as
of May 1, 2002; and Mr. Buttacavoli owned (a) immediately exercisable warrants
to purchase 120,000 shares of Common Stock of the Company at an exercise price
of $1.21875 per share under his employment agreement, dated as of November 1,
1999, (b) immediately exercisable warrants to purchase 200,000 shares of Common
Stock of the Company at an exercise price of $1.22 per share granted on June 8,
2001 and (c) immediately exercisable warrants to purchase 400,000 shares of
Common Stock of the Company at an exercise price of $0.93 per share under his
employment agreement, dated as of May 1, 2002.(2)
According to his Form 4 filed with the Commission on December 5, 2006,
Mr. Lekach exercised certain of his outstanding options to acquire 700,000
shares of Common Stock for a purchase price of $0.93 per share.
Under the terms of the Agreements, each of Mr. Lekach and Mr.
Buttacavoli (each an "Executive," collectively, the "Executives") is entitled to
a severance payment in the event his employment is terminated by the Company
without "cause" or if the Executive terminates his employment for "good reason."
The occurrence of a change of control constitutes "good reason" under the
Agreements. In the event of a termination upon the occurrence of a change of
control, each Executive would be entitled to the following:
(a) Upon a termination of employment by the Company without cause
following a change of control, a lump sum payment (or at the
Executive's election, in installments) equal to the greater of
(i) twice the entire salary due to the Executive until the end
of the term of the Agreement based on an annual base salary at
the highest rate in effect during the twelve months immediately
preceding the termination or (ii) three (3) times the
Executive's annual salary, based on the highest salary rate in
effect during the twelve month period immediately prior to the
termination date;
(b) Upon a termination of employment by the Executive for "good
reason" as a result of a change of control, a lump sum payment
(or at the Executive's election, in installments) equal to the
greater of (i) twice the average compensation of the Executive
during the Agreement for the taxable years prior to such
termination or (ii) three (3) times the Executive's annual
salary, based on the highest rate in effect during the twelve
month period immediately prior to the termination date. In
- --------------------
(2) The number of outstanding stock options and exercise prices are adjusted
for a 2-for-1 stock split in June 2006.
16
determining the average compensation, the Company is required
to take into account, among other things, salary, bonus, values
realized upon option exercises or any other payments received
by the Executive during the five years prior to the date of the
change of control.
In addition to the payments and benefits described above, in the event
of a change of control, the Agreements require the Company to double the number
of each Executive's outstanding unexercised "options" (which term appears to be
used interchangeably with "warrants" in the Agreements) while retaining the
original exercise price. The table below summarizes the doubling of existing
warrants for Messrs. Lekach and Buttacavoli.
Summary of Ilia Lekach's Outstanding Warrants
---------------------------------------------
Number of
Warrants Number of Warrants if Doubled
Date of Agreement Outstanding Exercise Price Following a Change of Control
- ----------------------- --------------- ---------------- -------------------------------
November 1, 1999 300,000 $1.21875 600,000
- ----------------------- --------------- ---------------- -------------------------------
June 8, 2001 1,000,000 $1.22 2,000,000
- ----------------------- --------------- ---------------- -------------------------------
May 1, 2002 300,000 $0.93 600,000
- ----------------------- --------------- ---------------- -------------------------------
Summary of Frank Buttacavoli's Outstanding Warrants
---------------------------------------------------
Number of
Warrants Number of Warrants if Doubled
Date of Agreement Outstanding Exercise Price Following a Change of Control
- ------------------------ --------------- ---------------- -------------------------------
November 1, 1999 120,000 $1.21875 240,000
- ------------------------ --------------- ---------------- -------------------------------
June 8, 2001 200,000 $1.22 400,000
- ------------------------ --------------- ---------------- -------------------------------
May 1, 2002 400,000 $0.93 800,000
- ------------------------ --------------- ---------------- -------------------------------
In the event of a change in control, the Company is required to (i)
provide each Executive with continuation of health and hospitalization benefits
until the later of (x) the end of the term of the Agreement or (y) eighteen
months following termination of employment, and (ii) pay each Executive all of
his legal fees and expenses incurred in contesting or disputing any termination
provision, regardless of the outcome. Also, upon a change of control, each
Executive is no longer subject to any restrictive covenants under his Agreement.
