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Filed pursuant to Rule 424(B)(1)
Registration No. 333-80059
3,500,000 SHARES OF COMMON STOCK
(perfumania.com LOGO)
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perfumania.com, inc. operates an online store that specializes in the sale
of fragrances, fragrance related products and bath and body products on a retail
and wholesale basis.
We are offering 2,500,000 shares of our common stock and Perfumania, Inc.,
the selling shareholder, is offering 1,000,000 shares of our common stock.
No public market currently exists for our common stock. We have applied to
list our common stock on the American Stock Exchange under the symbol "PF".
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER SHARE TOTAL
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Public offering price....................................... $7.00 $24,500,000
Underwriting discounts and commissions...................... $ .49 $ 1,715,000
Proceeds to perfumania.com, inc............................. $6.51 $16,275,000
Proceeds to Perfumania, Inc. ............................... $6.51 $ 6,510,000
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We have granted the underwriters an option for 45 days to purchase up to
525,000 additional shares at the same price indicated above to cover over
allotments.
Cruttenden Roth Incorporated
Pennsylvania Merchant Group
H.C. Wainwright & Co., Inc.
The date of this prospectus is September 29, 1999
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 4
Forward Looking Statements.......... 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
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Business............................ 28
Management.......................... 38
Principal Shareholders.............. 44
Certain Transactions................ 45
Description of Capital Stock........ 47
Shares Eligible for Future Sale..... 49
Underwriting........................ 51
Validity of Common Stock............ 53
Experts............................. 53
Where You Can Find More
Information....................... 54
Index to Financial Statements....... F-1
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The terms "perfumania.com," "we," "our," and "us" refer to perfumania.com,
inc. unless the context suggests otherwise. The terms "you" and "your" refer to
a prospective investor. The term "common stock" means perfumania.com, inc.'s
common stock, par value $0.01 per share.
Unless otherwise stated, all information contained in this prospectus
assumes no exercise of (a) the over-allotment option to purchase up to 525,000
shares of our common stock granted to the underwriters, (b) warrants to purchase
350,000 shares of our common stock to be granted to the representatives of the
underwriters upon completion of this offering and (c) options to purchase
645,000 shares of our common stock outstanding under perfumania.com's 1999
Incentive Stock Option Plan and 355,000 shares of our common stock reserved for
further issuance under the plan.
The underwriters are offering the shares subject to various conditions and
may reject all or part of any order. The shares should be ready for delivery on
or about October 4, 1999.
Until October, 24, 1999 (the 25th day after the date of this prospectus)
all dealers effecting transactions in the common stock, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY OUR COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER
OR SOLICITATION IS UNLAWFUL.
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[INSIDE COVER -- IN THE UPPER LEFT HAND CORNER IS THE FOLLOWING TEXT
"PERFUMANIA", "YOUR FAVORITE FRAGRANCE STORE WITH LOW, LOW PRICES ON GREAT
DESIGNER BRANDS, HAS GROWN FROM 280 STORES ACROSS THE NATION TO ......." AT THE
BOTTOM LEFT OF THE INSIDE FRONT COVER IN THE FOLD OUT ARE THREE STACKED COLOR
PHOTOGRAPHS OF PERFUMANIA STORES. IN THE MIDDLE OF THE PAGE ARE THE WORDS "24
HOURS A DAY AROUND THE CLOCK SALES ON THE WORLD WIDE WEB! 7 DAYS A WEEK 365 DAYS
A YEAR." -- THREE COLOR DEPICTIONS OF SCREEN PAGES FROM PERFUMANIA.COM'S RETAIL
WEB SITE APPEAR ON THE RIGHT SIDE OF THE PAGE, DESCENDING FROM TOP TO BOTTOM.
THE BACKGROUND IS A LIGHT BLUE SHADE.]
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire document carefully. You should consider the
information set forth under "Risk Factors" and our financial statements and
accompanying notes that appear elsewhere in this prospectus.
OUR BUSINESS
perfumania.com operates an online store that specializes in the sale of
fragrances, fragrance related products and bath and body products on a retail
and wholesale basis. We launched our online store in February 1999 and offer
retail customers over 1,700 products at significant price discounts, including
hard-to-find and discontinued brands. The business-to-business component of our
online store offers our products on a wholesale basis to the largely underserved
market of smaller specialty retailers.
We are a subsidiary of Perfumania, Inc., a leading discount fragrance
retailer that operates a chain of approximately 280 specialty fragrance stores.
Our relationship with our parent provides us with the following advantages:
- exclusive online use of the highly recognized Perfumania brand name;
- cross marketing our online store with Perfumania, Inc.;
- access to Perfumania, Inc.'s extensive supply relationships; and
- Perfumania, Inc.'s considerable fragrance industry experience and
expertise.
THE PERFUMANIA.COM ADVANTAGE
We believe online retailers offer significant advantages over traditional
retailers by providing substantial improvement in convenience, product selection
and price. Our competitive advantages include:
- Our online store is available 24 hours a day, seven days a week and may
be electronically visited from any PC with access to the Internet.
- We have virtually unlimited shelf space and can offer consumers a wider
selection of products than most traditional brick and mortar businesses.
- By offering our products online and at discounted prices, we can service
price-sensitive customers.
OUR STRATEGY
Our objective is to become the leading destination for retail consumers and
smaller specialty retailers seeking to purchase fragrances and fragrance related
products over the Internet. Key elements of our strategy include:
- Capitalizing and expanding upon the Perfumania brand name to drive
traffic to our online store.
- Enhancing our online shopping experience to accommodate our customer's
purchasing habits and preferences.
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- Leveraging our industry relationships to help us obtain products on the
most favorable terms.
- Focusing on the underserved smaller specialty retailers through our
business-to-business online store, perfumaniawholesale.com.
- Addressing the growing international demand for fragrances.
OUR HISTORY
We have had limited revenues from operations and as of July 31, 1999 had an
accumulated deficit of approximately $1.9 million. We expect to have losses for
at least the remainder of this year.
We were incorporated in January 1999 in the State of Florida. Our principal
executive offices are located at 11701 NW 101st Road, Miami, Florida 33178 and
our phone number is (305) 889-1600. Our online store is located at
www.perfumania.com and www.perfumaniawholesale.com. Information contained on our
Web sites do not constitute part of this prospectus.
THE OFFERING
Common stock offered by
perfumania.com................ 2,500,000 shares
Common stock offered by
Perfumania, Inc. ............. 1,000,000 shares
Total common stock offered...... 3,500,000 shares
Common stock outstanding after
the offering.................... 7,500,000 shares
Use of proceeds................. To fund anticipated operating losses,
enhance our online store, repay an
approximate $3.5 million advance from
Perfumania, Inc., and for working capital
and other general corporate purposes. We
will not receive any proceeds from the sale
of Perfumania, Inc.'s 1,000,000 shares of
our common stock. See "Use of Proceeds."
American Stock Exchange
symbol.......................... PF
Risk factors.................... Investment in our common stock involves
significant risk and you could lose your
entire investment.
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SUMMARY FINANCIAL DATA
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this prospectus. All per share information in this prospectus gives effect to a
5,000-for-1 stock split that was effective June 7, 1999. Our fiscal year is
comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of
January.
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FOR THE PERIOD
FROM JANUARY 7,
1999 (DATE OF FOR THE FOR THE FOR THE
INCEPTION) THREE-MONTH THREE-MONTH SIX-MONTH
THROUGH PERIOD ENDED PERIOD ENDED PERIOD ENDED
JANUARY 30, MAY 1, JULY 31, JULY 31,
1999 1999 1999 1999
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STATEMENT OF OPERATIONS DATA:
Net sales.................... $ -- $ 161,972 $ 227,871 $ 389,843
Gross profit................. -- 51,306 44,090 95,396
Loss from operations......... (270,906) (732,622) (736,112) (1,468,734)
Net loss..................... (273,505) (764,657) (803,994) (1,568,651)
Basic and diluted loss per
share:..................... $ (0.05) $ (0.15) $ (0.16) $ (0.31)
========== ========== ========== ===========
Weighted average number of
common shares
outstanding................ 5,000,000 5,000,000 5,000,000 5,000,000
========== ========== ========== ===========
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AS OF JULY 31, 1999
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ACTUAL AS ADJUSTED(1)
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BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 103,550 $12,715,365
Working capital (deficit)............................ (1,900,642) 13,474,358
Total assets......................................... 985,975 13,597,790
Due to parent........................................ 2,763,185 --
Shareholder's equity (deficit)....................... (1,842,146) 13,532,854
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(1) Adjusted to give effect to the sale of common stock that we are offering at
the initial public offering price of $7.00 per share and the application of
the estimated net proceeds as discussed in "Use of Proceeds" on page 18.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations and your investment. If any of the following risks actually occur,
our business, financial condition or operating results could be harmed. In such
case, the trading price of our common stock could decline and you may lose part
or all of your investment.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT OR IMPOSSIBLE FOR YOU TO
EVALUATE OUR PERFORMANCE AND MAKE PREDICTIONS ABOUT OUR FUTURE.
We launched our online store in February 1999. Accordingly, we have a
limited operating history upon which you can evaluate our performance. Before
investing in our common stock, you should consider the risks and difficulties we
may encounter as an early-stage company in the new and rapidly evolving
e-commerce market. These risks include our ability to:
- implement our business model;
- anticipate and adapt to rapid changes in our markets;
- retain existing customers, attract new customers and maintain customer
satisfaction;
- introduce new and enhanced Web sites, services, products and alliances;
- maintain our profit margins notwithstanding price competition or rising
wholesale prices;
- minimize technical difficulties, system downtime and the effect of
Internet brown-outs; and
- manage the timing of perfumania.com promotions and sales programs.
If we do not successfully manage these risks, our business will suffer. We
cannot assure you that we will successfully address these risks or that our
business strategy will be successful.
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY AND MAY BE UNABLE TO PERFORM OR
OBTAIN ESSENTIAL SERVICES NOW BEING SUPPLIED BY PERFUMANIA, INC.
We have not operated as a fully independent company. Prior to this
offering, we have operated as a wholly-owned subsidiary of Perfumania, Inc. We
have relied on Perfumania, Inc. to provide corporate, fulfillment, inventory
supply, advertising space-sharing and other administrative services. We will
continue to receive those services pursuant to an intercompany agreement with
Perfumania, Inc. for the foreseeable future. If Perfumania, Inc. fails to
adequately provide us services or if we fail to develop management and financial
systems, our business could suffer until we develop our own sufficient
operational, administrative and other systems and infrastructure.
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THE ALLOCATIONS FOR EXPENSES RELATED TO SERVICES BEING PROVIDED BY PERFUMANIA,
INC. MAY NOT ACCURATELY REFLECT THE COSTS OF THESE SERVICES IN THE FUTURE.
The historical financial statements contained in this prospectus include
allocations for administrative, distribution and other expenses incurred by
Perfumania, Inc. for services rendered to us. While we believe that these
allocations are reasonable, they are not necessarily indicative of, and it is
not practical for us to estimate, the levels of expenses that would have
resulted if we were operating as a separate, stand-alone company. Allocations
for services rendered to us by Perfumania, Inc. may be less than the amount we
may have to pay for the same services provided to us by an unaffiliated third
party. We have also relied on Perfumania, Inc. to provide financing for our
operations. Therefore, investors should not rely on our cash flows to date as
indicative of the cash flows that would have resulted if we had been operating
as an independent company during the periods presented.
WE MAY BE UNABLE TO CONTINUE OPERATIONS IF PERFUMANIA, INC.'S FINANCIAL
DIFFICULTIES PRECLUDE IT FROM FUNDING OUR OPERATIONS OR PROVIDING SERVICES OR
MERCHANDISE TO US.
The report of Perfumania, Inc.'s independent certified public accountants
as of January 30, 1999 expressed substantial doubt about Perfumania, Inc.'s
ability to continue as a going concern. We have not included the accountants'
report relating to Perfumania, Inc. as part of this prospectus. The concern
stemmed from Perfumania, Inc.'s recurring net losses, its $3.8 million working
capital deficit, and its default in its bank line of credit agreement as a
result of its violation of certain debt covenants. Because we are dependent on
Perfumania, Inc. for many services, our business would suffer if Perfumania,
Inc. is unable to successfully remedy its problems.
Perfumania, Inc.'s $35.0 million line of credit agreement requires
Perfumania, Inc. to maintain a minimum tangible net worth of $15.0 million, a
minimum net income level and comply with other operating covenants that limit
the number of new stores that Perfumania, Inc. may open. The lender notified
Perfumania, Inc. that it was in default for failing to maintain the minimum net
worth and net income levels established by the financial covenants and exceeding
the limit on new store openings.
Perfumania, Inc. reported in recent filings with the SEC that it intended
to remedy this situation by obtaining a waiver for the debt covenant violations,
limiting new store openings, closing non-profitable stores, improving the
effectiveness of its sales promotions and reducing operating expenses. On July
14, 1999, Perfumania, Inc. obtained a waiver of default from the lender as of
and for the year ended January 30, 1999 and through September 30, 1999. Future
outstanding borrowings will bear interest at the prime rate plus four percent.
The lender agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event is that perfumania.com must
receive at least $10 million from the offering proceeds, of which at least $2
million is to be repaid to Perfumania, Inc.
Perfumania, Inc. has informed us that the lender extended the waiver to
October 15, 1999. If the conditions of the waiver are not satisfied by then,
Perfumania, Inc. will seek to again extend the waiver termination date and
renegotiate the terms of the loan with the lender or will seek substitute
financing from other sources. If Perfumania, Inc. cannot renegotiate with the
lender or obtain substitute financing for a period extending significantly
beyond termination date, it is possible that the lender will accelerate payment
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and attempt to collect the entire outstanding balance of the loan from
Perfumania, Inc. If the lender takes those actions, Perfumania, Inc.'s
managerial and financial resources may become strained and may interfere with
Perfumania, Inc.'s ability to provide funding and services to us. We rely
heavily on Perfumania, Inc. for funding and services and believe that the
inability of Perfumania, Inc. to serve our various needs would damage our
business.
Based on the factors described above and our recurring losses, the report
of our independent certified public accountants also contains an explanatory
paragraph regarding our ability to continue as a going concern.
As of July 31, 1999, we have received from Perfumania, Inc. advances
totaling approximately $2.8 million which have been used to finance our start-up
costs. Perfumania, Inc. has indicated its intent to continue to advance funds to
us as may be needed to continue our business and complete the offering. All
amounts advanced to us will be repaid from the proceeds of the offering. If
Perfumania, Inc. cannot continue as a going concern or continue to advance funds
to us until the offering is completed, we may have inadequate capital to
continue operation. We also depend on Perfumania, Inc. to provide numerous
services to us, to supply merchandise to us, and to license to us its brand
name. If Perfumania, Inc. cannot continue its operations, we may be unable to
find substitute services or merchandise and may lose the right to use the
Perfumania brand name.
IF PERFUMANIA, INC. TRANSFERS ITS MAJORITY INTEREST IN OUR STOCK, NEW
SHAREHOLDERS MAY ELECT A MANAGEMENT TEAM THAT DOES NOT OPERATE OUR BUSINESS IN
THE MANNER DESCRIBED IN THIS PROSPECTUS OR IN A MANNER THAT IS IN YOUR BEST
INTEREST.
We face additional risks if Perfumania, Inc. sells its majority ownership
of our common stock. New owners of a large percentage of our stock may elect a
new management team whose business plan varies greatly from our current plan and
does not further your interest as a minority shareholder. New management may
lack an understanding of the industry in which we operate, may be unable to
develop or maintain strategic relationships, such as the Perfumania, Inc.,
relationship, or may manage our finances or inventory poorly. In addition, all
assets of Perfumania, Inc., including our common stock, have been pledged to
secure its line of credit. If Perfumania, Inc.'s lender were to foreclose on the
common stock, it would become the majority shareholder of our company and might
control perfumania.com in a manner that is detrimental to its public
shareholders.
WE EXPECT TO INCUR SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FOR THE
FORESEEABLE FUTURE SO THAT YOUR INVESTMENT MAY NOT BE VALUED BASED ON OUR
EARNINGS.
Since inception, perfumania.com has been operating at a loss. Our net
losses of approximately $1.9 million through July 31, 1999 primarily relate to
start-up costs. We expect that operating losses and negative cash flow will
continue for the foreseeable future as we must invest in marketing and
promotional activities, technology and operating systems. We cannot be certain
when and if we will achieve sufficient revenues in relation to expenses to
become profitable. We believe that increasing our revenues will depend in large
part on our ability to:
- increase consumer awareness of our online store and develop effective
marketing and other promotional activities to drive traffic to our Web
site;
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- enhance our online store, transaction-processing systems and network
infrastructure to support increased traffic;
- provide our customers with superior e-commerce experiences; and
- develop strategic relationships.
Our future profitability depends on generating and sustaining high revenue
growth while maintaining reasonable expense levels. We cannot assure you that
our sales or revenues will increase. Slower revenue growth than we anticipate or
operating expenses that exceed our expectations would harm our business. If we
achieve profitability, we cannot be certain that we would be able to sustain or
increase profitability in the future.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS ON TERMS
UNFAVORABLE TO INVESTORS IN THIS OFFERING IF WE DO NOT GENERATE ENOUGH REVENUE.
We require substantial working capital to fund our business and may need
more in the future. We will likely experience negative cash flow from operations
for the foreseeable future. The net proceeds from this offering, together with
our available funds, should be sufficient to meet our needs for working capital
and capital expenditures needs for the next 12 months. If, however, we need to
raise additional funds through the issuance of equity, equity-related or debt
securities, your rights may be subordinate to other investors and your stock
ownership percentage may be diluted. We cannot be certain that additional
financing will be available to us.
OUR MANAGEMENT'S EXPERIENCE IN THE E-COMMERCE INDUSTRY IS LIMITED AND WE MAY
FAIL TO HIRE, RETAIN AND INTEGRATE KEY PERSONNEL WHO ARE EXPERIENCED IN E-
COMMERCE.
Our success depends on the expertise of our key technical, sales and senior
management personnel. perfumania.com's senior management has limited experience
operating and managing an online store engaged in the sale of fragrances and
fragrance related products.