Under the Agreements, a change of control is deemed to have occurred
upon the occurrence of an event or series of events (whether or not approved by
the Board) by which any person or other entity or group of persons or other
entities acting in concert together, as determined in accordance with Section
13(d) of the Exchange Act, with its or their affiliates or associates shall, as
a result of a tender offer or exchange offer, open market purchases, privately
negotiated purchases, merger or otherwise (including pursuant to receipt of
revocable proxies) (a) be or become directly or indirectly the beneficial owner
of more than 30% of the combined voting power of the then outstanding Common
Stock of the Company or (b) otherwise have the ability to elect, directly or
indirectly, a majority of the members of the Board.
Accordingly, Mr. Nussdorf's solicitation of written consents to remove,
without cause, all existing members of the Company's Board and to elect the
Nominees, if successful, may constitute a change of control under the
Agreements, resulting in severance payments and the "doubling" of the
Executives' respective options. See "Background and Reasons for the Consent
Solicitation" for a description of certain actions which the Nominees intend to
take with respect to the Agreements.
CONSULTING AGREEMENTS OF ALBERT VERCILLO AND FREDERICK PURCHES
On June 1, 2005, the Company entered into consulting agreements with
each of Albert Vercillo (the "Vercillo Agreement") and Frederick Purches (the
"Purches Agreement," together with the Vercillo Agreement, collectively, the
"Consulting Agreements"). The Consulting Agreements provide for an initial term
which will expire on March 31, 2009, and that upon the expiration of the initial
term, each Consulting Agreement will be extended for a period of one year, and
from year to year thereafter, unless either party gives a notice of non-renewal
at least six months prior to the expiration of the initial or extended term.
17
The Vercillo Agreement provides for annual compensation of $150,000,
$125,000 and $100,000 for the periods ending March 31, 2007, 2008 and 2009,
respectively. The Purches Agreement provides for annual compensation of
$125,000. The Company granted each of Mr. Vercillo and Mr. Purches (each a
"Consultant," collectively, the "Consultants") non-qualified stock options to
purchase 60,000 shares of the Company's Common Stock at an exercise price of
$1.125 per share under consulting agreements, each dated November 1, 1999. The
Company granted each Consultant additional non-qualified stock options to
purchase 60,000 shares of the Company's Common Stock at an exercise price of
$0.93 per share under consulting agreements, each dated May 1, 2002. (3)
Under the terms of the Consulting Agreements, in the event of a change
of control, as defined above in "Employment Agreements of Ilia Lekach and Frank
Buttacavoli," the Consultants are entitled to a lump sum payment equal to the
greater of (a) twice the amount then due through the end of their term under the
Consulting Agreements or (b) two times the annual compensation paid to the
Consultant. In addition to these payments, in the event of a change of control,
the Consulting Agreements require the Company to double the quantity of each
Consultant's outstanding unexercised options while retaining the original
purchase price. In addition, the Company is required to pay each Consultant all
of his legal fees and expenses incurred in contesting or disputing any
termination provision, regardless of the outcome.
Accordingly, Mr. Nussdorf's solicitation of written consents to remove,
without cause, all existing members of the Board and to elect the Nominees, if
successful, may constitute a change of control under the Consulting Agreements,
resulting in a lump sum payment and the "doubling" of the Consultants'
respective options.
REVOLVING CREDIT AND SECURITY AGREEMENT
On July 20, 2001, the Company entered into a revolving credit and
security agreement (the "Credit Agreement") with GMAC Commercial Credit LLC
("GMACCC"). As amended on January 10, 2006, the Credit Agreement enables the
Company to borrow up to $35,000,000 at an interest rate of 0.25% below the prime
rate with a maturity date of July 20, 2008.
The Credit Agreement's terms provide that the occurrence of any change
of control is an event of default that makes all obligations of the Company
under the Credit Agreement immediately due and payable at GMACCC's option. A
change of control is defined in the Credit Agreement as the occurrence of any
event that results in a transfer of control of the Company, including the power,
direct or indirect, (i) to vote 50% or more of the securities having ordinary
voting power for the election of Company's directors or (ii) to direct or cause
the direction of the management and policies of the Company by contract or
otherwise.
According to the Company's Form 10-Q for the three month period ended
June 30, 2006, the Company had $31,812,043 outstanding under the Credit
Agreement. On January 9, 2007, the Company issued a press release stating that
it had paid down its bank debt. To the extent that outstanding debt exists under
the Credit Agreement in the future, Mr. Nussdorf's consent solicitation, if
successful, may constitute a change of control under the Credit Agreement. The
Nominees intend to cause the Company to seek a waiver from GMACCC for any event
of default resulting from the election of the Nominees, or if such waiver is not
obtained, the Nominees intend to cause the Company to seek refinancing of the
Company's outstanding indebtedness under the Credit Agreement to the extent that
any outstanding indebtedness exists. There can be no assurances that any such
waiver or refinancing, if necessary, will be obtained.
- ----------------------
(3) The number of outstanding stock options and exercise prices are adjusted
for a 2-for-1 stock split in June 2006.
18
INTERESTS OF PARTICIPANTS IN THIS SOLICITATION AND CERTAIN
BUSINESS RELATIONSHIPS BETWEEN THE COMPANY AND MR.
NUSSDORF, AND THEIR RESPECTIVE AFFILIATES
This consent solicitation is being conducted by Mr. Nussdorf with the
assistance of certain other Participants as identified in Annex A. Information
in this consent statement and in Annex A about each Participant was provided by
that Participant. There are various business and financial relationships between
Mr. Nussdorf and certain of his affiliates and family members, on the one hand,
and the Company and its affiliates, on the other hand, as set forth below.
2003 ACQUISITION PROPOSAL
On May 19, 2003, Quality King Distributors, Inc. ("QKD"), a
privately-held corporation owned by Mr. Nussdorf, Stephen Nussdorf (Mr.
Nussdorf's brother) and Arlene Nussdorf-Mark (Mr. Nussdorf's sister), acting
together with Ilia Lekach, the Chairman and Chief Executive Officer of the
Company, submitted a proposal to the Company to acquire all the outstanding
shares of the Company's Common Stock, pursuant to a tender offer, at a price of
$4.00 per share in cash. This proposal was contingent on the approval of the
Board and the approval of QKD's lenders. QKD withdrew its proposal on June 12,
2003 because QKD was unable to obtain the approval of its lenders.
MODEL REORG, INC.
Mr. Nussdorf is a principal stockholder of Model Reorg, Inc. ("Model").
Model is a privately-held holding corporation that is controlled by Mr.
Nussdorf, Stephen Nussdorf and Arlene Nussdorf-Mark. Model is the parent of a
group of fragrance companies, including Quality King Fragrance, Inc. ("QKF"),
Scents of Worth, Inc. ("Scents"), Northern Group, Inc. ("Northern Group"), and
Five Star Fragrance Company, Inc. ("Five Star") (collectively, the "Model Reorg
Group").
QKF and Northern Group are wholesale distributors of fragrances selling
primarily to the mass retail store market and, to some extent, to other
wholesalers as well. These companies do not sell to the department store market.
Five Star is the owner of and licensee of several designer fragrance brands that
it resells to the mass retail store market. Scents is a consignor of fragrance
products that consigns fragrances on an exclusive basis to several retail
chains.
While the Company is not a supplier to the Model Reorg Group, the
Company has, for a limited time, been a customer of Five Star. Five Star had net
sales of $927,288 (which does not reflect a $150,000 credit issued to the
Company during 2006) to the Company during the period from September 2003
through April 2006 (at which time the relationship terminated) representing the
sale of Royal Copenhagen branded fragrance merchandise, which the Company then
exclusively distributed to the department store market.
PERFUMANIA AND ECMV
Perfumania, Inc. ("Perfumania") is one of the Company's largest
customers and is a wholly-owned subsidiary of E Com Ventures, Inc. ("ECMV").
Mr. Nussdorf and Stephen Nussdorf beneficially own an aggregate of
approximately 45% of the shares of common stock of ECMV. According to the 2006
Proxy Statement, the Company had net sales to Perfumania of $23,517,313,
$35,330,772, and $31,964,407 during the fiscal years ended March 31, 2006,
2005 and 2004, respectively.
On January 30, 2004, Mr. Lekach, IZJD Corp. and Pacific Investment
Group, Inc., each of which are wholly-owned by Mr. Lekach, and Mr. Lekach's
wife, Deborah Lekach (collectively, "Lekach Group"), entered into an option
agreement with Mr. Nussdorf and Stephen Nussdorf, pursuant to which Mr. Nussdorf
and Stephen Nussdorf were granted options to acquire up to an aggregate 720,954
shares of ECMV's common stock beneficially owned by members of the Lekach Group,
for a purchase price of $12.70 per share exercisable in specified installments.
Mr. Nussdorf and Stephen Nussdorf have acquired all 720,954 shares of ECMV
pursuant to such
19
agreement from the Lekach Group. In February 2004, Stephen Nussdorf was
appointed Chairman of the Board and a director of ECMV and Michael Katz became
President, Chief Executive Officer and a director of ECMV.