We depend heavily on the continuing service of our management and on their
ability to quickly develop an expertise in the e-commerce aspects of our
business. Loss of the services of Rachmil Lekach, our chairman, president and
chief executive officer, Michael Amideo, our chief financial officer and chief
operating officer, and Richard Veliz, our chief technology officer, or other key
employees would hurt our business.
We anticipate hiring additional persons to serve on our management team.
Our success depends on our ability to continue to attract, retain and motivate
skilled employees who can effectively manage an online fragrance business.
Competition for qualified e-commerce employees is intense. We may be unable to
retain our present key employees or to attract, assimilate or retain other
qualified employees in the future. We may experience difficulty in hiring and
retaining skilled employees with appropriate qualifications. Our business will
be harmed if we fail to attract and retain key employees.
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OUR OPERATING RESULTS ARE SUBJECT TO WIDE VARIATION, WHICH COULD CAUSE OUR STOCK
PRICE TO FLUCTUATE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. Many of these factors are outside our
control and include:
- seasonal fluctuations in consumer purchasing patterns and advertising
spending on fragrances and fragrance related products;
- changes in the growth rate of Internet usage and online user traffic
levels;
- actions of our competitors;
- the mix between retail and wholesale sales, since the wholesale business
has lower margins;
- the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses; and
- general economic and market conditions.
Because we have a limited operating history, our future revenues are
difficult to forecast. A shortfall in revenues will damage our business and
would likely affect the market price of our common stock. Our limited operating
history and the new and rapidly evolving Internet market make it difficult to
ascertain the effects of seasonality on our business. If seasonal and cyclical
patterns emerge in Internet purchasing, our results of operations from quarter
to quarter may vary greatly and may cause our business to suffer.
Fragrance sales are generally lower in the first half of each year and
increase substantially during the Christmas purchasing season and near other
holidays. We expect to experience similar seasonality in our business. You
should not rely on quarter-to-quarter comparisons of our results of operations
to gauge our future performance. It is possible that in some future periods our
results of operations may be below the expectations of public market analysts
and investors. In this event, our stock price may fall.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AS WE FACE INTENSE COMPETITION FROM
INTERNET-BASED AND RETAIL-BASED BUSINESSES.
We cannot assure you that we will be able to compete successfully or that
competitive pressures will not damage our business. Our competition includes:
- traditional department stores and stand-alone perfume retailers such as
Macy's, and Bloomingdale's;
- nationally known discount perfume retailers such as Perfumania, Inc. and
The Cosmetic Center;
- competition from other retailers who seek to purchase high demand or
limited supply products;
- Web sites maintained by online retailers of fragrances and fragrance
products, such as fragrancenet.com and fragrancecounter.com;
- catalog retailers of fragrance and fragrance related products; and
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- Internet portals and online service providers that feature shopping
services, such as America Online, Yahoo!, Excite and Lycos.
We believe that our ability to compete depends upon many factors,
including:
- the market acceptance of our Web sites and online services;
- the success of our sales and marketing efforts;
- the performance and reliability of our services;
- the price of our products; and
- the effectiveness of our customer service and support efforts.
Our competitors may be larger than us and may have substantially greater
financial and marketing resources. In addition, our competitors may be able to
secure products from vendors on more favorable terms, fulfill customer orders
more efficiently and adopt more aggressive pricing or inventory availability
policies than we can. Traditional store-based retailers also enable customers to
see, feel, and smell products in a manner that is not possible over the
Internet. Some online competitors may be able to use the Internet as a marketing
medium to reach significant numbers of potential customers more effectively than
we can.
Our wholesale competitors will likely have more established distribution
channels than us and may have entered into exclusive supply arrangements with
retailers who constitute part of our potential wholesale market. These factors
may preclude us from competing effectively in the wholesale fragrance
distribution market.
WE MAY BE UNABLE TO SUPPORT INCREASED VOLUME ON OUR WEB SITE, THUS PREVENTING
POTENTIAL CUSTOMERS FROM PURCHASING OUR PRODUCTS AND DECREASING OUR REVENUE.
A key element of our strategy is to generate a high volume of traffic on
our Web site. However, growth in the number of users of our online store may
strain or exceed the capacity of our computer systems, lead to declines in
performance or systems failure, and negatively affect our revenues.
We believe that our present systems will not be adequate to accommodate
rapid growth in user demand. We believe that we will therefore need to add
additional hardware and software and to continually improve and enhance the
functionality and performance of our e-commerce, customer tracking and other
technical systems. We intend to upgrade our existing systems and implement new
systems as we anticipate new demand. Failure to implement these systems
effectively or within a reasonable period of time would cause decreased levels
of customer service and satisfaction.
We must also introduce additional or enhanced features and services to
retain current users and attract new users to our online store. If a new service
is not favorably received, our current customers may visit our online store less
frequently. These new services or features may not function well and we may need
to significantly modify the design of these services to correct errors. If users
encounter difficulty with or do not accept our services or features, our
business would be damaged.
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WE OPERATE IN AN INDUSTRY WHERE GREY MARKET GOODS ARE PREVALENT AND WE MAY BE
LIABLE FOR INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS IF WE INADVERTENTLY SELL
GREY MARKET GOODS.
perfumania.com purchases its products from domestic and foreign
manufacturers and secondary sources such as distributors, wholesalers, importers
and retailers. Our purchases include trademarked and copyrighted products
manufactured in foreign countries. Our merchandise may be manufactured by
entities, particularly foreign licensees, who are not the owners of the
trademarks or copyrights for the merchandise. We may also purchase "grey market"
goods from wholesalers who we mistakenly believe to be selling authorized
licensed, or authentic merchandise. The term "grey market" refers to the
situation where foreign manufactured goods, bearing a valid United States
trademark, are imported into the United States without the consent of the U.S.
trademark holder. A person who sells or resells "grey market" goods may be
exposed to liability to the holder of the trademark for infringement claims. If
we are called upon or challenged by the owner of a particular trademark or
copyright to demonstrate that specific merchandise was produced and sold with
the proper authority and cannot do so, perfumania.com may be restricted from
reselling the particular merchandise or be subjected to other liabilities.
We cannot always know or demonstrate that the manufacturer of specific
merchandise had proper authority from the trademark or copyright owner to
produce the merchandise or permit it to be resold in the United States.
perfumania.com's suppliers generally will not disclose the identity of their
suppliers, which they consider to be proprietary trade information. As a result,
we cannot determine specifically what portion of our merchandise purchased from
grey market sources may not have been manufactured with a proper trademark or
copyright. Future judicial, legislative or administrative agency action,
including possible import, export, tariff or other trade restrictions, may limit
or eliminate some of the secondary sources of supply used by us or our business
activities. In addition, our business activities may become the subject of legal
or administrative actions brought by manufacturers, distributors or others. No
patent or trademark infringement suits have been threatened or are pending
against us.
WE WILL INCUR ADDITIONAL MARKETING EXPENSES AS WE INCREASINGLY RELY UPON ONLINE
AND TRADITIONAL ADVERTISING TO GENERATE SALES.
Our traditional advertising efforts to date have consisted primarily of
advertising in Perfumania, Inc.'s stores, print and other media materials such
as the Wall Street Journal, USA Today, Chicago Tribune, GQ, Business 2.0, and
Industry Standard. We intend to commit substantial resources to promoting our
online store and enhancing our brand name through online advertising,
advertising in Perfumania, Inc.'s stores and other advertising materials. Our
online advertising may include strategic relationships that require large,
long-term commitments. We cannot assure that this advertising will effectively
attract users to our online store or lead to a substantial amount of sales. Our
inability to develop and maintain effective advertising campaigns may harm our
business.
WE NEED TO EFFECTIVELY MANAGE GROWTH OF OUR PERSONNEL AND OPERATIONS TO ASSURE
THAT WE MAINTAIN ADEQUATE INVENTORY AND MANAGEMENT RESOURCES SO AS TO AVOID
UNNECESSARY EXPENSES OR PRODUCT SHORTAGES.
perfumania.com's success depends upon effective planning and growth
management. Excluding part-time employees, at August 31, 1999 we had a total of
14 employees and
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<PAGE> 14
one independent consultant. We intend to continue to increase the scope of our
operations and the number of our employees. perfumania.com also faces challenges
associated with upgrading and maintaining our information systems and internal
controls, particularly those related to our purchase and receipt of inventory.
If we do not successfully implement and integrate these new systems or fail to
scale these systems with our growth, we may not have adequate, accurate and
timely forecasting and financial information.
OUR FAILURE TO RESPOND TO CHANGES IN CONSUMER TRENDS MAY HINDER OUR BUSINESS.
The market for fragrances and fragrance related products largely depends on
trends in consumer tastes, the fashion and accessory industry and advertising
efforts. Our success depends on accurately predicting and responding to these
trends by being able to obtain popular products and delivering them on a timely
basis.
WE DEPEND ON THIRD PARTY SHIPPERS, COMMUNICATIONS PROVIDERS AND VENDORS TO
OPERATE OUR BUSINESS.
perfumania.com is wholly reliant upon a number of third parties to deliver
goods and services to it and its customers. Unlike many other e-commerce retail
and wholesale businesses, we have no ability or resources to obtain or deliver
merchandise on our own. We cannot operate our business unless carriers such as
the United States Postal Service, United Parcel Service and Federal Express
deliver inventory to us and ship our merchandise to our customers. Strikes or
other service interruptions will affect us more severely than an e-commerce
business with internal delivery capabilities. Those events would impair our
ability to deliver merchandise on a timely basis and may result in lost revenue.
We also depend on communications providers to provide our Internet users
with access to our online store. Our online store could experience disruptions
or interruptions in service due to failures by these providers. Our users
similarly depend on Internet service providers and Web site operators for access
to our online store. Each of these groups has experienced significant outages in
the past and could experience outages, delays and other difficulties due to
system failures unrelated to our systems, which could cause our Web site to
become inoperative. These types of occurrences could cause users to perceive our
online store as not functioning properly and therefore cause them to stop using
our services. These risk pose a greater threat to us than to traditional "bricks
and mortar" fragrance sellers whose operations can continue despite a
communications systems failure. Unlike those competitors we are virtually
certain to lose sales as a result of systems failure.
Our business depends on the ability of third-party vendors, including
Perfumania, Inc., to provide to us and Perfumania, Inc. with popular, high
demand fragrances at competitive prices and in sufficient quantities. We have
purchased more than 95% of our merchandise from Perfumania, Inc. since our
inception. Many of the smaller suppliers used by us and Perfumania, Inc. have
limited resources, production capacities and operating histories. Our success
depends on our ability to obtain products to satisfy customer demand and could
be harmed if either our or Perfumania, Inc.'s ability to procure products were
limited.
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<PAGE> 15
WE MUST IMPLEMENT ADEQUATE MEASURES TO MAINTAIN THE VALUE OF OUR DOMAIN NAME AND
TO PROTECT AGAINST THIRD PARTIES WHO MAY TAKE ACTIONS THAT NEGATIVELY AFFECT OUR
DOMAIN NAME.
Perfumania, Inc. holds various Internet domain names relating to our brand,
including "perfumania.com" and "perfumaniawholesale.com". We have obtained the
exclusive right to use these domain names online under a technology transfer and
licensing agreement with Perfumania, Inc. The acquisition and maintenance of
domain names currently is regulated by governmental agencies and their
designees. perfumania.com may not license acquire or maintain adequate domain
names and intellectual property; therefore we may be unable to prevent third
parties from acquiring domain names that damage our trademarks, proprietary
rights licensed from Perfumania, Inc. or our business.
WE MAY BECOME SUBJECT TO SALES AND OTHER TAXES WHICH WILL REDUCE OUR ABILITY TO
OPERATE PROFITABLY IF WE CANNOT PASS THESE COSTS TO CUSTOMERS.
perfumania.com does not currently collect sales or other similar taxes for
physical shipments of goods into states other than Florida. One or more local,
state or foreign jurisdictions may seek to impose sales tax collection
obligations on us. In addition, any new operation in states outside Florida
could subject our shipments in such states to state sales taxes under current or
future laws. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on the sale of our products the
resulting tax liability could impair our business.
AS AN E-COMMERCE COMPANY, RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE MAY AFFECT
OUR BUSINESS MORE THAN OTHER BUSINESSES THAT DO NOT RELY AS HEAVILY ON THE
INTERNET AND OTHER TECHNOLOGY FUNCTIONING PROPERLY AS A MEANS OF GENERATING
REVENUE.
Many existing computer programs and systems use only two digits to identify
a year in the date field. These programs and systems were designed and developed
without considering the impact of the upcoming turn of the century. If not
corrected, these computer applications could fail or create erroneous results in
the Year 2000.
The failure of any of our software or systems to be Year 2000 compliant
could inhibit users from accessing our online store and prevent us from being
able to process or fulfill orders from our customers. Our financial and
management controls and reporting systems may also be damaged. Any failure, if
not quickly remedied, would hurt our business, results of operations and
financial condition. Any extended failure of our systems and software to be Year
2000 compliant could result in the failure of our entire business if we cannot
fix our systems or if we must incur costs and expenses substantially exceeding
our sales revenue. We have not completed tests on all of our material operating
software and systems to assess and ensure Year 2000 compliance. We cannot assure
you that all of perfumania.com's material operating software and systems will be
Year 2000 compliant.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our third
party service providers. These include providers of financial,
telecommunications and parcel delivery services. We also cannot assure you that
our service providers have, or will have, operating software and systems that
are Year 2000 compliant. We have limited or no control over the Year 2000
compliance efforts of our providers. Since all purchases at our online store
will be made
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<PAGE> 16
with a credit card, our business and financial condition may be damaged if our
customers cannot use their credit cards due to Year 2000 issues.
THERE ARE RISKS RELATED TO OUR RELATIONSHIP WITH PERFUMANIA, INC.
WE DEPEND ON PERFUMANIA, INC. FOR MERCHANDISE AND SERVICES. We have
entered into an intercompany service agreement with Perfumania, Inc. to provide
us with merchandise and corporate and administrative services that are key to
our success. Substantially all of our sales orders are processed and fulfilled
through Perfumania, Inc.'s systems. The termination of this agreement, the
failure of Perfumania, Inc. to satisfactorily perform its obligations under
these agreements or an adverse change in the terms of agreement would damage our
business because we would be required to obtain these services from another
provider. We may incur additional costs in order to obtain substitute products
or services and we may be unable to obtain them on commercially reasonable
terms. If we choose to perform these services, we may not be able to perform
them adequately, and may lose customers.
PERFUMANIA, ITS MANAGEMENT AND ITS PRINCIPAL SHAREHOLDERS MAY EXERT CONTROL
OVER OUR BUSINESS. After this offering, Perfumania, Inc. will own and control
the voting power of approximately 53.3% of our common stock. As a result of its
share ownership and the other rights described in this prospectus, Perfumania,
Inc. will be able to elect a majority of the members of our board of directors
and make other decisions that significantly affect our business. This
concentration of ownership and other rights could also delay or prevent a change
of control. If Perfumania, Inc. sells all or some of its investment in our stock
to a third party, other people or companies may control perfumania.com. Such a
sale may reduce the market price of our common stock and may harm
perfumania.com's business. In addition, Mr. Ilia Lekach, who is a member of our
board of directors, also serves Perfumania, Inc. as its chairman and chief
executive officer. This dual service could create or appear to create potential
conflicts of interest if faced with decisions that have different implications
for each company.
BECAUSE OUR WEB SITE RELIES HEAVILY ON PERFUMANIA, INC.'S TRADEMARKS AND
ONLINE CONTENT, OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO USE THE TRADEMARKS
AND ONLINE CONTENT OF PERFUMANIA, INC. IN THE FUTURE. We license the logo,
name, domain names, other valuable trademarks and some online content from
Perfumania, Inc. and its other subsidiaries on an exclusive basis for Internet
use. If our technology transfer and license agreement with Perfumania, Inc. is
terminated, we will need to change the domain names of our Web pages and devote
substantial resources towards building new brand names. Perfumania, Inc. may
terminate the technology transfer and license agreement if any person other than
Perfumania, Inc., its affiliates or strategic partners acquires 75% or more of
the voting power of perfumania.com and under other limited circumstances. The
technology transfer and license agreement also may be terminated by either party
to the agreement if the other party to the agreement, after receiving notice of
breach, does not cure the breach within 30 days of receipt of the notice of
breach.
The technology transfer and license agreement contains restrictions that
may prevent us from marketing our products and services in the same way we would
if we owned these trademarks. These restrictions could damage our marketing
efforts.
The agreement obligates Perfumania, Inc. to protect and defend its marks
and domain names. Its actions to protect its proprietary rights may not be
adequate. Third parties may infringe or misappropriate its intellectual
property, and we or our parent may be able to
13
<PAGE> 17
detect unauthorized use and take appropriate steps to enforce our rights. Our
parent's inability to protect its marks adequately could have a material adverse
effect on the acceptance of the Perfumania brand and on our business, financial
condition and operating results. Although we believe that our parent's
proprietary rights and our use of the license, its marks and domain names do not
infringe on the intellectual property rights of others, we cannot guarantee that
other parties will not assert infringement claims against our parent or us.
WE DEPEND ON PERFUMANIA, INC. FOR CROSS MARKETING EFFORTS. Pursuant to the
intercompany services agreement, Perfumania, Inc. has agreed to provide us with
advertising and promotional space in its retail stores and in its traditional
advertising. Perfumania, Inc. may control the timing and placement of these
advertisements and promotions. Perfumania, Inc. also does not guarantee to us
the demographic composition of the target audience. Advertising and promotion
are important elements of our strategy to further enhance awareness of the
Perfumania brand name. If we were not able to advertise in Perfumania, Inc.'s
retail stores, we would make substantially fewer sales on our Web sites. The
advertising obligations can be terminated by Perfumania, Inc. under the same
circumstances as the technology transfer and license agreement. These
obligations can be terminated by Perfumania, Inc. under limited circumstances.
PERFUMANIA, INC. DOES NOT HAVE LONG TERM SUPPLIER AGREEMENTS. Pursuant to
the intercompany services agreement, perfumania.com purchases products from
Perfumania, Inc. for resale on our online store. We anticipate that a
significant portion of our revenue for the foreseeable future will be derived
from the online sale of merchandise obtained primarily from Perfumania, Inc.
Accordingly, our future revenues and business success partly depend on
Perfumania, Inc.'s ability to maintain and renew relationships with its existing
vendors and to establish relationships with additional vendors.
Perfumania, Inc. does not have long-term contracts with any of its
suppliers. In addition, many of the smaller vendors used by Perfumania, Inc.
have limited resources, production capacities and operating histories. The
supply obligations can be terminated by Perfumania, Inc. or may remain
unsatisfied. Our ability to obtain merchandise from our suppliers in a timely
manner is critical to our success.
WE ARE SUBJECT TO RISKS RELATED TO THE E-COMMERCE INDUSTRY.
WE DEPEND ON CONTINUED GROWTH IN USE OF THE INTERNET AND E-COMMERCE. Our
pricing strategy is premised largely on high volume, low margin sales. Our
customer base consists exclusively of Internet users so the successful growth of
our business depends on the growth in use of the Internet and growth in online
purchases of fragrances and fragrance related products. If Internet use declines
or remains constant, we may be unable to achieve the sales volume or revenue
that our business needs to survive. Rapid growth in the use of the Internet and
commercial online services is a recent phenomenon. We cannot assure you that a
large base of consumers will adopt and continue to use the Internet for retail
or wholesale commerce. Demand for recently introduced services and products over
the Internet and online services is subject to a high level of uncertainty. The
successful development of the Internet and online services is subject to a
number of factors, including:
- continued growth in the number of users of such services;
- concerns about transaction security;
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<PAGE> 18
- continued development of the necessary technological infrastructure; and
- the development of complementary services and products.
The following factors may inhibit growth in Internet usage:
- inadequate Internet infrastructure;
- security and privacy concerns;
- inconsistent quality of service; and
- unavailability of cost-effective and high-speed service.
WE DEPEND ON THE STORAGE OF PERSONAL INFORMATION ABOUT OUR USERS. Web
sites typically place identifying data, or cookies, on a user's hard drive
without the user's knowledge or consent. Perfumania.com and other Web sites use
cookies for a variety of reasons, including the collection of data derived from
users' Internet activity. Our ability to use this technology is especially
important as we need personal information about our customers to implement our
direct and personalized marketing strategy. Any reduction or limitation in the
use of cookies could limit the effectiveness of our sales and marketing efforts.
Most currently available Internet browsers allow users to remove cookies at any
time or to prevent cookies from being stored on their hard drive. In addition,
some commentators, privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. Currently pending before Congress is
a bill entitled the "Internet Growth and Development Act of 1999" which proposes
to restrict development of electronic mail advertisements and authorizes the
Federal Trade Commission to prescribe rules to protect users of commercial
Internet Web sites. Presently, the Federal Trade Commission recommends self
regulation as the preferred approach to regulation of privacy concerns. The
European Union recently adopted a directive addressing data privacy that may
limit the collection and use of information regarding Internet users. This
directive may limit our ability to target advertising or collect and use
information in European countries.
OUR BUSINESS WILL SUFFER IF WE EXPERIENCE BREACHES OF ONLINE
SECURITY. Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. We rely on encryption and authentication technology licensed
from third parties to securely transmit confidential information, such as
customer orders, customer credit card numbers and other demographic information
about our customers. We believe that our ability to obtain this information
gives us a competitive advantage over traditional brick and mortar retailers and
other Internet retailers who do not use this technology. A compromise or breach
of our technology used to protect customer transaction data may occur.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions.
perfumania.com may need to expend significant additional capital and other
resources to protect against a security breach or to alleviate problems caused
by any breaches. Our business and your investment may be harmed if security
measures do not prevent security breaches. Under current credit card practices,
a merchant is liable for fraudulent credit card transactions where, as is our
case, merchant does not obtain a cardholder's signature. A failure to adequately
control fraudulent credit card transactions would injure our business.
15
<PAGE> 19
THERE ARE RISKS SPECIFICALLY RELATED TO THE PURCHASE OF OUR STOCK IN THIS
OFFERING.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE, AS IS TYPICAL OF
INTERNET-RELATED COMPANIES. You may not be able to resell your shares of common
stock at or above the initial public offering price due to the possible
volatility of our common stock after this offering. The stock market has
experienced significant price and volume fluctuations, and the market prices of
securities of technology companies, particularly Internet-related companies,
have been highly volatile.
The market price for perfumania.com's common stock is likely to be highly
volatile and subject to wide fluctuations in response to the following factors:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new products or services by
us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in e-commerce;
- changes in the economic performance or market valuations of other
Internet, e-commerce or retail companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock; and
- potential litigation.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. The institution of such litigation against us
could result in substantial costs to us and a diversion of our management's
attention and resources.
YOU ARE UNLIKELY TO RECEIVE DIVIDENDS FOR THE FORESEEABLE FUTURE. We have
never declared or paid cash dividends on our common stock. We currently intend
to retain all available funds and any future earnings for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
It is unlikely that an investor in our stock will derive current income
from dividends resulting from ownership of our stock. This means that your
potential for economic gain from ownership of our stock depends on an
appreciation in the value of our stock and will only be realized upon a sale of
the stock at a price higher than your purchase price.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK SO YOU MAY BE
UNABLE TO SELL OUR STOCK ON TERMS FAVORABLE TO YOU. There has been no public
market for perfumania.com common stock. We have applied to have our common stock
listed on the American Stock Exchange but cannot assure you that an active
public market will develop. The initial public offering price will be negotiated
between the representatives of the underwriters and perfumania.com. Among the
factors considered in determining the initial public offering price will be our
future prospects, our industry in general, sales, earnings,
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<PAGE> 20
and certain other financial and operating information, and the market prices of
securities and certain financial and other operating information of companies
engaged in activities similar to ours. The initial public offering price may not
be indicative of the market price for the common stock after the offering, which
price may decline below the initial public offering price.
YOUR PROPORTIONATE OWNERSHIP INTEREST IN PERFUMANIA.COM MAY BE DILUTED
BECAUSE PERFUMANIA, INC. PAID LESS THAN THE PUBLIC OFFERING PRICE FOR ITS
SHARES. Based upon the initial public offering price of $7.00 per share,
purchasers of the common stock in this offering will experience an immediate and
substantial dilution in net tangible book value of $5.20 per share of common
stock purchased. To the extent outstanding options to purchase common stock are
exercised, there may be further dilution. Dilution will reduce the per share
value of our stock and reduce the proportionate ownership interest in our
business.
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS AND FLORIDA LAW MAY HAVE
ANTI-TAKEOVER EFFECTS. Certain provisions of our articles of incorporation, our
bylaws and Florida law could make it more difficult for a third party to acquire
us, even if a change in control would be beneficial to our shareholders. For
more information, see "Description of Capital Stock-Anti-takeover Effects of Our
Articles of Incorporation and Bylaws" and "Anti-takeover Effects of Florida
Law."
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. These statements may be identified by the use of
words such as "believes", "may", "will", "expects", "anticipates", "intends",
"plans" and similar expressions. Our actual results could differ materially from
those anticipated in such forward-looking statements. Factors that could
contribute to these differences include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.
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<PAGE> 21
USE OF PROCEEDS
The net proceeds from the sale of the 2,500,000 shares offered by
perfumania.com at the initial public offering price of $7.00 per share are
estimated to be approximately $15.4 million after deducting underwriting
discounts and estimated expenses. If the underwriters fully exercise the over
allotment option, the net proceeds to us from this offering will be
approximately $18.8 million. We will not receive any of the proceeds resulting
from the sale of Perfumania, Inc.'s 1,000,000 shares of our common stock.
The net proceeds from the offering will be used for the following purposes:
- to fund anticipated operating losses, including sales and marketing
expenses and payments due under strategic relationships and intercompany
agreements with Perfumania, Inc.;
- to enhance our online store;
- to repay an approximately $3.5 million advance from Perfumania, Inc.; and
- for working capital and other general corporate purposes.
perfumania.com reserves the right to vary the use of proceeds among the
categories listed above because our ability to use the proceeds is dependent on
a number of factors, including the degree of market acceptance of our online
store, unexpected expenditures for further technical development, sales and
marketing efforts and the effects of competition.
Until perfumania.com uses the net proceeds of the offering, perfumania.com
will invest the funds in investment grade, interest-bearing securities.
From time to time, we also expect to evaluate possible acquisitions of or
investments in businesses and technologies that are complementary to our
business and technologies, and may use net proceeds from the offering for such
purposes. While from time to time we consider potential investments or
acquisitions, perfumania.com has no firm plans, commitments or agreements with
respect to any such investments or acquisitions.
DIVIDEND POLICY
perfumania.com has not declared or paid any cash dividends on its capital
stock since our inception. We do not expect to pay any cash dividends for the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business.
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<PAGE> 22
CAPITALIZATION
The following table sets forth, the actual capitalization of perfumania.com
as of July 31, 1999 giving effect to the 5,000-for-1 stock split which was
effective June 7, 1999, and adjusted for the issuance and sale of common stock
in this offering at the initial public offering price of $7.00 per share. See
"Use of Proceeds." This table should be read in conjunction with the financial
statements and the notes thereto and the other financial information included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Due to parent....................................... $ 2,763,185 $ --
----------- -----------
Shareholder's equity (deficit)
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding
actual and as adjusted......................... -- --
Common stock, $0.01 par value, 20,000,000
authorized, 5,000,000 shares issued and
outstanding actual; 7,500,000 shares issued and
outstanding as adjusted........................ 50,000 75,000
Additional paid-in capital........................ -- 15,350,000
Accumulated deficit............................... (1,892,146) (1,892,146)
----------- -----------
Total shareholder's equity (deficit)........... (1,842,146) 13,532,854
----------- -----------
Total capitalization........................... $ 921,039 $13,532,854
=========== ===========
</TABLE>
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<PAGE> 23
DILUTION
Our net tangible deficiency as of July 31, 1999 was approximately $(1.8
million) or $(0.37) per share of common stock. Net tangible deficiency per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding.
After giving effect to the sale of shares of common stock that we are
offering at the initial public offering price of $7.00 per share, and the
receipt of the estimated net proceeds by us, our net tangible book value as of
July 31, 1999 would have been approximately $13.5 million or $1.80 per share.
This represents an immediate increase in net tangible book value of $2.17 per
share to existing shareholders and an immediate dilution of $5.20 per share to
new shareholders purchasing common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $7.00
Net tangible deficiency per share prior to this offering.... $(0.37)
Increase per share attributable to new shareholders......... 2.17
------
Net tangible book value per share after this offering....... 1.80
-----
Total tangible book value dilution per share to new
shareholders.............................................. $5.20
=====
</TABLE>
The following table shows the difference between existing shareholders and
new investors with respect to the number of shares purchased in this offering,
the total consideration paid and the price paid per share. The table assumes
that the public offering price will be $7.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PRICE
-------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
Existing shareholder....... 4,000,000 53.3% $ 10 0.0% $0.00
New investors.............. 3,500,000 46.7 24,500,000 100.0 $7.00
--------- ----- ----------- -----
Total................. 7,500,000 100.0% $24,500,010 100.0%
========= ===== =========== =====
</TABLE>
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<PAGE> 24
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
in this prospectus. The selected statement of operations data for the period
from January 7, 1999 (date of inception) through January 30, 1999 and the
three-month period ended May 1, 1999, and balance sheet data as of January 30,
1999 and May 1, 1999, have been derived from our financial statements, which
have been audited by PricewaterhouseCoopers LLP, independent certified public
accountants, and are included elsewhere in this prospectus.
The statement of operations data for the three-month and six-month periods
ended July 31, 1999 and the balance sheet data as of July 31, 1999 have been
derived from our unaudited financial statements included elsewhere in this
prospectus. In the opinion of management the unaudited financial statements
include all normal and recurring adjustments necessary for a fair presentation
of results for such periods. The selected financial and operating data for the
three-month and six-month periods ended July 31, 1999 are not necessarily
indicative of the results to be expected for fiscal year ending January 29,
2000.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 7,
1999 (DATE OF FOR THE FOR THE FOR THE
INCEPTION) THREE-MONTH THREE-MONTH SIX-MONTH
THROUGH JANUARY PERIOD ENDED PERIOD ENDED PERIOD ENDED
30, 1999 MAY 1, 1999 JULY 31, 1999 JULY 31, 1999
---------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ -- $ 161,972 $ 227,871 $ 389,843
Cost of goods sold....................... -- 110,666 183,781 294,447
---------- ---------- ---------- -----------
Gross profit........................... -- 51,306 44,090 95,396
---------- ---------- ---------- -----------
Operating expenses:
General and administrative............. 60,245 213,698 275,904 489,602
Management fee to Parent............... 29,644 93,001 75,855 168,856
Marketing and sales expenses........... 32,852 347,272 304,774 652,046
Web site development expenses.......... 18,146 87,633 47,489 135,122
Consulting expenses.................... 130,019 42,324 76,180 118,504
---------- ---------- ---------- -----------
Total operating expenses............... 270,906 783,928 780,202 1,564,130
---------- ---------- ---------- -----------
Loss from operations..................... (270,906) (732,622) (736,112) (1,468,734)
Interest expense to Parent............... (2,599) (32,035) (67,882) (99,917)
---------- ---------- ---------- -----------
Net loss................................. $ (273,505) $ (764,657) $ (803,994) $(1,568,651)
========== ========== ========== ===========
Basic and diluted loss per share......... $ (0.05) $ (0.15) $ (0.16) (0.31)
========== ========== ========== ===========
Weighted average number of common shares
outstanding............................ 5,000,000 5,000,000 5,000,000 5,000,000
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF
------------------------------------------------
JANUARY 30, 1999 MAY 1, 1999 JULY 31, 1999
---------------- ----------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 100,000 $ 100,808 $ 103,550
Working capital deficit........................... (287,708) (1,064,801) (1,900,642)
Total assets...................................... 323,868 631,221 985,975
Due to parent..................................... 531,326 1,617,332 2,763,185
Shareholder's deficit............................. (273,495) (1,038,152) (1,842,146)
</TABLE>
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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that reflect our plans,
estimates, and beliefs and that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements.
OVERVIEW
perfumania.com operates an online store that specializes in the sale of
fragrances, fragrance related products and bath and body products on a retail
and wholesale basis. We launched our online store in February 1999.
Perfumania, Inc. has financed our operations since our inception on January
7, 1999. These cash flows are not indicative of the cash flows that would have
resulted had perfumania.com been operating as a separate stand-alone company
during the periods presented. Since our incorporation, we have incurred
significant net losses as a result of our start up costs and for the three-month
periods ended July 31, 1999 and May 1, 1999, we had incurred net losses of
$803,994, and $764,657, respectively.
We intend to enhance the features of our online store. We believe that our
operating expenses will significantly increase as a result of the financial
commitments related to the development of marketing channels, future strategic
relationships and enhancements to our online stores and other capital
expenditures. We expect to incur losses and generate negative cash flow from
operations for the foreseeable future. Our profitability primarily depends upon
our ability to generate traffic and revenues on our online store and
substantially increase net sales. In view of the rapidly changing nature of our
business and our limited operating history, we believe that our historical
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
RESULTS OF OPERATIONS
NET SALES. Net sales include the sale of our fragrances and fragrance
related products, net of returns and outbound shipping charges. Net sales
totaled $227,871 and $161,972 for the three-month periods ended July 31, 1999
and May 1, 1999, respectively. During the three-month period ended July 31, 1999
net sales included $42,265 of wholesale sales. There were no sales in the month
of January as we launched our online store in February 1999.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the cost of
merchandise sold and outbound and inbound shipping costs. Cost of goods sold
totaled $183,781 and $110,666 for the three-month periods ended July 31, 1999
and May 1, 1999, respectively. During the three-month period ended July 31, 1999
cost of goods sold included $37,860 from wholesale sales. There was no cost of
goods sold in the month of January as all shipping and sales activity began in
February 1999.
GROSS PROFIT. For the three-month periods ended July 31, 1999 and May 1,
1999, perfumania.com had a gross profit of $44,090 and $51,306 or 19% and 32%,
respectively. Included within gross profit for the three-month period ended July
31, 1999 was $4,405 or
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10% of gross profit from wholesale sales. In the future, we may expand or
increase the discounts offered to customers as well as expand product offerings
to areas that may have lower gross margins than our existing business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and related expenses for executive, accounting and
administrative personnel, recruiting, professional fees and other general
corporate expenses. General and administrative expenses totaled $275,904 and
$213,698 for the three-month periods ended July 31, 1999 and May 1, 1999,
respectively. For the period from January 7, 1999 to January 30, 1999 general
and administrative expenses totaled $60,245. General and administrative expenses
will continue to increase as our staff expands and incurs additional costs to
support the growth of the business.
MANAGEMENT FEES TO PARENT. Management fees to Parent consist primarily of
expenses, which have been allocated to perfumania.com by Perfumania, Inc. for
costs associated with resources it shares. These fees consist primarily of the
pro rata cost of rent, utilities and facilities maintenance. Management fees
totaled $75,855 and $93,001 for the three-month periods ended July 31, 1999 and
May 1, 1999, respectively. For the period from January 7, 1999 to January 30,
1999, management fees totaled $29,644. Effective May 1, 1999, perfumania.com and
Perfumania, Inc. entered into an intercompany services agreement covering these
services. See "Certain Transactions" and Note 2 of Notes to Financial
Statements.
MARKETING AND SALES EXPENSES. Marketing and sales expenses consist of
expenditures related to advertising and promotion. Marketing and sales expenses
totaled $304,774 and $347,272 for the three-month periods ended July 31, 1999
and May 1, 1999, respectively. During February 1999, perfumania.com began a
cross-marketing campaign with Perfumania, Inc. that it intends to continue. For
the period from January 7, 1999 to January 30, 1999, marketing and sales
expenses totaled $32,852. After the offering, we expect to expand our marketing
efforts and, as a result our marketing expenses will significantly increase.
WEB SITE DEVELOPMENT EXPENSES. Web site development expenses consist
principally of expenses for development of our Web site, network operations and
systems and telecommunications infrastructure. Web site development expenses
totaled $47,489 and $87,633 for the three-month periods ended July 31, 1999 and
May 1, 1999, respectively. This amount reflects the staffing and associated
costs related to building and enhancing our online store and
transaction-processing systems, as well as our investment in systems and
telecommunications infrastructure. For the period from January 7, 1999 to
January 30, 1999, Web site development expenses totaled $18,146. Web site
development expenses are expected to increase as we continue to enhance our
online store and expand our staff.