Mr. Lekach served as Chairman of the Board and Chief Executive Officer
of ECMV until his employment was terminated by ECMV's board of directors on
February 10, 2004. According to Mr. Lekach's most recent Schedule 13D filed with
the Commission on October 31, 2006, he beneficially owns an aggregate of 120,000
shares (approximately 4%) of ECMV's common stock. Mr. Lekach is not currently an
officer or director of ECMV.
On November 10, 2006, Model made a proposal to the Board of Directors
of ECMV whereby Model would be acquired by ECMV and all of Model's outstanding
common stock would be converted into 6,396,649 shares of ECMV common stock.
Following this conversion, Mr. Nussdorf and Stephen Nussdorf would beneficially
own an aggregate of approximately 80.20% of ECMV's outstanding common stock. On
November 17, 2006, ECMV issued a press release disclosing that a special
committee of independent directors had been formed to review and evaluate the
proposed offer.
On October 31, 2006, Model and Jacavi Holdings, Inc. ("Jacavi
Holdings") entered into a joint venture agreement under which, upon its
consummation, Jacavi Holdings will contribute its fragrance business and Model
will provide financing to Jacavi, LLC ("Jacavi"), a joint venture entity, of
which Model and Jacavi Holdings each own 50%. Model and Jacavi Holdings have
agreed that in the event Model enters into a merger agreement with ECMV, then
Jacavi Holdings will be merged into Model immediately prior to the effective
time of the merger of Model and ECMV.
Jacavi Holdings operates a wholesale fragrance business through two
entities owned by Jacavi Holdings, Integrated Global Resources, LLC ("Integrated
Global") and Distribution Concepts, LLC. Integrated Global was a customer of the
Company during the Company's fiscal year ended March 31, 2006. The Company sold
$3,100,281 in fragrance products to Integrated Global during the fiscal year
ended March 31, 2006, which constituted approximately 1.7% of the Company's
total net sales for the period.
STEPHEN NUSSDORF AND ILIA LEKACH
On July 14, 2003, Mr. Lekach issued a promissory note (the "Promissory
Note"), guaranteed by Mr. Ilia Lekach's wife, Deborah Lekach, in the amount of
$3,500,000 payable to Stephen Nussdorf, the brother of Mr. Nussdorf, bearing a
six percent (6%) annual interest rate. There is no guaranty or security for the
Promissory Note, other than the guaranty by Deborah Lekach. The principal of the
Promissory Note was to be due and payable in full on July 14, 2008 with monthly
interest payments to be made until that time. On September 25, 2006, Stephen
Nussdorf sent Mr. Lekach a letter notifying him that he was in default of his
payment obligations under the Promissory Note and that, as a result, the
outstanding principal balance was thereby accelerated and due immediately, in
accordance with the terms of the Promissory Note. The letter demanded immediate
payment of $4,153,916.66, representing the principal balance of the note and the
accrued interest. Mr. Lekach has not made any such payment and is currently in
default of the Promissory Note. On December 8, 2006, Stephen Nussdorf filed a
lawsuit in the United States District Court for the Southern District of New
York against Mr. Lekach and his wife to recover the unpaid principal balance and
accrued and unpaid interest under the Promissory Note and guaranty thereof. This
lawsuit was served on Mr. Lekach and his wife on December 11, 2006.
CONSENT PROCEDURES
Section 228 of the DGCL states that, unless the certificate of
incorporation of a Delaware corporation otherwise provides, any action required
to be taken at any annual or special meeting of stockholders of that
corporation, or any action that may be taken at any annual or special meeting of
those stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take that action
at a meeting at which all shares entitled to vote thereon were present and
voted, and those consents are delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Consents must also bear the date of the
signature of the
20
stockholder who signs the written consent. The Company's certificate of
incorporation does not prohibit, and therefore permits, the Company's
stockholders to act by written consent.
On January 8, 2007, the Company issued a press release announcing that
the Board had set a record date of January 17, 2007 (the "Record Date") for
determining the stockholders entitled to consent to corporate action in writing
without a meeting in connection with Mr. Nussdorf's consent solicitation.
Consents representing a majority of all the Shares as of the close of
business on the Record Date entitled to be voted at a meeting of stockholders on
the Proposals (i.e., a majority of the issued and outstanding Shares) are
required in order to implement each of the Proposals.
In order for an existing director to be removed, without cause,
consents to that director's removal representing a majority of all Shares
outstanding on the Record Date entitled to be voted at a meeting of stockholders
(i.e., a majority of the issued and outstanding Shares) are required. A
stockholder may consent to the removal of only certain existing directors by
designating the names of one or more directors who are not to be removed on the
WHITE consent card. Accordingly, it is possible that some, but not all, of the
existing directors may be removed pursuant to Proposal 1. It is Mr. Nussdorf's
intention that if fewer than all of the existing directors are removed, then the
Nominees who are standing for election to fill the vacancies resulting from the
removal of such existing directors be elected in the following order: 1) Mr.
Nussdorf, 2) the four independent Nominees (Messrs. Angel, D'Agostino, Neil Katz
and Mitzman) with the independent Nominee receiving the most consents filling
the next available vacancy and 3) Michael Katz. If fewer than four existing
directors are removed pursuant to Proposal 1, then Mr. Nussdorf's Nominees, if
elected, will not constitute a majority of the Board and will not be able to
cause the Board to take (or not take) any specific action. In such an event, the
Nominees will seek to influence the Board and management to address the issues
they believe need to be addressed as set forth under the caption "Background and
Reasons for the Consent Solicitation." There can be no assurance that the
Nominees, if they constitute less than a majority of the Board, will be able to
persuade other directors to join with them in addressing such issues.
The Company has furnished Mr. Nussdorf with a list of record holders as
of December 29, 2006. According to such list, it appears that the number of
issued and outstanding Shares as of such date was 18,430,332. Assuming that the
number of issued and outstanding Shares is 18,430,332 as reflected on the
stockholder list furnished to Mr. Nussdorf, the consent of at least 9,215,167
Shares would be necessary to effect Proposal 1 and Proposal 2. The actual number
of consents necessary to effect the Proposals will depend on the actual facts as
they exist on the Record Date.
Under Section 228(c) of the DGCL, no written consent shall be effective
to take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered, written consents signed by the holders of a
sufficient number of shares are delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders or members are recorded.
If the Proposals are adopted pursuant to the consent procedures, prompt
notice will be given pursuant to Section 228(d) of the DGCL to stockholders who
have not executed consents.
An executed WHITE consent card may be revoked at any time before the
action authorized by the executed consent becomes effective by dating, signing
and delivering a written revocation. A revocation may be in any written form
validly signed by the record holder as long as it clearly states that the
consent previously given is no longer effective. The delivery of a subsequently
dated consent card which is properly completed will constitute a revocation of
any earlier consent. The revocation may be delivered either to Mr. Nussdorf,
care of Innisfree M&A Incorporated, 501 Madison Avenue, 20th Floor, New York,
New York 10022, or to the Company at 3725 S.W. 30th Avenue, Fort Lauderdale,
Florida 33312 or such other address as the Company may provide. Although a
revocation is effective if delivered to the Company, Mr. Nussdorf requests that
either the original or photostatic copies of all revocations of consents be
mailed or delivered to Mr. Nussdorf, care of Innisfree, at the address set forth
above, so that Mr. Nussdorf will be aware of all revocations and can more
accurately determine if and when consents to the actions described herein have
been received from the holders of record on the Record Date of a majority of
outstanding Shares.
21
Please note, however, if your Shares are held in the name of a
brokerage firm, bank or other nominee, only it can execute a revocation of a
previously executed consent representing your Shares and only on receipt of your
specific instructions. Accordingly, if you wish to revoke a previously executed
consent, you should contact the person responsible for your account and give
instructions to execute a written revocation on your behalf. You can also revoke
your consent by signing, dating and returning a later dated consent card to your
brokerage firm, bank or other nominee.
Mr. Nussdorf plans to present the results of any successful
solicitation with respect to the corporate actions proposed herein to the
Company as soon as possible.
SPECIAL INSTRUCTIONS
Record holders of Shares as of the close of business on the Record Date
may elect to consent to, withhold consent to or abstain from consenting by
marking the "CONSENT," "DOES NOT CONSENT" or "ABSTAIN" box, as applicable,
underneath each Proposal on the accompanying WHITE consent card and signing,
dating and returning it promptly in the postage-paid envelope provided.
In addition, stockholders may withhold consent to the removal of any
individual member of the Board or to the election of any individual Nominee by
writing such person's name on the consent card. Mr. Nussdorf will not be able to
elect any of the Nominees unless stockholders also approve the removal, without
cause, of one or more of the existing members of the Board.