CONSULTING FEES. Consulting fees consist primarily of amounts paid to
various technical and managerial consultants for services provided in the
development of perfumania.com. Consulting fees totaled $76,180 and $42,324 for
the three-month periods ended July 31, 1999 and May 1, 1999, respectively. For
the period from January 7, 1999 to January 30, 1999, consulting fees totaled
$130,019. See "Certain Transactions" and Note 4 of Notes to Financial
Statements.
INCOME TAXES. perfumania.com was incorporated in January 1999 and has not
yet filed a federal income tax return or a State of Florida income tax return.
perfumania.com's 1999 fiscal year will end on January 29, 2000. perfumania.com
expects to have operating
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losses for the foreseeable future and does not expect to have any federal or
state income tax liability until it is profitable and its net operating loss
carryforwards are used or expire.
NET LOSS. As a result of the factors discussed above, primarily relating
to the significant initial investments made in establishing and developing our
Web site, the net loss totaled $803,994 and $764,657 for the three-month periods
ended July 31, 1999 and May 1, 1999, respectively. For the period from January
7, 1999 to January 30, 1999, the net loss totaled $273,505. We expect to incur
net losses for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to acquire merchandise, maintain and
improve our online store and engage in advertising and promotional activities.
Effective April 15, 1999, we entered into a 36 month service agreement with a
software and network developer providing Web hosting services and make 36 equal
monthly payments of $14,200. Under the term of the service agreement, in return
for displaying the network developer's corporate logo on our Web page, we shall
receive a marketing credit of $1,700 per month, resulting in a net monthly Web
hosting services fee of $12,500 per month. The net monthly Web hosting service
fee is expensed as incurred and is reflected in Web site development expenses.
We are subject to an early termination fee of $201,165 if cancelled within the
first 12 months and $100,583 if cancelled after 24 months of service. Since our
inception through July 31, 1999, we have primarily financed these requirements
through $2.8 million of advances from Perfumania, Inc. The loan accrues interest
at 12.5% per annum and all amounts are due on demand. This loan will be repaid
with a portion of the net proceeds of this offering.
At July 31, 1999 and May 1, 1999, we had a working capital deficit of
approximately $1,901,000 and $1,065,000, respectively, and incurred losses since
inception of approximately $1,892,000 as of July 31, 1999. Our operations
significantly depend on Perfumania, Inc.
We used $1,663,761 and $787,794 in our operating activities for the
six-month period ended July 31, 1999 and three-month period ended May 1, 1999,
respectively. This was mainly the result of losses of $1,568,651 and $764,657
for the six-month period ended July 31, 1999 and the three-month period ended
May 1, 1999, respectively. We used $47,671 and $13,404 in investing activities
for the six-month period ended July 31, 1999 and the three-month period ended
May 1, 1999, respectively. These expenditures primarily related to the purchase
of computer hardware and software. Our financing activities for the six-month
period ended July 31, 1999 and the three-month period ended May 1, 1999 were
$1,714,982 and $802,006, respectively, of net borrowings from Perfumania, Inc.
We used $196,338 in our operating activities for the period from January 7,
1999 (date of inception) through January 30, 1999. This was the result of a loss
of $273,505, primarily offset by an increase in accounts payable of $66,037. We
used $14,308 in investing activities for the period from January 7, 1999 (the
date of inception) through January 30, 1999. This expenditure primarily related
to the purchase of computer hardware and software. Cash provided by financing
activities for the period from January 7, 1999, (date of inception) through
January 30, 1999, was $310,646, relating to the net borrowings under the loan
from Perfumania, Inc.
The report of Perfumania, Inc.'s independent certified public accountants
that accompanied Perfumania, Inc.'s, audited financial statements as of January
30, 1999 expressed substantial doubt about Perfumania, Inc.'s ability to
continue as a going concern.
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We have not included the certified public accountants' report related to
Perfumania, Inc. as part of this prospectus. The concern stemmed from
Perfumania, Inc.'s recurring net losses, its $3.8 million working capital
deficit, and the fact that Perfumania, Inc. at the time of the report was in
default on a line of credit agreement. perfumania.com's business may suffer if
Perfumania, Inc. cannot remedy this situation and continue as a going concern.
We depend on Perfumania, Inc. to provide numerous services to us, to supply
merchandise to us, and to license to us its brand name.
Perfumania, Inc.'s line of credit agreement requires it to comply with
various financial covenants, minimum tangible net worth, book value and achieve
specified levels of quarterly results of operations. Perfumania, Inc. violated
several covenants and, as a result of these violations, Perfumania, Inc. is in
default.
On July 14, 1999, the lender waived defaults for all covenant violations
through September 30, 1999 as of and for the period ended January 30, 1999.
Future outstanding borrowings will bear interest at the prime rate plus four
percent. The lender agreed to less restrictive covenants concerning net losses
and store openings provided that we receive at least $10 million from the
offering, at least $2 million of which is to be repaid to Perfumania, Inc.
On September 24, 1999 the lender extended the waiver to October 15, 1999 to
give Perfumania, Inc. additional time to satisfy the conditions of the waiver.
If the conditions of the waiver remain unsatisfied or if the waiver termination
date is not again extended, Perfumania, Inc. will attempt to renegotiate with
the lender or seek substitute financing. If Perfumania, Inc cannot renegotiate
the terms of the loan or obtain additional financing, it is possible that the
lender will accelerate and seek to collect the entire outstanding balance of the
loan. This could potentially harm Perfumania, Inc.'s financial condition and its
ability to perform its obligations under the services agreement and technology
transfer and license agreement. Perfumania, Inc. may be forced to divert its
financial and managerial resources in a manner that is not beneficial to our
business. As a result, we may lose the financial support and services that
Perfumania, Inc. has been providing and may be unable to obtain substitute
financing or services on terms favorable to us. Consequently, our revenues may
decrease and our expenses may increase and we may need to use more of the
proceeds from this offering to meet our working capital needs.
As a result of the factors described above, the report of our independent
certified public accountants contains an explanatory paragraph regarding our
ability to continue as a going concern.
We believe that funds generated from operations and the net proceeds of
this offering will be sufficient to finance our current and anticipated
operations for at least 12 months after this offering. Our long-term capital
requirements beyond this period will depend on numerous factors, including, but
not limited to, the following:
- The rate of market acceptance of the online store;
- The ability to expand our customer base;
- The cost of upgrades to our online store; and
- The level of expenditures for sales and marketing and other factors.
If the funds from this offering and our revenues are insufficient to fund
the activities in the short or long term, we would need to raise additional
funds by incurring debt or
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through public or private offerings of our stock. We may not be able to do
either on terms favorable to us, if at all.
YEAR 2000 READINESS
The Year 2000 issue results from computer systems using two digits rather
than four to represent the year so that a date using "00" is recognized as the
year 1900 rather than the year 2000. This situation may disrupt the smooth
operation of both our and third party's computer systems.
We have preliminarily assessed our Year 2000 exposure and believe that we
can achieve Year 2000 readiness by the fourth quarter of 1999. We are developing
a plan of communication with significant business partners to obtain appropriate
assurances that their Year 2000 issues are resolved in a timely manner. Our
remediation costs to date have not been material and we do not anticipate that
our future remediation costs will have a material effect on our business.
In estimating our Year 2000 related costs, we have assumed the continued
availability of certain resources, the ability to acquire accurate information
regarding third parties, and the ability to correct all relevant applications.
Our actual costs could differ materially from our estimates.
Our critical application systems are merchandising, inventory management
and distribution, our computer systems, human resources and finance and
accounting. These areas will be the focus of our remediation efforts. The
merchandising, finance and accounting, and inventory management and distribution
systems are currently being installed utilizing vendor software believed to be
Year 2000 ready. Our human resources systems will be upgraded in the third
quarter of 1999. Our hardware and communications network is outsourced to
Perfumania, Inc. and is currently being tested by Perfumania, Inc. and remedied,
where needed. In addition, a significant portion of the purchases from our
online store are made with credit cards. We will continue to take steps to
ensure Year 2000 readiness; however we cannot assure that such efforts will be
successful and may be harmed if, as a result of Year 2000 problems, customers
cannot use credit cards to make purchases.
We have engaged US internetworking and Digital Pulp to design, develop and
test our Web site and utilize other third party equipment and software. If their
equipment or software fails, we may incur expenses to remedy problems that could
harm our business. We initiated formal communications with our significant
suppliers and service providers to determine their Year 2000 readiness. We will
track the Year 2000 compliance status of our material vendors and suppliers via
our own internal vendor compliance effort. We cannot guarantee that the systems
of suppliers or other companies on which we rely will be Year 2000 compliant.
We are preparing our contingency plans, which will include the
identification of worst case scenarios. Currently, the likely sources of risk to
us include:
- the disruption of or Perfumania, Inc.'s internal inventory management
system;
- the inability of principal suppliers or third party providers to be Year
2000 ready;
- failure of hardware and software utilized by our vendors;
- disruption of our Web pages; and
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- disruption of communications links affecting our online store.
We cannot conclusively determine at this time whether Year 2000 failures
will harm us. We believe that our compliance efforts have and will reduce the
impact on us of any such failures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.
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BUSINESS
OUR BUSINESS
perfumania.com operates an online store that specializes in the sale of
fragrances, fragrance related products and bath and body products on a retail
and wholesale basis. We launched our online store in February 1999 and offer
retail customers over 1,700 products at significant price discounts, including
hard-to-find and discontinued brands. The business-to-business component of our
online store offers our products on a wholesale basis to the largely underserved
market of smaller specialty retailers. Users can easily browse and locate
products using our search engines. Our online store offers personalized customer
service, secure ordering, numerous shipping options and fast delivery.
We are a subsidiary of Perfumania, Inc., a leading discount fragrance
retailer that operates a chain of approximately 280 specialty fragrance stores.
Our relationship with our parent provides us with the following advantages:
- exclusive online use of the highly recognized Perfumania brand name;
- cross marketing our online store with Perfumania, Inc.;
- access to Perfumania, Inc.'s extensive supply relationships; and
- Perfumania, Inc.'s considerable fragrance industry experience and
expertise.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-COMMERCE. The Internet has emerged as a
global medium, enabling millions of people to share information, communicate and
conduct business electronically. International Data Corporation estimates that
the number of worldwide Web users will grow to approximately 320 million by the
end of 2002. This rapid growth represents a significant opportunity for
businesses to advertise and sell products online to both consumers and
businesses.
Business-to-consumer online transactions were approximately $8.0 billion in
1998 and it is anticipated that online consumer transactions will increase to
approximately $60.2 billion by 2003. Forrester Research estimates that
businesses bought and sold approximately $43.0 billion in goods over the
Internet last year and predicts that business-to-business e-commerce will grow
to approximately $327.0 billion by 2002 representing more than 90% of the total
projected e-commerce market.
THE FRAGRANCE INDUSTRY. Industry research indicates that United States
sales of fragrances exceeded $6.0 billion in 1998. The United States market for
fragrances and fragrance related products continues to grow moderately. We also
believe that there is a large and growing international demand for these
products due to increasing product availability and access to emerging markets.
The traditional retail fragrance industry is fragmented with different
competitive strategies used throughout. The industry includes upscale department
stores which compete based on advertising and promotions not on price, specialty
retailers which compete based on pricing, and mass-market retailers and drug
stores which emphasize convenience purchasing.
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We believe that traditional fragrance retailers face a number of challenges
in providing a satisfying shopping experience for consumers:
- The number of SKUs and the amount of product inventory that a traditional
retailer can carry in a store is constrained by the store's physical
space, thereby limiting selection.
- Limited shelf space and store layout constraints limit the merchandising
flexibility of traditional retailers.
- Due to the significant costs of carrying inventory in multiple store
locations, traditional retailers focus their product selection on the
most popular products that produce the highest inventory turns, thereby
further limiting consumer selection.
In addition, we believe that many consumers find the fragrance shopping
experience, especially at large department stores, to be time-consuming,
inconvenient and unpleasant due to factors such as location, product selection,
and high pressure sales tactics.
At the wholesale level, manufacturers of designer fragrances have
restricted their direct sales primarily to upscale department stores and larger
specialty stores. Smaller specialty retailers have traditionally obtained high
demand fragrance products from secondary sources and direct distributors who
principally resell products purchased directly from fragrance manufacturers and
foreign sources.
The unique characteristics of the Internet provide a number of advantages
for retail and wholesale fragrance sellers. Online sellers are able to display a
larger number of products than traditional store-based or catalog sellers at a
lower cost. In addition, online sellers are able to frequently adjust their
featured selections, editorial content and pricing, providing significant
merchandising flexibility. Online sellers also benefit from the minimal cost to
conduct business on the Internet, the ability to reach a large group of
customers from a central location, and the potential for low-cost customer
interaction. Unlike traditional channels, online sellers do not have the
burdensome costs of managing and maintaining a retail store infrastructure or
the significant printing and mailing costs of catalogs. Online sellers can also
easily obtain demographic and behavioral data about customers, increasing
opportunities for direct marketing and personalized services. Because brand
loyalty is a primary factor influencing a fragrance purchase, a customer's
presence at the point-of-sale and ability to physically sense the fragrance
product are not critical to the purchasing decision.
THE PERFUMANIA.COM ADVANTAGE
We are well-positioned to capitalize on what we believe to be increasing
demand and future growth prospects for the online sales of fragrances and
fragrance related products. We believe that our competitive advantages are:
- highly recognized brand name;
- established industry relationships;
- convenient shopping experience;
- extensive product selection;
- competitively priced products; and
- focus on the expanding international market.
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HIGHLY RECOGNIZED BRAND NAME. Our ability to market ourselves using the
Perfumania brand name gives us instant brand recognition and product credibility
in the fragmented retail fragrance industry. Unlike other online retailers who
are not associated with a nationally known specialty fragrance retailer, we can
focus our efforts on enhancing the visibility of Perfumania as an online brand
rather than on creating name recognition with consumers.
ESTABLISHED INDUSTRY RELATIONSHIPS. Strong supply relationships are
crucial to the ability of online retailers to service their customers. Our
arrangement with our parent gives us access to their merchandise and extensive
network of suppliers. We also believe that our ability to use the highly
recognized Perfumania brand name provides us with an immediate competitive
advantage in attracting Internet users who are interested in making online
fragrance purchases.
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with a
user friendly Web site. It is available 24 hours per day, seven days a week and
may be electronically visited from any PC with access to the Internet. We also
make the shopping experience convenient by organizing our products in easy to
use categories and providing our customers with personalized search
capabilities.
EXTENSIVE PRODUCT SELECTION. Online sellers have virtually unlimited shelf
space and can offer consumers a wide selection of products at competitive
prices. Unlike a traditional retailer, an online retailer can offer these
products without the expense generally incurred by brick and mortar retailers.
This is particularly valuable in the fragrance industry because consumer
preference and brand loyalty create varied demand and require a seller to carry
many different fragrance choices.
COMPETITIVELY PRICED PRODUCTS. We believe that the retail fragrance
industry has experienced a shift in the purchasing habits of consumers towards
greater cost-consciousness. The advent of the Internet as an alternative sales
venue and its operating effectiveness are likely to further accelerate this
change in buying habits. Online retailers can offer a wider variety of products
without the traditional expenses of brick and mortar retailers. By offering our
products online at discounted prices, we are able to service the growing base of
price-conscious consumers.
FOCUS ON THE EXPANDING INTERNATIONAL MARKET. We believe that the
international market for fragrances and fragrance related products is large and
expanding. The global reach of the Internet allows us to address this demand.
OUR STRATEGY
Our objective is to become the leading destination for retail consumers and
smaller specialty retailers seeking to purchase fragrances and fragrance related
products over the Internet. Key elements of our strategy include:
- capitalizing and expanding upon the Perfumania brand name;
- enhancing our online shopping experience;
- leveraging our industry relationships;
- focusing on the business-to-business market; and
- addressing the growing international demand for fragrances.
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CAPITALIZING AND EXPANDING UPON THE PERFUMANIA BRAND NAME. We will
continue to employ numerous advertising and promotional methods to drive traffic
to our online store and strengthen the highly recognized Perfumania brand name.
We will promote our online store in Perfumania, Inc.'s retail stores and
advertising materials.
We also intend to further enhance and expand the Perfumania brand name in
e-commerce through our own independent advertising and promotional efforts. We
believe that as more mainstream consumers come online to make fragrance
purchases, they will recognize the Perfumania brand name and feel comfortable
purchasing products from a seller with a proven track record and an excellent
reputation in the industry.
We will undertake efforts that will maximize repeat purchases such as
offering frequent purchaser discounts. Our online store allows us to create a
database of our online purchasers whom we intend to target through personalized
e-mails and promotions. We will also use other Internet technologies to tailor
our promotional banners to each customer's preferences and purchasing history.
We have entered into and continue to seek strategic marketing alliances with
leading high-traffic Web sites such as Yahoo!, DOUBLECLICK/AltaVista, Lycos, and
Microsoft Sidewalk.
ENHANCING OUR ONLINE SHOPPING EXPERIENCE. We intend to continue to enhance
our users' browsing and shopping experience. We have engaged USinternetworking,
Inc. and Digital Pulp to design, develop and host our online store emphasizing
customer friendliness and convenience features.
We intend to tailor our online store to the preferences and buying habits
of each individual user by displaying promotional banners tailored to each
customer's interests and providing informational commentary on our fragrance
products. Our Perfumer Recommends feature recommends certain products to
customers for different seasons, moods, occasions, and activities and
preferences. Our online store has a fragrance genealogy feature that directs
purchasers to currently offered fragrances that are comparable to other
fragrance brands. We intend to continue to invest in similar technologies.
LEVERAGING OUR INDUSTRY RELATIONSHIPS. We use our parent's extensive
industry contacts and our management's substantial experience in the fragrance
industry to help us purchase merchandise based on the most favorable combination
of price, quality, quantity and selection.
FOCUSING ON BUSINESS-TO-BUSINESS MARKET. Smaller specialty retailers
constitute a significant portion of the retail fragrance market. These retailers
have historically experienced difficulty in obtaining popular products at
competitive prices from manufacturers and distributors. We believe that
perfumaniawholesale.com can fulfill the needs of this underserved market by
offering a wide selection of products at discounted prices and with superior
customer service.
ADDRESSING THE GROWING INTERNATIONAL DEMAND FOR FRAGRANCES. We intend to
address the large and expanding international fragrance market by establishing
an international franchise network. These franchisees will be licensed to
operate local online stores in their native language and will fill international
orders using local distribution facilities and local currency. We anticipate
receiving royalties from each franchisee. We currently fill international orders
through our U.S. online store.
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SHOPPING AT OUR ONLINE STORE
Our online store provides our retail and wholesale customers with superior
features, pricing, and convenience.
BROWSING. Our online store offers visitors several special features
arranged in simple, easy-to-use formats intended to enhance product search,
selection and discovery. By clicking on the permanently displayed products and
product categories, our users can move directly to the Web page that contains
details about the particular products. Users can quickly browse promotions, such
as our perfume of the month, and other featured products. In addition, customers
can browse our online store by linking to specially designed pages dedicated to
products from well known national and specialty brands. Customers can also link
to pages based on product category, such as women's brand name perfumes, men's
brand name colognes, children's fragrances, gift set specials and bath and body
products.
LARGE PRODUCT OFFERINGS. Our online store offers customers a choice of
over 1,700 designer and private label fragrances, fragrance related products and
bath and body products for men and women at discounted prices. Our products are
sold for between $5 and $100 and include:
<TABLE>
<CAPTION>
FRAGRANCES FRAGRANCE RELATED PRODUCTS BATH AND BODY PRODUCTS
---------- -------------------------- ----------------------
<S> <C> <C>
Designer Fragrances Deodorants Aromatherapy Products
(Giorgio Armani(R), Shaving Creams Scented Soaps
Cartier(R), Fendi(R), Moisturizers Scented Candles
Tommy Hilfiger(R) and Balms Body Washes
other leading brands) Powders Massage Products
Private Label Fragrances Body Splashes
Body Lotions
</TABLE>
Giorgio Armani(R), Cartier(R), Fendi(R), and Tommy Hilfiger(R) are
registered trademarks of Giorgio Armani S.p.A., Cartier, Inc., Fendi Paola &
S.LLE S.A.S., and Tommy Hilfiger, Inc., respectively.
SEARCHING. The most prominent feature of our online store is the
interactive, searchable catalog of our extensive line of products. Our search
capabilities allow users to search for a product by name or category. Our
Perfumer Recommends feature recommends fragrances for different seasons, social
occasions, moods, activities and customers' preferences. In addition, for those
customers who wish to try new products, our online store offers several
alternative fragrances similar to a customer's favorite brand or to high demand
brands.
SELECTING PRODUCTS AND CHECKING OUT. To purchase products, customers
simply click on a button to add products to their virtual shopping cart.
Customers can add and subtract products from their shopping cart as they browse
around our store prior to making a final purchase decision, just as in a
physical store. To execute orders, customers click on the checkout button and,
depending upon whether the customer has previously shopped with us, are prompted
to supply shipping details online. We also offer customers a variety of gift
wrapping and shipping options during the checkout process. Prior to finalizing
an order by clicking the submit order button, customers are shown their total
charges along with the various options chosen, such as shipping method, at which
point customers still have the ability to change their order or cancel it
entirely.
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PAYING. To pay for orders, a customer must use a credit card, which is
authorized during the checkout process, but which is charged when we ship the
customer's items. Our online store uses a security technology that works with
the most common Internet browsers and makes it virtually impossible for
unauthorized parties to read information sent by our customers. Our system
automatically confirms receipt of each order via e-mail within minutes and
notifies the customer when we ship the order, which is typically within one to
two business days for in-stock items.
CUSTOMER SERVICE FEATURES. We believe that high levels of customer service
and support are critical to retain and expand our customer base. We monitor
orders from the time they are placed through delivery by providing numerous
points of electronic, telephonic and personal communication to customers. We
confirm all orders and shipments by e-mail. Our customer service representatives
are readily available during regular business hours by telephone.
USAGE. Our average daily page views, which represent the number of times
per day our server delivers a page to a user, has grown consistently increasing
from 5,013 views per day during February 1999 to approximately 300,000 views per
day during August 1999. User sessions per day have grown from 769 shortly after
launch of our online store to approximately 6,900 for August 1999.
MARKETING AND ADVERTISING
ONLINE MARKETING AND ADVERTISING
We have entered into a variety of relationships with several Internet sites
to build traffic and attract customers.
YAHOO! We have entered into an agreement with Yahoo! to promote and
advertise our online store. We have delivered to Yahoo! content about our online
store that Yahoo! has agreed to insert onto its banners and on its search
results page. We will give to Yahoo! discount coupons that can be used at our
online store by members of the Yahoo! Birthday Club. Under the agreement, we
have paid Yahoo! $117,500 and are entitled to receive 7.2 million page views. We
have fulfilled our obligations under the agreement with Yahoo! and, once Yahoo!
fulfills its obligations, either party may terminate the agreement at any time.
LYCOS. Our advertising agreement with Lycos obligates Lycos to place
perfumania.com banners on its site. We have also purchased key search words,
which when entered by a user, display a banner promoting our online store as a
search result. Under this ten-month agreement Lycos will provide over 9.3
million page views of our banner advertisement for $192,000. We must pay Lycos
$19,200 per month until the agreement terminates on December 31, 1999.
DOUBLE CLICK/ALTAVISTA. Our agreement obligates Double Click to advertise
our online store on AltaVista through banner advertisements and keyword
searches. We are obligated to pay Double Click $14,000 per month until
expiration of the agreement. We are receiving up to 50 million page views under
this agreement. The agreement terminates at the end of September 1999.
MICROSOFT SIDEWALK. We have entered into an agreement with Microsoft
Sidewalk to advertise our banners and tiles on their online shopping guide. We
pay a flat fee per city for continual inclusion on this site. The per city
monthly fee that we pay ranges between
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<PAGE> 37
$800 and $1,500 per city. We advertise in approximately 10 cities. We may add
or, with 90 days prior notice, remove cities at our option.
We intend to expand our use of these kinds of alliances in the future. We
will strive to ensure that future alliances are cost-effective in terms of the
potential customers to be acquired, potential revenue to be generated, level of
exclusivity and brand exposure. We send e-mails to our customers advising them
of our promotions and other pricing specials for their favorite fragrances. We
intend to continue to advertise in whichever forms of media prove most
effective.
TRADITIONAL MARKETING AND ADVERTISING
In February 1999, we began a comprehensive national advertising campaign to
increase awareness of our online store. Our online store is advertised in a
number of national print media sources, including USA Today, The Wall Street
Journal, The Chicago Tribune, Business 2.0, The Industry Standard, GQ and
Details as well as other local media. We pay standard rates for our advertising
on a per advertisement basis.
Our advertising initiatives also include collaborative advertising efforts
with Perfumania, Inc. Our Web site is advertised in all of Perfumania, Inc.'s
stores and advertising materials. We are participating in the exclusive online
launch of WCW cologne in a joint marketing effort with Perfumania, Inc. and
World Championship Wrestling.
FULFILLMENT AND INVENTORY MANAGEMENT
We offer over 1,700 fragrances and fragrance related products which we
believe is a wider selection of products than offered by most traditional
fragrance sellers. We obtain most of our inventory from Perfumania, Inc. because
they have offered the most favorable pricing and services to date. Our
relationship with our parent gives us access to their extensive network of
suppliers and we may obtain inventory directly from these and other suppliers
depending on which offers us the most favorable selection, pricing quality and
quantity terms.
Our inventory is stocked in our Miami, Florida facility. Products are
generally shipped within 24 hours unless they are out-of-stock in which case
they are generally shipped within 48 to 96 hours. Customers have numerous
shipping options including overnight or international shipping. Orders not
filled through our online network are processed by a telephone order group.
TECHNOLOGY
We believe that we use an advanced e-commerce platform. We believe that our
platform will allow us to grow rapidly while providing reliable, secure, and
cost-effective e-commerce solutions. Our online store is hosted by
USinternetworking in Annapolis, Maryland.
Our Web sites are Microsoft NT Server 4 based, running Internet Information
Server, Site Server Commerce Edition, and SQL Server. Site Server Commerce
Edition and Internet Information Server together offer a comprehensive Web
server platform, optimized for Windows NT Server and conducting business online.
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<PAGE> 38
We have taken steps to prevent the failure of our mission-critical business
applications. Routers, switches, firewalls, and servers associated with our Web
sites are all deployed with backup or stand-by components so that we have at
least six different paths to the Internet. Our Web site uses USinternetworking's
total security architecture. This architecture is specially designed and built
to deliver Web-enabled enterprise applications and ensures that customer
information is protected and that transactions are conducted securely over the
Internet. USinternetworking has taken significant measures to provide customers
with secure application hosting services. The security architecture is a layered
approach that addresses security at every layer from the application down to the
physical wire and ensures the primary aspects of security -- confidentiality,
integrity, and availability -- are addressed and that customer information is
secure.
Our technology allows us to avoid Internet congestion as we have secured
direct access to each of the six major Internet backbones in the U.S. This
enables our customers to achieve LAN-like speeds for over 80% of all Internet
connections, which makes roundtrip performance up to four times faster than can
be achieved using traditional Internet service provider network architectures.
The Web site's workload will be distributed over a web server and a
database server, both high-end Compaq machines. With this solution,
perfumania.com can rapidly achieve its goal of implementing a fully scalable and
a robust e-commerce Web site without investing in hardware, software, servers,
or infrastructure. If, in the future, it becomes necessary to increase the
capacity of the Web site, USinternetworking can easily do this for
perfumania.com by adding new hardware. With a file replication system in place,
identical Web sites can easily be hosted on multiple Web servers. With the
addition of a Cisco Local Director switch, the workload can be dynamically
balanced across the different Web servers. The high-performance switch is
equipped with a failure mechanism that eliminates all points of failure for the
Web server platform.
Credit cards will be authorized and processed securely using Cybercash,
which handles the authorization in real time, while the shopper is online. If
the authorization is successful, the user is presented with an order
confirmation message and number, and the order information is written to a
database at USinternetworking.
All order information written to the USinternetworking Internet site
database is automatically written to the database at perfumania.com. This
synchronization is conducted securely through a virtual private network using
Checkpoint Firewall-1 at both USinternetworking and perfumania.com. If the
connection between the two databases were to go down, the replication would
resume upon reconnection and resynchronize the database. This provides a high
level of fault tolerance. On an hourly basis we move the new order data to our
back office system.
Using our software package's accounting, merchandising, and warehousing
modules, fulfilling orders and running other aspects of the business will be a
very efficient process. RF scanning technology is used when receiving goods from
vendors, fulfilling orders, and conducting inventory counts, making these
processes more accurate and efficient. Our system will print packing slips,
shipping labels, and direct the fulfillment team to conduct efficient product
picking and packing using the RF scanners' LED readout. Once the order is
fulfilled and shipped, the customer will be e-mailed and the Web sites' database
will be updated with the new shipping status. Our software package is capable of
scaling very high, often running businesses much larger than perfumania.com.
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COMPETITION
Our competition includes:
- traditional department stores such as Macy's and Bloomingdale's;
- nationally known discount fragrance retailers such as Perfumania, Inc and
The Cosmetic Center;
- competition from other retailers who seek to purchase high demand or
limited supply products;
- Web sites maintained by online retailers of fragrances and fragrance
related products including fragrancecounter.com and fragrancenet.com;
- catalog retailers of fragrances and fragrance related products; and
- Internet portals and online service providers that feature shopping
services.
We believe that our ability to compete depends upon many factors,
including:
- the market acceptance of our online store and services;
- the success of sales and marketing efforts;
- the performance and reliability of our services;
- the price of our products; and
- the effectiveness of our customer service and support efforts.
Our competitors may be larger than us and may have substantially greater
financial, distribution and marketing resources. In addition, our competitors
may be able to secure products from vendors on more favorable terms, fulfill
customer orders more efficiently and adopt more aggressive pricing or inventory
availability policies than we can. Traditional retailers also enable customers
to see, feel, and smell products in a manner that is not possible over the
Internet. Some online competitors including fragrancenet.com and
fragrancecounter.com may be able to use the Internet as a marketing medium to
reach significant numbers of potential customers more effectively that we can.
Our wholesale competitors will likely have more established distribution
channels than us and may have entered into exclusive supply arrangements with
retailers who constitute part of our potential wholesale market. These factors
may preclude us from competing effectively in the wholesale fragrance
distribution market.
EMPLOYEES
As of the date of this prospectus, perfumania.com employed 14 full-time
employees. We also employ one independent contractor to perform duties in
various departments, including software development. The loss of services of one
or more of our key employees could damage our business. Our employees are not
represented by unions, and we consider our relationship with our employees to be
excellent. We believe that success is dependent on our ability to attract and
retain qualified personnel in numerous areas, including software development.
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FACILITIES
Our administrative and warehouse facilities are located in Miami, Florida
and total approximately 20,000 square feet. We believe that these facilities
will be sufficient to accommodate our anticipated growth over the next 12
months. Our space is shared with Perfumania, Inc. pursuant to an intercompany
services agreement. See "Certain Transactions."
LEGAL PROCEEDINGS
perfumania.com is not presently involved in any legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors and executive officers consist of the following
persons:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rachmil Lekach............................ 52 Chairman of the Board of Directors,
President and Chief Executive Officer
Michael Amideo............................ 30 Chief Financial Officer, Chief Operating
Officer and Director
Richard Veliz............................. 30 Chief Technology Officer
Ilia Lekach............................... 50 Director
Daniel Manella............................ 74 Director Nominee
Daniel Sawicki............................ 48 Director Nominee
</TABLE>
RACHMIL LEKACH has served as president and a director of perfumania.com
since inception in January 1999 and as its chief executive officer and chairman
of the board of directors since July 1999. Mr. Lekach is a co-founder of
Perfumania, Inc. and was Perfumania, Inc.'s chief operating officer from 1990 to
1994. Mr. Lekach joined perfumania.com from Ocean Reef Capital Management, an
investment banking boutique, where he served as chief executive officer from
1996 to 1999. From August 1996 to February 1997, Mr. Lekach served as chairman
of the board and from August 1996 to August 1997 as chief executive officer and
a director of L. Luria & Son, Inc. From 1993 until 1996, Mr. Lekach served as
the president and a director of Parlux Fragrances, Inc.
MICHAEL AMIDEO has served as the chief financial officer, chief operating
officer and a director of perfumania.com since June 1999. From April 1999 to
June 1999, Mr. Amideo served as controller of Perfumania, Inc. From 1995 to
1999, Mr. Amideo was employed by PricewaterhouseCoopers, LLP, as a certified
public accountant. From 1994 to 1995, Mr. Amideo was employed by Arthur Andersen
LLP as a certified public accountant.
RICHARD VELIZ has served as perfumania.com's chief technology officer since
April 1999. Mr. Veliz worked in Internet design and development for Strategic
Business Systems from July 1997 until April 1999. He performed the same function
for AIC, a computer consulting business, from August 1998 until April 1999 and
for Sterling Solutions Group, an IT solutions business from February 1997 until
April 1998. Mr. Veliz worked in software design for Blockbuster Entertainment
Group from May 1996 until January 1997 and for The College Experience from
December 1992 until May 1996.
ILIA LEKACH served as chairman of the board and chief executive officer of
perfumania.com from its inception in January 1999 to July 1999 when he resigned
as chairman and chief executive officer of perfumania.com, inc. and currently
serves as a director. Mr. Lekach is a co-founder of Perfumania, Inc. and was
Perfumania, Inc.'s chairman of the board and chief executive officer from its
incorporation in 1988 until his resignation in April 1994. In October 1998 Mr.
Lekach was reappointed Perfumania, Inc.'s chairman of the board and chief
executive officer. Mr. Lekach served as Chairman of the Board of L. Luria & Son,
Inc., a South Florida-based catalog retailer from January 1997 through August
1997. Mr. Lekach has also served as chairman of the board and chief executive
officer of Parlux Fragrances, Inc., a publicly traded manufacturer of fragrance
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<PAGE> 42
and related products since 1990. Mr. Lekach is expected to devote only a portion
of his working time to the business of perfumania.com.
DANIEL MANELLA will become a director upon completion of the offering. From
1997 to present, Mr. Manella has served as the chief executive officer of the
Jel Sert, a food manufacturer and distributor. From December 1990 to 1997, Mr.
Manella was engaged in personal investment activities. Prior to that, he served
as the chairman of the board and chief executive officer of McGregor
Corporation, a manufacturer of men's and boy's apparel, and as the chairman of
the board and chief executive officer of Faberge Incorporated, a manufacturer of
toiletries and fragrances. He also served as the chairman of the board and chief
executive officer of Elizabeth Arden, Inc. a manufacturer of cosmetics and
fragrances and a wholly owned subsidiary of Faberge. Mr. Manella is a member of
our audit committee.
DANIEL SAWICKI will become director of perfumania.com upon completion of
the offering. Mr. Sawicki served as the president of Hero Communications,
Incorporated, a satellite television company from 1986 until 1996. From 1992
until 1998, Mr. Sawicki served as Vice President of Hero Productions, Inc., a
teleport company. Mr. Sawicki also founded HTV, Inc., a cable television
network, in 1995 and served as an executive officer of the company until its
sale in 1999.
Ilia Lekach and Rachmil Lekach are brothers. There are no other family
relationships among our directors and executive officers.
In August 1996 ORM, Inc. and its affiliates, of which Ilia Lekach and
Rachmil Lekach are principals, purchased a controlling interest in L. Luria &
Son, Inc., a catalog showroom with serious financial problems. Shortly
thereafter they joined L. Luria & Son, Inc. in management positions and
attempted to work out its problems with the creditors. Those efforts failed and
on August 13, 1997, L. Luria & Son, Inc. filed for relief under Chapter 11 of
the Bankruptcy Code and has since been liquidated.
Upon completion of this offering, we will establish audit and compensation
committees of our board of directors, which will each have a majority of
non-employee directors.
perfumania.com's amended and restated articles of incorporation divides the
board of directors into three approximately equal classes with staggered terms.
Directors are elected for three-year terms and, in each case, until their
successors are duly elected and qualified or until their earlier death,
resignation or removal. The members of each class will be appointed upon
completion of the public offering.
Our executive officers are elected annually by the board of directors and
serve at the discretion of the board of directors.