If the stockholder has signed, dated and returned Mr. Nussdorf's
consent card, but has failed to check a box marked "CONSENT," "DOES NOT CONSENT"
or "ABSTAIN" for one or both of the Proposals, such stockholder will be deemed
to have consented to such Proposal or Proposals, except that such stockholder
will not be deemed to have consented to the removal of any member of the Board
or the election of any Nominee whose name is written-in by such stockholder on
the consent card. A vote to "ABSTAIN" will have the same effect as withholding
your consent to a proposal.
MR. NUSSDORF RECOMMENDS THAT YOU CONSENT TO BOTH OF THE PROPOSALS.
YOUR CONSENT IS IMPORTANT. PLEASE SIGN AND DATE THE ENCLOSED WHITE
CONSENT CARD AND RETURN IN THE ENCLOSED POSTAGE-PAID ENVELOPE PROMPTLY. FAILURE
TO RETURN YOUR CONSENT WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE
PROPOSALS. PLEASE NOTE YOU MUST SIGN AND DATE THE WHITE CONSENT CARD IN ORDER
FOR IT TO BE VALID.
VOTING SECURITIES
According to publicly available information (including the Company's
certificate of incorporation and bylaws), the Shares constitute the only class
of outstanding voting securities of the Company. Accordingly, only holders of
Shares are entitled to execute consents. Each Share is entitled to one vote. The
Company's stockholders do not have cumulative voting rights.
SOLICITATION OF CONSENTS
Consents will be solicited by mail, telephone, telefax, telegraph, the
internet, e-mail, newspapers and other publications of general distribution and
in person. Mr. Nussdorf, his affiliates and the other Participants listed on
Annex A hereto may assist in the solicitation of consents without any additional
remuneration (except as otherwise set forth in this consent statement).
Mr. Nussdorf has retained Innisfree for solicitation and advisory
services in connection with the solicitation of consents, for which Innisfree is
to receive a fee of $125,000. Up to 30 people may be employed by Innisfree in
connection with the solicitation of consents. Mr. Nussdorf has also agreed to
reimburse Innisfree for out-of-pocket expenses and to indemnify Innisfree
against certain liabilities and expenses, including reasonable legal fees and
22
related charges. Innisfree will solicit consents from individuals, brokers,
banks, bank nominees and other institutional holders. Directors, officers and
certain employees of companies affiliated with Mr. Nussdorf may assist in the
solicitation of consents without any additional remuneration. Mr. Nussdorf's
expenses related to the solicitation of consents are currently estimated to be
approximately $600,000, of which approximately $300,000 has been incurred to
date. The entire expense of soliciting consents in connection with the Proposals
by or on behalf of Mr. Nussdorf is being borne by Mr. Nussdorf. To the extent
legally permissible, Mr. Nussdorf will seek reimbursement from the Company for
the costs of this solicitation. Mr. Nussdorf does not currently intend to submit
approval of such reimbursement to a vote of stockholders of the Company at a
subsequent meeting of stockholders unless required by applicable law.
If you have any questions concerning this consent statement or the
procedures to be followed to execute and deliver a consent, please contact
Innisfree at the address or phone number specified below.
FORWARD-LOOKING STATEMENTS
This consent statement contains certain statements which are "forward
looking" in nature, and stockholders should be aware that any such
forward-looking statements are only predictions, subject to risks and
uncertainties that exist in the business environment which could render actual
outcomes and results materially different than predicted. In some cases, such
forward-looking statements may be identified by terminology such as "may,"
"will," "could," "should," "expects," "intends" or "believes" or the negative of
such terms or other comparable terminology.
OTHER INFORMATION
The information concerning the Company contained herein has been taken
from, or is based upon, publicly available documents on file with the Commission
and other publicly available information. Although Mr. Nussdorf has no knowledge
that would indicate that statements relating to the Company contained in this
consent statement in reliance upon publicly available information are inaccurate
or incomplete, he has not to date had access to the books and records of the
Company, was not involved in the preparation of such information and statements
and is not in a position to verify any such information or statements.
Accordingly, Mr. Nussdorf does not take any responsibility for the accuracy or
completeness of such information or for any failure by the Company to disclose
events that may have occurred and may affect the significance or accuracy of any
such information.
Annex A, attached hereto, sets forth information concerning
"participants" in Mr. Nussdorf's solicitation of consents from the Company's
stockholders.
Mr. Nussdorf expects that the Company will furnish stockholders with a
consent revocation statement which will set forth (a) information regarding the
Company's directors and management, including information relating to management
compensation, (b) information concerning security ownership of certain
beneficial owners, directors and management of the Company, (c) information
concerning the procedures for submitting stockholder proposals for consideration
at the Company's 2007 annual meeting of stockholders, (d) information concerning
the method by which votes are counted, including the effect of abstentions and
broker non-votes and (e) the number of Shares outstanding as of the Record Date.