COMPENSATION OF DIRECTORS
Our non-employee directors will receive compensation for their services as
a director in the amount of $5,000 per year. We will reimburse them for any
expenses related to attendance at meetings. Non-employee directors will also be
eligible to receive grants of stock options under our 1999 Incentive Stock
Option Plan. See "1999 Incentive Stock Option Plan" with respect to stock
options granted to our non-employee director nominees.
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<PAGE> 43
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated articles of incorporation contains provisions to
indemnify directors and officers to the extent permitted by Florida law. Under
current law indemnification or advancement of expenses may not be made to or on
behalf of any director, officer, employee, or agent of perfumania.com if a
judgment or other final adjudication establishes that his or her actions, or
omissions to act, were material to the cause of action so adjudicated and
constitute:
- a violation of the criminal law, unless the director, officer, employee,
or agent had reasonable cause to believe his or her conduct was lawful or
had no reasonable cause to believe his or her conduct was unlawful;
- a transaction from which the director, officer, employee, or agent
derived an improper personal benefit;
- in the case of a director, liability for unlawful distributions; or
- willful misconduct or a conscious disregard for our best interests in a
proceeding by or in the right of the corporation to procure a judgment in
its favor or in the proceeding by or in the right of a shareholder.
Our bylaws provide that perfumania.com will indemnify its directors,
officers and employees against judgments, fines, amounts paid in settlement and
reasonable expenses.
EXECUTIVE COMPENSATION
We were incorporated in January 1999 and through July 31, 1999 have paid
compensation to Ilia Lekach, Rachmil Lekach, Michael Amideo and Richard Veliz,
in the amounts of $50,000, $248,076, $11,537, and $58,076, respectively. See
"1999 Incentive Stock Option Plan" with respect to stock options granted to the
Messrs. Lekach, Amideo and Veliz.
EMPLOYMENT AGREEMENTS
RACHMIL LEKACH. Effective May 1, 1999, we entered into an employment
agreement with Rachmil Lekach under which Mr. Lekach serves as our president for
an initial period of five years ending in April 2004. The agreement will
automatically renew for additional one year terms unless terminated by Mr.
Lekach or us on not less than 60 days' notice given prior to the expiration of
the initial term or any renewal term. The employment agreement provides for a
base salary of $200,000 and other benefits including certain health benefits.
Pursuant to the employment agreement, Mr. Lekach has been granted options under
the 1999 Incentive Stock Option Plan to purchase 225,000 shares of common stock
at an exercise price equal to the initial public offering price. These stock
options vest as of the date of grant and will expire ten years from the date of
grant.
If Mr. Lekach's employment is terminated by us without cause, in addition
to his base salary and any accrued but unpaid bonus to the date of such
termination, Mr. Lekach will be entitled to receive a lump sum equal to the base
salary that he would have otherwise received through the end of the initial or
renewal term.
In the event that Mr. Lekach's employment is terminated by us within six
months of a change of control of perfumania.com as defined in the agreement, he
will be entitled to
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<PAGE> 44
receive a lump sum payment equal to three times his base salary. In addition,
all unvested stock options will immediately vest.
Mr. Lekach is also entitled to terminate his employment and receive the
payments described above if, within six months, following a change in control,
Mr. Lekach's title or duties are diminished in any material respect or Mr.
Lekach is required to relocate out of the South Florida area.
Under the non-competition clause contained in the employment agreement, Mr.
Lekach is prevented from engaging in any business competing with our business
during:
- his active employment with us;
- all times while he is receiving the base salary from us; and
- the period of 12 months following the expiration of the initial term or
any renewal term of the employment agreement.
The non-competition clause does not prevent Mr. Lekach from accepting
employment from Perfumania, Inc. or Parlux Fragrances, Inc. following a
change-in-control of our business so long as those businesses are not engaged in
the online sale of fragrances or related products.
MICHAEL AMIDEO. We entered into an employment agreement with Michael
Amideo effective July 1999 pursuant to which Mr. Amideo serves as our chief
financial officer and chief operating officer for a term of three years expiring
in July 2002. The employment agreement provides for a base salary of $120,000
with an annual increase of at least 5%, and other benefits including health
benefits. Mr. Amideo has been granted options under our 1999 Incentive Stock
Option Plan to purchase 50,000 shares of common stock vesting over a three year
period with an exercise price equal to the initial public offering price. In the
event of a change of control as defined in the employment agreement, Mr.
Amideo's salary and stock options will be doubled and will immediately vest.
RICHARD VELIZ. We entered into an employment agreement with Richard Veliz
effective July 1999 pursuant to which Mr. Veliz serves as our chief technology
officer for a term of three years expiring in July 2002. The employment
agreement provides for a base salary of $140,000 with an annual increase of at
least 5%, and other benefits including health benefits. Mr. Veliz has been
granted options under our 1999 Incentive Stock Option Plan to purchase 50,000
shares of common stock vesting over a three year period with an exercise price
equal to the initial public offering price. In the event of a change of control
as defined in the employment agreement, Mr. Veliz's salary and stock options
will be doubled and will immediately vest.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, we have not had a compensation committee. All
decisions concerning compensation of executive officers were made by the board
of directors as a whole.
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1999 INCENTIVE STOCK OPTION PLAN
GENERAL. perfumania.com's 1999 Incentive Stock Option Plan provides that
options to acquire shares of common stock may be granted to key officers,
employees, consultants, advisors and directors or others designated by the board
of directors. The plan assists in attracting and retaining individuals who will
contribute to our success and achieve appreciation in your investment. Awards
under the plan may take the form of stock options, including corresponding share
appreciation rights or SARs.
SHARE AUTHORIZATION. Up to 1,000,000 shares of our common stock may be
awarded under the plan. Unexercised portions of options, forfeited options and
common stock subject to any awards that are otherwise surrendered by a
participant without receiving any payment or other benefit with respect thereto
may again be subject to new awards under the plan. Shares subject to options
with respect to which SARs are exercised, are not again available for the grant
of awards under the plan.
The shares to be issued or delivered under the plan are authorized and
unissued shares, or issued shares that may be acquired in the open market or
from private sources by perfumania.com, or both.
PLAN ADMINISTRATION. The plan is administered by the compensation
committee. Our board of directors may remove members from, add members to, or
fill vacancies in the compensation committee. The committee may establish such
rules and regulations as it may deem appropriate for the conduct of meetings and
proper administration of the plan. Subject to the provisions of the plan, the
committee may grant awards under the plan, interpret the provisions of the plan
and administer the plan or any award thereunder as it may deem necessary or
advisable.
OPTIONS. Incentive stock options meeting requirements of Section 422 of
the Internal Revenue Code of 1986, as amended, and nonqualified stock options
that do not meet such requirements are both available for grant under the plan.
The term of each option will be determined by the committee. No option will be
exercisable prior to six months from the date of grant or more than ten years
after the date of grant (except in the case of options that are nonqualified
stock options, where the committee can specify a longer period). Options may
also be subject to restrictions on exercise, such as exercise in periodic
installments, as determined by the committee.
In general, the exercise price for incentive stock options must be at least
equal to 100% of the fair market value of the shares on the date of the grant
and the exercise price for nonqualified stock options will be determined by the
compensation committee at the time of the grant and will be at least equal to
50% of the fair market value of the shares on the date of the grant. The
exercise price can be paid in cash or by tendering shares owned by the
participant and held for at least six months. Options are not transferable
except by will or the laws of descent and distribution and may generally be
exercised only by the participant (or his guardian or legal representative)
during his or her lifetime, provided, however, the nonqualified stock options
may, under certain circumstances, be transferable to family members and trusts
for the benefit of the participant or his family members.
SHARE APPRECIATION RIGHTS. The plan provides that SARs may be granted in
connection with the grant of options. Each SAR must be associated with a
specific option and must be granted at the time of grant of such option. A SAR
is exercisable only to the extent the related option is exercisable.
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ANTIDILUTION PROVISIONS. The number of shares authorized to be issued
under the plan and subject to outstanding awards (and the grant or exercise
price thereof) may be adjusted to prevent dilution or enlargement of rights
under certain circumstances.
CHANGE IN CONTROL. Upon the occurrence of a change in control of
perfumania.com, options and related SARs may become immediately exercisable, the
restricted shares may fully vest and stock purchase loans may be forgiven in
full.
TERMINATION AND AMENDMENT. The plan will automatically terminate in 2009.
No awards may be made after that date. Awards outstanding on the termination
date will remain valid in accordance with their terms. The terms of awards under
the plan may be amended by the compensation committee.
OUTSTANDING OPTIONS. As of the date of this prospectus, we have granted
options to purchase a total of 645,000 shares of common stock under the plan,
including options to purchase 200,000, 225,000, 50,000, and 50,000 shares
granted to Ilia Lekach, Rachmil Lekach, Michael Amideo, and Richard Veliz,
respectively and options to purchase 15,000 shares of common stock granted to
each of our non-employee director nominees. The exercise price of these options
is equal to the initial public offering price. Options to purchase 100,000
shares of common stock granted to Ilia Lekach vest immediately. All options
expire ten years from the date of grant.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the common stock as of the date of this prospectus by each person
known by perfumania.com to own beneficially more than 5% of the outstanding
shares of common stock, each of perfumania.com's directors, and all directors,
director nominees and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS OUTSTANDING
NAME OF BENEFICIAL OWNER ---------------------------------- --------------------------------
OR IDENTITY OF GROUP(1)(2) BEFORE OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
- -------------------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Perfumania, Inc. ....... 5,000,000 4,000,000 100.0% 53.3%
Ilia Lekach............. 5,200,000(3) 4,200,000(6) 100.0% 56.0%
Rachmil Lekach.......... 225,000(4) 225,000 4.5% 3.0%
Michael Amideo.......... 50,000 50,000 1.0% *
Richard Veliz........... 50,000 50,000 1.0% *
Daniel Sawicki.......... 15,000(4) 15,000 * *
Daniel Manella.......... 15,000(4) 15,000 * *
All directors, director
nominees and executive
officers as a group (six
persons).............. 5,555,000(5) 4,555,000(7) 100.0% 60.73%
</TABLE>
- -------------------------
* represents less than 1% of the outstanding shares of common stock after the
offering.
(1) the address of each person named in the table is c/o perfumania.com, 11701
NW 101st Road, Miami, Florida 33178.
(2) Except as other indicated, the persons named in this table have sole voting
and investment power with respect to all shares of common stock listed,
which includes shares that these people have a right to acquire a beneficial
ownership interest within 60 days of the date of the prospectus.
(3) Represents 5,000,000 shares owned by Perfumania, Inc. and 200,000 shares
issuable upon the exercise of stock options.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes 5,000,000 shares owned by Perfumania, Inc. and 555,000 shares of
common stock issuable upon the exercise of stock options.
(6) Represents 4,000,000 shares owned by Perfumania, Inc. and 200,000 shares
issuable upon the exercise of stock options.
(7) Represents 4,000,000 shares owned by Perfumania, Inc. and 555,000 shares of
common stock issuable upon the exercise of stock options.
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CERTAIN TRANSACTIONS
GENERAL
Since January 7, 1999 (date of inception) through August 31, 1999,
Perfumania, Inc. has advanced to us approximately $3.2 million which has been
utilized primarily to finance our start-up costs. We expect such advances to
total approximately $3.5 million at the time of the offering. Such advance bears
interest at a rate of 12.5% per annum and is payable upon demand. We will use a
portion of the net proceeds of this offering to repay this amount to Perfumania,
Inc.
Since inception, we have purchased approximately 95% of our inventory from
Perfumania, Inc. at a price equal to our parent's cost plus five percent. For
the period from January 7, 1999 through January 30, 1999 and for the three-month
periods ended May 1, 1999 and July 31, 1999; such purchases totaled
approximately $220,000, $284,000 and $233,000. We will continue to obtain
merchandise from Perfumania, Inc. pursuant to the intercompany services
agreement described below. We may, however, secure products from other
distributors and suppliers, including Parlux Fragrances, Inc. Ilia Lekach, is a
member of our board and is chairman of the board and chief executive officer of
Perfumania, Inc. and Parlux Fragrances, Inc.
Since inception, Perfumania, Inc. has provided us with corporate,
fulfillment, inventory supply, advertising, and space-sharing and other
administrative services. Perfumania, Inc. charged us approximately $30,000,
$93,000 and $76,000 for such services during the period from January 7, 1999 to
January 30, 1999, and the three-month periods ended May 1, 1999 and July 31,
1999, respectively. We will continue to receive these services from Perfumania,
Inc. pursuant to the intercompany services agreement.
During the three-month period ended July 31, 1999 the Company sold
approximately $39,000 of fragrances to the former Chief Financial Officer of
Perfumania, Inc. This amount is included within trade receivables in the
accompanying balance sheet as of July 31, 1999.
Ilia Lekach provided consulting services to us amounting to $50,000 during
the period from January 7, 1999 to January 30, 1999. In addition, a party
related to Mr. Lekach provided consulting services to us amounting to $65,000
since our inception to January 30, 1999. We do not expect to receive any further
consulting services from these persons.
TECHNOLOGY TRANSFER AND LICENSING AGREEMENT
Effective May 1, 1999, perfumania.com entered into a technology transfer
and license agreement, pursuant to which we have been granted an exclusive
royalty-free license to use the Perfumania name and trademarks in our
operations. The license is not revocable unless we default under the agreement
or there is a change in control of perfumania.com. The agreement also gives us
the right to use Perfumania, Inc.'s inventory sourcing and special order
software, customer lists and demographic information. The license agreement
renews annually unless terminated by either party on at least 90 days written
notice prior to the commencement of the renewal year. Perfumania, Inc. may
terminate the technology transfer and transfer and license agreement of any
person other than Perfumania or its affiliates or strategic partners acquires
75% or more of the voting power of perfumania.com and under certain other
limited circumstances.
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<PAGE> 49
INTERCOMPANY SERVICES AGREEMENT
Effective May 1, 1999, perfumania.com entered into an intercompany services
agreement with Perfumania, Inc. pursuant to which Perfumania, Inc. will provide
services to us, including corporate, fulfillment, inventory supply, advertising,
space-sharing, and other administrative services. Perfumania, Inc.'s obligations
to deliver those services will terminate if and when the technology transfer and
license agreement is terminated.
CORPORATE SERVICES. Perfumania, Inc. will provide all of the services it
currently provides to perfumania.com, such as merchandising, inventory
management, creative, marketing, technical, human resources, finance,
accounting, administrative, and other services, as well as those services
perfumania.com requires by virtue of its status as an independent public
company. Perfumania, Inc. will provide these services to us at a monthly fee of
$10,000 until such time as our monthly gross sales exceed $50,000, at which time
the fee will be increased to $10,000 plus two percent of monthly gross sales.
FULFILLMENT SERVICES. Perfumania, Inc. will provide us with warehousing
and fulfillment services, including receiving, quality control, storage,
processing and shipping orders and processing of customer returns. For these
services, we will pay Perfumania, Inc. an amount equal to three percent of the
cost of goods sold by us which have been handled by Perfumania, Inc. under the
intercompany services agreement.
INVENTORY SUPPLY. Perfumania, Inc. will supply inventory to us. We will
pay Perfumania, Inc. an amount equal to 105% of Perfumania, Inc.'s cost for the
inventory. We must pay Perfumania, Inc. within 30 days of invoice.
ADVERTISING. Perfumania, Inc. has agreed to include references to our
business and Web sites in their print and electronic media advertising materials
or in-store displays. We presently intend to participate in all advertising
campaigns of Perfumania, Inc. and will share the advertising costs. We will pay
Perfumania, Inc. either 20% or 50% of the advertising costs, based on the amount
of space we receive in the advertisement.
SPACE-SHARING. Perfumania, Inc. will permit us to use a portion of its
office and warehouse space that we mutually agree upon. Our cost for this space
will be an amount equal to our proportionate share of Perfumania, Inc.'s cost of
the space, initially 15% plus a proportionate share of common area maintenance
changes, taxes and utilities for the space.
APPROVAL OF AFFILIATED PARTY TRANSACTIONS
We believe that each of the foregoing transactions were on terms no less
favorable than those which could have been obtained from unaffiliated third
parties. Following completion of this offering, all transactions between us and
our directors, executive officers and principal shareholders will be on terms no
less favorable than could be obtained from unaffiliated third parties and have
been and will be approved by a majority of our independent outside directors,
when elected.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following is a description of perfumania.com's capital stock and
certain provisions of our amended and restated articles of incorporation and the
bylaws. The following discussion summarizes those documents. We recommend that
you refer to the full text of the documents for a complete description of those
documents.
Our authorized capital stock consists of 20,000,000 shares of common stock,
par value $.01 per share and 5,000,000 shares of preferred stock, par value $.01
per share.
COMMON STOCK
All of our 5,000,000 issued and outstanding shares of common stock are held
by one shareholder, Perfumania, Inc. There will be 7,500,000 shares of common
stock outstanding upon the closing of the offering, 4,000,000 of which will be
held by Perfumania, Inc.
VOTING RIGHTS. The holders of common stock are entitled to one vote per
share on all matters to be voted on by shareholders. Holders are not entitled to
cumulate their votes in the election of directors. Generally, all matters to be
voted on by shareholders must be approved by a majority of common stock present
in person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any preferred stock. Amendments to our
articles of incorporation must be approved by a majority of the outstanding
shares of common stock voting together as a single class. Amendments to the
anti-takeover provisions of our amended and restated articles of incorporation
must be approved by the holders of two-thirds of the shares of common stock.
Perfumania, Inc. as a holder of approximately two-thirds of our common stock
can, on its own, cause us to amend our articles and bylaws.
DIVIDENDS. Holders of common stock will share ratably in any dividend
declared by the board of directors, subject to any preferential rights of any
outstanding preferred stock. No dividends have been paid and we do not
anticipate paying dividends for the foreseeable future.
OTHER RIGHTS. If we merge or consolidate with or into another company and
shares of common stock are converted into or exchanged for shares of stock,
other securities or property including cash in that transaction all holders of
common stock, will be entitled to receive the same kind and amount of shares of
stock and other securities and property including cash.
Upon liquidation, dissolution or winding up, after payment in full of the
amounts required to be paid to holders of preferred stock, if any, all holders
of common stock are entitled to share ratably in all assets available for
distribution to holders of shares of common stock.
No common stock is subject to redemption or has preemptive rights to
purchase additional shares of common stock. Upon consummation of the offering,
all the outstanding shares of common stock will be legally issued, fully paid
and nonassessable.
47
<PAGE> 51
PREFERRED STOCK
The board of directors is authorized, without further shareholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock and to fix or alter the designations, fix the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. No
shares of preferred stock are outstanding and we do not presently anticipate
offering preferred stock for the foreseeable future.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of perfumania.com by means of a proxy contest, tender
offer, merger or otherwise.
ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. Certain provisions of our articles of incorporation and bylaws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt, including attempts that might result in a
premium being paid over the market price for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS. Our board of directors will be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
These and other provisions may deter a shareholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by such removal with its own nominees.
SPECIAL MEETING OF SHAREHOLDERS. Special meetings of our shareholders may
be called only by the chairman of the board of directors, a majority of the
board of directors, or the holders of not less than 50% of all votes entitled to
be cast on any issue proposed to be considered at such meeting. This provision
could make it more difficult for shareholders to take actions opposed by the
board of directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws state that shareholders must provide timely notice of
their intention to bring business before an annual meeting of shareholders, or
to nominate candidates for election as directors at an annual meeting of
shareholders.
To be timely, notice must be delivered to, or mailed and received by us,
not less than 120 days nor more than 180 days prior to the first anniversary of
the date of our notice of annual meeting for the previous year's annual meeting.
If we held no annual meeting in the previous year or the date of the annual
meeting of shareholders is more than 30 calendar days earlier than, or 60
calendar days after, such anniversary, a timely notice must be received not more
than 60 days prior to the annual meeting of shareholders or the close of
business on the 10th day following the date of the meeting. The form and content
of a shareholder's notice must comply with the bylaws. These provisions may
preclude
48
<PAGE> 52
shareholders from bringing matters before an annual meeting of shareholders or
from making nominations for directors at an annual meeting of shareholders.
ANTI-TAKEOVER EFFECTS OF FLORIDA LAW
We are subject to several anti-takeover provisions that apply to a public
corporation organized under Florida law, unless the corporation has elected to
opt out of those provisions in its articles of incorporation or bylaws. We have
not elected to opt out of those provisions. Florida law prohibits the voting of
shares in a publicly-held Florida corporation that are acquired in a control
share acquisition unless the holders of a majority of the corporation's voting
shares, exclusive of shares held by officers of the corporation, inside
directors or the acquiring party approve the granting of voting rights as to the
shares acquired in the control share acquisition.
A control share acquisition is defined as an acquisition that immediately
thereafter entitles the acquiring party to 20% or more of the total voting power
in an election of directors. Florida law contains an "affiliated transaction"
provision that prohibits a publicly-held Florida corporation from engaging in a
broad range of business combinations or other extraordinary corporate
transactions with an "interested shareholder" unless:
- the transaction is approved by a majority of disinterested directors
before the person becomes an interested shareholder;
- the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years; or
- the transaction is approved by the holders of two-thirds of the
corporation's voting shares other than those owned by the interested
shareholder.
An interested shareholder is defined as a person who together with
affiliates and associates beneficially owns more than 10% of the corporation's
outstanding voting shares. This may include takeover attempts that might result
in a premium over the market price for the shares held by shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
When the offering is completed, we will have a total of 7,500,000 shares of
common stock outstanding, of which the 3,500,000 shares sold in this offering
will be freely tradable. The remaining 4,000,000 shares of our common stock
outstanding after the offering, which are held by Perfumania, Inc. are
restricted shares. These restricted shares may be resold only through
registration under the Securities Act of 1933 or under an available exemption
from registration, such as provided through Rule 144. All of these shares will
be eligible for result beginning in January 2000, subject to the volume
limitation and other requirements of Rule 144 and the lock-up agreement
described in the next paragraph.
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<PAGE> 53
Perfumania, Inc. and our directors and executive officers, have agreed that
they will not without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly offer, sell or otherwise dispose of any shares of our
common stock or any other equity security of perfumania.com, or any securities
convertible into or exercisable or exchangeable for our common stock or enter
into any agreement to do any of the foregoing, for a period of 270 days from the
date of this prospectus.
In addition, options to purchase 645,000 shares of Common Stock have been
granted under our 1999 Incentive Stock Option Plan to our directors, executive
officers and other employees. It is anticipated that a registration statement on
Form S-8 covering the common stock that may be issued pursuant to the options
granted under the 1999 Incentive Stock Option Plan will be filed after this
offering. The shares of common stock issued pursuant to the Form S-8
Registration Statement generally may be resold in the public market without
restriction or limitation, except in the case of affiliates of perfumania.com
who generally may only resell such shares in accordance with the provisions of
Rule 144, other than the holding period requirement and subject to the lock-up
agreement.
The sale of a substantial number of shares of common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the common stock. In addition, any such sale or perception could make
it more difficult for perfumania.com to sell equity securities or equity-related
securities in the future at a time and price that we deem appropriate.
50
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions of our underwriting agreement, the
underwriters named below, for whom Cruttenden Roth Incorporated, Pennsylvania
Merchant Group and H.C. Wainwright & Co., Inc. are acting as representatives,
have severally agreed to purchase from us and Perfumania, Inc. and we and
Perfumania, Inc. have agreed to sell to the underwriters, the respective number
of shares of common stock set forth opposite each underwriter's name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................ 758,334
Pennsylvania Merchant Group................................. 758,333
H.C. Wainwright & Co., Inc.................................. 758,333
Advest, Inc. ............................................... 175,000
Janney Montgomery Scott L.L.C. ............................. 175,000
JWGenesis Securities, Inc. ................................. 175,000
Pacific Crest Securities.................................... 175,000
Stephens Inc. .............................................. 175,000
Tucker Anthony Incorporated................................. 175,000
C.E. Unterberg, Towbin...................................... 175,000
---------
Total.................................................. 3,500,000
=========
</TABLE>
Our underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business, the receipt of certificates,
opinions and letters from our counsel and independent public accountants. The
nature of the underwriters' obligation is such that they are committed to
purchase and pay for all the shares of common stock if any are purchased.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock directly to the public on the terms set
forth on the cover page of this prospectus. The underwriters may allow selected
dealers a concession of not more than $.27 per share, and the underwriters may
allow, and such selected dealers may re-allow, a concession of not more than
$.10 per share, to other dealers. After the initial public offering of our
common stock, the public offering price and other selling terms may be changed
by the representative. No change in these terms will change the amount of
proceeds to be received by us and Perfumania, Inc. as set forth on the cover
page of this prospectus.
We have granted an option to the underwriters, exercisable for a period of
45 days after the date of this prospectus, to purchase up to an additional
525,000 shares of common stock at the same price per share as the initial shares
to be purchased by the underwriters to cover over allotments, if any. To the
extent that the underwriters exercise this option, each of the underwriters will
be committed, subject to certain conditions, to purchase such additional shares
of common stock in approximately the same proportion as set forth in the above
table. The representatives have advised us that they do not expect any sales of
the shares of common stock offered hereby to be made to discretionary accounts
controlled by the underwriters.
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<PAGE> 55
We have agreed to pay the representatives a non-accountable expense
allowance equal to 1% of the aggregate price of the shares of common stock
offered hereby including with respect to shares of common stock underlying the
over allotment option, if and to the extent it is exercised as set forth on the
front cover of this prospectus.
The representatives' expenses in excess of the non-accountable expense
allowance, including its legal expenses, will be borne by the representatives.
We have agreed to issue to the representatives at the closing of the offering
warrants to purchase up to 350,000 shares of common stock at an exercise price
per share equal to 140% of the initial per share public offering price. The
representatives' warrants are exercisable for a period of four years beginning
one year from the date of this prospectus.
The holders of the representatives' warrants will have no voting, dividend
or other shareholder rights until the representatives' warrants are exercised.
The terms of the representatives' warrants were established as the result of
negotiations between the representatives and us. If the representatives'
warrants are exercised, the representative may realize additional compensation.
By their terms, the representatives' warrants will be restricted from sale,
transfer, assignment or hypothecation, except to persons that are officers of
the representative.
The number of shares covered by the representatives' warrants and the
exercise price are subject to adjustment to prevent dilution. In addition, we
have granted certain rights to the holders of the representatives' warrants to
register the representatives' warrants and the common stock underlying the
representatives' warrants under the Securities Act of 1933. Total compensation
to the representatives and the underwriters is as follows:
<TABLE>
<S> <C>
Commissions........................... $.49 per share of common stock sold
Nonaccountable expense allowance...... $.07 per share of common stock sold
Warrants.............................. 350,000 shares of common stock at 140% of
the initial public offering price.
</TABLE>
Perfumania, Inc. and our directors and executive officers have agreed that
they will not without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly offer, sell or otherwise dispose any of our shares of
common stock or any other equity security of perfumania.com, or any securities
convertible into or exercisable or exchangeable for our common stock or enter
into any agreement to do any of the foregoing for a period of 270 days from the
date of this prospectus. Cruttenden Roth Incorporated has no present intention
to release the locked-up shares prior to expiration of the 270-day period
although Cruttenden Roth Incorporated may release the locked-up shares prior to
expiration of such period. The granting of any release would be conditioned, in
the judgment of Cruttenden Roth Incorporated, on such sale not materially
adversely impacting the prevailing trading market for the common stock on the
American Stock Exchange. Specifically, factors such as average trading volume,
recent price trends, and the need for additional public float in the market for
the common stock would be considered in evaluating such a request.
Prior to the offering, there has been no established trading market for the
common stock. Consequently, the initial public offering price for the common
stock offered hereby has been determined by negotiations among the
representatives and us and Perfumania, Inc. Among the factors considered in such
negotiations were the preliminary demand for the common stock, the prevailing
market and economic conditions, our results of operations, estimates of our
business potential and prospects, the present state of our
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<PAGE> 56
business operations, an assessment of our management, the consideration of these
factors in relation to the market valuation of comparable companies in related
businesses, the current conditions of the markets in which we operate, and other
factors deemed relevant. There can be no assurance that an active trading market
will develop for the common stock or that the common stock will trade in the
public market after the offering at or above the initial public offering price.
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A stabilizing
bid is a bid for or the purchase of shares of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A syndicate covering transaction is the bid for or purchase of common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A penalty bid is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member
purchased by the representative in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be effected on
the American Stock Exchange or otherwise and, if commenced, may be discontinued
at any time. The underwriting agreement provides that we will indemnify the
underwriters and their controlling persons against liabilities under the
Securities Act of 1933 or will contribute to payments the underwriters and their
controlling persons maybe required to make in respect thereof.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock issued by us in this offering
will be passed upon for perfumania.com and Perfumania, Inc. by Greenberg
Traurig, McLean, Virginia, and for the underwriters by Broad and Cassel, a
partnership including professional associations, Miami, Florida.
EXPERTS
The financial statements as of January 30, 1999 and May 1, 1999 and the
period from January 7, 1999 (date of inception) through January 30, 1999 and for
the three-month period ended May 1, 1999, included in this prospectus have been
so included in reliance on the report (which contains an explanatory paragraph
relating to perfumania.com's ability to continue as a going concern as described
in Note 2 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE> 57
WHERE YOU CAN FIND MORE INFORMATION
perfumania.com has filed a registration statement on Form S-1 with the SEC
in connection with this offering. In addition, we will file annual, quarterly
and current reports, proxy statements and other information with the SEC. You
may read and copy the registration statement and any other documents filed by
perfumania.com at the SEC's public reference room at 450 Fifth Street, NW,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. Our SEC filings are also available to
the public at the SEC's Internet site at http://www.sec.gov. This prospectus is
part of the registration statement and does not contain all of the information
included in the registration statement. Whenever reference is made in this
prospectus to any contract or other document of perfumania.com, the reference
may not be complete and you should refer to the exhibits that are part of the
registration statement for a copy of the contract or the document.
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<PAGE> 58
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets as of January 30, 1999, May 1, 1999 and
July 31, 1999 (unaudited)................................. F-3
Statements of Operations for the period from January 7, 1999
(date of inception) through January 30, 1999, for the
three-month period ended May 1, 1999 and the three-month
and six-month periods ended July 31, 1999 (unaudited)..... F-4
Statements of Changes in Shareholder's Deficit for the
period from January 7, 1999 (date of inception) through
January 30, 1999 and for the three-month periods ended
May 1, 1999 and July 31, 1999 (unaudited)................. F-5
Statements of Cash Flows for the period from January 7, 1999
(date of inception) through January 30, 1999, for the
three-month period ended May 1, 1999 and the six-month
period ended July 31, 1999 (unaudited).................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholder of perfumania.com, inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of
perfumania.com, inc. (the "Company") at January 30, 1999 and May 1, 1999, and
the results of its operations and its cash flows for the period from January 7,
1999 (date of inception) through January 30, 1999 and the three-month period
ended May 1, 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred net losses since January 7, 1999
(date of inception) and has a working capital deficit of $1,065,000 at May 1,
1999. In addition, the Company is significantly dependent upon its Parent
(Perfumania, Inc.) for the conduct of its operations. The Parent has incurred
substantial losses in its prior two fiscal years and was in default of its bank
line of credit agreement as a result of its violation of certain debt covenants,
which violations have subsequently been waived by the bank. There is no
assurance that the Company will be able to generate future net income or that
the Company's Parent will be able to secure a long-term credit agreement and
generate profits in the future. These matters create substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Miami, Florida
May 14, 1999, except for Note 8 as to which
the date is July 14, 1999
F-2
<PAGE> 60
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, MAY 1, JULY 31,
1999 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 100,000 $ 100,808 $ 103,550
Trade receivables..................... -- 21,042 79,235
Prepaid expenses...................... -- 50,000 178,591
Inventory, net........................ 209,655 432,722 566,103
--------- ----------- -----------
Total current assets............... 309,655 604,572 927,479
Property and equipment, net............. 14,213 26,649 58,496
--------- ----------- -----------
Total assets....................... $ 323,868 $ 631,221 $ 985,975
========= =========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Due to Parent......................... $ 531,326 $ 1,617,332 $ 2,763,185
Accounts payable and accrued
expenses........................... 66,037 52,041 64,936
--------- ----------- -----------
Total current liabilities.......... 597,363 1,669,373 2,828,121
--------- ----------- -----------
Commitments and contingencies........... -- --
Shareholder's deficit:
Common stock, $0.01 par value, 20
million shares authorized, 5
million shares issued and
outstanding........................ 50,000 50,000 50,000
Accumulated deficit................... (323,495) (1,088,152) (1,892,146)
--------- ----------- -----------
Total shareholder's deficit........ (273,495) (1,038,152) (1,842,146)
--------- ----------- -----------
Total liabilities and shareholder's
deficit.......................... $ 323,868 $ 631,221 $ 985,975
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 61
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 7, 1999 FOR THE FOR THE FOR THE
(DATE OF INCEPTION) THREE-MONTH THREE-MONTH SIX-MONTH
THROUGH PERIOD ENDED PERIOD ENDED PERIOD ENDED
JANUARY 30, 1999 MAY 1, 1999 JULY 31, 1999 JULY 31, 1999
------------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................... $ -- $ 161,972 $ 227,871 $ 389,843
Cost of goods sold.......... -- 110,666 183,781 294,447
--------- --------- --------- -----------
Gross profit................ -- 51,306 44,090 95,396
--------- --------- --------- -----------
Operating expenses:
General and administrative
expenses............... 60,245 213,698 275,904 489,602
Management fees to
Parent................. 29,644 93,001 75,855 168,856
Marketing and sales
expenses............... 32,852 347,272 304,774 652,046
Web site development
expenses............... 18,146 87,633 47,489 135,122
Consulting fees -- related
parties................ 115,000 -- -- --
Consulting fees........... 15,019 42,324 76,180 118,504
--------- --------- --------- -----------
Total operating
expenses............. 270,906 783,928 780,202 1,564,130
--------- --------- --------- -----------
Loss from operations........ (270,906) (732,622) (736,112) (1,468,734)
Interest expense to
Parent.................... (2,599) (32,035) (67,882) (99,917)
--------- --------- --------- -----------
Net loss.................... $(273,505) $(764,657) $(803,994) $(1,568,651)
========= ========= ========= ===========
Basic and diluted loss per
common share.............. $ (0.05) $ (0.15) $ (0.16) $ (0.31)
========= ========= ========= ===========
Weighted average number of
common shares
outstanding............... 5,000,000 5,000,000 5,000,000 5,000,000
========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 62
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE PERIOD FROM JANUARY 7, 1999 (DATE OF INCEPTION)
THROUGH JANUARY 30, 1999
AND FOR THE THREE-MONTH PERIODS ENDED
MAY 1, 1999 AND JULY 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 7, 1999
(date of inception)......... 1,000 $ 10 $ -- $ 10
5,000-for-1 stock split (see
Note 8)..................... 4,999,000 49,990 (49,990) --
Net loss for the period from
January 7, 1999 (date of
inception) through January
30, 1999.................... -- -- (273,505) (273,505)
--------- ------- ----------- -----------
Balance at January 30, 1999... 5,000,000 50,000 (323,495) (273,495)
Net loss for the three-month
period ended May 1, 1999.... -- -- (764,657) (764,657)
--------- ------- ----------- -----------
Balance at May 1, 1999........ 5,000,000 50,000 (1,088,152) (1,038,152)
--------- ------- ----------- -----------
Net loss for the three-month
period ended July 31, 1999
(unaudited)................. (803,994) (803,994)
--------- ------- ----------- -----------
Balance at July 31, 1999
(unaudited)................. 5,000,000 $50,000 $ 1,892,146 $ 1,842,146
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 63
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 7, 1999 FOR THE FOR THE
(DATE OF INCEPTION) THREE-MONTH SIX-MONTH
THROUGH PERIOD ENDED PERIOD ENDED
JANUARY 30, 1999 MAY 1, 1999 JULY 31, 1999
------------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(273,505) $(764,657) $(1,568,651)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Provision for inventory........... 11,035 16,500 16,500
Depreciation and amortization..... 95 968 3,388
Change in operating assets and
liabilities:
Trade receivables.................... -- (21,042) (79,235)
Prepaid expenses..................... -- (50,000) (178,591)
Inventory............................ -- 44,433 143,929
Accounts payable and accrued
expenses.......................... 66,037 (13,996) (1,101)
--------- --------- -----------
Net cash used in operating
activities...................... (196,338) (787,794) (1,663,761)
--------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment... (14,308) (13,404) (47,671)
--------- --------- -----------
Net cash used in investing
activities...................... (14,308) (13,404) (47,671)
--------- --------- -----------
Cash flows from financing activities:
Net borrowings from Parent........... 310,646 802,006 1,714,982
--------- --------- -----------
Net cash provided by financing
activities...................... 310,646 802,006 1,714,982
--------- --------- -----------
Net increase in cash and cash
equivalents.......................... 100,000 808 3,550
Cash and cash equivalents at beginning
of period............................ -- 100,000 100,000
--------- --------- -----------
Cash and cash equivalents at end of
period............................... $ 100,000 $ 100,808 $ 103,550
========= ========= ===========
</TABLE>
Supplemental cash flow information:
- No amounts were paid for interest or income taxes for the period from
January 7, 1999 (date of inception) through January 30, 1999, for the
three-month period ended May 1, 1999 and for the six-month period ended
July 31, 1999.