Reference is hereby made to such information which, to the extent it may be
deemed required, is incorporated herein pursuant to Rule 14a-5(c) under the
Exchange Act.
If your Shares are held in the name of a brokerage firm, bank or other
nominee, only it can execute a consent representing your Shares and only on
receipt of your specific instructions. Accordingly, you should contact the
person responsible for your account and give instructions for a WHITE consent
card to be signed on your behalf. You can also sign, date and return the
enclosed WHITE consent card to your brokerage firm, bank or other nominee in the
postage paid envelope provided.
YOUR PROMPT ACTION IS IMPORTANT. MR. NUSSDORF URGES YOU TO SIGN, DATE
AND RETURN THE ENCLOSED WHITE CONSENT CARD TODAY. PLEASE NOTE YOU MUST SIGN
AND DATE THE WHITE CONSENT CARD IN ORDER FOR IT TO BE VALID.
January [ ], 2007
23
If you have any questions or require any assistance in voting your
Shares, please contact:
Innisfree M&A Incorporated
501 Madison Avenue
20th Floor
New York, NY 10022
Stockholders Call Toll Free: (877) 456-8847
Banks and Brokers Call Collect: (212) 750-5833
24
ANNEX A
CERTAIN INFORMATION CONCERNING THE NOMINEES
There are no material legal proceedings in which any of the Nominees or
any of their associates is a party adverse to the Company or any of its
subsidiaries, or proceedings in which such Nominees or associates have a
material interest adverse to the Company or any of its subsidiaries. There are
no family relationships among the Nominees or between any of the Nominees and
any director or executive officer of the Company.
None of the Nominees have been involved in any legal proceedings in the
preceding five years described in Item 401(f) of Regulation S-K ("Regulation
S-K") other than as set forth in this Annex A or in the consent statement. Other
than as disclosed in this consent statement, there are no arrangements or
understandings between any of the Nominees and any other party pursuant to which
any such Nominee was or is to be selected as a director or nominee. Other than
as disclosed in this consent statement, none of the Nominees nor any of their
associates has received any cash compensation, cash bonuses, deferred
compensation, compensation pursuant to plans, or other compensation, from, or in
respect of, services rendered on behalf of the Company, or is subject to any
arrangement described in Item 402 of Regulation S-K.
CERTAIN INFORMATION CONCERNING PERSONS WHO MAY BE PARTICIPANTS IN
MR. NUSSDORF'S SOLICITATION OF CONSENTS
The following sets forth the name and the present principal occupation
or employment, and the name and principal business address of any corporation or
other organization in which such employment is carried on, of persons who may be
deemed to be participants on behalf of Mr. Nussdorf in the solicitation of
consents from stockholders of the Company. Each person is a citizen of the
United States.
Nominees of Mr. Nussdorf for Election to the Board of Directors of the Company
The business address and present principal occupation or employment of
each of Mr. Nussdorf's Nominees listed below is set forth in this consent
statement under the heading "The Proposals - Proposal 2: Election of Nominees."
Name
- ----
o Glenn Nussdorf
o Michael Katz
o Joshua Angel
o Anthony D'Agostino
o Neil Katz
o Robert Mitzman
Alfred Paliani
Alfred Paliani's principal occupation is General Counsel of QKD and
its subsidiary and affiliates. Mr. Paliani also serves as the Chief Legal
Officer and Assistant Secretary of Model. Mr. Paliani's principal business
address is 2060 Ninth Avenue, Ronkonkoma, New York 11779.
Shares Held by Participants
The participants and their associates may be deemed to have beneficial
ownership of the Company's Shares as set forth below:
Common Stock
Beneficially Percentage
Owned (1) Ownership (1)
Joshua Angel 0 -
Anthony D'Agostino 0 -
Michael Katz 0 -
Neil Katz 0 -
Robert Mitzman 0 -
Glenn Nussdorf (2) 2,212,629 12.0%
Alfred Paliani 0 -
(1) Based on information furnished to Mr. Nussdorf by the Company, it
appears that the Company had 18,430,332 shares of Common Stock
outstanding as of December 29, 2006.
(2) Includes (a) 1,962,629 shares owned directly by Glenn Nussdorf and
(b) 250,000 shares which are also beneficially owned by Lillian Ruth
Nussdorf.
Transactions in the Company's Securities Involving Participants
Other than the transactions described below, no Participant has
purchased or sold any securities of the Company in the past two years.
Transactions in the Company's Common Stock by Glenn Nussdorf (1)
Number of Shares of the
Date of Transaction Nature of Transaction Company's Common Stock
- ----------------------- ----------------------- -------------------------
January 19, 2005 Purchase 3,254
January 24, 2005 Sale 3,254
February 15, 2005 Purchase 400
February 16, 2005 Sale 1,400
February 18, 2005 Sale 400
February 22, 2005 Purchase 5,000
February 25, 2005 Sale 5,000
March 8, 2005 Purchase 746
March 9, 2005 Purchase 4,200
March 11, 2005 Sale 746
March 14, 2005 Sale 4,200
March 16, 2005 Purchase 4,000
March 18, 2005 Purchase 13,000
March 21, 2005 Sale 4,000
March 22, 2005 Purchase 15,000
March 23, 2005 Sale 13,000
March 28, 2005 Sale 15,000
August 11, 2006 Purchase 650,000
August 11, 2006 Purchase 250,000 (2)
August 16, 2006 Sale 500,000
August 18, 2006 Purchase 300,830
August 28, 2006 Purchase 276,188
August 29, 2006 Purchase 535,611
August 30, 2006 Purchase 100,000
September 06, 2006 Purchase 400,000
September 07, 2006 Purchase 200,000
(1) Mr. Nussdorf effects purchases of securities primarily through margin
accounts maintained for him with Goldman, Sachs & Co. and Davis
Securities, which may extend margin credit to Mr. Nussdorf as and when
required to open or carry positions in the margin accounts, subject to
applicable Federal margin regulations, stock exchange rules and the
respective firm's credit policies. With respect to the Company's Common
Stock, Mr. Nussdorf had margin loans of $4,370,173 with Goldman, Sachs &
Co. and $984,337 with Davis Securities as of January 10, 2007.
(2) These Shares were purchased by and are beneficially owned by Lillian Ruth
Nussdorf, Mr. Nussdorf's mother. Lillian Ruth Nussdorf shares with Mr.
Nussdorf voting and dispositive power with respect to the 250,000 Shares
beneficially owned by her.
Miscellaneous Information Concerning the Participants
Except as described in this Annex A or in the consent statement, no
Participant nor any of his or her respective associates or affiliates (together,
the "Participant Affiliates"), is either a party to any transaction or series of
transactions since April 1, 2005, or has knowledge of any currently proposed
transaction or series of proposed transactions, (i) to which the Company or any
of its subsidiaries was or is to be a participant, (ii) in which the amount
involved exceeds $120,000, and (iii) in which any Participant or Participant
Affiliate had, or will have, a direct or indirect material interest.
Furthermore, except as described in this Annex A or in the consent statement, no
Participant or Participant Affiliate (i) directly or indirectly beneficially
owns any securities of the Company or any securities of any subsidiary of the
Company, or (ii) has had any relationship with the Company in any capacity other
than as a stockholder.
Except as described in this Annex A or in the consent statement, no
Participant or Participant Affiliate has entered into any agreement or
understanding with any person respecting any future employment by the Company or
any of its affiliates or any future transactions to which the Company or any of
its affiliates will or may be a party. Except as described in this Annex A or in
the consent statement, there are no contracts, arrangements or understandings by
any Participant or Participant Affiliate within the past year with any person
with respect to any securities of the Company, including, but not limited to,
the transfer or voting of such securities, joint ventures, loan or option
arrangements, puts or calls, guaranties of loans, guarantees against loss or
guarantees of profit, division of losses or profits, or the giving or
withholding of proxies, consents or authorizations.
In an order entered on February 9, 2006 by the Supreme Court of New
York, New York County, each of QKD, Pro's Choice Beauty Care, Inc. ("Pro's
Choice"), GSN Trucking Corp. and the officers and directors of such
corporations, Michael Katz and Marcy Blick, President of Pro's Choice, were
preliminarily enjoined, either directly or indirectly or by or through Lillian
Ruth Nussdorf, Mr. Nussdorf or Stephen Nussdorf, from purchasing, selling,
bartering or distributing any products bearing an ARTec trademark and/or brand
name. This order was entered in a lawsuit entitled L'Oreal USA, Inc. et al. v.
Quality King Distributors, Inc. et al., that is ongoing and in which the parties
are disputing the meaning and scope of the terms of a settlement agreement
relating to certain hair care products sold under the ARTec brand name that was
entered into in 1996.