- Inventory in the amount of approximately $220,000, $284,000 and $517,000
(unaudited) for the period from January 7, 1999 (date of inception)
through January 30, 1999, for the three-month period ended May 1, 1999
and for the six-month period ended July 31, 1999, respectively, was
purchased from the Parent in non-cash transactions.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 64
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS:
perfumania.com, inc., (the "Company") is a wholly-owned subsidiary of
Perfumania, Inc. (the "Parent"), and was incorporated in the State of Florida on
January 7, 1999. The Company is an online retailer of fragrances and fragrance
related products. The Company utilizes the Parent's business relationships and
infrastructure and has relied on the Parent to provide financing for its
operations.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting principles and practices used by the Company in the
preparation of the accompanying financial statements are as follows:
FISCAL YEAR END
The Company's fiscal year ends the Saturday closest to January 31 to enable
the Company's operations to be reported in a manner which more closely coincides
with general retail reporting practices and the financial reporting needs of the
Company.
INTERIM FINANCIAL STATEMENTS
The financial statements for the three-month and six-month periods ended
July 31, 1999 and all related footnote information for these periods are
unaudited and reflect all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods. The results
of operations for the three-month and six-month periods ended July 31, 1999 are
not necessarily indicative of the results to be achieved for the entire fiscal
year ending January 29, 2000.
BASIC AND DILUTED NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS 128 and SAB 98, basic and diluted net loss per share is
computed by dividing the net loss available to common shareholders for the
period by the weighted average number of common shares outstanding for the
period. The calculation of basic and diluted net loss per share excludes shares
of common stock issuable upon exercise of employee stock options as the effect
of the exercise would be antidilutive.
PREPAID EXPENSES
Prepaid expenses consist primarily of offering costs. All offering costs
have been capitalized and will be offset against additional paid-in-capital upon
receipt of the proceeds of the offering. As the Parent has funded the operations
since the Company's inception on January 7, 1999, all amounts have been
reflected within Due to Parent on the face of the accompanying balance sheet.
The Company has expensed all start-up activities, such as the initial
development of the Internet site, as incurred. No start-up costs have been
capitalized.
F-7
<PAGE> 65
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates made by management in the
accompanying financial statements relate to the estimated sales returns,
inventory reserves and estimated useful lives of property and equipment. Actual
results could differ from those estimates.
MANAGEMENT FEES
Management fees reflected in the statements of operations represents shared
expenses which have been allocated to the Company by the Parent for costs
associated with resources it shares with the Parent using the proportional cost
allocation method. Such allocations include the prorata share of the rent,
utilities, facilities, maintenance, and administrative services provided by the
Parent. Prorata amounts of rent, utilities and facilities expense were
determined based on the square footage utilized by the Company while
administrative services charges by the Parent were determined based on the
prorata share of time spent by the Parent's administrative personnel. Although
no formal agreement existed through May 1, 1999, management believes these
allocations are reasonable. The financial statements of the Company do not
necessarily reflect the results of operations or financial position that would
have existed had the Company been independent of the Parent, however, management
believes that these fees are representative of the fair value of the services
provided.
Effective May 1, 1999, the Company entered into an intercompany services
agreement (the "Agreement") with its Parent. Under the terms of the Agreement,
the Company will pay various management fees to the Parent as follows: for
corporate services, the monthly fee is fixed at $10,000 unless monthly gross
sales exceed $50,000, at which time, the monthly fee will amount to $10,000 plus
two percent of the Company's monthly gross sales; for fulfillment services, the
fee is equal to three percent of the costs of goods sold by the Company and
serviced by the Parent; for advertising services, the fee ranges between 20% to
50% of the cost of the advertisement incurred by the Parent; for shared
facilities, the fee is equal to a proportionate share of the facility costs
incurred by the Parent, initially 15%; and for inventory purchases, the purchase
price is equal to 105% of the Parent's cost of such inventory. Management fees
for the three-month and six-month periods ended July 31, 1999 were calculated
based on the Agreement.
MARKETING AND SALES EXPENSES
Marketing and sales expenses, which consist primarily of advertising and
promotional costs, are charged to operations as incurred.
WEB SITE DEVELOPMENT EXPENSES
Web site development expenses consist principally of expenses incurred for
the development of the Company's web site and are expensed as incurred. These
costs are
F-8
<PAGE> 66
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
primarily covered under a service agreement with a software and network
developer providing web hosting services (see Note 6).
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred net losses of approximately $274,000, $765,000,
$804,000 and $1,569,000 for the period from January 7, 1999 (date of inception)
to January 30, 1999, the three-month period ended May 1, 1999 and the
three-month and six-month periods ended July 31, 1999, respectively, and has a
working capital deficit of approximately $1,065,000 and $1,901,000 at May 1,
1999 and July 31, 1999, respectively. The Company is significantly dependent on
its Parent for the conduct of its operations. The report of
PricewaterhouseCoopers LLP that accompanied the Parent's audited financial
statements as of January 30, 1999 contained an explanatory paragraph indicating
factors which create substantial doubt about the Parent's ability to continue as
a going concern. Such factors include the Parent's recurring net losses in
fiscal 1999 and 1998 and a loan default, which has subsequently been waived by
the bank, on the Parent's bank line of credit agreement as a result of its
violation of certain debt covenants (see Note 8).
These factors among others indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The Company's continuation as a going concern is dependent
upon obtaining adequate financial resources from its Parent or through a
contemplated initial public offering of its shares or otherwise. The Company
expects to have sufficient working capital from the proceeds of the initial
public offering to support its operations during the twelve-month period
subsequent to May 1, 1999, thereby making the Company financially independent of
its Parent. However, there can be no assurance that such offerings will be
successful or such resources will be available from its Parent.
The accompanying financial statements have been prepared giving retroactive
effect of a share dividend of an aggregate of 4,999,000 shares of Common Stock,
$0.01 par value, to its shareholder of record in order to effect the equivalent
of a 5,000-for-1 stock split to increase the number of shares of Common Stock
outstanding from 1,000 shares to 5,000,000 shares (see Note 8).
REVENUE RECOGNITION
Revenue from on-line transactions is recognized, net of discounts and
estimated returns, upon shipment of inventory.
INVENTORY
Inventory, consisting of finished goods purchased primarily from the
Parent, is stated at the lower of cost or market, cost being determined on a
moving average cost basis. The cost of inventory includes product cost and
freight charges. The Company recorded a
F-9
<PAGE> 67
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
provision of approximately $11,000, $17,000, $0 and $17,000 for the period from
January 7, 1999 (date of inception) through January 30, 1999, the three-month
period ended May 1, 1999 and the three-month and six-month periods ended July
31, 1999, respectively, to reduce the carrying amount of inventory to its net
realizable value. Provision for potentially slow moving or damaged inventory is
recorded based on management's analysis of inventory levels, turnover ratios,
future sales forecasts and through specific identification of obsolete or
damaged merchandise.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets. Costs of major additions and improvements
are capitalized and expenditures for maintenance and repairs which do not extend
the useful life of the asset are expensed when incurred. Gains or losses arising
from sales or retirements are included in income currently.
INCOME TAXES
The Company files a consolidated U.S. Federal income tax return with its
Parent. The provision for income taxes is computed as if the Company filed a
separate tax return, on a stand-alone basis.
The Company utilizes the asset and liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities using tax rates in effect for the year in which
the differences are expected to reverse. A valuation allowance is established
when it is more likely than not that some or all of the deferred tax assets will
not be realized.
DUE TO PARENT
Due to Parent includes amounts payable to the Parent primarily for working
capital requirements. Such amounts are due on demand. Interest is charged at
12.5% per annum. Total interest expense was $2,599, $32,035, $67,882 and $99,917
for the period from January 7, 1999 (date of inception) to January 30, 1999, the
three-month period ended May 1, 1999 and the three-month and six-month periods
ended July 31, 1999, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and trade receivables approximate fair value as
of January 30, 1999, May 1, 1999 and July 31, 1999.
F-10
<PAGE> 68
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following:
<TABLE>
<CAPTION>
ESTIMATED
JANUARY 30, MAY 1, JULY 31, USEFUL LIVES
1999 1999 1999 (IN YEARS)
----------- ------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment.... $ -- $11,538 $11,538 5-7
Computer equipment and software...... 14,308 16,174 50,441 3
------- ------- -------
14,308 27,712 61,979
Less: Accumulated depreciation....... (95) (1,063) (3,483)
------- ------- -------
$14,213 $26,649 $58,496
======= ======= =======
</TABLE>
NOTE 4. RELATED PARTY TRANSACTIONS:
The Company has purchased a majority of the inventory sold since inception
from the Parent at an amount equal to the Parent's cost plus five percent. For
the period from January 7, 1999 (date of inception) through January 30, 1999,
for the three-month period ended May 1, 1999 and the three-month and six-month
periods ended July 31, 1999, such purchases totaled approximately $220,000,
$284,000, $233,000 and $517,000, respectively.
The Company is charged for various services provided by the Parent
including administrative, distribution and other services. Such charges were
approximately $30,000, $93,000, $76,000 and $169,000 for the period from January
7, 1999 (date of inception) to January 30, 1999, the three-month period ended
May 1, 1999, and the three-month and six-month periods ended July 31, 1999,
respectively, and are classified as management fees in the accompanying
statements of operations. Purchases of inventory and expenses charged by the
Parent are not necessarily indicative of costs and expenses which might have
been incurred had the Company been operating as a separate, or stand-alone
company. Management believes that all operating costs incurred by the Parent on
behalf of the Company are reflected in the accompanying financial statements.
During the three-month period ended July 31, 1999 the Company sold
approximately $39,000 of fragrances to the former Chief Financial Officer of the
Parent. This amount is included within trade receivables in the accompanying
balance sheet as of July 31, 1999.
F-11
<PAGE> 69
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's former Chief Executive Officer (the "former CEO") provided
consulting services to the Company amounting to $50,000 during the period from
January 7, 1999 (date of inception) through January 30, 1999 (see Note 6). In
addition, a party related to the former CEO provided consulting services to the
Company amounting to $65,000 during the period from January 7, 1999 (date of
inception) through January 30, 1999. These consulting services were not subject
to a written consulting agreement. Management believes that these amounts are
representative of the time both parties spent in providing these consulting
services to the Company during the respective period. Both of these amounts are
included in consulting fees in the accompanying statement of operation during
the period from January 7, 1999 (data of inception) through January 30, 1999.
NOTE 5. INCOME TAXES:
The income tax provision differs from the amount obtained by applying the
statutory Federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE FOR THE FOR THE
JANUARY 7, 1999 THREE-MONTH THREE-MONTH SIX-MONTH
(DATE OF INCEPTION) PERIOD ENDED PERIOD ENDED PERIOD ENDED
TO JANUARY 30, 1999 MAY 1, 1999 JULY 31, 1999 JULY 31, 1999
------------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Benefit at Federal
statutory rates.......... $ (95,723) $(267,630) $(281,398) $(549,028)
State income taxes, net of
Federal benefit.......... (7,193) (20,105) (20,968) (41,073)
--------- --------- --------- ---------
(102,916) (287,735) (302,366) (590,101)
Valuation allowance........ 102,916 287,735 302,366 590,101
--------- --------- --------- ---------
$ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
F-12
<PAGE> 70
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The primary components of temporary differences which give rise to the
Company's net deferred tax assets at January 30, 1999, May 1, 1999 and July 31,
1999 are as follows:
<TABLE>
<CAPTION>
JANUARY 30, MAY 1, JULY 31,
1999 1999 1999
----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses carryforward......... $ 98,763 $ 327,283 $ 632,722
Allowances and reserves................... 4,153 64,425 61,452
--------- --------- ---------
Total deferred tax assets.............. 102,916 391,708 694,174
Deferred tax liabilities:
Property and equipment.................... -- (1,057) (1,157)
--------- --------- ---------
Net deferred tax assets................... 102,916 390,651 693,017
Valuation allowance....................... (102,916) (390,651) (693,017)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance against deferred tax assets of $102,916,
$390,651 and $693,017 at January 30, 1999, May 1, 1999 and July 31, 1999,
respectively.
The Company has Federal and State net operating loss carryforwards of
approximately $1,681,000 as of July 31, 1999, both of which will begin to expire
in the year 2019.
The Company, which is a wholly owned subsidiary, participates in the
filling of a consolidated U.S. Federal income tax return of its Parent. Once the
Company is no longer a subsidiary of its Parent, the amount of net operating
loss carryforwards may decrease or become limited.
NOTE 6. COMMITMENTS:
Effective April 15, 1999, the Company entered into a 36 month service
agreement with a software and network developer providing web hosting services.
Pursuant to the agreement, the Company must remit 36 equal monthly installments
of $14,200. Under the term of the service agreement, in return for displaying
the network developer's corporate logo on the Company's web page, the Company
shall receive a marketing credit of $1,700 per month, resulting in a net monthly
web hosting service fee of $12,500 per month. The Company is subject to an early
termination fee of $201,165 if cancelled within the first 12 months and $100,583
if cancelled after 24 months of service. The net monthly web hosting service fee
is expensed as incurred and is reflected in web site development expenses in the
accompanying financial statements.
Effective May 1, 1999, the Company entered into an employment agreement
with its chief executive officer and president for a five year initial term.
Total annual base salary is
F-13
<PAGE> 71
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$200,000. A total of 225,000 common stock options were granted at an exercise
price equal to the contemplated initial public offering (the "Offering") price.
These options vested immediately at the date of grant. Upon change of control of
the Company, the president will be entitled to a lump sum payment equal to three
times the annual base salary. Upon termination without cause the president will
be entitled to receive a lump sum payment equal to the base salary through the
end of the initial term of his employment agreement.
NOTE 7. STOCK OPTION PLAN:
Effective May 1, 1999 the Company adopted the 1999 Incentive Stock Option
Plan (the "Plan"). Officers, key employees and nonemployee consultants may be
granted stock options, stock appreciation rights, stock awards, performance
shares and performance units under the Plan. The Company has reserved 1,000,000
shares of common stock for issuance under the Plan, subject to the share
dividend effective upon the consummation of the Offering and subject to further
antidilution adjustments.
Prior to establishment of a Compensation Committee (the "Committee") of the
Board of Directors, the Plan will be administered by the Board of Directors of
the Company. The Board of Directors or the Committee will be authorized to
determine, among other things, the key employees to whom, and the time at which,
options and other benefits are to be granted, the number of shares subject to
each option, the applicable vesting schedule and the exercise price. The Board
of Directors or the Committee will also determine the treatment to be afforded
to a participant in the Plan in the event of termination of employment for any
reason, including death, disability or retirement. Under the Plan the maximum
term of an incentive stock option is 10 years and the maximum term of a
nonqualified stock option is 10 years.
The Board of Directors has the power to amend the Plan from time to time.
Shareholder approval of an amendment is only required to the extent that it is
necessary to maintain the Plan's status as a protected plan under applicable
securities laws or the Plan's status as a qualified plan under applicable tax
laws.
Options to purchase an aggregate of 630,000 shares have been granted under
the Plan to employees (400,000 shares) and non-employee director nominees
(230,000 shares) of the Company at an exercise price equal to the Offering price
of the common stock offered hereby. These options have a total term of ten
years. Out of those 630,000 options granted, options to purchase 135,000 shares
vested immediately on the date of grant and options to purchase the remaining
495,000 shares will vest as follows: 16%, 34% and 50% of the total number of
shares granted on the first, second and third anniversary of the date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation ("SFAS No. 123"), encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company will measure compensation expense for the stock Plans using
the intrinsic value method prescribed by Accounting Principal Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly,
compensation expense for qualified and non-qualified employee stock options
granted under the Plan is equal to the difference between the fair market value
of the stock at the date of grant and the amount an
F-14
<PAGE> 72
PERFUMANIA.COM, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PERFUMANIA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employee must pay to acquire the stock. For options granted to employees which
were outstanding prior to the Offering, the compensation expense is equal to the
difference between the fair market value of the stock upon consummation of the
Offering and the amount an employee must pay to acquire the stock. For options
granted to non-employee directors or other than employees in exchange for goods
or services, compensation cost is measured in accordance with SFAS No. 123.
NOTE 8. SUBSEQUENT EVENTS:
On June 7, 1999 the Company's shareholder approved an increase in the
number of authorized shares of common stock from 1,000 shares to twenty million
shares. The Company also authorized five million shares, par value $0.01 per
share, of preferred stock.
Effective June 7, 1999, the Company declared a share dividend of an
aggregate of 4,999,000 shares of common stock, $0.01 par value, payable to its
shareholder of record in order to effect the equivalent of a 5,000-for-1 stock
split to increase the number of shares of common stock outstanding from 1,000
shares to 5,000,000 shares.
On July 14, 1999, Perfumania, Inc. obtained a waiver of default from its
lender through September 30, 1999 as of and for the year ended January 30, 1999.
The lender agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event includes that the Company
is to receive at least $10 million from the Offering proceeds, of which $2
million is to be repaid to Perfumania, Inc.
F-15
<PAGE> 73
(perfumania.com LOGO)
3,500,000 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
(CRUTTENDEN ROTH INCORPORATED LOGO)
PENNSYLVANIA MERCHANT GROUP
H.C. WAINWRIGHT & CO., INC.
September 29, 1999
